AllianceBernstein Holding LP (AB) 2010 Q2 法說會逐字稿

Thank you for standing by, and welcome to the AllianceBernstein second-quarter 2010 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 a question at that time.

As a reminder, this conference call is being recorded and will be replayed for one week. I would now like to turn the conference call over to your host for this call, the Director of Investor Relations for AllianceBernstein, Mr. Phillip Talamo. Please go ahead, sir.

Thank you, Christie. Good morning everyone, and, welcome to our second-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/investor relations.

Here in New York, we have our Chairman and Chief Executive Officer, Peter Kraus and our Chief Financial Officer, John Howard. Joining us from our London offices is our Chief Operating Officer, David Steyn.

I would like to take this opportunity to note that some of the information we present today is forward-looking in nature and is subject to certain SEC rules and regulations regarding disclosure. Our cautionary language regarding forward-looking statements can be found on page 2 of our presentation, as well as in the MD&A section of our 2009 10-K and second-quarter 2010 10-Q, which we filed earlier this morning.

In light of the SEC's Regulation FD, 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. And now I will turn the call over to Peter.

Thanks, Phil. To be up front about this quarter, our second quarter wasn't what we would have liked. Performance in value and growth equities was challenged in April and May. Although we like the security selections in the portfolio today and we're pretty confident about those -- the portfolio construction, we really didn't see the performance we would have expected in the April and May market decline.

Financial results, as you've seen, were also weaker than we would have liked, due primarily to losses from the marked-to-market and deferred compensation balances and other reductions and revenue caused by the market declines in the quarter. Fixed income performance, however, continued the strong results, allowing us to raise $5 billion net positive flows during the second quarter. Assets today are roughly around $200 billion.

One aspect of the quarter to note, however, is that we are certainly busier. We've talked about gross sales in the past and our need to grow these. This is the fourth consecutive quarter of higher firm-wide gross sales. This has had the obvious and expected impact of improving our net flows.

As corporations consider more flexibility in their retirement plans and look forward in the future, we've seen encouraging strength in our CRS strategy, providing returns on our investment in this platform. And lastly, our efforts in building our alternative platform are on track. The various funds we have initiated are successfully executing their strategies.

One thing we've discussed in the past is our geographic diversification. This continues to be a positive for us. We've mentioned this, our global footprint, and here are a few recent facts. 36% of our assets under management are derived from nine US clients, and 54% of our AUM is invested globally.

What's attractive about this is our footprint allows us to capture the growth outside the US. Consequently, we've seen consistent positive flows from non-US clients. Additionally, our strong fixed income brand in Asia has continued to grow and be embellished by both the growth and our performance in that region.

On the people side of the equation, we've added to our investment talent. Laurent Saltiel, now the senior PM for international large-cap growth and global large-cap growth, is off to a strong start in positioning the portfolios to take advantage of our research and his own views. Ashish Shah, Head of Global Credit, has provided new and thoughtful insights into our credit process.

We've also recently announced broadened responsibilities for some of our most senior talent, designed to leverage their experience. Sharon Fay has expanded her role to the CIO of Equities, leveraging heard world-class investment experience and her demonstrated capacity to build a research engine and harness risk to produce effective returns for clients. [Fadim Salatnikov] has added firm-wide market strategies to his responsibilities, capitalizing on his industry-leading research content and innovative thinking.

Lastly, we've expanded our team in SCB in Asia, hiring research analysts and sales and trading personnel, taking advantage of what we think is a long-term secular growth in that part of the world.

As I said at the outset, the quarter was disappointing. But the underlying business is well positioned. There are positive results in gross sales, clear evidence of declining outflows, strong performance in fixed income where global customer demand is robust. Additionally, our equity platforms Small Cap Growth, SMID Value, Global and US Thematic and Emerging markets services had strong performance and are continuing to attract investor interest.

With those opening remarks, I will turn it over to David to take you through some greater detail on performance and flows.

Thank you, Peter. Peter has given a high level overview of the second quarter. What I would like to do is to drill down and provide a little bit more detail on some of the key points which he has raised.

So let me start with performance, which we summarize on page 3. And as Peter said, on the equity side of our business, the second quarter was a challenging quarter. In some senses, the second quarter was an atypical quarter, dominated as it was by the fiscal crisis here in Europe, a fiscal crisis which has led to the largest post-recovery correction in decades, the S&P down 11.4% in the second quarter; ether markets down 14% in the second quarter; and the volatility index spiking from 17.6% to 34.5%.

With risk aversion, investors have focused on macro risks, not micro opportunities, not fundamentals. And as The Wall Street Journal reported in the second quarter, not since the crash of 1987 have stocks moved so much in lock step.

But at another level, the second quarter was typical. With 40+ years experience as a bottom-up proprietary research-driven, stock-picking active investment manager, one thing we have learned is that premiums come in spurts. For example, if we look at the six largest value recoveries over the last 40 years, for 33% of the recovery, the recovery in value stocks, cheaper stocks actually trailed their broader index. And there's nothing at all about this give-back in the second quarter in terms of its length or depth, which looks atypical or different from our prior experience. And as fundamentals and prices diverge, diverged in the second quarter, so the long-term investor opportunity has got greater. It is with that in mind, just referring to how Peter commented about how our portfolios are constructive. Now we have positioned our portfolios today. Our value portfolios, heavily biased towards companies with stable cash flow and strong balance sheets.

In fact, as an aside, balance sheets, particularly in corporate America, are flush with cash today, with some $1.84 trillion of cash and liquid assets.

On the growth side of our business, bias, as you'd expect, to companies where we anticipate positive earnings surprise, but just as importantly, for the reasons I've just commented on, companies with [ex, they] are almost unprecedentedly attractive valuations.

So if the second quarter was one of understandable setback in performance, we look at flows, the picture is much more encouraging, with another quarter of an improvement in flows. Now, on page 4, we show the flows by investment service. And as Peter commented in his remarks, the noteworthy point here is the momentum of fixed income with fixed income assets under management today just a shade short of $200 billion.

On page 5, we take the same data, and we slice it by distribution channel. And if the story by service is one of the momentum of fixed income, the story by distribution channel of the second quarter is the improvement in institutions.

This data on page 4 and page 5 are net flows. Peter commented, however, on gross sales, and this is data which we are showing on page 6 -- this is not normally part of our debt -- but it shows the pattern of gross sales over the past five quarters. As Peter commented, four quarters now of improved gross sales.

In a minute, I will comment on each of the channels individually, but at a Company level, I think there are two common denominators to this improved gross sale picture, which I would just like to highlight. The first is the payback of strategic initiatives, strategic initiatives of the last few years, particularly in two areas. The first, fixed income, and the second, defined contribution.

And the second common denominator, perhaps slightly more tactical, is the impact of new products and services. So as you may recall in previous quarters, I've talked about the rolling out of dynamic asset allocation to the Private Client channel. In quarters to come, we will be talking more about the rolling out of a broader and deeper alternative suite with the first major initiative being the launch of our real estate capabilities in the second half of this year.

So with that, let me turn to retail. This was the only channel which saw a decline in net numbers in the second quarter, a direct response to events here in Europe with the fiscal crisis set off by events in Greece.

At a sales level, although down 18% in the second quarter, our gross sales remain strong, and for the first half of this year, are double gross sales for the first half of last year. In fact, the vast majority of the decline in gross sales second quarter over first quarter can be accounted or attributed to our Luxembourg funds, where inevitably, as a result of the focus on events in Europe, and there was a decline in sales activity. It's early days yet, but as we go into the third quarter, it looks as if that has stabilized.

In fact, if we look at the United States sales, sales are up 35% year over year, and flat quarter versus quarter, so largely unimpacted by the events of Europe of the second quarter. And much of the sales activity in the United States of America can be attributed to the focus on fixed income services.

At a redemption level, again, the major story was the fallout post the fiscal crisis in Europe. Whereas on the sales side, that led to a slowdown in sales activity in Europe, on the redemption side, it led to an increase in redemptions in Asia, particularly of global high-yield services. Again, just as sales activity seems to have stabilized in Europe, so the redemption picture in Asia looks, as we enter the third quarter, that it has stabilized. And as for the United States, mutual fund redemptions actually decreased 8% Q2 over Q1, and are currently running marginally lower than our long-term average redemption level.

The last comment I'd make on retail is that, as was reported in the press, our 529 CollegeBoundfund contract with the State of Rhode Island, which totaled some $7 billion in assets under management, was renewed.

Let me turn to Private Clients. Here, like retail, second-quarter gross sales increased significantly over the second quarter of '09, though they were flat versus the first quarter of 2010.

Unlike our sub-advisory business, whereas in previous earnings calls, we commented that we see very little evidence of re-risking, whilst it is gradual and slow, the data does suggest that at a high net worth level in the United States of America, risk aversion is slowly abating. And, we continue to invest in our footprint, the distribution footprint, with a new training class started in June, and a second training class now scheduled for September.

Terminations continue to decline and are now extremely close to long-term averages, leading to net outflows declined for the sixth consecutive quarter. Now I mentioned in my introduction to the distribution side that there's a much greater focus on enhanced products and services. I commented on dynamic asset allocation. That has been extremely successful in the Private Client channel. It's probably the fastest ramp-up of any product or service we've introduced into the Private Client channel. As of the end of the second quarter, some 6,000 client relationships have signed up to dynamic asset allocation. That is 3 times the number I reported at the time of this call in April.

And I mentioned that the next focus is going to be on alternatives with the launch of real estate in the second half of this year, the first big step in the broadening out and expansion of our alternatives platform for the Private Client business.

Lastly, on the distribution side, let me say a few words about institutions. Here, the flow picture looks much healthier than previous quarters. Second-quarter 2010 gross sales increased 133% sequentially to $8.1 billion. That is over 500% up from the second quarter of 2009. Sales continue to be driven by fixed income services, especially global and emerging market strategies.

On the redemptions, or outflow side, second-quarter outflows remained relatively flat, sequentially improving by 2%, but down, improved, 41% from the second quarter of 2009.

Now in the press release we issued, we observed that the pipeline finished the quarter flat or marginally down compared to the first quarter. In fact, early -- one month into the third quarter, the pipeline has expanded significantly, particularly as a result of wins in defined contribution space. Defined contribution was a market which, in 2009, we observed in these earnings calls had appeared to be extremely quiet. But recently, we've begun to see a surge of activity, and we're getting some real traction in defined contribution. So that will be an issue I'll be returning to at the next earnings call.

So with that, let me turn to the sales side, Sanford C. Bernstein or as we label it here, Bernstein Research Services.

Peter, in his remarks, commented about our expansion of the footprint into Asia. We now have six senior analysts on board and senior hires made to lead both sales and trading. This is the third leg of our sell-side operation. It follows the ramp-up here in Europe over the past decade, which has transformed our business. This is the next missing piece of that jigsaw.

As I look at Europe, we highlight here the Thomson Reuters Extel Survey of European Institutional Investors, where we had our highest-ever results; particularly gratifying, bearing in mind this business is less than 10 years old.

Turning to the financials, revenue is up 6% versus prior-year quarter, and indeed 6% versus the first quarter of 2010, with both US and Europe seeing rises in revenue. Having said which, market trading activity has decelerated meaningfully in the third quarter, as has been widely commented on in the Street over recent weeks as earnings have been reported. And whilst we see and are enjoying earnings, market share gains, inevitably in this environment, those market share gains will be slowing. So with that, let me hand over to John, who will take you through the financials.

Thanks, David. Good morning, everyone. I will start with a high-level recap of the results we reported earlier this morning.

As Peter mentioned, our earnings were down this quarter from Q1. We took significant investment losses on our deferred comp investments, consolidated venture fund and seed capital investments, as global markets declined in the second quarter. On the expense side, we made investments in personnel, strategic hires to support our new business initiative, and increased client-related travel and conferences to support servicing and sales efforts.

As for the numbers, GAAP revenues were down 5% from the prior-year quarter and the first quarter of 2010. GAAP expenses were down 1% from both prior periods, primarily due to lower deferred comp expenses associated with the Q2 market decline.

Our tax rate increased to about 12% in Q2 versus 9% in the first quarter. Because our earnings decline from Q1 to Q2 was largely in our domestic subsidiaries, which have a much lower tax rate, earnings in our foreign subsidiaries, which are taxed at higher rates, represented a larger proportion of our global net income.

This, too, was a function of the losses on deferred comp investments as most of our employees are US-based. We're projecting an effective tax rate of about 10% for calendar 2010.

As mentioned on last quarter's call, we received our final trail payment from the sale of our money market business to Federated in the second quarter. GAAP earnings were $0.31 per unit, and adjusted earnings were $0.38.

Let's move on to slide 12 to discuss adjusted earnings. So, what are adjusted earnings and why are they important? We believe they are more relevant to how we monitor our performance and that they will help investors better understand the underlying trends in our results. We'll be introducing several new performance metrics today, including adjusted revenues, adjusted operating income, and adjusted operating margins. As you can see on the chart on this slide, GAAP and adjusted earnings and operating margins can be materially different at times. We believe reporting both GAAP and adjusted metrics will keep our investors better informed.

Please refer to our press release, the appendix of this presentation and the earnings deck, and our Form 10-Q for more information and the supporting reconciliations as required under the rules. We'll also provide a six-quarter history of GAAP to adjusted reconciliations on our website, which you can download later today.

Let's take a look at the adjustments to revenues, which relate to three key areas. First, the investment P&L related to deferred compensation. This is clearly the largest and most volatile item that impacts our adjustment to revenues. The significant market volatility over the past couple of years have created large gains from deferred compensation in 2009, especially in Q2 and Q3 of last year, and large losses in the second quarter of this year.

Second, the results related to our consolidated A.B. Venture Capital Fund. We consolidate one investment partnership with our corporate results, the Venture Fund, so 100% of this Fund's results are included in our GAAP revenues. Because we only own 10% of the Fund, we've backed out 90% of the P&L from our earnings through the minority interest line. So for our adjusted earnings presentation, we net the majority interest against our revenues, leaving only our 10% economic interest.

And third, distribution-related payments. Distribution revenues are largely a pass-through for us. The funds pay us distribution fees, which we book as revenues, and then we pay them out almost entirely as expenses. We believe that netting these distribution pass-through expenses gives us a truer picture of our core operating revenues when we are determining adjusted operating margins.

Now let's talk about adjustments to operating income. We have adjusted for the net impact of the investment P&L and employee compensation associated with the marked to market on deferred comp. Next, we adjust for the venture fund, as we previously discussed. And then finally, we exclude the impact of periodic non-core charges such as real estate charges.

So to summarize the concepts of GAAP versus adjusted results, we feel that adjusted results are a valuable tool in managing our business. They present a clearer picture of our operating performance and allow us to see long-term trends without the distortion primarily caused by the marked to market and deferred comp. Since we measure our results using these metrics, we believe that it provides a valuable perspective for investors.

Let's move on to slide 13 and discuss our revenues. Base fees were up 14% versus the prior-year period on higher average AUM and slightly higher average realization rate. Fees were flat sequentially. While average AUM fell slightly, we had a slight improvement in our average fee rate, and we had one extra business day during the quarter.

As David mentioned, research revenues were higher, up 6% versus prior period, driven by higher volumes in April and May. And distribution revenues improved due to higher average retail AUM. Though these are similarly -- you see similar changes in distribution-related payments, which offset these increases.

So to this point, operating revenues compare favorably with both prior periods. However, the Q2 market decline created poor investment P&L comparisons with prior periods. We took $57 million of investment losses during the second quarter, which included $37 million in losses on the marked to market of deferred comp, $10 million loss on the consolidation of the venture fund, and $5 million in losses on seed capital investments.

Overall, we saw a $120 million decline in investment P&L versus the prior-year quarter and a $50 million drop versus the first quarter of this year. GAAP revenues were down 5% versus both prior periods, but as you will see, adjusted net revenues paint a more positive picture.

Again, let's review quickly how we get from GAAP to adjusted net revenues. First, we remove the investment gains and losses associated with deferred compensation, and 90% of the venture fund, and then we net down the distribution-related payments. The end result is adjusted net revenues up 11% versus the prior-year period, and flat consecutively compared to a 5% decline on a GAAP basis.

Let's now review slide 14 for a discussion on expenses. GAAP expenses in the second quarter were down 1% versus both prior periods primarily due to lower employee compensation due to the impact of marked to market losses on deferred comp, partially offset by investments in personnel, client conferences, and other client-related activities. Compensation was down 4% versus the prior-year period and 2% consecutively. Our headcount is roughly flat with the end of Q1 at around 4,300 employees.

As you know, we target our compensation as a percentage of revenues excluding distribution revenues. Over the first half of 2010, our compensation ratio was 49.2%, down from 52.5% in the first half of 2009 and up slightly from our comp rate of 48.5% for all of calendar 2009.

Base compensation was $110 million in Q2, $100 million in base salaries, and $10 million in severance. That's down about 2% from the prior-year quarter.

Base compensation is up 5% consecutively, which was driven entirely by severance. We had $5 million in severance in Q1 and $10 million in severance in Q2.

Incentive compensation declined versus both prior periods. Marked to market losses on deferred comp investments have pushed incentive comp down 13% versus the prior-year quarter and 9% consecutively. This was partially offset by higher cash bonuses versus prior quarters. Our cash bonus accrual is up 3% in the first half of 2010 versus the first half of last year. Once again, incentive compensation is booked based on our targeted compensation ratio.

Commissions and fringe expenses are versus the prior year due to $7 million in recruitment expenses in the current quarter. Quite simply, we're adding talent in many areas of the firm. We hired 200 new employees in the current quarter, which is the most hires we've had in a quarter since the second quarter of 2008.

We made personnel investments within our investment teams on the buy side, and Peter mentioned a couple of examples in his opening remarks. We've also invested in our sell-side business, especially in Asia; alternatives; and key support staff. Sequentially, these expenses are flat, as lower payroll taxes and fringes offset the higher recruitment expenses.

Promotion servicing expenses are up, which mostly reflect a higher level of business activity. Expenses are up 15% versus the prior-year period and 9% consecutively. Distribution related expenses are up versus both prior periods, though the increases in expenses are largely offset by increases in the distribution revenues.

Versus Q1, we also had over $5 million of incremental expenses associated with client conferences and client-related travel. The increase in conference costs is seasonal, as we host the majority of our annual conferences around Q2. We hosted conferences on the sell side, within growth, and we hold a number of our annual private client conferences during the quarter. These costs will fall on the second half of the year. Travel expenses have picked up this quarter. We're seeing higher business activity across the firm, driven by the increase in our gross sales, building out the Asian sell-side business, and launching [a] new alternative businesses, to name a few.

G&A is down 9% from the prior year and 7% consecutively. The decline versus the prior-year period is due to higher claims processing charges and FX losses last year. The first quarter of 2010 was impacted by a $12 million real estate charge. Excluding the charge, G&A rose by $3 million from Q1, due primarily to FX losses. We had a $1.5 million FX gain in the first quarter and a $1.5 million FX loss in the current quarter.

Let me talk about real estate for a minute. As we previously mentioned, we're in the process of reviewing our real estate footprint in the New York City area, primarily as a result of the reductions in headcount over the past couple of years. There are a lot of things to consider before we make a final determination on a reduction plan. There are economic considerations, such as the marketability of each location and buildout costs, as well as business and infrastructure requirements. We expect to complete this review by the end of the year, and based on the final outcome, additional real estate charges could occur in the future.

Let's now move on to slide 15 to review the reconciliation of GAAP to adjusted earnings. First, the deferred comp adjustment. This adjustment reflects the net impact of investment P&L and employee compensation expense related to the marked to market of deferred comp. It results in an $18 million add-back to GAAP results in the current quarter, a reduction of $55 million in the prior-year quarter, and a reduction of $11 million in the first quarter of this year. Second, we add back a real estate charge of $12 million in the first quarter of this year. And third, minority interest balances are adjusted for, as well.

Adjusted earnings of $135 million in the current quarter are up 74% from the prior-year quarter, while GAAP earnings for the same period show a 19% decline. Adjusted earnings for the second quarter are down 15% from Q1 versus down 23% for GAAP.

Adjusted operating margins also tell a much different story year over year. GAAP margins fell from 18% to 17%, while adjusted margins rose from 13% to almost 21%. And once again, adjusted earnings were $0.38 per unit in the current quarter.

Let's move on to slide 16 before we wrap up our review of the financials. On this slide, we provide a bridge showing the major variances between the adjusted earnings of the current quarter and the first quarter of this year. Note that there are no variances related to advisory fees since they were flat consecutively. Most of these items have already been addressed earlier in the call, such as severance, recruitment, and FX, so let me spend a minute on seed capital.

We have not included seed capital gains and losses within our adjusted earnings adjustments, as we believe they are a key operating activity in launching new products. We had a $7 million swing in investment P&L on seed capital balances, driven by a $2 million gain in Q1 and a $5 million loss in Q2. We have over $150 million of seed capital investments across our various AB, traditional and alternative investment products.

With the increased volatility in the markets, we made a decision to hedge our seed capital investments toward the middle of the second quarter. Our seed capital investments saw gains of $12 million in 2009 and losses of $3 million year to date.

Now, let's speak briefly about the year-over-year periods -- the year-to-date periods. Adjusted earnings increased from $121 million in the first half of 2009 to $292 million in the first half of this year.

One quick comment on the buyback. We repurchased 3 million units during the first half of this year. As we mentioned in the earnings release today, we will continue to buy back units in the second half in anticipation of funding future deferred comp awards, which will occur in December of this year.

So to wrap things up, and I will focus on adjusted numbers here, adjusted net revenues were flat consecutively and up 11% versus the prior-year period. Adjusted operating income was down 15% sequentially and up substantially versus the prior year. And adjusted earnings were $0.38, while GAAP earnings were $0.31.

So, results weren't as strong as we would have hoped. Adjusted revenues were flat sequentially, but certain expense categories were up, although it was for investments in people and clients. So if you have any questions on the numbers or the new presentation of adjusted results, Phil and I will be happy to help you after the call. And with that, we will open up the call for Q&A.

(Operator Instructions). Michael Kim, Sandler O'Neill.

Can you first just kind of give us the lay of the land in the institutional channel? Where do you think you are from a flow standpoint? And do you feel like there are still redemptions to come because we really haven't seen maybe any big shifts from the institutions? But maybe these could be offset by renewed interest from other areas of the business?

Why don't I kick off on that one? I mean, clearly, the good news on the flows on the institutional side is widespread traction in fixed income space. We commented on this in the past. Part of that is because of the competitive nature of our services and performance in fixed income. Part of that is the shift within pension funds largely worldwide, out of equities or reducing equities, and into fixed income, a shift which predates the credit crisis of 2008, but certainly was accelerated by the credit crisis of 2008.

Now, whilst it's perhaps a little bit rash to say that is a secular shift, it certainly is a shift which is showing no sign at this point of abating. So, on the positive side of flows, the combination of that asset allocation shift by institutions -- by the way, not just limited to pension funds, but certainly led by pension funds and the competitive nature of our performance in that space -- has been very positive.

On the equity side, I think you're seeing the mirror image of that, that particularly domestic large-cat equity services, arguably worldwide, are in retreat, retreat both because the proportion of the pie which is in equities has gone down; then the portion which is in domestic has gone down; and then the portion in domestic, which is [in active] has gone down.

More positively on the equity side, we continue to see flows in the industry going into global, which is global equities, which has been a major source of business for this firm over the past decade. So, my slightly long-winded answer is a very complex picture. Fixed income, good. Domestic equity, a continuing decline in asset exposure, and global equities still positive. Does that address your question?

Yes, that's very helpful. And then maybe secondly, just more conceptually now that Sharon is now I guess the Equity CIO, any sense that you're kind of moving towards a more centralized structure on the investment management side and just how you're thinking about that structure going forward? Thanks.

No, Michael, we're going to continue to be focused on what we would refer to as style purity in investing, so there is growth investing and value investing. Those research staffs and portfolio managers will continue to be separate. And Sharon will, in a simple way of thinking about it, continue to be as she has been, player coach on the value side and coach as it relates to the growth team.

We think there are three main advantages in having a CIO of equities. One is the leverage-ability in Sharon's formidable investment experience. Secondly, in understanding how to actually harness opportunities in investing across the globe in areas like risk. And third, in understanding the excellence in research and in bolstering and embellishing the research process in both of the specific style activities, growth and value. So in a word, no; we don't intend to back off of or to reduce our investment in the style pure activities of the equity platform.

Okay. Thanks for taking my questions.

Robert Lee, KBW.

Thanks. Good morning, everyone. Could we maybe focus on the DC business a little bit. I guess, Peter, David, you both made some comments regarding seeing improved momentum there. Has it possibly got any kind of -- is it more that part of your unfunded pipeline is more in the DC business? Or there's more conversations? And to the extent you're starting to maybe see more wins or compete for more business, are you able to get some of your investment selections as part of your overall pipeline? I know you also obviously have a business managing the glide path, but have you been able to kind of insert your own investment selections as well?

I think the answer to that is sort of yes, yes, and we will see. So let me try to answer them in slightly more detail. I think one of the characteristics of DC is it's got a longer sales cycle than the DB business, for a whole host of reasons -- many more stakeholders, many more constituents, it's much, much more complex when moving a plan, when putting in structures such as our customized retirement systems, there's a great deal of what we would call plumbing to do. There is a participant communication to do. So in some senses, the surge in activity which we're beginning to see now is like the tip of the iceberg. And actually things have been going on for some period of time out of sight.

The customized retirement strategy initiative is something we've focused a great deal of resources on over the past few years. And you are right that there are two component pieces here in one sense. There is the platform which we are supplying to some extremely large sophisticated institutions. And then in time, we would also hope that we would have stand-alone services of AllianceBernstein capabilities embedded in that platform.

But the first comes before the second, but we definitely see this as a key growth initiative of the firm and potentially something which could build a very attractive business, but also one which has got very sticky characteristics.

Okay, great. And maybe as my follow-up, can you maybe update us a little bit on what you are seeing from kind of an investor behavior as we kind of -- maybe how it would progress over second part of Q2 and into Q3 here? I mean I know you mentioned that you've seen at least a pickup in the institutional pipeline, but any color you can provide on does it feel like private clients are kind of all gone on holiday more so than usual? Or any kind of color you can provide on kind of business trends and investor psychology as we get into Q2 here?

Sure, sure. No, as much as all of us might wish for everyone to go on holiday and give us a few weeks off during the summer, I don't think there's that much evidence of private clients going on holiday. In fact, if anything, across multiple sectors, there's evidence of a wall of money sitting to be engaged within the market. I mean, even in institutional space, cash holdings are at perhaps unprecedented levels. So, the activity levels within the Private Client business are tracking very consistently with this stage in comparable recoveries from bear markets.

As I said on the last earnings call, if there is a difference, the difference is not in the number of relationships we're opening up. The difference is in the size of the funding of the relationship. So whereas four years ago, you pitched for a $20 million mandate, you either got it or you didn't; today you pitch for a client with $20 million and you perhaps get $10 million, and $10 million sits in the bank.

Having said which, I spoke earlier about the incremental re-risking which is taking place in the Private Client business. I mean it's slow, it's gradual, but it's real. If I were to give you a data point on that, if you looked at calendar year 2009, new accounts and new money of the firm in Private Clients went 54% into fixed income, 46% into equities. Sorry -- 61% fixed income, 39% equities. So far this year, first half of this year, it is 54% fixed income, 46% equities. So a meaningful re-risking is underway.

Great. Thank you very much.

Craig Siegenthaler, Credit Suisse.

Just to talk about net flows for a second, you know, it sounds like there could be some good improvement in the Luxembourg channel. You mentioned Dynamic Asset Allocation, and just talked about DC. What areas of the business are you kind of most worried about from a kind of a net flow standpoint over the next 12 months?

Well, I think the area which continues to frustrate, if that's the right way to put it, is the sub-advisory channel, which saw a significant de-risking -- for us -- saw a significant de-risking take place post 2008. And, we continue to see very little evidence of that reversing. Again, that's a slightly sweeping generalization. And I'm talking about a de-risking; we saw meaningful assets moving into passive. And, we're not seeing that turn around. So, that's discouraging.

But on the mutual fund side, I think looking at the events of the second quarter, in some senses, we were protected -- not protected, but we were helped by the fact that recent success has been heavily skewed towards fixed income, and the big flows across the industry in mutual fund space were out of equities. So, the picture right now in retail in terms of flows is looking reasonably healthy.

And then, just to look on the fixed income side, do you feel a little more comfortable with some of the high-yielding areas of that fixed income product that are a little bit more kind of anti-inflationary fighting, you know, like emerging market bond funds and global bond funds; and you're more concerned with maybe your core and core plus products, just on a 12-month basis?

I think the answer to that is the flows have been -- not just for us -- but the flows have been most positive in the industry in things like global and high-yield, and we would expect that to continue. And we are particularly competitive in that space.

Got it. Thank you for taking my questions.

Bill Katz, Citigroup.

Thank you. Good morning, everyone. Just coming back to the institutional business on the redemption side. Given your monthly disclosure would suggest there's been a bit of a slowdown as you sort of exited the quarter, I'm just sort of wondering if you could talk a little bit about the trends on the redemption side.

I'm sorry, I'm not quite sure I understood that question?

Can you just talk about, on the institutional side, if you could sort of talk about the redemption pace entering and exiting the second quarter?

I'm happy to, but I would be loathe to draw too many conclusions from it. June was a good month. So we exited the quarter with all three channels in positive territory. That's one month.

I don't think at this point there any particular trends I would highlight, certainly not in the course of that three-month period, which I would extrapolate forward into future quarters in terms of the redemption picture.

Okay. Second question sort of comes back to a discussion about some of the headcount additions you've made I guess through the quarter. I was wondering if you could talk a little about the pro forma impact on third-quarter expense run rate, if any?

Bill, it's John. If you look at our compensation process, as you know, we record compensation based on a compensation ratio. So the first half, the compensation ration was 49.2%. The investments are within that ratio. So that's part of the reason why the ratio ticked up slightly from 48.5% in calendar 2009 to 49.2% in the first half of 2010. So, I think you should think about it in the context of a slightly higher ratio.

Okay, thank you.

Marc Irizarry, Goldman Sachs.

Great, thanks. Peter, a question for you. If you look at -- if you forget about other for a second and just look at the equity versus fixed income, you know, it's pretty balanced between the two. When you think about the alternatives business and you talked about real estate as sort of the first step, but when you look at the overall business and the role of alternatives, is there a way for you to accelerate your growth there? What's sort of the game plan to build out some of the other capabilities that institutions and retail investors might be looking for?

Well, I think, Mark, it's a step-by-step process. We have launched a number of alternative investments, not only just the real estate, but also in the hedge fund space inside of the firm and, in connection with an outside hedge fund manager.

We also have, and it was announced today, two people internally looking at organizing a oil and gas -- early-stage oil and gas investing activity.

I think what you're going to see from us in the next call it three to six months is a continued drumbeat of new opportunities in that space that will round out a fulsome offering of internal hedge fund opportunities and potentially external hedge fund opportunities that both our individual and institutional clients can take advantage.

Okay, great. And then just on the retail part of the business, it looks like non-US retail in particular has seen some gross sales trends that were very strong during the quarter. Can you just comment on those trends that you're seeing in non-US retail versus US retail?

Sure. I mean actually, over the recent quarters, the way we have framed this is that the turnaround in our retail business, excluding sub-advisory, was being led for us first of all in Asia, then working its way westwards, Europe and then to the United States and was being led by fixed income.

Those trends continue. I mean what is encouraging is, how much the sales activity in the United States have picked up to catch up with the improved momentum outside of the United States of America. I think there is a broadening of distribution, which will take time to mature but will make it less lumpy. But I don't think -- I don't think there's any reversal of the fundamental trend. What's leading the game at the minute for us is fixed income.

Thanks.

(Operator Instructions). Cynthia Mayer, Bank of America Securities.

Good morning. If you look at some of the more discretionary spending items you have, like conferences, travel, recruiting, even cash bonuses, some of which were up in 2Q versus 1Q, can you give a sense of whether collectively you expect that spending level to be sustained here in the second half? I think you mentioned conferences are somewhat seasonal and will be going down, but other than that, can you give us a sense of the outlook?

Sure; with respect to conferences, Cynthia, you are spot on. They typically are higher in the first half of the year, and in 2010, conferences were higher for us in Q2, so they should -- and they will drop in the second half. And that's probably a $2.5 million to $3 million -- probably a $2.5 million savings on a quarterly basis moving forward into the second half.

With respect to recruiting costs, they should fall from the Q2 run rate in the second half. A little bit difficult to predict, but the number should come down versus Q2.

I think those are the two specific items that I'd point to. Anything else that you have particular questions on with respect to discretionary? The cash bonuses, you did mention, and that's going to be based on the comp ratio. So, I think that's not -- that's not a Q2-only event. We book it based on the comp ratio. We're at 49.2% for the year. And we look at that on a quarterly basis based on revenue trends and some of the investments that we're making.

Right. Okay. And are you comfortable with the 49.2% going forward?

That's on a year-to-date basis. And specifically for the quarter in the second quarter, the rate was 49.8%. In that range of 49.8% to 49.2% is probably reasonable in the short term.

Okay.

Next quarter.

Okay. And then, Peter, you just mentioned on another answer that within the alternatives initiative, you're thinking of including external hedge fund opportunities. I'm just wondering if you could clarify how that would work. Are you thinking of a fund to funds business? Is that for Private Client or Institutional?

Well, we've said many times in the past that we've looked at external hedge funds, and we're continuing to do that. There is a particular activity that we've joined up with one other external hedge fund that we are talking with clients about, and that's really what I was referring to. And as you know, it's hard to talk about specific funds in these calls, so I won't be able to do that. But I think you will see a constant investigation on our part on how we can continue to broaden our hedge fund activities.

Okay, thanks.

Bill Katz, Citigroup.

Thanks very much. If you adjust for the $5 million or so of unusual expenses in -- I think in the distribution line, your revenues were up about 3% sequentially, but the residual expense went up about 11%. I was just wondering A, if I have my math right; and if that is right, can you talk about the dynamics between the revenues and the expenses, if there is any sort of margin trend here or any other unusual items in the quarter?

Sure. Let me just speak at a high level. And I think what I will focus your attention on is slide 16 for the bridge to show some of the major variances, and I will focus on those.

Severance was up. Well, let's speak specifically about compensation. The compensation rate increased over the first quarter. We were 49.8% and the comp ratio for Q2, 49.2% year to date. Severance was higher -- $5 million Q1 to Q2, and recruiting was higher; it was higher by $4 million, and that was $7 million in Q2 specifically.

With respect to promotion and servicing expenses, the big driver there was a $5.5 million increase in travel and conferences. And as I responded to Cynthia's question, probably about half of that would drop in the second half of the year on a quarterly basis due to the higher concentration of conferences in Q2.

And then with respect to the G&A expenses, they were flat. if you pull out the FX losses Q1 to Q2. So we are about -- if you pull out the FX loss in the second quarter, we would have been $127.5 million for G&A. So those are the big movers consecutively Q1 to Q2.

Okay. I just want to ask a follow-on. My question is really more specific to the distribution plan payment line, which was $71 million this quarter. If you subtract out I guess the bulk of the travel and the conferences, you're still $65 million, and that's 11% growth sequentially. Maybe something in the first quarter that was unusually soft? But you only had a 3% lift in related revenues. Is there anything going on between those dynamics?

Yes, I would look at distribution P&L on a net basis. So taking distribution revenues less distribution-related payments and the amortization of the DSC. And if you look at that -- those one revenue and two expenses on a net basis, they were slightly positive around a few hundred grand positive in the second quarter, down from a little over $1 million positive in Q1.

Those numbers were slightly negative in the third quarter of last year and the fourth quarter of last year. So if you look at the trailing four quarters, the net distribution P&L is positive or minus -- $1 million up or $1 million down. So it's within the normal range.

Okay, thank you.

Roger Smith, Macquarie.

Thanks. I want us just to stay right on this because it looks like if I look at what was reported in the three -- the first quarter of 2010, in this press release versus last press release, it looks like there's stuff that was moved from other into plan and distribution payments. And maybe if we just understand what happened there, that might help us see the differences better.

Sure. Sure. Absolutely, Roger. Very, very good point. We did have some re-classes within promotion servicing expenses, so it was not between expense categories in between G&A and P&S. It was just within promotion and servicing.

There are three line items within our P&S expense, distribution plan payments, the amortization of the DSC and other.

We had -- there were distribution-related expenses that were included in other historically, and beginning in Q2, we have reclassed those into distribution plan payments. We've actually broadened the category and now call it distribution and related payments.

The re-class in the first quarter was a little over $8 million, and the re-class in Q2 of 2009 was about $6.4 million. So those total promotion and servicing expenses did not change. It's just a realignment between those individual components of promotion and servicing expenses.

If you look at the reconciliation, the six-quarter reconciliation within the press release and the 10-Q, you can see all of those numbers on a -- going back since the first quarter of 2009. So it's a good point, Roger. There was some movement within P&S.

Okay. Thanks very much.

There are no more questions in queue.

Perhaps, Phil, actually, if I could just go back to Mark's question, because I can give you greater granularity. You ask about the trends within retail flows. First half this year over last year were up over 100%. Fixed income is up over 200%. Value sales up 55%. Gross sales up 48%.

And then when you look at where it's being led by, I said Asia had led -- that's up 162%, and US coming up in the rear if you want to put it that way, up 33%. We would expect that to even out over time.

Okay, great. Thanks, everyone. And as always, the IR team is available for your calls and questions later today. Have a good day.

Thank you, everyone, for participating in our conference call. Please feel free to contact Investor Relations with any further questions. Have a great evening. You may now disconnect.