AllianceBernstein Holding LP (AB) 2006 Q4 法說會逐字稿

Welcome to the AllianceBernstein fourth quarter 2006 earnings review. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded and will be archived for one week. I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AllianceBernstein, Mr. Philip Talamo. Please go ahead.

Good afternoon everyone and welcome to our fourth 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 results today is Jerry Lieberman, President and Chief Operating Officer. Lew Sanders, our Chairman and Chief Executive Officer, and Bob Joseph, our CFO, will also be available to answer questions at the end of Jerry's formal remarks.

I would like to take this opportunity to note that some of the information we present today may be forward-looking in nature, and as such, is subject to certain SEC rules and regulations regarding disclosure. Our disclosure regarding forward-looking statements can be found on page 2 of our slide presentation, as well as in the Risk Factors section of our 2005 Form 10-K.

In light of the SEC's Regulation FD, management is limited to responding to inquiries from investors and analysts in a non-public forum. Therefore, we encourage you to ask all questions of a material nature on this call. At this time I would like turn the call over to Jerry Lieberman.

Good afternoon to everyone on the call. I will start today's call with a few highlights, and then add some additional commentary and texture on the quarter and the full year.

Well, it all starts with investment returns. And the Capital Markets produced strong gains globally, driven by a growing global economy and robust corporate earnings. From a relative performance perspective, AllianceBernstein's value equity services continued to outperform their benchmarks. And our fixed-income services continued their trend of improving performance.

Conversely, performance in our growth equity services materially lagged their respective benchmarks in the quarter and for the year. Although the three, five and ten year period returns for these services remain generally competitive.

Our firm's organic growth rate was strong for the quarter and the year. We ended the year with client assets under management of just under $717 billion, an increase of 23.9% for the year, as market appreciation, performance, and net inflows added $138 billion to AUM.

Operating partnership net revenues were nearly $1.2 billion for the quarter, up 30.3% versus fourth quarter '05, with performance fees a significant contributor.

Operating income was up 48%. And net income increased by more than 45% to a record $421 million. Net income and distribution per unit for AllianceBernstein Holding, the publicly traded partnership, were a record $1.48, up 45.5% -- 45.1% versus the fourth quarter of 2005.

Finally, there's a very recent development and that we mentioned in our press release this afternoon. This relates to an error that may require a fourth quarter adjustment to earnings on the order of $0.15 per unit. However, substantial recovery of the cost of this error is anticipated. I will have more on this later.

Having covered the highlights for the quarter, I will now give you a more detailed description of our results. As shown on display 4, you'll see that all four U.S. Capital Market indices were up significantly for the second consecutive quarter, with the indices posting their best quarter of the year and, by the way, their strongest year since 2003. Moreover, the S&P's gain of 15.8% was more than 500 basis points ahead of its 15 year average.

On display 5 you'll see that nine U.S. Capital Markets, as represented by the three MSCI indices, all had an outstanding quarter and year. Both MSCI emerging markets and MSCI EAFE more than doubled their impressive third quarter returns. And more importantly, the 12-month returns for all three indices were spectacular, ranging from 20.1% to 32.2%. The MSCI EAFE and MSCI World indices each recorded their best annual returns since 2003.

Meanwhile, relative returns for our clients for the quarter, and more importantly for the one, three and five year periods in our value equity services were extremely strong, and in some cases outstanding. This is particularly true in our Global & International Service for institutional and individual clients alike, with returns as high as 840 basis points higher than respective benchmarks or Lipper averages.

Our fixed-income services have generally done well, in some cases substantially so, performing above benchmarks for our institutional and above Lipper averages for our individual clients. More importantly, we are seeing continuing improvement in the relative performance numbers in our fixed-income services, as investments in research, analytical tools, and portfolio construction are benefiting our clients.

In contrast, our relative performance in our growth services were weak for the year, especially in the U.S. With that said, the valuation compression between the value and growth components of the Capital Markets have reached the point where continued underperformance by growth appears unlikely. We believe our growth services are well-positioned to benefit from this change in trend.

With a review of absolute and relative market returns as its backdrop, let's turn to display 7 for a summary analysis of assets under management by distribution channel for the three months ended December 31, 2006.

As you can see, market appreciation, coupled with strong net asset inflows resulted in AUM growth of 8.7%. Net flows for the quarter were approximately $10.6 billion, consisting of $6.3 billion in institutional investments, over $2.3 billion in retail, and nearly $2 billion in our Private Client channel.

Display 8 shows changes in assets under management by channel for the 12 months ended December 31, 2006. Our AUM increased approximately $138 billion or 23.9% for the year. Net inflows were strong, totaling $47.8 billion for an organic growth rate of 8.3%, and investment performance added $90.1 billion, or 15.6%.

Record gross sales of over $112.5 billion for the year were nearly 40% higher than 2005's gross sales. Each channel posted a new record for gross inflows for our calendar year, with institutional investments totaling $53.8 billion, retail, $44.3 billion, and Private Client $14.4 billion. Net inflows by channels consist of approximately $27.2 billion in institutional investments, $12.2 billion in retail, and $8.4 billion in our Private Client channel.

Turning to display 9, we have the summary of changes to AUM by investment service for the three months ended December 31. Our value equity service was clearly the main driver of total inflows for the quarter, with record net inflows of $10.2 billion. Fixed income had $1.6 billion in net inflows, while our growth services were essentially flat.

Turning to display 10. You can see for the 12 months ended December 31, value equities again led the way with about $54.8 billion in gross sales and $31.5 billion in net inflows, both new firm records. In addition, market appreciation of our value equity services was nearly $65 billion for a total increase of over $96 billion or 40.5% in 12 months.

Gross inflows for growth equities were almost $34 billion, with $13.8 billion of net inflows. Fixed income service achieved net inflows of $6.8 billion compared to no net flows in 2005. While improving our relative performance in fixed-income services -- with improving our relative performance in fixed-income services, we expect fixed-income net flows to increase still more in 2007.

Let's turn to display 11 where I will start my discussion of our distribution highlights beginning with our institutional investments channel. At December 31, our institutional assets totaled $455 billion or 63.5% of our overall AUM. The 8.9% increase in institutional investments AUM for the quarter was primarily driven by market appreciation of $34 billion, while net inflows were about $6 billion as we funded 140 institutional mandates.

During the fourth quarter our value equity and blend strategy services accounted for roughly 70% of all new assets. Now looking at it from another way, Global & International Services comprised approximately 75% of all new assets in the quarter, a continuing trend. And lastly, our pipeline of won unfunded new institutional mandates remains strong.

Turning to display 12. You will see that our retail assets under management are up $13 billion or 8.5% for the quarter to $167 billion, and represent 23.3% of our total AUM. As you can see, market appreciation accounted for most of the increase in the quarter. For the full year net inflows were $12 billion and an organic growth rate of 8.4%, which was our best year since 2000, and compares to only $1.1 billion of net inflows in 2005.

The organic growth came from significant increase in global, international and multi strategy services. The net flows were across both equity and fixed-income services, and in both our U.S. and Luxembourg funds. Oh yes, 2006 marked the first year of positive net sales for U.S. retail mutual funds since 2001, and the sixth straight consecutive quarter for net flows for the channel.

Display 13 shows our Private Client channel highlights. Here you can see that the assets of our high net worth clients represent 13.2% of our total AUM, as total AUM grew by almost 27% year-over-year to $95 billion, mostly the result of market appreciation and double-digit organic growth for the year. We continued to invest in our Private Client business, as we added 37 financial advisors, for a total of 298, a 14.2% increase over the past 12 months.

Highlights for institutional research services are shown on display 14. Revenues totaled $89 million for the quarter, a 1.9% increase from a year ago, driven primarily by our European business. However, as shown in the appendix on display 37, after adjusting for a reclassification of transaction charges associated with investment management clients, research revenues actually increased by 6.1% versus the prior quarter, and 16.2% for the year.

Our market share improved in the U.S. thanks to strong growth in algorithmic trading volumes, and increased acceptance of our research services. These gains were partially offset by pricing pressure and a shift in mix to trading services having lower revenue yields.

Full year revenue grew strongly in our London-based operations as well, with the fourth quarter run rate recovering from some weakness in the third quarter. Also, during the quarter Institutional Investor released the results of their best U.S. independents survey, and our performance was excellent. Our analysts ranked in 26 sectors, including 23 first-place finishes in the survey.

In summary, we're quite pleased with our results for the fourth quarter and the full year for all four of our channels. The success and continued dedication to improving our level of service across all of our distribution channels, coupled with outstanding performance of our investment services will further our progress towards achieving our goal of becoming the most admired investment firm.

Before I begin my review of financial results, I would like to highlight the diversity of our assets under management. Turning to the center pair of pie charts on display 15, you can see that we currently have 75% of our $717 billion of total AUM in equities versus 72% a year ago, and manage $177 billion in fixed-income securities.

Looking at the two other sets of pie charts, you'll note that our firm's business continues to become increasingly global from a client domicile and investment service perspective.

The pair of pie charts on the left side of the display show that AUM of our non-U.S. domicile clients increased by 44% from December 2005 to $257 billion compared to the 24% increase in total AUM.

The right side of the display illustrates that over the past 12 months our assets in global and international investment services grew by 50% from $257 billion to $385 billion, resulting in Global & International Services now accounting for 54% of the firm's total assets under management, compared to just 44% just one year ago.

Finally, the pie charts on display 16 highlight the diversity of our investment services and the growing importance of our blend strategy services. Our blend services, which are offered in U.S., non-U.S., and global constructions totaled $134 billion at quarter end, and are up 52% versus 2005.

Now that I have provided some highlights of the Capital Markets and our performance, asset flows, key trends in our distribution channels, and the diversity and changing nature of our asset mix, let's turn to our firm's financial results, starting on display 17. Net revenues for the quarter increased 30.3% to approximately $1.2 billion, a record for the firm, compared to $911 million in the fourth quarter of 2005.

Investment advisory fees increased by 34.1% or $227 million, which represents 82% of the increase in net revenue. So let's turn to display 18 where we provide additional detail on advisory fees.

Here you can see base fees were up 25.5%, or $146 million, versus the prior quarter, the $722 million. The increase was primarily attributed to higher average AUM in all three channels, but also to a favorable mix shift to more value-added, higher priced investment services. That is a shift to more equities, more non-U.S. investment services, as well as growth in our alternative investment services.

This shift manifests itself with higher average fee realizations under investment services. Another view is to consider the impact as additive to the firm's organic growth. The 8% rate as measured by cash flows becomes double-digit with respect to base fee revenues when mix shift is included in the calculation.

Moving down to the performance fee line, you can see our firm's record-setting total of $173 million for the quarter, up 87.7% versus the fourth quarter of 2005. The increase in performance fees represents more than 29% of the year-over-year increase in net quarterly revenues.

Although largely hedge fund-related, our long only services accounted for approximately one-third of our performance fees for the year. Performance fees represent more than 19% of our advisory fees in the quarter, compared to less than 14% in the quarter of 2005.

As a percent of our AUM -- as our percent of AUM with performance fees grows, revenue and earnings seasonality and volatility may become more pronounced as performance fees amplify the impact of investment returns.

With that said though, the $236 million in performance fees for the year represents just 6% of our revenues versus 4% in 2005, and provides us with the opportunity to earn significant incremental fees when we deliver for our clients.

Moving to the lower half of the display we show advisory fees by distribution channel. Here you can see the 35.3% increase in our institutional investments channel, where higher AUM, a favorable mix change and performance fees all contributed to the revenue increase.

In the retail channel advisory fees increased 18%, benefiting from higher average AUM during the quarter. While in our Private Client channel fees grew 45.6%, driven primarily by hedge fund performance fees and higher AUM, in that order.

Now let's turn to expenses, which are summarized on display 19. The 21.6% growth in operating expenses for the quarter is significantly lower than the 30.3% increase in net revenues, and resulted in a 450 basis point improvement in our operating margin in the quarter.

Display 20 provides additional detail on the employee compensation and benefits. The 25.4% or $87 million increase in employee compensation and benefits represents almost two-thirds of the increase in total operating expenses versus the fourth quarter of 2005. Base compensation is up 17.4% versus last year, as we increased headcount by 14%, more than 600 staff members, to 4,914 at year end. As I mentioned last quarter, we have increased headcount in operations in response to the growth in value and the increasingly complex global nature of our firm.

Additionally, in our retail channel we're investing to expand distribution capacity in the U.S. in our infrastructure outside the U.S. In our Private Client channel we continue to increase our global financial advisor staff levels. And we are also investing in operations and technology to support the expansion of our platform and improve operational functionality and efficiency.

The increase in incentive compensation of 29.4%, which is significantly less than our 48% operating earnings increase, is attributed to an increase in deferred compensation and the higher earnings which drives annual cash bonuses.

Commission expenses increased 25.7%, with increases in all distribution channels. You should remember that growth in commission expense is actually a leading indicator for future revenue and earnings, because the full impact of new business isn't reflected in the current P&L since commission schedules are generally front loaded in the first year of a sale.

Turning to display 21, please note that our promotion and servicing line includes the amortization of deferred sales commission, which, as shown in this afternoon's press release, was $28.7 million in the fourth quarter. I would like to point out that the $28.7 million includes a cumulative catch-up adjustment of a prior period amortization that increased the expense by approximately $4 million. So considering the impact of this adjustment, you will arrive at a more appropriate run rate for at least the next few quarters.

Also on display 21 you can see that G&A increased $31 million or 28.8%. Expanded space to New York City and several U.S. Private Client offices, as well as new offices in London, Shanghai, and Hong Kong, accounted for approximately one-third of this increase, while volume-related transaction costs accounted for another one-third.

As I wrap up my comments, please turn to display 22 where we present a summary income statement for AllianceBernstein for both the quarter and the full year periods. Operating margin expanded by 450 basis points to 37.6% for the quarter, and 290 basis points to 30.9% for the year. Margins benefited significantly from the increase in performance fee revenues in both the fourth quarter and the full year, and moderation in our cash incentive compensation growth rate.

Carrying the operating partnerships' fourth quarter and full year net income forward to display 23, we show the AllianceBernstein Holdings' financial results. Holdings' share of AllianceBernstein's earnings were $137 million for the fourth quarter versus $92 million in the same quarter last year, resulting in net income of $127 million or 50.5% better than '05. For full year 2006 net income totaled $343 million versus $248 million in 2005, an increase of 38.2%.

As I mentioned in my opening remarks, our distribution per unit for AllianceBernstein will be $1.48, more than 45% higher than the $1.02 distribution in the same quarter last year. Additionally, we will be distributing $4.02 to our unitholders for 2006, a record for the firm.

As noted earlier, we very recently discovered a clerical error in processing claims for class-action settlement proceeds on behalf of clients. The guidance we're providing on the cost of this error is based on very preliminary data. More complete information is necessary before we can establish a reserve for this matter. As such, an adjustment to the fourth quarter 2006 earnings may be required. We do anticipate, however, that the bulk of the cost of this error will ultimately be recovered from available settlement proceeds and/or insurance.

In summary, this was a very good quarter, capping off a very strong year for our firm. A favorable Capital Market environment, solid relative returns, our continued success in generating organic growth drove a significant increase in our assets under management.

Our AUM became increasingly global from both a services and client domicile prospective. Both the quarter and full year saw several records being set, including AUM, asset flows, revenue, and net income. Performance fees increased 88% versus the prior year, the result of superior Alpha generation for our clients, as well as significant organic growth in both long only and long short services that include a performance fee component.

Let me reiterate that our performance fees are and will continue to become an increasingly important part of our business. They are by nature seasonal and volatile, and thus very difficult to predict. Meanwhile, we continue to make long-term investments for the future. And as always, all of our financial successes are the result of providing superior service to and meeting the investment objective of our most important stakeholders, our clients.

Now we will take your questions.

(OPERATOR INSTRUCTIONS). Niamh Alexander, CIBC.

Great quarter. I just had a question on the compensation. If I back out the performance -- the incentive compensation, it still looks like there was a bit of a true-up in the fourth quarter, or am I reading that incorrectly?

Then the other thing is on the incentive comp you mentioned earlier there was a moderation in how it was calculated. Can you expand on that just so we understand, and maybe it's lower or there's a new basis for calculating it going forward? Thanks.

The second piece first. Historically we have increased our incentive compensation pool in concert with the increase in operating earnings. In this year, as I mentioned in the call, the growth in operating earnings exceeded the amount of bonuses that we paid out to the staff. Right? The first part of your call -- sorry, is there a true-up? No, there is no true-up anywhere. There was no true-up.

So I guess the core comp line just grew with the growth in the staff and the business then?

Exactly.

Thanks.

Exactly, exactly.

That's fair. Then if I could just go back to the pipeline and my second question. The pipeline with regards to the institutional business, I'm just wondering if -- as well as kind of looking at a healthy pipeline, if you can help us frame it where it was relative to the beginning of last year, because you did have those record flows last year?

And then I guess just in context are you also kind of hearing more about maybe some rebalancing and potential for some outflows?

As far as the pipeline, we have had a couple spectacular peaks over the last two years, but we -- this is a very solid number now, and probably pretty much where we were a year ago -- certainly where we were a quarter ago when you saw those (inaudible). If anything, it is slightly higher. Lower from our absolute peak, but trending up -- trending up for the firm. I'm sorry, the other question?

I was just wondering if you have heard any feedback or gotten any from clients yet about maybe some rebalancing, because they've had such a strong year.

No, we haven't at all.

Bill Katz, Buckingham Research.

I want to stay on the comp question for just one second. Jerry, I'm not sure you fully answered the question. Has there been sort of a structural change in the methodology to which you're paying out incentive compensation, or was just 2006 an exceptional year?

I think quite frankly we had enough -- we felt that we were able to pay our staff fairly and competitively and appropriately with what we paid out. And with these extraordinary increases in earnings, we just didn't need to pay out more. So nothing more than that. If next year's earnings increase is smaller and competitive pressures are appropriate, then we will pay out what we think is appropriate.

Just a clarification for my next question. On the performance fees, is there any structural difference in the compensation payout relative to base earnings?

Absolutely not. That is a practice that we stopped several years ago.

Okay. A bigger picture question, maybe Lew, I'm sort of curious on your thoughts as well, if you think that we might be poised for a more aggressive shift in style. Does the relative return of your growth platform broadly -- are there any issues there? So you look at the -- I saw that sheet that summarized the growth platform, and there are a lot of brackets around the numbers. I am just sort of curious, would you be marginalized in any way if there were something that was more decisive today in turn?

I think you can read the data as well as anyone on that score. I would say that our growth services are truly style pure. And to the degree then that there is a performance headwind confronting the style as there was to an exceptional degree in '06, you can anticipate our returns will amplify that negative effect. And they indeed did, especially in the United States.

On the other hand, the pressure of last year notwithstanding, our trailing returns remain competitive. And I might add that our standing with the consulting community, which as you know is quite granular in its assessment of the competency of the managers they review, is strong. So to the degree that interest in growth services grew broadly, I think we would participate.

I might add that if history is a guide, however, one shouldn't anticipate that in the period immediately ahead because there has typically been, as you know, a pretty substantial lag between the revival of a style and the cash flows that accrue to it.

Robert Lee, KBW.

A quick question. I'm just curious if the clerical error -- and possibly having to establish a reserve. In the past when you've had to take a charge if the reserve up has actually impacted the cash distribution in that period or afterwards? Should we -- if that happens, should we expect something similar next year?

No, we don't anticipate that will be the case at all. As we mentioned, first of all, this is very preliminary, so we are in the process. But we do expect to recover this, either through the settlement process, or through our insurance. So we do not expect to change the timing of the distributions. Actually it would be wrong to do so. We would be shifting the earnings that we had for the shareholders and unitholders today to unitholders of the future. It would just be wrong.

I'm just curious, you had the huge increase in performance fees which you attributed to a great degree to hedge funds. How much of this is related to -- the growth in underlying assets there may be related to your -- the initiatives you talked about in the other quarter about ramping up that business and becoming more aggressive in your hedge fund products? Is it actually you're starting to see some flow-through of assets there? Or is this just -- you haven't even gotten to that point yet?

It is both. The performance was spectacular in the hedge funds. And we are seeing an increase in our -- in the AUM and the hedge funds.

I would refer you to the data that we reported in the third quarter on that score. We presented a history of AUM hedge funds, and it traces very strong growth.

Thank you.

Growth which continued, by the way, in the fourth quarter.

Cynthia Mayer, Merrill Lynch.

I'm wondering if you could talk a little about institutional research services. I think last quarter you characterized the decline in revenues there as a blip, but it looks like it is flat from there. So is this a new run rate?

No, I don't think so. December typically is a bad month for this business. There's a little bit of seasonality here. But year-over-year the revenues are up, we think, nicely. And, no, we don't think we have a problem there.

Also, you know from your observations that quarter to quarter this business manifests a surprising amount of volatility. So I don't think you should draw too much from fourth quarter results. We're actually pretty pleased with the year-on-year gains, which were substantial, both here in the United States as well in our London-based operations.

Just also on the clerical error, I'm just wondering if you can give a little more color on that. What went wrong? Was that a particular class-action that you were handling for mutual fund shareholders or something like that?

We're still gathering and analyzing the information, and we feel a little uncomfortable about being more specific at this time. But it did have to do with making claims on a class-action suit that we were late in submitting the claim.

Great. Two questions only, right?

Yes, you can come back, Cynthia. We're here.

Christopher Spahr, Prudential.

A quick question on modeling. Your weighted average equity ownership interest has been trending up for the past few years. I'm just wondering should we build in a few extra basis points in quarters going forward? Or when does it reach a steady run rate?

Are you referring to Holdings' share of the operating partnership?

Yes.

As a function of option exercise, I think you can anticipate that that will continue to trend up slowly.

Then also, just the tax rate was a little bit lower -- the effective tax rate was a little bit lower this quarter, also related to the Holdings' share?

No, you're looking at Holdings. Remember that the tax rate in Holdings isn't related to income, it is related instead to revenue. And to the degree then that operating margins are expanding, the tax rate will fall.

Bill Katz.

I am sort of curious, maybe Bob you could chime in on this as well. In the revenue and the expense line, I am just sort of curious, the dividend and interest income I presume is a function of the jump sequentially -- is a function of year-end cleanup. But have we reached a new level or do you expect that to trend down.

And then conversely on the G&A line, is the 141 a new run rate or was there also some sort of year-end cleanup that might peter out a little bit as we go into the first quarter?

There are two issues here. Let's start out with dividend and income. There's some seasonality in that line, because mutual funds tend to pay out a lot of dividends in the fourth quarter. So that -- there's some seasonality for that.

Then let's be careful when you're looking at interest and expense in regards to our brokerage business, which we started grossing up, I think it was one-quarter ago. Right? Maybe it was two. You have to look at those numbers net on the interest lines. There's nothing unusual going on here at all.

On the G&A side? I am curious, Jerry, if the 141 is a new run rate given all the investments, or was there -- take advantage of the year-end revenue stream to sort of maybe accelerate some expenses that may have otherwise --?

No. There's nothing being accelerated. You can look at this as a run rate. What is driving some of this, as I mentioned -- it is actually some is just being driven by the increase in the business actually on our sell-side business. We have transaction fees that end up being recorded on that line. As the volumes increase in that business, it has been driving an increase in the volumes. And on some of the increased transaction costs, even on the buy-side.

And the space stuff, we opened up an office in London. That is the most now expensive space in the world. That is where our Private Client office is. That is embedded in there. So there's nothing accelerated. There's nothing being dumped in. These are pretty much run rates.

Great. Thank you.

I just want to add on space, remember that there won't be in '07 any material new expansion in our physical infrastructure. And so the continued growth of the business holds some potential to more completely absorb that fixed cost.

You still feel the same way? I think last quarter, Lew, you had mentioned that -- I think it was the first time you had said this in quite a while. I seem to ask the same question every quarter. That you could see some -- maybe it is implicit here to your answer just now -- could you see some margin expansion, I guess, normalizing for performance fees this quarter, but could we see structurally an upward bias to margins, given what seems to be a slowing investment spending cycle, as well as the revenue mix shift you have been talking about?

That calls for a forecast. But I think you can see in our results for '06 that if we deliver for our clients and the Capital Markets are favorable that there is meaningful operating leverage in the Company.

Wonderful. Thank you.

Marc Irizarry, Goldman Sachs.

My first question is on your fixed income flows. It looks like your redemptions ticked up during the quarter. Maybe you could speak to that somewhat, and is that part of, Jerry, your comment about flows continuing in '07? Is it partly the uptick a result of robust pipeline or less expectations of redemptions?

That decrease -- that negative number was just a CBO being terminated. There's nothing eventful about that. It is not a client dropping us or termination or anything like that. And with the improved performance, and the way the calls are going with prospects and clients and consultants, we feel very good about our future flows in these services.

Great. Maybe, Lew, this is a question for you. Notwithstanding any style shift, what can you do that is under your control of your own destiny, if you will, to kind of help improve performance on the growth side?

We have a wide range of initiatives here that you're familiar with. And expanding our research footprint and initiatives around research innovation that are directed specifically at growth services, as well as an increased investment in quantitative methods, which I think hold substantial promise for Alpha generation in that domain where actually -- in most cases they are rarely applied. So we feel as if we are taking the appropriate action to benefit when that style headwind finally dissipates.

I will add, as the press release itself indicated, that the valuation structure of growth equities, as compared to value, is reflecting now many consecutive years of under performance of the style. It is at an usually compressed state. And while that doesn't ensure a recovery in growth, it does suggest that the headwinds that have been so strong against this style will ameliorate. And on that basis that we think the investment returns, both absolute and relative, will improve.

Niamh Alexander, CIBC.

If I could go back to your discussion about investment and the expanding of the distribution capacity in the U.S., I understand you were referring primarily to retail there. Can you expand a little bit more on that? Because I understand you have kind of a different strategy and a different approach to really try and differentiate your product and your pitch to your competitors there with the retail distributors.

Sure. What happened is as we were repositioning this channel going back almost three years now, we actually downsized it quite a bit. And now we're back into investing and staffing up in additional salespeople and in wholesalers that have been trained in the new positioning of the franchise. And we just -- we built that up in the course of the year. These are mostly commission salespeople. And we are now really ready to go out and we think make a -- get our message out to our clients and intermediaries.

Actually I think I would ask you to ask that question again -- perhaps you won't have to -- at the next quarterly conference call, where we might be in a position to elaborate more completely on the engagement model that we're pursuing in that particular domain. We're enthusiastic about its prospects.

And as Jerry noted, we have the plan to invest to expand our presence in that market. The time is right for that for us. And we do think we have a distinguished set of services and message to bring to bear. And we will elaborate more completely next time we're together.

That is very helpful. Thanks.

Robert Lee, KBW.

I have a question on the Private Client business. Thinking a little bit about your 2007 objectives, I know, Lew, you mentioned the existing office footprint is probably going to stay as it is. But what are your objectives for growing the number of advisors and [bags] that -- a pretty healthy increase this year? Are you starting to get to a point where you've got to let the advisors you have sort of mature somewhat, or do you see a lot of opportunity to continue to grow that at a double-digit rate?

We think that we can expand our field force in the double-digit area in '07 without any additional physical expansion. Of course, we are planning on the maturity of the large increase in the salesforce that we have made over the last several years to assist in driving that business. So really both factors still apply.

Maybe also in Private Client, is it possible to just get a little sense of maybe how your client mix there has been evolving this past couple of years? Are you continuing to see that incrementally more and more of your business is coming from ultra high net worth, or maybe a little bit more color on that?

Yes. The business has for some number of years been moving northward from a demographic profile perspective. And our presence in the ultra high net worth component has grown the fastest of all of the segments that we serve in that market.

That is not to say that we're not still achieving noteworthy growth in smaller relationships, we are. But I think our service offering is especially distinguished in the high end because our investment planning skills, especially in the domain of complex investment planning problems, are in our judgment differentiated. And our success in the market would seem to support that assertion.

Cynthia Mayer, Merrill Lynch.

Hoping I could just make it very -- two very quick ones. One is on the comp, is any of the comp cost mark-to-market of deferred comp this quarter? How much of that is --?

It is small.

It is small.

It is small. The other part I wondered is just drilling down to the hedge fund fees, performance fees, should we assume most of those were from global diversified?

Actually, you shouldn't. I think the way you should see performance fees in the firm, whether they are hedge funds or long only services, is that they are sourced from actually a fairly diversified group of services. And the services themselves are sourcing their Alpha from an increasingly diverse array of Capital Market opportunities.

So for instance, global diversified, as you know, in its most advanced form looks to long short equity, long short fixed-income, currency, as well as commodities as the basis for its return stream. So it too has a degree of internal diversification which we think is one of its salient features competitively, and one of the factors that has actually been providing the return premiums we have been earning.

Okay.

The point is, it is not one thing. It is many things.

And it is global -- including global opportunities, global diverse side as you mentioned. The fact that a different play was global diversified. We have something called a long-short equity hedge. It is really several services across multiple clients.

Great. Thanks a lot.

I don't -- I also want to mention that, again as I mentioned earlier, a significant part, a real part of these performance fees are also long only services. And that is a feature that we see not only in the fourth quarter but throughout the year. And for us we think -- we see it as an opportunity as clients look to do this. If we can perform for them, which is what we're paid to do, this actually goes in our favor.

There are no further questions, sir.

Thanks everyone for participating in the call. If you have any further questions, feel free to contact the IR team at any time. Enjoy the rest of your evening.

This concludes today's conference call. You may now disconnect, and have a great evening.