May 1, 2013
Executives
Andrea Prochniak - Director, Investor Relations Peter Kraus - Chairman and CEO John Weisenseel - Chief Financial Officer Jim Gingrich - Chief Operating Officer
Analysts
Rob Lee - KBW Bill Katz - Citi Matt Kelley - Morgan Stanley Cynthia Mayer - Bank of America Merrill Lynch Michael Kim - Sandler O’Neill Marc Irizarry - Goldman Sachs
Operator
Thank you for standing by. And welcome to the AllianceBernstein First Quarter 2013 Earnings Review.
At this time, all participants are in 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 for one week. I would now like to turn the conference over to the host of this call, the Director of Investor Relations for AllianceBernstein, Ms.
Andrea Prochniak. Please go ahead.
Andrea Prochniak
Thank you, Sarah. Hello.
And welcome to our first quarter 2013 earnings review. This conference call is being webcast and accompanied by a slide presentation that is posted to the Investor Relation section of our website.
Our Chairman and CEO, Peter Kraus; and our CFO, John Weisenseel will present our financial results. Our COO, Jim Gingrich is also with us and will join in answering questions after our prepared remarks.
Some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosures. So I’d like to point out the Safe Harbor language on slide one of our presentation.
You can also find our Safe Harbor language in the MD&A of our 2012 Form 10-K and in our first quarter 2013 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 the public forum.
So, please ask all such questions during this call. Finally, we will be providing twitter updates during today’s call.
You can follow us on twitter using our handout at alliancebernstein. Now, I'll turn the call over to Peter.
Peter Kraus
Thanks Andrea. And thank you for joining us for our first quarter 2013 earnings call.
John, Jim and I are pleased to be here with you today and as always John and I will review our operating and financial results for the quarter, and Jim, will join us in answering questions following our prepared remarks. Let’s start with an overview of our results which are on slide three.
After finishing 2012, on a high note, first quarter gross sale dipped about 2% sequentially, though they were up 31% from last year’s first quarter. Net inflows of $2.6 billion were down from last quarter’s $5 billion but a far cry from last year’s first quarter net outflows of $12 billion.
With net inflows and the strong market performance during the quarter, our period end AUM of $443 billion and average AUM of nearly $437 billion were up from prior periods. Slide four shows flow trends by channel.
In institutions, we built on our strong momentum coming into 2013 and in private client we gained ground after particularly tough end to 2012. Both of these channels demonstrated significant improvement in both gross sales and net flows in the first quarter of 2013 versus the prior quarter and year.
In retail, we lost steam after last year's tremendous run, particularly in Japan and Asia where sales and net flows had been strongest. Gross sales moderated with (inaudible) causing net in flows to decline steeply versus both prior periods.
I’ll go into these flow trends in more detail in my quarterly review by channel. The upside is that our firm-wide net flows were positive for a second straight quarter and our sales redemption to net flows all look very different today than they did year ago.
Now, let’s look at our channels beginning with institutions on slide five. The chart at the top left illustrates how much this business is improved over the past year.
First quarter gross sales of $7.3 billion were up 8% sequentially and nearly doubled last year’s first quarter. In our second consecutive net flow positive quarter, inflows of $3.3 billion were up 14% sequentially, gross redemption were down some 75% from the first quarter of 2012 and net flows improve by $16 billion year-over-year.
These are really gratifying results. The strength we’re seeing has spread across regions and services, you can see from the chart at the top right that we had a particularly strong quarter in the Americas and EMEA regions.
Gross sales were up by double digits. These two reasons accounted for about three quarter of our institutional gross sales in the quarter.
RFP activity keep trending higher with greater client interest in products like fund of funds, select equity, emerging market debt, global bond and high yield. We finish the quarter with robust pipeline of $7.8 billion and awarded but yet to be funded mandates that’s at the bottom left.
Of that $7.8 billion, 44% represents first quarter business wins mostly in fixed income but some equities as well. The table of the bottom right highlights some notable addition to the quarter.
Clients are gravitating towards core and credit on the fixed income side and equity is starting to dip a toe back into value. Throughout the quarter, it became clear that the great rotation was more about investors finally putting cash to work in equities again then a shift from fixed income to equities.
In any environment clients are most focus on performance and here our fixed income offerings continued to excel that is clear on slide six. Our largest services have outperformed for every time period.
In fact at quarter end 90% of our assets were in services that outperformed the benchmarks for that three year periods. So the five years it’s 92% and for the one year it’s 84%, that’s a stellar record.
We have pockets of consistent out performance in equities as well. Now I’m on slide seven.
Though not in as many services as we’d like or as our clients deserve. Among our U.S.
offerings, U.S. small cap value and select equity are perennial out performance and highly ranked in their categories.
Well, small cap growth has lagged recently, its top quartile for that three and five year periods. Global and international services that have performed well across multiple time periods include global market neutral, one of our newest stability equity strategies, global REITs and international discovery, our international SMID Cap Growth Service.
Emerging markets growth where we’ve made changes design to improve our invested process and performance, outperform for the one year and for the quarter as well. In equity investing, we continue to see a real divided between what’s working and where we believe additional opportunity lies.
We address that split on slide eight. Even as equity market return has been strong, investors kept filing into stock for seed as less risky.
The top half of this slides tell us the story. In the first quarter equity rally, the MSCI Min VOl indices outperformed the board market in most of the regions of the world and not by small amount.
At the same time, defensive stocks like consumer staples, telecom and utilities were the leading stock category in the quarter by wide margin. Why?
Because they tend to have two things in common, historically stable earnings and healthy dividends. You’d expect this flight to safety and typical risk of quarter but not in an environment where equities posted strong gains, including double-digit returns in both the U.S.
and Japan. It tells us that equity investors don't think we are out of the wood yet.
We are there for them, with services that are more defensively positioned, like the ones you see at top right of the slide, yet even as we broaden our products set to meet our clients evolving needs, we are traditionally keep value and growth investors at heart. And looking at the charts on the bottom of this slide, it’s hard to imagine, we’ll stay in this current defensive mode forever.
One thing, global correlations continue to come down, which give stock picking a chance to work. Another, over the past decade low beta stocks have risen as rates have fallen and the opposite has been true with low price-to-book stocks.
As rates reverse, we expect these relationships will hold and low price-to-book stocks will outperform while low beta lags. So companies that have been bid up based on high dividend yield will no longer be able to justify such reach valuations and overlooked gems with strong growth prospects, but low dividends will suddenly look even cheaper than they do now.
If these long-term opportunities that appeal most to us is fundamental growth and value investors, history has shown that market eventually revert to the mean, that's why we’re glad to be positioned as we are in services listed at the bottom right. Now let’s move on to retail, highlighted on slide nine, I mentioned that our sales slowed and gross redemptions to increase significantly in the quarter.
You can see this in the chart on top left. While, the quarter’s gross sales kept pace on an annualized basis with 2012's record year.
Redemptions were up more than 40% from last year's quarterly average. Most of this increase can be attributed to a spike in redemptions in January.
During that month’s our two largest retail fixed income funds, Global High Yield and American Income experienced the surge in growth redemptions in Asia, where each has became a leader in its category. We also had a large subadvisory termination of one of our blend strategies in January.
After that redemption stabilized, but these two factors, higher January redemptions in Global High Yield and American Income, and that month’s large subadvisory termination accounted for more than half of the quarter’s total gross redemptions. While, we expected total gross redemptions trend higher as our businesses got bigger.
We attribute these quarters higher redemptions rate that you see on the chart at the top right to this January average. Sales trends in this business remain strong and we’re excited about the growth we’re seeing in the U.S.
and Latin America. The first quarter sales were up by double digits sequentially and year-on-year, that’s the chart at bottom left.
We also reached a number of milestones during the quarter. Four of our newer offerings high income muni, real asset, muni inflation and bond inflation celebrated three year anniversaries for strong early performance together they have already gathered a combined $3 million in assets.
Other offerings have been successful and in even shorter period of time. Take select equity, which has attracted $2 billion in assets in retail alone since late 2011.
Finally, we continue to collect performance awards globally most notably in Asia. During the first quarter, we had eight funds approved for sale in Hong Kong in fixed income equity and multi-asset categories, which I’m confident, will help us keep building our strong presence in this fast-growing market for us.
Strength of our global retail franchises undiminished, even as we've come up last year's heady levels, clients continue to respond to our innovative offerings and strong performance. Now on to private client, another channel where we are laser focus on providing the rate investment solutions to our clients, I’m on slide 10 now.
There is no doubt that the fourth quarter of last year was quiet challenging, between the fiscal cliff debate and expected changes to the tax code investor uncertainty was high. Our FAs did an amazing job helping our clients through such a difficult time.
But you can see from the chart at the top left the impact is had on our business sale reflect redemptions strike, with investors making wealth transfers ahead of potential tax changes. The good news is that once the fiscal cliff was reverted and equities began to rally investors we engaged, our gross sales rose 85% sequentially this quarter to a two year high, gross redemptions declined by 35% and net outflows by more than 70%.
Even better news is that enhances we’ve made to our investment solutions for our clients are delivering for them. In April, we celebrated the three-year anniversary of Dynamic Asset Allocation, the strategy designed to actively managed equity exposure during volatile times.
Our goal was to reduce volatility and client portfolios while protecting returns. The chart at the top right shows we've done exactly that.
We've had success so far with our strategic equities as well and fund of funds with offering. We’ve migrated nearly all of our private clients to strategic equities since we launched about a year ago and is performed well, including in the most recent quarter.
And our RIC has already attracted $400 million from eligible clients significantly outperformed in the first quarter. The Bernstein model works and for a number of reasons.
One, we keep our clients properly allocated to equities as part of our long-term investment planning process in Barron's Annual Survey of the top 40 U.S. Wealth Managers.
We consistently rank higher than the group by this measure. The past two survey years are shown at bottom right.
Two, because we manage our clients money, we have unique insights into underlying portfolio that allows us to monitor individual accounts so we can make trade that take into account an individuals income tax rates, not to mention, advise them on important changes in tax law like at the end of last year. Finally, we are advisors not brokers, we don't pick managers.
We don’t chase performance. We build customized portfolios designed to expose our clients to return opportunities over the long run and tailored to each client’s specific needs.
Our portfolio performance is improving and I believe that will continue. Our clients know that we put them first in any market environment.
I’ll wrap-up by business highlights with Bernstein Research Services which is on slide 11. In the environment of stabilizing global trading volumes, our first quarter revenues increased 6% sequentially and 4% year-over-year, that’s the top of the slide.
We keep growing globally and growing profitably, and we’re increasingly making our mark in the fast growing yet highly competitive Asian market. This was our strongest quarter yet in Asia, revenues doubled year-over-year and the number of clients who traded with us grew by two-thirds over the same period and 25% sequentially as more analysts initiate coverage in the region.
We are earning greater recognition for our research. We now have 10 publishing analysts and four more in the pipeline.
By year-end we expect will be at critical mass in publishing. Meanwhile, we just had another strong showing in the European II survey where we had five teams ranked number one.
I can't say enough about the quality of our global self side research team. To conclude with slide 12, we made further progress in the first quarter on our long-term strategic goals.
I reviewed many of these highlights already, so I’m just going to touch on a few. On performance, not only do our fixed income strategies continued to outperform but many of our fixed income and equity funds were again recognized in Lipper's 2013 awards.
On diversification and globalization fronts, the Americas and EMEA were standouts this quarter. U.S.
retail flows were net positive for the first time since late 2007 and our Latin American business is incredibly profitable and growing. EMEA is a huge growth area for us as well in both the institutional and retail channels.
Speaking to innovation, four years into our push to innovate the clients we’re celebrating important performance in asset gathering milestones that positioned us well in new areas. Finally, on our financials, by staying vigilant on expenses we added 1.3 adjusted margin points on a sequential basis and nearly 4 points year-over-year, that’s our best showing in two years and we’re not going to let up on this front.
Our year is off to a solid start, yet we are mindful of what each of the past three years has brought at about this time, economic uncertainty, volatile political conditions, difficult markets and investor anxiety. Some of these dynamics began cropping up in April though more modestly than in years past, which gives us hope that 2013 could be better for the industry.
In the meantime, we keep moving forward on our strategy and finding new ways to deliver for our clients. I feel good about what we've accomplished so far here at AB.
With that, I’m going to turn it over to John for the discussion of the quarter’s financials. John?
John Weisenseel
Thank you, Peter. My remarks today will focus primarily on our adjusted earnings.
As always you can find our standard GAAP reporting in the appendix of this presentation, our press release and our 10-Q. Let’s start with our adjusted financials on slide 14.
First quarter adjusted revenues were essentially flat sequentially and up versus the first quarter 2012. Adjusted expenses were slightly lower versus both prior periods.
Our adjusted operating margin in the first quarter improved to 21.9% from 20.6% in the fourth quarter and 18% in the first quarter of 2012. Adjusted earnings per unit were $0.38 for the quarter versus $0.40 in the fourth quarter and $0.29 in the prior year quarter.
As I discussed during our last earnings call, approximately $0.04 of the fourth quarter’s $0.40 represented a change in estimate of a federal tax benefit relating to the first nine months of 2012. Now I'll review the quarterly GAAP to adjusted operating metrics reconciliation on slide 15.
This quarter there were two minor adjustments that make up the difference between GAAP and adjusted operating income. First, we adjusted for the $1 million non-cash real estate charges recorded in GAAP expenses in the first quarter.
These were related to true ups of real estate charges recorded in previous quarters. There were no other real estate charges in the first quarter.
Second, we excluded from net revenues $1 million of investment losses related to the 90% non-controlling interest in the venture capital fund. Now I'll turn to the adjusted income statement on slide 16.
Adjusted net revenues of $577 million for the first quarter were essentially flat versus the fourth quarter and up 3% versus the first quarter 2012. Adjusted operating expenses of $451 million were down 2% versus both prior periods.
Adjusted operating income of $126 million for the quarter increased 6% sequentially and 25% from the prior year quarter. Adjusted earnings per unit were $0.38 and our cash distribution will also be $0.38.
Slide 17 provides more detail on our adjusted revenues. Base fees in the first quarter increased 2% sequentially due primarily to an increase in retail and institutional average AUM.
The 5% increase versus the prior year quarter is due primarily to the increase in retail average AUM. Performance fees declined from the fourth quarter where we earned performance fees on our fund to funds offering.
Bernstein Research Services first quarter revenues increased 6% sequentially and 4% versus the prior year as client trading activity increase in Europe and Asia. Investment gains and losses included state investments, our 10% interest in the venture capital fund and our broker dealer investments.
Gains in these investments were flat sequentially but down $6 million from the year quarter as a result of lower seed investment gains. We ended the first quarter with $497 million in seed capital investments, up $21 million sequentially as a result of both additional net investments and market appreciation.
Total adjusted net revenues were flat sequentially and up 3% versus the first quarter 2012. Now let’s revive our adjusted operating expenses on slide 18.
Beginning with compensation expense. As you know we accrue total compensation excluding other employment cost such as recruitment and training as a percentage of adjusted net revenues.
We accrued compensation at 15% ratio in the first quarter up from 49% in the fourth quarter but in line with the first quarter of 2012. Total compensation and benefits increased 2% versus both prior periods.
The sequential increase is due primarily to the higher compensation ratio for the quarter. The increase versus last year is due to an increase in adjusted revenues.
We ended the first quarter with 3,269 employees down by 49 or 1.5% year-to-date. Now looking at non-compensation expenses.
First quarter promotion and servicing expenses declined 4% sequentially due to lower client-related travel and entertainment partially offset by higher marketing costs associated with our annual private client conferences held in the first quarter. Promotion and servicing expenses increased 2% from the prior year quarter due primarily to higher trade execution costs, resulting from increased trading activity and higher marketing costs.
These increases were partially offset by lower travel and entertainment expenses versus the first quarter of 2012. First quarter G&A expenses decreased 11% sequentially, due primarily to lower legal expenses, also contributing to the decrease for occupancy savings of approximately $3 million, resulting from our global real estate consolidation strategy.
Legal expenses include fees paid to outside counsel for various legal matters in addition to periodic adjustments to our legal reserves. Both of these items were lower in the first quarter, compared to the fourth quarter of last year, resulting in lower than typical legal expenses for the first quarter.
The 15% year-over-year decline in G&A was partially offset by cash receipt of $6.5 million in the prior year period related to the finalization of claims processing contingency originally recorded as an expense in 2006. Adjusting for this cash receipt, G&A declined by approximately $25 million, or 19% versus the prior year.
More than one half of this decline is due to occupancy savings, with the remainder attributed to lower technology, professional, portfolio and service fees. With the $3 million in sequential occupancy savings realized in the first quarter, we have now realized total occupancy savings of $10 million per quarter or $40 million on an annualized basis, from executing our global real estate consolidation strategy.
So we have accomplished our objective of reaching $38 million to $43 million of targeted annual savings. Total adjusted operating expenses were down 2% versus both prior periods.
Now let's move on to slide 19, adjusted operating results. Adjusted operating income for the quarter was $126 million, up 6% sequentially and 25% versus the prior-year quarter.
Adjusted operating margin is 21.9% for the first quarter, also improved versus both prior periods. Lower expenses drove the sequential margin expansion and lower expenses and increased revenue drove the year-over-year increase.
Adjusted earnings per unit of $0.38 for the first quarter compared with $0.40 in the fourth quarter and $0.29 in the first quarter of 2012. Finally, the effective tax rate for AllianceBernstein LP for the first quarter was 9%, higher than the 6% we estimated at the end of last year.
Two factors account for the increase. First, approximately 200 basis points of the difference came from higher than anticipated first quarter income at foreign locations with higher tax rates.
Since our foreign tax rates are significantly higher than our U.S. -- overall U.S.
domestic tax rate, fluctuations in realized versus forecasted income growth rates for domestic and foreign entities will create volatility in our effective tax rate. We expect this volatility to continue and now anticipate that our 2013 effective tax rate will be higher than our previous 6% forecast.
The second factor in our higher than anticipated tax rate involves foreign lease reassignment payments associated with our real estate restructuring program These payments, which were not deductible for foreign taxes contributed approximately 100 basis points to the first quarter’s 9% effective tax rate. With that, Peter, Jim and I are pleased to answer your questions.
Operator
(Operator Instructions) Your first question comes from the line of [Jacob Robert Lee] from KBW. Your line is open.
Rob Lee - KBW
Good morning. It’s Rob Lee, as you guys know.
Good morning everyone. See my first question would be, may be looking at the private client business and clearly, you’ve had the improvement in moderation and outflows.
Could you maybe update us on how -- I know that business has gone through some trials with some turnover in the financial advisors or relationship managers, I guess, more at. Could you just, maybe update us on where your own plans are to, kind of, to re-staff or maybe -- I know you tend to train your own.
So that -- are you accelerating maybe, your new training classes and trying to kind of refill the pipeline in that way. I guess, that maybe first question?
Jim Gingrich
Rob, it’s Jim. We’re always in the market, looking to add advisors.
You’re correct that we do recruit our own. We typically group those into classes that we can process through our system in the most efficient way possible.
We just actually had a class join us at the beginning of October and that means they, if you will, kind of hit the ground, running at the beginning of this year. So that process is going to continue.
I actually think in terms of the business overall. As you said, we’re very encouraged by the trends that we’re seeing, both in terms of financial results, how we’re delivering for clients and turnover of our rep As.
Rob Lee - KBW
Hey, thanks. Maybe my follow-up question, I appreciate the added disclosure around the flows and as a mix but within the other category, where you’ve had -- you had pretty strong flows in the quarter.
Maybe you’ve been, I guess, drilled down a little bit in that and give some little bit more color, particularly maybe around fee structures. I’m assuming that other bucket in addition to the bunch of the alternative strategies includes things like the overlay strategies within your DC business.
Maybe some color around the various fee structures in there and how that -- what that asset mix maybe?
Jim Gingrich
Sure. Rob, we did try to arrange the assets and the asset flow numbers for you all in a little bit more clear manner.
So that you could see what was going on in other because that category was continuing to grow. And I think that the context of the fee question which is asked reasonably regularly is that really there is no changes.
In other words, we haven’t seen any decompression in any of our major activities. It is true that the overlay strategies in the DC services or at lower fees are obviously traditional active services, where enhanced services are factor-based strategies.
But we haven't seen any negative change there. And indeed as we add in that DC strategy, more value enhanced services like lifetime and retirement strategies, actually these are stronger than they are in the CRS based.
So I would say to you that the composition of the fees are unchanged, yet there are some fees there that are less than the active management as you would expect in any passive environment. But the things that we’re adding there lifetime income strategies, alternatives, factor-based funds which we noted in some of the disclosure, those are going to be fees that are better than the base fees that you’ve seen in the business up until now.
Rob Lee - KBW
Okay. Thanks.
I’ll get back in the queue.
Operator
Your next question comes from the line of Bill Katz from Citi. Your line is open.
Bill Katz - Citi
Okay. Thank you.
Good morning. A couple of questions.
First question, maybe more clarification on the legal cost, could you sort of quantify how much of the benefit was in the particular quarter versus the run rate?
John Weisenseel
Bill, this is John. As I mentioned that there is two components to legal cost.
One are just fees that we pay to external lawyers on various legal matters that they work for us on. And the other components of periodic adjustments too to the legal reserves.
These costs obviously swing from period to period and creates volatility in the G&A expense line but to go further below that -- well I’m going to stop right there.
Bill Katz - Citi
Okay. Broader question is, it seems like the franchises are moving from defense to offense, if you will.
Performance is better for us to picking up, your global reach is stronger. What are your thoughts in terms of marketing spend, if you will.
Is there any kind of initiative here to maybe get more proactive and maybe bump up some spend to accelerate your organic growth beyond, sort of, your couple of billion dollars a quarter?
Peter Kraus
So good question, Bill. You’ll recall last year, I think it was in the middle of the year.
We had advertising expenditure that was around the fixed income strategies, which we thought was quite successful. We would expect that during the course of the year, we would continue to do things like that.
We don't have any particularly planned right now. So we can tell you it’s going to happen in month x or y.
But as we incurred those expenses last year and as I suspect your models include this year, we would probably do similar kinds of things. We thought those were successful.
They were highly targeted. They were specifically directed at particular channels and distribution world in the client group.
And I think they will probably do that in the coming months and years.
Bill Katz - Citi
Okay. And if I guess, one quick follow-up, I was intrigued by your comments about -- from the funds in the private client business in the $40 million.
What percent of your client you think have used that product versus how much more you might be able to penetrate into the channel?
Peter Kraus
I don't know the percentage directly but I would say to you that we’re seeing increasing penetration of our client base. We have a terrific service.
There is great returns, very consistent, run by a terrific team. And we think that there is significant upside for us overtime.
Jim Gingrich
Bill, this is Jim. If you remember that our RIC offering in that product was really just introduced at the beginning of the fourth quarter.
So as Peter says we think we have a lot of runway.
Bill Katz - Citi
Okay. Thanks for taking my questions.
Operator
Your next question comes from the line of Matt Kelley from Morgan Stanley. Your line is open.
Matt Kelley - Morgan Stanley
Great. Thanks.
First, I wanted to ask you guys, appreciate the new disclosure by investor service and channels. So thank you for that.
Just wondering within the equity active U.S. bucket, obviously, a significant diversion -- positive diversion from past trend there this quarter.
Can you kind of break that down for us as to if there's any large fundings in that or if it’s specifically kind of your Small and SMID cap products or what else it might be in that bucket that’s causing the change?
Jim Gingrich
I think -- look I think overall -- this is Jim. I think overall just, maybe, this is more than answer than you want.
But I think they were really encouraged by the breadth of what we’re seeing overall in the business. In terms of both, product channel and region, relative to -- and we’re making progress, I think across the board.
With respect to equities, there are number of good things that are happening. We had a very strong quarter for us to select equity services both in a long-only and a long-short form.
But we’re also strengthened in a number of other areas, some of which you mentioned. So there is a lot of good stuff happening that we’re very encouraged about.
I think this is also a little bit you're seeing the result of a few years of new product development and track records having been developed and client-to-client group having made greater connections with the end-clients and the retail distribution side as well as institutional. These things take time.
We’ve always said they take time but if you’re consistent at it and you produce consistent results, you’re going to get positive responses and we’re beginning to see that.
Matt Kelley - Morgan Stanley
Okay. And then along those lines, I guess, I’m curious to get your takes.
Everyone’s focused on operating margin expansion coming more from the, kind of, the cost saves. And as you want these new products over the last few years, are there any and not just one but a few products or kind of areas where you think you could get significant scale enough to really drive margin expansion that way as well.
Jim Gingrich
Well, look, I think our core business as well as the new businesses that we’re developing, we’re very mindful of managing costs. I think you have seen of late that that this company is doing a terrific job in that regard.
And our operating leverage, we would expect to continue to be quite strong if we can grow the business. So, I don't think there's certainly as you would anticipate that there are some products that have slightly higher incremental margins than others.
But overall if we look forward, if we can grow the topline, our expectations and we will continue to manage cost tightly and try and deliver a large portion of that to the bottom line.
Matt Kelley - Morgan Stanley
Okay. And then one last one for me and then, I will jump back in the queue.
But in terms of your fixed income taxable flows, strong first quarter after really, really strong last year. So, I’m just wondering you kind of had a volatile month-to-month and I know it’s not a month-to-month business but you’ve got a volatile trend there recently.
So, I’m just wondering kind of like, coming out of first quarter and into April and in second quarter, how were you feeling about momentum from here in that business?
Peter Kraus
Well, I think we made some efforts, trying to identify where the volatility was in the quarter in January. And we actually said that that was a little bit unique.
I think we referred to January as an aberration. I had to give you some sense as to how we feel about the quarter and what’s likely going forward.
Matt Kelley - Morgan Stanley
Okay. Great.
Thanks very much.
Operator
Your next question comes from the line of Cynthia Mayer from Bank of America Merrill Lynch. Your line is open.
Cynthia Mayer - Bank of America Merrill Lynch
Hi. Good morning.
Thanks a lot. Just one clarification on the tax rate.
Sorry, if I missed this but is this quarter’s 9% rate a good rate for the balance of the year?
Peter Kraus
Cynthia, as I mentioned, we expect it to continue to be volatile because of the differentiation between the very low U.S. domestic tax rate and the higher foreign rates.
And to the extent as we forecast, the income for the year, we expect there is movement between domestic to foreign, that's going to have a big very large volatility factor in terms of the effective tax rate. When you look at this quarter, again the 9%, 100 basis points of that was really unique to this quarter and it had to do with these foreign lease assignment payments that are not deductible for foreign tax purposes.
So, I think you can look at the 9% take off the 100 basis points and we should probably trend somewhere around there give or take I think for the year.
Cynthia Mayer - Bank of America Merrill Lynch
Okay. Great.
And then on the equity outlook, it seems like your equity performance is really strong in small-cap and SMID-cap, and I'm wondering those are typically products with capacity issues and where the products that typically don't have capacity issues, the performances isn’t quite as strong. So, do you have -- do you see any limits to where those can go?
Would you be able to somehow shepherd people towards some other products, if you begin to hit those limits? And also I guess if those products selling best in the retail?
Thanks.
Peter Kraus
The small and SMID-cap products actually sell across retail and institutional, very good following in both places and frankly in a global marketplace. Our capacity limits for both services, SMID is obviously much larger and there is actually a fair bit of room.
I think that the Large Cap equity services have been challenges us over a time, although you'll notice there are some Large Cap equity services like equity being the most significant where returns are terrific and flows are obviously, as we said pretty positive. So, I don't think we feel today that in the equity platform that we've got limiting capacity constraints overall.
There are clearly some products that will have capacity limitations and we will be tough on closing them. We've said many times, that we are going to be much more demanding on capacity because we've got a more diversified portfolio that will let us continue to grow and we want to be able to create returns for our clients.
Cynthia Mayer - Bank of America Merrill Lynch
Okay. Great.
Thanks.
Operator
Your next question comes from the line of Michael Kim from Sandler O’Neill. Your line is open.
Michael Kim - Sandler O’Neill
Hey, guys. Good morning.
First, Peter, the franchise has certainly evolved over the last four, five years or so. Just thinking about product development, infrastructure and the firm’s culture, so now that it seems like a lot of that work has been done, particularly on those fronts and your newer strategies are starting to generate some meaningful AUM growth.
Just curious, what some of the initiatives or strategies that you are thinking about today, or that will kind of help drive the next stage of growth if you will?
Peter Kraus
Well. Thanks for those comments, Michael.
Look, I think that there are some very interesting opportunities in Europe. And particularly in the equity world, we’ve seen European equity market that has been pretty well pummeled by -- in all directions.
We think that there are attractive valuations in the European equity business. We've got some interesting services.
Some are low beta equity services that have outperformed the general indices over the last few years and now have almost three-year track records. I think that there are also interesting ideas for us in the multi-asset category where we have a dynamic asset allocation, shown a pretty good track record over the last three years.
And there are services that are based on that activity that are outcome oriented that both institutional clients and individual clients are looking at them. And lastly, we talked about this factor -- these factor funds although they are quite small.
We think that people's interest in been exposed to systemic beta in value, growth and income are also interesting and eliciting lots of discussion today. We talked about the low vol that continues to be of interest and is outperforming significantly at the present time.
So, I think those are areas that we have developed that are getting a lot of attention on the equity side. On fixed income, we talked about our building businesses structured credit, our building business and RMB funds, our expanding business and just global credit, our expanding business in the developing corporate world.
There are some good opportunities there as well as that are building for us where we’ve got strong performance and where clients are seeing us as leaders in these spaces. So, I don’t want to go on and on.
But I think that there are lots of things that have been built in the firm over the last few years that are beginning to take hold. We’ve talked a lot about real estate.
In the past, we continued to think real estate lending is an interesting opportunity, both in the commercial side in particular as well as the residential side, so good opportunities for us, Michael. Good opportunities.
Michael Kim - Sandler O’Neill
Okay. That’s helpful.
And then just as it relates to your institutional equities business, assuming performance continues to improve and pension plans ultimately start to think about moving up the risk curve. How do you see that playing out for your strategies?
I realize the pool of competitors has shrunk. But just trying to get a better understanding of maybe the balance between some built-up demand for sort of disciplined deep value mandates versus maybe more of a secular shift away from sort of style box allocation if you will?
Peter Kraus
Yeah. I think you said a couple of things in that comment that are quite provocative.
One is that, if you were an investor looking for concentrated less benchmark sensitive exposure to deep value or growth, the number of managers that are prosecuting that investment process in disciplined way over a long period of time is as you know quite small. And the asset in that category are also quite small because the performance has been tough and many investors have allocated away.
As institutions look at their allocations, much of their equity performance or equity allocation is driven by -- I’ll call it Large Cap benchmark weighted exposures. In those, large-cap benchmark weighted exposures whether they are passive or otherwise, there are significant risks today.
We’ve talked about them, four, six to nine months, most of that being around the high dividend paying stocks, which are valued at high multiples. And I think institutions are mindful of that and they are trying to figure out, what is the right way to expose the capital of the pension plans and the long-term savers to risk anomalies that are different than the exposures they have.
And I think that's where our platform has particular strength, because we have had consistency. Yeah, it’s been challenged performances in some of the areas but those are the places that investors are very underexposed and we do think that that’s an upside for us.
Michael Kim - Sandler O’Neill
Okay. I will stick with the two questions.
Thanks.
Operator
Your next question comes from the line of Marc Irizarry from Goldman Sachs. Your line is open.
Marc Irizarry - Goldman Sachs
Great. Thanks Peter.
Can you talk a little bit more about the institutional business? Your pipeline sort have been in this $7 billion, $8 billion range for a while I guess and you’ve got a more diverse mix of products that you are capable of selling into the institutional world and I guess maybe this hits a little bit on the asset allocation team or the portfolio of solutions team for institutions.
But is that increasingly, when we think about the growth in the institutional world view, is it really about packaging more of everything that you do rather than just sort of more products specialist type of point and product solutions, just more sort of a broad portfolio solutions on the institutional business?
Peter Kraus
Well, in a word, Mark, I think it’s both, but one is that the $7 billion to $8 billion pipeline has been consistent for a little bit now. And it’s probably doubled what it was when I first came and our institutional pipeline was in the force.
So we’ve seen substantial growth in that business and obviously pipeline is the unfunded piece. And we’re seeing reasonably attractive fundings inter quarter.
So that activity has actually been satisfying. I’ve always said that we’ve kept our dialogues with the consultant community and clients, even though we’ve had a lot of challenged performance in last four years.
That is paying off because people are now recognizing that we have a more diversified platform. There is an increasing level of interest in some of the global credit work that we’ve done and you’ve seen that taking hold.
You can’t miss the fact that investors are looking carefully at their equity exposures and how to expose capital going forward in different areas than market cap weighted benchmarks and traditional value and growth or style based investing. And that I think has had a positive impact for us because we’ve talked about these things and we’ve been innovative in discussing that.
So look, I think that we’ve got a broader platform. I think we are engaged with clients on many more services than we had in the past.
We had the good fortune in the past of having a particularly high-performing, large-cap, global equity opportunity that everybody wanted, that was a good thing but it was very concentrated. I think now we’ve got a much more diversified discussion going on with clients and when you have that and you’ve got good services across that diversification, you can populate the various asset opportunities across the platform and build up diverse and more consistent business and that’s what I think is going on.
Marc Irizarry - Goldman Sachs
Okay. And then just sticking with the theme of diversity, I guess if you look at the retail business in areas like Japan or maybe Asia, ex-Japan, how diversified are your sort of product offerings out there.
Is there a little bit of sort of hot product or concentration risk in some of those regions where there is maybe one or two strategies that are really towing the load and are you more aggressively getting into those channels with newer products?
Peter Kraus
When I made the comment in my first thought that we had eight new products in Hong Kong that were approved this year. And that’s important because in those services, our both multi-asset services as well as equity services, as well as additional fixed-income services.
And you are right that we have a terrific brand in Asia and that brand has been focused around American income and global high yields and those are good things because people know us for that. But it also allows us to expand into other services, the Renminbi bond fund which I think is over $1 billion was completely new service.
No one ever really heard of it before we did it. I think we won a few awards and it continues to grow, as the Chinese bond market is continuing to grow and there is lots of interesting information about what is happening in that bond market and the rate of that growth.
So, I would say to you, in Asia, we are experiencing a interesting opportunity there where the core business which has been the fixed-income business is beginning to expand. The product diversification is also beginning to take route, and we’re developing new ideas and new services in that space.
So there is some historical concentration, but I think there is actually now factual evidence that that’s beginning to diversify.
Marc Irizarry - Goldman Sachs
Okay. Great.
Thanks.
Operator
(Operator Instructions) And your next question comes from the line of Cynthia Mayer from Bank of America Merrill Lynch. Your line is open.
Cynthia Mayer - Bank of America Merrill Lynch
Hi. Thanks for the follow-up.
I guess just a follow up on that. I am wondering, on the bond products sold in Asia, have you seen any impact from the yen.
And then just on the issue of the legal expense. Is there any way to at least quantify the change to reserves and presumably that’s like a non-cash benefit?
Thanks.
Peter Kraus
I’ll let John illustrate you on a legal response. But I’ll comment on the yen.
You didn’t get the message in what we are going to say there. Look on the yen, no, I don’t think there’s been any positive or negative impact of any size right on the change or the depreciation of the yen other than the obvious, which is the Japanese equity market has been pretty strong and that’s had some positive impact on our Japanese value equity business in Japan in terms of positive performance, also little bit on international value which is exposed there positively.
So I would say I can’t see any big impact on the fixed-income business as a result of the depreciation of the yen right now, Cynthia. I’ll let John come in on the other…
John Weisenseel
Thanks, Peter. Cynthia, it’s John again.
Just to maybe help you out here without again giving specific numbers. As I mentioned in my comments that the G&A number was $105 million for the quarter and I talked about the difference between that $118 million in the fourth quarter and the primary driver being the legal expenses.
I’ll just go on to say that the $118 million was typically higher than expected than the normal in terms of G&A. And the $105 million is lower.
And you shouldn’t count on the $105 million in G&A expenses as a run rate going forward. So I think we should leave it at that and hopefully that will help you in terms of your projections.
Cynthia Mayer - Bank of America Merrill Lynch
Okay. Okay.
Thanks a lot.
Operator
Your next question comes from the line of Matt Kelley from Morgan Stanley. Your line is open.
Matt Kelley - Morgan Stanley
Thanks for taking another question from me. I just wanted to ask since you guys have a large institutional presence.
We hear a lot about kind of the barbell approach. And I think you guys have kind of a unique view because you are both passive and active and alternative.
So from your view, what are you seeing from institutional clients both inside the U.S. and outside the U.S.
as well as Sovereign Wealth Funds in terms of what exactly they are doing from an asset allocation standpoint?
Peter Kraus
Well, by the way it’s different in both the regions and in the type of funds. So the Sovereign Wealth Funds don’t always act exactly like the defined benefit plans.
The Sovereign Wealth Funds some, for example, are cash flow positive. They are just growing like weeds.
And they’ve got a different risk parameter to them than a U.S. defined benefit plan which is decided to basically terminate over time and has got a shrinking footprint.
So it’s a little difficult to generalize, but I’ll try in any case recognizing that there’re some qualifications to my comments. I think the asset allocation issue is a little bit more subtle than how much do I have in equities and how much do I have in bonds.
I think the discussion that clients are having is how do they move away from, I’ll say it in broad terms in the traditional market calculated indices. So whether it’s the Lehman Egg or it’s Barclays index, or it’s some other fixed-income index, or obviously equity market calculated indices.
How do you start to expose capital to different kinds of risks other than those that are embedded in those indices. Those indices obviously have most of the capital in them.
But there is clearly a desire to look for alpha beyond that. And I think that that’s the search that institutions are engaged in.
And it happens in various different way. So the institutions are looking for fixed-income products that have positive convexity.
They are looking for fixed-income opportunities that have interest in credit exposures. They are looking for fixed-income opportunities.
They have interesting exposures to corporates that they don’t normally get in the indices. In the equity services, they are looking for systemic beta.
They are looking for opportunities for concentrated managers. They are looking for different capitalization opportunities, looking for different time horizons, looking for different volatility exposures.
So that’s where I think the diversification is in the institutional space. I don’t think it’s as much in how much do I have in equities and how much do I have in bonds.
It’s more of this rotation -- I won’t call rotation but search for different risk within those services. And frankly, I think that’s a good exercise because if you are constantly dominated by these market cap weighted indices, you’ve got a sort of unknown risks that you are exposed to or let say you may understand the risk but risk that you are not actually doing something about.
And I think that that has the characteristic of hurting returns over time because you’re constantly driven by where the money in the market cap weighted indices is going. You are sort of always invested in the crowded trade by definition.
And I think trying to find a way to allocate capital away from that crowded trade is what institutions are attempting to do.
Matt Kelley - Morgan Stanley
Great. Thanks very much for that.
Operator
With no further questions in queue, I’ll turn the call back over to Ms. Prochniak.
Andrea Prochniak
Thanks everyone for participating in today’s call. Feel free to contact us in the investor relations if you have any further questions.
Thanks and have a great day.