AllianceBernstein Holding L.P. (AB) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the AB Fourth Quarter 2016 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 AB, Ms. Andrea Prochniak. Please go ahead.

Thank you, Jack. Hello and welcome to our fourth quarter 2016 earnings review. This conference call is being webcast and accompanied by a slide presentation that is posted in the Investor Relations section of our website, www.abglobal.com. Peter Kraus, our Chairman and CEO; John Weisenseel, our CFO; and Jim Gingrich, our COO, will present our financial results and take questions after our prepared remarks. Some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I'd like to point out the Safe Harbor language on slide 1 of our presentation. You can also find our Safe Harbor language in the MD&A of our 2016 Form 10-K which we filed this morning. Under Regulation FD, management may only address questions of a material nature from the investment community in a public forum, so please ask all such questions during this call. We also live tweeting today's earnings call. You can follow us on Twitter using our handle @AB_insights. Now let me turn it over to Peter.

Good morning, everyone and thanks for joining our call this morning. By now, you have heard about the challenges that all asset managers faced in 2016. We were certainly affected as well. Let's go through the numbers though beginning with the firmwide overview on slide 3. While total gross sales of $73 billion were down 3% in 2016, momentum picked up in the second half and gross sales of $39.2 billion increased 16% sequentially. Full-year 2016 net flows of negative $9.8 billion include the two lumpy redemptions we reported in the third quarter, a $7.6 billion redemption of a portfolio of alternative assets that we had been managing for a large institutional client at a low fee and a $6.7 billion outflow resulting from the conclusion of our Rhode Island college-bound 529 relationship. Excluding these two flows, annual net flows would have been a positive $4.5 billion. Fourth quarter net flows of negative $100 million improved year-on-year from negative $2.5 billion. Full-year average AUM was essentially flat, though fourth quarter average AUM was up 2.5% year-on-year. As we reported last week, January AUM increased 2% from December to $489 billion on market appreciation, net flows to institutions, slight net flows to retail, partially offset by private wealth net outflows. Now let's dive into the quarterly flows which you can see on slide 4. Institutional gross sales of $6.7 billion for the quarter were our highest since the second quarter of 2015, mostly due to higher-than-average fundings and passthrough activity. Net flows of $1.8 billion returned to positive territory in the quarter. Retail gross sales of $10.3 billion were up 27% year-on-year, but down 16% sequentially and net flows were negative $1.5 billion. In private wealth, net flows were negative $400 million, in part due to increased post-election charitable giving at year-end which was ahead of potential personal tax rate changes. Moving to slide 5, that shows the channel-specific impact of the third quarter's lumpy outflows for the year. Institutional would have been $2.2 billion net positive were it not for the one large alternatives portfolio redemption. In retail, the $6.3 billion 529 plan outflow took annual net flows from positive $1.5 billion to negative $4.8 billion and the $400 million 529 plan outflow from private wealth cut our annual net inflow number in half. We can't predict single large client redemptions or sales, but we can control our investment performance which, of course, drives flows. Slide 6 shows our strength in global fixed income. We attracted $9.7 billion in total fixed income net inflows in 2016, including $5.7 billion to taxable and $3.3 billion to tax-exempt as our fixed income services continued to perform exceptionally well. As you can see from the left side of this slide, our percentage of assets in outperforming services ranges from 81% to 89% across time periods and we stack up well relative to peers. Global Aggregate, Global Plus, Global Fixed Income all ranked top decile for the three year and European Income and European high-yield ranked top decile for the one year. Like many other managers, our equity performance was challenged in 2016. Now I have moved to slide 7. While our percentage of outperforming active equity assets for the one-year period declined significantly, our long term track records remain strong. 80% of outperforming equity assets for the three-year period is a multiyear high for us and our five-year number is very respectable at 64%. Top decile and quartile services across multiple time periods include concentrated growth, global core, U.S. mid-cap value, U.S. large cap and emerging markets growth and strategic core. We see these relative rankings as a positive leading indicator for flows. Now let's talk about our client channels beginning with institutional which is on slide 8. This slide demonstrates the diversity of our sales and pipeline activity in 2016. Fourth quarter gross sales increased year-on-year in the Americas and in EMEA. Sequentially, they were up in the Americas, EMEA and Asia. Fourth quarter pipeline fundings were 86% above our trailing five quarter average which largely drove our 56% year-on-year sales increase. The left side pies show our pipeline at the end of 2016 versus the end of 2015. Equity mandates representing $765 million in assets were four of our top six pipeline adds during the quarter and our year-end active pipeline shows a much more even split versus 2015. By region, Asia grew from 22% to 39% and was the largest slice of our active pipeline at the end of 2016. We also made progress in the new growth areas we've been pursuing. Our third quarter acquisition of Ramius Alternative Solutions added new capabilities in custom, factor-based and alternative risk premia solutions. We also funded our first target date multi-manager CIT mandate in 2016 and we're doing what we set out to do in our institutional business -- diversifying, globalizing and broadening our offering in a way that resonates with clients. Now let's move to slide 9 and that's retail. Retail gross sales of $41 billion in 2016 were up 15% and our fourth year of $40 billion plus sales out of the past five. Our momentum was driven largely by the resurgence of Asia ex-Japan retail fixed income. As the top left chart illustrates, industry-wide regional gross sales of $46.2 billion last year were up 68% from 2015. Industry sales in the areas where we compete, U.S. dollar and global high-yield bond rose by 186% and 25% respectively. Our sales in the region were up 40% in 2016 and combined sales of our flagship global high yield and American income portfolios increased by 85%. We're also seeing our investment in innovative new products begin to pay off. Now that these funds have had time to season, they are performing quite well. As you can see in the bottom left chart, our number of four and five-star rated U.S. and Lux funds tripled between 2011 and 2016 to 56 today and of the funds that we added between 2009 and 2013 that are still open, 81% are four and five-star-rated today. One of our newer services, high-income muni, was ranked top 10 in its U.S. fund category by net flows in 2016. It joins legacy products like number one-ranked AB Global Bond and in Lux, number one-ranked American Income and number two-ranked, Global High Yield. Of course, everyone is wondering how fixed income will fare as U.S. rates rise. The bottom right chart shows how quickly bonds recovered from the Fed rate hike in the mid-2000s and in the 2013 taper tantrum. When rates are rising in a strong economy, equities typically perform better and high-yield portfolios tend to behave more like stocks than bonds and we don't see investors' demand for yield diminishing anytime soon. So we feel good about how we're positioned in both fixed income and in equities today. Now let's take a look at private wealth management which is on slide 10. This business had it best overall flow picture in 2016 since the financial crisis. Gross sales of $10.2 billion increased for the fourth straight year. That's the top left chart. Advisor gross production was the highest since 2008 and with client retention still near all-time highs, net flows were the best since 2007. We have this momentum because we're offering clients what they need most -- solid advice, stable performance and relevant offerings. We also have a motivated team of senior advisors on the ground. Our retention rate among principals was an impressive 99% in 2016. As you can see from the chart at the bottom left, it's averaged 98% for the past four years versus 88% for the for before that. Advisors are energized by how we have evolved our private wealth offering to fully meet client goals and preferences. A perfect example is our new series of research-based targeted services. Last year, private clients committed $1.3 billion to targeted services. More than half went to two new offerings -- Energy Opportunities which we closed at capacity with $435 million in committed assets and Global Research Insights which raised $400 million. Targeted services clearly contributed to our 33% growth in the average size of new client relationships in 2016 and the 13% rise in average production per advisor. Private clients want both institutional quality portfolio and risk management and access to unique investment opportunities. We offer both today and have satisfied clients and more of them because of it. I will finish with our business highlights with the sell side. That's on slide 11. U.S. composite volumes spiked in November following the surprise outcome of the U.S. Presidential election. You can see the sharp move in the top right bar. As a result, fourth quarter Bernstein research revenues rose both sequentially and year-on-year. We did still finish down 3% for the full year, however; those are the top left bars. Considering that global equity commissions declined an estimated 10% in 2016 however, we actually fared quite well and gained share across our regions. We attribute our relative strength to Bernstein's differentiated global research and our trading capabilities. Extending our global research platform has allowed us to leverage our expertise across regions, better serve clients and compete with firms much larger than us. We've grown our base of publishing analysts by 15% since 2012, primarily in Asia and in Europe. As you can see in the bottom left chart, our total non-U.S. publishing analysts and stocks under coverage now well exceed those in the U.S. Plus, we've taken our global marketshare to a record high with increases in client votes everywhere that we operate. Our growing regional research presence is being recognized. In the most recent European institutional investor survey, we delivered our best results ever, ranked number seven overall with 13 top three-ranked teams and three runner ups. In trading, our unique electronic capabilities enable us to grow in difficult times. We utilize 18 different dark pools and are cost-agnostic in our approach which allows us to access more liquidity for our clients and we're not exposed to high-frequency traders. In 2016, we increased our U.S. low touch trading revenues by double digits and one major independent industry survey has ranked Bernstein number one for both electronic trading quality and electronic trading service for the past two years. Even in a changing regulatory environment, we have good reason to believe our clients will continue to choose Bernstein. MiFID II has given us the opportunity to engage constructively with our clients on the Bernstein difference. They know that we're not afraid to change service models where we have to and are committed to getting the appropriate value for our research. So we feel even more confident today that we will have a position at the table no matter what happens. Now I will close with a recap of progress on our strategy. That's on slide 12. In a challenging year, kept our heads down and we executed. We delivered for clients with our long term fixed income and equity track records. We broadened our business by asset class and geography in every client channel. We continue to innovate in areas like target date multi-manager, custom alternative solutions, private credit and private wealth-targeted services and we delivered our fifth straight year of margin expansion for our shareholders. Times are always uncertain and we don't know what the future holds, but I do know that AB has the right strategy, talent and capabilities to keep our clients ahead of tomorrow in any market environment. That's where we've been focused for 50 years and where we will stay focused in the years to come. John, over to you.

Thank you, Peter. Now let's start with the GAAP income statement on slide 14. Fourth quarter GAAP net revenues of $786 million increased 8% from the prior-year period. Operating income of $222 million increased 30% and the 27.4% operating margin was 410 basis points higher. GAAP EPU of $0.77 compared to $0.52 in the fourth quarter of 2015. As always, I will focus my remarks from here on our adjusted results which remove the effects of certain items that are not considered part of our core operating business. We base our distribution to unitholders upon our adjusted results which we provide in addition to and not as substitutes for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation's appendix, press release and 10-K. Our adjusted financial highlights are included on slide 15. Fourth quarter revenues of $662 million, operating income of $209 million and our margin of 31.6% all increased versus the same prior-year period. We earned and will distribute to our unitholders $0.67 per unit compared to $0.50 for last year's fourth quarter. Higher base, performance fees and Bernstein Research revenues and lower non-compensation expenses primarily drove the improvement. For the year, although revenues decreased $55 million to $2.469 billion, operating income increased by $5 million to $624 million and operating margin increased by 80 basis points to 25.3%. Adjusted EPU increased to $1.89 from the prior year's $1.84. Lower base fees, Bernstein Research revenues primarily drove the decline in revenues and diligent expense management drove our continued margin expansion. We delve into these items in more detail on our adjusted income statement on slide 16. Beginning with revenues, fourth quarter net revenues rose 9% versus the same period of the prior year and full-year net revenues declined 2%. The 3% increase in fourth quarter base fees came as a result of higher average retail and private wealth AUM. The 2% annual decline was due to lower average retail AUM and lower fee rate realization reflecting a mix shift from higher to lower fee products. Fourth quarter performance fees of $29 million compared to $4 million in the same prior-year period. For the year, performance fees increased by 38% to $33 million. For both periods, the increase is primarily due to higher performance fees earned on our securitized assets, private credit, concentrated growth equity services in more favorable fixed income and equity markets. Fourth quarter revenues for Bernstein Research Services increased 8% year-on-year from higher global client trading activity, but decreased 3% for the full year due to lower activity in Europe and Asia, as well as the negative foreign exchange effect of a stronger U.S. dollar. Fourth quarter investment gains were attributed to seed investment gains compared to seed losses in the fourth quarter of 2015. For the year, seed investment gains were greater than in 2015. Other revenues increased 26% for the fourth quarter and 13% for the full year as a result of higher dividends, interest earned and capital gain distributions on our seed and broker dealer investment portfolios. Both prior periods also include a one-time $2 million refund of custodian fees. Moving to adjusted expenses, all in, our total fourth quarter operating expenses of $453 million increased 2%. Full-year operating expenses of $1.845 billion decreased 3% from the prior year. We reduced non-compensation expenses for both periods with our continued focus on expense management. Total compensation and benefits expense increased 6% in the fourth quarter with higher incentive compensation partly offset by lower fringe and other employment costs. The full-year 3% decline was primarily due to lower incentive compensation and other employment costs. Compensation was 44.6% of adjusted net revenues for the fourth quarter and 48.5% for the full year. The 540 basis point reduction in our comp ratio in the fourth quarter from the 50% ratio in the third quarter added approximately $0.13 to our fourth quarter EPU. Going forward, we expect to continue managing to a comp ratio that will not exceed 50%. Fourth quarter and full-year 2016 promotion and servicing expenses declined 9% and 7% respectively compared to the same prior-year periods primarily due to lower T&E and marketing costs and reduced transfer fees related to our loss of the Rhode Island College Savings Plan during 2016. G&A expenses decreased 5% year-on-year in the fourth quarter and 2% for the full year due primarily to lower occupancy expenses and professional fees partially offset by higher portfolio servicing fees. Both periods include a one-time $3 million benefit from the reduction of legal reserves related to settled litigation. Fourth quarter operating income of $209 million increased 29% from the prior-year period as revenue growth outpaced expense growth. The incremental margin for the fourth quarter was approximately 85%. Full-year 2016 operating income of $624 million increased $5 million from the prior year despite a 2% or $55 million decline in revenues. Fourth quarter operating margin of 31.6% was up 490 basis points year-on-year and our full-year operating margin of 25.3% was up 80 basis points. You may have noticed that our fourth quarter adjusted operating income was $13 million lower than our GAAP operating income. We excluded two items from our adjusted results that are not part of our core or recurring business operations. First, we recorded a $7 million non-cash real estate credit for GAAP reporting due to true-up of our sublease assumptions relating to prior-period real estate write-offs. The second item relates to our January 2016 adoption of new consolidation accounting standards for variable interest entities for GAAP reporting. Beginning in the first quarter of the year, we consolidated certain seed investment funds that had not been consolidated previously. This increased GAAP operating income by approximately $7 million, but had no effect on net income or EPU. So we deconsolidated these seed investment funds for our adjusted reporting in effect subtracting the $7 million from our adjusted operating income. For the year, adjusted operating income of $624 million was $99 million lower than GAAP operating income. Here we excluded four items of note -- $21 million in consolidated variable interest entity operating income, $22 million in contingent payment reversal credits and a $75 million gain realized on the sale of our Jasper Wireless investment which were partially offset by $18 million non-cash real estate charges. All of these non-GAAP adjustments are outlined in the appendix of the presentation. Finally, I will discuss our effective tax rate which also differs for GAAP to adjusted based on nonrecurring items. The full-year 2016 effective tax rate for purposes of calculating adjusted EPU for AllianceBernstein LP was 7.2%, essentially the same as 2015. The full-year 2016 GAAP effective tax rate for AllianceBernstein LP was 3.9% and reflects two credits to income tax expense totaling $21.5 million recorded in the fourth quarter which we excluded from our adjusted results. First, a $13.3 million income tax credit relating to the lowering of the estimate for the tax liability for the deemed dividend from foreign affiliates that we recorded in the third quarter of 2016. Second, an 8.2 million income tax credit for the reversal of the foreign currency translation adjustment deferred tax liability. As we said on our third quarter earnings call, we will no longer permanently reinvest foreign earnings generated after 2016 and instead will allow them to flow back to the U.S. and be taxed at the appropriate U.S. tax rate net of applicable foreign tax credits. This will afford us more flexibility in managing our U.S. intercompany balances with foreign entities and accessing cash generated in our foreign entities. We anticipate that this will increase the full-year effective tax rate for AllianceBernstein LP to approximately 8% beginning in 2017 based on our current estimates of the percentage of pretax income we expect to derive from foreign jurisdictions and applicable foreign tax credits. We highlight these points on the next slide of this presentation as well and with that, Peter, Jim and I are pleased to answer your questions.

[Operator Instructions]. Your first question comes from the line of William Katz with Citigroup. Your line is open.

Appreciate all the comments around the momentum in each of the business lines, but let me switch back and look at the gross sales [indiscernible]. What strategies as you look into 2017 can maybe beef up both the gross sales and hopefully the net sales as well?

I'm not sure I got all of your question there; you broke up a little. Let me just repeat it back. Are you asking what strategies do we think in 2017 will accelerate and increase our gross sales? Well, I think it's probably more of the same, meaning that the equity and fixed income franchises have very strong performance. Yes, 2016 equity performance was more challenged, but the three and five-year records are quite strong and as you know, many equity managers were challenged in 2016. So I think that, in equities, I think we will continue to see our concentrated services grow. I think we will see our core services grow, our strategic core services grow and our U.S. large cap growth service and our small cap services which are also having strong numbers. And I would take special note though of emerging markets where we haven't seen positive flow, but our emerging market equity services, whether that's emerging market growth, whether it's EMA, emerging market value, Next 50 which is Frontier, all have had very strong performance in a difficult three to five-year time period in emerging and should the industry flows begin to notice that emerging might accelerate, we would expect to see some pretty interesting flows in that emerging market platform. As it relates to fixed income, our traditional long term strong performers are persistent. U.S. high yield, global high yield, all the muni platform, muni SMA has been very strong. High-yield muni or high income muni has been strong. American Income last year was particularly strong and no reason to see that lagging. So I think that we will see a repeat performance in the places where we've been strong.

Okay. My follow-up is I guess you guys [indiscernible]. If U.S. tax reform were to play out this year or next year, how do you think about the MLP structure versus potentially converting to a C-Corp?

Well, I think that there's much unknown there and the principal issue is going to be what is the ultimate tax rate. The tax rate would have to get pretty low for us to see it as advantageous to flip to a C-Corp. I do think -- so I think that seems unlikely, but, of course, I'm guessing along with the rest of the United States of America as to what will happen in corporate taxes, but it seems unlikely the rate would get that low. I do think though what it does say about the stability of our own structure is that if the tax rate changes as we expect don't impact our own structure, I think there is little reason to believe that the structure is going to have to be adjusted in the future. So it becomes, in my judgment, as stable as whatever the U.S. corporate tax, the C-Corp tax rate is and the differences are not going to be very great and so any discount that may exist between us and C-Corps I think starts to evaporate.

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

This is Ari Ghosh filling in for Craig. Could you update us on some of the new mutual fund structures that you are working on, including I believe a new structure with a variable management fee that toggles with performance? And then just more broadly if you can comment on overall fee pressures that you are seeing and if you've lowered the management fee or expense caps on existing funds. Thanks.

So let me take the second question first. The answer is yes we have made some adjustments to existing mutual funds to lower those fees. I don't know the percentages. They are not huge, but they are not immaterial either. As to the first question, we have filed six funds with the SEC. As they are at the SEC, we can't discuss much in detail about them. Of course, you are free to read the information, but I would say, in general, that we're trying to do something different and say to clients, if we don't perform, we don't expect to be paid much more than 5 basis points and if we do perform, subject to all the limitations in those documents, we would expect that clients would be happy to pay us and that that is a pretty competitive offering to the passive world.

And then just maybe a quick follow-up on the fixed income comments. Could you give us a quick update on what early trends look like in U.S. retail and maybe even in Asia? Are flow trends holding up in early 2017?

Well, we don't comment on the flows month by month. I think we put out the January numbers and so I think I would go back to Bill's question of what we think are going to be strong in 2017 and I think that's a continuation of what we've seen in 2016.

Your next question comes from the line of Michael Carrier with Bank of America. Your line is open.

John, maybe just on expenses. Obviously, it was a good year in terms of you managing the expense base. I just wanted to get some sense -- I know you mentioned the comp ratio below the 50%. Obviously, this quarter came in a lot lower than that. So I just wanted to get a sense of is there some true-up this quarter for the full year. And then on the non-comp, anything that we should be thinking about for 2017 versus maybe the full-year run rate that we saw in 2016?

Sure. Mike, I will start first on the compensation, the comp ratio. It happens -- typically, as we start out the year, we're accruing at a 50% comp ratio and it is really not until we get into the fourth quarter where we really get a feel for where revenues are going to come in for the full year, as well as our actual compensation needs. As we get into the fourth, quarter we're building the comp pools from the ground up and that is there for -- we were able to actually adjust down the ratio in the fourth quarter, but meet our compensation objectives for the full year. And I would expect that trend to continue this year as well. On the non-comp side, let's start with G&A expenses and they came in at $412 million for the year; they were down 2%. They did have some one-time benefits in there. I mentioned the $3 million reversal of the legal reserve. That flowed through there. We also had some positive foreign exchange translation benefits for the full year as well. So these types of things we don't expect them to reoccur next year. We also faced some headwinds in G&A in terms of occupancy expense. Our lease here at our New York City headquarters, we actually have shortened the lease for accounting purposes down by five years from 2029 to 2024. We had an option to extend the lease; that's why we had the accounting out to 2029, but we decided not to exercise that. So that's going to increase the leasehold amortization expense, so there will be some upward pressure on G&A. I would expect it to grow at somewhat above the inflation rate this year. In terms of the promotion servicing expenses, they were down 7% for the year, largely driven by declines in marketing, T&E. Those types of expenses, you can expect them to increase from quarter-to quarter going forward as we launch different customer promotion programs, have different customer conferences and we will do that as we see a return on those investments. So those types of expenses I think are more in the cost-containment mode now as opposed to the reduction mode. I would expect promotion servicing to increase somewhat in line with inflation or maybe slightly above.

Okay. And then just as a follow-up on the performance fees, so obviously a strong quarter. When we think about the products that you guys have launched over the past five years, just wanted to get a sense on maybe the percentage of AUM that can generate performance fees and if we should expect that given the performance track record, that that could be more significant going forward?

I think the actual disclosure in the 10-K -- and again, I am just doing this from memory -- but I think somewhere around 10% of our AUM has performance fees attached to it. The ones that really threw off -- the performance fees, I mentioned three strategies. Two of them -- securitized assets, private credit -- obviously are fixed income-based. They actually have a hurdle rate on the portfolio and they were above that hurdle rate as far as yield and then they are earning a performance fee, a percentage above that. And the third one was an equity strategy which as well it basically has an upside potential as far as the percentage of the returns that it produces as well. So those are really what drove the numbers this quarter as well as for this year.

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

Just talking a little bit about flow trends here. So in 4Q, you guys saw a quarter-over quarter pickup in institutional gross sales, but a decline in the retail gross sales. Any additional color on this dynamic?

Well, I would say that fourth quarter industry retail was very challenging and so I think that we might have slightly outperformed the industry. I haven't done the numbers, but I think we look like the rest of the world. I think we have--

But I guess maybe more just in terms of the divergence between the two. It seemed like there was a pretty significant divergence at a broader level, not necessarily just you guys.

I'm not sure I've got a good answer, Surinder; I really don't.

I think with respect to retail, we had a very strong third quarter in Asia and we continue to have a strong quarter in Asia in 4Q, just not as strong and institutional -- again, institutional is tough because the fundings can be very lumpy. We had a number of large fundings that came in in 4Q.

Fair enough. And then maybe just some quick thoughts on the broader industry at this point. It seems like you guys are well-positioned for growth, but when you look across the world, it just seems to be all of the discussion is around passive and the momentum that passive has. We look at ETFs and they basically had three months of record inflows at this point. Would you agree or disagree with the statement that active management is in a period of crisis at this point and then is there anything that can be done to stem the tide towards passive?

I think crisis might be slightly elevated in terms of its emotional content, but I do think we've been very consistent on saying that this active passive shift has a lot of structural elements to it, is not cyclical and there needs to be changes in particular active equity management in order to offset that flow. There is no doubt -- there is just no doubt that investors have felt more comfortable with what is perceived to be low cost and safe passive investing versus choosing active managers at higher fees and suffering on average, because that's what the average numbers show, underperformance net of a fee. I think that what we have done over the last five years is deliver products with higher active shares, more concentration, we believe higher probability of outperforming the fees and as has been noted earlier, we're changing the revenue structure. And as I said, I can't comment on those funds because they are in registration with the SEC, but that's a material change that if others were to follow would change the way in which investors would look at fees and would look at performance net of fees. But I don't think that the active/passive shift is going to materially change until the active industry changes what it does.

And then maybe just one quick follow-up here. It seems like FX movements in general were elevated again in 4Q. Any color on the impact it had on your AUM and maybe your revenues and expenses and how the setup is into 2017?

Sure. We don't break out the impact of FX from the markets on our AUM; it's always bundled inside of that. So it just flows through the performance numbers that we report. As far as the actual P&L, when we talk about translating from nonfunctional currencies into functional currencies and what goes through the P&L, as I mentioned for the quarter, it was flat; for the year, it was a slight benefit, as I had mentioned earlier. And we try to hedge out that risk and we've been fairly successful at doing that.

[Operator Instructions]. Your next question comes from the line of Robert Lee with KBW. Your line is open.

Peter, could you maybe just talk a little bit about the Ramius business that you acquired, your vision for its role within Bernstein and where do you see the opportunity with that? I think some of your peers have acquired or invested in I will call it quantitative or factor type managers and it seems ultimately in some cases it was a prelude to trying to launch an ETF business. I'm not sure that's where you are going with it, but can you maybe talk a little bit about your vision for that?

Sure. I think we were very attracted to the talent in Ramius. I think that that team has shown that they are at the cutting edge of thinking about factor-based investing in an even more advanced way than you find in most shops in terms of types of factors they are looking at, some structural factors, not just the traditional factors. They also were and are continuing to be particularly good at helping clients understand where their exposures are and what exposures can be replicated with higher liquidity and lower fees and that that is particularly attractive to clients who are looking to optimize their fee budget and to create the best return for the most liquidity. And I think this is a team that has shown a demonstrated track record in achieving that and that's basically the business opportunity that we see in the short run. Now that could be expanded into -- and that's almost entirely in institutional business. That could be expanded into more of a retail business by packaging those activities and some of those more interesting factors into a retail type product which ultimately could be an ETF, but that's further down the line if we were to go in that direction. I think our primary focus on the Ramius team is the additional insights it gives us into factors and changes in research around factors and in helping large institutional clients make their portfolios much more efficient from a fee point of view, a liquidity point of view and a return point of view.

And maybe as a follow-up question, can you talk a little bit about institutional RFP activity maybe around the election and maybe early in the year. Just maybe some color. Did you see a lot of institutions boldly step away from the process or slow it down and then maybe subsequently as the year started kind of seen it maybe pick up or you find institutions are still going slow and looking at making changes?

Well, that's sort of a touchy-feely thing, so I will give you a touchy-feely response. I do think that the U.S. election slowed down some decision-making late in 2016 and I would say that discussion activity, RFP activity, communication activity between consultants and institutional clients has picked up in December and through January. I think it's hard to take those things to the bank. As Jim mentioned, the institutional stuff is tricky. That was the point of Surinder's comment. It's very difficult to project here. I think that we've got a little bit more confidence in our feelings about retail flows because we can see them every day, but institutionally it is challenging. I do have a more optimistic view of the institutional marketplace in 2017 than we had in 2016, but I think that's AB's view given our performance, the breadth of our product and the longer track records that we now have for many of the new things, including things like Ramius that we didn't have before and so the level of activity, interest, communication between us and institutions on non-traditional product and newer things we've been doing has continued to escalate and I think we see that. That may be a little different than what the market sees.

There are no further questions at this time. I would now like to turn the call back over to Ms. Prochniak.

Thanks, everybody, for participating in our conference call today. Feel free to follow up with Investor Relations during the day with any follow-up you may have. Thank you.