AllianceBernstein Holding L.P. Units

Thank you for standing by, and welcome to the Alliance Bernstein Third Quarter 2022 Earnings Review. At this time, all participants are in a listen-only mode. After the remarks, there will be a question and answer session, and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be available for replay on our website shortly after the conclusion of this call. I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Mark Griffin. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our third quarter 2022 earnings review. This conference call is being webcast and accompanied by a slide presentation that's posted in the Investor Relations section of our website, www.alliancebernstein.com. With us today to discuss the company's results for the quarter are Seth Bernstein, our president and CEO, Kate Burke, COO and CFO, and Onur Ercan, head of Global Client Group and Private Wealth. Bill Siemers, controller and chief accounting officer, will join us for questions after our prepared remarks. Some of the information we'll present today is forward looking and subject to certain SEC rules and regulations regarding disclosure. So I'd like to point out the safe harbor language beginning on slide two of our presentation. You can also find our safe harbor language in the MD&A of our 10-Q, which we filed earlier this morning. Under Regulation FD, management may only address questions of material nature from the investment community in a public forum. So please ask all such questions during this call. Now I'll turn it over to Seth.

Good morning, and thank you for joining us today. Financial market conditions continued to be challenging in the third quarter as investors reacted to both rising geopolitical stresses and further rate increases in the face of accelerating inflation. Other than investing in cash and certain commodities, investors have experienced negative returns year-to-date. We were not immune to industry-wide pressures as we saw outflows from active equity and taxable fixed income, particularly in September when global stock markets declined by 9% or more. In the quarter, we continue to generate organic growth in alternatives and municipals. Our realized fee rate improved by 7% year-over-year, driven by the addition of Carvel and an improving asset mix as higher-fee active equities and alternatives grew organically on a trailing 12-month basis. Our institutional pipeline grew to a record $24.7 billion, up $14.5 billion sequentially, driven by the addition of a $7.5 billion target date mandate. $4.6 billion of carve-out commitments, and an additional diversified mandate. Let's get into specifics, starting with a firm-wide overview on slide four. Growth sales were $19.8 billion, down $12.5 billion, or 39% from the year ago, reflecting much lower global retail demand as risk aversion prevailed in the face of volatile markets. Firm-wide active net outflows were $7.8 billion or $6.1 billion, excluding acts of redemptions. Quarter-end assets under management of $613 billion declined 17% versus the prior year and 5% sequentially. An average AUM of $654 billion was down 13% year-over-year and 5% sequentially. Slide 5 shows our quarterly flow trend by channels. Firm-wide, third-quarter net outflows were $10.5 billion or $6.6 billion, excluding acts of redemptions. Retail growth sales of $13.8 billion continued to moderate from 2021's robust levels, and we saw net outflows of $5 billion or $2.8 billion, excluding acts of $2.2 billion in passive redemptions. The macro overlay continued to drive risk-off behavior by investors amidst a third consecutive quarter of negative market returns. Our institutional channel saw net outflows of $6.3 billion or $4.6 billion ex-axa. Gross sales of $1.9 billion declined from prior quarters amidst weaker activity industry ride with redemptions concentrated among a few accounts. In private wealth, gross sales of $4.1 billion increased sequentially and net flows rebounded to positive $800 million following tax-related outflows last quarter. Net flows now have been positive for seven of the last nine quarters. Investment performance is shown on slide six, starting with fixed income. In the third quarter, fixed income yields in developed markets initially fell on growth concerns, then spiked as inflation remained stubbornly high. Many developed market central banks have turned progressively more hawkish and deliberate on rate hikes and quantitative tightening. Most credit sector returns were challenged during the period. Within the corporate space, high yield held up best, while investment grade corporates sold off more, given their higher sensitivity to rates. AB's fixed income performance over the three and five year periods was on par with the market, though below our standards, with 53% of assets outperforming over both time periods. Many of our fixed income strategies rely on a combination of both credit and interest rate exposure, which both performed poorly in the quarter, an unusual event as they tend to be negatively correlated. Our one-year underperformance reflected our positioning in global credit as most of our retail fixed income strategies are broader-based than just the U.S. in focus. The U.S. continues to outperform, making peer comparisons more challenged. Turning to equities, Equity market volatility persisted in the third quarter as investors came to terms with the new reality of high inflation and rising interest rates and rising risk of recession. The MSCI World Index fell by 4.4% in the third quarter in local currency terms and was down by 21.9% year-to-date. In developed markets, growth modestly outperformed value for the third quarter, though both were negative, and for the year-to-date period, growth underperformed. with the Russell 1000 growth index down 30.7%, lagging the Russell 1000 value index at negative 17.8%. While our active equities performance remained strong over the long term, with 80% of AUM outperforming over the five-year period, our one- and three-year performance continued to lag due to underperformance by composites against benchmarks. PEERS also struggled against benchmarks, with just 19% of U.S. large-cap growth managers and 30% of SMIT cap growth managers beating benchmarks year-to-date. Importantly, our retail mutual funds continued out to perform the Morningstar peer groups, as 63%, 61%, and 78% of our equity assets outperformed on this basis over the one, three, and five-year periods. Factors such as profitability and balance sheet strength have not provided the typical cushion against spiking volatility because the equity correction so far has been dominated by inflation. causing buyers to demand higher discount rates. Not only has this disproportionately weighed on longer-duration growth stocks, but reflation strength early in the year fueled cyclical expansion, which favored value stocks and factors such as leverage. Too often, management's extrapolated gains and investors capitalized extra profits generated by the COVID-19 conditions and stimulus. Regarding value. Concerns about recession and a strong U.S. dollar, which is negative for commodities, have weighed heavily on certain value sectors of the equity market. So the bulk of negative market performance this year is due to PE multiple compression rather than earnings erosion. Our teams continue to focus on identifying management teams that are executing well in a challenging environment. As attention shifts to earnings delivery, we believe we're well-positioned. Now I'll review our clients, beginning with retail on slide seven. Gross sales of $13.8 billion in our retail channel declined by $11.8 billion over last year's record levels and $3.5 billion sequentially, reflecting buoyant active equity sales last year and third quarter's torpid market sentiment across both fixed income and equities. Net outflows were $5 billion, or $2.8 billion, excluding expected AXA redemptions of passive variable annuity-related accounts. The overall redemption rate was stable ex-AXA. Taxable fixed income net outflows improved substantially by $3.9 billion in the third quarter. Of note, American income sales were up $1 billion sequentially, generating $500 million in net inflows for that product. Still, the recovery in flows we saw in the first two months of the quarter unfortunately reversed in September. Municipals led by our SMA Muni TaxAware product continued to grow for the ninth consecutive quarter, bucking industry-wide outflows, a story which owner Erzan will cover in his remarks. Active equity snapped a remarkable period of 21 straight quarters of growth, posting net outflows of $1.5 billion. Including year-to-date 2022, Retail active equity has posted six consecutive years of positive net flows, generating $45 billion in net AUM, or 9.4% average annual growth over this period. Several flow rankings are shown in the bottom right. AB ranks seventh out of 464 in U.S. equity flow rankings, with positive flows in the U.S. driven by large-cap growth. Turning to institutional on slide eight. Third quarter gross sales of $1.9 billion declined from prior periods in a period of muted activity industry-wide. Net outflows were $6.3 billion or $4.6 billion ex-axa, driven by a few concentrated redemptions which reflected broader asset allocation or multi-manager portfolio restructurings. AB still retains sizable AUM with each of these clients and in some cases is being considered for new business. Year-to-date, this channel has generated $4.6 billion of net inflows, or $6.9 billion excluding acts of redemptions. In the quarter, we experienced record U.S. and European credit fundings driven by Equitable, which has now funded approximately half of its multi-year $10 billion commitment in permanent capital. This was the ninth consecutive quarter of all MAS inflows. Notably, the channel's realized fee rate increased by 25% from the prior year period and was up 19% sequentially as we onboarded Carvel's higher fee rate private alternatives AUM in addition to record credit fundings. Our pipeline more than doubled to $24.7 billion at quarter end, up $14.5 billion sequentially, driven by a $7.5 billion custom target date mandate, $4.6 billion of Carvel commitments, and additional diversified active mandates. As shown in the bottom left chart, private alternatives now represent over 80 percent of the pipeline's annualized fee base, resulting in a pipeline active fee rate three times the channel average, up from two times a few years ago. Moving to private wealth on slide nine. Third quarter gross sales of $4.1 billion were even with prior year period and up 25 percent sequentially. Redemptions improved relative to the tax-driven sales in the second quarter, and net inflows were $800 million, or 3% annualized organic growth. This is the seventh of the last nine quarters in which private wealth has generated net inflows, proof that the growth strategy we articulated earlier this year is resonating. Our mix continues to shift toward our ultra-high net worth, $20 million and over clients, the fastest-growing client segment growing at more than twice the channel average. These larger clients tend to be concentrated in our New York, Los Angeles, and San Francisco offices and are influenced by our pre-liquidity event planning efforts for which our pipeline remains solid. Private alternative commitments remain healthy and are up 94% year-to-date. Our proprietary direct indexing strategy grew to 1.8 billion, up 15% organically year-over-year, and ESG portfolios of nearly 6 billion continue to resonate with our clients. I'll finish our business overview with the sell side on slide 10. Third quarter Bernstein research revenues decreased by 19% year over year and were down 14% sequentially. Despite more volatile markets in 2022, institutions are trading significantly less amidst an uncertain environment. In particular, we saw global asset manager clients reduce trading activity in the United Kingdom and Asia, favoring the U.S. Research checks remained stable sequentially and grew year over year at Autonomous, reflecting the strength of our brand and the value brought to clients. We held our 19th annual European Strategic Decisions Conference in September, receiving strong client response. Our European research team ranked in the top 10 by institutional investor, and we launched coverage on five global sectors this quarter, Korean Internet and Media, U.S. Restaurants, U.S. Mid-Cap Software, U.S. Consumer Credit Bureaus, and FinTech Strategy. I'll conclude by reviewing the status of our strategic initiatives on slide 11. Long-term performance and equities remain strong while fixed income performance moderated and near-term performance in both asset classes reflected challenging markets. Our third quarter growth was led by private wealth and our alternatives MAS offerings while we continue to grow immunities as well. Our pipeline more than doubled to a record $24.7 billion with an active free rate three times the channel average. We launched our first two active ETFs, ultra-short income and tax-aware short-duration muni, supported by Equitable. Touching briefly on our financial results, which reflect the addition of CarVal, third-quarter adjusted operating income declined by 27%. Adjusted operating margin was 25.1%, and adjusted earnings and unit holder distributions of 64 cents per unit declined 28% versus the prior year. Now, I'm pleased to introduce Onur Erzan, head of Global Client Group and head of Private Wealth, to review our differentiated retail and institutional distribution platform.