AllianceBernstein Holding LP (AB) 2008 Q1 法說會逐字稿

Welcome to the AllianceBernstein Holdings first quarter 2008 earnings review. I would now like to turn the conference over to the host of this call, the Director of Investor Relations for AllianceBernstein Holdings, Mr. Philip Talamo. Please go ahead.

Thank you, Donald. Good afternoon, everyone and welcome to our first quarter 2008 earnings review. As a reminder this conference call is being webcast and is supported by a slide presentation that can be found in the investor relations section of our website at www.alliancebernstein.com\investorrelations. Presenting our results today is our President and Chief Operating Officer, Gerry Lieberman, Lew Sanders, our Chairman and CEO and Bob Joseph, our Chief Financial Officer, who 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 is forward-looking in nature and subject to SEC rules and regulations regarding disclosure. Our disclosure regarding forward-looking statements can be found on page 2 of our presentation as well as in the risk factors section of our 2007 10-K.

In light of the SEC's Regulation FD, management is limited to respond to inqueries from investors and analysts in a non-public forum, therefore, we encourage you to ask all questions of a material nature on this call. Now I'll turn the call over to Gerry Lieberman.

Thank you, Phil, and good afternoon to everyone on the call.

Not to belabor an all-too familiar topic, but allow me to set the stage for the discussion of our business and financial results with a quick reminder of just how challenging the first quarter of 2008 was in the global capital markets. For the quarter, all six equity indices that we track in our presentation were negative in the high single to low double-digit range. While the references to Depression by some in the media are clearly exaggerated, these are the worst performance figures for these indices since the third quarter of 2002, a quarter that included major corporate scandals..

On display 3, you'll see that all three U.S. equity industries charted here were negative, from 870 basis points for the Russell1000 Value to 1,020 basis points for the Russell 1000 Growth. The Lehman Aggregate Bond index returned a respectable 220 basis points despite continued turmoil in the credit markets. The weak performance in nine U.S. markets is shown on display 4. The MSCI Emerging Markets index which was down by 11%, had the worst performance figures among these three indices for the quarter, with the World and EAFE indices down around 9%.

Additionally, first quarter '08 is the first quarter in five years in which all three of these major indices posted negative returns. Display 5 provides a synopsis of our relative performance. Suffice it to say that relative returns trailed benchmarks across virtually all of our services. After a strong fourth quarter in 2007, our growth equity services underperformed their relative benchmarks in the first quarter of 2008. While to a lesser degree than growth, value equity services were also generally below their respected benchmarks for the quarter.

Although generally providing solid absolute returns, our fixed-income services also trailed benchmarks even as virtually all of our municipal bond service outperformed.

Finally returns for our suite of diversified hedge fund services were negative for the third consecutive quarter, resulting in the funds falling further below their high-water marks. From a portfolio construction perspective, we continue to believe that this is an appropriate time to gradually increase our risk profile, as valuations represent unusual return opportunities. Consequentially, our returns were negatively impacted in the first quarter of 2008. Additional detail on the relative performance of many of our services can be found in the appendix on displays 27 to 36.

My review of changes and assets in the management begins on display 6. During the first quarter of 2008, total AUM fell for the second consecutive quarter, down 8% since the end of 2007. Net outflows were a modest $1.5 billion as $4.4 billion in retail net outflows were partially offset by net inflows in both institutional and private click channels. Market depreciation on the other hand was material, reducing our AUM by nearly $64 billion. On display 7, you'll note that market depreciation was also the driver of the decline in total AUM over the last 12 months, as assets fell by 1%.

Organic growth for the previous 12 months grew to 2.3% as $13.9 billion of institutional net inflows and $5.4 billion of private client net inflows were slightly offset by $2 billion of retail net outflows, while market depreciation totaled $24 billion. We are seeing evidence of a decline in client's appetite for investment services, likely the result of continuing market turmoil. Display 8, summarizes the changes in AUM by investor service for the three months ended March 2008. Our fixed income services generated $2 billion of net inflows, along with $2.7 billion of market appreciation, and while our value and growth equity services each suffered only small net outflows, they experienced significant market depreciation of $38.7 billion, and $25.7 billion respectively.

On display 9, our value equity in fixed-income service produced organic growth rates exceeding 5% for the 12-month period, while growth easily services saw net outflows of $2.7 billion. Fixed income was the only service that experienced market appreciation during the period at $9.3 billion. Value, and equity services suffered market depreciation of $29.6 billion and $3.2 billion respectively. Highlights of our distribution channels begin on display 10. Institutional investments AUM declined 7% in the quarter.

Market depreciation of $39.3 billion was only marginally offset by inflows even as clients funded over 100 mandates. Global and international services once again dominated net inflows, comprising approximately 91% of these new services. Notably, 30% of new assets were in fixed-income services.

Our pipeline of one, but unfunded institutional mandates increased by about $2 million, and stands at over $16 billion, with the majority to be funded over the next six months. More than one-third of our pipeline is in defined contribution services, demonstrating the growth momentum we're experiencing, with respect to these extremely important opportunity. As you can see on display 11, our retail channel had a difficult quarter, as total AUM decreased by 11%, primarily due to market depreciation of $16.1 billion. We experienced net outflows of $4.4 billion, spread almost evenly in the U.S. and Non-U.S. markets, primarily in equity services. Also, AUM in our Investment Strategies for Life services decreased sequentially by $1 billion to $23 billion, as net inflows were more than offset by market depreciation.

Turning to display 12, you'll see that the spike continued market turbulence, our private client channel produced net inflows, although quite modest compared to recent quarters. Net sales of our fixed income services, primarily municipal bond funds, more than offset outflows in hedge fund services. A market depreciation of $8.2 billion, principally due to poor performance in equity services, dwarfed net inflows, as total AUM for this channel fell by 7%.

Last quarter, I pointed out the growth in financial advisory headcount would moderate in 2008, affording us the opportunity to leverage the investments we have made in this channel, during the previous several years. In contrast with the double-digit growth rate we have been discussing for the last four years, financial advisor headcount was up only 6% year-over-year. Our institutional research services channel continues to grow, as shown on display 13. Revenues increased 20% versus the first quarter of 2007, with the growth concentrated in the U.S., but our European operations grew as well.

Sequentially, revenues grew slightly, versus a record fourth quarter '07 due to the growth in the U.S. The increasingly global nature of our firm's AUM is displayed in display 14. Assets managed on behalf of non-U.S. clients, which are found in the pair of pie charts on the left side of this display, grew by 8% over the last 12 months, and assets in our global and international suite of services, found in the pair of pie charts on the right side of this chair, grew by 9%.

This growth came even as our firm's AUM dropped by 1%. Conversely assets managed for U.S. clients and in U.S.-only services fell by 6% and 13% respectively. This displays evidence of how our platform has produced global services, distributed to U.S. and non-U.S. clients alike, insulating both our client's performance and our assets and revenues from the perils of -- charge. On display 15, you'll see that our blend strategy services AUM stands at $158 billion, up 8% year-over-year. Global and international services were entirely responsible for the growth in blend strategies, up 13% versus March 31st, 2007, as UM blend strategy services actually fell by 3% during the same period.

However, both value and growth equity sleeves had disappointing results in the first quarter of 2008, generating a decline of 10% sequentially. With the recent growth of our stand-alone currency services, we have modified display 16, formally our hedge fund AUM chart, to reflect a total AUM associated with our suite of our alternative investment services. The AUM displays on this display are dominated by hedge fund services, but now include stand-alone currency mandates as well as the invested capital of our venture capital fund.

As I mentioned earlier, we experienced a decline in hedge fund AUM during the first quarter of '08, a combination of market depreciation and net outflows. This decline was mostly offset by the funding of a large currency mandate that was in our pipeline at the end of 2007.

While the currency mandates we manage today generally come in on lower base fees than our hedge funds, they do have performance fee attributes that provide comparable aggregate revenue opportunities. I'll begin my review of our financial results with revenues on display 17.

Revenues totaled just over $1 billion for the quarter, down 1% versus the prior-year quarter. Increases in advisories fees and institutional research were more than offset by a $78 million swing in net investment losses. Losses on investments related to employee-deferred compensation plans, represent $58 million of the mark-to-market losses in the first quarter of 2008, compared to mark-to-market gains of $11 million in the first quarter of 2007. You'll recall that these mark-to-market gains and losses have a corresponding offset in current and future incentive compensation expense, which I will discuss further when I review compensation benefits.

The steep decline in dividend and interest income, and the corresponding offsetting decline in interest expense, shown at the bottom of this display, were largely the result of the outsourcing of the prime brokerage businesses we previously provided to our hedge funds, a decision I announced in our fourth quarter '07 earnings call.

Let's turn to display 18 with additional detail behind the advisory fees.

As you can see in the middle of this display, the 7% increase in base fees for the first quarter of '08 resulted from an improved fee mix due to increasingly higher added-value nature of our investment services, on top of a 4% increase in average AUM. However, a decline in long-only performance fees partially offset the increase in base fees, resulting in a 5% net increase in total advisory fees. From a channel perspective, institutional investments and private client each contributed about half of the increase in advisories fees as retail fees were flat.

Operating expenses detailed on display 19 were essentially flat year-over-year. I'll provide some detail on employee compensation and benefits on the next display, but I'll begin our expense discussion with promotion and servicing expenses which fell by 2%, primarily due to expense controls we have put in place in light of the challenging economic climate.

General and administrative expenses were up 6% versus the first quarter of 2007, primarily driven by higher infrastructure and costs to support increased headcounts. In addition, higher legal expenses incurred to conclude our employee-related arbitrations, reduced current quarter earnings by $0.04 cents per unit. We believe a significant portion of these arbitration costs will be recovered from insurance.

Turning to display 20, fellow employee compensation and benefits fell by 2% to $434 million. Base compensation is actually up 20% versus last year due to a 12% increase in headcount, most of which incurred in the second half of 2007, and our annual merit increases. As we announced on last quarter's call, we anticipated a substantially slower growth rate in headcount for 2008. In fact headcount increased by only five staff members, versus year end 2007 to 5,585.

Incentive compensation is down 20% year-over-year, due principally to the impact of mark-to-market losses on investments related to employee deferred compensation plans, and lower accrual for cash bonuses, reflecting pressure on our operating margin. In first quarter '08, deferred compensation expense was reduced by $20 million, as a result of the $58 million mark-to-market loss I discussed earlier, resulting in a net reduction and earnings per unit of approximately $0.13 for the quarter.

While we fully appreciate the funding implications, as well as the fact the accounting for investments related to employee compensation plans contribute to quarterly earnings volatility, we firmly believe in the merit of the plans, as they align employee interests with those of our clients by having them invest in the same services. To get a better sense of the significance of our compensation plan, I'll refer you to our balance sheet on Display 37, where we disclosed a value of investments related to our defered compensation plans. Approximately 80% of these assets are invested in AllianceBernstein mutual funds with the balance in our hedge funds.

Our other investments category consists primarily of U.S.-T bills held on behalf of our clients. Finally, commissions were basically flat as increases were mostly offset by declines in our institutional investments in retail channels. The increases in fringes and other expenses were caused by higher headcount-related taxes and insurance expenses. The summarized income statement on Display 21, shows that operating income declined by $13 million or 5%, and our operating margin declined by 90 basis points to 26.5%.

These relatively modest declines were achieved through ongoing expense management initiatives, which help mitigate the adverse impact of the higher employee-related legal expense, and the mark-to-market investment losses I discussed previously. Finally, income taxes increased by $7 million, or 31%, as income generated outside the U.S., where tax rates are generally higher, continues to grow as a percentage of consolidated income. The whole company share of AllianceBernstein earnings is shown on Display 22.

Holdings 33.1% share of the partnerships earnings was $82 million in the first quarter of 2008, versus $88 million in the same quarter last year, resulting in net income after taxes of $72 million. Diluted net income, and distributions per unit of $0.83, represent a 90% decrease versus the prior year. In conclusion, as the economic turmoil and resulting adverse impact on the global capital markets continues, our focus on servicing our clients, investing in strategic initiatives vital to our long-term growth, and controlling expense growth, have all intensified. Our ability to deliver on these efforts underpins our long term success and therefore the success of all the stakeholders of AllianceBernstein. And now, we'll open up the line for your questions.

(OPERATOR INSTRUCTIONS) Thank you. Our first question is coming from William Katz from Buckingham Research Group.

Thank you. Good afternoon. Couple of questions. First one is, still looking at some of the appendices as you were speaking Gerry. Looking at the relative performance, how much is potential for snap back here just to improvement in the macro environment, versus what seems to be a head wind building on short-term performance. The question is - How well typically the institutional channel and maybe the retail and private client, how well do investors appreciate the repositioning that's going on that may be affecting some of the relative performance?

Well, I'll take that question. I think our clients institutionally and in the private client space, and the gate keepers in the retail channel all understand well our investment strategies in our key services. I think you know that we pride ourselves as a firm on our communications abilities.

It's something we emphasize highly. And the amount of information and color that we have provided about the increases in skewness, if you will, the increases in wagering that we have put in to portfolios in growth value and fixed income during this period where risk premiums suggests that one should move in that direction, I think have been very well supported and well received. In the period in April, where risk premiums fell, our performance reflected those wagers. The returns thus far in the months have been quite strong.

Okay. That's helpful, and the second question just comes back to the discussion on high water marks, the alternative products and so forth. Last year, I think you were accruing related compensation on a quarterly basis, but almost like a cash accounting, if you will, on the potential for revenues. Is that the same accounting as we think about this year, and as a result of that if you don't see a more decisive recovery in the performance, would one expect to see some kind of true ups as we go through the year on the comp line as well?

I think you are already seeing it in the first quarter. As I mentioned part of the reason you see decrease in our incentive compensation quarter versus quarter was obviously due to the mark-to-market, but another piece I pointed out, indeed, Bill, was a decrease in the accrual for bonuses. I apologize. That's okay. So the answer is yes.

Okay. Terrific. Thank you.

Thank you. Our next question is coming from Craig Siegenthaler from Credit Suisse.

Thanks for taking my call. First just a macro one for Lew. Lew, can you provide us some perspective on changes on product demand levels in the institutional marketplace? Specifically what are you seeing with defined benefit plans endowments? Are they rethinking their overweight positions in cash, and possibly thinking about allocating back towards global equity and emerging market alternatives next quarter?

Well, look, I think the best measure of the trends in asset allocation are the relative growth rates in money market assets over the last 12 months, and for that matter during the first quarter. And they were stunningly large. I'm sure you are familiar with the data, but in the last 12 months in the United States, balances in those services grew by $1 trillion, and they were up 45% year-over-year. So, it's evident that the overwhelming share of cash flows have moved to a defensive stance at least through March.

On your question about the appetite however, if your seizing the moment, given the emergence of high-risk premium, and therefore, high expected returns both in equities and throughout the fixed-income markets, say of governments, there is an interest, and I wouldn't describe it as a burgeoning one, but clients do recognize that the setting presents interesting opportunities, and I think that there's thus a latent demand for more active services and a redeployment of all of that liquidity as market conditions in the period ahead, but with unpredictable timing, relieve some of the anxiety that has lead to these defensive postures.

Through the first quarter, however, as is evident from the cash flow, there was very little of that. In the retail channel, and this is something I know that you all cover carefully, the move to defensiveness was definitive in the first quarter. With equity funds in significant net redemptions in the industry, both here and abroad, and overwhelming share of cash flow going in the money market fund.

Just to remind everybody, we have made a decision four years ago to get out of the cash management business. All right? So we're not seeing an offset in any of this movement. We're not able to capture it on the one hand. And on the other hand, I don't think we regret that decision at all.

Not at all.

Thanks, Lew, and Gerry just an accounting one that maybe you can handle. On the investment gain loss line, the deferred compensation portfolio, I'm just wondering in a normal market let's say 2% up per quarter in the equity markets, backing to what the disclosure gave me, I'm getting to $15, $20 million per quarter which is kind of a fair range I'm guessing, can you comment on that at all, and also can you give us any color on the underlying asset sides that could generate those fees in terms of the size of those assets and in terms of the also the asset class.

We actually made a point, Craig, of breaking the assets that we hold for these plans on a separate line on the balance sheet this quarter for the first time, and I'll give you a sense of the size. Not all of those assets are unvested, some of those are vested, so the impact is reversed in the same quarter. You are a little bit high on the number. It's closer to $10 million than it is $20 million. All right? But your thinking is right. Over normal markets it goes up, and as long as we're growing concern, there's actually a benefit on our P&L by the way we handle this.

Got it and that's just --

And Craig, on your question, as you look at the aggregate assets that we report in deferred compensation plans, note that the overwhelming share are in equity-type services.

Got it. And that's the $664 million?

That's right. Which represents assets that we purchased on behalf of our employees for both vested and unvested deferred compensation that they have left with the firm and they haven't taken. We give our employees an opportunity to push out the income recognition for tax purposes. So some of those assets are there at the employees choice.

Okay. Great. Thank you very much for taking the questions.

You're welcome.

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

Hi, good afternoon. On the hedge fund I'm wondering if the high water marks reset or sunset after a year or two, or are they permanent?

They are ongoing.

We're going to have to earn our way out.

What is that?

We're going to have to earn our way out.

Okay. And then I think you said expense controls intensified, given the environment. I don't know if you meant that you'll be doing something differently this quarter and coming quarters than in Q1, but I was hoping you could talk a little bit about that.

I think we put in place a pretty fairly aggressive look at this, and we have identified investment initiatives that we're still funding. What should happen over the year, is you'll see a little more bite of this. Some of this just takes time to reflect on the P&L, but we pretty much have taken the steps that we're taking. And we're seeing in the out-of-pocket spending, the types of trends we were looking for.

I want to add we haven't sacrificed any of our new service initiatives. Most particularly, our efforts to bring guaranteed withdrawal benefits to defined contribution plans, our efforts to build a presence in institution solutions space in the LDI arena, our product efforts in some innovative data management strategies.

All of those are ongoing. There have been no cutbacks whatsoever, and there won't be.

Okay. Thanks.

Thank you. Our next question is coming from Mark Irizarry from Goldman Sachs.

Oh, great, thanks. You know, when you look at the release, obviously it seems that, you don't expect the organic growths firm-wide to come back until the capital market volatility subsides. Do you line that up with the pipeline of about $16 billion, Lew, and many opportunities on the DC side with some new services that are on the come, if you will. Is it sort of implicit in that that you expect the retail channel going to remain at about Q1 levels? And if you can, have you seen anything in April that is contrary or convinces you that that's the case?

I think what we're reflecting on Mark, is that especially retail has a long history of cash flows having a trend following character. And they don't respond immediately to improved market conditions. They do so with a lag. After people observe success for a while, and their anxiety falls, and they respond accordingly. So yes, our commentary about future period organic growth reflects those observations.

And how about April? I mean, any signs of continuing trend or differences --

I would say April shows no noteworthy change.

Okay. Great. Thanks.

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

Good evening. I was just wondering if you can explain the increase or the record levels in institutional revenues? Was it pricing, volume, share gains?

It's the latter two. And unfortunately not the former. We haven't seen a pricing gain since I've been with the firm, but we are getting some share gains, and what's interesting, Chris, is that gains have been in the U.S., and, for a while there, a lot of our growth was coming outside the U.S., and we're actually seeing gains here in the U.S. And we're feeling pretty good about it. We love our product. We have a strong sales force. We have invested significantly in our trading functionality, that has come out to have a nice payback, so we're feeling quite good about the sales side business, which as you know is a tough one.

Thank you.

Thank you, our next question is coming from Robert Lee of KBW.

Thanks, good afternoon, everyone. I have a quick question on the private client business. If I go back and look historically to the bear market, '01, '02, '03, I mean, that business despite a pretty difficult environment for a couple of years, did a pretty good job of generating organic growth, obviously off of a much smaller asset base. Proportionately it was pretty strong, and I'm just curious, do you think in some way, you know, that that business may have changed to the extent that maybe it's more susceptible now than it was even to dislocations in the market? Because while clearly I would expect the difficult environment to have some impact. I was just wondering if it's a less experienced sales force than you had back then, or all the growth, any concerns that may be some of the products or strategies aren't being marketed correctly?

Mark, it's actually the opposite. If you study the performance of that business, you'll find that in the year 2000, reflecting very turbulent relative returns, and a hostile absolute return environment, that business was in net redemptions.

Uh-huh.

In you go back to 1990, the prior turbulent time in the global capital market, it was that long ago, the business was also in net redemptions, which it recovered from before too long in both cases, and you are reflecting more on the success of that recovery in '02, '03, '04, as opposed to the performance in the year 2000.

And it was a similar pattern in 1990. By 1992, the business was on firm footing and growing strongly. Here we are in a highly turbulent condition in the current setting, and the business is actually still growing, even if quite slowly. I judge that to be a substantial improvement in its resiliency, as opposed to any evidence of deterioration. And just as I noted with Mark, during the next period where client concerns begin to recede, we would anticipate our growth rate would accelerate once again.

That's helpful. Thank you .

Thank you. We now have a follow-up question from William Katz of Buckingham Research.

Thank you. Just two questions again. First one is, just given some of the volatility that seems to be creeping globally, any thoughts of sort of reallocating expenses and/or capacity back to the U.S.? And then the second question is, given the volatility you are seeing in this deferred compensation plan now for a number of quarters, just sort of wondering how that is resonating with the rank and file? Is there any sort of systematic thoughts to somehow hedge that to the benefit of the employees?

Bill, can I ask you to clarify part A of that two-part question?

You see some of these global markets down 15% to 30% in Q1 and coming off of three or four years of stellar growth. You just sort of wonder if the incremental growth opportunity might be stronger in the United States, so I'm wondering if you'd be thinking about realigning any of your growth initiatives or costs, et cetera, to maybe take advantage of some of that to make more of a domestic push going forward.

It's an interesting observation that you make. I think the way you think about this firm, and I would argue the way one should think about the capital markets, is these regional boundaries that we historically imposed are artificial. The capital markets are largely sector and industry based in valuation and risk attribution today, as opposed to regionally based, and the capital moves across the globe as relative opportunity surfaces. We don't need to restructure the company to accomplish that. We already have. If you look at the mandate designs that have become increasingly popular in our firm, they give us that authority. In addition, we define the research problem as a global problem.

So the infrastructure necessary to execute on our product mission will always be global, and your investments may concentrate in one part of the world or another, really better put in one industry or another that has a regional focus, but you don't need to restructure the company to take advantage of those opportunities, and I would argue that that flexibility is one of the key advantages that global mandates provide, and is the future of the industry. Now on this point about the deferred comp plans and the volatility that they produce. , I mean, if you are an investment professional and you don't understand that the capital markets are volatile, I think we need an educational initiative here to bring you up the curve. No, I think this is well understood. To me, by far and away, as Gerry said in his formal remarks, the value of this is in alignment with our client.

As you can see, from what we reported there's over $600 million of deferred comp invested in client services, right alongside the client, who deserves our undivided attention. And that alignment ensures it. I'll add too, although it doesn't affect the P&L, there is more than $500 million invested in firm services in our 401k plan, so in aggregate well more than $1 billion of employee moneys in invested alongside clients. It is in my judgment among the most important cultural features of this

Okay. That's helpful. Thanks so much.

Thank you. We now have a follow-up question of Cynthia Mayer from Merrill Lynch.

Hi, thanks. Just a question. Since fixed income is getting decent flows, do those on the institutional side tend to receive performance fees, and I assume the base fees are lower, but in other respects would they be the same?

Some do, Cynthia, some do, but it's not as strong or as strong of a trend that we saw in the equity services. And as we mentioned on calls in the past, if the clients want them, we're fine with them. We feel that if a client wants to change as long as we are able to realize total fees, consistent with our goals for the fee service we're fine with it. So we're seeing a little bit of a trend that way, but not a heavy one.

Right. And on the DC assets you are expecting, what styles are attracting those? Or is it, really the full suite with the asset allocation overlay?

It's mostly, Cynthia the latter, but there are also mandates where we were hired as a sleeve manager for an active role in the portfolio that includes other managers. But our CRS platform. our Customized Retirement Solutions platform is really what is driving the firm, and the target date design that that includes, which I think you know from your knowledge of the firm, and others on the call know, is a very flexible design that can include all of our services or just a subset thereof, it can be active or it can be passive. But in all cases we manage the asset allocation, and it's on that platform that we will bring the guaranteed withdrawal benefit, which we're hoping will differentiate it in a material way. Our goal is to, our goal remains to bring that to the market in the second half. The guaranteed benefits? Yes, probably towards the middle, if not the latter part of the second half.

Okay. Thanks.

Thank you. We now have a follow up question from Craig Siegenthaler of Credit Suisse.

Thanks a lot. On previous calls you have given us pretty good color on your hedge fund assets. In terms of if you look at the $9.6 billion, what percentage of it is generating or actually is above high water marks? What percent of it is actually relative to a long lead benchmark like a spread above LIBOR, and how they rank? Can you kind of break those up for us in those three buckets?

You want to do it?

Well, I was going to say, I don't know that we can provide the kind of granularity that you just asked, I think what was clear based on Gerry's remarks, that these funds were meaningfully below high water marks. I will report to you that there was quite a strong recovery in April, but we still have a ways to go before we are in a position where a substantial fraction of those assets will be in an incentive fee position, and our expectations are we'll eventually get there. The ex anti-alpha opportunities, in those services, as you might imagine given the elevated risk premium in the capital markets are in our judgment impressive, and should eventually turn to both absolute and relative return.

Thanks, and then actually just a follow-up on the previous question. You are getting in to some of the riders and the variable annuities. What insurance companies are going to offer these riders, and are you going to offer a GMWB for life? Or is this just strictly a GMWB?

This is a very simple withdrawal benefit that defines the high water mark as the basis of the benefit, and the plan participant will be able to draw a fixed percentage of that for life. So it's not a fixed income annuity. It's rather a variable annuity with a defined rate of withdrawal, based on high water marks. So if you think about the character of that guarantee, it accomplishes two very important things in the perspective of plan participatant. It can no longer run out of their money if they happen to have a long life, a major fear of most retirees who are not wealthy. And secondly, they don't have to worry about the next bear market undermining their wealth.

Because it's the high water mark that controls that rate of withdrawal. It's a very simple idea. And there are no surrender charges. There are no complications. If you die early, unfortunately, and there is principal left, it goes to your estate. You can withdrawal from the program at will. It's a very flexible program. It can be explained in a paragraph.

And as a result, it will be very low cost by the standards of what have been typically the kind of burdens that annuitization has put to retirees, I mean very low cost relative to those figures, which is the essence of this innovation, and so it's on those grounds that we hope that it will make quite a difference in the marketplace when we hopefully bring it, the commercialization later this year.

And our thought here, Craig, is we'll end up with open architecture on the insurance companies. If you are trustee sitting over a plan, you are not going to want to have all of your employees guarantees with one firm. So we're talking to several. There are two in particular, that will probably be the leaders, but we think over time, both whether we're offering this, or other firms enter into these services, this will be an open architecture, just like the assets under management will be an open architecture.

On that score, which is a very crucial feature, especially the large plan, we have designed this offering such that you can easily add at launch, and then later multiple carriers to diversify the insurance risk, both at the participant level and for the plan in aggregate. Now I want to emphasize that these are a set of expectations. We are hopeful that we'll be able to accomplish all of this, but it isn't actually yet in the marketplace.

I agree. Thanks a lot.

Sure.

Thank you. And now a follow-up question from Mark Irizarry of Goldman Sachs.

This may be a tough one for you Lew, if you look back at 2000, you did refer to that as the period where we're in a similar sort of retail flow pattern, in terms of what the market volatility looks like. What were the experience in terms of sales versus redemption rates? I think if I look at this quarter, it looks like you had an uptick in both. Can you put any historical perspective on sort of which one if any would move first? Thanks.

Actually, what has happened in prior cycles is that the flows were impacted from both sides, which is gross sales slowed, and redemption rates increased. Post 2,000, especially in growth services, there was a dramatic shift that persisted for years. In the private client channel these shifts as I outlined were more subtle, but they were still quite noticeable. And a similar pattern, although more subtle on the redemption side has surfaced so far this year.

The principal change, if you look at our financials is in gross flows, as opposed to meaningful uptick in redemptions. Offshore, in offshore mutual fund, I think there is a more noticeable redemption, especially in Asian Fixed Income. It's very typical of that particular geography. But if you think about the company much more broadly, and you look at and you annualize, let's say Q1 growth versus outflows, I think you'll see that most of the change in flows is on the gross levels, gross inflows.

So our expectations are once again that as capital market conditions improve in some uncertain timeframe, with a lag, gross flows will respond.

And just as a quick follow-up, your redemption rate I think probably in large part is in your control in terms of explaining your process and having folks stick with you and you have done a good job of getting that, the message out there in terms of your performance. But is there anything that you can do to accelerate sales even in a tough environment, or alternatively, are some of the P&L tightening, how do you balance cutting off muscle and manage expenses?

Well, you don't cut any muscle. I mean, that's just so short-sighted, but there are opportunities, and Gerry has, without being very specific, has made it clear that we have any number of initiatives around controllable expenses, and think you can see in Q1 results that they have already borne fruit. But they don't involve any pruning of ether our distribution footprint or the initiatives that we think are central to continuing to move ahead with important product initiatives, and won't, even if conditions get more hostile, and that means the margins come under still greater pressure.

It would just be a fool's errand to manage the company that way. As to stimulating sales, I think the way you succeed in this business is not to define your relationship with clients quite that way. You need to be a trusted advisor to the clients that you serve, and that doesn't mean that you ever push products. Because the market conditions suggest that you, quote, need to for financial reasons. You should never do that. Instead you sustain a relationship with clients during turbulent times, and they remember you for the support, they remember you for the clarity that you brought to all of the turbulence, they remember saving them if you will, from making inappropriate choices, as so many clients do.

Even institutional clients, during times of hostile market conditions, and that redounds to your market share later, and that's how we're manage ourselves through this one.

And again, just to emphasize Lew's point earlier, so far what we have seen is a decrease in new money coming in rather than redemptions going out. And this stickier money is both with our private institutional channels, where we're closer to the clients. And in the retail channel, it's a little bit harder, because our communications are with intermediaries.

Thank you. And now a follow-up question from Robert Lee of KBW.

Thanks. I was curious, could we get some color on the fixed-income flows. It seems to be a point where you are seeing some success. Is it coming across a broad range of strategies? Or are there one or two in the particular that seem to be drawing a lot of attention. As you mentioned, it's a good time to start taking some risk. Are you starting to see that reflected at least in fixed income in terms of investors choices?

Yes to all of the above. Let me start with in the fixed income, it has been mostly in our global services, Rob.

Uh-huh.

And you'll recall, I have to say, at least that would have to be about two years ago when we actually saw this coming, we made investment in the research, and we felt very good about these services, and we thought we'd make a difference and it started to do great, to bring some added-value in performance, we've been servicing and selling this globally, so it's global, primarily global service sold globally, and I'm sorry the second half of your question had to do with?

Well, I'm just curious if you are seeing it go to kind of more of a core bond product, more to a risky or higher yield products.

This goes back to Lew's comments earlier, in that we see opportunities and premium growing across all of our services, and we are gradually moving to take advantage of that in growth, equity, and fixed income. So the --

And actually in a specialized service, which defines its mandate as all assets, including equities, fixed incomes, synthetics, asset backs, and perhaps even real property as co-investor in a fund that focuses, in the heart of the storm where the risk premiums are the highest. That's something we're in the process of assembling now. But I wouldn't cite as it as material to a company of our scale, but I think it's important to our brand equity and also highly synergistic from a research perspective with our mainstream services.

Great. Thank you.

Thank you. There appears to be no more questions at this time. I would now like to turn the floor over to the host for any closing comments.

Thanks, everyone for participating in our call. As always feel free to call the investor relations team if you have any further questions. Enjoy the rest of your evening.

This does conclude today's AllianceBernstein call.