AllianceBernstein Holding LP (AB) 2006 Q1 法說會逐字稿

Thank you for standing by and welcome to the AllianceBernstein first quarter 2006 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 remainder this conference is being recorded and will be replayed for one week. I would now like to turn the conference over to your host for this call, the Director of Investor Relations for AllianceBernstein, Mrs. Valerie Haertel, please go ahead.

Thank you, Nicki. Good everyone -- good afternoon everyone, and welcome to our first quarter earnings review. As a reminder this conference call is being webcast and is supported by a slide presentation that can be found on our website at alliancebernstein.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 Chief Financial Officer, will also be able to answer your 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 material nature on this call. At this time I would like to -- like to turn the call over to Gerry Lieberman.

Thank you, Valerie and good afternoon to everyone on the call. Well, the short version of my remarks is that we are pleased to be off to a very good start in 2006. From an investment perspective our global and international equity investment services have excellent relative performance, coupled with strong absolute performance. And while absolute U.S. equity returns were quite positive there was some mixed relative performance in our U.S. domestic services. With an assets under management point of view, we had organic growth in all three of our distribution channels, across all three product families totaling $12 billion with investment performance adding an additional $27 billion in the quarter

In our institutional research services channel, we continue to gain market share with a 26% growth in commission revenues. We achieved a record quarter. We reported solid financial results for the quarter with our operating Company revenues up 20%, pretax margin up 330 basis points and net income up 35%. As a result AllianceBernstein Holding reported net income of $0.78 for the quarter a 31.5% increase from a $0.58 per unit in the same quarter a year ago. Even after incurring legal expenses of approximately $0.04 per unit to resolve some of the outstanding litigation. We also declared a quarterly cash distribution of $0.78 per unit.

Now that I covered the most important quarterly highlights I'll add a bit more detail to our discussion beginning with non-U.S. market performance. As you can see on display four, once again the non-U.S. markets had very strong performance results. The MSCI Emerging Market index was up 12% for the quarter. Nearly 48% for the 12 months ended March. The MSCI EAFE index increased 9.4% for the quarter and 24.4% for the 12 month period and MSCI World index rose 6.6% for the quarter and 18% for the twelve months. The importance of the impact of non-U.S. markets outperforming U.S. markets on both our clients and our firm should not be underestimated. A point that I'll come back to later in the presentation.

With that said, and as shown on display five, U.S. performance results for the quarter were strong with a major equity indices up significantly, albeit once again considerably less than non-U.S. markets. The Russell U.S. Growth index and the Russell 100 Value index were both up nicely for the three and 12 month periods and the S&P had its best first quarter since 1999, increasing 4.2% for the quarter and 11.7% for the 12 month period. While equity markets experienced significant gains, two federal reserve rate increases drove bond returns into negative territory. The Lehman Aggregate Bond actually decline 0.6% for he three months ended March but was up 2.3% for the 12 month period ended March.

With the capital markets performance as a backdrop, let’s review the highlights of how we perform for our clients as shown on display six. You can reference displays 31 through 40 later for more detail. As I noted earlier, investment performance varied by service this quarter. However, importantly for one year and for longer period returns, our relative equity performance ranged from very competitive to excellent across our -- most of our growth, our style blend and global and International value services. For the quarter, institutional growth equity services outperformed benchmarks in several of our key investment services including mid cap, small cap and emerging markets, where we -- where we exceeded benchmarks from 130 to 560 basis points. In our international value, global value and emerging market value services outperformed their perspective benchmarks by 320, 250 and 190 basis points.

Our U.S. strategic value and large cap growth institutional composites did underperform the quarter by nearly 200 basis points. However, for the one and three year periods, our U.S. and non-U.S. growth relative performance numbers are overwhelmingly impressive as are our non-U.S. value figures. Turning to our style blend services. Global, international and emerging market style blend, beat their benchmarks by 170, 120 and nearly 100 basis points. For the one year period global style blend, U.S. style blend and international style blend outperformed strongly.

Finally, although rising interest rates have taken their toll on fixed income returns, our one interior relative returns on core and core plus services were positive as we continue to add value to our client's portfolios.

My last and perhaps most important comments on performance refer to display seven. Here you will see relative performance for our most important 30 institutional services going back to inception dates. For some, we are in our fourth decade of managing their services. As you go down the column showing our relative performance four our value, our growth, our style blend and fixed income services, both U.S. and non-U.S., you'll see one thing in common for the vast majority, positive annualized performance since inception and for our equity services out performance typically in the hundreds of basis points. As we all know past performance is no guarantee of future results but our investment performance is one tool used by both current and perspective clients to evaluate how we're doing. It could also be a leading indicator of the potential future success of the firm.

Now, let's turn to our distribution channel inflows for the three months ended March 31st on display eight with solid long-term investment returns for our clients and a continuing shift with global investing as a foundation. You can see that we achieved positive net flows of $12 billion, consisting of 5.5 billion in institutional investments, 3.8 billion in retail and 2.7 billion in private client. For our retail channel, 3.8 billion in net flows is the highest level quarterly dead earning flows in over five years. And we'll have more to say about our retail progress when we discuss our channel highlights. Keeping in mind that the first quarter in our private client channel is typically strong, organic growth was still over 14% on the annualized basis and our institutional investments channel net inflows were once again quite robust. When you add in the 27 billion of investment performance our AUM increased by -- by more than $39 billion or 6.7% for the quarter.

I would like to remind everyone that as we reported a few weeks ago transfers of certain client accounts were made among distribution channels. This is resulting from changes and how these accounts were serviced by the firm and these changes are reflected in the transfers line. These transfers resulted mainly from the growth we experienced in our nine U.S. offices where retail and institutional accounts were initially serviced by the same team instead of by channel specific teams. As our AUM grew we were able to add additional personnel to service accounts along channel lines. There are no fee changes or any financial impacts resulting from these transfers, just a better servicing model for our clients.

Display nine shows changes in assets under management by channel for the 12 months ended December 31, 2006. You can see that net inflows totaled nearly $34 billion, consisting of almost 22 billion in institutional investments, about 7 billion in the private client channel and over 5 billion in retail. In addition to the asset transfers, the 12 month views also reflects over $28 billion of previously reported asset dispositions which included our cash management services, our South African joint venture interest and Indian mutual funds. Here you can see that total AUM increased nearly 16% or 22% excluding dispositions and transfers.

Turning to display 10, you can see our flows by investment service for the three months ended March. Growth equity net flows of 5.9 billion surpass value equity net inflows of 5.4 billion for the first time since the second quarter of 2001. And you should note that we experienced net inflows into both our U.S. and non-U.S. growth equity services. And despite the rising interest rate environment we're pleased to see that fixed income net flows totaled nearly $1.6 billion.

Turning to display 11. You can see for the 12 months ending March we brought in nearly $88 billion in gross inflows and almost 34 billion in net. Value equities led the way with over $37 billion in gross flows and 24 billion in net inflows. Growth equity net inflows totaled nearly $12 billion with over 31 billion in gross flows while fixed income experienced modest outflows of $635 million.

Let's turn to display 12 where I'll start my discussion of our distribution channel highlights with our institutional investments channel. At March 31, 2006, our institutional investment channel, assets accounted for 63.2% of our overall AUM with $390 billion. Which is up 8.7% of the quarter and 25.3% of the 12 month period. Our style blend service accounted for approximately one-third of this channels inflows and we have strengthened our global and international services in the first quarter. We closed the quarter with a strong pipeline of mandates that have been awarded but have yet to be funded. These mandates are widely diversified in terms of service and geography and bode well for uptime -- upcoming quarters. We are very encouraged by the solid start that we have this year.

Turning to display 13, you will see that our retail assets comprised 26.3% of our total assets under management. It was a great quarter for retail overall. As non-U.S. net inflows continued at a healthy pace to order -- due our strength in our Luxembourg funds. But additionally and importantly, we experienced net inflows into our U.S. based funds for the first time since the first quarter of 2002. We are extremely pleased with our turnaround in this channel as we believe it validates the steps we instituted just two years ago to refocus our attention on meeting our clients needs. We restructured this business, strengthening our fiduciary culture, rationalizing our product offerings to those better aligned with our client's interest rather than just pushing the hot funds. This new approach coupled with improved investment performance is starting to show results with increasing sales and better client retention. And most importantly, it'll be to the benefit of our client's over the long term. We're very proud of our retail and our investment teams for their efforts and these visible signs of success.

In the U.S., our separately managed account business strengthened again this quarter and our wealth strategy services reached nearly $6 billion with the clients split roughly two thirds in the U.S. and one third non-U.S. I think it's noteworthy to point out that our AllianceBernstein value funds reached their five year anniversary this March. These are the first mutual funds that we launched after Alliance and Bernstein merged in 2000. Our discipline, value, philosophy and commitment to deep, fundamental and quantitative research have been well received by our clients in this channel. Today 51% of our retail equity investment services are value equities. That's up from 9% at the time of the merger. This is just another example of the success of the combination of Alliance and Bernstein as well as the firm's commitment to helping investors achieve their goals by providing carefully designed investment strategies.

Display 14 shows our private client highlights. Here you can see that our high net worth business represents 13.2% of our total AUM with $82 billion in assets. And the first quarter, which is typically a strong quarter for the channel, we brought in $3 billion of net inflows, a record for the channel and this is $7 billion for the 12 month period. For the 12 month, this channels assets are up over 25% including market appreciation performance but excluding the asset transfers and dispositions. We continue to invest -- we continue to invest in our private client business adding staff as we prepare to open our London office in the second half of the year. We've increased the number of financial advisors by 23% to 270 from the first quarter of 2005 to support the growth in this business and to staff new offices. As previously announced we do not plan to open any new offices in 2000 this year but will continue to add staff in many of our current office locations.

Highlights for the institutional research services are shown on display 15. Excluding a reclass that I'll discuss later, revenues totaled $95 million for the quarter, an increase of 26% from a year ago. Both the U.S. and London experienced double-digit organic growth while London's revenue is just up over 40% this quarter. Our market share continues to increase to the continued recognition of the research quality, expanded added value trading services and research coverage launches which more than offset continued pricing pressures. Underpinning our firm's success for clients is our commitment to high quality innovative research and just today, yes, today, we learned that a leading research poll of portfolio managers ranked Sanford C. Bernstein number 1 for overall research quality for the seventh year in a row. We're also ranked number 1 in stand-alone sales quality for the first time ever and -- and we improved our trading rank and market share. Great achievements for our firm.

In summary, we are extremely pleased with the accomplishments and progress we've made in each of the four distribution channels and we're excited about the challenges and the opportunities that lie ahead. Before I begin my review of financial results, I'd like to highlight briefly as I've done in previous quarters, the diversity of our assets under management not only from a U.S. non-U.S. perspective, but also importantly from an equity fixed income investment services mix perspective. Turning to the center pair of pie charts on display 16, you can see we currently have 73% of our $618 billion in totaling AUM in equities,. up from 64% in March 2005. Since the disposition of the low yielding cash management services we continue to benefit from an improved asset mix.

Looking at the two other sets of pie charts, you'll get a sense of the increasingly global make-up of our firm's business. On the pie charts on the left side of the display we show that non-U.S. AUM by client domicile increased by 40% in March 31, '06 versus March 31, '05. Turning to the right side of the display, we show that over the past 12 months our assets in global and international services grew by 51% from 194 billion to 293 billion. The value that this diversity brings to both our clients and our unit holders should not be under estimated.

As I noted in previous quarters. There are many factors contributing to the increasing global nature of our firm and they're worth repeating here. The four most important are: Our investment in human capital, especially research and portfolio management in support of our global investment services. The creation of new, non-U.S. investment services. Excellent investment returns for our clients, and our investments in non-U.S. distribution in client servicing. This display demonstrates that our continuing investment in broadening our seamless global research platform resulting in borderless portfolio construction, our ability to use that research better and our investment in client services are paying off.

In summary, non-U.S. AUM by client domicile accounts were 192 billion or 32% of our AUM while global and international AUM by service accounts for 293 or 47% of our total. Significant contributors to our asset growth are style blend services as reflected on display 17. At the end of the first quarter, the equity component of style blend service accounts were $100 billion of assets under management were 16% of our total AUM versus zero dollars in October of 2000 when Alliance and Bernstein combined. Blend style assets are now some of our most important services and they're a differentiator among other asset ventures. Our blend services start with our disciplined portfolio construction strategy that combines Alliance growth and Bernstein value equities and rebalances the portfolio systematically. Managed in both U.S. and non-U.S. offerings $64 billion of our blend services are in global and international products.

Now that I've provided some highlights on performance, asset flows, key trends in our distribution channels and our mix of AUM, let's turn to our firm's financial results starting on display 18. For the quarter revenues for the quarter increased 19.8% to $899 million as compared to 750 million in the first quarter of 2005 with investment and advisory fees up 21.1% or $109 million. You may recall, that in previous reporting periods, the advisory fees line actually included transaction fees. That is the line actually read advisory and transaction fees. Last year we started to eliminate transaction fees for our private client. Partially offsetting this decrease in fees by raising our private client advisory fee schedule. With a 96% decline in transaction fees quarter over quarter we're now reflecting all of our transaction fees in our institutional research services revenue line.

So if you turn to display 19, you'll see the impact of the reclassification on transaction fees to the institutional research services revenue line on the P&L. As you can see in this display, if we had not reflected this reclass, our advisory fee incla -- re -- advisory fee increase would have been 17% and our institutional research services fee increase would have been 26% which is the actual growth rate of this channel.

Moving to display 20, we've detailed advisory fees by fee type and by channel. Base fees were up 20.5% or $105 million with 614 million this quarter, driven primarily by higher average AUM for both market appreciation and net inflows and to a lesser degree by the change in our private client fee schedule. Moving to the lower half of the display we show advisory fees by distribution channel. Here you can so the 37% increase in our institutional investments channel and the 24% increase in the private client channel are both attributable to higher AUM. As reported, retail, advisory fees grew marginally during the quarter. However, excluding the impact of the sale of our cash management services, advisory fees would have increased by 18%. A significant increase, indeed.

And on display 21, you can see the distribution of revenues decreased 4.6% to $103 million.

Display 22 shows that net distribution activity for our retail business. This quarter marks the third consecutive quarter we have -- where we have net distribution revenue versus significant net distribution expense as in the first quarter of 2005. Lower distribution revenues and distribution plan payments were attributable to the disposition of the cash management services. Additionally, we continue to experience a significant decrease in the amortization of the preferred sales commissions related to prior year sales. A decrease we expect to continue into 2007.

On display 23, institutional research services revenues reflects only a 1.9% increase. However, I refer to the comments that I made related to display 19. Explaining that our reclass of transaction fees masked the 26% revenue growth in our institutional research services channel. Additionally, other revenue increased significantly to $74 million. Now, 26 million of the current quarters revenue were attributable to mark to market gains our mutual fund held for deferred compensation plans resulting from strong equity marketing performance. Nearly half of this amount produced a corresponding increase in compensation expense in the current quarter and the remainder will increase compensation expense in future periods as deferred compensation awards continue to vest.

Now that I have covered our 19.8% of revenue increase, I want to talk about our 14.8% increase in total expenses. As you can see on display 24 employee compensation of benefits increased 29.9% in the quarter to $371 million or 57% of our total expenses. Our increase in incentive compensation of 36.8% is shown on display 25. It's pretty much in line with our increase in earnings over 30 -- of over 35% including the impact of increased amortization of deferred compensation. That brings us to our increase in commission expense which was -- which was up nearly 42%.

I have already pointed out to you that our first quarter was very strong. With record new business generation in both our private client and institutional research services channels, the best new business quarter for retail in over five years and -- and yet another strong quarter of new mandate fundings in our institutional investments channel. All of this growth results in higher commission expense which is, quite frankly, a best of kind type of leading indicator for future revenues and earnings increases. Since the full impact of the incremental business isn't reflected in the current P&L.

Turning to display 26, note the promotion and servicing cost declined by 16.5% or nearly $30 million. The decrease of these costs can be attributed to the lower distribution plan payments from the disposition of our cash management services and lowered deferred sales commission amortization as I discussed on display 22. G&A increased $27 million. Facility expenses accounted for approximately 8 million of the G&A increase due to three new private client offices that we opened in the U.S. since the first quarter of 2005 and the new office space we acquired in London, Hong Kong and Shanghai increasing our facility expenses run rate to accommodate our recent growth and our future growth. Legal expenses accounted for another 6 million of the G&A expense. The current quarters legal expenses were primarily attributable to the net cost of our continued progress in resolving outstanding litigation. While in the first quarter of 2005, we incurred significant trial related expenses.

On display 27, we presented a recap of total revenues and expenses that come to a summarized net income statement for AllianceBernstein. Here you can see our margin is up 330 basis points to 27.1% and our net income is up 35% to $228 million.

Carrying a 228 million of AllianceBernstein net income forward to display 28, we show the holdings financial results. AllianceBernstein Holdings equity share of AllianceBernstein earnings were $73 million for the first quarter versus 53 million in the same quarter last year. With net income after taxes of 66 million or 40% better than '05. Our distribution per unit for AllianceBernstein Holding will be $0.78, a 39.8% increase from the $0.56 distribution in the same quarter last year.

In summary, this is a good quarter for the firm on many fronts. First, the performance of our investment service for our client. Second the diversified mix of increasing asset flows. Third, higher revenues. Fourth, improved margins and finally the strong returns to our unit holders. Now I'll turn the call over to Lew who'll spend a few minutes on our global service program.

Thank you, Gerry. With Gerry having reviewed the first quarter quite comprehensively I think it's worth spending a few minutes with you on how we're positioning the firm. Although a single graphic can hardly do justice to our scale and scope, the display before you, display 29, is nonetheless an attempt to do just that. There are a number of important messages in this picture. First, that the Company's DNA is research from which everything else flows. Second, that our research footprint is unusual, for its shear breadth of coverage, geographic reach and comprehensive quantitative capabilities. Third, that this intellectual capital has brought together an integrated global investment platforms making it impossible for us to source alpha from virtually all the relevant asset classes around the world in global or regional mandates or as I'll emphasize in a moment, highly specialized portfolio constructions.

Fourth, that we can amplify, we can isolate alpha in a range of investment alternatives that are a district derivative of our core competencies. Fifth, that we possess advanced investment planning and asset liability modeling skills which permit us to craft differentiated investment solutions for clients. And finally, that we can reach and serve clients, ranging from mutual fund investors to high net worth private investors to the largest corporate and government sponsored retirement plan in virtually every major market throughout the world.

Now, if all of this sounds familiar to you, we here at AllianceBernstein would be quite pleased because this is how we hope you see us. Yet, it's important to emphasize that there's a subtle evolution underway that reaches beyond this description. An evolution that we think will increase still further our relevance to clients. As an example. Our specialized research teams in early stage growth in strategic change are rapidly making us subject matter experts in many advanced technologies. As a natural derivative eventual capital opportunity has surfaced which the Company has been seeding thus far with partnership capital. The opportunity here is developed faster and appears to be greater than we initially anticipated. Thus, we plan to turn this into an asset management service for clients shortly. Now while venture capital standing alone is unlikely to be an important source of business for us given our scale, it's a window into net -- technological change, It's a window of great significance and as these changes influence results at large incumbent companies.

Having this kind of knowledge promises to make us better investors across the board. Indeed, we see the integration of venture investing with mainstream equity investing as a major source of competitive advantage in both domains. The same research is driving a suite of high alpha services under the moniker of strategic research which is meeting with increased success in both the retail channel in the form of separately managed accounts and in the institutional channel as a non-style based satellite service.

Another noteworthy development is the evolution of our product platform in alternatives. Giving the growing importance of this category, we've established a new strategic business unit to manage and develop this area. It will remain tightly linked to our mainstream services because in our case they provide the primary input for alpha generation. However, the unit will have its own specialized operations, marketing and client service team in addition to its extensive quantitative research resources. Note that alternatives are already a meaningful business of the firm with assets under management of well more than 5 billion, up nearly 40% during the last 12 months. With the addition of commodities as another uncorrelated alpha source in our diversified hedge fund, and the launch of currency based hedge funds shortly, our service profile continues to strengthen in this area.

I want to call attention as well to our initiatives in asset liability management. Our goal here is to design specialized portfolio solutions using appropriate combinations of alpha and beta sources to meet the unique needs of planned sponsors. While such mandates remain at the periphery of most pension plans today, they promise to become increasingly important especially in larger plans. We believe we have the capabilities to be a factor in this market. Perhaps an important one since it's a natural extension of the tools and talent present in our style blend business unit. We're also hopeful that this unit's leading edge asset liability modeling skills will help us to become an important factor in the defined contribution arena as target date offerings designed by this unit begin to gain traction among planned sponsors and participants.

So while we are often thought of as a firm with the three major investment platforms, in growth and value equities and in fixed income. I think you can see that we've evolved organically to be quite a lot more. We think we'll be better investors for it across all of our investment platforms. We will truly be in a better position to meet a larger fraction of our client's needs. With services, and this is key, that are inherently complementary. Services designed to work well together. All of which should mean better results for clients and therefore for our firm. And now for your questions.

Nicky, we're ready to take questions.

(OPERATOR INSTRUCTIONS) The first question comes from Bill Katz from Buckingham Research. Please go ahead.

Thank you, and good afternoon. I appreciate the thorough review, as usual. Lew, maybe a question for you since you sort of ended the commentary, Just sort of curious as I listened to your plans for the asset liability opportunity. How do you go about supplanting the big three, so to speak? BlackRock, Legg Mason and Pimco without maybe compromising margins.

Well I don't think there is any margin risk here at all, Bill, to the contrary. This is a derivative of competencies that already exist in the firm. We're simply extracting them and repackaging them in a way that better meets the particular needs of the plan sponsor. So I'll give you an example. We generate alpha regularly from our mainstream services in growth and value equities. In currency, in fixed income. We can strip the beta out of those alpha sources. We can reattach them to any number of beta sources that would match the particular liability characteristics that a plan happens to want to fund. And in that way, deliver I think a tailor made and optimized solution.

All that capability exists in the firm. There's no new overhead involved. It would be margin enhancing as opposed to detracting. Now we'll see how successful we are. This is in the early going and in fact, the market although noteworthy is still actually not all that large. But it does show signs, as I -- I noted in my commentary of becoming more important. Especially in larger plans and we think that we have a lot to offer here. So you'll -- you'll see us more prominently competing in this space.

So the follow up question would be on the litigation expenses that were sort of $0.04 in the quarter. I guess first of all, do you sort of view those as one time and then, maybe you could just give a little more detail as to the progress you're making and what it might forebode for incremental expenses going forward?

Well, what I -- what I'd prefer to do first is have you refer to the details of what actually occurred in the first quarter. In our 10-Q which will be filed next week. What I can tell you is that we did incur what we described as an unusually high run rate in this quarter, unusually high, and it -- and it related to resolving several significant items of litigation. Including a major portion of the civil litigations stemming from market timing. Further details, however, I want you to refer to the 10-Q.

Okay. Thank you.

Your next question comes from Jeff Hopson from A.G. Edwards. Please go ahead.

Okay. Thank you. Could you comment on some of your initiatives to establish research and other infrastructure in Hong Kong, China, et cetera? If these represent typical reinvestments for growth or are these at an accelerated level at this point. And then number 2, could Lew comment on the decoupling of returns of the U.S. versus some of the international markets that we've seen over -- over the past six months?

Okay. Well, let me take both of those questions. As it relates to our research footprint in Asia, it's actually always been substantial with a major investment team in gross and value in Japan, in Hong Kong, in Singapore, Australia, is a very prominent area for research in the firm and asset management. We have small teams in India and in Taiwan and most recently, and I think importantly, we established a team in Shanghai, the goal of which was outward looking, that is, it wasn't initially to support investments in the country, but instead to be a window into developments in China, which is of course as you know, have emerged as central to the success of a number of multi-national industries. In fact, China in those industries take iron ore for in -- for instance, completely controls the outcome. So as -- said another way, as -- as economic activity, as important technologies and -- and as industries migrate increasingly to that region of the world we've placed research resources in locations that give us the appropriate insight to manage money well for our clients. So I think you should see this as a continuum and -- and I don't think what lies ahead on that score is any abrupt increase, any substantial increase in our Asian research commitment. It's already, I think, very substantial indeed. I would argue one of the largest in the industry.

Now as to your question about the in quotes, decoupling of investment returns in the last number of years between the U.S. and the developed and emerging world in the equity markets, I think this reflects principally a convergence evaluation across all geographies which four or five years ago was highly skewed especially with regard to the emerging markets where at that time valuation was still suffering from the high anxiety that surrounded many of those companies, industries and countries a derivative still of the trauma of the late 1990s. Those risk premia have fallen dramatically and as a result valuations have converged and thus there's been in that way a very noteworthy tailwind behind non-U.S. equity investments. What I described applies to the developed world too but just in lesser magnitude. So, based on today's valuation structure expected returns actually look more or less similar. Emerging still looks a little higher but on the other hand its volatility is. So if you were to draw an expected return curve, I don't think that you would find any noteworthy pricing anomalies across these geographies.

And by the way, if you -- if you plot variance in valuation by country, by industry and companies within this, within industry, every single one of those metrics will reflect an extraordinary convergence. So, what I would say is the cycle fairly mature, but entirely explainable by the status some years ago of -- of capital market pricing. Very different than today.

Now the final point I'd make, perhaps giving you a little bit more than you bargained for in the question is that when you consider non-U.S. investment returns and you see it from any currency reference, in our case, the dollar, exchange rates are going to matter a lot to measured returns and given the -- the current account imbalance which is -- which is historic in magnitude, actually completely unprecedented, the likelihood is that there'll be a headwind in front of the dollar, a tailwind for the currencies of our major trading partners which will tend therefore in dollar terms to elevate returns offshore relative to the U.S.

Okay.

And it's obviously that we'll have implications on our financial results.

Okay. And do you have any particular concerns in regard to where say retail flows are heading today? Some of the hotter areas perhaps?

Well, if -- if what you're saying is we're -- we're witnessing yet another example of trend following, which is to say, this opportunity is now being discovered, by the retail world after it's been largely earned out, I would have to support that proposition. On the other hand, given the description of valuation that I provided, it isn't as if today, non-U.S. equities as we see it are mispriced relative to the U.S. Actually they offer competitive returns and they offer currency diversification and they should play therefore an important role in anybody's portfolio, private, institutional or otherwise. And the fact is that that a lot of U.S. households were very underweight if they had any exposure at all offshore. So I don't see the recent interest in this area as having quite the risk that trend following typically engenders when it begins to develop. Should it continue and this get exaggerated well, of course, that'll develop later on.

Very good. Thank you.

Your next question comes from Cynthia Mayer from Merrill Lynch. Please go ahead.

Hi. Thanks a lot. When you say that the pipeline of unfunded mandates is very strong I'm just wondering if you can put that in a little perspective versus past quarters. If it's all funded this quarter would the flows be stronger than say 4Q and 1Q or sort of in line with what we've seen recently?

Well, I believe, Cynthia, I can't time exactly when the money is going to come in. But what I can tell you the pipeline is high as it's ever been which means that it's high if not a little bit higher than it was in the peak of last year. Which was the best year in the history of the firm. So we've -- we used up some of the pipelines we got into the fourth quarter now we've built it right back up again and in the -- in the -- and it's very robust.

Okay. Great. And --

And -- and when we look at this pipeline and we're assuming that the fundings will take place certainly within a year's time. Usually around six months or so. If they're all over the lop, it's -- it's around that time.

Okay. And quick, another expense question, the -- the 8 million that was for new private client offices.

That -- that's all of our new offices. That's private client offices, new space in London, brand new fitted out space in Hong Kong, the new space in Shanghai. It's all the new offices.

Are -- are those up front costs or those costs that just are built in or will continue?

No, that's -- that's a run rate. Those are built in run rate numbers.

Okay. And at this point how much are the costs of London is in?

Well, you have the full run rate for the new space which you don't have is all -- not all the build out for London is in there but the -- all the build out for the other offices, the three private client offices, the Shanghai office, the Hong Kong office. They're all in there on a full run rate basis. The London space we'll be kicking in in the second semester.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) The first question comes from Christopher Spahr from Prudential. Please go ahead.

Good evening. The non-U.S. clients are about a third, that's among the highest in the industry. And I was just wondering if you could give a little bit more breakdown by region and which regions do you think will be growing faster than others and where do you think this as a percent of total client area this can go to eventually?

All right. Well as to regional breakdowns. It's really very diversified. We have this very strong presence in the UK, on the continent, and impressive market share in Japan.

Huge market share in Australia.

One of the top three in Australia. First in New Zealand. You know, it's -- it's a very diversified client base. Now, when you get to channel, it is dominantly in our institutional business and in our retail mutual fund business, our private client business, as I think you know, until very recently has been overwhelmingly U.S.centric. It's just now on it's path of globalization. Now as to what this ultimately will ascentote (ph) to, I wouldn't even venture a prediction. But it's a big world out there, right? And if you are thinking about the role that U.S. capital asset plays in the global capital market, well you'd think that at least half of your clients would probably ultimately come from domiciles other than here. We think that. Maybe that's the target. But we don't really think in those terms. We're just trying to deliver the appropriate services to clients and -- and the growth will therefore be a derivative.

Okay. Next question, regarding alternatives. As a percent of total AUM it's still relatively small compared to some of the larger asset managers. Do you think this kind of this robust growth that you've had last year is going to continue? Especially say with the introduction of like the currencies and so forth.

Yes. We think it is an important opportunity for the firm. It's really important to stress, however, in our case, these services are derivatives of alpha engines that are part of the mainstream of the Company. They're not some attachment. They're not some team that we brought in or developed. It's all very integrated and the opportunity here is -- is quite substantial and our track record, I think, very competitive which -- which ought to mean, that this business will grow strongly. But this is a volatile industry. And so you have to accept these -- these forecasts will the appropriate degree of caution and humility.

Thank you.

The next question comes from Niamh Alexander from CIBC. Please go ahead.

Thank you very much. Just on the alternative selling up there, I'm wondering if you're seeing any opportunity to kind of adjust the pricing in the traditional institutional money management business there as you kind of the same clients now feeding into that [INAUDIBLE] alternatives.

We don't really see that opportunity nor do we look at it in those terms.

Thank you. And then could you explain a little bit on defined contribution? Are you growing? How are you progressing with that particular channel of institutional?

Well the defined contribution business, is a -- is a part of our service array. Typically where we're a subadvisor to a defined contribution plan. A sleeve, a choice in that plan. But, by comparison to our presence in defined benefit market, we're not an important factor and we should be. We need to be. And we think that there is an opportunity on two fronts.

First, as the -- the D.C. retirement plans become ever more prominent among plan sponsors the amount of attention paid to planned participant choice, the amount of professional advice provided, we think's going to grow and we believe that will open up an opportunity for us. Second, there is this movement to target date maturity funds. It is I think, a -- just a terrific development, by all accounts. Especially for the planned participants. Because for well designed -- designed such plans, it is just an excellent choice in that they're inherently balanced by asset class, by geography if properly constructed. They systematically rebalance at an appropriate rate given the planned participants age and retirement possibility. It's -- it's just clearly superior to the supermarket based approach that has characterized the -- this space heretofore.

Now, we have made a major attempt to build brand equity around intellectual capital if you will that we're bringing to this space and while it's self serving to -- to make this assertion, we really do think, we've advanced the state of the art in target date plan design. We published on it, we're -- we're -- we're trying to build visibility and we are trying to establish relationships that will enhance our ability to -- to penetrate this market. And hopefully we'll have something more to say about that in coming quarters. So you should see -- we see this as a very important area of opportunity for us. We'll really be emphasizing it.

Thank you very much. That's helpful.

The next question comes from David Haas from Fox-Pitt Kelton. Please go ahead.

Hi. Just one -- one question sort of getting at operating leverage and incentive compensation expense. If -- if I look at a sequential basis and I recognize the -- the high performance fees in the fourth quarter, but with revenues down, sort of if I take out the -- the mark to market even down around 50 million sequentially and incentive comp if I take out the -- the 12 million off of the mark to market as well as even the rapid rise in commissions because of strong growth there still coming up with sort of a $5 million rise or so in compensation. It seems like you still have compensation rising a lot more rapidly than revenues on a sequential basis and then on a year-over-year basis incentive comps up 37% with revenues up around 20%. I recognize it's tied to operating profit, but can we expect this sort of incentive comp run rate to -- to remain stable going forward? Is this sort of a good level?

David, the formula drives our IC is indeed a formula based on operating earnings. There's pieces that come and go like the fact that we were heavy on deferred so you have some stepping in the deferred that plays into this formula. But, it's based on operating -- on operating earnings, to the extent that we can manage the margins without IC and that's what -- that's what drives the number and so your -- your model must be off a little bit. All right.

So, Dave, the only thing I would add to, is Gerry tried to emphasize in his formal remarks that the character of commission compensation is sensitive to an acceleration in growth rate that creates a transitional increase in commissions of the percentage of revenue earned in the -- in the first period. As time passes, the margin attached to that business improves.

Now, that's on the commission line. Looking at the total comp line, Lew said we're hitting we're right back to -- to my -- to the point I tried to make in the presentation. Not IC. So on -- commission is literally a leading indicator because we're paying the commissions at an earlier period than what we're realizing the revenues on for almost in -- in -- almost in every plan that we have. And the fact that we have a big spike in the increase in the sales creates a spike in commissions and that will go -- if we stop -- if we stop sales next quarter, to -- and everything else was absolute, our revenues are going up without even the market moving or any more sales. The revenues will go up and the commission expense will stop. So there's a leading indicator or lag effect here on the revenues that are generated by the -- by the commissions being generated. Does that help, David?

It does. It does. I guess I was -- I was also just sort of simply looking at year-over-year growth rates and operating profit and they seem to track, at least in this case, almost one for one with the growth rate in the incentive comp.

Well, it should. [INAUDIBLE - three people talking at once] And don't lose sight of the fact the operating was up more than 300 basis points. It's the extent that you're managing your other expenses more effectively, absorbing them more completely because of the IC formula it will tend to drive up the payroll ratio. But the unit holders will benefit net net. Indeed. Substantially.

Okay. Thank you.

The next question comes from Robert Lee from KBW. Please go ahead.

Thanks. Good afternoon, everyone.

Hello Robert.

Two quick questions. I'm just curious, there's clearly been two sort of mega transactions in the -- the industry the past year. Have you -- are you seeing at all any fallout from that, I mean, to your benefit in terms of people starting to look around for someone who's not going to do a big deal or is -- is some of the - your competitors get put on hold, so to speak, at some consultants or soft hold? Do you see any benefit there?

No, we're not. And, frankly, I don't think we'll ever be able to tell if there were one.

Okay. Second one and just real quickly, the improvement in the U.S. mutual fund space and I apologize if you mentioned this earlier. Is that coming, are you seeing that come mainly because of an increase sales in -- in the target date products or is there one or two specific products that are -- that are driving the improvement in the -- in the U.S. retail?

It's not targeted at all. It's our wealth strategies services. Which the core that we want to build as a foundation. And it's our non-U.S. services to U.S. clients. They're looking at -- they're becoming more global as -- as Lew referred to earlier and then it's across to the other services. No major home run and certainly not the one -- not target based funds.

And. again, I want to stress that our high organic growth rate in that channel owes to very rapid growth offshore and the product array there is quite diversified.

Okay. Great. Thank you very much.

Let me say that, in that -- in the -- in the offshore including some significant services and fixed income services that are just great track records in a long history of group performance.

The next question comes from Bill Katz from Buckingham Research. Please go ahead.

Just a follow up on expenses, if I may. The end of last year, I believe, you sort of iterated a sort of five or six major investment spending programs for I guess this year and maybe into early next year, just sort of curious if you can give us an update of where you might be in the life cycle of the investment spin on that and more specifically just what is the incremental impact of the UK office buildout?

Well, I have to go back and see which quarter we discussed the four or five investments, Bill. But if we're talking about the investments in strategic growth and strategic change and investment in Shanghai, they're all there. There -- everything is -- is there and running. I can go back to the point that Cynthia raised on the facilities, everything is on a run rate except for London, and like I said what -- what we don't have in London yet is we haven't dumped it all out yet and so that's not -- that will still be a step up in the facilities cross. And then again London space is expensive. All right, it's become, so the -- the [INAUDIBLE] I say that in a -- in an absolute term. But we're still building that space out.

But Bill, the sense of your question is when you think about the -- the kind of center core of intellectual capital, human capital and all the physical infrastructure required to support it I wouldn't anticipate rapid growth from this point. We -- we -- if -- if there's any message that -- that single display attempts to deliver is that we have in place an awfully impressive array of resources to claw on. We don't need a lot more. So, if we -- if we're successful in delivering the investment returns that -- that we hope to for clients we ought to be able to leverage it. Which I'm -- which I think is the sense of your question.

Okay. And then if I can just have one follow up on that. Your share count involved the diluted number and then also at the traded partnership level, both sort of increased reasonably high sequentially. Just sort of curious if you can give us detail behind that.

Options. Exercise of employee options. All right. I mean the -- the -- the unit -- the unit prices have done well recently. And we have -- although we haven't been using options as a con -- compensation tool for the last few years, the firm had for several years and the -- and the employees took advantage of -- of the -- of the performance of last year and exercised some options. Some of which, you know, weren't even -- weren't -- weren't -- weren't above water until -- until the last six months or so. Hold on.

In addition to that, our -- our old deferred comp plan which was basically a cash plan but it doesn't get distributed until employees leave although it's largely vested at this point in time. We actually converted that from a cash plan basically to a unit plan and so people substituted units at fair value at the end of the year for the cash obligations we had to them and so that also caused an increase.

Right.

You talked about deleveraging a little bit this year. Any thought of maybe buying in some of the units to offset the -- the dilution?

No, actually Bill, I don't think that would be particularly wise. The -- we're going to pay off, as you know, the -- the debt that's coming due, late summer, I think it's August. And -- and the way we analyze our cash requirements we will -- we will have a volatile working capital requirements that will cause us to be borrowers in the commercial paper market, occasionally but for very short periods. For noteworthy amounts and on average, not a whole lot. But on average it will be a positive number. That is we will have on average some short term debt. And so in view of that capital structure, I think, shrinking our equity base could make a lot of sense. Look, you got -- got to remember when you contrast us to many of the other companies you follow, we pay 100% of our -- of our partnership earnings in dividends. We don't repaint it. We don't build liquidity. So if you think about a share repurchase as an another form of dividend, because essentially it is. It's just a return of capital to shareholders. We're already doing it. And I think leveraging the business financially beyond that that we have, which is modest, but given its volatile character, I think appropriate. I just think it's the wrong strategy.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) There appear to be no further questions at this time.

Thank you very much Nicki. I'd like to thank everyone for joining us this afternoon and I'd also like to invite you to call investor relations should you have further questions. Thank you very much.

This concludes today's AllianceBernstein conference call. You may now disconnect.