AllianceBernstein Holding LP (AB) 2010 Q1 法說會逐字稿

Thank you for standing by, and welcome to the AllianceBernstein first quarter 2010 earnings review. At this time, all participants are in an only-listen mode. After the formal remarks, there will be a question-and-answer session and I will give you instructions on how to ask a question 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.

Thank you Julianne. Good afternoon, everyone and welcome to our first quarter 2010 earnings review. As a reminder this conference call is being webcast and 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 are our Chairman and Chief Executive Officer Peter Kraus; our Chief Operating Officer, David Steyn; and our Chief Financial Officer, John Howard. I would like to take this opportunity to note that some of the information we present today is forward-looking in nature and subject to certain SEC rules and regulations regarding disclosure.

Our cautionary language regarding forward-looking statements can be found on page two of our presentation, as well as in the MD&A Section of our 2009 10-K. In light of the SEC's regulation update, management may only address inquiries of a [material] nature from the investment community in a public forum. Therefore, we encourage you to ask all such questions on this call. With that, I'll turn the call over to Peter.

Thank you, Phil. This afternoon, we'd like to talk a little bit about performance in a slightly different way than we traditionally do. You'll find in the presentation that the Appendix, pages 21 to 24, our traditional presentation for performance, which shows you first Q -- quarter performance for value, growth, fixed-income, and also shows you annual performance for each of those services in the traditional manner.

What we have talked about, I guess quite consistently over the last year with regards to our businesses and our services is some of the significant performance that we experience in 2008, and the impact that that's had on the business. So what we decided to show you in this quarter was peak to trough performance. That is October, excuse me, October 9, 2007 which is the peak through March 9, 2009, the bottom, ie; the trough, and then March 9, 2009 through March 31, 2010. So showing the relative outperformance and the relative underperformance.

We recognize that our clients do look at our performance over time. They do actually look at how much our outperformance has outrun our underperformance. And this is another way for us to explain to all of you why we are confident about where we are going in the future.

So if you look at the first page, which shows you Lipper percentile ranks, which is different than the institutional rankings in precise amount but not in directional -- not from a directional point of view. You'll see for global value, international value and the US value, the bottom diamond, which reflects the peak-to-trough underperformance and the relatively poor competitive rankings.

You'll see then the trough to present rankings for the same services as being at the top decile or top quartile performance, or in the US value, almost top third at 34%. And those performances are actually quite attractive and you can see what the actual numbers are below those bars.

Similarly, you can see for growth essentially the same kinds of performance. For GRG which is the first bar, international growth and small and mid-cap growth.

And last, you can see those performances for the bond strategies, which are for global bond the high income strategy where we are really doing quite well at the fifth percentile, and even the intermediate diversified muni portfolios, which actually are switched.

And that is exactly what we want from that performance, which is the service outperforms in the tough times and the service is underperforming in obviously the recovery. Because we are looking for, conservatively well-managed diversified municipal portfolios and that is exactly what we've got.

So, the punch line here is that we feel pretty good about the performance from the bottom to the present. The outperformance across the services is pretty consistent with the exception of municipal activities, which as we said is as we have designed. And that makes us feel more optimistic about what our clients are likely to do with regards to allocating capital to us going forward. And what prospects are likely to do in allocating capital to us going forward.

Our Q1 performance, as I said, is in the appendix pages 21 to 24. And for the first quarter, we had averaged to in some cases below average performance. But as I say, that is one quarter, and we don't think that is going to change the trend that I have just articulated.

Let me move to net flows by investment service for the quarter, which is on page seven. There, you can see substantial inflows in the fixed-income area, better than anything we've seen since the first quarter of 2009 at $5.2 billion. Continued outflows in both value and growth, although for value at a significantly lesser level and for growth at a reasonably consistent level from the last two quarters.

With that, I'm going to turn it over to David to talk about net flows by distribution channel.

Thank you, Peter. As Peter said, the conventional way of showing our performance is included in the appendix, and what that shows for Q1 is a generally flat quarter. Off the back of a stunning 2009 almost across-the-board where performance was good or great, particularly noteworthy being value and fixed-income performance. So when we look at the flow picture, which Peter has just been talking about; an improvement in value and a very positive fixed-income flow story.

The numbers on page eight and then in the subsequent pages for each of the channels are sort of consistent with that message as we look at the channels of institutions, retail, and private clients. What I'll try to do is give some flavor of what's happening within or behind these numbers.

But at the macro-level, the story we have been talking about for the past three or four quarters continues to be borne out with a turn around in the channels led by retail, closely followed by private clients with institutions still being challenged.

So let me talk about private clients, which is on slide nine. And at the risk of boring -- there is going to be a sort of consistency to the themes of what I'm talking about today because they really haven't changed from last quarter or the quarter before or indeed the quarter before that.

Within private clients, a story of slower outflows and higher sales. Now when I say higher sales, there is a caveat to that. The dollar number of sales is actually down. It is pretty constant from Q3 2009, Q4 2009, and first quarter of 2010. But the number of sales, number of new accounts, number of new relationships has actually been improving materially.

What the logical conclusion of that is what we are seeing is a lot of activity at the smaller to medium-sized end of the marketplace, rather than the medium to large end of the market.

The second theme underpinning private client activity is the one we talked about for most of last year, the gradual re-risking of portfolios. We are seeing an asset shift back into equities, certainly out of cash, and some shifts out of fixed-income and munis.

And the last comment I would raise is the new products and services which we have been introducing into the private client channel, which we see as a very important enhancement of our services post-2008, particularly, dynamic asset allocation. We say here, in the fourth bullet point, it has been adopted by over 2,000 clients since late February. Actually, as of today, it is 2,650 clients. And we are seeing very, very high demand and interest from our client base and our prospect base for this dynamic asset allocation approach.

So let me turn to retail. As I said, retail is the channel which has led us to the turnaround, moving significantly into positive territory. Again, many of the same themes we have talked about for the past two or three quarters. If we look at redemptions, first of all, it is like a steady state. I say state redemptions, by the way, these don't look particularly different to past years as a redemption picture for our retail business.

There is a difference in the story, which we have mentioned in the past, between mutual funds versus sub-advisory. The mutual funds business both in redemptions and sales are looking rather healthier, much more positive than the sub-advisory where we continue to see some elements of de-risking. But overall, steady state redemptions and a better sales picture.

Looking at the geographic split of the business, and here I'm particularly talking about the mutual fund activity, we said in the past this has been led by the non-US markets. We do highlight here in the third sub-bullet point that the US is still negative. I really should say that that's a very marginal negative number. We have certainly seen an improvement in mutual fund sales in the United States, but very positive flows outside the United States of America. So that is a non-US versus US perspective.

If we look at it as an asset class level, fixed-income is clearly leading in every market in which we are operating over equities, and we continue to see meaningful fixed-income flows. In fact, at a sort of anecdotal level, we had had some early concerns that some of our Asian distribution might be challenged by volatility in the marketplace. We have, in past cycles, seen significant correlation between volatility and outflows. In fact, to date we have seen very little of that. It all seems to be somewhat dampened.

Looking slightly forward, the one observation I would make about Q1 2010 is the mutual fund flows have been lumpy. By which, I mean, there have been a couple of very large deals with distributors. Looking out into the second quarter, we definitely see a broadening of support and a reduction, if you want to put it that way, in the lumpiness.

So the picture on retail continues to look encouraging, and looking forward looks encouraging. Institutions is of the three channels as we commented in the past, the most challenged by the performance of 2008. But even here or here we see a changing picture. Net outflows have improved significantly versus fourth quarter 2009 and versus first quarter of -- sorry, fourth quarter 2009 and versus first quarter 2009, due to decreased gross outflows.

Now Q1 2010 sales are actually down on fourth quarter 2009. I wouldn't read anything into that. As the pipeline number further down shows the pipeline is growing. In fact from these numbers as we look out halfway through Q2, the pipeline's a little bit higher than this. I would rather say a little bit like the retail performance being a little bit lumpy in the first quarter of 2010, the institutional flows have been somewhat lumpy in the first quarter of 2010. So as I say, I wouldn't extrapolate anything out in that decline in sales.

Like fixed -- sorry, like retail, much of the success over this period is coming out of fixed-income where strong performance is driving fixed-income sales, particularly, outside of the United States of America, and we expect that to continue. A -- because of the very strong performance of AllianceBernstein, but secondly because in many of these markets we continue to see a shift of assets into fixed-income. This is the fixed-income piece of the institutional pie.

Now, one question Peter and I have been asked in a number of previous meetings has been, how is the institutional business relating to consultants? And what type of feedback are we getting from consultants? We tried to answer that in the past by saying it is very hard to treat the consulting community as one homogenous group. They vary around the world. And we've also pointed out they also vary depending upon the services we are talking about.

There is really to just sort of focus on that, we put in a third bullet in these highlights that we feel the dialogue we're having with consultants is actually really improving. And that has been evidenced by recent, very strong advocacy for the community for our fixed-income services.

Now, one theme which has transcended all three of our channels; private claims, retail and institutions, has been a new product development. In private clients, I spoke about dynamic asset allocation. But in retail and institutions, we've also had very significant innovation over the past few quarters, all of which are helping gain traction and reposition the firm.

We have talked in the past about PPIP where we would be the largest single capital raiser of the nine PPIP managers.

Our other initiatives have included Brazil infrastructure fund, emerging market debt with currency overlay options, a strategic opportunity's fund roaming across the entire capital markets, dynamic asset allocation, I have spoken about. Pending is a whole series of inflation strategies; back into our retail channels for US investors, muni high income, US Strategic Research. For non-US investors, Europe high-yield and US SMID. I think this is a pattern which you will continue to see within the organization over the quarters to come, as we evolve into a broader suite of services for all of our clients -- institutional, retail, and private clients.

Let me turn last on the business side, to comment on our sell-side, Bernstein Research. And again it is going to be a repetition of the themes we have spoken about over recent quarters. A revenue rise over first quarter 2010 over first quarter last year and fourth quarter last year driven by market share gains, both in the United States of America and in Europe, but perhaps particularly noteworthy in Europe.

Second point, I would highlight is the research and trading capabilities of Sanford C. Bernstein continues to be recognized by our peers and our clients. Bernstein again being ranked number one in all key metrics of research, quality in a leading independent survey of US, including highest quality of equity research, greatest knowledge of companies in industries, most creative ideas and themes. And actually, I think the one which is almost most important, most trusted by our clients.

So looking forward on the sell-side of Bernstein research, it will be more of the same. Continue to roll-out the global footprint, to continue to build the roster of published analysts, to continue to expand and grow the service debt equity derivatives, electronic platforms, ETM.

And the last bullet point on this page is perhaps something new for these quarterly calls, what we say here is increased collaboration between our sell-side and our private client sales operations. We see great opportunities here to bring some of the capabilities of our sell-side to the top end of our private client business in a series of innovative products and services, which will broaden the product array we can offer some of the most sophisticated private clients in the world.

So with that, let me just close on headcount, which is on page 13. At tail-end of last year, I said that we expected to end the year at 4,400 headcount, give or take. I'm not quite sure whether we are giving or taking here, but our headcount at the end of the first quarter 2010, was actually 4,276.

Again, I wouldn't read anything into this particular number. But I just thought as a point of reference, this is actually at or lower than first quarter attrition historically in this firm. Stripping out 2009, which was obviously a somewhat unusual year, our first quarter headcount attrition has ranged from 4% to 6%. Here we are showing 4%, so in fact this is at the lower end of attrition compared to the years 2005, 2006, 2007 and 2008.

So with that, let me hand over to John Howard, our new Chief Financial Officer, who will take you through the financials.

Thanks, David. Before we begin, I would like to highlight one change that we have made within our financial slides in an effort to make our earnings calls more informative. As we review the financial results of the current quarter, we will now compare these results to both the year-over-year and quarter-over-quarter period. On prior calls, we have primarily focused on reviewing the year-over-year trend.

Let's begin on slide 13. Earlier today, we reported GAAP earnings per holding unit of $0.46, which included a $0.04 charge for real estate write-off. Excluding the real estate charge of $0.04, our earnings were $0.50 per unit during the quarter.

GAAP earnings in the first quarter 2009 were $0.07 per unit and we earned $0.62 in Q4. Net income at the operating partnership level was $148 million this quarter, compared to $37 million earned in the first quarter of 2009, and $192 million earned in the fourth quarter of 2009.

Let's first compare this quarter's results with the first quarter of last year. Net income at the operating partnership level increased by 300%, driven by a 21% increase in net revenues and an increase in operating expenses of only 4%. Operating margins increased to almost 22%, from about 7% in the prior year quarter.

The improvement in our financial performance was largely driven by an 18% increase in base advisory fees and keeping the growth in our expenses to a minimum.

Now let's compare the first quarter's result with the fourth quarter of last year. Net income at the operating partnership level fell by 23% from Q4 driven by a 7% decrease in net revenues and a 1% increase from operating expenses. The majority of the decline in our net income was a result of the following three items; a 3% decrease in base advisory fees, an 84% decrease in performance fees, which I'll discuss on the next slide, and a $12 million charge related to excess real estate this quarter.

Before leaving this slide, let's briefly discuss our operating partnership's effective tax rate. After adjusting for the net earnings attributable to minority interests, our effective tax rate was about 8% during the first quarter, up slightly from about 7.5% for all of calendar 2009.

The change in our tax rate is primarily impacted by the percentage of our consolidated pre-tax earnings generated from the operations of our US partnership. We currently expect the full year 2010 tax rate to be in line with the first quarter.

I would also like to highlight we expect to receive our final trail payment from the sale of our money market business to federated in the second quarter of 2010. We will no longer receive any future trail payments after June 30 of this year.

The next slide provides an overview of our first quarter revenues, compared with the prior period. Net revenues were $725 million during Q1, up 21% compared to the first quarter of last year, and down 7% from Q4. Base advisory fees grew 18% from the prior year quarter, due to a 16% increase in average assets under management. Compared to Q4 or our base advisory fees were down 3%, due to a slight decrease in our assets under management as well as two fewer calendar days which had adversely impacted revenues in our retail channel.

The change in performance fees is largely a timing issue. We typically collect the majority of our performance fees from hedge funds in the fourth quarter, which explains the sequential drop in these fees. During the first quarter of 2009, we earned a $12 million performance fee due to the closure of the All Asset Deep Value Fund.

As David already discussed, revenues from Bernstein research were up 5% from Q1 of last year and 2% compared to Q4. Distribution revenues, which are based on average mutual fund assets under management, increased by 38% from the prior year period and decreased 1% from the fourth quarter, roughly in line with changes in our retail AUM. Note that these changes in distribution revenues are largely offset by changes in our AUM-based distribution plan payments included in promotion and servicing expenses.

Over the past couple of years, the main driver of changes in our investment gain and loss line item was mark-to-market changes in our deferred compensation, and AllianceBernstein investment products. We recorded $11 million of gain on these deferred compensation investments this quarter, an improvement of $39 million from the $28 million investment loss we recorded in the first quarter of last year. Mark-to-market gains in Q4 were $15 million.

We also recorded a $19 million investment loss in the first quarter from our consolidation of the AllianceBernstein venture capital fund. Note that we only have a 10% interest in this consolidated fund, so 90% of this loss is backed out as minority interest below the line.

Let's move onto the next slide to discuss some key revenue drivers. We ended the quarter with $501 billion in assets under management, up 1% from the end of last year, and up 22% from the end of the first quarter of last year. Our average AUM in Q1 was up 16% from the prior year period and down 1% from Q4.

The change in base advisory fees largely mirror our change in average AUMs with the difference related to changes in our product mix. We've included the composition of our base advisory fees by channel. All three channels are up over the prior year period with our retail and private client channels leading the way.

On the next slide, we provide a high level breakout of our operating expenses. Overall, operating expenses were up 4% from the prior year quarter, and up 1% compared to Q4. I'll discuss employee compensation in more detail on the next slide.

Promotion and servicing expenses increased by 16% from Q1 of 2009, and decreased 5% from Q4, primarily due to changes in our distribution plan payments driven by fluctuations in our mutual fund AUM.

G&A expenses were down 1% from the first quarter of last year and up 11% in Q4. Let's first discuss the year-over-year comparison. The first quarter of 2009 and 2010 were both impacted by real estate charges. We recorded a $12 million real estate charge in the first quarter of this year and a $7 million charge in Q1 of last year. Year-over-year, we also experienced a $7 million improvement in foreign currency P&L.

The main driver of the increase in our G&A expenses compared to Q4 was the $12 million real estate charge this quarter. Excluding the impact of non-operating charges and foreign currency fluctuations, we currently estimate the quarterly run rate for G&A expenses is approximately $125 million to $130 million per quarter.

The next slide provides some additional information on compensation and benefits. Total compensation and benefits expense for the quarter was $319 million, up 2% from the prior year quarter and down 1% from G4. Base suspension fell from both prior periods due to lower base salaries and lower severance. Our current base salary run rate is $100 million per quarter.

Severance was $5 million during the quarter, down from $21 million in Q1 of 2009 and $12 million in Q4. In the current quarter our cash bonus accrual was $68 million, roughly in line with the accruals for the prior period.

Deferred compensation was up $25 million from Q1 of 2009 and down $4 million from Q4. The year-over-year variance was due to sizable mark-to-market losses on the deferred compensation investments in the first quarter of last year. There were more modest mark-to-market gains in both the fourth quarter of 2009 and the first quarter of this year, resulting in a much smaller quarter-over-quarter variance.

If you would like more information about the effect of deferred compensation mark-to-market on our historical quarterly results, please turn to slide 34 in the Appendix.

Commissions were in line with the first quarter of last year and up from Q4, largely driven by higher retail sales. Fringes are up sequentially from Q4 due largely to the traditional increase in payroll taxes at the beginning of each year.

The next slide shows comparative financial results for AllianceBernstein Holding, the publicly traded partnership. As mentioned earlier, GAAP earnings and distributions per unit in Q1 were $0.46, versus $0.07 in Q1 of last year and $0.62 in Q4. As of the end of Q1, AllianceBernstein Holding owned 36.6% of the operating partnership, up from 35% as of the end of 2009.

I would also like to give a brief update on our repurchase program. In March, we announced a repurchase program of up to 3 million units to help fund anticipated obligations under our incentive compensation award program. During Q1, we repurchased approximately 834,000 units for a total cost of $23.6 million. Please note that there were 102 million AllianceBernstein Holding units outstanding as of March 31.

Finally, as a reminder, as we disclosed in our 2009 10-K, our existing long-term incentive plan expires in July of this year. Therefore, we will be holding a special meeting of unit holders this summer to seek approval of a new plan and anticipate filing our proxy statements by the end of May.

That completes our financial review and now we are ready to take your questions.

Thank you. (Operator Instructions) Your first question is from the line of Craig Siegenthaler with Credit Suisse

Thanks. Good afternoon, everyone.

Hi Craig.

First, just on the institutional channel. Given the still low level sales which you commented is a little lumpy both the improvement on the unfunded pipeline and redemptions. When do you expect to turn to positive flows in this channel? And also what products and distribution segments of this challenge do you think will lead the way?

Well, the first part of that question, I wish I could answer but I most certainly cannot. I don't have a crystal ball to inform us when this one will turn into positive territory.

The second part of your question, I can give guidance on. I mean, clearly, we've seen some meaningful traction emerging in fixed-income, global emerging market debt. We are seeing flows coming out of a broadening part of the world. So, flows coming out of the Middle East, continent of Europe, Japan, and some activity here in the United States of America.

So it's again, you are absolutely right. I did say things are lumpy at the minute in both retail and institutional. But the lumpiness is easing. We are seeing a broadening out of where we are seeing activity. And I would expect that to continue.

And while the lumpiness on the institutional side sounds more like a negative adjustment now, was the lumpiness on the retail channel more of a positive helping? Maybe benefiting mutual fund flows or retail flows in the first quarter? Or is that not true?

Yes, there is a degree of truth in that. The first quarter was lumpy -- on the retail side in a positive and nice way. But, the increased levels of activity, which we have been talking about over the past few quarters in retail, we expect to see continue into second and third quarter. But it does mean we are going to have some fluctuations around the trend line, which again I would encourage you not to read too much into. I would look at the longer term trend line rather than one quarter over the last. But, yes, Q1 retail was very good.

And real quick on the 2010 strategic initiatives like the Asian research business, derivatives, European ECM. Will this have any impact on the income statement meaning higher costs back-end loaded this year?

Yes, I think that you'll encourage or you will have in the income statements some additional expenses relative to the build out of those activities. And you won't see revenues attached to that for 12 months or so.

So you should expect that there is some investment going on here in the business in many different places as we see significant more demand for the kinds of things that we do, not just in the Bernstein business, meaning the research business, but also in the investment business.

Great. Thanks Peter, thanks David.

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

Thanks, good afternoon. I guess my first question, just looking at the growth franchise and I guess one of my observations is that you are notwithstanding the improvement from the recent trough in performance. If you look back over, I don't know maybe the last decade it seems almost, that part of the business never really seemed to, I think fully recover, if you will, from the tech bubble days, at least that is one perception I have.

When you look at that, how do you -- how does that play into your thoughts around use of capital, potential acquisitions? You have talked a little bit since you came on board, Peter, about willingness to look at modest-sized, small strategic things that may make sense. I mean, but in all, do you see any need to make more changes in the growth franchise or somehow complement it in some way with possibly a third party business?

So, Robert, I think the growth business certainly has some challenges as a result of coming out of the early 2000s. You know, whether it was the tech bubble or whether it was some of the other challenges the company faces at that time which affected the detailed distribution of the business, there is no doubt that that's the case.

We still believe, however, that the growth research process which we bolstered in the last six to nine months and the performance that we've actually been able to create in that peak-to-trough analysis that I discussed at the outset, I recognize that that's a little bit different. But again, if you look at the growth performance in that chart, the peak-to-trough analysis showed, and in particular the international growth, where there is substantial demand, as well as in the global growth, much stronger performance than what we obviously saw at the bottom. So clients are looking at that and saying well that's pretty interesting in terms of prospects as to where we are going to go.

So I agree with you the business was negatively impacted at the beginning -- the beginning of the 2000s. I think we continue to be focused on how can we improve that business by adding people to it that we think are substantial, important and alpha-generating personnel. And will continue to be focused on doing that as we think that this franchise has room to grow, and we think the performance -- recent performance actually gives some support to that.

So that encompasses your comment about acquisitions, meaning that we'll look at and continue to look at those people and businesses that make sense. But as I have said consistently, it is going to be much more in light of people than it will be in terms acquiring franchises.

Okay. Great, I do have a follow-up question, I think, maybe to David. I'm just curious in the private client business, as I think you highlighted the new relationships are growing at a nice rate, but you are not necessarily seeing that translate into more growth sales because of maybe it is coming more on the smaller, mid-sized relationships.

Why do you think that maybe larger, you are seeing less, fewer flows from larger sized, potentially larger sized relationship? Is it that, those, I'll call them ultra-high network clients are just doing less, staying put more, or less willing to make a change? I mean, how should I think about that compared to at least a couple of years ago, where a lot of your incremental growth was coming from the ultra-high income segment?

That is a really interesting question and not an easy one to answer in two lines. Let me give you a few thoughts on it.

In no particular order, first and foremost we are certainly seeing the phenomenon of a private client who for the sake of the argument has $20 million and two years ago, they would do a beauty parade and award $20 million. Now they are doing a beauty parade and awarding $10 million and keeping $10 million on the sidelines. So, that phenomenon is under way, and I think that is true of the entire industry.

Now, being slightly more parochial in the sense of talking about us, I think the character of our business, which is a proprietary architecture based upon trust, based upon wealth forecasting, planning, analysis, very much a holistic service to the private client.

When I say proprietary architecture, I mean is we do the asset management, we do tax management, we do tax -- financial planning, et cetera for our clients. That today, post-2008, and the credit crunch and the financial crisis, that particularly resonates with that end of the marketplace. By that end of the marketplace, I mean, the $5 million, $10 million end of the marketplace rather than the $50 million ,$100 million end of the marketplace.

So, I'm giving you two reasons. First of all, your clients are keeping on the sidelines and making an allocation. And then secondly, what you might call the sweet spot of the Bernstein private client business is particularly active right now.

Now of course, for you, you framed your question slightly differently, what's happening at the top end of the marketplace. And I'm giving you an answer by talking about what's happening at the lower end of the marketplace.

I think the top end of the marketplace of private clients, first of all, I -- I won't say the widest set of options but, can access a wider array of asset managers, almost certainly is much more open architecture, will have multiple advisers and may very well have consultants involved in that process.

Also, by the way, would have had much more exposure to alternative vehicles than the smaller end of the marketplace. So, it's experience of what happened in 2008 would have been different than the experience of what happened to the smaller end of the marketplace. And therefore, perhaps, different things are resonating in that marketplace.

You are right in saying that, a few years ago, we were definitely having some success at the upper end of the marketplace, which we talked about. But having said which, the bread and butter of the Bernstein private client business; the sweet spot in the marketplace for us, the part where we win most mandates and most have greatest brand equity, if you want to put it that way, has always been closer to the $5 million, $10 million than the $50 million, $100 million segment of the market.

Okay, great. And if I could, maybe just one last follow-up question. This relates to, I guess, share repurchase and I guess it's tied into comp. As evidenced I guess by the share count this quarter, the plans are to use more restricted stock, I guess, in a compensation going forward. You talked about the share repurchase.

I'm just curious. given your MLP structure and the limitations you have on capital retention, how does that play into your share repurchase? I mean, does it at all impact even if it's just a penny or two, here or there, what you may end up distributing per quarter? I'm just trying to kind of reconcile the need to distribute everything versus the increased need for cash for share repurchases going forward.

Robert, you recognized that if we are not paying our employees in cash, and we are paying them in shares, we are obviously saving that cash?

True.

So that is principally where the share repurchases are coming from. So for $1 of compensation expense, just to use an example, if that $1 was entirely stock and we expensed that, and we don't pay that out in distribution, then we saved that cash.

Now, of course the price at which we buy the stock back could be equal to, greater than or less than the price at which we issued it. And, of course, half of those shares get paid back effectively by -- or bought back effectively by withholding them for taxes or some whatever the tax rate is depending upon the individual's earning rate.

So, most of the cash that's being used to buy the stock back is actually coming from what would otherwise be compensation. And you'll find us actually being pretty parsimonious in the amount of debt that we want to take on the balance sheet. We like running a lower levered organization. We have got plenty of leverage -- operating leverage in the company and plenty of leverage in the $0.5 trillion of assets that we are also managing.

That was it. Thank you very much.

Your next question is from the line of Bill Katz with Citigroup.

Thank you (inaudible), just a couple of questions. Just trying to reconcile your discussion of reinvestment in the business versus your guidance around base compensation and G&A. Where would we expect to see the step up of investment spending around new products?

Well, I think Bill that you'll see base compensation go down less slow -- less quickly. But, obviously, we've got a much smaller headcount today than we had a year ago or a year and a half ago. So you would expect to keep base compensation lower. And obviously incentive compensation will be impacted similarly, which means to say that it will go down less quickly as well. And in fact, quarter-to-quarter it's up but that is for different reasons.

So, I think that we are not going to encumber the income statements hugely by investing, but we are going to invest. We see significant opportunities in the research business. We see significant opportunities in some of the investment businesses. We have talked about real estate for a year, obviously that is a place where we are investing.

So those things continue to be places that we are going to allocate costs, not capital, effectively, because we are not buying something there, but costs to higher individuals before revenues will be in the P&L.

Bill, most of those expenses are going to be in the incentive comp line item and not in base salaries.

Okay. Second question, just to go back to your new slides, assuming that you can look at it that way. But you step back from that, and you look at the volatility on the way down and the volatility on the way up. How -- what do consultants focus on more now at this point in time is it the cumulative return across the cycle or the volatility of return across the cycle? And how may that affect the pipeline going forward?

You all have asked us questions in the past about how our consultant dialogue is going and what we can tell you about that. I think in the last few months, the consultants' dialogue has turned decidedly more positive with us. They are asking us questions about how do we help them solve their problems; their client's problems. And that was a dialogue, quite frankly, that we weren't getting to because people were very focused on performance.

So the reason for showing you these peak-to-trough numbers and trough-to-peak numbers, or trough-to-present numbers, is to give you some sense that consultants are gaining comfort in our ability to perform. And for the organization to actually do what we have said the organization can do.

So we are not trying to make projections, because we can't. Not just we can't because we don't know, because we can't. But what we are trying to give you a sense is that the dialogues around the institutional marketplace and the consultant marketplace is decidedly different than what it was in the past. And part of the reason for that is the numbers that we're showing you in performance.

Okay. One last question if I may, I'll get back into queue because I have a few others. I noticed and maybe I'm not watching the calendar appropriately. It seems to me your distribution declaration dates or payable dates, excuse me, seem to be slipping a little bit. I'm wondering if it's any change in the strategy or is it a function of the calendar?

I think it's the calendar, Bill.

Okay, thank you.

Your next question is from the line of Michael Kim with Sandler O'Neill.

Thank you. Good afternoon. First, can you maybe give us some additional color on the sub-advisory side of the retail channel? Are the outflows still centered in variable annuities and maybe driven by this ongoing transition to passive strategies? And then just where do you think we stand in that whole process?

Basically, yes. I said in my remarks that we continue to see de-risking. The sub-advisory channel, we are largely talking about the US, we're largely talking about insurance companies and we're largely talking about variable annuity. And we and much of the rest of the industry have seen the same response by the variable annuity business post-2008, which was to de-risk and shift some meaningful assets into passive.

I have said, in the past, that many of the flows we've seen, we've known about. When I say we've known about, it's part of a process, which has been underway for a sustained period of time. So it's not coming -- it's not a new leg of a process, it is not a new phenomenon, which is happening. I would stand by that remark. There is nothing in the sub-advisory flows which looks different, or is unexpected.

Now, we are also, it has to be said, talking to many of our counterparties in the sub-advisory world about re-risking, by which I don't simply mean a shift from passive to active. But what would be the appropriate type of active products and what type of characteristics would they want long-term, as an alternative to passive.

Those debates are ongoing. I wouldn't, I wouldn't begin to predict when we are going to see asset flows from them. But I do not -- we do not necessarily think the shift into passive is a one way street or necessarily even a permanent street. So it's more complex picture.

Okay. And then, I know you talked about this earlier but maybe to come at the share repurchase discussion a bit differently. How should we be thinking about buybacks more broadly just in light of the recent equity grants? And then the $3 million unit buyback authorization, would you expect to work through that authorization relatively quickly to minimize that dilution?

I think our view on share repurchases is to buyback shares as and when we can without affecting the market, and we'll continue to do that as we have in the past.

Okay great. Thanks.

Your next question is from the line of Cynthia Mayer with Bank of America.

Hi, good afternoon. Maybe just to clarify a little bit, I think you said there were two significant fund launches in Asia in the quarter. What were those products and what assets did those contribute? I assume that's also what you meant by lumpy?

We don't intend to disclose that information at a client-by-client level. But there were two launches and they were lumpy in the sense they were meaningfully sized launches, which we were very happy with.

Okay and I think you said it's really global fixed income that was selling outside the US, and it drove retail in the quarter --

And emerging debts and high yields. I mean, it's not just global fixed income but global fixed income has been one of the products, which has had particular traction.

Okay. Do you have any capacity constraints on the emerging debt or the high yield?

We don't feel there are capacity issues at the minute.

Okay. And what are the trends on those this quarter? Is that I think you said they are still meaningfully strong. Is there any signs that -- of that peaking?

So, Cynthia, did you say flow trends?

Yes, flow trends.

Flow trends continue to be strong in those fixed income services. It's very hard to call a peak in advance, but the traction we have seen over recent quarter is continuing.

Okay. And just a couple more, let's see, in terms of the headcount, are you expecting that to stabilize here?

Yes, I wouldn't -- each of these quarters, I said look 4400 and change. We don't have a hard target as to what the headcount is now, we certainly had a target when it was 5600 to materially reduce it, and 4400 was a ballpark number. Whether the headcount of this firm is 4200 or 4400 or 4500, I wouldn't read that much into those numbers. What I can assure you is, it is not going up to 5000.

Okay. And in terms of the subletting charge, what's the expense save associated with that? Is that why G&A guidance is going to $125 million to $130 million?

It is about a $3 million save annually hereafter. Starting with the second quarter of this year, you can start modeling about a $3 million annual run rate save on rental expense.

Okay, is there more space to be sublet at this point or is that it?

We have nothing to disclose at this point. We certainly, as we discussed on prior calls, we do have some excess real estate relating to consolidation of some space amongst some our offices, especially, in the New York region. But we have nothing to disclose at this point with respect to sublet space.

And then one other comment, Cynthia, about your first question, with respect to lower G&A guidance. In prior quarters, prior to December 31 2009, we had included all of our transaction costs associated with our sell-side business within G&A. That's on the bottom of slide 16. There is a footnote there. So we reclassed that up to promotion servicing expenses. So that's if you are looking at it over prior guidance, you need to adjust for that reclass.

Right, since I think the old guidance was $140 million, right?

Right.

So, okay. All right and then, if I could just ask one more? Your exhibit on page 15 shows institutional fees declined 7% sequentially but that (inaudible) declined 4%. Is that due to just two fewer days or is that a mix shift of some kind?

It is the combination of both.

And what would the mix shift be due to? Is that towards fixed income or toward the other category?

Marginally, I think, you asked this question last quarter, we talked about fixed income. Marginally our success at fixed income has a bit of an impact on realization rates. And that's probably what the -- that is probably what that shows.

Great. All right, thank you.

Your next question is a follow-up from the line of Bill Katz with Citigroup.

Okay. I'm sorry, there might be some moving parts to this question, so I apologize. Just trying to reconcile your last comment on G&A versus promotion. If you look sequentially, it doesn't seem like there is a one-for-one increase, if you will, in terms of your distribution expenses relative to your discussion around G&A. So I'm wondering if there's been a more permanent reduction in your infrastructure expense all else being equal.

So Bill, your specific question is around G&A or promotion and servicing?

The two, you have given guidance here, I guess, longer term of $11 million, $12 million prior G&A versus current G&A.

Right.

If I look at your promotion line, at least relative to where you were at last quarter and again, there is an average impact in here et cetera, but it doesn't seem like there is a corresponding step-up here as well. So I'm just wondering, all those being equal, are you just more profitable today than yesterday?

Well, let me just speak generally about G&A for a second. If you look at our G&A expenses in the current quarter, if you get back out the real estate charge that number falls to about $126 million, which is within the range we previously discussed. When you move the transaction costs up to promotion and servicing fees, you are saying the trend in prior quarters versus Q1 you are not seeing the -- you believe there is other declines in other expenses?

I'm wondering. Yes, basically I'm wondering if --

Yes, let me talk about the trends in promotion servicing; I think that is what your question is about. I think there was a decline of about 5% in distribution plan payments versus the prior period, which are generally trending with our retail assets under management. We did have some cuts in our travel and entertainment costs versus prior quarters. It was about a $2.5 million improvement in our T&A expenses versus the fourth quarter, which is probably netting against that transaction cost number.

Okay.

And then just a follow-up, when you look at the ancillary businesses with some of these product innovations, and it seems like you are more focused on people versus, I guess, either process or platform at this point in time. Is there anything out there that you are looking at that could accelerate the market share opportunity here? Is there an opportunity cost of doing things de novo rather than potentially looking outside to further accelerate the opportunity?

Bill, we will continue to look at both people, platforms, and broader opportunities as we have in the past. We are going to take our time, we are going to look at what we think is interesting. We have had a leaning towards hiring people, as opposed to build -- buying businesses, because they are just more complex to merge together. My guess is we'll continue to lean in that direction.

Just my last follow-up. Thanks for taking all the questions. When you look at your headcount sequentially, just sort of wondering what some of the dynamic might be. I know you said year-on-year you are about 4% to low-end range, 4% to 6% range as we look over the last several years, for example 2009. Where are you seeing some of the sequential change and what does that mean for incremental hiring needs in the most immediate term?

I don't think there is any particular message behind the numbers. I just thought it was interesting to point out that the first quarter over fourth quarter number was totally consistent or better than our experience in 2005 to 2008. In fact, if I drill even deeper into it and split it out between voluntary and involuntary departures, on both of those two criteria, it has also been better than or equal to past experience.

So there is nothing happening on the headcount which is in any way painting a picture or telling a story. So, it's the normal Q1 attrition or better than normal Q1 attrition of recent years.

Okay. Thanks very much, guys.

Julianne, we have time for one more question.

Your final question is also a follow-up from the line of Robert Lee with KBW.

Thanks, good afternoon. I appreciate everyone's patience taking all these questions.

I'm just really curious and possible get some update on the initiatives in the 401(k) market. I mean, if I went back starting a few years back that had been, I think, a fairly important and large initiative for the firm to build up, I guess, for lack of a better way of putting it, an open architecture 401(k) platform. We can manage the glide paths and have third party products in there and all kinds of things.

I think for a period of time that was also accounting for a reasonable amount of the firm's wins or unfunded wins when they were reported quarterly. You don't hear -- you're not talking about that too much, I think more recently. Can you update us? Is that still a key priority for the firm? Has there been a shift more maybe away from that where you think there is better opportunities to focus management's time and resources?

A pleasure to answer that question, it's just that I'm very modest and we haven't been talking about it. It continues to be a strategic priority of the firm.

If you look at 2008 and immediate aftermath into 2009, one of the interesting phenomena was that the DC, the 401(k) industry here in the States almost froze. There was just no activity as people sat back and tried to work out what was happening as the dust settled.

We are undoubtedly seeing the unfreezing of that, and activity in DC is increasing. There are many conversations underway with DC plans right now. And the very initiatives you highlight in your question are at the forefront of it.

So for example, customized retirement strategies, which was a very big initiative of this firm a few years ago, that is one of the areas where we are having some of the most interesting conversations with our prospects and our clients today. So, it was a strategic priority, it continues to be a strategic priority, there undoubtedly was a pause in 2009 in DC activity, almost across the board. We see that area hotting up now.

There is, of course, a great deal of debate in Washington about the DC industry and there could be changes and ramifications there, which we are keeping an eye on. But it's definitely something which is a high priority for us and I would be more than happy to talk in greater detail in subsequent earnings calls about it.

Great. That was it. Thank you very much.

Thanks everyone for participating on our call. If you have any further questions, reach out to the IR team whenever you would like. Enjoy the rest of your evening.

Thank you all for participating in today's conference call. You may now disconnect.