AllianceBernstein Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2024

There are 10 speakers on the call.

Operator

Thank you for standing by and welcome to the Alliance Bernstein Second Quarter 2024 Earnings Review. At this time, all participants are in a listen only mode. After the 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. I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB.

Operator

Mr. Mark Griffin, please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to our Q2 2024 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 at www.alliancebernstein.com. With us today to discuss the company's results for the quarter are Seth Bernstein, President and CEO and Jackie Marks, CFO. Oner Erzahn, Head of Global Client Group and Private Wealth will join us for questions after our prepared remarks.

Speaker 1

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 on Slide 2 of our presentation. You can also find our Safe Harbor language in the MD and A of our 10 Q, which we filed this morning. We base our distribution to unitholders on 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 our 10 Q.

Speaker 1

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.

Speaker 2

Good morning, and thank you for joining us today. In the Q2, AB's diversified global offering continued to drive sustained organic growth, led by strength in both taxable and tax exempt fixed income. We saw further market share gains in U. S. Retail, Japan equities and APAC ex Japan fixed Income.

Speaker 2

Our Private Markets business grew to $64,000,000,000 with fundings driven by private credit and real estate equity. As well Equitable completed its initial $10,000,000,000 commitment. Notably, our Private Wealth business had its strongest alternative raise ever. And importantly, investment performance improved in equities and remained healthy in fixed income. As Jackie will detail, AB's adjusted operating margin was 30.8%, up 3 80 basis points year on year as we executed on our multi year margin improvement plan.

Speaker 2

Taking a step back, we're benefiting from the progress made from our long term strategy of building out distribution in U. S. Retail and investing in private wealth. While it is early days, we're enthusiastic about what we're seeing in our insurance vehicle and our start in China has been good despite what are challenging local markets. Now let's get into the specifics, starting with a firm wide overview on Slide 4.

Speaker 2

2nd quarter gross sales were $31,900,000,000 up $9,500,000,000 or 42% from a year ago period. Firmwide active net inflows were $1,300,000,000 or 1% annualized organic growth. Quarter end assets under management of $770,000,000,000 increased by 11% year over year and 1% from the end of the first quarter. And 2nd quarter average assets under management were up 11% year over year and 2% sequentially. Slide 5 shows our quarterly flow trend by channel.

Speaker 2

Firmwide 2nd quarter net inflows were $900,000,000 Strong Retail gross sales of $23,200,000,000 increased 41% year over year, driven by both active fixed income and equities. Net inflows were $2,800,000,000 or 4% annualized organic as we continued to gain share in fixed income and active equities, notably in the U. S. Our institutional channel saw gross sales of $3,300,000,000 while net outflows were $1,800,000,000 as active equity outflows outweighed insurance led fixed income growth. In Private Wealth, gross sales remained strong at $5,400,000,000 with slight net outflows reflecting seasonal tax related selling.

Speaker 2

Investment performance is shown on Slide 6. Starting with fixed income. The Bloomberg Global Aggregate Bond Index ended lower by 1.2% in the 2nd quarter as investment grade corporate bond markets in the U. S. And Europe delivered positive returns, both absolute and relative over government bonds.

Speaker 2

High yield markets yet again outperformed both investment grade and governments. AB's fixed income performance remained healthy with 89% of assets outperforming over the 1 year period, 68% over the 3 year period and 60% over the 5 year periods. This performance translated to a 9% annualized organic growth across our fixed income asset base this quarter with double digit growth in institutional taxable and in municipals. We're encouraged by growing client interest in our systematic suite, which leverages our quantitative factor based research for which we've now launched 4 retail vehicles, including 2 Luxembourg domiciled UCITS funds announced earlier this week, in addition to segregated mandates for institutional clients. With $6,400,000,000,000 of cash sitting on the sidelines today, it stands to reason that bond flow should benefit handsomely as the Fed gets closer to lowering interest rates, which we expect later this year.

Speaker 2

Turning to equities. The U. S. Equity markets rally began in the 2nd quarter, with the S and P 500 index gaining 4.3%, primarily driven by larger technology stocks as market breadth deteriorated during the quarter. Value underperformed growth, while small caps lagged large caps.

Speaker 2

Importantly, our investment performance improved as our large retail funds outperformed, including several foreign domiciled funds that we now show ranked against their Morningstar peer groups for all periods. 68%, 65% and 64% of our equity assets outperformed over the 1, 3 5 year periods respectively. While we continue to see outflows in equities in the quarter, recent outflows have slowed and we are seeing increased opportunities with clients. Specifically, we see increased interest in value giving meaningful valuation spreads to growth, and we were encouraged by a $200,000,000 win in the quarter for U. S.

Speaker 2

Large cap value for which relative performance is strong. We're also seeing momentum build for our new European global growth service across both institutional and retail channels. Now I'll review our client channels beginning with retail on Slide 7. Gross sales remained robust to $23,000,000,000 up 41% year over year. Net inflows of $2,800,000,000 reflected our strong geographic and product breadth led by munis, high income and U.

Speaker 2

S. Large cap growth. In taxable fixed income, we grew organically at 7% annualized with our 2 large offshore high income funds both ranking 1st in their categories for net inflows and mortgage income ranking 2nd in its category. We're pleased that mortgage income, a barbell strategy with a short duration profile that complements our income suite across the $1,000,000,000 mark this quarter, with strong rankings across a 10 year track record. Munis posted net inflows of $1,500,000,000 a 17% annualized organic growth rate, positive 15 out of the last 16 quarters.

Speaker 2

Notably, active equity sales were up over both periods with net inflows of $400,000,000 driven by U. S. Large cap growth. We continue to see strength in retail active equity July to date. In the quarter, we launched 2 more active ETFs and we converted another one last week.

Speaker 2

Our 15 ETFs, which are principally new services rather than existing services and new wrappers, now total $4,600,000,000 including our first ETF year, which now exceeds 1,000,000,000 dollars Turning to Institutional on Slide 8. 2nd quarter gross sales were $3,300,000,000 up $1,800,000,000 from a year ago and in line sequentially. Net outflows of $1,800,000,000 improved versus prior periods. Insurance led fixed income growth was outweighed by active equity redemptions. Encouragingly, we saw $3,200,000,000 of fundings from our pipeline this quarter, including over $1,000,000,000 at AB CarVal.

Speaker 2

And Equitable completed its initial $10,000,000,000 commitment to our private markets program with fundings in the quarter to AB CarVal's residential mortgage strategy and U. S. Credit. The pipeline was $9,800,000,000 at quarter end, down $1,700,000,000 sequentially. Pipeline additions, also $1,700,000,000 were driven primarily by private placements, Global Plus fixed income and short duration wins.

Speaker 2

Moving to Private Wealth on Slide 9. 2nd quarter gross sales of $5,400,000,000 were up 20% year over year and in line sequentially driven by strong advisor productivity. Seasonal tax related selling, consistent with last year's Q2, turned an otherwise net inflowing quarter into $100,000,000 net outflow. Strategies with net inflows included real estate, our proprietary direct indexing strategy, ETFs and munis. Year to date, we remain on track for our 4th consecutive year of organic growth.

Speaker 2

As previewed last quarter, we fielded a strong slate of alternative offerings, which drove a record alternatives raise of over $1,300,000,000 Real Estate Equity led with our largest single close ever with additional raises by AB Carval and our private equity fund of funds. On a year to date basis, alternatives raises are up 28% year over year, proof of the strong flywheel effect as our Private Wealth business catalyzes growth of our longer dated private alternative strategies. Now I'll turn it over to Jackie to discuss the financials and wrap up before taking questions. Jackie?

Speaker 3

Thank you, Seth. I'll start with the financials and then wrap up by summarizing our progress in the quarter across our strategic initiatives. As you know, this is our Q1 reporting results with Bernstein Research Services deconsolidated, reflecting the joint venture which closed on April 1. Our equity interest in the net income of the JV is now reflected in the investment gains and losses revenue line in GAAP earnings. As this business is no longer a core operation, any gains or losses are added back to adjusted earnings.

Speaker 3

Let's start with the GAAP income statement on Slide 10. 2nd quarter GAAP net revenues of $1,000,000,000 increased 2% from the prior year period and were up by 12% on a like for like basis if we were to exclude Bernstein Research Services in both periods. Revenues included a $28,000,000 investment loss from our share of the JV as customers and operations transitioned to the new JV entities in its Q1 of operations. We anticipate improved results as the business scales. GAAP operating income of $199,000,000 increased 6% year over year and operating margin of 19.0 percent increased by 60 basis points.

Speaker 3

GAAP EPU of $0.99 in the quarter increased by 87% year over primarily driven by a non operating $134,000,000 gain on the sale of Bernstein Research Services, a $0.44 per EPE benefit to GAAP results. I'll focus my remarks from here on our adjusted results, which remove the effect of certain items that are not considered part of our core operating business. These highlights are shown on Slide 11, which I'll touch on as we walk through the P and L shown on Slide 12. Reported net revenues of 826,000,000 dollars were flat versus the prior year period and increased 13% on a like for like basis. 2nd quarter adjusted operating income of $254,000,000 increased by 15% versus the prior year period, and operating margin of 30.8% increased by 380 basis points year over year.

Speaker 3

Walking through the components of revenue, 2nd quarter base fees increased by 9% versus the prior year period, driven by 11% higher average AUM. The 2nd quarter fee rate of 39.4 basis points was up marginally from the 1st quarter, driven primarily by retail growth and funding of long term alternatives. The fee rate declined 2% year over year, driven predominantly by asset mix, including organic growth in lower fee rate, munis and money markets. 2nd quarter performance fees of $42,000,000 increased by $27,000,000 from the prior year period, primarily due to higher fees from U. S.

Speaker 3

Select Equity Long Short and Private Credit. We now see full year 2024 performance fees up slightly from 2023 levels. Moving to adjusted expenses. All in, our total second quarter operating expenses of $572,000,000 declined by 5% year over year, reflecting the Bernstein Research Services deconsolidation. 2nd quarter total compensation and benefits expense was down 1% versus the prior year period, driven by a slightly lower compensation ratio of 49.0 percent of adjusted net revenues as compared with 49.5% in the prior year period.

Speaker 3

Given continued strong equity market conditions, we plan to accrue at a 48.0 percent compensation ratio in the Q3 of 2024 and may adjust further throughout the year. As we guided, promotion and servicing costs decreased by 29% from the prior year period, reflecting the significant reduction of trade execution and clearance expenses from the Bernstein Research Services deconsolidation. For calendar year 2024, we expect promotion and servicing expenses to decline by approximately 18% to 20% on a year over year basis, which embeds some market related growth from retail mutual fund transfer fees. G and A expenses declined by 10% in the Q2 versus the prior year period, slightly better than our prior guidance. On a like for like basis, G and A was down 1% year over year.

Speaker 3

We continue to expect full year 2024 G and A expenses to decline in the mid to high single digit range on a year over year basis. We're making good progress on our North American relocation strategy, and we anticipate pulling forward $13,000,000 of lease expense for the legacy New York building from the Q4 into the Q3. Accordingly, we expect 3rd quarter G and A will decline by 1% to 2% from the prior year, while 4th quarter G and A will decline by approximately 20% versus the prior year. As such, we now expect the targeted incremental 100 basis points to 150 basis points of year over year margin improvement from our relocation strategy will commence in the Q4 of 2024, which is 1 quarter earlier than planned. 2nd quarter interest expense decreased by $3,000,000 from the prior year period.

Speaker 3

We paid down an incremental $81,000,000 of debt in the 2nd quarter as net regulatory capital was freed up. That's in addition to the $304,000,000 debt reduction in the Q1 stemming from the JV equalization payment. In the 2nd quarter, adjusted operating earnings were $55,000,000 above GAAP operating earnings due to acquisition related expenses, earnings from the JV and interest expense. That said, GAAP EPU was $0.28 above non GAAP EPU, as the net gain on sale of Bernstein Research Services outweighed acquisition related expenses. The 2nd quarter effective tax rate for ABLP was 6.0%, which was lower than expected, reflecting a favorable mix of earnings across AB Tax Filing Group.

Speaker 3

Our guidance for ABLP's effective tax rate in 2024 is now a range of 6% to 7%, down from the prior range of 7% to 7.5%. This reflects our mix of foreign earnings, tax savings initiatives and finalization of the Bernstein Research Services JV. Now let's turn to Slide 13 to summarize our progress against our key initiatives. As Seth highlighted, our diversified global offerings and client base coupled with improved investment performance continues to drive sustained organic growth. We delivered positive net flows for the Q2 and year to date periods, driven by our well balanced, globally diversified retail channel and 9% organic growth in active fixed income with municipals growing at 11%.

Speaker 3

We saw over $3,000,000,000 in fundings from our institutional pipeline, including over $1,000,000,000 funded at AB CarVal. Secondly, we continue to develop, commercialize and scale our suite of services. We launched 2 additional active ETFs in the quarter, now standing at $15,000,000,000 with $4,600,000,000 in AUM. Our private markets AUM increased to $64,000,000,000 up 5% year over year. We launched the AB Carval Interval Fund in Private Wealth, expanding our alternative offerings, while also deploying the NAV Lending initiatives supported by Equitable.

Speaker 3

Additionally, we announced the hire of Jeff Cornell, as CIO of our insurance business, an important focal point for us going forward. We remain focused on executing on targeted operating margin expansion. Our 2nd quarter adjusted operating margin was 30.8 percent, up 3 80 basis points year over year, reflecting the margin benefit from the Bernstein Research deconsolidation and favorable markets. Overall, we are well on our way to executing on our multiyear 350 to 500 basis point operating margin improvement target that we outlined for you last year. With that, we are pleased to answer your questions.

Speaker 3

Operator?

Operator

Your first question comes from the line of Bill Katz with TD Cowen. Please go ahead.

Speaker 4

Great. Thank you very much. I also appreciate the streamlined supplement this morning on a very busy day. Seth, thanks for your comments again from a big picture down. We sort of expect fixed income and longer duration asset demand sort of pick up.

Speaker 4

I guess the question is, so I hear mixed things from different companies. Where do you think the money comes from? Is this from other longer dated AUM? Does it come from the liquidity in the system? How do you sort of see that playing out?

Speaker 2

Thanks, Bill for the question. And I'm going to start and owner may want to pop in and add some comments. My first thought is, I think certainly some of it comes out of the whatever 4.6 or whatever the number of 1,000,000,000,000 dollars of cash that's sitting on money market funds. I certainly think, particularly retail investors are getting more comfortable that the Fed, if they don't ease next week that they will be easing in September. But that I think it's $6,500,000,000,000 that's sitting on the side.

Speaker 2

So I certainly think some of it's coming there and we do see it. We see it in our muni SMA growth, which continues in the second quarter. I'd also say as pension defined benefit schemes here in the United States are now or near fully funded That will trigger both annuitization as well as the de risking, which I think will see some allocation. And we see continuing demand offshore. So I think the offshore demand continues.

Speaker 2

I mean, we're obviously watching the end, although that's less of an issue for us than it was in the past. But I think that is a different market for it as well. Onur, I don't know if you have anything you want to add.

Speaker 5

No, I think that was a good summary, Asad. I can't come back to any other details as the questions come in.

Speaker 4

Okay, very good. And as a follow-up, just to maybe Jack your launching point for your way you sort of ended the conversation. Just in terms of the margin, so it sounds like you're moving a little bit quicker, which is great to see. And I think when you guys exited the BRS platform, there was some embedded overhead, I think, sitting inside that. So sort of wondering, as we look ahead, since you're now already running at, I think, toward where you were trying to get yourself to at the Investor Day just recently, how should we be thinking about like the end state for margins here just given the core business is running faster, your relocations are coming in sooner and you still have I think an opportunity to maybe take out some savings in the remaining overhead at BRS?

Speaker 4

Thanks.

Speaker 3

Thanks, Bill. We are still very committed to the guidance that we gave. I'll remind you that, that guidance did not include market performance. So that is specific to the relocation strategy, which we talked about and specific to the improved performance from the deconsolidation of Bernstein Research Services. I will say specific to that question that as evidenced by the 546 employees that we transferred to the new JV, the majority of resources with Bernstein Research Services have already transferred.

Speaker 3

We have some further work being done under transitional services agreements that we continue to provide key services to the JV, which will allow us time to rationalize those costs as the services roll off in the future.

Operator

All right. Your next call comes from Craig Siegenthaler from Bank of America. Please go ahead.

Speaker 6

Good morning, Seth. My question is on improving bond flows, which I think I heard you say you expect to improve handsomely if and when the Fed starts cutting. We agree, and it feels like we've been waiting on this for a while. So it's nice to see that you're winning flows in both the taxable and muni bond businesses. But we actually have to forecast this out.

Speaker 6

So I would appreciate any perspective on the size and timing, as we think of a period of elevated bond inflows.

Speaker 2

Actually, I think I'll pass it to owner. I mean, that's more a timing issue. Obviously, it's hard to predict institutional, and we're not very good at it because every manager I'm sorry, every sponsor has their own timeframe and particular issues. But Onur, what would you add?

Speaker 5

Yes. I think one obviously, particularly with some of the liability driven investors like insurance companies, we continue to see strong demand with the growth of the annuity franchises and we are a beneficiary of that. That's why we have strong institutional fixed income net flows. So we expect that trend to continue. In terms of the more retail segments, as Seth mentioned earlier in the conversation, definitely there is some expectation for money to come out of money market funds and flow more into higher yielding taxable and tax exempt strategies.

Speaker 5

In our case, we play both sides of that, right. We have a leading market share gaining muni franchise. So we expect that trend to continue both a combination of client demand given historic lows of fixed income allocation coming from a no yield environment. So we'll benefit from that. And then internationally in this kind of environment typically our high yield and barbell strategies, both global and U.

Speaker 5

S, continue to do well. So all in all, again, it's hard to be precise with the exact quarter or percent, but we feel confident about continued fixed income strength for our franchise across institutional retail as well as U. S. And offshore.

Speaker 6

Thank you, Yonar. Just as my follow-up, it's on ultrahighnetworth. So Bernstein has recently carved out ultrahighnetworth, an effort inside of the private client channel. And I think this has been a bigger focus for the firm. But several wires have recently adjusted their cash sweep rates mainly with the higher tiers, so ultra high net worth.

Speaker 6

And I'm curious because I've never focused on this with you guys before, but what are the cash sweep options that you offer inside of Bernstein, especially with higher tiers? And have you been thinking about adjusting cash sweep strategy just given recent move at the wires?

Speaker 5

Thanks for that question. So first of all, we continue to experience high growth with our Alta Networks and Family Office segments. So given our strategic focus, we are happy with the relative growth of that segment as opposed to lower value segments. When it comes to cash, the one important distinction for our platform is more than 90% of our revenue comes from advisory and service fees. So as a result, it's a very high quality recurring fee base and it's not very sensitive to spread income, right.

Speaker 5

That's I think something that makes our franchise very predictable. On the cash rate, we always want to be extremely competitive, taking advantage of our in house custody and clearing, which is part of our client proposition. We are able to offer very competitive rates to our clients. Today, our rates are between 4.5% to 5% depending on the type of the clients and that has been the case for a long time. So we offer very competitive cash rates to our clients.

Speaker 5

So we are not nervous about some of the recent developments. And then furthermore in terms of our cash options, we have a very strong and net flowing money market franchise in our Bernstein Private Wealth business in addition to our strong money market funds, we offer also 3rd party options. So all in all, A, we are less dependent on interest income B, that income has been very accretive and then C, we are not worried about any competitive dynamics given we have very high rates on our sweep.

Speaker 6

Thank you. And those rates, 4.5%, 5% are pretty good. Thanks for taking my question, guys.

Operator

Our next question comes from Dan Fannon with Jefferies. Please go ahead.

Speaker 7

Thanks. Good morning. Seth, I wanted to follow-up on your comments on equities and obviously the industry is still a bit challenged. You talked about some wins on the value and pickup in demand. But the growth side, looking at performance and you're still seeing some outflows there.

Speaker 7

So just wanted to get a little bit more color on the overall complex as you think about the equities and prospectively the outlook in terms of where you could you see potential momentum and or headwinds?

Speaker 2

Okay, Dan. Thanks for the question. Couple of thoughts. First, we have seen continuing strength in active equities in retail. Large cap growth is a component of that, but it's not unique.

Speaker 2

It's the largest component of that, but it's not unique. I'd also say that for the first time in the 7 years I've been here, we are beginning to see more pronounced and wider spread interest in value in U. S. Value, which I think is exciting. Hard to gauge the potential of that, but I think it can be quite significant.

Speaker 2

But it's early days and I think we're going to need to see value sustain appealing performance. Where we struggled and it's more concentrated of course on the institutional side are 2 strategies in particular where we've had very strong historical performance, our concentrated growth strategy and our global core strategy. And I'd say while the last few weeks last week or so have helped, we had a big hole to dig out of. And so we were seeing higher redemptions than we would hope in those strategies. Now they have tapered a bit and quarter over quarter, year over year institutional, the redemption, the amount of the redemptions has fallen.

Speaker 2

But that, of course, is performance driven. You know better than I, this has been very much a concentrated market. And if you have a concentrated strategy and you weren't long the key Mag Fiber, Mag 7, however you wanted to define it, that was a pretty treacherous marketplace to be trading in. We are very confident in the quality of the team. They have a long set of relationships and strong consultant partnerships, but it's been a problem and we recognize it and we continue to have exposure there.

Speaker 2

But I think we have it in hand and I'm encouraged by the overall improvement of our equity investment performance to see it. But I continue to be more optimistic on the retail side than I am on the institutional side for equities. But we do see consultant demand. I wouldn't say it's coming over the transom, but it's certainly stronger than it's been in a while. Onur, do you have anything you want to add to that?

Speaker 2

Yes.

Speaker 5

I mean, on the redemptions, this was the lowest level of institutional redemptions we had over the last 4th quarters. So definitely pleased with the trend line there. I mean, it was still an outflow quarter for us in institutional, but it's good to see that redemptions are much better than the previous three quarters. 2nd, I think obviously we are an active shop and we competed well in that with retail active equities turning positive in the second quarter. The other aspect of it, however, is the tax managed strategies.

Speaker 5

We have been an innovator in tax management and fixed income and we have been carrying that into equities. Our tax managed equity service called PAT just hit the $5,000,000,000 mark with very high momentum. So I think the way we play into active is sometimes active tax management and that will be a growing part of our franchise. So I know smaller as a percentage of total, but pleased with the momentum there and we see synergies between our tax management capabilities in fixed income and equities and bringing them in the SMA strategies for a broad range of our clients.

Speaker 7

Great. That's helpful. And I guess sticking still with some smaller contribution, but just the ETF strategy as a whole, I was curious as we think about, I think it was $4,600,000,000 or 15 products. As you prospectively look at it, are these are you thinking to complementary strategies? I think to date they've been new, but you're seeing several of your peers get more active in this market who historically weren't in the ETF market.

Speaker 7

And so just thinking curious about your strategy and how you're thinking about it longer term?

Speaker 5

Sure. We are very pleased with the build out and the acceleration of the business. If you recall, our first ETF was back in September 2022. So we have been in the market for less than 2 years and now we have 15 products with 4 point $6,000,000,000 So that's very, I think in my opinion, a good start. Yes, in terms of the product strategy, we have basically 2 existing plays and then we are going to add a 3rd play to our strategy.

Speaker 5

First play is obviously introduce new products in categories where we can enter. We have done that with the short duration money market competitive products like here, our first ETF, which is now about $1,000,000,000 So that was go to white space using existing capability. Number 2, make conversions where conversions add access and opens new distribution channels. We have done that with the 4 conversions we had, including the recent ones on the short duration fixed income. And since we converted U.

Speaker 5

S. High yield, which was the first one we converted, although it's a small base, we have seen much more flows than we had when it was a mutual fund, right? Because in these categories, getting shelf space in a mutual fund is much higher, harder. But then you launch an ETF, you open the strategy to the broader retail world through online channels as well. So conversions has been the 2nd part of the strategy.

Speaker 5

The 3rd part of our strategy is now look at different markets. Obviously, we have strong distribution in many parts of the world, particularly Asia, and we are really looking at the developments with capital markets in those markets. So as the regulatory framework evolves to go from only passive ETF to active, we will selectively enter some of those markets over time as well. So those are a few important areas to highlight.

Speaker 8

Great. Thank you.

Operator

Our next caller comes from John Dunn with Evercore ISI. Please go ahead.

Speaker 8

Thank you. Can you kind of frame for us how past rate cutting cycles have played out for your high yield funds distributed in Asia?

Speaker 2

I'm sorry. Can you just repeat the question?

Speaker 5

Yes, I can get started. I think the question was how did our Asia fixed income franchise acted when we had previous rate reduction cycles?

Speaker 2

Sorry, sorry.

Speaker 8

Exactly, yes. Thank you.

Speaker 5

Look, I think at the end of the day, it depends on the size of the reduction and how fast that happens as well. So I think it's hard to generalize. In the current environment, given our barbell strategies as well as our high yield strategies, we believe even with rate cuts, our relative performance and demand should remain strong. And obviously, there are a lot of variables there, including the credit spreads, etcetera, which has been low. But just based on the rate environment, if there is no recession, etcetera, we don't expect any major issues in terms of our relative performance or the market demand based on the type of the strategies we run and the history.

Speaker 5

But Seth, please comment.

Speaker 2

The only thing I would add, John, I'm sorry, I didn't hear exactly what the question was, is that it off the other factor I would point out is what the local alternatives are. So we've had periods where we've been in a declining rate environment, but the local Chinese equity market was quite strong. So the enthusiasm for U. S. Yield product might have been less than it would otherwise be.

Speaker 2

That's not an issue now, although that could turn around. It's certainly a low valuation base today, but local alternatives also matter in the determination of that.

Speaker 8

Got it. And then Japan seems to be an increasingly attractive area of interest. You guys sell a bunch of U. S. Growth equity funds there.

Speaker 8

Are there any other products you're marketing and how much of a focus is Japan?

Speaker 2

Japan remains a historical focus for us and very strong, not just on the retail side, but on the institutional side as well. So we've seen success in our systematic fixed income, which we're excited by. We continue to have meaningful relationships there institutionally and are in discussions with our clients there on other strategies, but nothing to report. In retail, global high yield continues to be an important strategy for us in the local market. And so AIP to a lesser degree, but there's continuing demand there for those products.

Speaker 5

On Japan, John, two things I would add. 1, we have an ITM range. ITMs are the local wrappers like the LargeCap Growth product that is market leading that you mentioned. So that ITM range is important. There has been new regulation pension expansion in Japan called Nisse accounts.

Speaker 5

Nisse accounts actually led to a pretty strong sales expansion in the Japanese market. So given our strong distribution network and strong reputation as a active equity manager, that's a favorable trend for us. And on institutional, actually we have seen strong interest in our new systematic fixed income capabilities in Japan. Actually there has been significant funding for systematic fixed income from leading Japanese investors, both pension and insurance clients. So all in all, I think we have multiple ways to play Japan, but there's always a word of caution.

Speaker 5

The word of caution is if Bank of Japan basically hikes rates and the Japanese yen appreciates, obviously there could be some uncertainty there, which is hard to predict.

Speaker 8

Got it. Thank you.

Operator

Our next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Speaker 9

Hi, everybody. Good morning. Thank you for the question. I wanted to start with a question around the institutional business and a couple of things there. I guess one, it's nice to see that you guys are progressing with the onto the next $10,000,000,000 from your insurance partnership.

Speaker 9

Can you talk a little bit about the pace of deployment and sort of the strategies and perhaps the fee rates that's likely to earn? I guess when you zoom out broadly, can you help us frame the fee rate on these additional pipeline as you disclose in your deck? Thanks.

Speaker 2

With respect to institutional, yes, the first $10,000,000,000 from Equitable has been funded. They continue to be working with us whether it's in our PCI business or in AB Carbel and in U. S. Cred. So continued participation there.

Speaker 2

Onur, perhaps you want to give a bit more color?

Speaker 5

Yes. Yes, sure. In terms of our pipeline, our pipeline remains very strong despite the strong fundings this quarter, over 3,000,000,000 funded as you know. Our pipeline is still around $10,000,000,000 near $10,000,000,000 in the institutional. Of that, 8% to 2% of the fees are attributed to alternatives and effective fee rate remains significantly higher than our current run rate.

Speaker 5

So it's around 49 basis points right now in the blended rate for the buyback.

Speaker 9

Great. That's helpful. Thank you. And then just a little bit bigger picture, you guys made significant progress in positioning AllianceBernstein to be a player in the private credit and private fixed income space broadly. Do you find that you have all the pieces necessary to sort of continue to serve that channel, especially when it comes to insurance or are there still pockets that you think you might need to pursue inorganically?

Speaker 2

We think we have the vast majority of the tools we need. There are a number of asset based strategies that Carvel is picking up and running with as in our PCI business. I think also there are areas that I think are getting to our asset, our liability manager clients, insurers, infrastructure is one that we continue to look at and debate. So I would say we're mostly there and there's nothing at the moment that we're on the heels of them focusing. We're just continuing to work CarVal and PCI and CRED to build out their current platform and marketing support they need.

Speaker 5

Yes. So we added, owner jumping in here as well on the insurance specific investment grade private credit. We've made very strong progress on IG services for insurance clients. As you know, Equitable came in to the NAV financing with a significant commitment. We funded more than 750,000,000 dollars in U.

Speaker 5

S. Residential whole loans that obviously is a heavy lift in terms of the infrastructure to create that. We can offer that to third party clients as well on both cases. As Seth mentioned, we are making a lot of great progress on asset based financing and specialty finance, IG including our relationships with leading banks. And then we have the traditional real estate debts, private placements.

Speaker 5

So as we think about the typical insurance general account appetite for Private Credit IG, I think we check most of the boxes, if not all of the boxes. So we believe our platform is pretty complete.

Speaker 9

That's great. Thank you all.

Operator

All right. We have one more question on the line from Bill Katz with TD Cowen. Please go ahead.

Speaker 4

Okay. Thanks very much. Actually, it's just a couple of housekeeping items. But just coming back to the Private Wealth platform, could we just dig a little bit further on to the cash allocation? What percentage of the portfolio sits in cash today?

Speaker 4

What's the split between what's in sweet versus in money market? And you mentioned that your yield is rather high and that is I think Ray J and Steve were around 2% to 3% and LPLA is down less than 1%. Is there anything other than competitive dynamics here on the tiered pricing at play? And I have other follow ups after that. Thank you.

Speaker 5

Yes. Thanks, Pivotal, again. As I mentioned, the great majority of our fees, over 90% comes from the advisory and service fees. So the cash sweep economics, although is positive, is not a huge driver of our overall revenue picture. In terms of the cash options, the cash allocation tends to be relatively small.

Speaker 5

So typically, it would be more the transactional cash that stays in the accounts. A good chunk of that goes to money market funds, either our own proprietary money market fund or a 3rd party money market firm. Cash balances are typically in the 1% to 2% of our assets when it comes to cash sweep and the money market assets would be in the low to mid single digits. So that's I think how I would kind of add those up. Remember, like sometimes depending on the fee relationship etcetera, some assets might not flow through the advisory assets and flows etcetera.

Speaker 5

So that's why it's not a perfect math, but that's how it works.

Speaker 4

Okay. And I'll follow-up offline on the competitive dynamic. Seth, you sort of teased us a little bit on some of the July trends to date. I was wondering if you could zoom out a little bit and talk to me about the big picture of how the overall flow picture is looking. And then separately, you also called out that taxes were a big driver to the private wealth side.

Speaker 4

I wonder if you could frame out how big the tax impact was. And then one last clarifying point, I'm sorry to ask so many questions. But you mentioned that you have about $10,000,000,000 left in the Switch pipeline and $10,000,000,000 with Equitable. Are those separate and apart? I just want to make sure I'm not double counting the opportunity.

Speaker 4

Thank you.

Speaker 2

So in reverse order, yes, they are separate. The institutional pipeline and what ECCO has, except in a situation where they already mandated us on a particular strategy. And it's not an operation, but I don't think that's a particularly consequential number built in the scheme of things. So for example, in the $500,000,000 NAV mandate, I think that would have shown up, I think, once it was mandated. But Mark should clarify that in terms of but I don't think there's an overlap between the 2.

Speaker 2

But to just keep going on the second part of the question or the first part of the question with regard to trends, seeing pretty strong retail trends and that's continued in institutional. It remains mixed, I think is the way I'd put it. And with regard to taxes and private wealth, I think that was the second question. Ona or Jackie, do you want to take that? Because I didn't quite understand it.

Speaker 5

On the tax question, sorry, can you clarify the tax question? I didn't fully understand the question.

Speaker 4

Yes. I'm sorry to drag this on, particularly on a busy day. Just you had mentioned that the Q2 in the private well site was impacted by seasonal tax related redemption. Yes, absolutely. Yes, yes, yes.

Speaker 4

Yes, yes, yes. Yes, yes, yes. Yes, yes, yes. So, I apologize. So, Bill,

Speaker 5

Yes, yes, absolutely. Yes. So apologies. So Bill, on that one, so it was very similar to the Q2 of 2023. So we had less than $100,000,000 of outflows.

Speaker 5

There's a seasonal effect for sure. If you look at that, what gives me confidence is our sales has been strong and up more than 20% year over year. So that shows you the sales momentum. It was our record private alts capital raise for the channel, all time high. And remember, not all of those fund raises or capital raises flows through net flows, right?

Speaker 5

We wait until funds to be deployed or start earning fees until they get counted at net flows. So that is a positive. And then 3rd, if you look at the productivity of our advisors, it remains strong. So all in all, there wasn't anything materially different about tax outlook than last year. And if you think about the sales momentum and quality of sales pipeline, we feel good about the outlook.

Speaker 5

That said, high rates still keep bunch of clients on the sides. And with the election coming with a relatively full market valuation on equities, people are not super motivated to kind of put more money into action. So I think we're going to see a little bit of a macro environment that will make people sit on the sidelines, if you will.

Speaker 4

Thanks for your patience and answers. Thank you so much.

Operator

All right. There are no further questions at this time. Mr. Griffin, I turn the call back over to you.

Speaker 1

Okay. Thanks everyone for joining our conference call. We're happy to answer any additional follow ups. You can contact Investor Relations.

Speaker 2

Have a great day.

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Earnings Conference Call
AllianceBernstein Q2 2024
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