AllianceBernstein Holding LP (AB) 2006 Q2 法說會逐字稿

Thank you for standing by and welcome to the Alliance Bernstein second 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 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 Bernstein, Miss Valerie Haertel. Please go ahead.

Thank you, Mary, and good afternoon, everyone, and welcome to our q 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 AllianceBernstein.com. Presenting our quarterly results today are Gerry Lieberman, President and Chief Operating Officer, and Lew Sanders, Chairman and Chief Executive Officer. Bob Joseph, our CFO, will also be available to answer questions at the end of our formal remarks.

I would like to take this opportunity to note that some of the information we present today may be forward-looking in nature and, as such, is subject to certain SEC rules and regulations regarding disclosure. Our disclosure regarding forward-looking statements can be found on page two of our slide presentation and in the Risk Factors section of our 2005 Form 10-K. In light of SEC's regulation FD, management will be limited in responding to inquiries from investors and analysts in a non-public forum. Therefore we encourage you to ask all questions of material nature on this call. At this time I would like to turn the call over to Gerry Lieberman. Gerry?

Thank you, Valerie, and good afternoon to everyone on the call. As I am sure you have all noticed, in the last half of the second quarter and much of July, for that matter, equity markets were weak in almost all geographies. The concerns over inflation, rising interest rates and, very importantly, slowing economic growth took its toll, and this was before risks in the Middle East intensified. On top of this, our relative investment performance in the second quarter was pretty much disappointing. On top of this, our relative investment performance in the second quarter was pretty much disappointing.

With that said, we are reporting a very strong quarter from a net asset-gathering point of view with record highs for the firm as a whole. As we forecasted, we just had terrific net sales results in all three asset management distribution channels as well as recorded high quarterly revenues in our sell-side equity channel with organic growth seeing double digits in all four channels. In addition our financial performance for the quarter was very strong with operating partnership -- their revenues up more than 23% versus last year to $933 million. [indiscernible] was up just under 32% at $261 million as we improved our margins by 130 basis points, while Alliance Bernstein Holdings net income and distribution per unit were $0.89, up 31%.

Having covered four quarterly highlights, equity markets, relative performance, organic growth, and financial performance in just 90 seconds or so, let's take a closer look at the details.

I'll start with market performance. So let's go to display 4 for our charts on three key, non-U.S. markets indices. Here you'll see that for the quarter MSCI EAFE in world indices were basically flat at 70 basis points, up 50 basis points down, respectively. The MSCI emerging markets index lost 430 basis points. These performance results were very different than what we were experiencing in the previous four quarters -- or three years, for that matter. But even with this weak quarter, the 12-month returns for all indices were up smartly with nearly 17% in MSCI world, 26.6% MSCI EAFE, and a huge 35.5% in the emerging markets.

These returns served our clients with non-U.S. equity exposure and our AUM level as well. Forty-nine percent of our AUM is at international and global services where market appreciation and these services added $43 billion to our AUM versus 16 billion for U.S. investment services. As far as the U.S. indices were concerned, on display 5, you'll note that the Wausau 1000 Index lost 390 basis points. It brought the 12-month performance down to only 6.1%. The second quarter was the worst quarterly performance for this index since the first quarter of 2005. By the way, for the 12 months ended March of 2006, these returns were 13.2% as the index replaced the solid second quarter of '05 with a weak quarter in the second quarter of '06.

Meanwhile, the Wausau 1000 Index squeaked out its 13th consecutive quarter with a positive return albeit only 60 basis points, and the S&P Index was a negative 1.4% for the quarter dropping the 12-month return down to 8.6% versus 11.7% at the end of March. With the drop in major equity market indices, what happened to bonds? Well, two additional federal reserve rate increases totaling four in 2006 kept bond returns in slightly negative territory with the Lehman Aggregate Bond they're planning 0.1% in the second quarter and 0.8% over the last 12 months.

Now that I've reviewed the capital markets performance, let's turn to the display 6, and I'll show you how we performed for our clients. You can also reference this phase 25 through 35 later for still more detail on these important leading indicators.

As I noted earlier, our quarterly investment performance with notable exceptions, was generally disappointing for the quarter. However, longer-term relative returns ranged from competitive to excellent across most services, especially our style blend, global, and international value equity services where we continue to gather very significant assets.

As Lew will discuss later in his remarks in this call, in our view, the market turbulence and the press results in the second quarter actually leave us in a position to take advantage of noteworthy investment opportunities into the growth equity debate -- but more on this later.

For the quarter, institutional growth equity services under-performed benchmarks in all of our key investment services including multi-cap, small cap to the emerging markets. However, longer period 3 and five-year returns most important to the consultant community and clients remain competitive.

With respect to our institutional value equity services, for the quarter our global equity service outperformed its benchmark by 130 basis points. But the other significant services added no alpha in the quarter. However, here, too, longer period returns remained very competitive as institutional, international value, global value, emerging markets value returns were excellent for three and five and even 10-year periods with out-performance ranging from 320 to 640 basis points.

Obviously, our style blend portfolios were negatively impacted in the quarter by the returns in the gross sleeve of their respective portfolios. Conversely, our style blend portfolios benefited from the value sleeve and, as a result, you will see impressive longer-term returns in these services. And, which I will discuss later, these services continue to account for a significant amount of new candidates.

Finally, although interest rates have virtually wiped out fixed income, absolute returns are global and strategic core plus services relative performances were positive for the quarter, albeit barely with the latter service, and provided better performance for the one, three, and five-year periods. As we all know, past performance is no guarantee of future results, but performance is one data set used by both current and prospective clients as well as consultants to the institutional community to evaluate how we're doing. It can also be a leading indicator of the potential future success of the firm. We feel that our investment performance in clients service offering bode well for our clients and our unit holders.

Now let's turn to our distribution channel flows for the three months ended June 30th on display 7. Let's see just how successful asset-gathering activities have been. Here you can see that we achieved positive net flows of $16.9 billion, a record for the quarter, consisting of 9.6 billion in institutional investments, 4.7 billion in our retail, and 2.5 billion in our private client channel. The 5.5 billion gross inflows figure for our institutional channel was made up of 382 mandates funded in the quarter. For our retail channel, it was the fourth consecutive quarter of net inflows. The 13.3 billion in sales and 14.7 billion in net inflows are the highest for this channel since the merger of Alliance and Bernstein in 2000. And our private client channel recorded net inflows of 2.5 billion with just 160 million less than the first quarter, which is typically the highest net quarter every year. The 4 billion in new accounts and sales growth was, indeed, the best quarter ever for the channel.

Display 8 shows changes in assets under management by channel for the 12 months ended June 30, 2006. You can see that we had gross sales of almost $105 billion, a record by 17 billion over the previous high, while net inflows totaled 51.7 billion, also a record for a 12-month quarter-end period, both contributing significantly to our increase of 21.2% in AUM. Net inflows consist of 31.4 billion institutional investments, 12.2 billion in retail, and 8.1 billion in our private client. Our 12-month view reflects the acquisition of assets in Hong Kong through a joint venture interest as well as previously reported asset dispositions of our South African joint venture interest, and our India mutual funds.

Turning to display 9, you can see our flows by investment service for the three months ended June 30, 2006. For the fourth quarter in a row, we had positive net flows into both growth and value equity as well as fixed income investment services. Note the 5.9 billion in value equity growth sales for the quarter as another growth sales record was achieved.

This is the fourth quarter in a row where our fixed income flows exceeded $1 billion, but perhaps more noteworthy, with the passing of the quarter, we reached a five-year milestone in our fixed income Core Plus services, a milestone that we hope will be viewed positively by the consultant community as returns in that service have been very competitive over this important timeframe.

Turning to display 10, you can see after the 12 months ending June 20, 2006, value equities led the way with over 45 billion in gross flows and 29 billion in net flows, both records for our value services, growth equities that influenced totaled over $18 billion with 38 billion in growth flows while fixed income experienced net inflows of $6 billion.

Now let's turn to display 11, I'll start my discussion of our distribution channel highlights beginning with our institutional investments channel. At June 30, 2006, our institutional investments channel assets accounted for 63.4% for our overall AUM, or $396 billion. This was up only 1.6% for the quarter to the $4 billion in market depreciation, partially offsetting the strong net inflows for the three-month period.

Our U.S. and non-U.S. style blend services accounted for approximately one-third of this channel's fundings, and we had continued sales stream in our global and international services in the quarter, which comprised 80% of new fundings.

It should be noted that our pipeline of unfunded mandates, which were at an all-time record high last quarter has declined to a lower level as mandates funded this quarter were very significant while the little activity for new mandates slowed. My last bullet point on this slide is a preview, of sorts. Here I refer to a new sales, marketing, and investment service initiative into the fine contribution space that Lew will elaborate on later in the call -- an initiative that we believe has significant strategic importance and opportunity, if we are successful.

Turning to display 12, you will see that our retail assets comprise 23.4% of our total assets, or 146 billion other management in this channel. Wealth strategies our important set of asset allocation services reached 6.5 billion in assets this quarter with the U.S. distribution component comprising 4.3 billion of assets and the non-U.S. component, global wealth strategies, comprising 2.2 billion.

Now with that said, although we feel well positioned to both grow the AUM in this channel and grow it in the best interests of our clients by not pushing hot niche funds, we are experiencing slower sales this month. The fact is, retail fund sales are reacting to the difficult equity markets both in the U.S. and around the world, even though our research shows their current economic conditions are not a reliable predictor of future stock performance.

And, finally, regarding our retail channel, our College Bound fund was ranked number one in performance by savingforcollege.com, a leading authority on section 529 for college savings plans. As our 529 balances grew to a total AUM of $6.8 billion.

Display 13 shows our private client channel highlights. There you can see that a high net worth channel represents 13.2% of our total AUM with $83 billion in assets. Following a seasonally strong first quarter, we still brought nearly 3 billion in net inflows for a quarter that includes April 15th. The 8 billion in the last 12-month period was a record high for net flows for the 12-month quarter-end. Oh, yes, for the 12-month, this channel's assets are up over 23%.

We continue to invest in our private client business. We added staff as we expanded our footprint. From the second quarter of '05 to June '06, we increased the number of financial advisors by 50 to 280, a 22% increase in staffing and a significant investment for the future.

After the close of the June quarter, we opened our new London private client office, establishing our first non-U.S. high net worth presence in the UK. As a reminder, we have no plans to open any other new private client offices this year, but we will continue to add staff in many of our current office locations as business opportunities dictate.

Highlights for institutional research services are shown on display 14. Revenues totaled $103 million for the quarter, an increase of 35% from a year ago, when you exclude a $4 million reclass of buy-side transaction fees in the second quarter of 2005. Both our New York and London sell-side offices experienced double-digit organic growth as we continue to increase our market share and participate in volume increases in an environment of continue pricing declines. We also continue to receive recognition for our research quality as two leading European research surveys give us high marks on quality. Distinguished research, leading-edge trading technologies, and terrific sales and support contributed to strengthening our market position.

Additionally, we continue to add to our industry coverage launching research for European medical devices and supplies, European luxury goods, and European retail.

In summary, we are extremely pleased with the accomplishments in progress that we made in each and every one of our four distribution channels, and we're excited about the challenges and 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 from a U.S./non-U.S. and equity fixed income investment services perspective. Turning to the center pair of pie charts on display 15, you can see that we currently have 73% of our 625 billion of total AUM in equities versus 69% a year ago, a mix change that has added to our over fee realization. Thanks.

Looking at the two other sets of pie charts, you'll get a sense of the increasingly global makeup of our firm's business. On the pair of pie charts on the left side of the display, we show that AUM by nine U.S. client domicile increased by 42% in June '06 versus June '05, from 146 to $208 billion. The right side of the display illustrates that over the past 12 months, our assets being global and international services grew by 54% from 201 billion to $309 billion.

As Lew noted in the press release, and it's worth repeating here, our global and international services now account for 49% of the firm's total assets under management, a sign of the success of our non-U.S. expertise in both managing money and serving non-U.S. clients.

Now to provide some highlights of 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 16.

Their revenues for the quarter increased 23.4% to $933 million compared to $756 million in the second quarter of 2005 with investment advisory fees up 30.5%, or $161 million. Moving to display 17, we detail advisory fees by fee time and by channel. Base fees were up 29.5%, or $148 million to 653 million this quarter. The increase was attributable primarily to higher average AUM but also impacted significantly from a shift from lower-priced U.S. to higher-price non-U.S. investment services. Also, you will note that our performance fee number was strong, the result of anniversary dates long-only institutional mandates that performed very well.

Moving to the lower half of the display, we show advisory fees by distribution channel. Here you can see the 42.2% increase in our institutional investments channel, which is where we experience significant cause of mix change and earned the performance fees.

Private client and retail advisory fees grew by 26.8% and 18.5%, respectively, during the quarter has both benefits from higher AUM, although the latter's growth rate was adversely impacted by the sale of our cash management assets last year.

On display 18, institutional research services revenue increased by 27.5%, or perhaps more accurately, 35% when you include the prior period by $4 million re-class from an advisory base. The strong increase is the result of higher market volumes and market share increases only partially offset by the lower pricing.

The dividend and interest income and interest expense lines shown in this display are largely brokerage-related and increased to the increase in interest rates and balances.

Then, finally, on this display, the impact of mark-to-market losses on deferred compensation-related investments of $15 million in the current quarter versus gains of $7 million in the prior year's quarter are reflected in other revenue. But, as you know from prior meetings, the bottom-line impact of these gains and losses were mostly offset in the quarter by decreases in deferred compensation expense, which will be recognized as [awards back].

Now that I've covered our 23.4% net increase -- net revenue increase -- I'd like to talk about our 20.3% increase in total expenses starting on display 19. As you can see, employee comp and benefits increased 21.1% in the quarter to $374 million and represents 56% of our total expenses. As shown on display 20, base compensation increased approximately 10% as we increased headcount by 470 staff members to 4,588 at quarter-end. Increased staffing in our private client and retail channels, IT, and the buyout of our partner in Hong Kong accounted for a majority of our headcount increase.

The increase in incentive compensation of 14.5% is less than our earnings increase as the 23% increase in cash IC accruals were partially offset by a 3% decrease in deferred compensation including the impact of the mark-to-market losses on deferred compensation-related investments.

However, commission expense increased over 40%, that's 40.4%, the result of our outstanding new-business generation across all four of our distribution channels, and in particular sales strength in our institutional investments and private client channels.

This impressive growth in commission expense is, quite frankly, a best-of-kind type of leading indicator for future revenues and earnings increases. Just the full impact of the new business isn't reflected in the quarter P&L, while the commission schedules are front-ended in the first year.

Turning to display 21, you can see that G&A increased $47 million, or 57.1%. Significant contributors to this variance include $18 million insurance recoveries for legal fees in the second quarter of 2005, and $10 million in increases in occupancy expense this year with new space in our London, Hong Kong, and several private client offices. In addition, we had 5 million in brokerage processing expenses and $4 million in higher market data services costs. All three increases in these spending categories -- occupancy, brokerage processing, and market data services -- will be recurring based on our new level of business.

In addition, you should understand that we can incur one-off expenses in any given quarter that can easily be as high as $10 million or as low as a $2 million in any given quarter.

As I wrap up my comments, please turn to display 22, where we present a recap of total revenues and expenses that come to a summarized income statement for Alliance Bernstein. Here you can see that our pretax margin is up 130 basis points to 29.3%, and our net income is up 31.9% to $261 million. You will note an 11.8% decrease in the tax rate to a change in the earnings mix and, therefore, lower accrual estimates for the year. As noted in our press release, this downward revision in our estimated full-year tax rate added a penny per unit to the second quarter earnings.

Carrying the 261 million of Alliance Bernstein's net income forward to display 23, we show Holdings financial results. Alliance Bernstein Holdings equity share of Alliance Bernstein earnings were $85 million for the quarter versus $63 million in the same quarter last year with net income after taxes of 76 million, or 35.4% better than '05.

As I mentioned in my opening remarks, our distribution per unit for Alliance Bernstein Holding will be $0.89, a nearly 31% increase from the $0.68 distribution in this same quarter last year.

In summary, this was a strong quarter for our firm on many fronts. While disappointed with our investment performance for our clients this quarter, we increased our firm's profitability through significant organic growth against all distribution channels. We continue to invest in expanding the firm while improving our margins for our unit holders. Importantly, we continue to improve our AUM from global and international investment services though by continuing to increase our realization for a better mix of investment services.

And, finally, our longer-term relative performance continues to benefit our clients. Now I'll turn the call over to Lew, who will discuss our opportunities in growth equities and the retirement savings market. Lew?

Thanks, Gerry. So before taking your questions, I want to discuss two issues. The first is tactical -- performance of our growth services. The second is strategic -- changes that we see developing in the U.S. retirement savings market and our response thereto.

Now, while strategic issues might not be on the top of your agenda right now given the turbulence in the capital markets of late, they are always on ours, and what's underway in the retirement savings arena here in the U.S. we think is really significant.

But first a few comments on the performance of growth stocks, ours, in particular, and the space, in general. The second quarter was, as you know, tough on growth investors, a trend that intensified, I might add, in July. In the U.S. growth style benchmarks of under-performed value benchmarks by almost 1,200 basis points year-to-date; in fact, nearly 500 basis points in just the last two months.

While style return differences have been less dramatic overseas, they are directionally similar. This caps a period extending some five years where growth returns have lagged value. As such, the investment opportunities in the growth domain are estimates now well above average. In response, our growth services, especially in the U.S., have elevated their exposure to growth attributes to levels well above normal. This has hurt returns in the short run as the second quarter makes clear. But promises to amplify relative performance when the growth style returns to favor, which is our expectation. At the same time, our value services have volatilities well below average and should do especially well in relative terms in a period hostile to the value style.

Now turning to developments in the retirement savings market in the U.S. -- the migration from defined benefit to defined contribution plan continues at a steady pace -- that's not new news. But of greater significance is the prospect for major changes in the way VC planned assets are deployed. We would offer the following observations -- the default option, as you may know, accounts for a significant portion of the typical asset distribution and plans will likely move with some speed from stable value mandates to target-date retirement funds. Automatic enrollment will be adopted, we think, by most plan sponsors, clearly stimulating new cash inflows into these plans. Automatic escalation of contribution by plan participants timed to correspond to pay increases we think will be embraced by an increasing number of plan sponsors stimulating cash inflows still more. And, finally, the principles and processes that have controlled manager selection in DB plans over the years will, we think, increasingly control such selection in the VC space, too. All of which makes building our presence in the VC market a strategic imperative. Thus we have established a new marketing unit headed by senior executives to pursue this opportunity exclusively. The unit is housed in our institutional investment division to capitalize on our broad network of relationships in this plan-sponsoring consulting community.

We'll continue to use our retail distribution resources to reach smaller plan, as we have in the past. In addition, we have expanded our product array, offering what we believe to be among the most comprehensive target date solutions in the industry. It includes four tiers. The first consists of turnkey solutions that use our advanced investment planning tools to manage the asset allocation glide path from inception of the investment to retirement and beyond. These solutions also use our services for all active sleeves in the allocation. Now, for those of you not familiar with the lexicon of this product category, the term "glide path" is used here to mean the evolution of asset allocation as the target date fund matures.

The second tier of our solutions consists of our glide path design and rebalancing services with index products for all the sleeves.

The third tier are solutions that use our glide path design and rebalancing services but employ active or passive sleeves managed by others. So here we are the asset allocator exclusively using none of our active services.

And, finally, we offer active sleeves that could be part of target date programs managed by others, in some cases, the plan sponsor itself. This service array positions us to respond to a very broad range of planned sponsor preferences; moreover, our investment planning know-how positions us to customize glide path design to incorporate the unique requirements that some plans may have.

Now, we recognize -- and this is a key point -- that this is a complex market. We have no illusions about the time and effort that will be required for us to succeed. This is a multi-year mission, but we think it's worth our focus first and foremost because we think we bring sorely needed investment planning know-how to plan participants' packaged in ways that's easy for them to understand and access. Second, because the changes afoot in this market promise to drive dramatic shifts in asset allocation, among the larges in the DC world for very many years, presenting an opportunity for the firm to gain market share in what ought to be a rapidly growing pool of retirement savings. We'll keep you current on our progress. And now for your questions.

[OPERATOR INSTRUCTIONS] Bill Katz, Buckingham Research.

Lew, maybe I'll start with you from the strategic imperative. I'm just sort of curious as to how you can take market share from, A, some of the embedded, defined benefit major players and, B, how you saw us stack up against some of the bundled providers, like a T. Rowe or a Putnam or maybe a Fidelity, in that matter, to take share? And is this a large incremental expense initiative on a go-forward basis?

Well, look, we, Bill, are making a set of assertions that we bring to this space some innovative solutions that our competitors have yet to match and that our presence in the defined benefit community, both clients and consultants, will be helpful in building our brand equity as the decision-making processes that drive DC plan choices increasingly migrate to the kind of considerations that have characterized DB plan choices. Now, once again, that's a forecast, that's not a current reality. But as the prominence of the DC plan as against DB has risen, in fact, in many companies becoming the key retirement vehicle, and as legislation and DOL rulings move to provide the appropriate environment for plan sponsors to provide investment advice and more carefully crafted solutions, as the default option moves from a very defensive orientation on the part of DC plan sponsors to something more appropriate, a window, we think has opened for us against really high quality, as you noted, really high quality, very established competitors.

And once again on your point, we don't harbor illusions about any rapid penetration here. It will take time, but it's worth the effort, and we think that we have a distinctive offering and thus it augurs well for our success with patience. Now, as to incremental expenses, don't worry. This is mostly a reallocation of existing downstream costs to this purpose as opposed to large new ones from our expense. There will be some, but you won't really -- they won't be material.

Thank you, and my second question is, you talked, Gerry, about the benefit of the shift in asset mix toward non-U.S. and away from fixed income toward equity on a revenue yield basis. I'm just sort of curious as how you think about that on a margin basis. Is your non-U.S. business at a point now where it's at least equal to or perhaps even higher than the core business, and if that trend were to continue, would we see a natural drift up in the margins then?

I think that's three yeses, Bill. It's yes our profitability overseas is reflected from there, it gets the benefit of the pricing; two, we're seeing it come through. I think the answer is yes, yes, yes, I'm serious about that. So we feel very, very good about this.

And we also -- a lot of the infrastructure now is built overseas, and we'll continue to look to see where we have to have a new office or something, but we're building up that infrastructure to serve those clients well.

Mark Irizarri, Goldman Sachs.

Oh, great, thanks -- a question on the evolution of your fee realization within the institutional channel. You know, when you think about the growth in the global blend product and your international product, you know, A, is that incremental business that you expect kind of on a go-forward basis so that your fees will drift up in that product or ultimately will that business be done at essentially the same kind of fee level of the existing gross composites, if you will.

Mark, to be clear on this, the style on services have price structures designed such that there is no arbitrage as against the component parts bought separately. So the relative growth, therefore, style blend, does not, by itself, improve yields. On the other hand, it's a factor in elevating equities as a service against fixed income. It does have a revenue-enhancing effect in relation to assets under management.

Okay, and if you think about the evolution of DB to VC, how would you expect the fees to play out as that business --

I think that's fee neutral.

Cynthia Mayer, Merrill Lynch.

I guess I'd like to ask what your sense is in terms of what institutional clients are doing in terms of asset allocations to emerging markets and international generally. If those styles continue to -- if emerging markets continue to sell off, do you think institutional clients would rebalance more into them or are they dialing down their exposure in a more permanent way?

Cynthia, I don't see at this point any noteworthy asset allocation response by institutions to the shift in capital market returns in the last few months. It's clearly prominent, however, in retail clients and actually developed quite rapidly, as you may have noticed. Nor would I forecast any likely important shift and institutional client interest in global or international -- for that matter, emerging market -- mandates. It takes quite a long time, and provocative capital market differentials to induce important shifts among institutional and investors with regard to asset allocation.

Okay, great, and I guess a question for Gerry. You mentioned that commissions are good leading indicator, and I'm just wondering how literal I can be about that and what kind of time lag should I assume between commissions and when the AUM shows up. I noticed they were up slightly from March to June, but does that say anything about money showing up this quarter? It sounds like you think flows will be a little bit slower this quarter.

No, the flows are going to be a little slower this quarter because we have this extraordinary pipeline that much of it got funded during the quarter, and the mandate activity hasn't been as intensive as it had been the previous couple of quarters.

But what happens, Cynthia, is when you bring in a mandate, the sales force is paid on the revenue on the mandate, and it's -- especially in institutional -- but it's also true in the private client space. It's a bigger percent in the first year, and then it drops in the second year and the third year. So it's a declining rate, whereas you'll get the assets in maybe in a mid-quarter, and then you'll go get the run rate going over a period of time. Does that clear up what -- the point?

[Liam Alexander], CIBC.

Thank you very much. I'm wondering if you could just spend a few minutes on the defined benefit channel and maybe expanding on the initiatives underway. You mentioned last quarter about venture capital, and this year it came out of the results of the research, maybe expand on the quantitative product and what's going on there?

Okay, now, once again -- there isn't anything new in DV land other than the fact that there have been very few new DV plans incepted in this country in recent years and, indeed, the most recent trend has been to freeze those that exist. The line, increasingly, in fact, overwhelmingly on VC solutions to provide this benefit, planned beneficiary. So my remarks were to say that we, as a firm, need to be responsive to that strategic change, and I went on to describe and environment in which perhaps an opportunity is being presented to us as legislation and regulation moves as well as plan sponsor interest to broaden and change the character of the kind of investments that they put in these VC plans. That's the essence of the strategic change we see, and we're moving aggressively to seize the moment.

Now, as to quantitative initiatives in the firm, probably no. There are many, they're ongoing, there is really nothing new to report on that score. I will tell you that, as we reported earlier, have launched in this quarter our currency service. This is to institutions, the first form of which is in alpha generation affair. Later, perhaps quite a bit later, we will offer currency overlay services or risk management perspectives. But the opportunity in alpha services is actually meaningful, and we're hopeful that bringing some interesting competitive advantage to this market. But there, too, it will take some time before this gains traction.

The VC initiative -- this is embryonic, and as I tried to stress when we described our interests here, they are more for the window into technology change, that being an active VC investor provides, a window very helpful to managing money in the mainstream, seeing early important new developments that can create opportunities and also disruption. The VC business standing alone, given our scale, is highly unlikely to be a significant source of revenue and profitability, but I think it will be an important feature of our research capabilities, of our research prowess, really, that will be down to the benefit of our ability to manage money in publicly traded equities.

Thank you, that's very helpful. If I could just ask, Gerry, on the institutional business -- just wondering if you could separate out maybe if there's trading revenue in there in addition to commissions; if you receive hard-dollar payment; if there's any way we could get a better mix of commissions versus hard-dollar fee for your research.

Let me start with there is no trading in from here. We only do our trades on an agency basis. So that's -- the answer to that is zero. And the hard-dollar component has been relatively small.

Tiny.

Really tiny, although there's been a tiny increase, the number is tiny. A couple of firms have done it, and one is in it for a while, a large firm, but it's a rounding error when you look at the total revenues for the channel.

Chris Spahr, Prudential.

A couple of quick follow-up questions on institutional research. Could you give a sense on the link order trends that you saw? I believe the guidance you gave -- or the comments you gave on the slide 14 was year-over-year?

That's right, it was year-over-year, and the business did improve quarter-to-quarter, too, but not by that large an amount.

Could you give a sense of volume, share gains, et cetera? Or like with the [inaudible].

We don't supply level of granularity, but I will tell you, and I think you know this, our market shares were up quite strongly, and the business benefited, too, from some growth in volume in the marketplace itself. On the other hand, it was affected as all other firms in this space by a pretty sizable erosion in the transaction plus, and this is happening dominantly the function of mix change. As the algorithm and trading platforms have gained share, while it's for a lot of volume, it's also lower realizations. Net-net for us, however, you can see in the data it's been a successful endeavor.

Okay, and then just a little clarification on the tax rate on a going-forward basis, like, going into next year. What shall we think of the effective tax rate?

Our CFO whispered in my ear and said, "6%."

Six percent?

What you're trying to do here, as you can imagine, is the mix of the business between U.S. and non-U.S., and what happened in this quarter, by the way, is we got it wrong in the first quarter, so we had to correct it in the second quarter both for what we think it's going to be the rest of the year and for the catch-up for the first quarter.

Keep in mind there's a catch-up every quarter because we book our tax provisions based on what our estimate of the rate for the full year is going to be. That changes as we get through -- obviously, is a good for the year, and we see the mix of business changing. So it's hard to predict it with any kind of accuracy but, you know, you should think around, generally, the 6% area.

That goes for fiscal '07 as well then?

Well, not necessarily. We're talking other things.

Robert Lee, KBW.

I have two quick questions -- [indiscernible] of the performance fees, there was a nice jump, I guess, sequentially. How much of that is coming from just performance or just the sheer number of assets and mandates you have with performance fee components is rising and, therefore, should we expect that to generally trend up just because there's more mandates with that fee?

For this quarter, it was particularly -- it was very specific BNAs where we just did well, long-only, institutional space, not a hedge fund. I think over the long term there are going to be more institutions that might go this way, and we're happy to accommodate them. But it hasn't added up to a lot of incremental -- a high percent yet. So this is really a -- we did well with some management, some clients, and we did well a year ago with some of the same clients. This is an anniversary issue.

But it is growing, Rob, and remember, too, that our alternatives business is growing and, in fact, we have a program to expand that business in a material way. So when you think about performance fees, then, over the long term, if we're successful, they should grow.

And to add to that point, most of them are still fourth quarter measurement dates.

There's a little seasonality -- actually, quite a lot.

Yeah, there's a lot of seasonality.

In Q4, but there's also anniversary dates in Q2.

And then just one follow-up -- I'm just curious -- you've had so much success expanding the business globally and winning future mandates outside the U.S. To what extent has the parent company acts have been helpful in this? I mean, my sense is historically it's been pretty hands off, but have you seen any change in the relationship or how you would deal with them outside the U.S.?

We deal with them on an arm's length basis, and so we've picked up some business from [ACSA], mostly outside the U.S. -- both outside the U.S. and here in the U.S. They're in an open architecture, so we compete, and our growth has been having the right people on the ground, having the right products, being able to provide the service, and the world is changing outside the U.S. So we're now able to serve clients, which heretofore weren't looking for non-local mandates.

But I want to add, too, if the sense of your question was whether ACSA's presence as a global insurance company is a factor in our success in clients outside of ACSA, the answer is not at all.

Zero.

They are a competitor with ACSA IM. Your perspective on them, then, as you framed the question, is correct.

Yeah, so we don't walk in with an ACSA card.

[OPERATOR INSTRUCTIONS] Bill Katz.

Bob on this one -- just sort of curious, if you look at your other expense line, not the G&A line but the other expense line, it looks like it gapped up from about 49 million to almost 60 million sequentially. So I'm wondering from your comment that any at any one core you might have a $10 million sort of one-off. Is that what happened in this quarter or is this line 2 a new run rate, going forward.

On the promotion on servicing? Is that the one you're looking at, Bill?

Correct.

That's T&E going up. As we become more global, our travel and expenses are going up. That's a step up.

Okay, and then I sort of curious -- the payouts on these performance fees, do they vary differently than the overall compensation to the firm?

No, no, some time ago we eliminated any of those distinctions. That's just revenue to the firm, and it's not going to compensation directly at all.

And then, Bob, just a technical question -- if you look at your press release, and you look at the summary consolidated statement of income for the operating partnership, and you take your operating income of 273 million, and you add the non-operating income of 9.7 million, your income before taxes is still 273. If you look at a year ago, you do the math, and it adds up to the right number. I'm just sort of curious, is there anything going on there, or is there a typo in the press release?

I don't know what you're looking at. It's 263 is the operating income. Non-operating income is another 9.7 million, which takes you up to 273.

I think you may have a typo in your press release then. You may want to revisit that.

The one I'm looking at says 263.

The one I'm looking at says that, too.

You've got to be careful with the lines, Bill. We had to gross up some of this P&L, which we didn't do before.

I don't know he's seeing that.

I don't know what you're seeing.

Well, I'm looking at what you sent me. Okay, thank you very much.

Robert Lee, KBW.

Just to make sure I have it right -- the intention is still to, I assume, pay off -- I think it's 400 million of debt next month?

Yes, that's the intention. I want to caution people who think that that means that our interest expense is now eliminated. It's not actually true. It will be -- the need for occasional short-term financing for working capital reasons will be quite seasonal. There will be some periods where we actually run a net cash position and have not borrowings, but there will be others where there are substantial borrowings, and the average balances will be less than the amount of debt we're retiring. So the interest expense should fall, but it's not going to zero.

Okay, and the second thing is just so the competitive universe -- one of your competitors talked about seeing price competition. That was primarily in the cash management business outside the U.S. but he did talk about seeing price competition. Are you running into much outside the U.S. where a local domestic player is attempting to compete via cut pricing or do you see much price competition outside the U.S.?

There is nothing new on that score.

Business as usual.

Mary, are there any further questions?

There are no more questions at this time.

Okay. Well, thank you, everyone, for participating on our conference call. If you have questions, feel free to call Investor Relations, I'm happy to help you. Have a great afternoon.

This concludes today's conference call. You may now disconnect. Have a wonderful day.