AllianceBernstein Holding L.P.
Q4 2016 Earnings Call Transcript

Published: 27 Apr 2017

[Operator:]

Thank you for standing by and welcome to the AB First Quarter 2017 Earnings Call. [Operator Instructions]. As a reminder this conference is being recorded, and will be available for replay for one week. I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AB, Ms. Andrea Prochniak. Please go ahead.

[Andrea Prochniak:]

Thank you, Michelle. Hello and welcome to our first quarter 2017 earnings review. This conference call is being webcast and accompanied by a slide presentation that is posted in the Investor Relations section of our website, www.abglobal.com. Peter Kraus, our Chairman and CEO; John Weisenseel, our CFO; and Jim Gingrich, our COO, will present our financial results and take questions after our prepared remarks. Some of the information we 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 1 of our presentation. You can also find our Safe Harbor language in the MD&A of our First quarter 2017 Form 10-Q which we filed this morning. Under Regulation FD, management may only address questions of a material nature from the investment community in a public forum, so please ask all such questions during this call. We also live tweeting today's earnings call. You can follow us on Twitter using our handle @AB_insights. Now let me turn it over to Peter.

[Peter Kraus:]

Thank you Andrea and good morning to everybody and thanks for joining us to day. The broader market started the New Year strong, with a nice rally in equities and continued momentum in fixed income, but we’re still dealing with secular and circular issues that make growth difficult for active managers. I’ll talk about these challenges today, as well as what we’re doing to position AB competitively in this environment. Let’s start with a firm over view which is on slide 3; total gross sales for the quarter of 19 billion were up 23% from last years’ first quarter, essentially flat with the fourth quarter of 2016. Net outflows of 200 million include a 2.8 billion low fee institutional investment grade credit outflow and a 2.2 billion passive outflow across our channels. Excluding these outflows, net flows would have been a positive 4.8 billion. Period end and average AUM were up versus both prior periods on strong market appreciation. Our quarterly flow breakout by channel is shown on slide 4. Institutional gross sales of 2.5 billion were down sharply from last year’s first and fourth quarters. We found that after rebalancing, following the election last November, our clients weren’t as active in the first quarter of this year. Net outflows of 1.8 billion compared to net inflows of 1.8 billion in the two prior comparable periods. This channel is where we saw the biggest impact of the fixed income and passive outflows I just referred to. In retail, gross sales were our best since the second quarter of 2013, with 13.5 billion in total, and positive net flows of 1.6 billion. Asia ex Japan, fixed income sales for the largest driver of the sequential and year-over-year increases, so strength was broad based across both regions and asset classes. Private wealth growth sales of 3 billion were down 6% year-over-year, but up 30% sequentially as clients became more active in the first quarter. Net inflows of 100 million were up 500 million in the fourth quarter of 2016. Moving to slide 5, our long term fixed income performance continues to be outstanding, with roughly 90% of assets in outperforming services over three and five years. Standout performers to the end of March include, Global Plus and TIPS plus top docile for the one, three and five year periods. Global fixed income top decline for the three to five year. Global high income top docile for the one, top quartile for the three and five years. And on the retail side, AB income, the closed end fund we converted to open end last April to compete in the intermediate bond category has performed at the top of the top docile across every major time period. Slide 6 shows how our equity long term track records continue to improve. Our percentage of outperforming active equity assets for the one year period improved to 42% and that’s too much. And at 83% and 65% of assets for three and five year track records and those were improving as well. Our strategic core strategies lagged the market increases during the most recent 12 month period. But they maintain top docile three and five year’s track records. The same is true of US large cap growth, one of our top sellers in retail during the quarter, and our concentrated growth strategies ranked in the top quartile for the one, three and five year. Strong relative performance like this positions us well to capture more flows. Now let’s talk about client channels beginning with institutional on slide 7. Two anomalies drove over the first quarter’s weak flow picture, historically low sales and a lumpy outflow I mentioned earlier. That said, our pipeline trends are more encouraging. The top left chart shows that not only did our pipeline of active services increase by 500 million sequentially, our average fee rate increased as well. That’s because we added higher fee commitments in the first quarter including 380 million to our commercial real estate debt fund and 200 million in customized multi-assets. Growing momentum in consultant advocacy, particularly for our newer services, has also been a big help. So far this year, one major global consultant has upgraded our global concentrated and global core equity charges to their highest ratings. Our emerging market strategic core equity service which ranked third percentile for the year period through March is getting closer scrutiny. And our new AB customer alternative strategies or cash team has been very well received; combination of strong performance and greater consultant support is contributing to the diversity of our pipeline as well. As you can see from the bottom left pies, our pipeline split by both assets and regions. It is much more equitable today than it’s been in the past, when fixed income mandates for US institutional clients typically represented the larger share. Moving on to retail on slide 8, I’m very pleased with the momentum in this business, which continues today. Not only were our total first quarter retail gross sales of 13.5 billion highest since the second quarter of 2013, our strength, spend, assets classes and regions. With industry-wide gross sales of global high yield, bond funds and Asia ex Japan up again during the quarter. That region was AB’s largest retail growth driver. We were very pleased with our first quarter US retail sales as well. Gross sales of 4.4 billion were up 22% sequentially and 10% year-over-year, and our highest since the first quarter of 2008. That’s the chart at the top left. We focused for years on rebuilding our presence and regaining relevance with retail clients and are finally where we need to be with the breadth and performance of our offerings. Today, we have 57 Morningstar 4 and 5 star rated US and Lux funds, nearly twice the number we had back in our pre-crisis hay day. And 78% of our total weighted assets are in 4 and 5 star funds today, that’s the chart at the bottom left. Our strategy is to parley these strong track records in to higher active mutual fund sales with the innovative new series of performance fee based funds we just introduced in March. As I’ve been saying for a long time, active managers need to level the playing field on fees and be more accountable for our performance, if we’re going to compete with ETFs. Our new series charges ETF like management fees and a performance fee only if the fund surpasses benchmarks. If we can succeed with this new structure and a big [F] since it’s early in the game, we think we can improve our competitive positioning and ultimately set a new industry pricing standard for active managers. We’ll keep you posted on our progress. Now let’s go to private wealth which is on slide 9. I mentioned our double digit sequential sales growth in the quarter and net inflows of a 100 million. Our underlying flow picture was in fact better. We had two large outflows totaling 230 million that were not performance related. Targeted services continue to be momentum story for us, as you can see from the pies at the top left, we now offer 10 different services with total commitments of 4.7 billion. And client interest in these research driven vehicles is only growing. New targeted service commitments in the quarter was 560 million, double that of last year’s first quarter. That’s a record for us in a quarter that did not include a new product launch and our second highest quarter ever. Targeted services accounts grow and onboard faster and tend to have significantly higher retention rates that accounts that do not include them. For example, Global Research Insights, a new concentrated equity service that’s just about to hit its one year mark has already attracted 560 million in commitments, performance so far is more than 800 basis points above its bench. Similar strong performance in our more seasoned targeted services is keeping clients in well past the lockup periods. That’s not to say we are any less committed to the Bernstein core solutions now more than ever. Private clients need institution like invested management and risk controls. Our model combines a core customized allocation by client, satellite services selected to augment return, income, diversification or combination of the three. And its Dynamic Asset Allocation process is designed to reduce portfolio of volatility. It’s an effective approach, particularly in less predictable markets. And because we manage these assets directly for clients, we can execute our investment strategies with the level of tax efficiency that others simply don’t have. Private wealth management is an important business for us, and we are well positioned today. I’ll wrap up our businesses with the sale side on slide 10. Both US trading volumes and volatility declined markedly from the elevated levels we experienced in the fourth quarter, and our revenues declined as a result. What’s more industry wide trading volumes continued its climb in both Asia and Europe, where revenues are pressured by the translation effect of a strong dollar as well. That’s the top right chart. We’re seeing some clients beginning to allocate assets to Europe from the US where valuations are high, though most remain on the sidelines in Asia. In the US despite the low activity levels of both loan only and hedge fund managers, we continue to maintain a strong competitive position. US market share is volatile from month-to-month and the date is lagged, but you can see from the chart at the bottom left that Bernstein share of US volumes has been trending positively for the past four years. So while the sale side continues to face unprecedented challenges and change, we feel we have certain advantages navigating the uncertainty ahead. First and foremost, we have a differentiated research offering the clients value. This is particularly critical as we engage with them on the implementation of [method] two in the UK and in Europe. We also have best-in-class trading capabilities and the unique ability to leverage our research insights on the desk, and we’ve expanded our trading operations to Zurich, Frankfurt and Scandinavia to make our full suite of execution services available in local markets. For these reasons, we are encouraged that with the new regulatory framework evolved, clients will continue to choose Bernstein. Finally, I’ll recap some of our recent strides in dealing with the current environment on slide 11. We’re delivering for clients with our investment performance in most of our fixed income and equity services, which is helping to drive flows to high growth areas. We keep broadening our presence with new products and services across our client channels and around the world. We innovated for our clients during the quarter with our new US retail performance fee mutual fund series, and we employed continued expense discipline to increase our adjusted operating income, margin and EPU and product a 55% incremental margin. Looking forward, we don’t know how the operating environment will evolve from here. Looking back, I’m proud of how we managed our business and our financial so far in 2017. Now I’ll turn it over to John.

[John Weisenseel:]

Thank you Peter. Let’s start with the GAAP income statement on slide 13. First quarter GAAP net revenues of 765 million decreased 1% from the prior year period. Operating income of a 166 million decreased 4% and the 19.6% operating margin was 360 basis points lower. GAAP EPU of $0.46 compares to $0.55 in the first quarter of 2016, included in last year’s $0.55 was a $0.16 net non-recurring benefit, resulting from a combination of a $75 million realized on the liquidation of our investment in Jasper Wireless Technologies and a 28 million non-cash real estate charge relating to further consolidation of our New York office space. As always, I’ll focus our remarks from here on our adjusted results, but remove the effect of certain items that are not considered part of our core operating business. We base our distribution to unit holders upon our adjusted results, which we provide in addition to and not as substitutes for our GAAP results. Our standard GAAP reporting and reconciliation of GAAP to adjusted results are in the presentations appendix, press release and 10-Q. Our adjusted financial results are on slide 14. Compared to the same prior year period, first quarter revenues of 624 million increased 6%. Operating income of 151 million increased 14% and our margin of 24.1% increased 170 basis points. We earned and distributed to our unit holders $0.46 of 18% versus the $0.39 for the last year’s first quarter. Higher base fees combined with flat non-compensation expenses primarily drove the improvement. Revenues, operating income and margin all decreased for the fourth quarter of 2016 due to lower performance fees and Bernstein Research services revenues and the usual first quarter sequential increase in our compensation accrual. We delved in to these items in more detail on our adjusted income statement on slide 15. Beginning with revenues; first quarter, net revenues of 624 million increased 6% year-over-year. The 9% increase in first quarter base fees compared to the same prior year period is primarily due to the higher average AUM across all three distribution channels and to a lesser extent higher fee rate realization reflecting a mix shift from lower to higher fee products. First quarter performance fees of 6 million compared to 1 million in the same prior year period had resulted from higher performance fees earned on our Select Equity long/short, CLO High Yield Bank Loans, Global Plus Fixed Income and Middle Market Lending strategies. Frist quarter revenues for Bernstein research services decreased 10% year-over-year due primarily to lower client trading activity in the US. A stronger US dollar contributed to our decline in European revenues. Investment gains increased year-on-year due to higher seed investment gains. Moving to adjusted expenses; all-in our total first quarter operating expenses of 473 million increased 3% year-on-year. Total compensation and benefits expense increased 5% year-on-year with higher incentive compensation partially offset by lower base compensation. Compensation was 50% of adjusted net revenues for the first quarter of both this year and last year, and compares to 44.6% for last year’s fourth quarter. Promotion and servicing expense declined 11% year-over-year, as a result of lower marketing, trend acquisition and transfer fees. G&A expenses increased 3% year-on-year due to higher professional fees and foreign exchange losses versus gains in the prior period. First quarter operating income of 151 million increased 14% from the prior year period, as revenue growth outpaced expense growth. The first quarter incremental margin versus the prior year period was approximately 55%, reflecting our continued diligent expense management. First quarter operating margin of 24.1% increased to 170 basis points year-on-year. On a sequential basis, 540 of the 750 basis points decline is due to the higher comp ratio. You may have noticed that our first quarter adjusted operating income was 15 million lower than our GAAP operating income. The difference is primarily due to the consolidation of certain seed investment fund for GAAP reporting, which increases operating income that has no effect on net income or EPU. Therefore we deconsolidated the seed investment fund for adjustment reporting resulting in the lower adjusted operating income. All of the non-GAAP adjustments are outlined in the appendix of this presentation. Finally, the first quarter affective tax rate for AllianceBernstein LP was 6% versus approximately 7% for the first quarter of 2016 and was lower than expected due to a favorable mix of pre-tax earnings from lower versus higher tax jurisdictions. Going forward, we expect the effective tax rate to remain below 7% based upon our current estimates or the percentage of pre-tax income we expect it to arrive from foreign jurisdictions and applicable foreign tax credits. We highlight these points and offer sequential quarter comparisons on the next slide of this presentation as well, and with that Peter, Jim and I are pleased to answer your questions.

[Operator:]

[Operator Instructions] Your first question comes from Michael Carrier from Bank of America. Your line is open.

[Michael Carrier:]

First question, just on the performance of fee series loans, just wanted to get a sense, you know some of the feedback that you’re getting and mostly on the distribution side in terms of the distribution channels, you’ve just given the new pricing structure and some of the competitive aspects relative to the past.

[Peter Kraus:]

First of all we are engaged with pretty significant number of distributors, about how this should be described to their clients and what their interest in actually distributing it to their clients in various different parts of their channel. I would characterize our engagement with our distributors as beyond a high level, very different than any other product we’ve ever rolled out, extensive discussion with both research management and at the FA level, and we are approaching clearing all the BlueSky hurdles and within the next, I’m making it a little longer just to be conservative 60 days or so, my guess is that we’ll actually be able start to sell. So if you judge the reactions by the engagement level, you’d have to be positively inclined.

[Michael Carrier:]

And then just a follow-up on may be the Bernstein like the research services, two questions on that; one is, just given method to coming online as we get in to ’18, just wanted to get your sense on how AB’s looking at it in terms of the impact to say Europe versus how tired of Europe. And then just given the weaker trading environment that we’ve been in just wanted to get a sense on how maybe the expenses work in that business, maybe relative to the buy side part of the business? Meaning when we see the little revenues you have much lever on the expense side or will we see more margin pressure.

[Peter Kraus:]

So I’ll answer the second first. The expenses in the sell side business are quite variable, of course there are fixed expenses in every business, but compensation makes up a very large percentage of those expenses. And you also have brokerage and clearing cost which you may note in the P&L promotion and servicing is a little soft that reflects the decline in activity. So if you were looking at the Bernstein P&L, I’d probably say that the amount of expenses they are variable in it versus the firm or actually larger. And so you have a lot of flexibility in the P&L and therefore less margin compression possibilities in a decline. Look that works in both direction by the way. When revenues go up, there’s less margin expansion. So you have a business that has actually a pretty stable margins and lots of different conditions and lot of variability in its expense. As it relates to MiFID II we tried to give you a little bit of a preview of that in the comments for having a very positive discussion with our clients in Europe. We feel good about where our competitive positioning is in Europe. I would say the MiFID II discussions outside of Europe, primarily in the United States are limited and we’ll wait to see if that adjusts or changes, but for the present time we are optimistic about our positioning in Europe and our competitive reality with regards to the legal changes that will be effective in January.

[Operator:]

Your next question comes from William Katz from Citigroup. Your line is open.

[William Katz:]

Just coming back to the new mutual funds that you had talked about, within the feedback you gained from the distribution partners, can you talk a little bit about specifically what attributes of the product they like and then if you’re getting a sense of where they may fund any allocation that could come from either is this less passive coming in to this book or would it be from other active?

[Peter Kraus:]

So I think what excites most people when they see this revenue structure is two things, one, you adjust the paradigm from paying managers whether they perform or not to paying managers when they perform, and when they don’t the fee is ETF like. That I think appeals to everybody from the perspective of putting the client first, and it also appeals to those from fiduciary point of view, not to say that fixed fees are not appropriate in a fiduciary sense, but it has a higher degree of sensitivity to what makes sense for the client. I think secondly, on sort of a more nuance level, I think people like the fact that now managers are more highly incentivized to actually perform rather than just gather assets, because if you just gathered assets and did not perform, the low base fee would not provide much competition. And so you’ve really changed the relationship between the client and the investor in a way that is quite friendly to the client and puts a lot more pressure on having to perform. As it relates to where distributors think this will be funded, I think that’s a little bit fussy. I’m not sure that people think it will come from one versus the other, I think it might come from both. I think it’s probably too early for us to conclude on that one.

[William Katz:]

And then my follow-up, and I’m sorry I did join the call a couple of minutes earlier a little bit busy morning today. I guess on the institutional pipeline that’s there, but you mentioned that your gross sales were less than half to 2016 quarterly average. Can you talk a little bit about was it just timing, what may have led to the softness on the gross sales for the quarter?

[Peter Kraus:]

Well we can’t speak for everyone in the industry, but as it related to our experiences there just wasn’t any activity. I don’t think that we really in that structure, I don’t think that we think that that’s going to be pervasive. But in the first quarter of this year, activity level was just quite low. Now, look, we know where in a structural trend where institutions are allocating less capital overtime, DB plans are shrinking, all that happening. So there’s nothing new in that . But as it relates to this first quarter, I think all we can conclude is for us that the activity level for clients and organizations we talk to which is most of the industry, we’re just very low.

[Operator:]

Your next question comes from Surinder Thind from Jefferies. Your line is open.

[Surinder Thind:]

I’d like to start with a big picture question, and just kind of the relative strength that we’ve kind of seen I would say industry wide in fixed income here in the US, even in this reflationary environment trade. With the Fed hiking a couple of times, I would have thought that the industry flows would have been at least a little bit weaker earlier in this part of the cycle. But they’ve actually held up really quite well or actually they’ve been doing quite well. Any insights or things that you’re seeing, are we kind of late in that great hike cycle in the sense that it has been such a protracted period that kind of getting here that we are back to where maybe we should be in terms of more normalized flows for fixed income.

[Peter Kraus:]

I think Surinder it’s a good question. I think you’ll recall that we’ve said a couple of times because we’ve been asked this a number of times. What is the impact of rising rates in a fixed income environment? And I think we’ve said that it does want to depend on the speed at which rates rise, and if rates rise modestly as opposed to quickly, it has a different short term effect. But it’s not a bad thing when rates are rising. Firstly, yields are going up and investors want yield. So that isn’t necessarily a bad thing for fixed income, and I think we’re seeing that. That was our expectation and that has been exactly what has played out. Now I think it has been somewhat more positive because the rate rises have been telegraphed, clear and slow. And I think that moderation has helped people stay in the fixed income instruments, just the capital depreciation coming from fast rate rises is modest. So, I think until investors feel that they have enough yield and they don’t have to allocate that much in assets to get the income that they want and that would be at yield levels that are much higher than where we are today. I think fixed income and yield bearing securities are going to be in high demand and that is the environment we are in.

[John Weisenseel:]

The other two things I would add to that are look, equity markets have come a long way, people do need to rebalance to keep strategic allocations which is going to tend to results and positive flows in the fixed income given what’s happened to equity markets. I think our conversations with a number of our intermediaries make them somewhat cautious about equity valuations in the US as well as there are some hesitancy to be over exposed. And then lastly the secular need for income is not going away.

[Surinder Thind:]

And then as a follow-up question, on the performance fee products, obviously a very interesting proposition or value proposition to the investor. When you guys were thinking about the various features of the product in terms of any color around how you guys determine maybe that the range of the performance fees or maybe the reset time period, how those trade-offs are or if maybe when you were thinking about it, is the expectation that most of the time you’ll earn kind of the base fee without the adjustments or how are you guys thinking about that?

[Peter Kraus:]

Good question Surinder. Number one, we wanted to be able to say to clients, if we do not perform, you do not have to pay us for more than what you pay for [Beta]. That was the key and most important assumption, because that set how you would have to think about the fulcrum structure. So if you believe that that was the right philosophy for both the client and the investor, then the performance fee and the steepness of that fee would be driven by the fact that you were starting at zero performance at 5 basis points. The rest of the structure sort of self-defines, because the fulcrum structure requires that you have as much upside as you have down side. And so we set then the fulcrum point if you will at what we thought was a reasonable expectation for performance for each of those products on a gross fee basis. So if a manager performed at the expected level, at their expected level, then they would get the expected fee which was pretty close to where we are in the market today. They outperform, they did better; under-performed, obviously. So that was our thinking. In addition to that we said, we don’t want to make this overly complex. We want people to be able to understand what the fees are at a moment’s glance, therefore we said we want to set the fee every day, we wanted to be clear every day, and we don’t want to use more than a one year calculation, because that would make it simplest and it would reduce the amount of confusion over what years performance am I paying for. In addition to that once you’ve made that decision, you then decide you need to reset it annually, because obviously you’re doing it on a one year basis. Again, simple, straight forward, clear.

[Surinder Thind:]

And then in terms of assuming that the product is successful, obviously would the idea be to - is this basically what you guys I think believed to be the magic bullet that might solve the active passive problem at this point in a sense that if you could reset all of the fee structures by the wave of a magic want, do you think at this point in time, I know it’s very early but this is what you do with all the products or could this structure basically fit most of the products that you offered at this point.

[Peter Kraus:]

So there is no magic wand I’m sure of that. I do think that this fee structure if it becomes successful, we’ll inform how most managers approach the market. This is flexible structure, people could look at this differently and they’ve had looked at it differently in the past. And as I’ve said numerous times from a business point of view, forget the client or the portfolio manager for a minute. But from a business point of view, an economic P&L point of view is it better to be paid the same amount of money every day no matter what happens? Of course that better. But if that’s shrinking at 6% a year, it’s not so much better. And so we view this as a revenue model that’s more responsive to the clients’ needs, more appropriate in terms of what active managers really say their value proposition is and therefore if it grows at 6% a year, it’s going to be a pretty attractive revenue model. So I think if it turns out that this is successful and in fact it does grow. I suspect it will be much more pervasive and not just AB’s P&L, but in most managers P&L. I’m sorry to interrupt, just want to say one more thing. Two things you have to think about in this model that is different than most performance fee structures that you see. Performance fee is not calculated on the beta. So it’s not like a private equity type structure where you’re calculating performance fees on your total return including the beta. Quite volatile, your market-to-market goes up and down. Here it’s calculated only on the alpha, different value proposition. Secondly, it’s an annual recalculation. Third, if you set this across a large number of products some of which will perform and some of which won’t and which there is actual diversification the volatility of this is far less than you might think just looking at one product and one performance fee. And I think that’s a key point as you think about how does this model, what this model look like if it were to grow overtime and be fully flushed out.

[Surinder Thind:]

And not to take up too much of your time, but just one really quick question about the two lost mandates, they were 2.8 billion and 2.2 billion was that right?

[Peter Kraus:]

Yeah.

[Surinder Thind:]

Okay. Thank you. That’s it from me.

[Operator:]

Your next question comes from Alex Blostein from Goldman Sachs. Your line is open.

[Alex Blostein:]

Peter wanted to go back to the MiFID II question for a second. You guys address how you’re thinking about it from a sales rep perspective. But I wanted to hear it for a second on how this made an impact. We asked the manager given kind of your global footprint, and I guess she was thinking about 2018. Any implications what the operating margin would be or we should be cognizant of when it comes from MiFID II in terms of whether you guys will be paying another (inaudible), whether you’ll be paying another P&L, any sort of updated thoughts on that would be helpful, thanks.

[Peter Kraus:]

I think MiFID II is from our perspective not looking to have much of an impact on us on the buy side. There’s of course the question that some clients might ask about, well, are you paying directly for research out of your GP or not, we are not. We don’t believe that that is actually a sensible question from the perspective that we make a product as an active manager, we use research, we believe that’s part of the process and so you if you can’t pick up, well let’s not pay for that part of the process versus another part of the process. If there’s a question about the overall fees the clients are paying that’s of course a discussion we have with clients all the time. But it doesn’t make any sense to us to say well, there’s one part of the ingredient that you put in to your product, I don’t like that ingredient, so I don’t want to pay for that ingredient. That doesn’t seem to make any sense. And I found that view to be pervasive amongst both the industry and in many clients, who also sometimes if they are managing their own money or are using their transaction floor to purchase research as well and wouldn’t separate that out.

[Operator:]

Your next question comes from Craig Siegenthaler from Credit Suisse. Your line is open.

[Craig Siegenthaler:]

I just had two follow-ups on the performance fee series. Number one, how does the fun work in a retail fee based account where there’s a distribution shell fee. And I’m just thinking of the scenario where there’s under performance and there’s little economics to be spread between the distributor and base comp and investment team. And then point two, can competitors launch his products with the product of the same structure or do they need to license it from you guys.

[Peter Kraus:]

So number one, if you are a manager selection business and you have a flat fee, let’s just say 150 basis points, and you go out and acquire, put managers on your platform. One is, you have a conflict. If the conflict is, you could pay 150 basis points then you’re trying to find managers who will cost you the least so that you can keep as much of the profit as is reasonable for yourself. So when you look at this product, it is actually more complicated for you because the fee is variable, and you might actually say I don’t want to put this product in that structure because that fee variable and that creates variability around my income i.e. they haven’t seen what you pay the manager and the total fee. And I’m said the distributors look there’s a big opportunity here for you to actually change your model, because you can now actually get away from that conflict and say I charge X for the advice and the manager selection and the capital allocation and the managers over here pay, you pay directly and its performance based, five basis plus performance. Some managers selectors actually do use performance fees. I think the largest one in the market is Vanguard and I think Fidelity does too. And I think they’ve effectively done that. They accept that risk that variability risk in their products, but I do think that this pushes on that form of manager selection process, and I frankly think it could be much better for the industry and the client if we unbundle or separate that, you remove the conflict, you may for advice for one thing and you may the manager for the other, and that’s very clean, transparent and from fiduciary point of view I think easier to understand. Your second question was?

[Craig Siegenthaler:]

Competitors launch this or any delays from eBay.

[Peter Kraus:]

Yeah, we are not in the vein of trying to make money on our idea. We want the industry to adopt it, it’s free. As they say come on in, the water’s fine. Anyone’s free to file whatever prospectus they want with the SEC and replicate the service. What we’ve said at the outset is we think the industry needs a change. I think the revenue model needs to change. We’re just running with our feet.

[Craig Siegenthaler:]

And Peter on the concentrated equity funds, can you talk about how you manage capacity and liquidity in these high reactor share sleeves, and when I’m especially looking at large cap growth just because it’s around pretty quickly here.

[Peter Kraus:]

We have capacity limits for all of our services, and we enforce them, and I think its lot more complicated than that unless I’m missing the question.

[Craig Siegenthaler:]

Is large cap growth close to a capacity constraint?

[Peter Kraus:]

No large cap growth has room.

[Craig Siegenthaler:]

MiFDI concentrated version?

[Peter Kraus:]

Concentrated version has room too and extremely good performance of both of them.

[Operator:]

[Operator Instructions] Your next question comes from Robert Lee from KBW, your line is open.

[Robert Lee:]

Couple of it about your SMA business, obviously that’s one place in US retail where for a long time now, but there’s generally been somewhat better demand given the fee based nature of it for report distributors. So can you talk a little bit about your positioning there, how you would kind of size that book if you feel like you have the right product offerings there and your willingness or interest in kind of the whole model portfolio or part of that business?

[Peter Kraus:]

So our key product in that space has been the muni product, the non-taxable product. That has been a big success, it continues to grow on many platforms, all muni SMA trying to resolve the issues that financial advisors have of holding individual bonds under the current regulatory environment. And so that’s one been an innovation, two been successful and three continues to grow until we clearly embrace that part of the market. We’re thinking about how do we do that in a taxable space, and we’ve also been thinking about other ideas that in equity space in the SMA market. But the SMA market has its limits too and the distributors like it, but they’ve got a much bigger non-SMA market that we continue to think we can grow on.

[Operator:]

I have no further question in queue. I turn the call back over to the presenters for closing remarks.

[Andrea Prochniak:]

Thanks very much for joining today everyone. I know it is a busy day, but our IR team is here to help you with any follow-up questions you may have. Thank you.

[Operator:]

Thank you every one. This concludes today’s conference call. You may now disconnect.