Q3 2022 AllianceBernstein Holding LP Earnings Call
[music].
Okay.
Thank you for standing by and welcome to the Alliance Bernstein third quarter 2022 earnings review.
At this time all participants are in a listen only mode.
After these remarks, there will be a question and answer session and I will give you instructions on how to ask questions at that time.
As a reminder, this conference is being recorded and will be available for replay on our website. Shortly after the conclusion of this call.
Now I'd like to turn the conference over to the host for this call head of Investor Relations for AB Mr. Mark Griffin. Please go ahead.
Thank you operator, good morning, everyone and welcome to our third quarter 2022 earnings review this.
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 Alliance Bernstein Dot com.
With us today to discuss the company's results for the quarter are Seth Bernstein, our president and CEO , Keith Burke, COO, and CFO and <unk> head of global client group and private wealth.
Bill Seamers controller, and Chief Accounting Officer will join us for questions. After our prepared remarks.
Some of the information we'll present today is forward looking and subject to certain SEC rules and regulations regarding disclosure so I'd like to point out the safe Harbor language beginning on slide two of our presentation.
You can also find our safe Harbor language in the MD&A of our 10-Q, which we filed earlier this morning.
Under 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.
Now I'll turn it over to Seth.
Good morning, and thank you for joining us today.
The actual market conditions continued to be challenging in the third quarter as investors reacted to both rising geopolitical stresses and further rate increases in the face of accelerating inflation.
Other than investing in cash in certain commodities investors have experienced negative returns year to date, we were not immune to industry wide pressures as we saw outflows from active equity and taxable fixed income, particularly in September when global stock markets declined by 9% or more.
In the quarter, we continued to generate organic growth in alternatives and municipals.
Our realized fee rate improved by 7% year over year, driven by the addition of carve out and an improving asset mix as higher fee active equities and alternatives grew organically on a trailing 12 month basis.
Our institutional pipeline grew to a record $24 7 billion up $14 5 billion sequentially driven by the addition of about seven 5 billion target date mandate $4 6 billion of carve out commitments and additional diversified mandates let's.
Getting into the specifics starting with a firm wide overview on slide four.
Gross sales were $19 8 billion down $12 5 billion or 39% from a year ago, reflecting much lower global retail demand as risk aversion prevailed in the face of volatile markets.
Firm wide active net outflows were $7 8 billion or $6 1 billion, excluding axa redemptions.
Quarter end assets under management of 613 billion declined 17% versus the prior year and 5% sequentially.
An average AUM of 654 billion was down 13% year over year and 5% sequentially.
Slide five shows our quarterly flow trend by channel.
Firm wide third quarter net outflows were $10 5 billion or $6 6 billion, excluding axa redemptions.
Gross sales of $13 8 billion continued to moderate from 2021 is robust levels and we saw net outflows of $5 billion or $2 8 billion, excluding access to $2 billion in passive redemptions.
The macro overlay continued to drive risk off behavior by investors amidst a third consecutive quarter of negative market returns.
Our institutional channel saw net outflows of $6 3 billion or $4 6 billion ex Axa.
Gross sales of $1 9 billion declined from prior quarters amidst weaker activity industrywide with redemptions concentrated among a few accounts.
In private wealth gross sales of $4 $1 billion increase sequentially and net flows rebounded to positive 800 million following tax related outflows last quarter.
Net flows now have been positive for seven of the last nine quarters.
Investment performance as shown on slide six starting with fixed income.
In the third quarter fixed income yields in developed markets. Initially fell on growth concerns been spiked as inflation remains stubbornly high.
Many developed market central banks have term progressively more hawkish and deliberate on rate hikes and quantitative tightening.
Most credit sector returns were challenged during the period.
Within the corporate space high yield how bedfast, while investment grade corporate sold off more given their higher sensitivity to rates.
<unk> fixed income performance over three and five year periods was on par with the market fell below our standards was 53% of assets outperforming over both time periods.
Many of our fixed income strategies rely on a combination of both credit and interest rate exposure, which both performed poorly in the quarter and unusual events as they tend to be negatively correlated.
Our one year performance reflected our positioning in global credit as most of our retail fixed income strategies are broader based than just the U S and focus.
The U S continues to outperform making peer comparisons more challenged.
Turning to equities equity market volatility persisted in the third quarter as investors came to terms with the new reality of high inflation and rising interest rates and rising risk of recession. The MSCI World Index fell by four 4% in the third quarter in local currency terms and was down by 21, 9% year to date.
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In developed markets growth modestly outperformed value for the third quarter, though both were negative and for the year to date period growth underperformed with the Russell 1000 growth index down 37% lagging the Russell 1000 value index at negative 17, 8%.
While our active equities performance remained strong over the long term with 80% of AUM outperforming over the five year period, our one and three year performance continued to lag due to underperformance by composites against benchmarks peers.
<unk> also struggled against benchmarks with just 19% of U S large cap growth managers, and 30% of smid cap growth managers, beating benchmarks year to date.
Importantly, our retail mutual funds continued out to perform the Morningstar peer groups is 63%, 61% and 78% of our equity assets outperformed on this basis over the one three and five year periods.
Factors, such as profitability and balance sheet strength have not provided the typical cushion against spiking volatility because the equity correction. So far has been dominated by inflation, causing buyers to demand higher discount rates.
Not only has this disproportionately weighed on longer duration growth stocks, but reflation strength early in the year fueled cyclical expansion, which favorite value stocks in factors such as leverage to.
Too often management's extrapolated gains investors capitalized extra profits generated by the COVID-19 conditions in stimulus.
Regarding value concerns about recession, and a strong U S dollar, which is negative for commodities have weighed heavily on certain value sectors of the equity market.
The bulk of negative market performance. This year is due the p/e multiple compression rather than earnings erosion.
Our teams continue to focus on identifying management teams that are executing well in a challenging environment.
His attention shifts to earnings delivery, we believe we're well positioned now.
Now I'll review, our clients beginning with retail on slide seven.
Gross sales of $13 8 billion in our retail channel declined by 11 $8 billion over last year's record levels and $3 5 billion sequentially, reflecting buoyant active equity sales last year in third quarters torpid market sentiment across both fixed income and equities.
Net outflows were $5 billion or $2 8 billion, excluding expected axa redemptions of passive variable annuity related accounts.
The overall redemption rate with staple ex axa.
Taxable fixed income net outflows improved substantially by $3 9 billion in the third quarter.
Of note American income sales were up $1 billion sequentially generating $500 million in net inflows for that product.
Silver recovery and flows we saw in the first two months of the quarter. Unfortunately reversed in September .
<unk> led by our SMA Muni tax aware product continued to grow for the ninth consecutive quarter bucking industry wide outflows, a story, which owners will cover in his remarks.
Active equity snapped a remarkable period of 21 straight quarters of growth posting net outflows of $1 5 billion.
Including year to date 2022 retail active equity has posted six consecutive years of positive net flows generating 45 billion in net AUM or nine 4% average annual growth over this period several flow rankings as shown in the bottom right.
<unk> ranked seventh at a 464 in U S equity flow rankings with positive flows in U S driven by large cap growth.
Turning to institutional on slide eight.
Third quarter gross sales of $1 9 billion declined from prior periods in a period of muted activity industry wide.
Net outflows were $6 3 billion or $4 6 billion ex access driven by a few concentrated redemptions, which reflected broader asset allocation or multi manager portfolio restructurings.
Still retain sizeable AUM of each of these clients and in some cases is being considered for new business.
Year to date. This channel has generated $4 6 billion of net inflows were $6 9 billion, excluding axa redemptions.
In the quarter, we experienced record U S and European Cred fundings, driven by equitable, which is now funded approximately half of its multi year $10 billion commitment and permanent capital.
Was the ninth consecutive quarter of alts.
Inflows.
Notably the channels realized fee rate increased by 25% from the prior year period and was up 19% sequentially as we onboard a carve out higher fee rate private alternatives AUM. In addition to record credit fundings.
Our pipeline more than doubled to $24 7 billion at quarter end up $14 5 billion sequentially driven by a $7 $5 billion custom target date mandate for $6 billion of carve out commitments and additional diversified active mandates.
As shown in the bottom left chart private alternatives now represent over 80% of the pipeline's annualized fee base, resulting in a pipeline active fee rate three times the channel average up from two times a few years ago.
Moving to private wealth on slide nine.
Third quarter gross sales of $4 1 billion were even with prior year period and up 25% sequentially.
<unk> improved relative to the tax driven sales in the second quarter, and net inflows were $800 million or 3% annualized organic growth.
The seventh of the last nine quarters in which private wealth has generated net inflows proof that the growth strategy. We articulated earlier this year is resonating.
Our mix continues to shift toward our ultra high net worth $20 million and over clients. The fastest growing client segment growing at more than twice the channel average.
These larger clients tend to be concentrated in our New York, Los Angeles, and San Francisco offices and are influenced by our pre liquidity event planning efforts, which our pipeline remains solid.
Private alternative commitments remain healthy and are up 94% year to date.
Our proprietary direct indexing strategy grew to $1 8 billion up 15% organically year over year, and ESG portfolios and nearly $6 billion continue to resonate with our clients.
I'll finish our business overview with the sell side on slide 10.
Third quarter Bernstein research revenues decreased by 19% year over year and were down 14% sequentially.
Despite more volatile markets in 2022 institutions are trading significantly less amidst an uncertain environment and.
In particular, we saw global asset manager clients reduced trading activity in the United Kingdom, and Asia favoring the U S.
Research checks remained stable sequentially and grew year over year at autonomous reflecting the strength of our brand and the value brought to clients.
We held our 19th annual European strategic decisions conference in September receiving strong client response, our European research team ranked in the top 10 by institutional Investor and we launched coverage on five global sectors. This quarter Korean Internet and media U S restaurants U S Smid cap software U S <unk>.
Tumor credit bureaus and Fintech strategy.
I'll conclude by reviewing the status of our strategic initiatives on slide 11.
Long term performance in equities remained strong while fixed income performance moderated our near term performance in both asset classes reflected challenging markets.
Our third quarter growth was led by private wealth and our alternatives emas offerings, while we continued to grow immunities as well.
Our pipeline more than doubled to a record $24 7 billion with an active free rate three times the channel average we.
We launched our first two active Etfs ultrashort income and tax aware short duration muni supported by equitable.
Briefly on our financial results, which reflect the addition of carve out third quarter adjusted operating income declined by 27% adjusted operating margin was 25, 1% and adjusted earnings and unit holder distributions of <unk> 64 per unit declined 28% versus the prior year.
Now I'm pleased to introduce owners on head of global client group and head of private wealth to review, our differentiated retail and institutional distribution platform owner.
Thanks Ted.
It's a pleasure to be with you today to share with you the key strengths that differentiate our global distribution platform known as the client group within AB.
Integrated across sales marketing product and client service functions. This includes both our institutional and retail distribution teams.
The key points I wish to leave you with today are the following.
We enjoy very strong global access with distinct capabilities across six unique pillars.
If delivered profitable growth across asset classes geographies and vehicles.
Building on this growth we are investing in several high growth convict scenarios.
Including augmenting use of data and technology.
Organic opportunities include the largest of those markets and our platform in conjunction with our partner equitable is structured to deliver continued organic and inorganic growth going forward.
Starting with slide 13, we had a wide global platform responsible for over half a trillion dollars of AUM across six continents split relatively evenly between institutional and retail with local presence in all major asset management geographies across APAC, EMEA and Latin America.
In addition to the U S.
We have regional expertise on local coverage.
Elements that enabled us to deliver complete solutions to clients.
For example, we have a strong competitively advantaged position Asia Pacific, having built local businesses overall over several decades.
Supported by strong long term investment performance from our tenured experienced investment teams.
Our global distribution platform has driven sustained organic growth in recent years well in excess of the peer group.
Active equities and alternatives and multi asset offerings led the way.
Within fixed income <unk> strategies in the U S also have outgrown the peers.
In active equities, we have grown organically by over 4% annualized over both the three and five year periods or nearly 10 percentage points above the peer group average.
And in alternatives and multi asset our track record has accelerated in recent years to nearly double digit annualized organic growth with both alternatives and custom target date mandate contributing.
Turning to slide 15.
We believe our sustained growth has been achieved due to a set of several differentiating capabilities, including the following.
Comprehensive local in market coverage owned by over 250 sales professionals that have poured strong relationships with leading global and regional intermediaries asset owners and consultants. These sales professionals are supported by local market specialists across product and marketing.
A broad investment product range, which allows us to leverage our scale relationships with key clients <unk>.
Examples include our award winning sustainable platform with global and U S sustainable thematic equity complemented by fixed income offerings as well.
Vehicle flexibility enables us to meet global demand and local endpoint needs. For example, we launched our <unk> in 2019, enabling us to target the UK markets with a local wrapper.
Moving to the top right, we supplement with value added services, including client capable to building such as our <unk> Advisory Institute, which provide practice management wealth planning and wealth management expertise to our partner firms.
Our institutional solutions group provides sophisticated capital market research strategies tools and solutions to optimize portfolio outcomes.
Fortunately <unk> strong brand maintained significant awareness globally.
As Ted mentioned earlier, we were recently ranked sixth most trusted financial company by Investor's business Daily.
And the AB brand was ranked fourth in all of APAC last year in our study by Broadridge.
We continue to develop data analytics capabilities, such as our newly launched digital sales thats going to the U S retail <unk>.
Enabling smart client prospecting targeting cross selling and servicing utilizing our new oculus platform.
Leveraging these tools, we continue to build momentum as sustained growth in U S retail historically underpenetrated market for us.
On the next few slides, we highlight a few examples of our capabilities.
Our U S. Large cap growth service provides an excellent example of our differentiated distribution capabilities.
Managed by a stable tenured investment team with a strong long term track record we have expanded distribution of this global relevant product in multiple vehicles to gain local access in diverse markets.
This approach has led to nine consecutive years of organic growth in our service with now nearly $50 billion of global AUM.
As shown in the table on the bottom left our relationships have enabled us to launch multiple local vehicles with large distribution partners, enabling global penetration across these platforms.
At the same time these vehicles give us the flexibility to work with regional partners for their local market.
The bottom right shows the progression of vehicle expansion with Korea local U S retail SMA.
CIP and Taiwan local vehicles all added in recent years.
The breadth of our U S retail footprint can be shown through the growth in municipal separate managed accounts SMA across our U S retail platform.
With over 10 consecutive years of organic growth, our Muni SMA business has grown to over $16 billion of AUM.
Led by Muni tax aware and including high quality Muni income and custom Muni.
The number of advisors, who use these products has grown 15 fold over the last decade with nearly twice that rate of growth in the number of accounts.
In fact, SMA across asset classes now make up 27% of our U S retail AUM more than four times, what they were in 2012.
Our new custom mini platform, which has enabled us to direct index and equity SMA uniquely positions us with the high net worth segment of financial Advisors. We are very excited about our new custom unit partnerships with multiple national and independent broker dealers as well as R&D.
Our newly launched <unk> tax aware short duration municipal ETF.
Potentially in a series will also help us continue to build our market share in this category.
The bottom right shows the strong compound growth rates, we have experienced at several of our distribution partners over this period.
Our defined contribution customer target date on retirement income solutions provide another example of our differentiated distribution.
We have grown this business organically by 15% annualized since 2011 to one which we now manage over 60 billion AUM or 29 custom target date on lifetime income clients across the U S and UK.
We were in an early innovator in delivering an implant guaranteed income solution.
Our lifetime income strategy is celebrating its 10th anniversary managing over 8 billion assets, including $3 4 billion secured income benefits for more than 120000 participants.
Our proprietary technology platform provides us with the connectivity to turn record keepers with plans for expansion and allows us to delivering a differentiated insurer benefits marketplace, featuring five insurers, including our partner equitable.
These solutions enable us to pursue strategic client partnerships with a lineup that can be used across public and private DC plans.
Specific strategic partnerships include.
A large state public fund for whom we manage the DC plans custom target date fund.
The glide path as well as several underlying sleeves across asset classes and are now being considered for their plants core menu within ESG oriented equity strategy.
And large aerospace defense company, which also uses our custom target date services and has entrusted our firm with a fixed income allocation in the glide path.
They are also now actively considering a custom lifetime income solution.
Across products vehicles on geography, we are focusing our efforts and investments in growth markets.
Private debt a large market in which we recently expanded our position through the additional carve out is expected to grow at a low double digit rate going forward.
Insurance is an important opportunity given our val developed capabilities with equitable that we're investing to grow through additional third party relationships.
In terms of vehicles, we recently launched our first two active Etfs ABL fell short income and AB tax aware short duration municipal.
First step towards introducing an innovative and differentiated global ETF, offering which will supplement our core capabilities.
We have proven expertise in managing strategies in or similar to these categories.
And consistent indications of interest from existing clients, where liquidity tools in this space.
Additionally, these etfs will allow us to reach a wider client base overtime.
We will continue to grow our U S retail SMA as previous dimensions, and we are investing in China, EMEA and U S retail all large market opportunities for ABB.
China being a long term view with EMEA and U S retail presenting substantial near term opportunity to gain share.
A few words on the insurance opportunity we see.
Our 40 years of experience in instruments managements with significant client assets of equitable holdings, along with our expense managing access assets positions us well to grow this business.
We have over 60 dedicated experts globally, who contribute to the 157 billion that we managed in this space.
<unk> spanning across public and private markets and include a dedicated insurance portfolio management team.
We offer a service oriented engagements with insurance specific solutions analytics client servicing and operations in our reporting.
On the right side, we show examples of recent client partnerships, where we have provided a range of solutions to a diverse set of institutions, including complex restructuring to optimize yields private alternatives than custom emerging market debt.
Notably two thirds of our recent U S credit fund number for rates was from insurers excluding equitable.
Finally, our structure, including our ability to leverage our partnership with equitable and our proprietary private wealth business provides a strong track record of growing both organic and inorganic channels through a strong multiplier effects.
We have successfully brought on multiple investment teams over the past decade and scale them through localized relationships on vehicles and tailored to specific channels.
As exemplified with CCH capital Nahua global core product.
Having grown four 4% to $13 billion AUM over the eight years since acquisition global core is now diversified across geographies with exposure in both APAC and EMEA. In addition to the U S and channels have grown across the institutional retail and private wealth.
Importantly, our partnership with equitable holdings has enabled our private alternatives business to grow third party capital by fourfold from its original seat.
Look forward to growing this business further with the $10 billion that equitable is committed to our private market strategies as well as with the additional carve out to which equitable has already commented at $750 million.
In summary, <unk> has uniquely global access to diverse local markets.
With distinct distribution capabilities.
<unk> delivered results driving profitable organic growth.
We're investing in high conviction high growth areas and our platform in conjunction with our partner equitable is structured to deliver both organic and inorganic growth going forward now.
Now I'll turn the call over to Kate who will do the financials Dave.
Sure.
Thanks Andrea.
The GAAP income statement on slide 23 third quarter GAAP net revenues of 1 billion decreased 10% from the prior year period operating income of $170 million decreased 39% and operating margin of 18, 3% decreased by 720 basis points GAAP EPS of <unk> 56 and <unk>.
Quarter to creased by 37% year over year.
As a reminder, this was the first quarter, including carve out which added 12 billion of <unk> at.
At approximately a 1% fee rate and margins consistent with our mature private alternatives businesses.
The deal remains slightly accretive to adjusted earnings in the second half of 2022 and the full year 2023.
I'll focus my remarks from here on our adjusted results, which removes the effect of certain items that are not considered part of our core operating business.
We base, our distribution to unit holders and our adjusted results, which we provide in addition to and not as a substitute for our GAAP results.
Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation Appendix press release and 10-Q.
Alright, adjusted financial highlights are shown on slide 24, which I'll touch on as they walk through the P&L.
<unk> hundred 95.
On slide 25, beginning with revenues net revenues of $814 million decreased 8% versus the prior year period.
Sequentially.
Base fees decreased 7% versus the prior year period, as 13% lower average AUR was driven by market declines the third quarter fee rate of 41 four basis points was up 7% year over year, Kevin by the addition of higher fee rate carve out base fees and by asset mix and up 5% sequentially.
Third quarter performance fees of $10 million declined by $8 million from the prior year period.
Given current market, we now see full year 2022 performance fees tracking below our prior guidance range or slightly below 2019 levels.
Third quarter revenues for Bernstein Research services decreased 19% from the prior year period, driven by lower customer trading activity in Europe , and Asia due to the prevailing macro economic environment.
Investment gains were $10 million in the third quarter driven by the sale of our minority investment in next capital grid as compared to a slight loss in the prior year period of less than $1 million.
Moving to adjusted expenses all in.
Our total third quarter operating expenses of $610 million increased by 1% year over year and were up 3% sequentially.
Total compensation and benefits expense declined by 2% from the prior year period, reflecting lower AUR driven revenue and performance fees.
Set by a higher compensation ratio of 51% of adjusted net revenues as compared with 48% in the prior year period lower incentive compensation.
Compensation reflected lower AUM, partially offset by higher based compensation driven by an increase in average head count.
And as typical in this time of year and the fourth quarter, we will true up our compensation ratio to balance market conditions in the year to date accrual rate.
Through the first three quarters of the year, we accrued compensation at a 49% rate comprised at 48% in each of the first two quarters and 51% in the third quarter.
Given market conditions, which includes the S&P 500, and Barclays U S aggregate first down 5% in the third quarter, we expect the compensation ratio should remain elevated in the fourth quarter of 2022.
As always we plan to pay competitively based on our performance given that our people are our most important asset.
As a reminder, the compensation ratio is sensitive to variability in the asset mix and two the mix due to year end performance of performance fee eligible funds.
Promotion and servicing costs increased by 8% from the prior year period, as peony and sales and client related meetings increased compared with depressed levels in the prior year period due to the pandemic offset by lower trade execution and clearance costs.
Essentially <unk> and meeting expense declined we continue to manage second half commission and servicing spend to be below first half levels.
G&A expenses increased 7% in the third quarter versus the prior year period, reflecting the negative impact of a higher U S. Dollar. The addition of carve out and continued strategic investments in growth and efficiency technology projects.
For the full year, we continue to target G&A growth in the mid single digits.
Third quarter operating income of $204 million decreased by 27% versus the prior year period third quarter operating margin of 25, 1% was down 670 basis points year on year.
Our margin comparisons in 2020 to reflect the meaningful impact of the year to date market correction. Additionally, higher inflation continuation of select growth related investments rebounding T&D expenses from prior year, covet and disclose and lower performance fees are all impacting this year's performance.
As outlined in the appendix of our presentation third quarter earnings excludes certain items, which are not part of our core business operations in the third quarter adjusted operating earnings were $24 million or <unk> <unk> per unit above GAAP operating earnings due primarily to acquisition related <unk>.
<unk>.
Amortization of intangible assets, which are included in acquisition related expenses in our GAAP to adjusted earnings reconciliation.
It's by $11 million, given the Carlile acquisition.
In the third quarter, we realized a one time tax benefit of $5 million, resulting in effective tax rate for alliance mentioned LP a three 1%.
We continue to expect an effective tax rate for 2022, approximately five to five 5%.
We continue to expect the Nashville relocation will be accretive for the full year 2022 with compensation related savings more than offsetting increased occupancy costs.
Now we're pleased to answer your questions operator.
Thank you.
As a reminder to ask a question. Please press star one one.
Please limit your initial questions to queue in order to provide all callers an opportunity to ask questions. You are welcome to return to the queue.
To ask any additional follow up question again, Thats star one to ask a question.
One moment, while we compile the Q&A roster.
And our first question will come from Craig Siegenthaler from Bank of America. Your line is open.
Good morning, Seth.
Sure.
Good morning, Craig.
So my first one is on the potential for a large client reallocations next year.
And this actually might be a good one for owner given that he has joined us today, but with interest rates expected to stabilize next year can you talk about any pent up demand from both retail and institutional investors to allocate back into fixed income.
And also kind of a second parter.
Do you think your soft our one year investment performance in fixed income could limit your ability to win these reallocations are though well there'll be more focused on our longer term track records.
So let me start and then I'm going to ask Helena to two.
Add in where I am.
Missing Scott.
Look we as rates have risen and yields have become pretty attractive, particularly in credit.
Are seeing.
Smattering of interest both retail and institutional.
For example, AIP.
American income actually had positive flows in the third quarter.
Which I think is an indication.
People are beginning to see value in credit.
So I do see the potential for more react allocations, whether that happens in the fourth quarter or the first quarter.
Harder to say I'd, probably would suspect it would be after the end of the year as we're getting close to the end now.
I think with regard to performance well there has been.
Deterioration in the fixed income performance, but our clients recognize that.
And risk off environment, we tend to underperform.
Just given our heavy allocation to carry the heavy allocation to credit generally and we had a weird situation this year, which I hope doesn't reoccur and frankly hasnt.
In October which is we've had.
Rates and credit deteriorating at the same time typically they have a negative correlation to one another.
So the barbell, we utilize in a number of our retail strategies tend to be.
We hedged for that kind of event. This has been an unusual period.
So I don't know that october's trend will continue but.
That's a more normalized behavior. So it's possible why don't you add an owner.
Absolutely.
<unk> operates at a higher level will be in general a positive for us.
Robert to comment on specific channels and products. In addition to access mentioned I will highlight a couple of other areas.
One of our high growth areas as I highlighted in my remarks is tax exempt munis strategies.
<unk> that category.
We'll have some momentum and that should help us.
Both growth.
Market share and expand the platform.
And then in terms of taxable fixed income.
We believe that should help us with our Asia franchise, given the large part of our retail taxable fixed income is.
Asia centric and then.
It's a much lower scale back Latam retailers and other geography that was depressed this year should benefit from that.
On the institutional side.
Definitely there will be some reallocations.
And definitely can help us in a couple of channels both in insurance and pension plans that being said I think being precise about the timing is hard. So we don't know when the rates will stabilize precisely and at what level.
And that uncertainty will create that thing some lack of precision in the timing.
Thank you and just as my follow up.
I wondered if you had any insight into tax loss harvesting activity just given it's been such a bad year for both equities and bonds.
And I guess this this.
What happened in the fourth quarter and it would impact equities in taxable fixed income, but any perspective on any kind of near term headwinds from that would be I appreciate it.
Absolutely we have been.
Seeing that.
Obviously, the fourth quarter is where you see the bulk of the tax loss harvesting activity.
It tends to be temporary.
The good news.
But given the declines in the indices and given tax exempt and Muni indices are not immune from that we definitely see some elevated tax loss harvesting.
Sure.
But that being said as I mentioned in most of the cases that they have had a temporary move and that will be in my opinion more than offset by future flows again timing is hard to predict on a net basis is a positive in the short term that will create definitely some pressure.
Thank you your honor.
Thank you.
One moment for our next question please.
And our next question will come from Alexander <unk> from Goldman Sachs. Your line is open.
Okay.
Hey, good morning, everybody. Thank you for taking the question.
I wanted to on our I wanted to start with.
A question for you around the insurance business, you highlighted that working with other insurance companies outside of equitable.
As an opportunity you see for alliance Bernstein, and obviously with a more expanded.
Products, including carve out you guys are should be well positioned to do that so maybe just expand on how you're going about this strategy what vehicles and products.
You are likely to utilize and as you think about the relationship with equitable.
Is that a tailwind or is that a headwind right because at the end of the day.
Having a large insurance company and working on them side by side.
As you are unique set of knowledge base, and perhaps a competitive advantage, but at the same time.
They have a large equity stake in <unk>, so which one of these things kind of went out.
No great.
Questions, Let me start from the end and make my way through the beginning.
Obviously, we think about the insurance opportunity on a global basis, and we think about it across our insurance sub sectors life insurance property and casualty and health.
The good news is that the space that equitable participates in an it leader and is only a portion of the markets and that U S. Life market is quite concentrated particularly if you focus on large and Youtube providers.
Obviously, we would be always sensitive to any perceived conflicts.
But that is only a handful of insurers and that doesn't necessarily reduce the appeal of the opportunity or the size of the addressable market in terms of how we are pursuing this opportunity as I mentioned in my remarks, we created insurance dedicated capability is front to back so that insurance dedicated services will help us to.
We added cater to a liability driven investor audience, which is different and that when it comes to products and services. As you highlighted we will leverage both our alternatives platform, particularly private credits not only AAV carve out, but the broader lending capabilities real estate lending being another one which is good.
Strength in terms of fundings in the third quarter bulk U S grad than European credit and.
Then finally, we are definitely working on a number of structures that makes our solutions more capital efficient for insurance balance sheets, and we have a pipeline of products.
Product opportunities that is that's coming so watch us in the insurance space. Its long term strategy, but we will continue to focus on it.
Great. That's very helpful. Thanks, and then my.
Second question.
As their own Carville, just was hoping to get to this a little bit more.
Given it's been under the alliance purchasing umbrella for a couple of months now so I guess one specific question related to the $4 6 billion in commitments that you highlighted in the pipeline.
Which products are those and how should we think about translating that into our fee growth to the bill on committed or deployed and if.
It is unemployed I guess, how are they thinking about the opportunities for putting capital to work in this environment.
Sure.
<unk>.
B diverse across several different strategies.
It includes.
The flagship credit value. It includes the clean energy strategies and then some of the more bespoke.
Other add on services as well.
Emerging markets et cetera.
In terms of that.
The funding period.
We will see we have seen some fundings in.
All of these kind of strategies, but.
Obviously, it will depend on the timing, we don't have a clear sense for how the market environment will impact that a little bit of a different thing for AB carve out because it's opportunistic distressed as you know can be counter cyclical thats made it hard for us to be very precise, but particularly in some of these strategies like clean air.
Energy et cetera, we expect more funding.
Great. Thanks, so much.
Thank you.
One on net for our next question. Please.
And our next question will come from Bill Katz from Credit Suisse. Your line is open.
Okay. Thank you very much for taking the questions. This morning, and the extra discussion.
This is more of a qualification.
The question, but part one is just in terms of the incremental pickup in the fee rate both in the institutional channel as well as overall I'm guessing is just a weighted average impact of Carlyle.
But are there any sort of catch up fees underneath that and the broader question is.
As you think about your overall pipeline, which grew nicely.
What what's happening in terms of the deployment of that is that a couple of quarters is normally the case or is that getting elongated in any way and I was just wondering if you could add to Alex question in terms of.
And when do you pay fees on the $4 billion. Thank you.
Well thanks for the question I'll start on the fee rate side look overall I would just say we have confidence that over the long over time, our fee rate is going to continue to work its way higher what we saw here during the quarter is that we experience positive fee rate in all three.
Channels that improvement was largely driven by a favorable mix to less alternatives. So.
So carve out played a part in that but it was not all of it as well as continued.
Relative.
Active equities and outflows in some of our relative fixed income business is so our view and when you look at the institutional pipeline is that youre going to we're going to be at that three times level that Seth mentioned in terms of the active pipeline fee rate versus our institutional average.
We expect that that will be supportive over time, but we do also highlight that there could be volatility when we have those larger low fee DC mandates. This pipeline does include that $7 5 billion target date mandate that was added in the third quarter and then add that one works its way through that.
That will ultimately show up in the quarterly rate.
Okay, just a follow up to that if you could just ask a question in turn sorry to belabor it but just the pipeline itself in terms of the timing.
Timing in terms of deployment, just given what seems to be a bit of a slowdown in decision, making and then on the carve out of the $4 billion.
Are those paid fee rates basically rates paid on committed.
Committed capital deploy capital and there's an opportunity for performance fees.
Yes in terms of the timing.
Keith mentioned in their remarks, we typically take nine to 12 month view when we look at the nature of.
The pipeline.
We are optimistic about the fourth quarter, but it's hard to be short term. So there is definitely uncertainty.
In terms of the carve out products.
All of the carve out products tend to have our performance fees.
And that's why you need to factor in both the management fees and performance fees.
The other question.
In terms of the.
The nature of the fundings et cetera.
Again, it will be it will depend on the underlying.
Asset class in terms of deployments for.
For instance, we will.
Work with equitable on.
U S residential mortgages as you know that was one of the synergies with equitable. That's the set went out at about $50 million. So we have made to the high kind of certainty around that but we will again get deployed based on the market opportunities. So those are a few highlights I would give you in terms of the nature of that and it's a <unk>.
Pretty diverse pipeline.
Pipeline. The one thing I haven't mentioned in my previous remarks is also that.
The CLO part of the overall.
Platform.
But bill just to be clear that the fees kick in on funding for the most part.
Okay terrific I think I spoke to a lot of questions. There. Thank you.
Thank you one moment for our next question. Please.
And our next question will come from John Dunn from Evercore ISI. Your line is open.
Maybe just to extend a little bit.
Global distribution.
Can you give us a state of the conversations of advisors in each of the different major regional intermediary market.
Nature of the advisors in terms of how the nature of our distribution partnerships.
How to interpret the question.
Trying to get at more of like how the conversations are.
Differing in each of the major intermediary market.
By regions of the color by region.
Yes, so let me try to tackle that by geography.
U S retail we touched on it obviously.
<unk> harvest thing and.
Thinking about the asset reallocation is that big trends, we continue to see.
Continued interest in our short term duration.
Taxable fixed income as well as munis strategies and then some advisers actually.
Find the entry point for the equity strategies attractive again, it's very slight goodbye distribution platform. So it could vary.
And then alternatives as I think you're a secular trend that said I think we have seen a little slowdown looking at the market.
In.
Asia Pac.
Given some of the challenges also with the Chinese equity market et cetera. It has been a tough.
The environments majority of our Asia retail tends to be our income oriented.
Some Asia ex Japan.
Honestly that interest continues.
But there is a wait and see to make sure the right stabilized before people jumped back into very attractive yield to worse.
Kind of strategies.
Japan, obviously the yen weakness.
Kind of drives interest in U S denominated assets, we definitely benefited from that in addition to our.
Our strong presence in equities in Japan, and although it slowed down on a relative basis I think the interest seems to be still relatively strong.
In Japan.
EMEA and lets out probably are the most challenged kind of geographies EMEA given the approximate to Russia, Ukraine, Straits et cetera, I think theres been sales levels have been more depressed.
And I don't think there has been a major.
Kind of team that I would call out at the product level other than a little bit of that.
First risk off kind.
Kind of environments and optimistic.
Sure.
Government changes et cetera in multiple markets like UK and Italy.
Similar a lot of.
Changes in administrations risk off environment and given those are also high emerging markets fixed income buyers I think they've been on the on the sidelines. So all in all.
Global trend is typically risk off stay on the sidelines stay on the short end of the duration curve and provide.
Our state liquids or have dry power their desktop.
Characterize.
Very helpful.
And then can you just talk about the outlook for replenishment of the unfunded pipeline what's your.
Are you at a point now where you guys can maintain a higher level.
Relative to the past.
I mean, that's very difficult to predict.
But we believe in the strength of our client franchise then.
The capabilities via highlighted MRI.
Presentation's.
There are a lot of large U S pension plans I mean can we and other retirement mandates that spirit of possible but.
Hard to give a very precise precise number what I can tell you is that given the <unk>.
Product mix, we have in the.
Our fee levels.
Have highlighted I think the revenue contribution will definitely be attractive to our starting point, particularly outside retirement, but start to be very precise on the AUM.
Thanks very much.
Thank you one moment for our next question. Please.
And we will take our next question from Dan Fannon from Jefferies. Your line is open.
Thanks, Good morning was hoping to talk a little bit more about carve out and the performance that they've been generating.
Thinking about it in some of their flagship strategies, if you could help.
Put some numbers around that or ranking.
To get a sense of.
How that's tracking and then.
Again, the future kind of pipeline and opportunity and maybe the biggest buckets that you see in terms of future fund raising in terms of the styles that would be helpful as well.
Well, let me start and owner May jump in again.
But.
They've raised roughly 2 billion a little over $2 billion since.
Our announcements.
Or actually since our closing.
And so we're very pleased with that.
Im sorry since announcement and so we're very pleased with the pace of about as Hunter alluded to it's got to be a more challenging market generally out there just given the volatility.
That the world is seeing.
We've been out marketing, our energy opportunities fund to a pretty broad reception and its really the first time, we are utilizing the <unk>.
Institutional sales force as part of that so far that's been beneficial to us we've gotten more looks than then.
Then carve out had experienced in the past, but it's still early days and that that process. We're also kind of setting up for.
Theyre more distressed strategies as we move forward.
There is interest in doing it and.
I think that's important and it's a traditional strength of the firm and our broader performance has continued to be in line or outperforming most of their competitors. So.
They come balanced the story is good there I think finally.
Just to recognize that the mandate with equitable on resi mortgages is in process of being.
Funded and further that opens the way for more opportunities with our insurance clients.
So on balance it's early but were pretty favorable on where we stand.
Yes, the only.
As the retail angle here.
Historically.
<unk> has been more geared towards the institutional channel I think one of the synergies, we really like and the combination is our ability to go deeper into retail on high network channels.
Through our proprietary private wealth channel, but also more broadly through our.
Intermediary partners.
We are working on a couple of more retail high net worth oriented products, leveraging our product structuring expert expertise bdcs rights interval funds and we will test the market with those kind of extensions so that all phones yet another.
Venue.
Which couldnt be captured in the institutional pipeline typically so we are optimistic about the long term prospects there.
Great. Thanks for taking my question.
Thank you and we do have time for one more question.
And we will take our last question from Bill Katz from Credit Suisse. Your line is open.
Excellent. Thanks, so much for taking the extra set of questions. So too.
Could you give me a sense of where you are in terms of alternative penetration into wealth management platform today, and what do you think that that ratio can get to and then just given your commentary about the growth initiatives. As you look ahead, one of the themes coming out of this quarter certainly is the challenge of balancing lower revenues again sort of ongoing spend how should we be thinking about expense growth rate.
Into 2023, thank you.
Okay. Thanks for let me take that.
Penetration question.
To confirm you are interested in our penetration of our private wealth channel right. Yes. Thank you Andre.
Yes, absolutely our alternatives platform in the private wealth channel currently represents roughly 10% of AUM.
AUM.
We had very strong momentum.
Even without any fundings to carve out so year to date to alternative raises have been.
Our up 95%.
And 4% to 5% of our AUM is but the accounts that have private alternative exposure.
So I think it's.
Very solid story for tourism, one we demonstrated that we can offer alternatives as part of our asset allocation too.
Our client base and as we add more <unk>.
Larger accounts, if you look at inflows net flows more than three quarters comps from 20 plus million accounts, which tend to be higher buyers of alternatives and given there is still runway with.
Clients that didn't invest in alternatives and 10% being probably lower than what you could think about as steady state. There's a lot of runway there.
In some of the third party channels.
Some of the third party has advocated for as of locations up to 30% into alternatives. So you can think about that the runway is quite significant.
And just to clarify I said energy opportunities that make clean energy with regard to carve out.
And one quick clarification on my side on the performance fees the majority of the carve out strategies.
<unk> fees it might not be 100%.
So then I'll just follow up quickly on the balance between our strategic investments and our expense management.
We are going to continue on the path of trying to be very disciplined overall on our discretionary spending and cost base, while continuing to sort of balance the strategic initiatives and capitalizing on our existing strengths.
And then where we're looking more on the margin, where we can reduce spending in the near term without jeopardizing. The long term goals. So we have a number of technology investments for example underway to support our growth initiatives in terms of spreading our infrastructure such as in the insurance space as owners are talking about or the Muni sma's.
Multi asset offerings ETF launches all of those we think are good long term capabilities and so we're going to continue to support that but on the but we've always maintained a very strong cost discipline and look to also to try to leverage automation.
Things like moving.
Our systems to the public cloud so for the full year, we're going to continue to targeted G&A number in the mid single digits.
And then on the permission servicing side, you've seen us have some discipline. There we do expect it to continue to decline sequentially.
Here in the second half of the year as compared to the first but above still high.
Hi, prior year because of the pandemic impact.
And ultimately as we look ahead, it's going to be.
The yen about balancing those priorities as well as rewarding and retaining that that that talent team. The talented teams that we have so I think that that's the best answer I can give you is that we're going to continue to be very disciplined.
Our approach, but we are not going to be short sighted and supporting our longer term initiatives.
Terrific. Thanks, so much.
Thank you there are no further questions at this time, Mr. Griffin and I will turn the call back to you.
Thank you everyone for joining us today on our conference call feel free to reach out to Investor relations with any further questions and have a great day.
The conference will begin shortly.
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