Aug 2, 2012
Executives
Andrea Prochniak - Director, IR Peter Kraus - Chairman and CEO John C. Weisenseel – CFO Jim Gingrich - COO
Analysts
Michael Kim - Sandler O'Neill Cynthia Mayer - Bank of America Merrill Lynch Matt Kelly – Morgan Stanley Steve Fullerton – Citigroup Marc Irizarry - Goldman Sachs
Operator
Operator
Thank you for standing by, and welcome to the AllianceBernstein second quarter 2012 earnings review. (Operator Instructions) I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AllianceBernstein, Miss Andrea Prochniak.
Please go ahead.
Andrea Prochniak
Thank you, Tracey. Good morning everyone and welcome to our second quarter 2012 earnings review.
As a reminder, this conference call is being webcast in company by a spy presentation that can found in the investor relations section of our website. Our Chairman and CEO, Peter Kraus, and our new CFO, John Weisenseel will present our financial results today.
Our Chief Operating Officer, Jim Gingrich is with us as well and will participate in the question and answer portion of this call. Now I'd like to point out the cautions regarding forward-looking statements on slide two of our presentation.
Some of the information we present today as forward-looking and subject to certain SEC rules and regulations regarding disclosure. You can also find our cautions regarding forward-looking statements in the MD&A of our 2011 form 10-K and 2012 form 10-Q filings.
We filed our second quarter 2012 10-Q this morning. I'd also like to remind you that 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. Now, I will turn the call over to Peter.
Peter Kraus
Thanks, Andrea and thank all of you for joining us for our second quarter earnings call. As Andrea noted, I'm joined today with our new CFO, John Weisenseel to review the results with you and of course, Jim Gingrich, our CO is here as well who will join us in addressing any questions you may have at the end.
So let's start today with slide three. Strong sales momentum continued in the second quarter.
Gross sales of $18 billion, up slightly from the first quarter and up 34% year-on-year. As gross redemptions were down as well, net outflows were about $3 billion, our best flow quarter since the first quarter of 2008.
However, after a very strong first quarter, markets were tough. And they worked against us in the second.
Hit my macro-economic concerns, nearly every major global equity market fell sharply. And our investment performance suffered.
Investment performance drove $9 billion of the quarter's $12 billion AUM decline, with three-quarters of the performance driven decline coming from U.S. value and growth.
As a result, we finished this second quarter of AUM of $407 billion, down 3% sequentially. Average AUM was down a little over 1% at $411 billion.
In slide four, we give you a little more detail on our flows by channel. Once again, retail was a standout in the quarter.
Gross sales were nearly $12 billion. Gross redemptions were $2.2 billion lower, down 21% sequentially.
The net flows of $3.5 billion were not only positive for a second consecutive quarter. They were $1.2 billion higher than the first quarter.
In institutions, gross redemptions were down $7.4 billion sequentially. Of that decline, $5.2 billion is due to the absence of AXA related outflows that we saw in the prior quarter.
Gross sales were up 50% both sequentially and year-on-year. And net outflows of $3.7 billion were about $9 billion lower than the first quarter.
It's also worth noting, the Vanguard lease, we terminated our equity services. This will reduce our July AUM, but the financial effect will be immaterial.
In private client, a $2.6 billion, we saw a sequential pickup in net flows. Gross sales were down particularly in June in the wake of very weak equity markets in April and May.
Redemptions were also higher due in part to the spike we see each April associated with tax seasons. Expensive times drilling down to specific channels beginning with institutions on slide five.
Clearly, strong year-to-date sales growth coupled with lower redemptions has helped our net outflows in 2012. They are down about 40% versus the first half of 2011.
We also added nearly $5 billion to our pipeline during the quarter to finish at $11.3 billion. That is the highest it's been in the time that I've been here.
Most but not all of that growth has been driven by strength in fixed income. As you can see from the pie at the bottom left that fixed income accounts for about 2/3 of our pipeline.
The list at the bottom right gives you a sense of diversity of our new fixed income additions including global, regional, emerging market, U.S. debt, levered loans, and short duration high yield.
In fact, we're seeing increased RFP activity across both fixed income equities. RFP activity is up 40% on an annualized basis year-to-date.
Beyond fixed income, the greatest demand is for emerging market and multi-asset services, U.S. small, and SMID cap end select equity.
Things indeed feel different here than they did even six months ago. We're getting more at best than we have had in a long time.
Clients want to talk to us about the services we offer that meet their needs and are performing well. Obviously, performance is key.
Slide six demonstrates how we continue to excel in fixed income. Our largest fixed income strategies are outperforming across most if not all time periods.
For the three year period, 85% of our fixed income assets are at services that are outperforming their benchmarks. At equities, things changed dramatically from the first to the second quarter.
Slide seven and eight illustrate the impact of this shift on our investment performance. Slide seven shows how our traditional growth and value strategies significantly outperformed in the first quarter's risk on environment.
Yet when global macro-economic concerns searched, market volatility spiked. And investors once again retreated from riskier assets in the second quarter.
The impact on equity performance is immediate. As you can see on slide eight, stability equities, services designed to better weather volatile markets, once again outperformed.
And traditional growth and value equities relinquished their first quarter gains. We were not alone.
Industry wide, performance data shows that 70% to 80% of active managers underperformed benchmarks in the second quarter. With value managers, that number is even higher.
That makes it tough for many clients to stick with our brand of deep value investing through such volatile times. We are always sorry to lose clients.
And recognize that we have underperformed. But we still believe these core services are delivering the investment discipline that our valued clients seek when they hire us.
Turning to retail, which is highlighted on slide nine, momentum here is clear. Gross sales stayed strong in the second quarter.
Redemptions were the lowest since the first quarter of 2010. First half net inflows of $5.8 billion represented improvement of nearly $9 billion over the same period last year.
Every region is up double digits here to date with fixed income sales the primary driver. Both new and longstanding products are selling well.
American income is our top seller year-to-date, up triple digits for the same period last year. New product sales of $3.4 billion so far in 2012 and nearly tripled for the first half of 2011.
And has doubled as share of total sales to 14%. We also surpassed the $1 billion mark in high income muni and our inflation suite of products.
Clients everywhere are responding to our strong fixed income performance and innovative offerings. So a great showing for retail.
We're just as focused on innovating and private client. Now I'm on slide ten.
For the past few years, we've been making enhancements to client portfolios to address their evolving needs. Chief among them, greater risk management and less volatility.
Today, our Bernstein fully diversified investment solution looks very different than it used to with components that diversify out the sources, moderate beta exposures, provide some protection against inflation risk, and attempt to cushion the portfolio from extreme volatility. During such tumultuous times, clients want to know we're doing all we can to actively manage the risk inherent in their portfolios and preserve returns.
We think we've delivered for them with DAA. The chart at the top right shows that DAA has done what we intended it to do since we introduced it in 2010 reducing portfolio volatility by anywhere from 7.8% to 11.7% on an annualized basis through this June with little or no impact on returns.
Now we're focused on producing more stable returns with strategic equities, an integrated portfolio designed to harness our highest conviction ideas across equity strategies, and to source diverse outlet streams. We've completed the role out of this strategy to qualified clients.
And the response so far has been quite positive. The diversified slice of the pie at the bottom left includes stability equities like low vol and select U.S.
equities. Again, strategies have outperformed at a risk off environment.
By adding small and SMID cap stocks to the portfolio, we're diversifying by market cap as well. As important, we're maintaining our high conviction.
The chart at the bottom right shows how the top ten holdings in strategic equities make up 21% of the portfolio. But these same ten holdings are just 8% of the benchmark.
We believe this approach can capture more investment insights across a broader universe. And therefore, deliver a more reliable performance in diverse market environments.
Let me wrap up our business highlights with Bernstein research services, which is pictured on slide 11. Sale side revenues were down slightly sequentially and year-over-year in the second quarter.
Our revenues have held up quite well considering the steep trading declines across global exchanges shown in the top right chart. We're outperforming because SCB is unique on the sales side in two ways.
One, we're investing to grow our global franchise. And two, our research just keeps getting better.
Two new European surveys out this summer show we've either held our high rankings or improved them across several key research quality and client service measures. And looking at the table on the bottom right, you can see we're positioning ourselves to gain more share going forward and cultivating new in a few years.
Impeccable research on a global scale is so much of who we are. SCB is constant proof of that.
Finally, each quarter I update you on the progress we're making in executing the firm's long-term growth strategy. Slide 12 recaps what's new in the second quarter starting with investment performance.
Our global fixed income team won manager of the year in yet another European survey. One of our 40 plus awards so far this year in Europe alone.
In equities, Japan's strategic value won a 2012 Mercer performance award, its' third in the past six months, past six years. We're diversifying by gathering net new assets in areas like alternatives, asset allocation, and stability equities.
We continue to innovate. In define contribution, we recently introduced the first ever multi-insure backed lifetime income strategy for UTC as a default in their DC plan.
In alternatives, we launched a new tail hedge fund during the quarter, another risk focused offering designed to meet client needs. Last but not least, we continue to make headway in cost, particularly real estate.
John will tell you about the next stage of our global real estate consolidation plan, which ultimately will save us tens of millions in occupancy cost. It's a critical part of improving our results over time in any market environment.
There's no question the environment works in the second quarter. And it's anyone's guess what the second half will bring.
But I do know that we're still seeing strong momentum in many areas. We remain as committed as ever to our core equity's franchise.
And we will continue to invest in this important area to our firm. Yet in many respects, we're a different firm today from 2008 or even 2010 with strong diversification across equity services, proven success in fixed income, a growing alternative platform, and expanding footprint in self side research, and a significantly reduced expense base.
So we are better equipped today to weather changing market environments as well. Now I'm going to hand it over to John for a detailed review of our financials.
John Weisenseel
Thank you, Peter. It's good to be here.
You may have noticed that we have changed our presentation format this quarter. While we are required to report GAAP results, we believe using adjusted operating metrics removes distortions caused by deferred compensation mark-to-market adjustments, pass through revenue and expenses, real estate consolidation charges, and other one-time items.
So beginning with this earnings presentation, I will start with the quarter's reconciliation from GAAP to adjusted results. And then focus solely on adjusted results for the rest of my remarks.
Our standard GAAP reporting is included in the appendix of this presentation, our press release, and our 10-Q. Let's start with the adjusted financials on slide 14.
Both adjusted revenues and expenses declined sequentially and versus the prior year period. For the second quarter, our adjusted operating margin was 16.1% compared to 18% in the first quarter and 19.7% in last year's second quarter.
Adjusted earnings per unit were $.24 in the second quarter versus $.29 in the first quarter and $.35 in the second quarter of last year. Now I'll review our current GAAP to adjusted operating metrics reconciliation on slide 15.
We've added to this slide to present further transparency as to the adjustments we made to our GAAP revenues and expenses and the net impact on operating income. Slide 37 in the appendix is a more detailed version of this table.
To review these modifications, the largest adjustment is for distribution related payments, which are netted against GAAP distribution revenues. Pass through expenses primarily related to our transfer agency are reimbursed and recorded as fees in GAAP revenues.
There is not net impact on operating income. The deferred compensation mark-to-market net impact is excluded from net revenues and compensation expense.
Since we took an acceleration charge in the fourth quarter of last year, the impact of this expense is down significantly. We excluded all of the gains and losses related to the 90% non-controlling interests in venture capital fund from net revenues.
Finally, we adjust for real estate write offs included in GAAP expenses. In the second quarter, our $6.8 million real estate charge had the greatest impact to adjusted operating income.
I'll discuss this in more detail shortly. Now, I'll review our adjusted earnings beginning with the adjusted income statement on slide 16.
Adjusted net revenues of $546 million for the second quarter declined 3% sequentially and 14% versus the prior year quarter. Adjusted operating expenses of $458 million declined 1% sequentially and 10% versus the prior year quarter.
Adjusted operating income for the second quarter was $88 million versus $101 million in the first quarter and $126 million in the second quarter of the prior year. Adjusted earnings per unit for the current quarter are $.24.
And we will distribute $.21 per unit. Slide 17 provides more detail on our quarterly adjusted revenues.
Base fees for the second quarter were essentially flat sequentially and down 17% from last year's second quarter. This is in line with the decrease in average AUM and the continuous shift from equities to lower fee investment strategies.
Equities represented 27% of total AUM at the end of the second quarter versus 30% last quarter and 40% one year ago. Bernstein Research revenues declined versus both prior periods as a result of lower trading volumes.
We had investment losses of $2 million in the second quarter versus gains of $8 million in the first quarter and losses of $6 million in the second quarter of last year. This includes seed investments, our 10% interest in venture capital fund, and appropriate dealer investments.
Sequentially, the decline is due to current quarter losses in our seed capital investments versus gains in the prior quarter when markets were much stronger. Losses were lower across all investments versus last year's second quarter.
We continue to develop new products and ended the second quarter with $481 million in seed capital investments. Down $55 million in the quarter as a result of returning some seed investments.
Overall, net revenues were down 3% sequentially and 14% versus the prior year quarter. Now let's review our adjusted expenses on slide 18.
Total compensation and benefits declined 3% versus the first quarter and 14% compared to the second quarter of the prior year due to lower severance, headcount, and adjusted net revenues. We ended the second quarter with 3,385 employees, down 10% year-to-date.
As you know, we accrued total compensation excluding other employment costs such as recruitment and training as a percentage of adjusted net revenues. Within comp expense, severance costs were lower in the second quarter than in the first when we had greater headcount reductions.
And our compensation mix shifted to a higher percentage of incentive compensation. We continue to manage our full year comp ratio to stay within 50% of adjusted revenues.
Now looking at our non-compensation expenses. Promotion and servicing costs were up 5% sequentially primarily due to higher advertising cost as we rolled out our global fixed income campaign.
They were down 12% year-over-year due to lower T&E and trade execution fees partially offset by higher advertising expenses. Last quarter, G&A expenses benefitted from their seat of a $6.5 million class action fund distribution, which drove the 3% sequential increase.
Excluding this first quarter benefit, G&A expenses would have declined nearly 2% sequentially. G&A expenses declined from the prior year period due to lower rent and technology expenses partially offset by higher professional and portfolio services fees.
Overall, total adjusted operating expenses were down 1% from the first quarter and down 10% compared to the second quarter of the prior year. Now let's move onto slide 19, adjusted operating results.
Adjusted operating income for the quarter was $88 million, down 13% sequentially and 30% versus the prior year period. Adjusted operating margin was 16.1%, down from both prior periods as a decline in revenues outpaced our expense savings.
Adjusted earnings per unit were $.24 for the quarter versus $.29 in the first quarter and $.35 in the second quarter of last year. So far, I have focused my remarks on adjusted results.
However, the largest driver of the difference between our GAAP and adjusted results this quarter was a $6.8 million real estate consolidation charge we recorded. This is latest in a series of charges we've taken since we began rationalizing our real estate footprint in 2010.
Let me take you through a history of these charges and our plans from here starting with slide 20. In 2010, we identified 380,000 square feet of office space in the New York Metro area to vacate and market for sub-leasing.
That year in the first and third quarters, we took a total of $102 million in non-cash charges. Since then, we have taken a number of steps that have resulted in further charges, including consolidating our London office locations from two to one in 2011.
We plan to consolidate further within the remaining location in the second half of this year creating up additional space for sub-lease, vacating our New York City data center in the first quarter of this year and beginning the process of marketing that space for sub-lease. And recording the $6.8 million non-cash real estate charge in the second quarter I mentioned, which was a result of a change in earlier estimates related to our 2010 charges for the New York Metro office space still to be sub-let.
To summarize everything we've done to date, so far we have successfully sub-let more than 75% of the total square footage associated with our 2010 charges. And we've recorded nearly $125 million in non-cash charges, which we expect to generate $29 million of estimated annual savings.
Slide 21 outlines what we have planned next. We recently completed a comprehensive global office space review.
And now have a plan to restack office space within several of our existing office locations. And consolidate staff on fewer floors.
This new plan will free up floors to market for sub-lease beginning in the third quarter. And result in initial real estate charges and ultimately extend savings in subsequent periods.
Based on our current assumptions, we project total non-cash real estate charges of $225 to $250 million to implement our entire office space consolidation plan. These charges are in addition to the prior real estate charges, which were recorded that I just reviewed.
The future charges will have no impact on the future quarterly distributions. These actions will primarily address excess space at our New York Metro, regionally U.S., and London office locations with our New York City corporate headquarters accounting for the majority of the charge.
Our goal is to further reduce our footprint by approximately 490,000 square feet. As for timing, we expect to record the majority of the total estimated charges during the second half of 2012 with the remainder coming in the first half of 2013.
The actual timing will depend upon when we vacate specific floors and market them for sub-lease. We currently estimate annual expense savings of approximately $38 to $43 million once all of the vacated office space has been successfully sub-leased.
Our estimates for both the real estate charges and the corresponding annual expense savings are based on our best current assumptions of the cost per pair at the companies to market, the length of the marketing periods, market rental rates, broker commissions, and sub-tenant allowances incentives. The actual total charges eventually recorded and the related expense savings realized are expected to differ from our current estimates as market conditions change over time.
When these additional planned actions are completed, we will have reduced our global real estate footprint by approximately 40% since 2009. With this comprehensive real estate consolidation plan and our other cost reduction efforts, we believe we can meaningfully improve our cost structure and position our firm for a stronger future.
Now, Peter, Jim, and I will be pleased to answer your questions.
Operator
(Operator instructions).
Operator
(Operator instructions). Your first question comes from the line of Michael Kim, please go ahead.
Michael Kim - Sandler O'Neill
Hey guys, first, do you get the sense that the institutional redemption from your large cap-core strategies have sort of run their course for the most part, and then have you started seeing any signs that demand for these strategies be picking up a bit, or are investors still broadly avoiding large cap-core equities at this point? Thanks.
Peter Kraus
Hi Michael, on the institutional redemptions, I think the only thing that we can say about the institutional client that are invested with us today in the core services is that they understand the risks and returns of those strategies. That – we made the statement in our prepared remarks that our clients are seeking a particular kind of risk from us, or a particular kind of investment process in the example of value, a deep value – investing process and a set of characteristics in the securities that they own, and we’re delivering that.
I think that that may such feel somewhat better about the population of people that remain with us as clients, but to say that institution redemptions have run their course, I think, is probably a little strong. I do think that we feel good about the clients that we have, and we feel good about what we’re delivering those clients in terms of what they expect – the risk that they expect us to take, but we’re not happy about that performance, and it’s – you know, the markets are difficult, I don’t think anybody is missing that point.
On the demand for the strategies, I think that the demand for the strategy that’s interesting is what we see in some of the new newer strategies that we have built on the back of our research insights in value and in growth. And there is demand for that, particularly these low ball equity strategies that have valued characteristics, or stability equity strategies that have both value in some cases, growth characteristics, where clients are demanding those services, and we are seeing positive flows.
Whether we will see increase in demand for additional deep value strategies, I think that time will come, but it’s not here today.
Michael Kim - Sandler O'Neill
Got it, that is helpful, and then just on the expense side, you know, you’ve outsourced the transfer agency business, you continue to be proactive in terms of your occupancy footprint, but are there maybe other areas that you think you could further streamline the infrastructure, and then how do you balance that against maybe getting a bit more aggressive on the marketing front to leverage some of your momentum?
Jim Gingrich
Michael, it’s Jim. I would say that we are continually reviewing all aspects of our cost structure, we are making progress quarter-by-quarter, we expect to make additional progress going forwards, none of us are happy with margins in the mid to high teens, and we are going to continue to work extremely hard to make improvements there, and I would just encourage you to watch what we accomplish over time.
In terms of investments on the marketing expense, we will also still continue to work there, we are very focused on growing from where we are today, and as you said, we are going to do that prudently to make sure that we are balancing near term results with longer term opportunity.
Michael Kim - Sandler O'Neill
Okay, great, thanks for taking my questions.
Operator
Your next question comes from the line of Cynthia Mayer, please go ahead.
Cynthia Mayer - Bank of America Merrill Lynch
Hi, good morning. I’m wondering if you could give a little color on private clients, because the redemptions picked up and the sales fell off, and this is, you know, a channel which is usually considered pretty sticky in the industry, and the low vol looks like it’s had success.
Could you maybe give us some color and whether this reflects FA’s leaving as opposed to ordinary redemptions, and what the trend is there?
Peter Kraus
Sure, I think there is two things going on in private clients that are challenging in this quarter. One is the gross sales are truly lower than they have historically been.
It’s hard to put your finger on exactly why that has taken place, but the turbulence in the markets didn’t help, the protracted challenge performance in the core services was not helpful. One of the reason why we’re so focused on having rolled back successfully strategic equities is it provides our clients with a broader, more diversified investment experience, continuing to expose clients of the concentrated risk in value and growth, and we think that will help us in gross sales going forward.
Some of the weakness in redemptions, i.e. increase redemptions, does come from FA departures – to predict what that would look like in the balance year is as hard as telling you what is going to happen with redemptions and gross sales, but in the weeks in the past – the people leaving the firm from that source has actually dropped off, but it’s lumpy as you know.
We’re comfortable with private clients to the point of view of the new opportunities that we’re providing to our clients which we listed out numerous times but DAA strategic equity alternatives, and our well strategies platform in how we actually articulate to our clients how they should invest over time to protect their wealth and build their – for their family net worth. That continues to resonate, and continues to be unique, and I think that’s the path which we will go forward.
Cynthia Mayer - Bank of America Merrill Lynch
Okay, and then maybe a quick one on the 10% reduction in head count, is any of that due to be outsourcing to State Street, or would the outsourcing add to that?
John Weisenseel
No, this is John – the outsourcing, that that is exclusive about the outsourcing, so we are down 10% across the firm year-to-date. If [inaudible] – I think when the head count – you know, we have said that we will continue to manage our head count consistent with our business, and we’ve done just that.
Cynthia Mayer - Bank of America Merrill Lynch
Great, thank you very much.
Operator
Your next question comes from the line of Matt Kelly, please go ahead.
Matt Kelly – Unidentified
Good morning guys, thanks for taking my question. So, I wanted to ask about – so, did your long term operation goals, there is a lot of moving pieces this course, I’m hoping on the revenue side, can you help us understand the Vanguard impact to your July AUM, as well as fees – I know that you said in material, if you had brought a little bit of contest on that.
And then the expense side, what your outlook might be for the timing of when you think you can sublease your building – I know that’s hard to predict, but if you could give us some sense as to what you think the demand is for that as well, that would be helpful, and those things together, what do you think is a realistic long term operating goal for you guys at this point?
Peter Krause
Great question, Matt. I’m going to give you the answers.
Number one is, as Jim said, we’re not happy with mid-teens to high teens margins, we want to do better, we will do better, and that is our objective – we’re not going to give you a number, we haven’t in the past, probably won’t today. Secondly, with regards to Vanguard, you will have a chance to read the [inaudible], all the details are in there, just let me reiterate again, it’s not material to revenues, or income.
Thirdly, on – I’m trying to remember what your last point was – on the leasing, it’s on leasing, yes.
Matt Kelly – Unidentified
Right.
Peter Krause
On the question regarding the leasing of the properties, again, there’s a lot here because we have to vacate the property, prepare them to market, and then at that point we can take the write-off, and savings follow subsequent to that. So, at this juncture, as you said, we’re going to start to pull the trigger on this in the third quarter.
The bulk of the charges will hit this year, some charge to a flow over into next year, and the savings will result from there. Other than that, at this juncture, we really can’t give you better guidance as far as when the savings will actually flow through the P&L, but we would expect to, when we get on the next quarter call, to give you more guidance in that regard as we would have pulled the trigger on some of the property at that point.
The other thing that I would add to John’s comment, is that we have been active in the sublease market in the areas of which we exist, we have subleased space over the last 18 months, we think we understand where the market is, and what the time it will take, and the extents that are required to get tenants into the space. I don’t think in the New York metropolitan area, I’m not saying anything earth shattering, there is no enormous growth opportunities in sublease activity – in London it’s probably a little stronger, and you know, those are two major markets that we are operating in.
Matt Kelly – Unidentified
Okay, great, that’s helpful, and then one follow-up from me, if you guys could just kind of detail what you think are your – what’s your plan for the alternatives platform, obviously that’s an area where we see a lot of structural growth in the industry. So, where do you think you have a strong presents, where can you get even bigger, and how much are your institutional clients asking for at this point?
Peter Krause
I hate to do what’s conventional with price [inaudible] start at the end, but I will this time. So, institutional clients are absolutely having broad discussions with us about how did they allocate their capital in manners in which they can versify their risks and effectively manage their exposure to market factors more effectively in the past.
And the word alternative managers, really, it’s focused on attempting to satisfy that objective – how do you better manage the risks that you’re exposed to around the globe, and protect an objective of an investment performance, a return number, that you are aspiring to achieve. And so, I don’t think there’s a significant institutional client that we’re talking to where we are not having a discussion about that issue, and about what different innovative investment services we can provide them that can help them reach that goal.
So, alternatives doesn’t just mean hedge funds per se, or some structured transaction, it also means, completely different one only services, which we’ve talked about now for two quarters, and will continue to talk about. So, I definitely think that institutional clients are investigating pretty carefully how they take advantage of these newer investment services that actually expose them to different factors in different market conditions, and provide different return sequences to the traditional investment process – so that is point one.
What we intend to do to service that is to look to our core strengths, our core research capability, the core investment processes that we have developed over time, and on the back of those core services, we intend to provide alternative investment opportunities, and we’ve done just that. So, let’s start with DAA for example, DAA was developed on the back of our already robust research activities in a fixed income, in currency, in equities in our economic and quantitative capabilities – that was an investment process that was built on all of those skills, and then we created set of investment services that effectively sit on top of that activity.
Low vol, that is built on the basis of our quantitative insights and fundamental research insights in the value equity space –another example of an extension into that space. There are hedge fund activities in both fixed income in equities, traditional long short for example, and macro and relative value activities in fixed income that are built specifically on our quantitative research and fundamental research in those spaces.
We will continue to build out those activities and populate those services with assets over time in ways that effectively meet our clients’ demands. We’re careful of [inaudible] capacity, I don’t think this is something that we are looking to just add assets, we’re trying to find clients that actually understand the risks that we are managing, are [inaudible] good with, and can allocate a [inaudible] capital.
We will build it over time, it’s not going to grow immediately, but it had very constant and consistent growth across a number of different investment clients’ channels.
Matt Kelly – Unidentified
Thank you very much for taking my questions.
Operator
(Operator instructions). Your next question comes from the line of Bill Katz.
Steve Fullerton - Citigroup
Hi, this is Steve Fullerton filling in for Bill Katz. With speaking about the pipeline and how fixed income has been a driver, can you provide some further detail and how we should look going forward, if this will continue to be a driver?
Peter Kraus
Well I think we gave you a fair bit of information in the deck on the major constituent pieces of the pipeline and what we are seeing today in what’s populating that pipeline. Predicting what’s going to be going forward is of course a challenge.
I don’t really see a material change in the next six months from what that pipeline looks like other than it will probably diversify a bit reflecting some of these newer equity services that we’ve talked about. And we probably will see some additional emerging market debt in the pipeline over time.
And then I think it’s lumpy when you talk about contribution because we win the CRS mandate, SRS mandates and they’re very big and they affect the pipeline idiosyncratically when they occur.
Steve Fullerton - Citigroup
Okay, great. And then for private client, if we were to see a risk on environment, how well positioned would private client be to that environment.
Peter Kraus
We think that we have done two things in private client. One, by diversifying the sources of alpha, we’ve been able to take more risk in each of the [Inaudible] so I went through the example of the concentration in the equity portfolios where that concentration in a risk on environment we think will provide very attractive returns.
We also think though in a risk off environment and the volatility that we’ve seen in these environments that having low vol and select equity, core equity kind of exposure will appropriately mitigate that downside. We have viewed these investment strategies over time and they in those rejections in both back testing and actual results they produce a return that’s equivalent and in some instances better than the historical more concentrated in one or two strategy equity portfolios have in the past.
So we believe and we’ve talked with our client about this that over time they are likely to experience a very attractive return for the risk that they’re getting in these portfolios. Will it be as volatile?
We hope not. We’ve actually built it to be less so.
Steve Fullerton - Citigroup
Okay, thanks for taking my question.
Operator
Your next question comes from the line of Marc Irizarry. Please go ahead.
Marc Irizarry - Goldman Sachs
Great, thanks. Peter, you talk, it sounded like the commentary on sort of we are out of the woods in institutional outflows and equities that maybe that’s, maybe it’s a little bit early to tell.
If you look at sort of the, you know, is there any sort of mandates that you think are sort of high risk on the equity side? And then on the other side of the equation, you know, if you lose some of those equity assets how’s your ability to capture those assets in other services?
Or is it more on the institutional side, just sort of a replacement of equity managers rather than sort of reallocations of the services where maybe you can pick up some of the lost business.
Peter Kraus
So on the redemptions I want to be conservative with you all and not say that geez we have lost a lot of equity assets and institutions. We remain committed to the clients that we have and the clients remain committed to us and we feel very good about them and we think that the redemptions going forward will continue to get smaller and continue to be less and less, and we feel pretty good about it.
I don’t want to be aggressive on that point. You can make the argument that that’s all logical, and it is logical.
But if we have two more years of very challenged performance and six years of negative cycle in value I’m not sure that that’s going to be the case. We don’t know what the length of this cycle is, but we already are almost a four year long value cycle that has been in reverse if you will.
And the further and further that cycle is extended the more and more likely in reverse. And that certainly is not just a history, but sort of the logic of it.
If you think about value investing and stocks for companies you’re trading at below book value or below their normalized price earnings ratio companies continue buy stock back and they continue to drive that value cheaper and cheaper, at some point it changes. At some point investors say this really did get too cheap, I’m going to start buying it.
And we don’t know when that’s going to occur, but we do know that the clients that are committed to us are committed to that exposure. And we do know that we provide that exposure to our clients in a very disciplined manner, in a very consistent manner.
And we do know that when the performance is good, when the environment is strong we clearly outperform. And that happened in the 1st quarter of 2012, it happened in the 1st quarter of 2011, and it happened in the 1st quarter of 2010, and I hate the fact that it happened in the 1st quarter of every one of the last three years, but the fact is that it did happen.
So we think that our clients understand that and that makes us feel much better about the commitment of them to us at this time. But to predict that that’s going to remain and no one will change their point of view in the risk that they’re taking, that’s too difficult to do and so I won’t.
Having said that, I do think that the conversations we’re having, I mentioned that the RFP activity is up substantially and I mentioned the pipeline at 11.3 billion, those indicators are much stronger indicators or much stronger facts than we’ve seen in frankly the last 3 years. And they aren’t by happenstance.
We have changed and built a lot of new opportunities for our clients. And we’ve built them on the same foundations, same research foundations, same research, same investment personnel that we’ve had for long periods of time.
So that I think should constitute some confidence that our clients are expressing in us, in our ability to produce investment performance for services that they want. It’s crystal clear that a client who invests us in one service is more likely to invest with us in other services.
As we penetrating more and more clients that feeds on itself. It feeds on itself in the institutional channel, it feeds on it with clients, it feeds on itself with consultants, and those things are, I’d say, reflecting positive momentum today.
Marc Irizarry - Goldman Sachs
Okay, that’s great. And, you know, the retail flow momentum kind of looks like it continued here in the 2nd quarter, any view so far 3rd quarter on sort of retail fund flow for you guys?
Peter Kraus
I don’t have any material information that could be useful for the 3rd quarter. I do think what’s important in retail is you now had success quarter to quarter growth in retail and we know in retail that it’s sort of a really big ocean liner, but when it gets going, you know, it tends to have momentum to it.
And I think we’re beginning to see that momentum. July AUM comes out next week, you’ll have a little bit more visibility, you know, when that number comes out, but it’s only one month and we like to look at it quarter over quarter.
But I do think you’ve now had two successive quarters of attractive growth in retail and as I say I think, and you know the retail business when you penetrate these platforms, these large platforms with services that begin to get traction then those wholesale distribution systems and FAs tend to buy more and more of the same platform. And that’s a good thing for us.
Marc Irizarry - Goldman Sachs
Okay, great. Thanks.
Operator
Your next question is a follow-up from Michael Kim.
Michael Kim - Sandler O'Neill
Hey guys, just a couple of quick follow-ups. Just focusing on the retail channel, I know the redemptions were down pretty meaningfully this quarter, but given the fact that it seems like a meaningful chunk of your sales are coming into newer products, is there a risk that you might see a redemption rate pick up down the road as those products vintage?
Or do you think kind of ongoing product innovation works as an offset to that dynamic?
Peter Kraus
Well there’s always a risk Michael. Let me try to characterize the new products slightly differently.
So in other words if they were new products i.e. very strong performance hot dot kind of things, I think you could argue that fads changes, people change, I think that the growth for us in retail is quite diversified.
It’s crossed a number of geographies, a number of products, a number of actually stable products, products that have been around for awhile, and there have been some new ones in fixed income, like high yield muni, and there’s been some traditional ones in fixed income, like American Income. There’s been growth in [Inaudible] Japan in equities and you know that’s a product category that Asia likes.
So there’s always a risk that you get a material change in the underlying investors moving away from a new service. But I don’t think that’s an elevated risk for us.
The more significant risk is material change in the macroeconomic environment. You know, we saw in the 3rd quarter of last year when the euro risks were elevated and there was concern about credit, material outflows in the retail side of the fixed income business.
And that is certainly possible. That’s where I think the bigger risk is.
Michael Kim - Sandler O'Neill
Got it. And then just quickly can you just give us an update on the residual outflows related to the axis dispositions, I think maybe a couple billion got pushed out a bit.
Any color there?
Peter Kraus
Yes, they definitely did not happen this quarter and they’ve been pushed out for the foreseeable future and potentially they may not be as large as what we originally had expected last quarter.
Michael Kim - Sandler O'Neill
Okay, great. Thanks for taking my questions.
Peter Kraus
Thank you, Michael.
Operator
There are no further questions at this time, I turn your call back over to Andrea Prochniak.
Andrea Prochniak
Thanks everyone for participating in the call. I will be available all day if you have any follow up.
Thank you.
Operator
(Operator Instructions)