AllianceBernstein Holding LP (AB) 2007 Q1 法說會逐字稿

Thank you for standing by and welcome to the AllianceBernstein first quarter 2007 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 the 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 AllianceBernstein, Mr. Philip Talamo, please go ahead, sir.

Thank you, Anthony. Good afternoon everyone and welcome to our first quarter 2007 earnings review. As a reminder, this conference call is being Webcast and is supported by a slide presentation which can be found on our Web site 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 our formal remarks.

I'd like to take this opportunity to note that some of the information we present today is 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 2006 form 10-K. In light of the SEC's regulation FD, management is limited to responding to inquiries from investors and analysts in a nonpublic forum, therefore we encourage you to ask all questions of a material nature on this call.

At this time, I'd like to turn the call over to Jerry Lieberman.

Thank you Phil and good afternoon to everyone on the call. As I normally do I'll begin with some high-level commentary and then I'll get into the more important details. A steep plunge in Chinese stock coupled with growing concerns over weakness in the housing and subprime mortgage markets triggered significant stock market volatility during the first quarter of 2007.

Nonetheless, after a very weak February, the world's stock markets rebounded in March and ended the quarter up modestly. Stock market volatility such as we experienced during the first quarter of 2007 reminds us why research-driven stock selection and broad diversification across geographies, asset classes, and investing styles are the best strategies to achieve long-term investment success. By the way, this is our message to our private clients and retail clients alike.

In terms of relative performance for the quarter, our value and growth equity services generally underperformed against our respective benchmarks and Lipper averages while our fixed income services modestly outperformed, with particular strength in certain retail services. As we announced earlier this month, total assets on the management as of March 31 were approximately $742 billion. That's up $124 billion in the last 12 months and up $25 billion for the quarter. These increases represent year-over-year and sequential growth of about 20% and 3.5%, respectively. Net influence was strong for the quarter, representing approximately 54% of the sequential increase in AUF, as our firm's organic growth rate continues to track at a high single digit annual rate. Net revenues for the operating partnership were up 16.6% versus the first quarter of 2006 to more than $1 billion.

Operating income was up 19.4% and net income increased by 17.6% to $258 million. For AllianceBernsteinHolding, the publicly traded partnership, net income grew by almost 20% to $79 million and the per unit distribution was $0.91, up 16.7% versus the first quarter of 2006. Our financial results are in-line with expectations from management's point of view after adjusting for a few unusual items, the nature of which I will address later in this call. Having covered the highlights for the quarter, I'll now provide some more detail.

As shown on display 4, while all four U.S. capital markets indices posted gains for the quarter, the gains were anemic, especially when compared to the robust returns in the fourth quarter of 2006. The (inaudible) of returns provided by equity markets is emphasized by the fact that the first quarter of 2007 marks the first time since the second quarter of 2005 that the Lehman Aggregate outperformed all three equity indices, as you can see on this slide. On display 5, you'll see a similar story for the non-U.S. capital markets. While still positive and stronger than U.S. equity markets, returns for the first quarter of 2007 pale in comparison to the stellar performance in the previous quarter for all three MSCI indices on this display.

Turning to the relative returns on slide 6, value equity services had a rough patch in the first quarter, generally underperforming their respective benchmarks and Lipper averages. However, longer term returns and many of our value equity services, especially our global and international services, remain several hundred basis points above the respective benchmarks or Lipper averages. Growth Services continued to struggle relative to their benchmarks and Lipper Averages, yet long-term returns remain competitive, especially in our institutional product line. And for the second consecutive quarter, fixed income services posted improving relative returns. Additional detail on the relative performance of many of our services can be found in the appendix on slides 28 to 37.

As you can see on display 7, growth sales were quite strong for the quarter at $38 billion and net inflows of approximately $13.3 billion were positive across all three distribution channels, with $6.3 billion in institutional investments, $3.4 billion in retail, and about $3.6 billion in our private client channel. Factoring market appreciation, all three channels posted annualized double digit AUM growth rates for the quarter.

Display 8 shows changes in assets under management by channel for the 12 months ended March '07, as total AUM increased approximately $124 billion or just over 20%. Net inflows totalled $49.1 billion for an organic growth rate of about 8%, and investment performance added $74.6 billion or 12.1%. The increase and total net inflows was led by institutional investments with $28 billion, which is 57% of total net inflows.

Turning to display 9, we have the summary of changes in AUM by investment service for the three months ended March 2007. Our value equity services have record quarterly net asset inflows of $10.9 billion and fixed income at its strongest quarter in over two years with $3.9 billion in net inflows. Conversely, growth equity services incurred about $1.4 billion in net outflows.

Display 10 details changes in AUM for the 12 months ended March by investment service. Value equities had growth record sales of $63.9 billion, which led to record net inflows of $36.9 billion. Meanwhile, record gross fixed income sales of almost $28 billion generated net inflows of $9.1 billion.

Let's turn to display 11. I'll start my discussion of our distribution highlights beginning with our institutional investment channel. At the end of March, institutional assets totalled $468 billion or 63.2% of our total AUM. The 2.9% increase at institutional AUM for the quarter was attributable to marketable appreciation of about $8 billion and net inflows of about $6 billion as over 100 institutional mandates were funded. Value equity and blend strategy services continued to account for the lion's share of our new institutional assets at roughly 64% for the quarter. Fixed income services made up the bulk of the remaining new institutional assets for the quarter.

Additionally, global and international services comprised of roughly 79% of all new assets in the quarter, a continuing trend. And lastly, our pipeline of one but unfunded new institutional mandates remains substantial.

Turning to the slide 12, you'll see that our retail assets under management are up $6 billion or 3.6% for the quarter to $273 billion and represent over 23% of our total AUM. Net inflows and market appreciation contributed equally to the quarterly increase in retail AUM.

Year-over-year organic growth was mixed globally driven by an increase in sales in U.S. funds, where, incidentally, we have gained significant market share over the last 12 months, offset by weaknesses in non-U.S. sales. Also worthy of note, our wealth strategy services reached $10 billion in assets during the quarter after having been available for less than four years.

On display 13, you'll note that our private client share achieved a milestone, $100 billion in assets under management. Our high net worth AUM grew by 5.7% during the quarter and 22.8% over the last 12 months, mostly the result of strong net inflows and now represent 13.5% of our total AUM. Gross net inflows result in three and 12-month periods were record for this channel. Our continued focus on growing our private client growth is further evidenced by the addition of 17 financial advisers during the quarter. As new FAs join both our U.S. and U.K. offices, our global FA staff now totals 315 financial advisers, a 15.8% increase over the past 12 months.

Highlights for the institutional research services are shown on display 14. Revenues of $99 million for the quarter, the second strongest quarter ever, were 3.3% higher than a year ago quarter, driven entirely by our growth in our European business and we're also up 11.5% sequentially. U.S. revenues were up sequentially, but were down slightly versus a very strong first quarter in 2006. Meanwhile, we continue to invest in our European business.

To summarize, we believe the first quarter of 2007 was a good quarter for our firm. Our ability to continue buying top of the line client service, competitive investment performance across a diversified suite of services regardless of market conditions is paramount in enabling us to achieve our goal of becoming the most admired investment firm. Our philosophy of putting clients first is bearing fruit in the form of increased net inflows and improved financial results.

But before spending time on our financial results, let's review the diversity of our assets under management. Let's do so and start with display 15. As you can see from the pair of pie charts in the left center of our display, our firm's assets under management continue to become increasingly global from the perspective of client domicile. During the last 12 months, assets from clients located out of the U.S. grew by 38% to $272 billion or some 37% of total AUM, which is up from 32% of AUM at the end of March 2006.

Global and international investment services, as reflected by the pie charts to the right center of the display, account for 56% of total assets or $414 billion. Assets in these services grew by 41% during the last 12 months, more than double the firm's overall 20% asset growth rate for that period.

Display 16 highlights our blend strategy services, which accounts for approximately 20% of our total assets under management. Our blend services, which are offered in U.S., global, and international constructions totalled $145 billion at quarter end and are up 40% versus March 31 of 2006. This quarter we've introduced a display which tracks the growth in our hedge fund AUM. As this asset class continues to grow and increasingly impacts the makeup and the seasonality of our financial results, we felt it would be appropriate to provide an update on the model of these assets in these services.

Slide 17 shows our hedge fund AUM at the end of years 2003 through 2006 and for the quarter ended March 31, 2007.

Our continued success of offering these services to our clients is evidenced by the 23% growth in assets during the first quarter of 2007. The majority of this growth was sourced by our private client channel as we are just beginning to market these services to institutional clients. On a somewhat related note, the firm booked its first currency mandate during the quarter, a service we just began marketing to clients late in the second half of 2006.

Now I'll begin my discussion of the financial results, beginning with revenues on display 18. Net revenues for the quarter were just over $1 billion, an increase of 16.6% compared to the $896 million in the first quarter of 2006. Investment advisory fees grew by 23.7% or $148 million. Dividend and interest income grew year over year but experienced a sharp sequential decline through the recognition of significant annual year end mutual fund capital gain distributions and deferred compensation investments in the fourth quarter of 2006. The variability of the other revenue line item, a line item which is difficult to forecast, especially on a short-term basis, is in large part driven by the mark to market of mutual fund investments associated with our employee deferred compensation plans, and is therefore linked to the vagaries of the capital markets. In fact, market to market gains declined by $18 million sequentially. This performance of global equity markets was significantly lower in the first quarter of 2000 than the fourth quarter of 2006. As we've pointed out in previous quarterly reviews, the financial impact of these gains is actually offset over a four-year period through higher incentive compensation expense through divesting.

Finally, the increase in interest expense is through the higher equity loan activity, which was more than offset by higher interest income.

On display 19, you can see base fees increased by $758 million or 23.5%. The increase was attributed to higher AUM in all three channels, as well as the shift to higher value-added equity services, including the increase in global and international investment services that I touched upon in my discussion of our AUM diversity slide, that was slide 15.

As I mentioned in last year's quarter, the effect of this shift favorably affects the firm's organic growth rate when measured by revenue as it drives fee realizations upward. In this context, the firm's annualized AUM growth rate of over 7% as measured by net inflows translates into a double digit rate for fee revenue when mix is factored into the calculation.

Also as a reminder, performance fee revenues during the first three quarters of the year are primarily related to our loan-only services while our hedge fund performance fees are generally earned in the fourth quarter.

Moving to the lower half of the display, we show advisory fees by distribution channel. Here you can see that the increase in total advisory fees was primarily driven by the 27.6% increase in our institutional investments channel, where higher AUM and a favorable mix change contributed to the revenue increase. In our retail and private client channels, advisory fees increased by 18.2% and 23.8%, respectively, benefitting from higher AUM.

The expense portion of our income statement is summarized on display 20. Here I would like to point out that the 15.6% increase in operating expenses for the quarter is 100 basis points lower than the increase in net revenues. Employee compensation and benefits rose by $71 million to $441 million or almost 19% and represents almost 70% of the increase in total operating expenses versus the first quarter of 2006. This increase was largely driven by higher base compensation, incentive compensation, and commission expense. I'll discuss compensation and benefits in more detail shortly.

But moving down the display, you'll notice the uptick in promotion and servicing expense. This was due to higher distribution plan payments resulting from higher retail AUM, as well as higher travel expenses as we serve our increasingly global client base. General and administrative expenses increased $17 million or 13.6%, primarily due to continued investments in office space and related information systems support. The quarter also included about $7 million or $0.025 per unit in unusually high employee-related legal costs as well as a trueup of the costs associated with the class action recovery error that we previously disclosed. We continually -- we continue to believe that the bulk of the costs of that error will be recovered from available settlement proceeds and insurance.

With that said, these costs are in contrast to a much higher litigation settlement in the prior quarter.

Display 21 provides additional detail on employee compensation and benefits. Base compensation is up almost 24% versus last year as head count grew by 13.2% to just under 5,000 employees at the end of March 2007. Also merit increases of approximately 5% effective January 1, 2007 and unusually high severance payments, which equals about $0.015 per unit in the quarter contributing to the interest. Incentive compensation, a line item which includes both annual cash bonuses as well as the amortization of long-term deferred incentive compensation increased 16% year over year, which is below the 19.4% growth in operating earnings. This increase is primarily attributed to the increased cash bonus estimates based on earnings, as well as the higher deferred compensation amortization.

As I discussed the increase in incentive compensation, I'd like to pause to address seasonality in a little more detail. As I think we've made clear in previous discussions, our quarterly financial results have become increasingly seasonal as performance fees have become a more significant contributor to our results. Similar to the performance fee driven seasonality as revenues, does also exist a seasonality of quarterly compensation expense ratios resulting from intrayear operating leverage. This leverage is created if revenues increase throughout the year at rates that are faster than our cash incentive compensation needs, thereby reducing compensational revenues -- ratios. The growing amount of performance fees tends to amplify this effect even further. While the quarterly variability of our financial results is driven by a multiple of components, a multitude of components, the seasonality of performance fees in cash incentive compensations can be quite significant.

Now I'll turn to my detailed discussion of employee compensation and benefits. As I've described on previous calls, the 22% growth in commission expense shown on this slide should be viewed as a positive leading indicator for future revenue and earnings. Our sales are up in all four distribution channels, the full effect of which is not reflected in the revenues for the current quarter.

As I wrap up my comments, please turn to display 22, where we present a summarized income statement for the operating partnership, with net revenues increasing 16.6% or 100 basis points more than the increase in our expenses, our operating margin expanded by 60 basis points to 27.4% for the quarter. As you move down the income statement, you'll notice an increase in our income tax rate to the effective rate of approximately 8%. This increase is primarily attributed to a growth -- to our growth in our London-based operation, a trend that we anticipate will continue.

Carrying the operating partnerships net income after-tax of $268 million forward, display 23, we show AllianceBernstein Holding's financial results. Holdings' share of AllianceBernstein's earnings was $88 million for the first quarter versus $73 million in the same quarter last year, resulting in net income after-tax of $79 million or almost 20% more than in March 2006. The distribution per units for the AllianceBernstein Holdings was $0.91, almost 17% higher than the $0.78 per unit we distributed in the same quarter last year. The per-unit distribution grew at a slightly slower rate than net income, as diluted units outstanding in the end of March 2007 grew approximately 2.8% versus the end of March 2006.

Turning to the summary on display 24, I'd like to reiterate that we believe we've begun 2007 by delivering good results in the face of turbulent capital markets throughout much of the first quarter.

Our continued success in generating organic growth showed a substantial increase in our assets under management, with particularly strong growth in our private client channel and our suite of hedge fund services. AUM continued to become increasingly global as the assets associated with global and international services and non-U.S. clients grew at faster rates than total AUM. We continue to make investments we deem vital to delivering superior client service and the growth of our business. Our focus on client satisfaction remains the underpinning of our financial success.

And finally, as mentioned earlier this afternoon in our press release, we believe it's appropriate to provide full-year earnings guidance in an effort to clarify the seasonality of our business. As Lew said if our press announcement, we currently estimate that full-year 2007 earnings at the Holding Company level will be approximately $4.65 to $5 per unit with the fourth quarter accounted for a disproportionate share of the total. This estimate assumes asset inflows continuing at levels similar to recent rates and equity and fixed income market returns at annual rates of 8% and 5% respectively for the balance of the year.

I want to again stress the importance of understanding that the firm's earnings are subject to considerable uncertainty, including but not limited to capital market volatility, which can be amplified by the information -- aforementioned increase on assets under management subject to performance fee arrangements. And now Lew and I are available for your questions.

Thank you. (OPERATOR INSTRUCTIONS) Management has requested that you please limit your initial questions to two in order to provide all callers an opportunity to ask questions. We welcome you return to the queue to ask follow-up questions. It is AllianceBernstein's practice to take all questions in the order in which they are received and to empty the queue before ending the call.

Our first question is coming from Bill Katz of Buckingham Research.

Okay. Thank you very much. First question is on the fixed income side, it seems to be an area of focus and momentum. I'm just sort of curious as to maybe a little more color as to where the flows are coming from, U.S. versus non-U.S. and is there any sort of shift in appetite towards fixed income to your benefit?

Bill, I'll answer that question. The flows are focused heavily on global and international oriented mandate and increasingly of a customized character, which are designed to meet the particular objectives of institutional investors. Many of them contain a substantial component of synthetic securities; indeed, there are some noteworthy mandates that are entirely based on execution around synthetic and derivative securities.

In addition, I would describe growing interest in LIBOR plus and/or absolute return-oriented mandates as opposed to the tradition in the U.S., which is steeped in Lehman aggregate relative benchmark kinds of mandates. And we believe these trends will turn out to be lasting and in that way, in terms of competition and fixed income are evolving in the direction that those mandates would point to.

That's very helpful. I just want to understand the qualifying sort of accounting question here, which is not my second question. On the hedge funds, I'm sort of curious, are you planning on continuing to give us that quarterly disclosure, and as you result in the revenue recognition, are the management fees on that showing up quarterly in the management fee rate, therefore the performance fees are only back ended? Is that -- is my understanding correctly?

The answer is yes and yes.

Okay. My second question is, on the G&A side, seems like you are reinvesting but at the same time you are starting to see some operating leverage. Did I hear you correctly, Jerry, that X the $7 million elevated charges this quarter, you would have been down in G&A, sequentially many.

Yes, we would have been.

Okay. Is that a fair run rate?

Yes. You taking out the adjustments that we pointed out, it's a fair run rate. Obviously, Bill, we continue to increase, but the infrastructure as a firm as we grow, especially with the international side of the firm. But it's a pretty fair run rate.

Okay. Terrific. Thank you very much.

Thank you. Our next question is coming from Cynthia Mayer of Merrill Lynch.

Hi, good afternoon. Just to clarify a little bit on the performance fees versus the comp, are you -- does the higher cash bonus estimate that is in the a -- part of the incentive compensation, does any of that anticipate fourth quarter performance fees, and would there be any kind of a trueup later if the performance fees were lower? Just trying to understand if the timing -- the seasonality of the performance fees is also reflected at all in the comp?

What I tried to explain in my comments, Cynthia, and in fact what you covered quite well in a note sent out this week, is that if revenues increase in the firm including performances through out the year, that we'll end up with a lower comp ratio in later quarters than we had in earlier quarters.

Right.

Does that answer your question? As far as whether or not we would need more money if performance fees came in much lower than we thought, there are a lot of variable there. How is the firm doing, clearly, what's happening in the marketplace as far as compensation? There are a lot of variables here, but we would expect our comp ratios will decrease if revenues increase throughout the year.

Okay. And can you talk a little about what styles are dominating within the hedge funds right now?

Actually --

What's -- and also what the flows have been. How much of the growth is just appreciation versus flows.

By far the largest majority was flows in the first quarter as the 23% gain readily indicates, although we did have a good quarter in terms of investment returns, especially in the global diversified component of our offering. And it's that category of hedge funds that's growing. As you may know, and as the name of those services implies, they actually call on multiple sources of alpha, long/short equity, currency strategies, long/short fixed income, as well as commodity strategies.

Okay. Thanks. I'll get back in the queue for another question.

Thank you. Our next question is coming from Chris Spahr of Deutsche Bank.

Good afternoon. I was just wondering if you can give a little bit of color on the lower non-U.S. sales on the retail side? That's a year over year, can you give a little bit of color on a lean quarter basis and if you're making any penetration on some of the open architecture going overseas?

We have an increase in share in the U.S. -- we have a decrease overseas and we had a spectacular first quarter last year outside the U.S., primarily in some fixed income services, so the -- it's really we've got momentum in the U.S., a little pause here outside the U.S., primarily in Asia. Does that help?

Yes, a little bit. Then also, can you just maybe give a little bit of a -- besides the advisory of performance fees, is there some seasonality that we should expect to see in some of those things, like dividend and interest income, given that's a relatively new line item over the last couple quarters?

Oh, yes. Only to the extent that in the fourth quarter -- because mutual funds pay out their earnings because of the tax law, that's a seasonality. The rest of it shouldn't see that much seasonality.

So we might be able to see similar growth rate that we saw in 4Q '06 and 4Q '07 then? Or --

Yes. Depending on how well the mutual funds do that everyone's invested in. That's literally paying out the earnings that they're required to under the tax law.

All right, thank you.

Thank you. There appear to be no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

Actually, if there's anyone in the queue with any follow-up questions, we still have some time.

Our next follow-up question is coming from Cynthia Mayer of Merrill Lynch.

Hi. I did have a question just on the interest expense. It looked like it was the same year over year, but higher sequentially. What's the dynamic there?

It should follow the consecutive quarter, Cynthia, because this is another example of seasonality, where our working capital requirements actually decline seasonally as we move from the first to the fourth quarter and our short run -- our short-term borrowed balances, therefore, fall accordingly.

Okay. So that's just a pattern you expect to see every year, I guess?

We do.

Yep.

Okay, then --

I think the way you should look at this, you start with the first quarter and then think about free cash flow growing and thus reducing the borrowed balances through the year seasonally.

Okay. And in terms of net flows, it sounds like underlying your guidance, you're assuming continued net flows along the lines of the last few quarters, so does that correspond to when you say you got your pipeline of one but unfunded mandates is substantial, I guess are you also saying that it's sort of in-line with the last couple quarters?

Exactly. Exactly, which have been a real nice pipeline and it continues. So as we're replacing the fundings with new mandates of similar sizes.

Okay. If I could just ask one more. How sticky do you think the inflows to the U.S.-sold funds are? It seems like a lot of them are going to be international value fund and if international were to lose some of its appeal, do you think they would move over to other AllianceBernstein funds or are you at all worried about them being concentrated?

Well, I wouldn't use the term worry, but I think your observation is pat. At the moment, and you can see that from the external measures of U.S. slowed, our most successful service is international value in the retail space. But I would tell you too that our wealth strategy family of services continues to grow in a very consistent way and so while it is true today that the flows have some degree of concentration over time, we're hopeful that they'll become more diversified.

If and when there's a rotation, we'd expect those assets, the wealth strategies to be stickier assets.

Almost certainly. Their character is multistyle, multiasset class, and global.

Okay. And I guess last question is, why not buy back some units to avoid the dilution?

Well, I think that as you well know, we are instead committed to distributing 100% of our cash flow in the form of distributions which we actually think is the most efficient use of our cash flow, and that leaves you in a position, if you so choose, to use that cash flow in a way that would accomplish the mission you describe.

Great. Thanks a lot.

Thank you. Our next question is coming from Niamh Alexander of CIBC.

Thank you for taking my question, good evening. If I can follow-up on the retail, but more to the distribution angle. You'd mentioned before that you were rolling in the confined distribution channel, you'd made some hires there. How is that going? I know it's early days but you do have the advantage of having great relationships with the consultants? And is there any update you can give us there on how that's progressing?

Remember, this is focused dominantly on the institutional channel, although we do have an important activity in the fine contribution area and retail as well. But the buildup in resources that you cite are focused on large plans in the institutional channel. And this, as you know, is an area where the nature of building a relationship is complex and requires considerable time and indeed mandate design is typically not off the shelf, but instead customized to the particular needs of these plants. Moreover, our service array by design offers that flexibility.

So what I can report to you is that we are experiencing a high interest in our offering the queue of business under consideration in the pipeline is growing and we're encouraged but it is not yet a material portion of our inflows.

That's helpful, thanks. And then, other on target date funds, because you were rather innovative in coming out with a more aggressive schedule of equities versus fixed income and we've seen some others follow. How does that -- how is the progress there in distributing those? I think one of the struggles will be not being in a 401K plan, but how is it going with the distributors? Is this an advantage when you come to pitch out your products?

I would actually describe our position in the market as quite a bit broader than just the glide path design that you refer to, which we do think actually set an industry standard. Our capabilities here also include asset classes that have historically not been included in these funds and play in our judgement a very useful purpose. More over, our offering is very flexible in terms of passive or active components of that asset allocation. We can focus the plan exclusively on passive components. We can be exclusively active in all of our services composing those active suites, or it can be a mixture of that as well as the use of asset management services of other asset management advisers. It's a very flexible platform. It doesn't depend on any one attribute but instead is much more a complete and comprehensive service profile.

So once again, what I would say to you is that we're pleased with the market response, but we anticipated that success here would develop over time and that patience and perseverance is appropriate for us to achieve the success that we're targeting in that space.

That's very helpful. Thanks a bunch. That's my question.

Thank you. Our next question is coming from James Allman of Sea Cliff Capital.

Good evening, gentleman. Could you give us a couple of comments on what is the real benefit for Alliance remaining as a public entity? With what we've seen with Sallie Mae and many other companies that no one thought would ever go private, going private and so much capital out there for them and your company having relatively low capital needs and a lot of free cash flow, the sort of things that the private equity firms seem to find very intriguing, what are the benefits of staying as a public entity and why would you not consider taking the company private?

Well, first, to say the obvious, more than 60% of our units are held by --

By (inaudible), yes.

A large global and large and very fine financial services enterprise. But second and really more importantly, we actually think that there is considerable value to being a public firm that's apart, of course, from capital-raising requirements. You properly describe us as a firm that produces cash as opposed to consumes it and we are committed to returning that cash flow to our unit holders.

That sets us apart from most publicly traded firms. There is considerable benefit inside the firm to the existence of a publicly traded unit from the standpoint of employee engagement and incentives. And in addition, I think that there is value to the transparency that being public brings to all the constituents and constituencies we serve. Our clients, the people we do business with, the vendor community, consultants, regulators, and the employees. Transparency is, in my view, an extremely valuable attribute and this reinforces it, quite comprehensively, especially given our reporting standards.

Finally, it's worth really stressing that a publicly-traded master limited partnership is an extremely valuable commodity, which cannot actually be replicated any longer in this country and so providing our unit holders with effectively a tax advantaged participation in the success of this enterprise is something that no one would likely walk away there.

Very good. Thank you very much.

Thank you. Our next question is coming from Robert Lee of KBW Asset Managements.

Good afternoon, everyone. Two questions really to the retail business. I'm just curious, haven't spoken in a while about the managed account business. Can you maybe talk a little bit about what's going on with that? And in particular with the seeming movement towards these model portfolios, what's your view of that? Is that anything -- does that actually make you less interested in that part of the retail business?

The managed account business continues to grow robustly and we are a willing participant in it on terms that we think appropriately compensate us for our contribution, for our value-added and those remain available to us, notwithstanding some evolution in the character of the marketplace that you cite.

Maybe one follow-up question. There's been a lot of chatter out of the SEC about the last two months about looking at 12B1 fees, how they're approved, how they're used, with all kinds of things being thrown out there as a suggestion. From your perspective, Lew, what do you make of this? Is this something that you expect is going to have any kind of -- that there will be any kind of change relatively soon or how do you think that this sort of may play out?

I wouldn't offer a prediction at this point. I think that it's a good thing that the SEC is expressing an interest in this and we'll, to the extent that we can contribute to their understanding of the way these fees are utilized, their efficacy and any issues that might surround them, we'll be a willing participant in that study. Not at all clear to me how it would come out.

Okay. Thank you.

Thank you. Our next question is a follow-up from Bill Katz of Buckingham Research.

Thanks again. Just trying to understand, it seems like you're having a favorable mix shift due to a number of factors and if I strip out the impact of performance fees quarter to quarter -- and maybe quarter to quarter is not the best way to think about, but that was the math I just ran -- it looks like the base revenue yield eased a tad quarter to quarter. I'm just sort of curious, is that just sort of a day issue and the timing of the asset build in the quarter, or am I missing something more structural.

What'd you do, fourth to first?

Yes. That's why I prefaced by saying, I didn't look year to year, but certainly fourth to first --

Number of days in the quarter -- I'm not sure. That could influence the mix between daily priced services as opposed to quarterly-based fees --

Is it fair to think --

There are so many variables, Bill, that could influence the consecutive quarterly pattern, especially fourth to first, I don't think you should draw any noteworthy inferences from that. I think you're safer to think about the pattern expressed by the first to first comparison, which Jerry emphasized in his remarks.

Okay. Okay, thank you.

Thank you. At this time, there appears to be no further questions. I'd like to turn the floor back over to management.

Thank you, everyone, for participating on our conference call. As always, feel free to call the Investor Relations team with any further questions and have a great evening.

Thank you. That does conclude today's AllianceBernstein conference call. You may disconnect your lines at this time.