Apr 30, 2014
Executives
Andrea Prochniak – Director, IR Peter Kraus – Chairman and CEO John Weisenseel – CFO
Analysts
James Howley – Sandler O’Neill Steve Fullerton – Citi Research Cynthia Mayer – Bank of America Merrill Lynch Craig Siegenthaler – Credit Suisse Andrew San Antonio [ph] Marc Irizarry – Goldman Sachs
Operator
Thank you for standing by and welcome to AllianceBernstein First Quarter 2014 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 for one week.
I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AllianceBernstein, Ms. Andrea Prochniak.
Please go ahead.
Andrea Prochniak
Thank you, Lisa [ph]. Hello and welcome to our first quarter 2014 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. Our Chairman and CEO, Peter Kraus; CFO, John Weisenseel; and COO, Jim Gingrich 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 2013 Form 10-K and in our first quarter 2014 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 are also live tweeting today’s earnings call.
You can follow us on Twitter using our handle @alliancebernstn. Now I’ll turn the call over to Peter.
Peter Kraus
Thanks, Andrea, and thank you all for joining us for our first quarter earnings call. Let me start with the firm-wide overview on Slide 3.
I’ll get into more detail as I review our channel-specific results. But overall, I would say that our results for the quarter do not depict the strong underlying momentum we’re seeing across our businesses.
Our institutional client activity levels were the highest and most diverse we’ve seen in years. Retail channel sales increased in most regions and private plant flows were at multi-year highs.
Yet as you can see here, gross sales were flat with the prior quarter and down nearly $9 billion from last year’s first quarter, a time when we were still enjoying new record sales in Asia ex Japan’s retail fixed income. Net flows were negative $4.4 billion, mostly the result of two large institutional redemptions during the quarter.
These outflows carried half the average realization rate of our overall firm. We finished the quarter with higher AUM as market appreciation of $8.1 billion more than offset outflows.
The quarter also saw net new flows in areas like US taxable and taxes exempt fixed income alternatives and US active equities. Average AUM for the quarter was higher versus prior periods as well.
Turning to Slide 4, you can see our quarterly flow trends across channels. I mentioned earlier that we had a couple of large institutional redemptions during the quarter – one fixed income and one low key passive service.
These drove the $3.8 billion in outflows from the channel. In retail, our flows improved sequentially in the first quarter.
Net outflows of $1.1 billion were less than one-third the prior quarter total, reflecting a very strong quarter in US retail as well as the success of our new product launches in Asia ex Japan and stabilizing redemptions in our flagship retail fixed income products in that region. The private client net flows turned positive in the quarter for the first time since early 2008.
Let’s spend some time on our business beginning with institutions on Slide 5. The top half of this slide is where you can see the disconnect between our client activity levels and the actual fundings during the quarter.
Even as first quarter 2014 gross sales declined sharply versus the first quarter of 2013, our RFP activities increased by 38% with growth in every major asset class. In fact, it was the highest our RFP activity has been since the second quarter of 2008.
Equity RFP activity more than doubled year-on-year with particular strength in small and SMID cap select equities and concentrated gross strategies, our new service that came over with W.P. Stewart.
The question I’m asked most often by investors is how are your relationships with consultants? I’ve always said that even in the toughest times, consultants have been willing to talk to us to hear about our investment discipline and market insights.
Today, rather than just hearing us out, more consultants are seeking us out, asking us to update their databases, participate in searches and compete in finals. In fact, we get about 40% of last year’s total US led consultant activity in the first quarter of this year alone.
Bottom half of this slide shows how this level and diversity of client and consultant activity is translating through our pipeline. We finished the quarter with a $7.6 billion pipeline, up $2 billion from yearend and spread fairly evenly across both asset classes and regions.
An interesting point here is that while our pipeline is about even with where we were a year ago in dollar terms, back then fixed income represented 87% of it compared to 37% today in alts, multi-asset and equities combined total just 12% versus today’s 39%. That mix shift bodes well for future revenues.
The annualized fee base for our pipeline today is the highest it’s been in years. We’ve been tracking this number thanks to growth in areas like select equities, real estate private equity and lending, just more proof that our efforts to build a broader, more balanced client focused institution platform are paying off.
Of course, performance drives new business wins. Delivering for clients with our investment performance is where we are always focused.
And in this area where our fixed income team is particularly excelled, it continues to excel, now I’m on Slide 6. We continue to outperform benchmarks across all time periods in the vast majority of our services.
At quarter end, 82% of our fixed income assets were in strategies that outperform for the three-year period. And 81% had outperformed for the five-year period.
Unconstrained bond has been a very strong performer. This strategy just celebrated its third anniversary with a return that was nearly 5 percentage points above bench and earned a four-star rating from Morningstar.
And [indiscernible] just awarded our strategy as highest grade in the category. US income, global high income and European high yield all continue to significantly outperform.
We have exciting plans underway to broaden our fixed income platform as well. Following the financial crisis and reregulation, increased capital requirements have accelerated our long term trend of bankers [ph] remediation.
These secular changes are creating opportunities for asset managers to become the new capital providers in emerging asset classes like illiquid credit. And theirs have historically been served by banks.
We’re very focused on exploiting these new opportunities. Slide 7 highlights our strategies.
We see the liquid credit opportunities in four key areas – residential mortgages, commercial mortgages, middle market lending and infrastructure lending. In the residential mortgage area, the government and banks are pulling back from housing chains [ph] just as the recovery in US housing market is getting into full swing.
We’re participating today through our AB Securitized Asset Fund, a $700 million levered vehicle that it does primarily in nine agency residential, commercial and agency mortgage-backed securities as a way to leverage current income and capital gains across market cycles. It’s managed by the same team that ran our very successful PPIP, [indiscernible] funds, so we have strong capabilities in this area.
In the commercial mortgage area, it’s estimated that more than $1 trillion in loans will mature in the next three years alone. Last year, we brought in a seasoned direct commercial real estate lending team and are now able to directly originate first mortgage loans.
We have focused primarily on the most underserved segment of the market – loans secured by high quality transitional US properties. This team has raised more than $750 million for their first close and are now raising money for a second close.
Middle market borrowers had another – are another underserved market today and another opportunity for us to directly originate private credit investments through the capital structure on a relative value basis. Earlier this week, we announced that we hired an experienced middle market lending team formerly at Barclays to lead this business for us.
Finally, we’re currently building a global infrastructure debt investing team starting with a senior hire in London in February to fill the infrastructure funding gap created by strained public resources and fewer private investors. We’ll begin with opportunities we see in the European developed markets.
As important to us is building our capabilities and attracting assets into each of these private credit investment categories as mixing them across categories. We’re increasingly being asked by our clients to find new and creative ways to allocate capital across the spectrum of illiquid credit, specialty lending and traditional credit opportunities.
Let’s move on to our equity investment performance highlighted in Slide 8. We’ve have [ph] tried to restore our equity performance premiums and while we’re not yet back to where we want to be, we’ve made meaningful progress.
We’re seeing this in our stabilizing active equity flows. Today, about two-thirds of our equity assets are in strategies that have outperformed for the past year through March 31st.
We’ve got good momentum in our international, US, European and global strategic value strategies which are – which have one year performance premiums ranging from more than 5% to more than 12 percentage points. US, global and European strategic value are all top – core top performers for the period.
In gross, the emerging market’s gross has done very well despite the challenging equity markets for the first quarter. This time, it’s beat its benchmark by more than 5 percentage points for the one year and retained its competitive position as a top quartile performer.
Our longer term track record SMID cap growth in select US equity stand out for their top decile performance over the five-year period, beating their benchmarks by more than 3 percentage points each. Now, let’s talk about our retail channel, and that’s on Slide 9.
Our retail flow picture improved substantially in 2014. On a sequential basis, quarterly gross sales increased in all major asset classes in nearly every region.
One question in everybody’s mind is sales trends in the Asia ex Japan region – our two flagship funds in that region global high yield and American income continues to be an outflow mode. So far this year, we’ve seen continued sequential improvement in monthly redemptions and that trend has continued in April but gross sales still haven’t recovered.
Both of these strategies performed well in the first quarter and have top decile since conception performance. In fact, AIP is top decile for the quarter, 3-, 5-, and 10-year periods and ranks number one in its category since conception.
But it’s going to take time for investors to return to these services. We’ve addressed investors’ concerns over a rising rate environment by introducing duration head share classes for AIP.
That’s helped keep some investors in the fund. Absent these two strategies, our retail net flows would have been positive because of the success we’re having with new product launches in the region and strong growth in other parts of the world.
This quarter, for example, we launched new fund-to-funds offerings in Taiwan that allocates a multi-asset income and fixed income strategies. Together they raised $400 million in AUM.
We’re also encouraged by the momentum we’re seeing in other parts of the world. US retail in particular had an outstanding quarter.
Gross sales were our highest since the second quarter of 2008 and net inflows were our best since the fourth quarter of 2007. Through the combination of product innovation and improved performance, we’ve been able to gain traction with US platforms.
Select US equity long/short, our leading retail liquid alts offering is a perfect example – timely, relevant and a strong performance since conception. It’s the number two selling US fund in its category with a 12% market share and passed $1 billion in assets in its first 14 months.
This is another growth area for us. Today, AB is the number four ranked medium manager across channels in gross sales.
Year-to-date, we’ve nearly doubled our market share from 4% to 7.9%. Strength in private client on Slide 10 with gross sales at a three-year high and our first net flow positive quarter since early 2008.
We feel very good about our momentum in this business. The effort we’re making to better customize what we do for clients is engaging them on a whole new level.
We see that in both the attendance and mood of clients at this year’s annual client conference series. Even better, more than 60% of clients we’ve surveyed at these events have answered 9 or 10 out of 10 on their willingness to refer others to Bernstein Global Wealth.
This continues our trend of steadily rising client satisfaction scores. We also have greater ability to pursue sophisticated and self-directed individuals with our targeted solutions approach.
You can see that from the timeline across the bottom of the slide. Between the advice we can offer and the tailored solutions we can design, we’re differentiating our business in states where activity is on the rise.
Two great examples are European opportunities and securitized asset funds we’ve introduced over the past year. Private clients have embraced these offers, investing more than $600 million in them combined.
We also have real estate private equity, frontier markets and financial services ventures underway, so that have been – and they have been quite well received in addition. Even as we seek to broaden the base of clients we can serve, we never lose sight of our bread and butter – long term wealth planning, dynamic asset allocation and sophisticated tax playing, an area where our clients need us most these days given all the recent changes in the tax law that people have to navigate.
I’ll wrap up with business highlights with Bernstein Research Services which is on Slide 11. It’s another strong quarter for our sell-side business.
Revenues were up 12% year-on-year and 9% sequentially, our highest since our record third quarter of 2008. Once again, strong international growth drove the increase.
Revenues were up double digits for the first quarter of 2013 in both Europe and Asia and represented 40% of total sell-side revenues. We had a great quarter in Europe where there was significant trading around our recovery in the region and some activity related to the instability of Russia and Ukraine as well.
We spent years investing to build 100% client aligned trading platform run by seasoned traders that could execute quickly and efficiently. We’ve also always been agnostic about dark pools which positions us well when it comes to high frequency trade.
Here, the well known concern that brokers will leave trades exposed in their dark pools for too long. Our strategy is to send orders to different dark pools to sweep up liquidity.
We’re invested heavily on the technology side to create proprietary algorithms that filter out creditory traders and to improve our crossing rates. And on the talent side, to bring in 13 experienced traders in the past year alone and staff new internationally trading guests [ph].
We’ve always been recognized for our industry-leading research talent at Bernstein. Our growing global base of satisfied clients and market share gains shine a light on our best-in-class trading capabilities as well.
I’ll wrap up my remarks the way I started by pointing out how strong the underlying momentum is across all of our businesses today. Slide 12 illustrates this strength.
We’ve maintained our long term investment performance creators [ph] of fixed income and continued our equities turnaround with very strong returns in areas like global and European strategic value and emerging markets growth. Client engagement levels are the highest they’ve been in years.
That’s reflected in our approved flow across channels. In diverse growth and rising profitability of our institutional pipeline in the progress we’re making with US retail platforms, in our ability to appeal to a broader base of private clients.
Investments we’ve made to evolve our business in a client-focused way are paying off. Innovative New York offerings are contributing to sales increases on both the buy side and strong double digit growth in our nine US operations in the quarter drove our second highest revenue quarter ever on the sell-side.
As important, we’re making these investments for growth even as we maintain strict expense discipline throughout the firm. Our vision’s clear.
Progress is unmistakable. Now I’m going to turn it over to John for a discussion of the quarter’s financials.
John Weisenseel
Thank you, Peter. My remarks today will focus primarily on our adjusted results.
As always, you can find our standard GAAP reporting in this presentation’s appendix, our press release and 10-Q. Let’s start with the highlights on Slide 14.
First quarter adjusted revenues declined sequentially given the seasonal impact of our fourth quarter performance fees but increased versus the first quarter of 2013. Adjusted expenses increased both sequentially and versus the prior year quarter.
Our adjusted operating margin was 21.9% in the first quarter compared to 29% in the fourth quarter and 21.9% in the first quarter of 2013. Adjusted earnings per unit were $0.39 for the quarter versus $0.60 in the fourth quarter and $0.38 in the prior year quarter.
Now I’ll review the quarterly GAAP to adjusted operating metrics reconciliation on Slide 15. First quarter adjusted operating income was $1 million higher than GAAP operating income due to three items that we do not consider part of our core ongoing operations.
First, we adjusted for the $2 million non-cash real estate charge we took in the first quarter which was including GAAP expenses. This charge primarily represents a new real estate charge-off resulting from the W.P.
Stewart acquisition. Second, we excluded $1 million in acquisition related expenses, mainly severance, temporary services, professional fees related to the W.P.
Stewart and CPH acquisitions which were included in GAAP expenses. Third, we excluded the $2 million of investment gains related to the 90% non-controlling interest and the venture capital fund from net revenues.
Now we’ll turn to adjusted income statement on Slide 16. First quarter adjusted net revenues of $598 million were down 6% versus the fourth quarter and up 4% versus first quarter of 2013.
Adjusted operating expenses of $467 million increased 3% sequentially and 4% year-on-year. As a result, adjusted operating income of $131 million for the quarter was down 29% sequentially but up 4% from the prior year quarter.
Adjusted earnings per unit were $0.39 and our cash distribution will also be $0.39. Most of the fourth quarter – most of the first quarter decline in adjusted operating income and EPU from the fourth quarter is due to the expected seasonal decline in performance fee revenues and higher compensation expense.
In addition, the first quarter’s adjusted EPU of $0.39 reflects a reduction of approximately $0.02 attributed to investment losses and higher tax expense recorded in the quarter. I’ll provide additional details on these items in the coming slides.
Slide 17 provides more detail on our adjusted revenues. Base fees were essentially flat for the fourth quarter as lower retail revenues were offset by higher institutional and private client revenues.
The 3% increase versus the first quarter of 2013 is primarily due to an increase in private client AUM. Performance fees of $3 million for the first quarter compare with $44 million in the fourth quarter and $4 million in the first quarter of 2013.
We recognized performance fees as revenues at the end of the calculation periods which in most cases is the fourth quarter. Of the $44 million in the fourth quarter performance fees, $7 million related to the strategic opportunities fund that we liquidated during that quarter.
Bernstein Research Service revenues increased 9% sequentially and 12% year-on-year as a result of increased client activity in the US, Europe and Asia. Investment gains and losses include seed investments, our 10% interest in the venture capital fund and our broker-dealer investments.
Current period investment losses include seed investment losses compared to seed investment gains in both the first and fourth quarters of 2013. At quarter end, we had $533 million in seed capital investments, the majority of which is hedged.
Seed capital increased $91 million from the fourth quarter, primarily due to new investments funded during the quarter. Now let’s review our adjusted operating expenses on Slide 18.
Beginning with compensation expense, we accrued total compensation excluding other employment cost such as recruitment and training as a percentage of adjusted revenues. We accrued compensation at a 50% ratio for the first quarter, up from our 45.3% ratio in the fourth quarter and in line with our accrual through the first three quarters of 2013.
Total compensation of benefits increased 4% sequentially due to the higher compensation ratio and 3% versus the prior quarter of 2013 due to an increase in adjusted revenues. We finished the first quarter with 3,343 employees.
Now looking at our non-compensation expenses. The first quarter promotion and servicing expenses increased 4% sequentially due to higher trade execution and marketing costs, partially offset by lower T&E expenses.
Promotion and servicing expenses were up 9% from the prior year quarter due to higher marketing and T&E costs. The increase in first quarter marketing expense is a result of a shift in the timing of our expenditure for the year as we launch new advertising campaigns for US institutions and Asia retail and continued our efforts for our design [p] contribution in US retail businesses.
First quarter G&A expenses of $107 million were unchanged for the fourth quarter. Versus the prior year’s first quarter, G&A increased 2% primarily due to higher portfolio servicing fees.
Now let’s move on to Slide 19, adjusted operating results. This slide summarizes the adjusted operating results that I’ve already discussed.
Here I’ll focus on our effective tax rate and the status of our global real estate consolidation plan. The first quarter effective tax rate for AllianceBernstein, L.P.
was higher than expected at 8.7%, approximately 117 basis points related to discrete items that we do not expect to reoccur, including a caption of city and state tax accruals and a reduction of our net deferred tax asset to reflect anticipated lower future New York City unincorporated business tax rates. Finally, in Phase 2 of our global real estate consolidation plan, we have recorded approximately $218 million of write-offs to date.
The related ongoing annual occupancy savings have already been realized in our financial results. As a reminder, until all of the vacated office space has been sublet, the total write-offs is subject to increase or decrease depending on changes in market conditions.
We still expect the range of Phase 2 write-offs to be $225 million to $250 million. These real estate write-offs are included in our GAAP results but we exclude them from our adjusted financial results.
With that, Peter, Jim and I are pleased to answer your questions.
Operator
(Operator instructions) Please limit your initial questions to two in order to provide all callers an opportunity to ask questions. You’re welcome to return to the queue to ask a follow up question.
And our first question comes from Michael Kim from Sandler O’Neill. Your line is open.
James Howley – Sandler O’Neill
Good morning, this is actually James Howley filling in for Michael this morning. I’m hoping you can give us a little bit more color on what’s underneath the digital channel because I think related outflow is actually picked up on a sequential basis at least [ph] could the MONY redemptions from the prior quarter, so I’m just curious as to the underlying driver there whether it’s performance or broader rebalancing trends?
Peter Kraus
Well, let me just comment. The quarter had a lower number of growth sales than we would normally have expected.
We indicated that our month there, our quarter end pipeline was higher than it had been the previous quarter by about $2 billion. And we do see in April a resumption of a higher level of gross sales in the institutional space.
So we think there was some timing at play in the quarter as to the level of sales activity in institutions. In terms of what’s happening for us in the mix of that product or that channel, we’ve also said pretty clearly that there’s been a shift in mixed to a more balanced set of services at AB.
We had almost 90% of the pipeline activity in fixed income in previous quarters. And this quarter, it was substantially reduced I think in the 60s – low 60s.
And a much better balance into other services across the firm. And we actually expect that that will continue.
We think that that will ultimately look close to the balance of the firm’s assets, fixed income equities and alternatives over time. I think that we have substantial more activity in the institutional space which we also indicated or the activity and consultant-led activity.
In the case of the consultant-led activity, actually a significant object in that communication and RFP activity that comes along with the rise in the consultant interaction. So for us, that looks like a positive trend.
And on the redemption side I think as Peter mentioned in his remarks, we did have two large redemptions during the quarter that totaled just under $4 billion which largely explains the outflow for the quarter.
James Howley – Sandler O’Neill
Right. And then I just wanted to follow up on the retail fixed income outflows in Asia.
I appreciate the color you gave in the prepared remarks. But any color in the mix between the global high yield and the American income fund and then can you talk about if there’s been any progress in terms of recapturing some of those redemptions into other strategies as investors have sort of migrate into multi-asset or alternative and equity strategies?
Peter Kraus
Well, we did note that we have launched the multi-asset product in Taiwan and that and the other service that was launched raised about $600 million – or $400 million I think was the number. And that was actually quite a successful launch.
And we feel good about recapturing some of that lost flow. We also launched a new share class in American income products to capture some of the more duration-sensitive money that has left the service and that seems to be working as well.
And I would point out that, as I said in my remarks, that AIP and GHI had a very strong performance quarter. I think top decile performance if I’m not mistaken.
I may not have that exactly right but I think it was. And, look, the track records – the long track records are absolutely outstanding.
We had a challenging – relative to our really great track record last year, we’re returning that performance this year. And as I said, I think it takes time for investors to come back.
Because some of the concern was not actually the performance, it was emerging market credit which concerned investors and duration. As those concerns lessened and those areas look attractive and its performance returns to its top decile, top quartile performance, we expect to see investors come back to the service.
James Howley – Sandler O’Neill
Thanks, that’s helpful.
Operator
And our next question comes from the line of Bill Katz from Citi. Your line is open.
Steve Fullerton – Citi Research
Hi, this is Steve Fullerton filling in for Bill Katz. I just want to get further detail into the recent acquisitions with CPH and W.P.
Stewart, just kind of talk about what maybe your outlook is for those and how quick we might see some volume or some material effects from those acquisitions.
Peter Kraus
Well, the CPH acquisition we still think is on track to close here on the second quarter. That depends on regulatory approvals.
So the specific timing is always tough to predict but it does feel like it is very much on track. We remain quite optimistic about what the long term prospects are in terms of our ability to raise assets in that strategy given where its position in its marketplace – where it’s positioned in the marketplace as well as its historical strong track record.
In terms of W.P. Stewart, that closed at the end of December.
The activity has so far been quite strong. I think they’ve done 70 plus client meetings in the first quarter.
There are 12 RFPs that have been submitted or that are underway. So the level that s indicative I think in terms of the level of client interest in concentrated US, concentrated EBIT, concentrated global strategies.
And we’re also putting in place or have put in place the appropriate retail vehicles as well. So in terms of how that quickly that translates into flows that’s always tough to predict, but in terms of early indications, we remain very positive on what both of those acquisitions promise to the firm over the long term.
Steve Fullerton – Citi Research
Okay, great. And then the BRS pick up you guys saw with the increased client activity seemingly mostly international, can you talk about how that’s extended into the current quarter and how sustainable this level might be for the business?
Peter Kraus
Trading volumes are always a difficult thing to predict and they can change quite quickly. I think you’ve seen that – if you look at trading volumes be it in the US or outside the US, they’ve remained reasonably robust.
So that business continues to percolate along. I think from a strategic standpoint, though, as we tried to indicate, we think it is very well positioned and is starting to harvest some of the long term investment that we’ve made in that business to expand it globally as well as to invest in our trading capabilities.
And that’s some of what’s your seeing in the current quarter. And I think guessing trading volumes is just impossible but there is persistency to our market share gains and growth in Europe and Asia.
And depending upon where the market – the trading volumes go in the world, we should continue to see growth in that business based upon the growth in Europe and Asia.
John Weisenseel
And this is John. And I would just add as well with regards to the US, the US was up both on a year-over-year basis slightly but it was up actually very robustly sequentially to the fourth quarter.
Steve Fullerton – Citi Research
Okay, great. Thanks a lot.
Operator
And our next question comes from Cynthia Mayer from Bank of America. Your line is open.
Cynthia Mayer – Bank of America Merrill Lynch
Hi, thanks a lot. So the question on fee rates I guess, it sounds like the mix of RFPs bodes really well for your average fee rate.
At this quarter, it also looked like the average fee rate was a little bit lower. I’m wondering if you could maybe help us understand to what extent, too few [ph] or that is –- impacts your fee rate.
And also just looking at Page 31, you guys had I think a 4% sequential drop in retail fees but a 5% sequential rise in private expense fees, so I’m wondering what’s driving that because it didn’t look like the AUM moved in either case that much. Thanks.
Peter Kraus
Okay. I was going to say the private clients fee rate is at some respects related to the mix of services that clients are exposed to in that channel.
There are – that has shifted somewhat towards alternatives and equities which carry a higher fee rate. And in retail, that is also a function obviously of the mix of what we have and the outflows that we’ve seen in particular in GHY and AIP had an impact there.
John Weisenseel
And this is John, Cynthia. I would just add that you are correct that compared to the fourth quarter, the fee rate on the overall portfolio dips slightly.
It was 0.2 Asia’s point, so we’re still above 40 at about 40.2. But again, I think the current pipeline, the fee rate associated with that as we’ve moved from fixed income into more higher price fee based products like multi-asset and alternatives, that’s in the pipeline now.
And I think as that fund is going forward, hopefully we start to see that filter through into a higher fee rate on the total portfolio. But it will take some time.
Cynthia Mayer – Bank of America Merrill Lynch
Yes. So I guess when you put in all the puts and takes, the retail pressure but the private client improvement and the RFPs, do you expect for now a stable fee rate?
Peter Kraus
That’s tough to call, Cynthia. I guess I would expect stability and over time if our strategy works, a slightly rising rate.
But –
Cynthia Mayer – Bank of America Merrill Lynch
Okay.
Peter Kraus
– hard to tell.
Cynthia Mayer – Bank of America Merrill Lynch
Right. Hard to tell.
And I’m sure the market impacts too. So I guess then just a question on the – I know your adjusted doesn’t look at distribution, it nets it out.
But I also had a question because it looked like gross retail sales were up but the distribution revenues and expenses were down and so was the net distribution slightly. So I’m wondering what the dynamics of that are.
Peter Kraus
You’re asking what can I –
Cynthia Mayer – Bank of America Merrill Lynch
And if you like I could take that offline if you want.
Peter Kraus
Well, I think if the question is what’s the change in the net between gross revenues that are distribution revenues and expenses that are distribution expenses, what’s going on in there which we net off? That’s your question?
Cynthia Mayer – Bank of America Merrill Lynch
Well, why would sales be up but distribution down?
Peter Kraus
Well, that could be the channel in which we’re selling it. Not all retail channels have the same distribution expense associated with distribution revenues.
I think it’s best to take it offline since – yes, we’ll follow up after the call.
Cynthia Mayer – Bank of America Merrill Lynch
Okay. All right.
Can I ask one big picture question then?
Peter Kraus
Sure.
Cynthia Mayer – Bank of America Merrill Lynch
So, thanks. So just in terms of the build out of your liquid credit, you’re adding some really interesting stuff but can you give a sense of whether you think you’ll keep adding or there are other things that you want to add that?
And also, what impact might we see on the income statement from that? Is there – will that cause expenses to take up in any way or how does the profitability of those products compare to what you have?
Thanks.
Peter Kraus
So number one, are we going to add more things overtime? As the bank remediation becomes clearer and there are other places in the credit spectrum to originate assets and where we think the origination franchise that we can build is sustainable, we would add additional services.
It’s not clear right now what that might be. And the areas we have – commercial mortgages, residential mortgages, middle market lending up and down the capital structure and the infrastructure space is a lot to get done.
And there’s a lot of assets we can add there. So I think we’re pretty focused on that.
And the middle market lending, you could be in buyout, you could be in just straight lending, you could be in a subordinated level of lending, you could be in a senior level of lending, there’s lots of places to go in that space. And that connected with our historical credit-sensitive – or credit-intensive investing where we have been in high yield, in emerging markets, in the US markets and have the capacity to actually build out that credit space more broadly, I think that we’ve got a lot of flexibility in the credit-sensitive part of fixed income all over the world and in all asset classes.
So we could add more but we’ve got a lot to build. In terms of the P&L impact, when you add people and you’re not adding revenues, that does have a negative effect on P&L.
I don’t expect it to be material but I do – I can tell you that we’re adding more revenues than expenses when we hire people. I think, Cynthia, one of the questions that maybe you or somebody else asked us in the last quarter was, why are we going to be a 50% comp to revenue this year – and we do think this is a unique opportunity to add this type of talent to our platform.
And – but there is a cost this year to that, so I think we indicated last quarter. And this is consistent with what we’ve been doing for five years.
We have been adding capability and people for five years and it’s investing in the business and that has cost money and that does keep the comp to revenue ratio a little higher than what it would otherwise be. But we think it’s paying off.
Cynthia Mayer – Bank of America Merrill Lynch
Great, thanks a lot.
Operator
And our next question comes from Craig Siegenthaler from Credit Suisse. Your line is open.
Craig Siegenthaler – Credit Suisse
Thanks, guys, good morning. I’m just looking on Slide 5 and I’m just wondering what specific equity products drove the significant rate of change increase in RFP activity?
Peter Kraus
Well, I think that starting from the top of our core services, consultant activity is actually increasing in the core space – growth and value. If you go from zero to something, that has a big change.
So number one is there is actual consultant activity in those spaces. There is consultant activity in concentrated products or high active share products which we have basically all over the firm in the equity space.
There’s also consultant activity focused on semantic [ph] investing. So those are the areas that we see and those are the areas that consultants are running searches in.
Craig Siegenthaler – Credit Suisse
Got it. And then on the expense margin front, can you talk about your budget plans for the two key non-comp expense side of 2014?
More specifically, I’m looking here at promotions, servicing and also G&A, how should you think about those two items progressing here in ‘14?
John Weisenseel
It’s John, Craig. I think in terms of – let’s talk about P&S first.
And it came in at $48 million for the quarter. I think you can just expect us to bounce around this level plus or minus.
The drivers here are marketing teenage rate execution. So to the extent that we have a quarter where BRS, the sell side has strong revenues, we could potentially have higher trade execution expense.
As to the extent they have lower revenues, it could be lower. So I think where we are right now, I’d expect to bounce plus or minus around this area.
The same thing on the G&A side, we’re at $107 million this quarter, $108 million, somewhere around there. Big drivers there are professional fees and it also contains things like foreign currency, fee valuation and trading errors.
So again, I think that’s a good level. We could bounce around plus or minus, depends on what happens with some of these other factors.
Craig Siegenthaler – Credit Suisse
All right, great. Thanks, guys.
Operator
And our next question comes from Andrew San Antonio [ph] from KBW. Your line is open.
Andrew San Antonio [ph]
Hi guys, this is Andrew sitting in for Rob. Thanks for taking our questions.
Just getting to getting back to flows by asset category, we noticed that the other category was roughly flat for the quarter when it had been running at solid inflow at least in 2013. Could you just comment on kind of what was going on within that category?
I’m not sure, maybe I missed this if it was partially related to one of the two large institutional redemptions in the quarter. Anything you might have on that category would be great.
Thank you.
Peter Kraus
You hit the nail on the head there, Andrew. There was some large outflows in institutional that affected the other category.
That is the primary effect which Jim mentioned a couple of times in his comments.
Andrew San Antonio [ph]
Okay. All right.
Thank you. And then just a second question with the – you mentioned private equity like funds, private real estate like funds being raised, just kind of from a technical standpoint, we were wondering how exactly do those assets flow into AUM, meaning, once the funds are raised and the capital is committed, does that flow immediately into your AUM or is it more when the dollars are invested themselves that you see the assets there hit your AUM number?
John Weisenseel
This is John. It would be when the assets fund.
That’s when they – we would pick them up in our AUM number.
Peter Kraus
So as they’re invested.
Andrew San Antonio [ph]
Okay.
Peter Kraus
Not as committed.
Andrew San Antonio [ph]
Okay. All right.
Thanks for taking our questions, appreciate it.
Operator
(Operator instructions) And our next question comes from Marc Irizarry from Goldman Sachs. Your line is open.
Marc Irizarry – Goldman Sachs
Oh, great. Thanks.
Peter, can you give us a sense of the size of your defined benefit, the client business across assets. And then, are you seeing some pressure or maybe, I don’t know, benefits from the pension moving into LDI, maybe your equity – your offerings on the equity side, maybe you’re taking some share there.
But is LDI actually sort of helping your franchise?
Peter Kraus
I don’t have the number on the top of my head as to the total AUM we have with defined benefit plans. It is sizeable.
I just, I don’t know the number. I think the trend in the defined benefit business is a little bit by geography.
Europe, it is most challenged in terms of its growth driven largely by the UK deactivation of defined benefit plans which has been going on for some time. In the United States, it’s a similar trend offset by public plans which are still growing.
But the corporate side of DB is definitely a slower growth to, in some cases, shrinking activity, not surprising those trends have been going on for some time. As those funds have gotten closer to fully funded and the public side, that’s less the case.
In the corporate side, that’s more the case. And in Europe, it’s closer to the case for most of the funds.
The fund sponsors have been moving to indemnify effectively the funds by buying long-term fixed income instruments. A couple of things are happening there that I think are actually interesting long-term trends.
One is, in the current time period, that has increased the demand for long duration credit assets. So those assets have actually gotten more expensive.
If you talk to UK’s plan sponsors, they’re actually – I’ll use the word desperate, that’s a little bit emotional, but certainly aggressive in trying to find assets that would fit that long duration characteristic. And that demand has driven down spreads for those kinds of assets.
It’s part of the reason why the infrastructure business is interesting to us in Europe. In the United States, that demand is not quite as high and the supply of assets is larger.
And so that’s a more achievable objective. However, I think there are assumptions in LDI investing that are potentially challenging, because remember, what you’re doing is you’re making an assumption at the right side of your balance sheet, the liability side of your balance sheet is static.
And the fact of the matter is is that although the plans are close and the lives have become inactive, there are still assumptions that you’re making about mortality and cost of living increases that are just that, assumptions, and you could be wrong. And if you are wrong, that’s going to change the valuation liability and that’s going to change the funding status.
And as you reduce the amount of assets available to growth, because that’s what LDI does, that creates pressure on that ability to actually recover from those assumptions. So while I think that that trend in LDI investing is continuing in the space, I think we’re building up a potential risk inside of these closed plans that will force them to look for more growth assets, perhaps assets or managers that actually take more risk in the growth side rather than the more traditional large cap, highly diversified portfolios and equities or index portfolios and equities that they’re currently invested in.
So actually, Marc, I think the longer-term trend in the defined benefit space is, one, a continuation of going to inactive; two, a growing sensitivity around the assumptions in the liability side, and that puts pressure on the small number of growth assets that are left to actually seek out higher alpha and higher return assets because they need to offset that risk that’s growing in the liability side of the balance sheet.
Marc Irizarry – Goldman Sachs
Okay, great, helpful. And then just real quick on the credit strategy.
I’m curious how you’re thinking about the offerings of vehicles across those pillars, liquid versus illiquid vehicles and the sort of buy versus build decision in those verticals as well as maybe the potential regulatory landscape that could unfold around our systemic importance or the likes. Thanks.
Peter Kraus
Sure. Well, buy versus build, we have done both.
We have brought teams in in the commercial mortgage space and market space and we have built on the residential space. And in infrastructure, we’ve brought a team in there as well.
We haven’t bought an existing team and business. They’re not necessarily so easy to find, number one.
It’s because some of them – they actually may not exist. And number two is, I think we’re actually quite focused on the integration of these credit activities with our existing business.
Because as I said in my comments, clients are increasingly asking us to allocate capital between illiquid activities and liquid activities. So that asset allocation activity is quite valuable to large plans who are not able to allocate that capital as quickly as they may want to, given their view of the changes in markets.
So if you build a business, which we are doing, that is integrated, you actually can offer that service, that capital allocation service and you can offer with a track record and a pretty effective way of delivering it. so we like the fact that we’re bringing in talent that has historical experience and track records because that makes it easier for us to more readily modify that talent, but we also like the fact that it’s an integrated business where we’re giving clients the ability to allocate that capital across these different spaces.
And lastly, building a franchise is what’s long lasting. The originations franchise is what’s long lasting in these activities.
And as we build from the bottom up, we can adapt to existing market or changing market conditions to build those franchises. And there are significant changes going on in the market place.
Banks are actually struggling with the regulatory environment and how to actually navigate that environment given their historical businesses. And that’s changing the way these origination systems and franchises can actually be built both in the region that they’re built, in the assets that they attract and in the people.
So actually, having the ability to build these things at this particular time creates some flexibility that we think will pay well long term.
Marc Irizarry – Goldman Sachs
Thank you.
Operator
We have no further questions in queue. I’ll turn the call back to Ms.
Prochniak.
Andrea Prochniak
Thank you everybody for participating in our conference call. Feel free to contact Investor Relations at any point during the day if you have any further questions.
Thanks and have a great day.