Q3 2020 AllianceBernstein Holding LP Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Alliance Bernstein third quarter 2020 earnings review.
At this time all participants lines are in a listen only mode.
After the remarks, there will be question and answer session and I will give you instructions on how to ask questions at that time as a.
As a reminder, this conference is being recorded and will be available for replay for one week.
I would now like to turn the conference over to the host for this call head of Investor Relations for AB Mr. Mark Griffin Sir. Please go ahead.
Thank you Carmen good morning, everyone and welcome to our third quarter 2020 earnings review.
This conference call is being webcast and accompanied by a slide presentation. That's posted in the Investor Relations section of our website Www dot blocks Bernstein Dot Com, Jeff Bernstein, President and CEO and Ali Dibadj had a financing strategy, we'll present our results John Weisenseel CFO caper CLL will join us for questions. After our prepared.
Thanks.
Some of the information we present today is forward looking and subject to certain FCC rules and regulations regarding disclosure so I'd like to point out the safe Harbor language on slide two of our presentation.
You can also find our safe Harbor language and the Mdna over third quarter, 2020, 10-Q, which we filed earlier this morning.
Well the regulation FD management may only address questions of material nature from the investment community in a public forum. So please ask all such questions. During this call no.
Now I'll turn it over to Seth.
Good morning, Thank you for joining us today.
We're pleased to report third quarter results that highlight consistent strength across our platform.
All three channels delivered net inflows led by another robust quarter for active equities in both retail and institutional we.
We posted annual like active organic growth, 5% net backs redemptions, while expanding our margins and delivering double digit earnings and distribution growth to unit holders.
The third quarter. So I continued broad based recovery in global financial markets across both equities and fixed income.
Our retail fixed income funds outperformed peers in the third quarter as credit sectors improved while our equities performed.
Platform retain good long term performance.
Lets get into the specifics starting with a firm wide overview on slide four.
Gross sales of 29.3 billion were up 3 billion or 11% from a year ago moderating sequentially from second quarter's near record levels.
Firmwide net inflows were 5.3 billion, excluding 2.2 billion a previously disclosed LOPI Axa redemption.
Active net inflows of 7.3 billion, excluding axa redemptions represented a 5% annualized organic growth rate.
Quarter end assets under management up 631 billion increased 6% year over year and 5% from the prior quarter.
An average or U.M. of 624 billion increased 6% year over year and 8% sequentially.
Slide five shows our quarterly flow trend by channel.
Firm wide net inflows reflected growth in each channel driven by strength in institutional and we.
In retail we generated net inflows of 700 million led by continued strength in active equities, which grew by 8% organically immunities, which grew at 12% organically more than offsetting the effect of moderating taxable fixed income sales at.
As shown in the bottom left chart institutional gross sales remained strong at 8.3 billion. Excluding the extra redemptions, we generated net inflows of 4.3 billion bounced across both active equities and active fixed income.
In private wealth gross sales increased 52% year over year and were up slightly sequentially and we generated net inflows of 300 million for the quarter.
Now, let's turn to investment performance beginning on slide six.
Our fixed income funds benefited from multi sector credit positioning in a risk on third quarter.
For the quarter, our retail fixed income funds ranked in the 39 percentile the Morningstar peer group.
This follows the second quarter, when we placed in the top quartile.
In the third quarter five of our top 10 retail taxable fixed income funds by 80 when placed in the top quartile their Morningstar peer group and eight out of 10 were in the top half.
And 10 of the top eight out of the top 10 retail municipal for portfolios by you when we're in the top quartile with six in the top desktop.
Our strategies benefited from continued recovery in credit sectors, which outperformed governments.
U.S. high yield is up nearly 5% European high yield up 3% emerging markets up 2% and global corporate is up 2% all posting healthy excess returns versus governments, which returned two tenths of a percent.
In fixed income 49% of assets outperformed over the three year period, and 63% outperformed over the five year period.
On a one year basis, the percentage of assets outperforming declined to 24% as our large American income funds slightly underperformed the diverse peer group.
It's important to note that as mentioned, we outperformed the peer group in both Q2 and Q3.
Since April one global high yield is in the top quartile 24th percentile and the American income is in the 34th percentile.
Key industry participants have noted our team's ability to bounce back from short term underperformance in the past we remain confident in the proven track records of our people process and approach.
In equities long term performance remained strong at 67% of assets outperformed over both the three and five year period.
In the most recent one year period, 43% of assets outperformed.
One year performance was impacted by our large cap growth portfolio, which while still outperforming most peers over the one year period at the 47 second percentile of the Morningstar peer group.
Well below the Russell 1000 growth institutional benchmark, which continues to be driven by a narrow group of Mega cap Tech stocks.
For perspective before detect sell off in September. These five tech stocks were up 56% year to date to August driving all of the S&P five hundreds year to date gains at that point and representing a record 39% of Russell 1000 growth waiting.
While our large cap and core growth equity strategies own. These names prudent risk management suggests lower weighting send or high benchmark levels full.
Well the 25% of the active risk in these five Mega Tech stocks is the momentum factor, which word first to chase it.
As market leadership broadens beyond technology as it did in September these strategies should be well positioned versus relatively concentrated the benchmark.
Slide seven and eight provide more insight on retail fixed income and equity investment performance.
In slide seven we show the majority of our offshore funds retaining good performance as mentioned, both global high yield and American income have outperformed their peer group since the March downturn.
American income retains top quartile performance for the three and five year periods driven by the funds time tested barbell allocation to rates and credits.
Among us taxable funds as risk assets rallied continue we have taken some gains letting risk positions drift lower.
In high yield structured credit contributed significantly over the quarter as did security selection.
Our municipal funds continued to show strong performance across the board spending fitting from an overweight to mid grade b any credit and favorable sector selection.
Moving to equities on slide eight among.
Among offshore offerings, a number of strategies are in the top quartile for the three and five years.
Our sustainable strategies have benefited from investing in secular growth companies that maintain high quality attributes, including strong ESG ratings high returns on capital and clean balance sheet.
You should continue to command a premium in todays uncertain environment.
In the U.S. our growth teams have driven strong long term performance by investing in companies with proven profitability that can self fund there will be investment to drive future growth.
These high quality companies are able to successfully manage any environment and come out the other side in a better competitive position.
In a market settled by to burst hazards are fundamental research teams are focused on broadening the portfolio as sources of risk and return to build equity portfolios with short term shock absorbers and long term staying power.
Moving onto our client channels, beginning with retail on slide nine.
Gross sales of 17.5 billion normalize following very strong prior year comparisons.
We generated net inflows of 700 million the eighth in the last nine quarters of positive net flows.
The left hand chart shows that our retail channel has benefited from improved balance in asset classes brought by consistent active equity inflows.
That was our 14th straight quarter of active equity organic growth delivered against the challenging industry backdrop.
Once again AB ranked in the top 3% for US equity fund flows in the quarter, placing 14th out of 450 managers.
Inflows were led by us large cap growth and sustainable global thematic.
Our scaled retail offerings from main diverse with 55 products have more than a billion dollars balance across asset classes as shown in the bottom right. A number of these have excellent net flow rankings.
Now I'll discuss institutional on slide 10.
Gross sales of 8.3 billion, where nearly tripled that of our prior quarter and were down slightly sequentially.
We generated 4.3 billion of net inflows, excluding the low fee Axa redemptions.
Active equity sales have accelerated to greater than $2 billion in six of the last seven quarters.
In the third quarter active equity net inflows of 1.6 billion, representing a 14% annualized organic growth rate.
This was the 10th of the last 11 quarters in which we have grown in active equities organically.
Equity flows were led by international small cap global core and concentrated growth.
Our institutional pipeline was 16.9 billion at quarter end were $4.9 billion in pipeline additions in the quarter.
7.1 billion was funded in the quarter, including a 2.6 billion lifetime income strategies mandate.
Notable pipeline additions include 4 billion of customized retirement strategies $450 million in global core equity and $250 million in concentrated Australian equity.
Taking a step back we've been explicit in our goal to offer investment strategies that deliberate idiosyncratic returns that can't be replicated by factors or other betas and that has resonated with our clients, but data alone isn't enough. Additionally, we've cultivated our network of consultants an asset owners.
In equities, we received five consultant upgrades this quarter two for select long short in addition to global core Euro zone equity and global sustainable.
Additionally, we've been we have seen in the substantial increase in client request related to EPS G, including an increase in RFP is for our SG focused portfolios were purpose.
We now manage nearly 15 billion in these strategies with ATM up 50% year to date.
Four of these funds were named as finalists by investment weaken their 2020, sustainable and ESG investment awards, including sustainable Global thematic responsible U.S. equities green managed volatility equities and sustainable thematic global credit.
We're also pleased to have recently launched the commercial real estate debt business and that in Europe, including a planned sizable commitment from our partner equitable. This is Paul.
This is part of our stated strategy to expand our institutional alternatives platform to new markets, while leveraging our strong relationship with back with the ball as they seek yield enhancing investment alternatives.
Moving to private wealth management on slide 11.
Gross sales of 3.5 billion increased by 52% year over year and were up 3% sequentially redemptions and.
Redemptions improved as outflows stabilized.
We generated net inflows of 300 million in the quarter.
Clients still remain relatively risk adverse though it was heartening to see some signs of thawing business transactions that are a precursor to client funding.
Our focus client engagement efforts continue to emphasize virtual events and were seeing traction on online client engagement with unique downloads up 88% across Bernstein insight networks.
The Muni impact portfolios continue to grow now $950 million in a UN well, yes, GP strategies have grown to 3.7 billion.
Our proprietary separately managed equity loss harvesting portfolio continues to scale with AUM up 34% this quarter.
I'll finish our business overview with the sell side.
On slide 12.
Bernstein research experienced slowing institutional trading volumes this quarter with revenues down 3% year over year and down 13% sequentially.
A significant share of year over year U.S. market volume growth was due to higher retail trading, which Bernstein does not participate in.
We were pleased that are Asian business, including India continues to post strong growth validating our earlier investments.
Our European strategic decisions conference at over 100, Ceos, and senior execs executives virtually presenting and 1200 50 institutional investors from well over 400 buy side firms.
We initiated I'm four sectors this quarter and published an integrated EPS GE research report across 50 global sectors, leveraging our bottoms up sector active expertise to identify critical SG issues for the stocks.
We also experienced strong flow when leadership, a pre IPO research enabled buyer conflict free research platform.
Highlights of some of our third quarter accomplishments are shown on slide 13.
67% up our equity assets are outperforming over three years, including 11 top cortile funds across multiple styles capitalization and geographic category.
Our differentiated return streams continue to resonate with clients as we drove net inflows across all three client channels in the quarter.
This is led by active equity growth across retail and institutional which grew organically by eight and 14% respectively.
Our institutional pipeline remains very strong with over 50% of that fee base comprised of alternatives.
We continue to grow our alternatives multi and multi asset offerings as evidenced by CB six multi asset strategies in 2020.
Importantly, our results show strong expense management, which is benefiting our bottom line as we grew earnings and distributions by double digits this quarter.
Finally, as announced earlier this quarter, our CFO John Weisenseel has decided to retire from may be effective in early 2021.
John It's been a strong partner to me in recent years and to a b over his nine year tenure and we're grateful for his leadership John.
John is currently transitioning its responsibilities to Ali Dibadj head of finance and strategy, who will assume the CFO role in February.
Ali will walk us through the financials this quarter.
Thanks, Seth so let's start with the GAAP income statement on slide 15.
Third quarter GAAP net revenues of $900 million increased 3% from the prior year period operating income of $217 million decreased 7% and the operating margin was 24.1% up 150 basis points.
If you have 70 cents.
Care to 62 cents in the third quarter of 2019 up 13%.
As you've done in the past, we'll focus remarks from here on our adjusted results, which remove the effect of certain items that are 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 a substitute for our GAAP results. Our standard GAAP reporting and reconciliation of GAAP to adjusted results are.
Recitation Appendix press release and 10-Q R.
Just the financial highlights are included on slide 16.
Our third quarter revenues of $727 million were flat year on year operating income of $260 million increased by 8% and operating margin of 29.7% increased by 220 basis points driven by strong incremental margins we.
We earned and will distribute to our unitholders 69 cents per unit compared to 63 cents for last year's third quarter, lower compensation and promotion and servicing expenses, primarily drove the improved results compare.
Compared to this year's second quarter revenues increased by 4% due to higher base fees operating income increased 11% and our margin increased 180 basis points, reflecting operating expense growth of just 1% lower promotion servicing energy and expenses we.
We delve into these items in more detail on our adjusted income statement on slide 17.
Beginning with revenues third.
Third quarter net revenues of $727 million were flat year on year.
Third quarter base fees increased 1% from the same prior year period on higher average AUM, partially offset by lower portfolio fee rate.
Compared to the third quarter of 2019 total average AUM increased 6.5% the portfolio. If the rate of 38.3 basis points calculated net of distribution fees decreased 1.9 basis points year on year lower fees earned on Baird equity pick up products and mix drove the decrease which you may recall, we first discussed last call.
Order.
Sequentially base fees increased by 8% from the second quarter, reflecting 8% higher average AUM across all channels with the portfolio of fee rate essentially flat with last quarter as we discussed.
Third quarter performance fees of $7 million were down 1 million year on year as lower performance fees for our middle market lending and concentrated global growth strategies were partially offset by higher fees from ARIA, our multi portfolio manager long short strategy.
Third quarter revenues of $99 million for Bernstein research services decreased 3% year on year due to reduced client trading volumes in the us and Europe, partially offset by robust growth in Asia.
He has decreased 13% sequentially due to lower client trading activity in the U.S. in Europe.
Investment losses of $1 million compared to gains of 4 million in the prior year period resulted from losses on our broker dealer investment portfolio and lower seed investment gains.
Other revenues decreased 11 million compared to the same period prior year period, because of lower dividends and interest earned on our broker dealer investments.
Interest expense on the other hand decreased $12 million year on year due to lower interest paid on broker dealer customer balances, resulting from lower interest rates.
Moving to adjusted expenses at all.
All in our total third quarter operating expense of 511 million decreased 3% year on year due to a lower compensation ratio and lower promotion and servicing expenses.
The third quarter transition costs related to our national 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 one.
The 1 million in savings is a net 4 million compensation savings and 3 million increased occupancy costs.
For the 2029 month year to date period transition costs totaled $21 million compared to estimated expenses savings of 20 million, resulting in a net 1 million reduction in operating income the one.
The 1 million expenses, the net of $8 million of increased occupancy costs and 7 million of compensation savings.
Total compensation and benefits expenses decreased 1% year on year on lower fringe benefits other planning costs and commissions.
We accrued compensation at 48% of adjusted net revenues for the third quarter of this year versus 48.5% in both the second quarter and the prior year quarter.
As we typically do this time of the year, we plan to revisit our comp ratio and adjust accordingly, as we gain further clarity as to the full year's revenue compensation requirement for our business and the transition costs relating to our corporate headquarters relocation.
The current market conditions persist, we do not expect that fourth quarter comp ratio to exceed 48.0%.
Third quarter promotion and servicing decreased 29% versus the same prior year period due to lower TV and for our meetings, resulting from continued COVID-19 travel restrictions.
Third quarter, Gionee increased 4% on year, a year on year due to increased miscellaneous taxes and unfavorable foreign exchange translation. In addition, Gina included the write off of one time legal fees incurred for products, which will not be launched excluding these onetime legal fees. She nay would have increased by less than two.
Percent year on year.
Third quarter operating income of 260 million increased 8% from the prior year as expenses declined by 3%, reflecting our continued focus on managing expenses and delivering our target high incremental margins.
Operating income increased by 11% sequentially due primarily to a strong increase in base fees combined with a minimal what percent increased operating expenses.
Third quarter operating margin of 29.7% increase 220 basis points year on year, and 180 basis points sequentially.
You may have noticed that our third quarter adjusted EPS was one cents below our GAAP EPS.
Our adjusted operating income of $1 million lower than our GAAP operating income. This primarily reflects office space leased impairments, which were recorded in reflected in GAAP financial results in previous quarters, but must be amortized over the remaining lease terms are so funny.
Actual results.
The third quarter effective tax rate for Liveperson LP was 4.2% lower than expected, reflecting a higher mix of domestic versus foreign pretax earnings. We anticipate that the 2020 full year effective tax rate will range from 5% to 5.5% based upon our current forecast of domestic versus foreign pretax earning.
Thanks.
I'll finish with an update on our planned corporate headquarters relocation to Nashville, we.
We continue to expect to begin moving employees into our new corporate headquarters building during the second quarter of next year. We currently anticipate the reduction in 2020 IPU due to the relocation to be approximately one cents, which is less than our prior estimate of two sets and our six cents original guidance for 2020.
We continue to expect that 2020, it will be our last year EPS dilution related to our headquarters relocation and protect a slight increase in your view beginning in 2021 with EPS accretion for each year thereafter.
Our estimate of ongoing annual expense savings beginning in 2025 once the transition period is over is unchanged and is expected to range from $75 million to $80 million per year.
With that I'll turn it back to Seth.
Thank you Ali turning to slide 19.
You might recall last quarter, we began more directly articulating the reasons to invest in the alliance Bernstein well.
What would turn to the slide with some frequency to test our progress on behalf of unit holders.
This quarter, we continued to execute along the following dimensions that we outlined.
Firstly, we drove 5% active annualized organic growth X X outflows based on differentiated investment performance.
We continue to expand our suite of higher fee alternatives through our recently launched European commercial real estate debt business, which.
Which ethical plants to support. Another example of the strong mutual interest in growing our yield enhancing longer dated alternative strategies.
We drove expanded margins year over year and sequentially with gionee up less than 2%, excluding a write off of one time legal fees.
As a partnership we continued to benefit from a durably low tax rate.
And we continue to pay a 100% of our adjusted income supporting our robust distribution yield of approximately 8% in the low rate environment.
We look forward to continued lean to report progress along these lines in the future with that we're pleased to take your questions.
Thank you at this time if you do have a question. Please press star one on your telephone please be sure to limit your initial questions to two in order to provide all callers an opportunity to ask questions. You are welcome to return to the keen to ask follow up questions.
And your first question will come from Craig Siegenthaler. Please go ahead with your question on announce your company.
Thanks, Good morning, everyone.
Wanted to start on fixed income so just given how low rates are today and the depressed for net return prospects across fixed income are you seeing a rise in fee pressure.
Either your bond business when your private client business.
Hey, Craig its Seth.
Thanks for the question, we've been seeing pressure for a long time in the particularly the investment grade.
To small business and I think we've talked about that in the past that continues.
Haven't seen the pressure.
In the private client business.
And in the retail business there I mean, we have seen some pressure in the retail business.
That that.
That has impacted us certainly in the third quarter, but I wouldn't say that anything unexpected I think it's just the continuation of the trend that we've we've been experiencing along with the industry for some time, but I think your point's right. It will continue.
And then we saw a large reset in buying yields in March and April.
But despite that there has been a very strong migration into fixed income.
Do you think we're at a point now where this may start to stall just given how low rates are and I know you've seen a pickup in other areas like active equity, but I'm most of your peers have not.
Look I think people are remain risk adverse I think income continues to be the theme that resonates with investors, both institutional and even more so at least.
At least in our experience in retail.
And I think that continues there's really very.
There's nowhere else they can go.
But ultimately I think the sense.
Central banks are pushing people into equities I think that is the net result of this and so I share your concern that that this.
This could ultimately begin to reverse because the role of fixed income is harder to justify and define in a zero bounded marketplace.
Thank you Seth.
Your next question will come from the line of Robert Lee.
Great. Thank you KBW.
Yeah, Hi, Seth.
Hi Ali.
I, just like to drill down a little bit into the retail flows.
Well you know.
Could you maybe break down how your.
How you are seeing on the EUR eight.
As noted in this quarter and what you're seeing there I mean, obviously.
Equity flows.
But just trying to get a sense of what you're seeing.
Demand wise or expectations, particularly exciting.
In Asia.
Strong point for you guys for a while.
Hey, Rob it's Seth.
Equity I'm, sorry fixed income flows in Asia have certainly in the third quarter slowed.
And we see that trend continuing.
I think that really is the story of two things one the local markets have been strong, particularly the Chinese equity market and that I think has has diverted attention.
I also think that.
As as.
We were just talking in the prior question.
Craig's question that lower rates, obviously field is important and yields have been falling as as asset prices have risen.
So, yes, I think both of those impacts through there we certainly.
We certainly have not seen any wholesale run for the doors there.
Theres continuing interest we still see positive flows but.
But it's not at the level, we had seen earlier this year or certainly last year.
Great and then maybe as my follow up.
We won't be able to get.
All of this quarter was on asking someone asking about when the news I guess maybe Ali.
Yeah, I would guess.
How we guess your response, but you look at it as with all the recent notable chatter about.
Validation.
No kind of your viewpoints on.
The.
Feeling within that.
And how you just.
Just your thoughts on that probably trending.
Sure Hey, its Ali I'll take that so obviously, there's been a lot of activity and there's a lot of anticipated activity.
I'd say three things I guess, one is we are very much in the flow of information on this you can imagine we we see a lot of things come our way, we get such things et cetera, and so we're we're not surprised even more active.
Even more activity around the corner and very much.
Had a sense of what was going on and in the past.
The second thing I'd say is as we've looked at it as a.
As they combine as we look at our own history in the industry's history.
We are challenged to make sense.
Some of the large acquisitions that went on in other words.
Our philosophy is if.
Cost cutting is the major vector of value creation in M&A. The probability that that M&A is going to work is actually quite low right and we've seen that over and over again and the market frankly is riddled with examples of that so far.
So so that's our view broadly about the M&A that we've seen much the M&A that we've seen so far some of them actually make sense I'd argue Morgan Stanley events, such a quite interesting as an example in the most recent ones, but broadly speaking what we look at for M&A as.
Thats point number three is areas, where we can surgically.
Bring on talent bring on teams that we can grow where it's not a cost cutting story, but it's a growth story and that's where we find we add the most value given our strength of distribution and finding teams that have the same investment discipline right.
Great track record a good cultural fit is the best way, we can serve our clients. So that's our M&A philosophy.
Great. Thanks for taking my guidance.
Your next question is from the line of Mike Carrier. Please go ahead.
Hi, good morning, and thanks for taking the questions first.
First just wanted to clarify form it sounds like Threeq you. It was fairly strong in fixed income but on a.
But on the performance start is usually fixing in equities.
Our realized that in the following quarters rolling off or I think you mentioned American.
I'm a bit below but just wanted to confirm that and then more importantly flows have been favorable and the pipeline looks good you just wondering if the weaker short term investment Oracle is starting to have much of an impact on conversations are clients, who remain focused on the stronger three and five year track record.
Hey, Mike it's that.
Uh huh.
Let me just clarify one thing your questions around equity flows or fixed income flows or both.
Yes. It was basically both do you think that the Threeq koremans looks a little bit weaker but it seems like overall on the active side, you're not just this quarter, but you guys, it's still been putting up a bit.
So it doesn't seem like it's having.
A big impact was just more curious coming up.
More.
It isn't yet, but that doesn't mean, it won't and we recognize that performance is the leading indicator or one of the key leading indicators on on flows. So we take it seriously I do think that clients understand.
That in the case of large cap growth.
Which is really what triggered I think the significant in the change.
The equity one year is really a story about just how narrow the equity markets or are and you guys know that story as well as we do it's really quite remarkable.
And we just weren't as concentrated as the benchmark now.
That could persist for a while it has been out there, but we have done quite well.
And in the.
Retracement, we saw a bit in September we gained a performance as a consequence of that.
So we're watching it but we havent seen any adverse.
Behavior or or or flows as a consequence of that yet, but it's out there with respect to fixed income look I think particularly in them.
Particularly in American income.
The uniqueness of that strategy and the yield that it has offered client has been compelling they are clients in Asia in particular node the team well and are familiar and comfortable with you know the risk on risk off nature of markets and how this portfolio performs so it's.
In gaming performance since March and.
And you know we're hopeful that it will continue to gain altitude again.
But.
I mean, the performance is performance and so we watch it and it and it could port foretell lower flows in the future, but it hasn't so far but overall flows the overall market has been slower.
Right Okay.
And then just given the favorable longer term warming positive flows.
Just wanted to get an update on how you guys are thinking about your distribution positioning and if you see some areas of opportunity.
Investing or areas of investment you need to drive additional flow.
[music].
Well look the first and foremost I am glad you asked that question is.
It's China for us.
We think that we have a lot to benefit from in building a presence and we are doing that now as I think you know inch in Shanghai, and we are moving forward in our process with regulators.
We you know that will start as more of an onshore money manager.
Money management to onshore distribution, but our hope is that ultimately opens up in.
Into being able to bring to Chinese investors, our capabilities in global and global investing both fixed income and equity I think that hands down is the biggest opportunity we see and that's why we're investing so aggressively there but beyond that we continue to want to expand our private client business and are doing.
So in adding at base.
And we are continuing to look at what we are doing here in the United States in our retail channel.
Channel. So I think look it's been a continuing investment focus for us since I've been here and on the margin China is where our emphasis is but we continue to add resources, albeit slowly.
In the U.S. and a little bit in Europe.
Okay. Thanks, a lot.
Your next question comes from the line of John Dunn. Please go ahead with your question.
Hi, Evercore ISI.
Maybe just on the mechanics of the pipeline any changes to where demand is coming from <unk>.
As funding times changed over the past year and.
Coming from existing customers, you're getting any new customers any color you could just give around the pipeline.
Sure. Thank you.
Look the pipeline had a poor.
$4.9 billion of additions in the third quarter.
And we it always changes a bit I think what is different now is we have you know with the passage of the secure act, we're seeing considerably more interest.
In customized retirement and that tends to be big DC plans.
And we and so given the size of those they tend to be disproportionate there were also lower fee.
We see that we also have seen interestingly.
Interestingly some very large.
Fixed income.
Investment grade, but that also tends to be lower fee and we've seen.
Cash cash has been moving back, but we don't have a large cash business like some other firms but that.
That introduces volatility both ways to to the pipeline in equities most.
Most of that is.
His client I'm, sorry is consultant Intermediated and therefore in a number of cases are new clients to the firm.
And so it's continued to be a door opener for us both here and in Europe.
And to some degree in Australia, and so that has been positive for us.
And in the alternative space that really is institutional as well and you know when its fund raising.
Mr will say dad or middle market lending they tend to go back to their original investors are there existing investor base, but we continue to add.
Periodically mostly from insurers and others, who were looking for higher yielding assets.
Thank you.
And maybe a little more on the European commercial real estate business.
Maybe what sort of kind of the objective maybe what my potentially look like over the next few years and then how does that region.
For from the U.S.
Well, we want to take advantage.
We want to take advantage of well Ali why don't you answer the question Okay.
Okay. No problem I think we're probably going to set up the same thing. Thanks. Thanks for the question.
Look where were really pleased to have launched that's commercial real estate that business in Europe.
It's important for us for a couple of main reason one is it's a classic example of us being able to.
Being able to lift and shift our knowledge base and our capabilities and Frank little bit of our brand from one region to the other obviously, we had a very strong us commercial real estate that business.
And so launching this in Europe is something very important to us and shows the ability for us to expand on off the second thing that better show that Seth mentioned this in his prepared remarks is.
As importantly, it it ties in to planned commitment from equitable.
It's tied very much to their strategy publicly stated of improving their yield.
Improving their returns and this is a great way to do that we think it's your question on the scales.
Quite well and we do believe that there is more opportunities like this in all to expand geographically from what we have is a good core base you EPS.
Got it thanks very much.
Your next question is from the line of Robert Lee. Please go ahead with your question.
Great. Thanks for taking my follow up so I'm just curious I mean.
Private wealth business you called it out for you your estimate Exelis farms.
Business in.
Arguably that something similarly made in one things tracking Morgan Stanley and you've talked a little bit.
No other plans to kind of roll out that capability more broadly.
Within retail.
It was my question.
Hi, its cancer care in our private wealth business I think that what you've seen from a tax perspective much of what we do is really in that estimate for him and that is a very attractive area for us that we continue to look to leverage in building out.
Overall, the private wealth business, we certainly are looking from a product strategy standpoint across channels and how we can leverage success in one channel to another that has been a focus of our product strategy work here and so we're we're going to continue to look for opportunities to see if there's a way to to leverage that also.
In the retail channel.
Great I think they'd give us one more follow ups just generally.
So generally you guys.
I think the voice in more sensitive.
The strength of your strategies, maybe some years.
Well in terms of good theme I'm just curious.
If you have any key strategies review.
Oh, just passed the Asian.
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Coming quarters again.
In Japan.
It's that let me hand, while we obviously always are monitoring capacity in small and mid cap space and some of that.
His closer and.
And so that would be the most likely stuff.
In the larger cap areas, we do have capacity limits. We we think we have been sufficient room that it shouldn't be impacting EPS anytime in the near future given the level of flows were having.
Great. Thank you for taking my follow.
Thank you and your next question is from the line of Bill Katz.
Okay. Thank you very much taking my question. This morning, just to take a little bit for those on my end just.
Just in terms of the five consultant upgrades you went through that rather quickly I was just wondering if you could maybe step back and just talk about maybe the cumulative opportunity across the product lines there.
Hi, Bill it's set.
Yeah, I think over quickly yet and maybe I should have been slower we got two upgrades for our select long short strategy, we had an upgrade for global core and upgrade for our eurozone equity.
And an upgrade for sustainable growth.
Service.
Look I think there's significant opportunity as we get broader support from the consultant community. The lead time on that is very hard to to guess, it's when they have demand and start we focusing on those spaces.
And so it tends to be episodic. So for example.
We've seen a lot of interest for our global core strategy and now a lot of that was consultant.
Sponsored and it's you know.
They utilized.
A sustainable.
Lands and to evaluate the company's they invest and they had a lot of appeal to institutions, particularly outside the United States, where he has GE is a more important focus we think thats adaptable year in the United States as well.
So we do see it as as an important door opener for us, but I think we would be foolish to try and handicap it and an estimate what the impacts are not that you you were asking so specific before because it's very much on their timeframe and their priority.
That we would we be.
We benefit from it.
Okay, Okay, and just maybe a follow up Ali and thanks for taking the questions. This morning.
Gave some fourth quarter guidance for the comp or just sort of quick.
Quick recollection that that ratio seems to be a little bit higher than what maybe it wasn't in the past couple of years of this for the fourth quarter.
What would be some of the sort of the variables.
For your thinking in terms of what might be you know a range within that no more than 40% how to think about what some of the key drivers might be.
So thanks for the question I guess in an absolute term, 40% isn't isn't higher than what we delivered in the past.
Fourth quarter at least from where we started at the start of you remember when we started this year, we took down the comp ratio by five full points. We started at a much lower level than we had done the past and we we as you've seen we've done our best.
To to ratchet that down over time that being just more efficient across the board.
So so that's just a little bit more context to today.
That question for the.
For the fourth quarter, specifically, but the big variable is going to be in the market.
Yes.
The market is where we are today, we don't think we'll go about 40%, but frankly youre.
Magic eight ball is probably as good as my magic ball about what could happen over the next couple of quarters and so we just want to be very prudent in that and make sure that we are.
Appropriately careful about the comp ratio and making sure we provide for our talent at the firm in the context of what's probably going to be a volatile market.
Okay. Thank you.
Your next question is from the line of Alex Blostein. Please go ahead with your question.
Great Good morning. Thanks.
Hey, guys I was hoping you could expand a little bit on some of the recent commentary you made with respect to your relationship with equitable. They obviously have a stated policy was try to improve their yield on the assets just.
Just like many other insurance companies I guess, but but can you talk a little bit about what strategies that you provide fit well within that what what is sort of the fee rates and opportunities that you see that for yourself.
And I guess lastly is there a bigger almost kind of like investment management agreement dynamic.
You got you guys. Good work out with equitable at some point of time like we've seen with the other sort of like insurance and asset management partnerships. Thanks.
Alex Thanks for the question.
Look we've been building our private alternatives business.
Hand in hand, with Axa initially and now equitable.
And we focus with our middle market lending business with our commercial real estate debt business, we will do the same with Larry.
European commercial real estate business, and we're continuing to look for other interesting.
Areas within private credit to build with the sponsorship of equitable, although they have to separately evaluated and reviewed with appropriateness for their general account, but we work very closely strategically with them in planning out that agenda and we have.
An understanding with them about our process and timing in the ultimate.
Amount of money that we may need for them to deploy and support helping us build out those additional capabilities. We think actually the partnership as it's currently configured with with equitable is the wage work because of the line see interest the policy holders and.
Equitable's any beach.
Shareholders and unitholders respectively.
In that.
Ultimately equitable benefits from the improvement in earnings we get from what are clearly higher feed products and the growth of those new businesses.
Through their 60 plus for 65% holding.
80 units.
These ownerships so.
We think that alignment is pretty natural and I think the coordination between the firms is quite.
Strong and quite interactive so we think it's an important plank in our in our growth strategy.
Thanks.
And your next question is from the line of Dan Fannon. Please go ahead with your question.
Thanks, Good morning, just wanted to follow up on the fee rate.
And kind of the outlook there retail seems to be the soft points in the quarter can you talk about the mix and kind of what are some of the factors are behind that and how we should think about the fee rate I guess in the overall context going forward.
Sure I think that.
So, let's talk about the fee rate and segregated a little bit to give you some extra color. So.
Look on it on a year on year basis, it's it was down 100.
91.9 basis points.
Lots of moving parts, obviously, but but essentially that change is the same changes we saw last quarter on a year on year basis the idea.
Some of the issues and some of whats moving around is effectively the same broadly.
Broadly speaking just to remind you the value equities portion of our a land.
<unk> was lower last quarter year on year this quarter year on year.
And that is a very high the product right. So so that's a mix effect.
That actually happens.
Pretty meaningfully in the private wealth channel that shift around in.
In in value equities happened, there as well, but you're right I mean more broadly we are seeing some pressure as Seth mentioned in his prepared remarks. The answer to your question on fixed income and some of that is in the retail channel as well, but but net net on a year on year basis broadly the same themes that we saw last quarter.
You talked about last quarter and that leads to a second play which is on a quarter on quarter basis were essentially flat right. So essentially flat, we're seeing some fee pressure across the board institutional retail, but nothing remarkable I'd say relative to some of the stuff that we talked about last quarter, but the one thing, though from a going forward perspective.
That work.
Worth emphasizing to your question about about a week.
Well, we'd anticipate NSF messenger, a little bit, but it's just worth underlining is if you look at the pipeline.
The pipeline.
Institutional side has a very broad dispersion right now fee rates right. So yes alternatives yet active equities.
The majority of it a large piece of it but but you will see this and you saw this in some of our monthly Aone aone announcements that were getting.
I think it's Pat Crs mandate getting for these mandates that are really chunky really big mandates.
The 2.6 billion dollar one that we talked about before.
Sure.
And and those just by nature of what they are much lower fee rates. So the dispersion within the pipeline is quite big what that means is.
Although the fee rate will be grinding higher right. It may not be linear lead grinding higher vitesse something fun, that's a lower fee rate and it happens to be a X billion dollars mandate, you might have quarter to quarter volatility in that fee rate, but but the thesis is exactly the same as it's been and we're fortunate to have some of these.
Larger mandates come it happened to be lower fee rate, but again, it's the same thesis as before grinding slightly higher over time, but could be a little bit more volatile quarter to quarter.
Thank you that's helpful and I guess just thinking about.
Spending for next year its earlier I'm sure you're still in the budgeting process was just trying to get a sense of kind of what you are thinking about kind of return to normalization for certain discretionary items and how we should be thinking about you know kind of 2021 expense traject.
Trajectory is for some of those line items.
So you're right, we're going through that process right now and if you look for example at at some of our expenses you disaggregate them right comp and Ben as you know, we're pretty focused on that and some of the help at Nashville is going to give us will certainly flow into that we hope going going forward.
But if you look at for example, promotion and servicing and DNA right. So pro and servicing obviously was a big in this quarter and you've seen so far.
A couple of quarters the drop for for the year. The big driver of that is certainly teeny, which was down a lot right. So you can imagine I think about your own travel schedule think about our own calif schedule.
A lot of capital going on right. So so so our hope for everybody say broadly for the world is that that gets back to a little bit more of a normalized level.
We are however, looking for opportunities to not go back necessarily to the same level, we're saying in 2019 as a whole and we're trying to really think through what the opportunities are for instance.
We have conferences there are much more virtual now I'm sure you all to you as well and is that something that we can do with more permanency.
I want to be clear, we don't expect things into you need to be down as much as they were this year.
They were this year next year, but we're being very very careful and not trying to go back to like the past normal because it might not be the past normal going forward.
All that to say, we'll wait and see most of the clients want it and adjust accordingly, but our hope is there will be some savings right and learnings from what's happened this year on the frontline services area on DNA that the guidance. The same right. We always try to keep that in line with inflation, hopefully a little bit slightly below and.
And you've seen it go up 4% quarter on quarter. This quarter remember that if you exclude some of these onetime charge offs.
It's less than 2% of growth, which is very much within the bound that we want to go up so.
I hope I can do a little bit more color as we think about it going forward.
Great. Thank you.
There are no further questions at this time I'll now hand, the call back to Mr. Griffin for any closing remarks.
Thank you everyone for participating in our conference call today.
Free to contact Investor relations with any further questions and have a great day.
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