AllianceBernstein Holding LP (AB) 2008 Q4 法說會逐字稿

Welcome to the AllianceBernstein fourth quarter 2008 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. I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be replayed for one week.

I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AllianceBernstein. Mr. Philip Talamo, please go ahead.

Good afternoon, everyone, and welcome to our fourth 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. Following Gerry's remarks, our Chairman and CEO, Peter Kraus, will provide some additional commentary. Our CFO, Bob Joseph, will also be available to answer questions after the formal remarks.

I would 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 two 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 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.

Now I will turn it over to Gerry.

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

First of all, a belated Happy New Year to all, and let's indeed hope that it will in fact turn out to be a Happy New Year, despite so many dire predictions. Clearly, no tears are being shed for the passing of 2008, the year during which capital market losses and financial sector dislocation led to the loss of tens of trillions of dollars of wealth, and swamped the business dynamics of our industry, and more specifically our firm. Whether you refer to 2008 as the year of the perfect storm, the year of the financial tsunami, the year of the black swan or long tail, it was a year of shock and awe.

As you all know too well, 2008 saw widespread carnage in the capital markets. As a firm, it was a year in which we were disappointed that we failed to provide much, if any, of a buffer to the losses of our clients. Furthermore, we underperformed benchmarks, in some cases by substantial amounts, in virtually all of our services, particularly in the fourth quarter. We owe our clients and our unit holders much better, and we are confident that we will do so.

As shown in displays three and four, equity returns in all corners of the capital markets were dire in 2008, declining a startling 20% or more in the fourth quarter. In fact, the fourth quarter erase would have been analyzed in cumulative three-year gains through the third quarter for all fixed equity indices that we plot on these displays. The S&P 500 posted its worst quarter since the fourth quarter of 1987, and its worst year since 1931, with little discrimination across styles, across geographies or capitalizations, as global equities declined more than 40% for the year. Specifically, 2008 was the worst year for the MSCI EAFE index since its inception in 1969, and emerging markets dropped an astonishing 53%.

Against this backdrop, we as asset managers fared poorly. As displays 27 to 35 in the appendix illustrate, our underperformance was widespread across our sweep of services. However, I would like to put this in context, not as an excuse but as an explanation. Our ability to understand and articulate what has happened, to describe the lessons learned and enhancements put in place, and to dimension the substantial opportunities we perceive, are all critical to retaining client confidence in our ability to recover lost performance.

Our performance in many services was so poor in 2008, [that was badly] contaminated over once excellent long-term track records. This is visible on display five, which shows year-by-year absolute and relative performance of two of our flagship services, global value and global research growth. It is clear from this display that 2008 was a highly anomalous one, one in which we underestimated the magnitude, the breadth and the duration of the financial crisis, and its ultimate impact on global economics.

You will note that we have underperformed before; for instance, during the tech bubble in value, and post-bubble in growth. But you will also note that we recovered after these episodes. Today, our portfolios are positioned to balance historic opportunities against the still high levels of risk present in the capital markets. Importantly, we have not shied away from taking advantage of today's extreme dislocations, ensuring that we have sufficient exposure to securities that we expect will outperform as markets anticipate the eventual resolution of this crisis, and the inevitable but perhaps not imminent improvement in global economies.

I have discussed with you on recent conference calls, as well as with our clients, how important we believe this positioning is. By way of example, I like to share with you our very recent performance in about a dozen or so of our most important investment services as 2008 came to a close. The period starts with November 20th, the lowest point during 2008 in the US equity markets and, for that matter, in many global markets, and the period ends on December 31st. I realize that these dates represent both a very compressed and a very selective period. It nonetheless is illustrative of the fact that our portfolios are constructed to perform during a market recovery, which this actual recent period presents.

These last six weeks of the year saw equity indices like the S&P 500 and MSCI World, as well as various retail benchmarks, increase between 18% and 28%; and the Barclay's US and global aggregate fixed income indices increased by 5% and 8% respectively. During this period, many of our equity services outperformed in the range of 200 to 2000 basis points, while two of our flagship fixed income services outperformed by 200 basis points. To be more specific, ten of our most important equity services were up 23% to 39% in this six-week period. And these two bond portfolios, which are heavily exposed to high-grade credit, were up 7% to 10%, thereby outperforming handsomely.

I offer this only to illustrate how quickly performance deficits can reverse if the extreme risk aversion investors abates even modestly, and how we are positioning our portfolios for this scenario. Finally, I will note that the strongest evidence of our ability to generate superior results for our clients is our nearly 40-year track record of doing so, with disciplines that have been stress-tested before and have delivered, as shown on display three to six.

Now, let's turn to our firm's financial and operating results. I doubt I'm surprising anyone when I say the fourth quarter of 2008 was one of, if not the most, difficult quarters in the history of our firm. The collapse of the equity markets in general, and the financial sector companies in particular, resulted in large losses to equity, and in several cases bondholders alike, and in turn had significantly - had a vast impact on our financial results. Our AUM was down 42%, revenues were down 50%, and net income was down 69% when compared to the prior year quarter, even as expenses were cut 40%.

Displays six through nine reflect our assets under Management [growth boards] by channel and investment service for both the quarter and the full year. These displays show that our assets have declined by $128 billion or 22% for the quarter, and $338 billion or 42% for the full year 2008. With $462 billion in assets under Management as of December 31st, 2008, we are at our lowest level of AUM since the third quarter of 2003. The decline occurred mostly in our institutional and retail distribution channels, and was overwhelmingly due to market depreciation in both value and growth equities.

Net outflows did accelerate in the four quarter to $23 billion, or more than one half of full year net outflows. The fourth quarter of 2008 saw record net outflows at all three channels, and all three equity managed services. I will provide more detail on net outflows in the three channels in just a couple of minutes. However, comparing displays six and seven will provide some insight into the dynamics driving flows. Specifically, you will see, when comparing the fourth quarter to the full year's flows, sales have slowed dramatically in all three channels. You will note an uptick in redemptions and terminations in our institutional and private client channels, with retail relatively in line with the full year. The fact is, we continue to anticipate weakness in flows until the capital markets stabilize, and our performance improves.

Now, let's turn to display ten, where I will begin my discussion of channel highlights. Excluding the transfer of assets to our retail channel for servicing, institutional investment assets under Management declined by 20% in the quarter to $291 billion, primarily due to market depreciation. Net outflows did accelerate to $10 billion, or more than two years of the full year outflows, and once again the main cause of increased net outflows is the lack of new sales, which was less than $6 billion in the quarter.

For the full year, assets in this [shell] declined by 41% excluding transfers, with market depreciation accounting for over 90% of the decrease. A lack of new sales to offset the funding of previously awarded mandates caused our pipeline of one [but] unfunded institutional managed to fall by 43% to $8 billion, over 40% of which was in defined contribution AUM. Meanwhile, consultants have confirmed that search activity has slowed.

Before moving on to retail highlights, I like to mention that we just notified that we maintain a top ranking in an annual pension survey by a leading independent Japanese industry publication, Newsletter on Pension and Investments. This follows a recent survey in Australia, in which we were rated as the leading global equities manager, as measured by the number of clients, in the 2008 Peter Lee of area consultants. We are also rated number two for overall quality of client service.

On display 11, you can see that our retail channel assets decreased by 27% for the quarter, excluding transfers in from an institutional investment channel. Once again, market depreciation was the principal cause for this decline, with net outflows of $9 billion in line with the prior quarter. While redemption stabilized when compared to the third quarter, already slow sales fell by 27% sequentially. For the full year, assets in this channel were half, excluding transfers. Nearly three quarters of this annual decline was due to market depreciation, and nearly three quarters of full year outflows occurred in the second half of the year.

For those of you who plan to ask us a question regarding the potential third huge consolidation of distributors, with the announced Smith Barney/Morgan Stanley joint venture, following the BofA/Merrill Lynch and Wachovia/Wells Fargo mergers, it's a little early to assess the opportunities and risks that these transactions present for AllianceBernstein. With that said, we can - plan to continue our strategy of aligning research and knowledge with the advice delivery platforms of financial institution distributors to improve the investment outcomes for the individual investors we jointly serve. At the same time, we think we can bring still more value for the largest distributors with this strategy.

Turn to the display 12. You will see that our private client channel AUM fell by 19% during the quarter, as net outflows increased to $4 billion. Additionally, during the quarter we received hedge fund redemption notifications totaling $900 million, redemptions which will be reflected in our January AUM. A portion of these redemptions will remain with the firm, invested in other services.

Despite one of the most turbulent investment climates in history, we did continue to add new accounts, albeit at a slower rate. Our closed account rate for the year, which did accelerate at the end of the year, was 5%, versus our historical rate of 4%. This compares quite favorably to our peak of 18% for the full year of 2000. And although down from recent years, our gross cash flow, which represents new assets from new and existing clients, still exceeded $13 billion for the year, and is reflective of the continued appeal of our private client value proposition.

As far as our team of financial advisors is concerned, although we did indeed downsize our staff levels, we did so by carefully keeping both the best and the highest potential professionals that service our private clients. Undesired turnover has been avoided, and we plan to start hiring new advisors shortly.

Display 13 shows that during third quarter 2008, the total AUM associated with our suite of alternative services fell by 19% sequentially, due mostly to hedge fund market depreciation. Alternative investment assets fell 32% versus the end of 2007 to $6.6 billion. This market depreciation and net outflows in hedge fund services were partially offset by net inflows in our standalone currency services. To put this in context, it was reported last week that the global hedge fund assets dropped below a trillion dollars for the first time in four years.

Turning to display 14, you will note that our institutional research services' full year revenue was up 11% to a record of $472 million, with robust growth in the US offsetting a modest decline in Europe. Fourth quarter revenue was flat year-over-year, and down 5% sequentially, as market volumes decelerated significantly in the second half of the quarter. But this has not at all put a damper on an outstanding, and perhaps our best, year with respect to our research trading and sales support.

Before turning to our discussion of the P&L, let's turn to display 15, which provides detail behind the changes to the composition of our AUM. As you can see, the events of 2008 not only greatly reduced our AUM but changed its composition. We ended 2007 with three quarters of our assets in equities, and one quarter in fixed incomes. One year later, we are much closer to a 60/40 split in favor of equities. To a lesser degree, but not inconsequential, our mix of US versus global and international services shifted by 500 basis points away from global and international. These trends have exacerbated the impact of lower AUM on our revenues, as our revenue yields as measured by our annual fee base decreased from 44 to 42 basis points at the end of the year.

Now, moving to the income statement. I will begin with a discussion of revenues as shown on display 16. Net revenues fell by 50% versus the fourth quarter of 2007 to $581 million. A sharp reduction in advisory fees, and mostly lower base fees resulting from the severe erosion of assets under Management that I discussed earlier, accounted for almost two-thirds of the decline, with a decrease in performance fees and the effect of the exchange that I just covered accounting for the remainder.

An $82 million increase in losses on investments, related to early -- related to employee deferred compensation, and a negative $34 million swing to the mark to market of our venture capital fund, contributed to the additional 20% of this decline. Now remember that our mark-to-market losses on the deferred compensation investments have a corresponding offset in current and future incentive compensation expense, and only 10% of the venture capital fund results flow to our bottom line, with 90% offset reflected below the operating income line in our P&L.

Distribution revenues were nearly half to $64 million, as retail AUM fell by a similar percentage during 2008. These lower revenues were offset by lower distribution plan payments, which are recorded in promotion and servicing expense, and shown on display 19. The decrease in dividend and interest income reflects lower dividend payments received from mutual fund investments related to employee deferred compensation, as well as the late 2007 outsourcing of our prime brokerage services. Finally, lower interest rates was a primary driver of low - interest expense, but our prime brokerage outsourcing also contributed to this decline, even as the net prime brokage interest a year ago was only $1 million.

Display 17 provides additional analysis of our advisory fees. Lower base fees represent over 90% of the $381 million or 43% decline in advisory fees, with the lack of performance fees comprising the remainder. Though all three buy-side distribution channels incurred significant declines in revenue, with retail down a full 50%, institutional investments down 43% and private client down 35%, which corresponds to full year AUM declines in each channel shown back on display 7.

Before going into a discussion of expenses, let's look at display 18 to see where we closed the year in regards to our reduction in force initiative. You can see on this bar chart our staff levels were down by 663 for the quarter, or just under 12% versus our September 30 levels. These figures did not exclude some staff members who have already been notified of the dismissal, but still on the payroll at year end. In addition, we have announced internally that we have identified approximately 80 positions that will be eliminated later this year as we move that work offshore.

While on the topic of expense reduction initiatives, ACTUAL capital expenditure reduced by about 50% below our original 2008 plan, and our 2009 capital plan includes a further 10% reduction from 2008 levels. As Peter remarked in our press release earlier today, if a worsening of economic and market conditions occurs, we may consider additional measures. I will cover the cost of the reduction in force, and the associated savings, in just a couple of minutes.

Let's start from the top with my review of expenses. Operating expenses, as shown on display 19, declined by $302 million or 37% year-over-year, with about two-thirds of the decrease coming from employee compensation and benefits, which fell by 44%. I will discuss the changes in employee compensation and benefits in greater detail on the next display. Promotion and servicing expense decreased by 40% or $71 million versus last year's fourth quarter. The lower distribution plan payments referenced to earlier accounted for approximately one-half of this decline. Controlled expenses, primarily travel related costs, but also decreases in printing and mailing, accounted for approximately one-third of this decline. General and administrative expenses were down 14% or $22 million verses the prior year quarter. Incremental foreign exchange gains, as well as lower consulting and legal costs, were the principal causes behind the decline, while infrastructure costs such as rented technology were essentially flat.

Details behind the 44% decrease in employee compensation benefits are shown on display 20. Base compensation was actually up 27% versus last year, due to $40 million in severance associated with work force reduction efforts. We anticipate these reductions will generate annual savings in excess of $70 million in salaries and related fringe costs. In addition, these individuals were rewarded over $40 million in incentive compensation in 2007, thereby reducing the demand on IC for 2008 and going forward. Fourth quarter incentive compensation expense was only $4 million or $174 million lower than last year. The primary causes for this decline was the year end true-ups of our incentive compensation and profit sharing plan accruals to the tune of $113 million. Also, the quarter saw an annual - saw an $80 million credit to the deferred compensation expense, due to the impact of mark-to-market losses and lower dividends for these investments, versus only a $12 million credit in the fourth quarter of 2007.

These expense reductions were partially offset by an $18 million accrual related to our former Chairman's retirement. Investments related to employee deferred compensation, disclosed on display 37, stood at $306 million at the end of 2008. Total commissions fell by 41%, with year-over-year declines in all three asset management channels, most significantly in institutional investments and private client. Fringes and other expenses fell by 38%, predominantly due to lower payroll taxes, a function of lower year and bonus accruals, as well as lower recruitment expenses.

On display 21, you will find a summary income statement for the operating partnership with quarterly and full year detail. As you can determine from this display, the drop in fourth quarter revenues constituted nearly 60% of the full year decline. Despite aggressive management expenses, which were down 40% and 18% for the quarter and full year respectively, net income fell 69% and operating margin declined by more than 1300 basis points versus fourth quarter 2007. Of course, both of these items include the adverse impact of separation charges that I mentioned earlier. Fourth quarter 2008 income taxes were only $2 million, due primarily to the reversal of approximately $13 million in tax reserves pursuant to FIN 48, as tax examinations were completed without material assessments for those years.

Display 22 details the holding company's financials. Net income and distributions per unit were down 73% versus the fourth quarter of 2007, a slightly larger decline than at the operating partnership level. As a reminder, the holding company pays a 3.5% Federal tax on its share of the operating partnership's gross revenues, and not net income, thus explaining the holding partnership's increased effective tax rate.

Before I wrap up, I would like to briefly address the overall health of AllianceBernstein. Our firm is one of the world's largest organizations focused exclusively on investment research and management for our clients. We are not a commercial bank. We do not originate mortgages, hold proprietary positions in mortgage-backed securities, or use our balance sheets for other banking activities that are at the epicenter of the recent problems. Not are we an investment bank or an assurance company that engages in investment banking activities, thereby having direct exposure to troubled assets. Additionally, AllianceBernstein has long maintained a conservative balance sheet, which is reflected in our strong long-term credit ratings of S&P at AA-minus, Moody's at A-1 and Fitch at A-plus, and we have a balance sheet that's backed up with significant committed credit lines.

Clearly, 2008 will be a remembered as one of the most difficult markets in a lifetime, one in which fundamental considerations were ultimately overwhelmed by fear in driving security prices. Real challenges to the global economy remain, and that will impact the reemergence of investor confidence and a recovery. Yet the deep fear that has overtaken investors has also resulted in potentially historic investment opportunities across the capital markets. Our task remains what it has been throughout our history, to apply deep and objective research, to separate emotion from fact as we assess securities for our clients' portfolios, and the pursuit of long-term investing success. While doing so, Peter and I are confident we will continue to control expenses and invest in a very few select strategic initiatives to strengthen and broaden investment services in order to meet our clients' needs.

Our balance sheet is strong, our intellectual capital is intact, and our expenses and capital outlays are being aggressively managed, while we continue to invest in our most important strategic initiatives. Therefore, we believe that AllianceBernstein is well positioned for the future, and that our efforts will benefit all of our stakeholders in the long run.

Now, I will turn the call over to Peter.

Thank you, Gerry. Good evening to all on the phone.

As all of you know, and I'm sure are experiencing, we are living in an environment characterized by turmoil all around us. The turmoil is changing the landscape, and in some cases dramatically. Our organization, as we have just discussed, has been impacted by this for sure. But AllianceBernstein exhibits three traits that I think will differentiate us from the competition going forward. First, although Gerry mentioned this I want to reiterate it, our financial strength, clean balance sheet, high liquidity and financial flexibility. Specifically $4.3 billion of partner capital, only $285 million of debt, a $1 billion dollar credit facility available to us, ratings of AA-minus and A-1. A majority of our third party assets are custody - of our assets are custodied at a third party, both institutionally and for private clients. Less than $100 million of long-term investments net on the balance sheet. No derivatives and off balance sheet obligations. A very strong financial statement indeed, which will give us the financial flexibility to do things in the future that others may have trouble doing.

Secondly, consistency in senior leaders in both the investment and client-facing roles. This longevity in the leaders is buttressed by investment teams that are energized about the opportunity to take advantage of historic dislocations, and client-facing teams, importantly, that are excited by the challenge of creating investment opportunities that will meet the needs of our clients. I assure, we cannot spend enough time with our clients, and our investment teams are excited by the research that they are doing and the opportunities they see.

Third, a research-driven culture. The value of research has never been more in evidence. It drives exceptional investment performance, it drives effective advice on asset allocation for private clients and institutional accounts, it drives effective risk budgeting for both current markets and long-term trends, and it drives unique advice for buy-side clients regarding investment themes and specific opportunities. We suspect that markets will continue to be volatile, uncertain, and create significant change in the competitive landscape, but leveraging the three core characteristics that I mentioned, financial strength and resultant flexibility, consistent senior leadership providing reliability to the investment process and sustainability of long-term client relationships, and a research-driven culture, we believe will give AllianceBernstein the competitive edge to grow our business through these difficult markets and outpace the competition.

Now let me just say a few words on the capital markets themselves. While we have seen some signs of better credit markets, as stronger corporate credits have been able to access capital markets and credit spreads have tightened somewhat, and the liquidity in those names has improved, economic data continues to deteriorate. Housing data, credit losses, employment statistics, GDP levels, retail data, all continue to show significant weakness. On top of this, financial stress on the balance sheets of the world's banks continue to be acute. New lending is episodic, capital growth in the face of deteriorating asset quality is certainly a challenge, offsetting the affects of deleveraging in the capital markets, and reengaging the unsecured debt market to provide wholesale funding to the balance sheet to these banks has been very hard to do.

Having said this, governments around the globe and related central banks are clearly focused on creating demand for goods and services and stimulating credit. Those actions will ultimately do just that. Although just one anecdote, when looking for where there is evidence of lending growth, China recently has experienced some loan growth in November of '08. Here, the government's very clear attempts to stimulate investment may be taking early root. We would expect similar impacts in the US, and later in Europe over time, as actual dollars and euros are being spent. Of course, the timing for the recovery will depend significantly on when and how these funds are spent.

It's against this backdrop that we continue to believe that deep research focused on broad trends, as well as company-by-company analysis, both fundamental and quantitative, will unearth unusually attractive security selection and drive out performance in our various investment services. While the timeframe for recovery, as I said, remains unclear, that it will occur is irrefutable. We believe we have positioned our portfolios to produce outsized returns that we have historically provided to our clients, and we also believe that the strength of Sanford C. Bernstein Research Platform on the sales side will be rewarded by buy-side clients in significant - to a significant extent.

I wanted to return to one area that when I last addressed all of you we discussed, which is the area of the DC business. It is it a place in which we continue to place a fair bit of focus and investment for us, and while it's still a fledgling business, I wanted to share some facts directly with you. In 2006 the business had less than $1 billion of net inflows. In '07 we won and funded over $4 billion of mandates, and in '08 over $6 billion of mandates. Our current one and unfunded mandates at this date in '09 are $3.5 billion. As of December 31, 2008, we are managing over $12 billion of DC assets. So while we have just begun to talk with our largest clients about our new flexible platform CRF, which DC sponsors can use to create multiple investment options for their participants, we believe that this business will continue to grow at the rapid rate that we seen so far. We are still relatively small in size, and that - but that business will continue to expand and create a meaningful incremental asset growth, and further deepen our relationships with our largest and most important clients, a key objective for us.

I would like to turn now, if I might, to some important people changes for us at AllianceBernstein. While I have spent a fair bit of time and we have all focused on our performance and the efficacy of our investment process, in times of financial stress we also want to continue to strengthen the focus on our clients. Clients are first and foremost our most important asset. In that regard, we have asked Marilyn Fedak to take on an expanded role as Vice Chairman of Investment Services. As such, she will focus on our largest and most important institutional and private clients around the world. She will continue to focus on trading, [count] assessment, remain a member of the Executive Committee, and of course stay a valued member of the investment policy group for the value team. Sharon Fay will step up and become the Head of the value business, and lead the value team going forward. We wish both Marilyn and Sharon great success in their new efforts.

With that, I'm going to turn the conversation over to you to ask questions of Gerry and I. So please, Phil, start that process.

Lynn, we will take our first question.

(Operator Instructions).

Your first question comes from the line of William Katz with Buckingham Research.

A question before I get into the meat of my question, I wanted to make sure I heard you correctly. On the compensation you mentioned, Gerry, that it was $113 million. Was that all a true-up? In other words, the next quarter would reset $113 million higher? Also in terms of the mark-to-market adjustment, the $80 million, is that sort of the 1/16 we should be thinking about on a go-forward basis, or was anything sort of that comes off that as a potential offset? And then could you clarify the FX gain on the G&A line that may not repeat itself in the next quarter? And I have a more substantive question after that.

Bill, you're going too fast. Let's start with your - what was your second question? I missed that totally.

I just want to know the FX - the second one was on the mark-to-market impact in fourth quarter, how much I guess repeats in to the new quarter, just as a guidepost?

Bill, you had three questions, right? One is $113million. One is the $80 million.

Right, and then can you quantify the FX gain that I guess helped G&A this quarter? Those are sort of - I put as clarifying questions. I do have one more substantive question.

Let's start with the 113. What the $113 million true-up does is bring the cash IC for the year to the number we wanted it to be for the year. That's what the 113 did. You with me, Bill?

Right.

All right, so we had accruals every - for the three quarters, every quarter trying to anticipate what would we need for the year, and then we got to the end of the year, obviously with the decrease in earnings. It was just - there is no run rate here, no - but if you want to use a run rate at all, it would be the number for the year against the earnings for that year. You could just use that. But it is - there is nothing to do with that number, other - the 113, other than to realize that is a true-up. Next question was on your --

$80 million.

Was on the $80 million on deferred compensation credit, on the mark-to-market?

Right.

So as you know, part of this is an offset to the mark-to-market that we have on the AUM that we are holding, in order to affectively hedge our deferred compensation. So again there is no run rate here, what we do is give you the amount of liability - I'm sorry, we give you the amount of the assets that we are holding at the end of the year, which is on the balance sheet that we break out separately for you, and for that you can - you get a sense of what our exposure is both to the market, and the fact that that is hedging what is outstanding, what the impact would be and any adjustments going forward. Those are the numbers I would work with, and not this particular adjustment.

This is Bob. One comment related to that. If you remember, this probably goes back about a year ago, we tried to help people out a little bit with the relationship between what happens on the asset side of the balance sheet and what is happening with the liabilities, and I think we indicated that in a normal quarter about 40% of the mark-to-market gains or losses on the asset side would reflect itself in higher or lower compensation expense, relative to what the ongoing amortization run rate really is, and that relationship has held fairly constant, that really hasn't changed.

So what that represents, that ratio, is those are the vested comp numbers that our employees have. They have vested so they get in the quarter the impact, and whatever the impact there is on the one quarter of the four year amortization.

Okay. And the FX?

You're asking - what you are looking for is to give you what the FX number was?

Right. Was it substantive?

I would say it was all - it was larger than normal, Bill, and it had to do with the relationship between Euro and sterling; we have Euro balances in the UK, and obviously there was currency movement there, and the P&L impact of that flows through to our consolidated financial statements. I wouldn't think of it as a outsized number necessarily, but enough to change the comparisons a little bit.

Right. And my more substantive is, Peter, I guess two things. First, you mentioned the financial flexibility to do things that others might not be able to do. I am sort of wondering, what are you alluding to there? Is it transactions, new product development? And secondarily, appreciative of the improvement in performance in the six weeks ending December 31st, if you look at your year-to-date results, at least looking at some of your retail funds on the US side, that out performance seems to reverse itself across many of the portfolios. So what changes are you making to smooth some of out this relative performance?

Well, two points. On financial flexibility, I think that it's critical going in to 2009 and further that we be in a position to take advantage of many different things. Point one, talent in the marketplace, to the extent we want to broaden and deepen our bench. Two, the attempt to be able to acquire specific activities or teams, if in fact we so chose to do that. And three, the opportunity to invest in growth in the business, in the activities that we think will bear fruit, in particular when others are leaving the playing field. So there is nothing specific, but there are those three components that I think are quite valuable, and given the opportunity is likely to knock more frequently in a period of time of stress, having flexible opportunity to take advantage of those things, ie dry powder, is we think is a particularly attractive attribute to the Company.

As it relates to performance, what we were trying to point out there was not that a year 40 days makes, because that is clearly not the case, but we were reasonably enthused about the recent outperformance as opposed to recent underperformance. But I want to be cautious to be very clear that that does not imply that we have had some huge turnaround, because we are talking about a very short period of time.

The more important question you asked is what changes did we make. We spent some time talking about a major change for us in personnel, something that is not a shock to the organization because Marilyn and Sharon have been working together for a very long period of time. And this was not a unusual activity or action, but I think it's very important that Marilyn, who is a very strong culture carrier for the Company and has a tremendous amount of substantive capacity in meeting with clients, can now focus, and frankly help me focus, on client opportunities around the world. And Sharon is now able to run the value team in a way in which she is able to direct the business as she sees fit, and I think that that will energize both people. And the early returns I get from both of them and the teams that they work with is everybody is very excited.

Helpful, thank you very much.

You're welcome, Bill.

Your next question comes from the line of Robert Lee with KBW.

Thanks, good afternoon. A couple of questions. First one, if you look at the institutional business, and you mentioned the sequential increase in I guess loss mandates, so can you give us some color on where you think your relationships are right now with consultants, and given that I would expect most institutional investors are going through their asset allocation process looking at what managers to hire or fire, I mean how do you think about the next couple of months and your ability to obtain - given your performance last year, so - the ability to kind of stem the outflow or at least the acceleration in lost mandates?

Bob, as you probably know, since in our last call I said that what I said I would be doing in the next 60 to 90 days, and it's 30 days into that, is meeting with clients. I have been doing just that. I have also spent a considerable amount of time with the investing teams and the investing process. I've met with most of the consultants, I've met with many of the large clients. Tonight I fly off to London, I'll be in London for two days; Saturday I fly to Tokyo, I will be there for two days. And that is all to see both large clients, institutional and consultants as well.

I feel good about reporting the following. In each and every case, I think our clients understand our investment process, are comfortable that we have been consistently applying that, are happy that we are open-minded about how we might enhance that and have already enhanced that over the course of the year in looking at additional factors and additional research, and feel good about the fact that although the performance has been challenged, that we haven't deviated from our willingness to take risk, our willingness to run appropriately-constructed portfolios that can provide substantial returns when markets do rebound. And I think that we haven't had much in the way of pushback on the issues of there is too much change and there is not enough consistency in the investment process.

Now that, of course, if investment performance continues to be poor, will continue to be an issue, and clients will appropriately evaluate us if our performance does not turn. I think most of our clients understand that investment performance takes time to turn, that returns - that is, investment returns - are not normally distributed, that they are lumpy, and that if you take too short a horizon, you have a much higher probability of not participating in the significant returns that the investment process is likely to produce. So no guarantees, but all very good conversations, and I will continue to do that the next 60 or so days because I think it's going to take that amount of time for me to physically meet with most of the important clients and consultants.

Great. I also have one follow-up question. This is a little bit, I guess, of follow-up to Bill's earlier question. Historically, if you look in the past, at least the impression from the outside looking at Alliance, is that AXA was a pretty hands-off parent. Listening to comments about whether it makes sense to hire teams if appropriate or acquisitions if appropriate, given that you've probably only been there about a month or so, is it fair to say that AXA has become -

31 days, actually.

31 days, okay. Is it fair to say that AXA is becoming a much more hands-on parent than it had been historically?

No. I'll elaborate, but I think the clear answer is probably satisfactory; no. The comments I made are comments that are emanating from our team and me, and reflect I think our strong competitive position in the marketplace, and our strong financial flexibility, which will allow us to take advantage of some of these things. I think AXA continues to be supportive and a significant shareholder, but they haven't changed the way in which they behave nor do I expect that they will.

Great. Thank you very much.

Let me add something, this is partially in response to Rob and partially back in response to Bill. On the issue of performance, again, that six-week period was trying to show how we are positioned if and when the markets turn favorably. But on the comment about how we've done this year, our performance - and you're looking at some mutual funds. Our performance in our value services and our growth services, there is not significant underperformance in this date through yesterday. In fact, most of our value services are ahead of their relative benchmarks, and our -

This year-to-date.

This year-to-date are ahead - this year-to-date, although the absolute numbers are tough. This is a tough 20 days into 2009, but relatively we haven't given up a lot of performance here. It's actually - our performance, most of it is relative benchmarks, and our growth is - some of our key growth services are slightly underneath their benchmark, but they're ahead of the S&P 500 fairly significantly. So, just a point of fact.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Thank you. My first question is for Peter. Peter, I was just wondering if your first few weeks on the job, if you could provide some ideas on how you look to upgrade certain areas of the firm, and I was thinking maybe you could start a little bit with the distribution channel?

Sure, Craig. Obviously, I can't give you specific forward-looking information, and I won't be able to say things that are either related to private investment of funds that we are talking about and/or prospective investment services that we haven't - we're not ready to publicly talk about, so my response will be somewhat limited.

But let me just talk about distribution, and my reaction to that. First rate, absolutely top grade, institutional and retail distribution business, and the private client business continues to impress me, as it has for the ten years that I have watched it from afar. I think that those are some of the greater strengths of the business. In particular, just let me give you a little bit of detail to that, the length and depth of the relationships that the client-facing personnel have at this firm with their clients is really quite unusual. It's not just that they know the senior person at the client, they know the six people down from the senior person; they don't know them for a year, they know them for five years or ten years. They have dealt with them in many different ways, they understand their objectives, they understand their concerns, and they are trusted and respected by the clients. That doesn't solve all of our problems, but that is one heck of step forward in building relationships and finding ways to create more depth and more breadth with your existing client base, which is assuredly one of the fastest ways to help improve the assets under management and the size of them.

I don't think, frankly, that there is any specific changes that I see in the distribution side of the house, other than to continue to support the strength of the organization, hire where appropriate and expand where appropriate. And I think our expansion in the DC business is probably at the level it needs to be at the present time, but as this CRS platform continues to take hold, we suspect that we will be able to add people down market in that world. As Gerry mentioned, the consolidation amongst the large retail firms, we suspect that that may also provide us with some opportunity as an independent, objective asset manager, where we can provide service to those retail organizations effectively, with personnel that have long and deep relationships with them. But I think, as Gerry said, that's sort of yet to play out because it's all very new, and people are trying to understand where they should be going.

Peter, BlackRock talked pretty positively about the asset strategy services and advisory services, not really on the product level but kind of taking a step back, and some of the services they provide clients. Does AB offer services in that arena for institutional clients, and is that an area you maybe could expand on the product side?

Yes, you know, one thing we haven't spend much time at, but I would like to spend a little time at, I referred to it briefly in my comments, that the Sanford C. Bernstein research platform is one heck of a platform. I mean you ask anybody, and I'm being a little biased here, but you ask anybody about close your eyes and think of what is the best research platform out there, and it's Sanford C. Bernstein. If you think that investors aren't craving research and scratching and clawing for the best ideas that they can find, you would be mistaken. They in fact are, and in fact that opportunity for us is I think actually quite significant. We are independent, we provide top grade execution service, you can check the surveys, I think we are in the top three or one of the their three different services - there are three different services, I think one of them ranks us number one, the other two in the top three.

So I actually think that while BlackRock has financial solutions, and that's a terrific service, and we may think about how we take advantage of that, because we do have -pay a lot of assets that are obviously managed by our own - by insurance businesses, and that is something for us to think about, our [anchor to win with] there is actually a fantastic research platform. It's actually more diversified, it's actually a more leveragable opportunity, and it's something that we actually think we can do a lot with in the next year and coming years.

Thanks, Peter. I just had one question, maybe Bob or Jerry could help me out here. When you think about comps sequentially, I'm wondering when did the reductions that happened in fourth quarter occur and hit the P&L? Was it a full-quarter impact? I'm guessing probably it was, and so I'm wondering, should we think about the decline - the quarter decline coming maybe in December or November, or how can we think about the sequential change there?

I think the best way to think about it, Craig, is I gave you what the annualized savings are in base and in fringes. I would use that number, and as far as when the people left, they left throughout the quarter. We started about mid-October and ran until about mid-December.

So is that page 20?

I don't know, is that page 20? No, I was referring to -- it was the text I gave you around the decrease, when I spoke about it, and I spoke about the savings -- let me find that for you when we go to the next question, and I'll come back to you. Let me just see if I can find it in the displays. I know it in my text, and I can give it to you, but let me see if it was actually - if it actually shows up in the slides. I don't think it - it may not. I think the number I gave you was $70 million. The number is, on the annual run rate basis, about $70 million.

Thank you very much.

That's just salaries. I also mentioned what the impact - not the impact was, but the fact that there is -- instead [on top] of those individuals, but I wouldn't look for that - to run rate it off. I would look at what happened in regards to an annual figure for the salary and fringes of $70 million. And I mentioned it, indeed, in reference to display 20, but there is no bullet point there on the slide. Does that help, Craig?

That helps a lot. Thanks a lot, Gerry.

Your next question comes from the line of Marc Irizarry with Goldman Sachs.

Great, thanks. Peter, a question for you on the alternative investment strategies, you know about $6 billion or so in AUM. How are you approaching building that business? You know, do you see that as using more internal capabilities or external capabilities, and building out - allowing different managers to - sort of into that platform and maybe opening up the architecture a bit more on the private well side? And then also, how are you thinking about that also in terms of a movement maybe towards more passive investing? You know, I do see it is $10 billion or so in mandates that moved into on the more passive side from active. Maybe you could just square how you are thinking about other managers and how they plan to grow in the business?

Sure, Marc. First of all, I think our alternatives are very closely associated with our research in both value and growth. So they reflect a fair bit, if not a lot, of the best ideas in those activities. So effectively what we have is [long-loaning] product and then levered product that basically express those best ideas in a higher-profile way. Those products also include currencies, to some extent commodity, and also macrofactors. So there is additional things going on in those products. They haven't had good performance in the last year, but they have had over time very good performance in '05 and '06, and '07 was basically breakeven, and '08 was a really poor year. So I think that those products have a place in the portfolio as a way of, as I said, expressing our best ideas in a more specific and emphasized manner.

Now you raised, I think, two good points that, frankly, we are discussing how to think about. We think that, again given our financial strength and our flexibility, and our credibility as a investing organization, that that plays to the strength of actually identifying managers who ultimately could provide good returns, and doing the due diligence necessary to identify strong operating systems and weak operating systems, and ultimately avoiding the managers who have the blow-ups or the managers whose styles drift and aren't true to form. Having said that, you know, that would be new for us, and it is something that we will debate internally and over the next six months or so, and make some decisions on whether that's an intelligent thing to do or not.

The same goes for the passive question. Certainly in the DC side, we see demand for passive portfolios. It's something that we now outsource; we could do internally if we so chose, and that's another debate that we would have. So I can't commit to you that we will or we won't, but I will commit to you because we are right now having that debate.

Okay, and can you maybe just talk about the $9 billion that went from active to passive; is that a growth or value mandate? Then it looks like the redemption rates in growth picked up, so can you maybe just hit on that a little bit.

Marc, those are totally reflective of variable annuity - services that were contained in variable annuity services of life insurance companies that wanted to move away from the volatility that active management was giving, because it was becoming difficult for them to hedge it. So it was a strategic decision that is being played out quite a bit in the insurance industry, to move from - it's easier to hedge against index products than it is against actively-managed products. So that explains that entire transfer.

I think Marc, by the way, that plays into the question that you're raising, about whether we should provide index. By the way, we say index; we are talking about enhanced index, it's just passive obviously. If it's DTF, it's DTF, if it's [FIDER], it's [FIDER]. We are not going to do that. But there may be a role for enhanced indexed product, but it's going to be tied to how we discuss this with the insurance companies.

And you've heard us talk about the DC business and the guaranteed life withdraw benefits, and if insurance companies feel comfortable with an enhanced index, then I could see us going in that direction. If they just prefer to have straight index with no enhancement, then I can see it being less attractive to us. So I think it's tied up in that conversation.

Just for some background, for those of you that haven't been covering us for a long time, we have experience with enhanced products, and we haven't been promoting them the last two years, but now with the new initiative in DC, it puts that topic back on the table that Peter is mentioning.

Great, thanks. I will get back in the queue.

Our final question comes from the line of Cynthia Mayer with Banc of America Securities.

Good afternoon. I was just wondering as you talk to clients, whether fees are a part of that conversation? And given the underperformances, do you think there will be any pressure on fees, or do you feel any pressure to make any kinds of fee concessions?

Cynthia, no and no. That isn't to say that there never will be a discussion about fees, because of course there are. That isn't to say, by the way, that in the past we haven't moved from traditional base fees to base fee and performance, because that will also happen. That's generally a conversation around a inflection point or breakeven point, and we get comfortable that the risk return for us and the client makes sense.

But I think generally what we've found, and I think this is true pretty much across the industry, that this is not really a fee discussion, this is much more about capacity, and Alpha, and investment process, and not about the fees for these kinds of products. Now if we are talking about hedge fund fees 2 and 20, with no clawbacks and no benchmarks, do I think those fees are going to be under pressure? I do. I think that that's for the obvious reasons, because clients are frustrated at paying, you know, yearly fees when there are profits, and then not having any ability to claw that back in future years. I think that people, meaning investors, are now being responsive to that, and I think you will see that in the industry. That's just the industry-wide comment.

Okay. And also just more generally, I think in the press release you mentioned if things worsen again you would consider other measures. I'm wondering if you can flesh that out a little bit? Would that just mean more headcount reductions or would you pull back from certain geographies or products?

I think that more than likely if we see the economy worsen, and we believe our prospects are dimmer, I think our first port of call would be to look at staffing levels and size. I think any organization, this included, would be reluctant to abandon a service or geography; it's hard to go back once you've pulled out. So I rather doubt that. In looking at our geographic breadth and footprint, I don't think there would be a material event or a material place where that could happen. I mean, there may be something small that could happen that I'm just not thinking about, but I think if you were to ask us strategically, we think our strategic footprint would look differently, I think we would say unlikely.

Okay. And then just wanted to clarify, Gerry, I think you mentioned the possibility of hiring more FAs, and wondered if there is a target there or, you know, what the timeline is?

Well, it's more than a possibility. We plan on hiring more FAs, and we will look to see how the year rolls out about how large that investment would be.

Cynthia, I think we really believe this an investment in the business, you can't shrink from this, we don't believe you should shrink from this. It takes three-plus years, sometimes five years, for FAs to be productive, and if you bleed the cash flow, meaning that you don't invest in this year to improve the cash flow, you're just stealing from the future. We don't see any reason to do that. We don't think that is in the unit holders' interest, and we certainly don't think that is in the long-term interest of the franchise.

Great, thanks.

Lynn, this is Phil. Considering the length of our formal remarks, we will give analysts another minute or two to get back in the queue. So, guys, if you want to ask a follow-up, feel free to get back in queue.

(Operator Instructions).

All right, looks like that's it. Thank you, Lynn, and thanks, everyone, for joining the call. As always, feel free to call the IR team if you have any follow-up questions, and enjoy the rest of your evening. This concludes today's conference call. You may now disconnect.