Q2 2020 AllianceBernstein Holding LP Earnings Call
Thank you for standing by and welcome to be Alliance Bernstein second quarter 2020 earnings review.
At this time, all participants Arnie listen only mode.
To be remarks, there will be question answer session and I will give you the instructions on how to ask questions at that time.
As a reminder, this conference is being recorded and will be available for replay for one week.
Now I'd like to turn the conference over to your host for this call head of Investor Relations for a b Mr market Griffin. Please go ahead.
Thinking Italia, good morning, everyone and welcome to our second quarter 2020 rigs review.
This conference call is being webcast and accompanied by slide presentation posted Investor Relations section of our website Www Dot lines Bernstein Dot com.
Seth Bernstein, <unk>, President and CEO, John why conceal so.
For our COO and Ali Dibadj head of finance strategy the present, our results and take questions. After our prepared remarks.
Some of the informational present today its forward looking subject to certain FCC rules and regulations regarding disclosure so I'd like to point out Safe Harbor language on slide two of the presentation. You can also under Safe Harbor language me Mdna over second quarter, 2020, 10-Q, which we filed earlier this morning.
But the regulation of T management may only to ask questions of material nature from investment community in a public forum.
Oh, please ask all such questions during this call.
Now I'll turn it over Joseph.
Good morning, and thank you for joining us today I'm pleased to report strong second quarter results robust sales across both retail and institutional channels. Another strong quarter for active equity flows and organic growth of 3% net of expected acts redemptions, while also expanding our margin.
The second quarter was a period of remarkable recovery in the financial markets. Following the March liquidity crisis and global sell off.
In this market eat up our top 10, we tell taxable fixed income funds posted top quartile performance in the quarter as credit sectors recovered as did 10 of our retail municipal funds.
He platform routine good long term performance.
Bernstein Research company that year over year growth and we've had several large alternatives wins that you or pipeline, so let's get into the specifics.
Starting with the firm wide overview on slide four.
Gross sales of 31.8 billion represented the second strongest quarter in over a decade up $4.5 billion were 16% from a year ago and up slightly sequentially.
Firmwide net inflows were 4.6 billion, excluding 7.9 billion a previously disclosed both be active redemptions at retail flows rebounded following the industry wide sell off in March.
Quarter end assets under management up 600 billion increased 3% year over year and 11% from the prior quarter, reflecting the strong financial market rebound in the second quarter.
Well average at U.M. of 579 billion increase 2% year over year and decreased 4% sequentially.
Slide five shows quarterly flow trend by channel.
Firmwide net inflows of $4.6 billion, excluding the aforementioned actually redemptions were driven by continued strength in both retail and institutional.
Retail habits third best sales quarter ever active equities generated inflows for the 13th straight quarter and active fixed income had $2 billion net inflows.
In the bottom left chart you can see institutional gross sales of 8.8 billion among the highest in recent years, excluding the extra redemptions as we had net inflows of 1.5 billion driven by active equity inflows of $2.9 billion.
In private wealth gross sales increased 13% year over year and were down slightly sequentially, while redemptions in this period of market uncertainty led to modest net outflows.
Now, let's turn to investment performance beginning on slide six.
Fixed income eat up our top 10, we tell taxable fixed income funds by a U M placed in the top core trial, there Morningstar peer group in the second quarter and all 10 of our retail municipal portfolios by you when we're in the top quartile this quarter from sick with six in the top desktop.
Disciplined we validation of our positions by are fixed income teams led to this improvement at several credit sectors posted strong recoveries, including global and U.S. high yield, which were up 12, and 10%, respectively emerging markets up 12% and crts up 26%.
Our one three and five year relative performance improved sequentially with 41%, 45% and 64% Abas, that's outperforming respectively.
We still have a lot of work to do to recover additional performance and we remain confident or people process and approach, which have stood the test of time.
In equities, 67% of our assets outperformed over three years and 70% over five years in the most recent one year period, 54% of assets outperform.
Good remarkable equity market recovery in the second quarter was narrow at the top led by large cap technology with the NASDAQ returning 31%, while the broader S&P 500 returned 20%.
Several of our strategies, such as our strategic equities portfolios maintained a lower beta and higher quality bias, which protected well during the March downturn, but lagged in the recovery led by high valuation high growth technology, and some higher betas cyclicals.
Slide seven and eight provide more insight on retail fixed income an equity investment performance.
The fixed income slide table on slide seven reflects the performance improvement in the quarter.
Among offshore fund American income as in the top quartile for the three and five year periods with second quarter performance aided by the funds barbell allocation to recovering credit sectors.
Our opinion income is in the top decile all over the three and five year period, and our global high yield portfolio, just top quartile performance in the quarter, returning 12% as positions in emerging markets that and crts rebounded the portfolio lags on a one three and five year basis.
A bar U.S. taxable funds global Bond fund performance is mixed the strike the strong second quarter, one and three year rankings or dragged down by credit sector challenges in the first quarter and duration positioning in earlier periods.
As mentioned our municipal performance improved high income in intermediate diversified Muni outperformed for the one three and five year periods, while municipal bond inflation lag.
Moving to equities on slide eight.
Among offshore offerings sustainable global thematic placed and top cortile, an all time periods, while concentrated global global low ball and global core aren't on top quartile toward the top decile into three and five year period.
Our U.S. retail funds large cap growth and discovery growth are in the top cortile for the one three and five year periods.
Select U.S. long short was in the top cortile over the three and five year periods.
Within our value offerings relative values outperformed over three in five years, while our broader offerings lag.
Moving onto our Klein channels, beginning with retail on slide nine.
Retail sales of 19.6 billion worth of third highest our history. Following a record first quarter second quarter redemptions normalized after the industry wide sell off in March and we generated net inflows at 3.8 billion. The seventh in the last eight quarters of positive net flows.
Net inflows were balanced across both fixed income and equities, notably it was our 13th straight quarter of active equity organic growth.
He be ranked the 11th out of 456 managers for U.S. equity fund flows in the second quarter, that's in the top 3%.
Our scaled retour offerings remain diverse 48 products of more than a billion dollars. Each in assets 19 of them equities 16 fixed income and 13 multi asset in alternatives.
Notably U.S. retail net flows rankings include.
Largecap growth 19 out of 342 small cap growth for its out of 166 global core equity eight out of 246, an AB high income 12 out of 100, maybe.
Offshore we told that flows rankings include global high yield second out of 127 American income first out of 37 and American growth fifth added a baby too.
Now I'll discuss the institutional on slide 10.
Global sales of $8.8 billion more than doubled sequentially and were up 60% from prior year quarter.
We generated 1.4 billion of net inflows, excluding the low fee acts a redemption.
If you back when he can <unk> continues to distinguish itself at 4.6 billion. It was the highest equity sales quarter in 12 years.
Net inflows of 2.9 billion in active equities translated into a 33% organic growth rate led by global core U.S. concentrated growth and international strategic value.
This is the ninth of the last 10 quarters.
Which active equities have grown organically.
Our institutional pipeline grew to a record 17.5 billion at quarter end were 4.7 billion pipeline additions in the second quarter.
In addition, we had $5.9 billion of new mandates that were both one and funded during the quarter.
Notable pipeline additions included 1.1 billion of CMBS 950 million in global core equity and 425 million at ARIA, Our multi pad long short fund.
We had a very successful 500 million dollar Tao fund raise which was four times oversubscribed with two thirds of a globally diversified LP base, new to AB, reflecting strong uptake by a diverse mix of institutions and console.
In our growing liquid alts, we we launched a third funds systematic macro and our merger Arb strategy received a consultant by rating.
Our anchor path acquisition brings a systematic risk overlaid up.
To our multi asset group, adding approximately 400 million dollarss and assets under management, which will be immediately relevant to the insurance sub advisory channel as well as our global retail channel.
We have also expanded our low carbon offerings with the launch of global low carbon equity strategy and plan to launch a low carbon Asian equity product in the second half of 2020.
Moving to private wealth management on slide 11, gross sales were $3.4 billion increased by 13% year over year, I interrupt 10% year to date versus the prior year.
Client risk aversion following first quarter volatility led to continued net outflows in the second quarter.
So to the cause delays and decision, making impacted liquidity events that are precursor to funding.
We remain intensely focused on client service and communication and completed the shift to virtual engagement posting 171 virtual events in the second quarter.
We saw continued strong client engagement for unique blog visitors, which were up 56% and over 8000 downloads on our Bernstein podcasts network.
We continue to innovate and support up are increasingly complex clients. The muni impact portfolios going to 850 million in assets under management, while E.S.G. strategies increased over 30% sequentially.
Our proprietary SDMA, Texas harvesting portfolio continues to scale with AIU am increasing by 150 million this quarter.
We closed two above $100 million and commitments to our 2020 vintage private equity fund to funds.
I'll finish our business overview with the sell side on slide 12.
Bernstein research continued to benefit from higher global market volatility, leading to higher trading volume and customer engagement second quarter revenues grew by 8% year over year, while moderating sequentially.
Global trading volumes remained elevated versus the prior year with the U.S. up 40% Europe up 4% in Asia up 42%.
We are gaining share globally, particularly in Asia, where investments in research capabilities and in India are reaping benefits.
Our virtual strategic decisions conference was by any measure a huge success with over 115, Ceos and senior executives per se and presenting and 2500 institutional investors up more than 50% year over year from over 600 buy side clients attending.
We received very positive feedback from clients for most ambitious virtual cell site undertaking to date supporting the conferences premier status globally.
More than the years past the autonomous acquisition, we are successfully cross selling subscriptions, having signed 65, new clients year to date.
Highlights of some of our second quarter accomplishments are shown on slide 13.
67% of our equity assets are outperforming over three years, including 13 top quartile funds across multiple styles capitalization and geographic categories. Once again, we drove net inflows in active equities across both retail and institutional channels are experienced fixed income teams had a good second.
Quarter and remain focused on improving performance, which we have conviction will continue to rebound over time.
Retail sales remain very strong while our institutional pipeline hit a new record.
Active equities and alternatives comprise over 80% of our fee base.
Bernstein research gain global market share and both Bernstein and private wealth grew sales year over year, while focusing on strong customer engagement.
In alternatives, we closed on 100 million and PE funds of funds launched our third offset strategy raised 425 million at ARIA completed a well diversified oversubscribed top raised and acquired anchor path.
Speaking broadly I would add that its heartening to see on a year to year basis across the industry active management outperforming indexes in over two thirds of Morningstar categories.
Well, we have a number of complement accomplishments to be proud of we also have areas, we need to improve and I wish to share with you abies commitment to racial equality and justice.
Maybe we want to live up to our promise to be a carrying coming they'd be the values everyone for their unique perspective, some contributions for which we are all better off.
Diversity is an imperative, particularly in the global investment and organization, where outcomes are based on fully informed viewpoints and perspectives as well as robust idea generation organizationally, we're committed to specific actions to further recruit developing retained black talent at all levels and ensure more black.
Leaders arm path to senior decision, making roles.
We also intend to leverage the strain for asset management platform and spending in our communities by engaging in intentional activities in how abbey operates as wells within the industry to drive collective change in progress.
We will hold each other accountable and I'm confident we have the right people and culture in place to be our best now I'll turn it over to John to review our financials.
Thank you so let's start with the GAAP income statement on slide 15 second quarter GAAP net revenues of 872 million increased 2% from the prior year period.
Operating income of 210 million increased 14% and the 21.7% operating margin increased by 110 basis points gap you, a 59 cents compared to 54 cents and the second quarter 2019.
So is I'll focus my remarks from here on our adjusted results, which moved the effect of certain items, they're not considered part of our core operating business, we base our distribution to unit holders upon our adjusted results, which we provide in addition to and not as substitutes for our GAAP results, our standard GAAP reporting and a reconciliation of GAAP.
Adjusted results are in our presentations appendix press release and 10-Q.
Our adjusted financial highlights are included on slide 16.
Although second quarter revenues of 699 million decrease year on year, both our operating income of 195 million that our margin of 27.9% increased.
Our until a distributor unit holders 61 cents per unit compared to 50.
Six cents in last year's second quarter, lower compensation and promotion and servicing expenses more than offset the decreased revenues and primarily drove the improved results.
Compared to this year as first quarter, our March it increased 30 basis points, but revenues and operating income decreased due to lower base fees and Bernstein research services revenues, which were partially offset by lower compensation and promotion and servicing expenses.
We delve into these items in more detail on our adjusted income statement on slide 17.
Beginning with revenues second quarter net revenues of 699 million decreased 2% year on year.
Second quarter base fees decreased 3% from the same prior period due to a lower portfolio fee rate the effective which was only partially offset by higher average AUM.
Compared to the second quarter of 2019 total average AUM increased 2.2%.
The portfolio fee rate of 38.4 basis points calculated net of distribution fees decreased 1.9 basis points year on year.
The portfolio fee rate was adversely affected by a products mix shift with high fee value equity strategies now representing a lower percentage of our total a U M than in the past. In addition to fixed income strategies represent a higher percentage and some fixed income products fees declined.
Base fees decreased 7% sequentially from the first quarter due to lower average age AUM and portfolio Sea Ray.
The decline due to the lower average a U M. That's greater than that due to the lower fee rate.
Second quarter performance fees of 9 million decreased 2 million year on year due to lower performance fees earned on our middle market lending strategies.
Second quarter revenues of 114 million from Bernstein Research services increased 8% due to higher revenues in the U.S. and Asia, resulting from increased customer trading activity attributed to greater global market volatility, which offset lower revenues in Europe.
The 12% sequential decline was due to lower market volatility and trading volumes.
Other revenues decreased 16 million compared to the same prior period because of lower dividends and interest earned on our broker dealer investments.
Interest expense decreased 13 million year on year due to lower interest paid on broker dealer customer balances, resulting from lower interest rates.
Moving to adjusted expenses.
All in our total second quarter operating expenses of 504 million decreased 6% year on year.
For the second quarter transition costs related to our Nashville, corporate headquarters relocation totaled 6 million compared to estimated expense savings of 7 million, resulting in a net 1 million increase in operating income.
The 1 million savings as the net of 3 million compensation savings and 2 million increased occupancy costs.
For the 2026 months here today period transition costs totaled 15 million compared to estimated expense savings of 13 million, resulting a net 2 million reduction in operating income. The 2 million expense is the net of 5 million of increase occupancy costs, a 3 million compensation savings.
Total compensation of benefits expense decreased 5% year on year on lower incentive compensation commissions and fringe benefits, we accrued compensation at 48.5% of adjusted net revenues for the second quarter. This year. The same it's the first quarter and versus 49.5% for the second quarter of last year.
If our current revenue trend continues we may accrue compensation at a 48% ratio for the second half of the or what the option to adjust accordingly throughout the remainder of the year if market conditions change and as we gain further clarity regarding the compensation requirements for our business and the transition costs related to our corporate headquarters relocation.
Second quarter promotion and servicing decreased 31% versus the same prior year period, and 26% sequentially from this year's first quarter due to lower marketing and see any expenses, resulting from the covert 19 travel restrictions.
Second quarter, Gionee increased 4% year on year due to higher technology expenses related to our business initiatives market data and occupancy expenses attributed to our headquarters relocation excluding that increase relocation expenses gionee would have increased less than 3%.
Second quarter operating income of 195 million increased 8% from the prior year as expenses declined more than revenues, reflecting our continued focus on managing expenses and our high incremental margin.
The 5% sequential decrease for the first quarter is due primarily to lower base fees and Bernstein research revenues.
Second quarter operating margin of 27.9% increased 280 basis points year on year, a 30 basis points sequentially.
You may have noticed that our second quarter adjusted EPU was two cents higher than our cap you while our adjusted operating income was $15 million lower than our GAAP operating income. This is due primarily to the exclusion of the following three items from our adjusted results, which are not part of our core business operations first.
We excluded 1 million an acquisition expenses.
Second we deconsolidated certain seed investments in our adjusted results that we had consolidated for GAAP reporting.
Consolidating these investments increased operating income by 21 million, but did not affect net income or if you.
Third we recorded a $5 million real estate charge for GAAP reporting to write off the last remaining floor and our White Plains office. In addition to some space in our New York City Office as a result, if our Nashville relocation.
Going forward. This charge will also be deducted from our adjusted earnings on a straight line basis over the remaining lease terms for White Plains office 15 months, and our New York City office for and want to half years and have been included in our headquarters relocation guidance.
The second quarter effective tax rate for life from are seeing LP was 5.4% about as expected. We anticipate the 2020 full year effective tax rate will range from 5.5% to 6% based upon current forecasts of domestic first foreign pre tax earnings.
I'll finish with an update on our plan corporate headquarters relocation to Nashville.
We plan to begin moving employees into our new corporate headquarters building during the second quarter of next year, which is a bit later than we originally expected.
We currently anticipate the reduction in 2020 IPU due to the relocation to be approximately two cents, which is less than our previous estimate of six cents.
The force that's expected improvement is attributed to a combination of greater compensation savings and lower occupancy costs due to the to late start date. So the rent on a new headquarters.
We anticipate the 2020 it will be our last year of EPA dilution related to our headquarters relocation project a slight increase in ERP you beginning in 2021 with the appeal accretion for each year thereafter.
In addition, our estimate of ongoing annual expense savings beginning in 2025 once the transition period is over remains unchanged in the range of $75 million to $80 million per year.
While we still expect the total transition costs to be between 155 to 165 million over the 2018 2024 period, we expect total savings to be greater and the range of 185 to 195 million compared to our previous estimate of 180 to 190 million for the same period.
I'll now turn it back to Seth for some additional comments before we begin to Q and a session.
Thank you John turning to slide 19.
Following several productive meetings of many of you this past quarter I wanted to do something a little different and briefly summarize what we believe distinguishes E b as an investment opportunity.
Firstly, our differentiated investment performance combined with distribution capabilities is driven sustained organic growth among the best in class in the industry. We were expanding our suite of higher fee alternatives. We have a strategic partner an equitable that is committed to seeding new strategies as well as supporting inorganic.
Growth.
We are generating strong incremental margins as we scale up and as we execute I'm focused cost reduction initiatives.
Our partnership structure affords us.
Less than 10% tax rate, particularly attractive attribute any event taxes rise in the future.
And we have a robust distribution yield of approximately 9% in a low rate environment.
Our Abiam Bernstein brands are renowned among and best institutional investors, while a private wealth business adds significant long term value.
Combination we believe the seven traits will continue to drive unit holder value for many years to come with that we're pleased to take your question.
[laughter].
Ladies and gentlemen at this time, if you would like to asking question. Please press Star then the number one on your telephone keypad again that is start wine.
Please limit your initial questions to to in order to provide all callers and opportunity to ask question. You are welcome to return to the Q2 ask follow up question.
Please hold while we've compiled acuity roster.
Your first question just from the line of Bill Katz.
Okay. Thank you good morning, everybody I appreciate taking the questions. Thanks for the thorough update.
First question, maybe centers on the expense outlook I appreciate the comp guidance. That's helpful. So much flexibility do you think they might be typically just we'll look to the fourth quarter as you've done in the past and then underneath that promotion was rather low I think appreciate sort of cobot 19 backdrop. So how much of that is sort of approach.
Permanent shift versus maybe a transitory shift to the extent that the some of the stressors other pandemic ease into New York.
Hey, Bill it's a it's John So just take these maybe one by one on a comp ratio. That's your Supercom, we're trying to reduce it in the third quarter again, we'll just have to see how the outlook goes out beyond the third quarter in terms of as we build our compensation pools from the ground up in the fourth quarter and we see how the revenues Chris.
The lies in the balance the here to see whether or not you know we can actually lowered again in the fourth quarter. So we'll just have to wait to see their commotion servicing go down 31%, yes, we're going to be down for the year I don't think we're going to be down 31%.
It's really a factor of I think how quickly we were seeing the normal business operations as far as the traveling.
The marketing you a lot of the marketing was it was really down because of lack of for meetings. We did our strategic decision conference. This year, which is relatively costly to put on we actually did it virtually it was very very successful so as things start to recover you'll expect to see those expenses increase we're down about 11% I think on.
A year to date basis. So I think about this year, perhaps that's a good started to point to think about you know for this year to be down around that assuming that you know we start to recover as we get towards the back half of the year.
On the Gionee side, you know were up 4% you strip out the relocation or up less than 3% I think that's probably a good guidance to go buy for this year as well.
Okay.
Just a follow up I think so that on the in your slide deck, you mentioned and play the institution business I think it was you raise a CLL fund sort of curious the timing of that given the backdrop is that something more we said it was that something that just was raised previously it has happened to fund this quarter, just trying to get a sense of that business line.
Hi.
Pellets, Seth and I think we didn't raise the CLL fun, we intend to raise at once we think conditions have have stabilized sufficiently.
We think there are signs of that now, but we were in place before the crisis hit.
And we put it on hold and so we're just watching the market. So I hope just to clarify there isn't a CLL that's been right. Okay.
How I'm no worries.
Okay. Thank you.
Well as John just to add to that so that's still low it was actually just the mandate from an institutional client that asked us to manage or let's say hello.
Got you okay. So it's an existing one we just took over the management of it.
Correct I.
Instant Okay, I apologize for the my not seen that correctly.
Doors.
Your next question. Please open the line of my carrier.
Hi, good morning, and thanks for taking the questions.
First and John just on the fee rate you gave you some color whether it was year over year in quarter over quarter.
You know that it was lower.
Yeah, I get you that average markets can distort things and given the volatility it's it's tougher to predict but just on some of the nuances and some of the product trends you know where you mentioned on the value products.
It has that started to slow you know given some of the growth that you're seeing in some of the other product areas and I know on the institutional side. You said the pipeline is equities and all twitch, either generally has a higher fee rates. So just trying to get a sense of maybe the ending fee rate and then you any color on on the outlook, which I know is tough to predict.
Sure so.
Like I think when you go back when you look at what's happened second quarter of this year to the second quarter or the prior year again the value equity side. It was it used to be basically about 14% of our overall portfolio within hi, Ti Vo equities is now down to about 12%. So it's a twofold.
Percentage points and these are very high fee products over 75 basis points for cell, so well above our fee rate on our portfolio and then there was that a shift into fixed income test. So taxable fixed income of about same thing about 2% much lower fee rate much well below a year before.
If the rate and there's also some fee pressures on those plain vanilla fixed income products. So I think when you look out longer term.
When you think about the pipeline and set a record for institutional 17, a half billion.
Those are very heavily centered in active equities and alternatives to fee rate on that pipeline is well in excess almost two times, our institutional fee rate. So thats funds I think that bodes well for the flow through rate for the firm and as we continue to build out our alts business as well those are.
Higher fee rate products, so that's going to help as well yeah. We're also we're losing the the axa mandates those that 14 billion. That's low fee fixed income mandates for 7.9 billion came out this quarter at the end of the quarter. So that will help us Gulf forward as well. So we had a mix shift in a lot of this is done but for the market.
In terms of value equity is being out of favor yeah. They have all them equity markets sold off in the fourth quarter, but the growth equity has rebounded and valued it and so really seeing the effects of that this quarter.
Got it okay that makes sense and then just as a follow up.
Just in fixed income good to see that either performance rebound this quarter.
But if you look the one three or you still under a little bit of pressure.
It seems like if we back out Axa, you're still seeing you decent trends you despite that but just more curious you know from the distribution standpoint and talking to clients.
He was the long term process you into the you know kind of keep them in there are you getting more questions. You know concerns from clients on the shorter term you know underperformance.
Thanks, Mike.
Interestingly I have been concerned that the the impact of the first quarter would would hurt the.
But.
The potential for continuing flows.
So we haven't seen that yet.
Okay. So given that longer term track records or at least the three and five year track record still need to heal more but the fact is we have seen in flows both in institutional and I think more from a revenue perspective more importantly.
From retail and in particular from Asia were goes keep funds are principally sold so it hasn't been impacting us, but we're watching it pretty closely.
Okay. Thanks, a lot, but much longer term track records of both AI P. Atmel Appia is still very strong but by yields as well.
And quite competitive, but you're right that three in five years still challenged.
Hi, Thanks, a lot.
Your next question me from the line of James Steel.
Yes, Hey, good morning show.
So my questions just on slide 19 looks like you mentioned M&A a couple of times there.
Said previously done each part of the babies Steri. So I'm just curious if this is a new focus for you guys. It's based on feedback you've received or your assessment.
In M&A landscape.
I don't think it to change and I would I'd respond to your by saying I think it's the reaction to the current landscape. It's my contentions art contention that.
The market is increasingly challenging for subscale managers, whether they're in private alternatives or in traditional areas and I think we offer a really appealing proposition for those people really differentiated returned stream.
I think we can get them scale quicker and and to a much faster break even through our distribution capabilities as well as our relationship with equitable and with our private client franchise. So I just feel ads. This current extraordinary economic situation continues and I suspect we'll see.
Quite a lot of volatility in markets.
That smaller managers may be looking for ways to.
Monetize their positions or Frank we find a more stable platform. There on today, what we're not suggesting and let me make this really clear is that we've changed our M&A strategy in or are searching for a large merger of equals kind of strategy. We continue to be focused on.
Incremental capabilities that we can add either in our product areas or in distribution selectively. So no I don't think it's a change we just think the marketplace may offer more opportunities I'm, hoping that's the case.
Okay. Thank you.
Your next question. Please open the line of Craig Siegenthaler.
Hey, good morning can you guys hearing.
Yeah.
Okay perfect. Good morning, Sad when John first an industry flow question.
Just given how low rates are across most of the fixed income market.
Do you think retail institutional investors will continue to migrate aggressively into all segments, where do you think we really see more of it still into higher yielding segments like high yield or global bond or maybe that active equity momentum you're seeing will actually continue for a longer.
Look I think the fed and you know these CB and others are forcing people into equity I think that is the.
Implications of the actions taken in the put they perspectively play certainly on the front end of the fixed income market.
That said, we still see value for institutions, particularly those who are managing liabilities in the investment grade arena institutionally, but that's a finite group of people and you know who they are [laughter] I think.
Oh, I think it's going to continue the concentrate.
In higher yielding portions of the market because that's the only play they have I'd say to use that Paul they're looking for is durations they need a lot less of it.
To accomplish the same diversification.
Benefit in a multi asset portfolio. So I don't know that that speaks optimistically produced demand for government bonds generally I think it actually decreases demand over time and I also think that.
You know fixed income markets other than high yield and elements of of structured credit and and E. M don't really prefer providing come anymore. So I think people are being forced to look at equities as a replacement there as well. So I think your inclination is correct and I guess in regard to Muni.
We continue to see pretty strong demand there, but you know means you know muni demand has increased for sure. After this you know the instability that we all saw as he ended the first quarter. It seems to have stabilized pretty well I think.
The fed and the treasury have been pretty important to that and to the extent, we do see deterioration and meaty credit quality.
That may change that that that calculus, but at the moment there is still demand there.
Not as much for sure, but there is still.
Thanks that just as my follow up maybe a few details or what is driving the now outflows in the private client channel and you think the path towards positive organic growth in this channel over the intermediate term.
You know what's been driving it for us really has been risk at version.
Ah that has caused number of our clients to want to stay on the sidelines and private client I think performance in the first quarter was also challenging for them, particularly when they looked at Muni portfolios and saw you know negative returns in some cases that that's a pretty unusual circumstance I think that's an industry wide.
Phenomena that certainly is not a reflection of our own unique performance.
But we shared it and and so I guess I'd say, Craig that I think that's temporary and while we have seen.
You know modest outflows over the past several quarters.
We have experienced ourselves pretty good growth there prior to that and and I think that's a function of the team's focus on really on ultra high net worth clients, where we're seeing increasing demand and that's driving.
Our strength there, but in contrast, we have oh.
A book of business up smaller accounts that we've had for a long time, where we're seeing aging and decay and so that's trading at the other side as hard growth and the ultra high net worth is expanding so.
There.
The underlying cross currents in our results can private wealth, but I suspect that we will begin to see stronger organic growth in the future of may not be next quarter, but.
The teams are very focused on what they're doing they have interesting services their marketing to clients.
And frankly, this isn't really volatile year and given that the overall level of uncertainty, which I think really cat characterized as market [laughter] broadly I'm, not particularly surprised but look we're focused on it is what's important area this be renewed growth though.
Great things that.
Your next question is on the line Alex Blostein.
Great Hey, good morning, seven one John I wanted to pull up on the common you mean early around declines in some of the fixed income product fees is that a function of lower interest rates and there's just more sensitivity in terms of the feed people are paying given gross yields have come down as much as they did.
Any channel or geography that is that's pushing harder I guess on this or any any additional color would be helpful. Sure Alex It's John So.
Some of it is just the if the plain vanilla institutional fixed income products, where there's been fee pressure across the industry now for quite some time in our peers are feeling yet and we're feeling it as well there is though some element of the lower interest rate in terms of more the retail sector in the private wealth sector.
So you know there has been some folks in the private wealth channel that have moved into.
Lower interest bearing lower fee fixed income products that we manage that's had an impact as well and the private wealth channel. This actually hit the hardest as far as to the decline in fee rate compared to the retail and institutional channel.
Got it.
And then just maybe follow up around the dynamics in the active equity business. Seth you guys have been obviously uniquely position in this part of the World. Most of you if you're seeing active equity outflows.
So maybe incremental detail would be helpful. There in terms of what are you seeing from either increase search activity you or any so anything sort of idiosyncratic that <unk> is doing to drive flows into active equities, obviously be outperformance performance been grade, but but curious if there's a uniquely you guys doing on the distribution side. That's been helpful. Over the last a couple of quarters.
No.
Thanks look I, we have some of its luck some of it surely skill. This has been a growth in core drip and market and we happened to have strong.
Candidates for for both retail and institutional clients to consider and what I think it's really been driving it more recently is search activity amongst institutions.
We've seen pretty pretty robust.
New inquiry and new RFP is coming out of consultants or these are replacement searches typically and stuff. We are seeing a good flow there in several particular strategies.
That have been beneficiaries of that particularly in global space Global core equity for example, and concentrated growth.
So we've seen and in our strategic core product. So we've seen increased activity there.
I do think that it's it's becoming received wisdom, among gatekeepers and institutional and retail.
That you really do have to have that maybe have some cradic returned stream.
Net of your factor returns to really earn your place and these portfolios and that makes intuitive sense to us and I think more and more people are using that as a basis screen.
Product and so I shortly there's some luck involved some of it is a where we invested in the past 10 years due to to rebuild our capabilities.
That said.
We're the market focus to ship to value, we'd we'd have a more challenging.
Opportunity there because we have seen some slightly improved performance in one or two areas with for our value sweep, but that sweet continues to be pretty challenged.
Great. Thanks for the color.
Your next question is on the line of Robert Lee.
Okay.
Great. Thank you good morning, everyone also going so well.
No. That's maybe a first question is one of a little bit on the on the a little more support.
I think you highlighted the.
I know, they're willing to support the kind of whether its seating products or maybe some somebody inorganic but.
Maybe getting an update on.
<unk>.
Our contributing turn lead assets or gross flows.
It's really more of the contribution from for the strategy or is there.
Are you seeing some on the change or pick up in their contributions.
Yes.
We may have to come back to one specific details, but it is both and.
I'd be more to clarify if if if I'm if I'm wrong on the numbers, but you know they have been they will be the equity investor for example in the COO.
Portfolios that were starting up they're also going to be key investors on some commercial real estate debt investments that we intend to undertake a.
Particularly in Europe. They have continued to show us flows and work with us on different parts of their general account.
You know that if their general account is not growing inside so it you know I I'm just.
I'm going to actually turned to marker to John maybe John to give specifics on the flows there just help me sure. Thanks, Rob just to give you some perspective here.
Still as has been for many years.
The percentage of our a land related to Oxford group, an equitable is around a quarter around 25% or just below and the fees roughly about 5% up our revenue.
Over time, though there's been a shift so.
As a group has.
Exited or for regain some of those guys James.
Thing about this 14 billion of low fixed rate a fixed income it's been picked up by echo that they picked up the to slash. So we still sit at those overall numbers on that portfolio in terms of a land and fees, but it's much more now heavily over on the equitable side and the coin.
Picked up a lot over the past couple of years as Oxy group has basically redeem certain strategies.
[noise] pretty it's been pretty beneficial to equitable and doing it I neglected to mentioned I think it just seeded a merger arb, but for us as well.
So they continue to.
Be quite supportive to watch.
That's very helpful and even in terms of yeah, we put in place a credit facility and 900 million dollar credit facility several months ago, <unk> as actually allowing us to borrow in the markets.
Well below the a commercial paper race and so if you look at our interest expense is down for two reasons. One is just rates are down but it's also because of the borrowing now that we're doing from an equitable as opposed to and see the market.
We've been very helpful.
Great.
Our fourth one of the on the private wealth business.
You know knowing that your common sense about.
The other though Morgan from outlook.
Well I'm just curious maybe more.
Your channel.
Yeah, Hi, we you thoughts are about your ability in this environment.
So the adds to the advisor headcount.
Sumit.
Notwithstanding the more positive outlook is client acquisition.
Moderating.
Harder to get in front of people sort of you know ultra high net worth.
Segment, that'd be fair characterization or not so much.
Well I'd, probably say bad.
The shutdowns that accompanied the pandemic, it's certainly forced us to change the way we're trying to engage.
Although the activity levels are pretty high, but I suspect that that is creating a temporary slowdown.
But we haven't.
We experienced much resistance to our introductions and meeting and networking with new higher you know ultra high net worth client.
But with respect to your your your first question with regard to financial advisors.
I think growing back group.
You know by fiber said, 6% annually for the last couple of years after three years and we want to continue doing that.
But as you know, we're not hiring typically lateral leap from other <unk>.
The actual advisors were.
Typically training our own taking people make career from other segments bought those other sales functions and read training them and that is a longer term investment, but we have a pretty high hit rate.
So I don't have anything really to report different there now, but we're continuing to do that and it's proven successful over time.
Great. Thanks, My plus.
Again to ask the question. Please press star one on your telephone keypad again that is start wine.
Your next question. Please open the line of John Dunn.
Good morning, and thank you.
You know your E.S.G. has been growing well in building, but you know, it's becoming more and more ubiquitous in People's conversations can you maybe get just give us a little color on why you think your approach is going to outpace the other guys.
It's certainly you you're right that it seems to be the order of the day.
But I think but.
We'll make differentiate us is exactly what differentiates us across our services today and that's our commitment to fundamental research.
Our contention is that.
People are not going to be buyers not gonna be content and simply the statement that you.
You utilize and E.S.G. lens to analyze stuff or that.
Your your prompting or or or engaging companies and providing.
A voice to push management to a more responsible approach to managing their business I don't think thats enough. We don't think that's enough. What we think is important is to actually be able to track it audit and and report it because people want to see both performed investment perform.
As well as performance results that are auto ball.
On non financial measures or non investment managers and that's what we're working really hard to do we have incorporated in our equity and credit research functions proprietary research and collaboration tools, which allow all our teams to share information on what they learn with clients.
So we try to use that yes G integration in our fundamental analysis across asset classes to give us.
Shared understanding of the progress or lack of progress individual companies are making.
But in addition, we think we need to continue to educate ourselves and that's why we entered into this partnership with Columbia University useful want Dougherty Earth Institute.
We've already you know phase one is already done which is we developed a client with them. They are faculty a client curriculum for our investors and it's been available for all of our investors to take classes.
It starts pretty grim, but there's really exciting stuff that rolls out of it because the impacts of climate change had been so profound already.
But where we're taking that into phase two which includes joint research industry, it's hopefully leveraging columbia's capabilities.
To help us develop climate risks scenario tools for our investors.
And even to think about potentially.
Product development ideas so.
I'm very excited about what we're doing and it is translating to different steps that we're taking on the product side today.
So for example, we launched a couple of years ago than our carbon neutral portfolio that investment global stocks.
There are valued we utilize a tool the measure carbon costs to with respect to valuing those stocks for inclusion in the portfolio.
We launched a credit version of the sustainable global thematic strategy, which investment companies that are focused on achieving the UN strategic development goals. So we have a number of products.
That we think will speak in resonate with different types of investors, both institutional and retail as we go forward, but I think ultimately what will differentiate us because again returns returns measured more broadly in this case, but returns nonetheless.
That's it and then just on investment spending you had talked about.
You know tech data, maybe could you go layer down on.
Maybe some other projects you're working on and particularly in the thing is customization.
Sure John It's a it's John the Big project, we're working on its been driving a lot of that most that increase in tech is actually we're redoing our multi asset systems. So are the flow management.
For multi asset we had had a.
Kind of a.
Conglomeration of of an equity system, a fixed income system alternatives and we're actually doing the entire.
Platform to be a holistic multi multi asset so that's really been they didn't the largest spend there. There are also has been spent in terms of for our client experience.
On the private wealth side, some mobile applications and then with regards to our client group, which is our distribution function.
For the for our team to be able to be more efficiently.
Function more efficiently and manager their client relationships more efficiently as well so those have been kind of the main areas of the spend.
Great. Thanks very much.
Welcome. Thank you.
There are no further questions at this time, Mr. Griffin I turn the call back over to you.
Thanks Italian.
Thank you everyone for participating in our conference call today, Please feel free to contact Investor relations with any further questions that have a great day goodbye.
[music].