Prepared remarks
Hello, everyone, and thank you for joining us. Welcome to the AllianceBernstein Second Quarter 26 earnings review. At this time, all participants are in a listen-only mode. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star 1 to raise your hand. If you would like to withdraw your question, press star 1 again. 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. Ioanis Jorgali. Please go ahead.
Good morning, everyone, and welcome to our second quarter 26 earnings review. Today's conference call is being webcast and is accompanied by a slide presentation available in the Investor Relations section of our website at www.alliancebernstein.com. Joining us today to discuss the company's quarterly results are Seth Perry Bernstein, our Chief Executive Officer, and Thomas Rudolph Simeone, our Chief Financial Officer. Ahmet Onur Erzan, our President, will join us for the question-and-answer session following our prepared remarks. Some of the information we will present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I would like to point out the safe harbor language on slide 2 of our presentation. You can also find our safe harbor language in the MD&A of our 10-Q, which we will file on Friday. We base our distribution to unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation appendix, press release, and our 10-Q. 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 will turn it over to Seth.
Good morning, and thank you for joining us today. Despite an uncertain geopolitical and policy backdrop, markets recovered during the second quarter supported by resilient economic growth and strong corporate earnings. Against this backdrop, AllianceBernstein generated its strongest sales quarter in five years, returned to positive organic growth, and reached its objective of $90 billion to $100 billion in private markets AUM more than a year ahead of our 2027 commitment. On slide 3, I will review the key business highlights of our second quarter. First, assets under management ended the quarter at a record level, exceeding $905 billion. This milestone reflects both market appreciation and, more importantly, the returns on years of investment and strategic initiatives that are now driving organic growth across insurance, private wealth, private markets, retirement, SMAs, and active ETFs. Within insurance, we now manage nearly $218 billion, including $128 billion in general account assets. We continue to see strong momentum in third-party insurance, where we manage $61 billion across roughly 100 clients. This includes $34 billion of general account assets, which are up more than 30% year-over-year. In the first half of 26, we initiated seven new relationships and deployed nearly $3 billion of third-party insurance capital on a gross basis. General account assets grew organically at a 6% annualized rate. As we discussed last quarter, the proposed combination of Equitable and CoreBridge represents the next step-function acceleration of our flywheel. Over time, we will add at least $100 billion of CoreBridge assets, meaningfully enhancing AB's scale and providing an organic glide path toward $1 trillion in firm-wide AUM. While it is too early to be specific, we see synergies from partnering with CoreBridge and the new Equitable that go well beyond just managing $100 billion of incremental assets. Bernstein Private Wealth continues to strengthen its position as a leading advice-led wealth platform, ending the quarter with $167 billion of assets and contributing nearly 40% of firm-wide revenue. By serving as our clients' trusted adviser, we build durable long-term relationships and deliver integrated solutions across traditional and alternative investments. Second, we continue to expand our investment in distribution footprint through strategic partnerships, tax-aware solutions, and vehicle innovation. A core element of our strategy is making our investment capabilities available in vehicles and formats that clients want. We continue to globalize our active ETF franchise. After initially launching three strategies in Taiwan, we have introduced five new strategies in Europe where we pioneered a dual share class structure, offering active-use ETF shares alongside mutual funds. Our platform now spans 31 strategies with over $20 billion of AUM, with assets growing 73% organically over the past year. From a near standing start nearly four years ago, this platform now generates an annualized run rate of approximately $100 million in management fees. This growth reflects both client demand for active exposures and more efficient wrappers and our ability to globalize successful investment capabilities across channels. Our SMA platform reached $69 billion of AUM and generated 17% annualized organic growth over the last year. While municipals are still the foundation of our SMA business, we are encouraged by the early momentum from extending our capabilities into taxable fixed income. We see SMAs as a meaningful long-term growth opportunity as personalization, technology, and advisor demand continue to converge. Our customized retirement platform has grown to $117 billion in assets. As plan sponsors increasingly see customized retirement solutions, lifetime income, and access to broader asset classes, AB is well positioned to help improve participant outcomes. A recent example is ABC 1, our partnership with Brookfield and Carlyle, which combines private credit, private equity, and private real assets in a single diversified sleeve designed to sit alongside existing target date funds and managed accounts. We believe that this solution validates AB's role as a trusted asset allocator and thought leader in retirement solutions, broadening participant access to private markets through a scalable and efficient structure in partnership with market-leading alternative managers. Third, strong sales momentum translated into a return to organic growth. Firmwide net flows were nearly $800 million in the second quarter, ending four consecutive quarters of outflows. This marked our strongest quarter of gross sales in five years, reflecting broad-based demand across most of our strategic growth areas. Fixed income was the key driver of inflows. During the quarter, we funded a $9 billion passive fixed income mandate from Equitable, reflecting the continued expansion of our relationship beyond pre-announced commitments. In addition, strong demand for tax-efficient income and continued market share gains in our municipal franchise generated approximately $3 billion of inflows. Alternatives and Multi-Asset Solutions generated more than $4 billion of net inflows, marking this as our sixth consecutive quarter of positive organic growth. Institutional deployments into private market strategies accelerated during the quarter, supported by demand across private credit, commercial real estate debt, and insurance-oriented solutions. These inflows more than offset continued pressure in active equities and taxable fixed income. Active equity outflows were nearly $11 billion while taxable fixed income outflows exceeded $4 billion. Both were largely driven by retail redemptions concentrated in Asia Pacific, where allocation preferences are increasingly favoring local equity markets given their strong recent performance. Slide 4 provides an overview of our financial results, which Tom will discuss in greater detail shortly. Skipping to slide 5, I will review our investment performance starting with fixed income. Credit markets delivered healthy returns during the second quarter despite higher volatility. Following a temporary widening in spreads during April, risk assets recovered as corporate fundamentals remain resilient and investors continue to find attractive all-in yields despite tight spreads. Rates moved modestly higher as markets recalibrated their expectations for a higher long-term equilibrium rate. Against this backdrop, the Bloomberg U.S. Aggregate returned 0.7%, while the Global High Yield Index returned 3.7% during the quarter. Our one-year relative performance improved sequentially, with 68% of AUM outperforming. Longer-term performance remains competitive with 81% and 61% of AUM outperforming over the three-year and five-year periods respectively. Within our flagship income strategies, American Income outperformed its benchmark and performed in line with its peer category, while global high yield outperformed its category and modestly lagged its benchmark during the second quarter. Turning to equities, markets rebounded sharply in the second quarter with very strong returns across regions. Developed markets posted exceptional returns as the S&P 500 gained 15%, its strongest quarterly advance in six years. Emerging markets were the standout performer globally as the MSCI Emerging Market Index surged 24%. The global recovery was supported by de-escalation in the Middle East leading to lower energy prices and continued enthusiasm around AI. Technology and semiconductor stocks again led the advance, extending a period of unusually narrow market leadership. Against this backdrop, our performance struggled, with 23%, 28%, and 31% of equity AUM outperforming over the one-, three-, and five-year periods respectively. Our relative performance continues to reflect a market increasingly driven by a narrow set of beneficiaries from the AI build-out. Our largest U.S. Growth strategies, which emphasize quality, diversification, and valuation discipline, have been out of step with this environment, weighing on our AUM-weighted performance. Recent volatility among AI-linked equities and the unwind of leverage positions have reinforced the importance of diversification and the risks associated with overreliance on a single market theme. More broadly, our equity platform remains diversified across styles, sectors, and geographies. We have over 25 strategies with more than $45 billion of assets under management that continue to outperform over both the three- and five-year periods. This includes our $10 billion International Strategic Equity strategy, which ranks in the top percentile across one-, three-, and five-year periods. We believe diversification across fixed income and quality-oriented equities can help clients generate income, stay invested, and broaden their sources of return beyond a handful of market leaders overleveraged to the AI build-out. Now turning to slide 6. Retail net flows rebounded in the second quarter driven by record sales momentum and continued demand for fixed income. Gross sales reached $31 billion, the highest level in five years, driving $900 million of net inflows in the channel's first quarter of positive organic growth since the first quarter of 25. Excluding the fixed income mandate from Equitable, our gross sales were $22 billion, up 14% versus the same period in 2025. As noted, fixed income was the primary driver led by continued demand for tax-efficient income in addition to the $9 billion fixed income index mandate mentioned earlier. Active equity outflows are still elevated, driven primarily by U.S. large cap growth redemptions across the U.S. and Japan. At the same time, we continued to build diversified sources of growth across the retail platform, including active ETFs and thematic strategies. For example, our Security of the Future strategy surpassed $5 billion in assets under management and generated nearly $2 billion of inflows during the quarter. Moving to slide 7, I will cover our institutional channel. Institutional flows also returned to positive territory in the quarter, generating more than $5 billion of net inflows. Demand was driven by alternatives and multi-asset, with over $4 billion of net inflows growing at an 11% annualized organic rate. This marked the sixth consecutive quarter of positive organic growth for the category. Roughly $5 billion in deployments were broad-based across our private markets platform, including residential mortgages, commercial real estate debt, private placements, and NAV lending. Active equity outflows persisted but improved sequentially, declining to $3 billion in the quarter. Earlier this month, we successfully onboarded $12 billion of commercial mortgage loans from Equitable, ahead of schedule. Beyond the revenue contribution, the mandate roughly doubles our scale in the strategically important private asset class, expands our origination and servicing capabilities and further strengthens the flywheel between long-duration insurance capital and AB's differentiated private markets platform. We expect to begin earning management fees on the established assets in the fourth quarter at a high single-digit fee rate. The blended fee rate will increase over time as new originations and servicing revenues are layered in. Our remaining pipeline totals approximately $14 billion and is well diversified, including roughly $5 billion in private alternatives, $3 billion in customized retirement, $3 billion in fixed income, and $2 billion in indexed equities. I would note that this pipeline does not include any of the $100 billion in expected assets from CoreBridge. As a result, we have good visibility into future growth. Turning to slide 8, I will cover Bernstein Private Wealth. Private Wealth experienced its typical seasonal pressure on net flows during the second quarter, but underlying business momentum remains strong as we continue to deepen relationships with ultra-high net worth individuals and families. As expected, tax-related selling weighed on our quarterly net flows which were negative $700 million. However, net new assets have grown at a 6% annualized rate over the last 12 months. Client engagement remains strong with demand concentrated in alternatives, tax solutions, and passive equities. Our ability to deliver customized after-tax outcomes across both public and private markets continues to differentiate Bernstein with ultra-high net worth clients. Product innovation also supported organic growth, including a strong capital raise for our newly launched high-muni strategies designed to address increasingly tax-management needs of high-net-worth investors. More broadly, Bernstein Private Wealth remains one of our most important strategic growth vectors. It provides direct access to ultra-high net worth clients and expands opportunities to deliver holistic investment solutions and serves as a valuable distribution channel for alternatives, tax-efficient equities, fixed income and customized portfolio strategies. I will now turn to slide 9, which highlights the continued growth and diversification of our private alternatives platform. I am particularly proud to report that we have already reached $91 billion of private market assets under management, achieving our $90 billion to $100 billion Investor Day target more than a year ahead of our original 2027 commitment. This milestone reflects the successful execution of a long-term strategy and the hard work of colleagues across our investment, distribution, operations, and client service teams. I want to thank everyone across the firm who helped make this achievement possible. Over the past several years, we have built a diversified private markets platform spanning corporate direct lending, alternative credit, commercial real estate debt, and private placements. Together, these capabilities provide differentiated sources of return and allow us to serve a broad range of client needs across institutional, insurance, retail, and private wealth channels. Importantly, we continue to see a strong growth trajectory. As I mentioned earlier, we successfully onboarded nearly $12 billion of commercial mortgage loans in July that are not reflected on this slide. Including those assets, our private market AUM would already exceed the upper end of our original target range. Closing with slide 10, I would like to bring together the themes we have discussed today. The proposed combination of Equitable and CoreBridge strengthens what we believe to be a unique competitive advantage for AB. At its core, the flywheel is straightforward. It starts with an asset-light approach that leverages long-duration insurance capital to seed and scale capabilities that can be extended across a much broader client base. The addition of CoreBridge meaningfully expands that opportunity. As the $100 billion is allocated over time, it will provide greater scale across the combined general account, enhancing our ability to originate differentiated assets, establish track records, develop new investment capabilities, and accelerate growth across the broader platform. Particularly capabilities across private placements, residential and commercial mortgages, and asset-based finance are not one-off mandates. They become scalable investment platforms that can be distributed across third-party insurance clients, institutional investors, retail wealth, and over time, defined contribution. We believe insurance, private wealth, retirement, and private represent some of the largest and fastest-growing pools of capital globally. Increasingly, AB is differentiated at the intersection of these opportunities, combining scale, customization, investment breadth, and direct client relationships in a way that is difficult to replicate. In conclusion, the second quarter reinforces the direction of travel for AB. We reached record AUM, returned to positive organic growth, generated our strongest sales quarter in five years, and continued to scale the strategic growth platforms we have spent years building. Taken together, these results demonstrate the increasing earnings power of the franchise and the benefits of investing in areas where we see sustained client demand and long-term growth opportunities. Now I will pass it to Tom to review our financial results. Tom?
Thank you, Seth. Good morning, everyone, and thank you for joining our call. Adjusted earnings for the second quarter of 26 were $0.82 per unit, representing an 8% increase year-over-year. Distributions grew uniformly with EPU as we distribute 100% of our adjusted earnings to unitholders. The quarter was defined by three key themes: solid base fee growth, disciplined expense management, and continued operating leverage. At the same time, we remain focused on investing selectively in initiatives that strengthen the platform and expand its long-term earnings power. On slide 12, we present our adjusted results, which exclude certain items not considered part of our core operating business. For a detailed reconciliation of GAAP and adjusted financials, please refer to our presentation appendix or our 10-Q. In the second quarter, adjusted net revenues reached $888 million, a 5% increase year-over-year. Base fees grew 7% year-over-year, reflecting higher average AUM across the platform, partially offset by the impact of changes in product and channel mix on our firm-wide fee rate. Performance fees totaled approximately $24 million compared with $30 million in the prior year, as strong contributions from public market strategies were offset by lower private market realizations. Dividend and interest revenue, along with broker-dealer related interest expense, declined year-over-year, reflecting lower cash and margin balances within private wealth. Investment gains totaled approximately $2 million. Other revenues were unchanged from the prior year period. Turning to expenses. Second quarter total operating expenses were $595 million, up 4% year-over-year, reflecting disciplined investment in strategic growth initiatives while maintaining a stable compensation ratio. Total compensation and benefits rose 5% year-over-year with a compensation ratio of 48.5% of adjusted net revenues, consistent with both the prior year period and our guidance. We expect to continue accruing at a 40.5% comp-to-net-revenue ratio in the third quarter, while retaining flexibility to adjust as market conditions evolve. Promotion and servicing expenses declined 3% year-over-year and G&A expenses increased 2%. Given our continued expense discipline and operating efficiency, we are lowering our full-year non-compensation expense outlook to $620 million to $640 million compared with our prior range of $625 million to $650 million. Promotion and servicing expenses are still expected to represent approximately 20% to 30% of non-compensation expenses, with G&A comprising the remaining 70% to 80%. Interest expense on borrowings was essentially unchanged from the prior year period. ABLP's effective tax rate was 5.8% during the quarter. Given the favorable earnings mix and updated outlook, we are lowering our expected full-year ABLP tax rate to 5% to 6% from our prior range of 6% to 7%. Operating income totaled $293 million, an increase of 7% versus the prior year period. Our adjusted operating margin expanded 70 basis points year-over-year to 33% as revenue growth outpaced expense growth despite continued investment across strategic growth initiatives. Importantly, margins remain above the midpoint of our 30% to 35% target, which we originally expected to achieve by 2027. As our strategic growth initiatives continue to scale, we believe the firm is increasingly well-positioned to generate operating leverage while continuing to reinvest for future growth. As demonstrated by this quarter's results, several of our newer growth initiatives have attractive economics despite carrying lower headline fee rates. In the second quarter, our firm-wide fee rate was 37.7 basis points. As we have noted previously, the fee rate is highly dependent on where clients are allocating capital and how those assets are funded over time. As Seth discussed, we see growth in strategic areas such as insurance asset management, SMAs, retirement, institutional solutions, and private markets. While several of these categories carry lower headline fee rates than our firm-wide average, they represent scalable long-duration sources of capital with attractive margin characteristics and strong earnings potential once fully funded and operating at scale. I would also note that this quarter's fee rate was negatively affected by the timing of onboarding the $9 billion passive fixed income mandate from Equitable, which funded on June 30. This mandate contributed to period-end AUM but generated little management fee revenue during the quarter, creating a temporary disconnect between asset growth and revenue realization. As Seth mentioned, approximately $11.8 billion of Equitable commercial mortgage loans were successfully onboarded in July ahead of our original plan. These assets will begin generating management fees during the fourth quarter at a high single-digit fee rate. The fee rate will increase over time as we originate new loans. Importantly, we view both mandates as highly attractive opportunities that enhance the scale, durability, and earnings power of the platform. While they create modest near-term pressure on the reported fee rate, they will contribute positively to revenue growth, operating leverage, and long-term profitability. We reached $91 billion of private markets AUM during the quarter, surpassing the low end of our $90 billion to $100 billion target more than a year ahead of schedule and before the onboarding of the commercial mortgage lending mandate. With the addition of approximately $12 billion of CML assets in July, private markets AUM now exceeds the high end of that target range. This milestone validates our multiyear investment strategy across private markets. These capabilities required upfront investments as we built the necessary scale, infrastructure, and distribution. Fundraising momentum is accelerating, deployment activity is increasing, and asset growth is continuing to compound; we believe private markets will continue to be a key driver of growth. Finally, turning to slide 13 and our outlook, we now expect total performance fees for fiscal year 26 of $115 million to $135 million compared with our prior outlook of $95 million to $115 million. This increase is primarily driven by our public market strategies. We now expect public market performance fees of $60 million to $70 million compared with our prior outlook of $25 million to $35 million. The increase reflects second quarter realizations from our generating U.S. Select strategy in addition to improved visibility into potential fourth quarter realizations from our consistently outperforming Financial Services Opportunities fund. For our private markets, we now expect performance fees of $55 million to $65 million compared with our prior range of $70 million to $80 million, which still represents a healthy level of performance fee contribution even as we take a proactive and conservative approach to marking our exposures and re-underwriting portfolio loss assumptions. As mentioned earlier, we are also reducing our full-year non-compensation expense outlook to $620 million to $640 million and our expected ABLP tax rate to 5% to 6%. Let me conclude by summarizing some of the key themes from this call. We were able to improve our financial outlook while continuing to build momentum across several strategic growth areas, including insurance, wealth, private markets, SMAs, and active ETFs. Our success in private markets provides a good example. We achieved our target of $90 billion to $100 billion of AUM more than a year ahead of schedule and continue to see a strong pipeline for sustained growth. Looking forward, the addition of $100 billion of CoreBridge general account and separate account assets will further expand our insurance platform, increase our scale, and provide a meaningful new source of long-duration capital for years to come. The CoreBridge assets can be onboarded onto our existing infrastructure with relatively limited incremental expense. As a result, while they may have a lower average fee rate, they have high incremental margins and will be accretive to earnings. We will continue to be disciplined in investing to build new sources of growth, recognizing that it may take time for platforms to scale and reach their full earnings potential. With that, operator, please open the line for questions.
Questions and answers
We will now begin the question-and-answer session. Please limit your initial questions to two in order to provide all callers with an opportunity to ask questions. You are welcome to return to the queue to ask follow-up questions. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Now please stand by while we compile the Q&A roster. Your first question comes from the line of Craig Siegenthaler with Bank of America. Your line is open. Please go ahead.
Good morning, Seth. Hope everyone's doing well. Our question is on the merger of EQH and CoreBridge. You know, CoreBridge's general accounts are managed by a number of third-party managers, which have various contracts. And I heard your low-fee-rate, high-margin comment. But can you update us on your ability to manage more of CoreBridge's general accounts? Specifically, could AB one day manage the $200 billion? And it will probably be bigger than $200 billion when we think about that day in the future.
Hi, Craig. Good morning. It is Onur. Let me take that question. As you pointed out, the Equitable-CoreBridge merger represents a big AUM opportunity for AllianceBernstein. As it was announced at the time of the merger announcement, we expected this $100 billion of AUM post-close of the transaction over a couple of year time period. And that comes from both general account assets and separate account assets. To put things into perspective, the combined general account assets will be around $350 billion. Separate account assets will be around $200 billion. So the AUM base of the combined entity is very, very significant. And on top of that, the origination on the liability side is around $70 billion to $80 billion per year. It will have a lot of money in motion. Given that large AUM base and the live origination, we believe even in the existence of other asset managers managing general account assets, we will have significant upside in terms of growing our share in that total AUM. Obviously, the merger has not closed yet; it is expected roughly by year-end. Hence, we will not be able to provide much more granularity in terms of the bottom-up. But we remain very confident and optimistic about its impact on our AUM, revenue, and profitability. In terms of profitability by category, again, it is going to be very asset-class dependent. There will be higher-fee private alternatives opportunities as well as higher-fee equity type opportunities depending on the channel and underlying vehicle. But the core fixed income part of the portfolio, which might be easier and faster to move, tends to be lower fee. That said, it is very scalable as well.
I guess, Craig, it is Seth. I just would add that we have seen what I would call cyclical rotations in and out in prior periods. Despite the trade-related disruptions and the activities in the Gulf, I would say that at least in our view, the lack of interest in the fixed income strategies has more to do with compelling local market alternatives, as Onur alluded to, than anything particular to U.S. dollar fixed income. Most of the markets where we are successful in Asia are tethered either explicitly or implicitly to the dollar. So that is the alternative, and we do not see any buyer strike. I just think it is a cyclical phenomenon.
Thank you very much. Onur, very comprehensive. Thank you.
Thank you. Your next question comes from the line of Bill Katz with TD Securities. Your line is open. Please go ahead.
Okay. Thank you very much, and good morning, everybody. Just a couple questions, maybe start with Onur, perhaps. Wanted to zero in on the private client side. I was wondering if you could comment on what you are seeing in terms of the competition for third-party financial advisers. A number of your peers are speaking to very elevated competition. I am curious if you are seeing it at the higher end. And then maybe a conceptual question for you as well: could you highlight how much alternatives are as a percentage of private client AUM and where you think that ratio can go over time? Thank you.
Sure. Thanks, Bill. Our private wealth business remains very resilient and robust, so we have not been broadly impacted by the competitive pressures both on the adviser recruiting side or on the client retention side of things. To me, the proof points are that adviser productivity continues to go up and we are on track on our adviser recruiting. Our adviser headcount is up 4% relative to the end of 2025, so we are definitely seeing strong results there. In terms of the alternatives side, we had a very strong alt fund raise in the second quarter—around $900 million for private wealth—significantly higher than the same period prior year as well as the first quarter despite all the headlines. Our private credit strategies continue to hold up really well, with low redemptions. Overall, we feel very robust about the business performance across clients, advisers, as well as the asset mix. In terms of alternatives allocation, it is already approaching roughly 10%, and I can definitely see that based on our target asset allocation going up to the mid-teens over time. Ultimately, we are a fiduciary and client-need and demand-driven; we are not going to shoot for a precise number. But given the client demand and the robust product set we have, we will see that go up. For example, in the second quarter alone, we launched multiple new products ranging from long-short hedge fund strategies to a muni private credit fund and new vintages of some private equity and venture capital funds. As a result, our platform continues to broaden, and it attracts more assets from existing clients and also brings new clients.
Great. Thank you. And then maybe just a follow-up for Tom. Could you unpack the decline in the private market performance fee opportunity set? I would have thought it would be more on base rates, but it sounds like more like some kind of write-down. Just wondering if you could click in a couple sentences and give a little more detail what is driving the decline versus the prior guide? Thank you.
There are primarily two things going on there, Bill. It is an unrealized mark in the portfolio, and then there were some tax events inside the fund at the investor level that flow through to our performance fee collection there.
You are welcome.
Your next question comes from the line of Alexander Blostein with Goldman Sachs. Your line is open. Please go ahead.
Hi. Good morning, everybody. I wanted to get your thoughts on the interplay between fee rate dynamics versus profitability over time, especially as CoreBridge assets come on. I think initially they will be at a pretty low basis point, kind of in the 10-ish range. But obviously, you highlighted pretty high incremental margin. As you think about profitability in the business as a whole relative to the margins where they are today, what do you see them going over time?
Yeah. Hi, Alex. Let me take that. We do not have a bottom-up view of the exact AUM split by asset class at this point. Obviously, the fee rate will be a blended average. From a profitability perspective, we expect the profitability of that incremental AUM to be robust—definitely in line with our current margin or even better depending on the asset class. As a result, we remain quite optimistic and bullish about the impact of that AUM on our business economics. The effective fee rate is an important metric we track, but it is not a predictor of margin by itself. We have a lot of persistent, lower-fee asset classes that are highly profitable, like our industry-leading muni platform. So fee rates and margin should be thought of as two separate things and you should not necessarily see a one-to-one link between them. In the short term, given there will likely be a significant amount of core fixed income assets onboarded, that will tend to have a negative impact on the effective fee rate but not necessarily on the margin.
Makes sense. All right. For my follow-up, I was hoping to get your thoughts on some of the recent focus from the Treasury Department on tax-advantaged investments. That has been a focus area of growth for you guys as well. Maybe give us a broader view of exposures across the platform to tax-advantaged strategies—outside of munis, but more explicitly focused tax-advantaged products—and how you think about growth in this part of the market?
Absolutely. Unlike some other publicly listed asset managers, our exposure to some of the higher-risk categories is very small. Treasury and IRS comments led to some concern in the marketplace, but the focus areas of those comments are very small as a percentage of our total. I do not see a material risk for our business. I think regulators were clear they are not targeting the broader tax-aware investing or tax-loss harvesting strategies if done properly. The great majority of our assets fall in categories that were not referenced. Municipal bonds are the most significant part, and that was not referenced. Our direct indexing platform, which we have over $10 billion in, is long-only. As a result, our exposure to those other categories is very small.
Your next question comes from the line of Daniel Fannon with Jefferies. Your line is open. Please go ahead.
Thanks. Good morning. I wanted to follow up on that last set of questions around profitability versus fee rate. One of the comments in the prepared remarks was that once fully funded and operating at scale, that's where profitability starts to increase. So curious how you define scale in some of these newer strategies and whether it is a reasonable time period to get there?
Scale is product-specific and difficult to generalize to a single AUM number. Historically, in periods where we had material AUM growth, we tended to see higher margins relative to our existing margin, sometimes even as high as 45% to 50%. History supports that typically our AUM growth translates into profitability. That said, it is asset-class dependent. We will continue to invest in new asset classes like private alternatives that may have lower margin while we build them. Overall, we are focused on our overall margin and our target of 30% to 35%—we are right in the middle of that range and feel comfortable. We also see upside potential from existing large categories like munis, institutional fixed income, and systematic fixed income.
I would add that we do not necessarily have to invest in new infrastructure or teams to take on incremental assets in many cases; we already have them here. That is why there can be 45% to 50% incremental margins dropping down to the bottom line, as Onur noted. As far as timing of when we can begin to take on these assets, we are really focused on getting the deal closed between CoreBridge and Equitable. We do think around 20% to 30% of those assets would come online in 2027 and accelerate from there into 2028 to complete the first $100 billion that we have spoken about.
Great. That is helpful. And then just following up on areas of investment and some of the expense guidance. Guidance is coming down a bit; curious where the savings are coming from. Also, in terms of spending or still investing in several growth areas, maybe highlight where the spend is growing and where you are seeing some of those savings come from?
Sure. We are spending in private markets, ETFs, building the insurance vertical, and expanding private wealth adviser base. As far as where we are seeing savings, we are seeing it across non-compensation expenses, both on the promotion and servicing side as well as general and administrative. This quarter, we reduced our guidance by $5 million to $10 million. That is all we have line of sight into now, but we continue to challenge the businesses and look for further efficiencies. If anything more shakes out, we will give you an update.
Your next question comes from the line of John Dunn with Evercore. Your line is open. Please go ahead.
Thank you. You mentioned the Security of the Future fund. Are there any other areas in active equities on the retail side you can point to that can be partial offsets to outflows? And maybe the same thing for institutional side—are there areas of demand you could point to?
Yeah. As you pointed out, we had several equity products that had really strong investment performance and that translated into very strong commercial performance. Security of the Future, which is a thematic product, exceeded $7 billion and is a relatively new product—great evidence of our ability to innovate and scale. Similarly, our technology-oriented Disruptor strategy has done very well and that ETF is around $3 billion. We are seeing a broadening of client appetite away from U.S.-only strategies to regional and global strategies, which has helped some international and emerging market strategies. There are also some historically niche products that are seeing renewed interest. For example, we had a good institutional client come into our global REIT strategy this quarter. On the institutional side, we continue to see strong demand in private alternatives. Our insurance third-party general account business grew by 33% year-over-year—robust growth, and that excludes our shareholder Equitable. That growth is broad-based across deployments in private alternatives. We are also seeing broadening investor demand on the fixed income side, with strong demand in both systematic and fundamental fixed income.
If I can just add on equities: international small and mid-cap drove the performance fees in U.S. Select and we have had a number of strategies performing well. Ultimately, despite strong performance in some strategies—U.S. large cap value being a good example—the flows depend on what clients want to buy, and that is what really drives inflows and outflows.
To your question on the ETF franchise, our ETF platform hit over $20 billion; that's a $12 billion increase from a year ago, an incredible growth rate. The platform has started to globalize, including in Taiwan where assets tripled from a small base. The effective fee rate on that business is around 50 basis points, and our annual run rate revenue for the ETF franchise is approximately $100 million. For a business only four years old, we are excited about the scaling, globalization, and prospects as active ETF adoption widens globally. Most of these were new strategies rather than reboots of existing funds.
Excellent. Thanks.
And your next question comes from the line of Mason Fleming with Barclays. Your line is open. Please go ahead.
Hi. This is actually Benjamin Budish. I wanted to follow up on the private markets piece—maybe a two-parter. First, could you remind us of the normal composition of private markets performance fees? I think most of it comes from credit, but between realized performance fees and realization-related revenues, what is the typical mix? And is there any more color you can share on the unrealized marks? I know we've seen some of the non-traded BDCs start to report a little bit, but curious what you are seeing in your portfolio.
What we are seeing in private credit is a slight decrease from what we saw last year. Last year we saw mid-to-upper-teen levels of realization, then there was a step down in Q1 and Q2 of this year. I expect that to normalize more in Q3 and Q4, but not necessarily back to last year's levels—more of a step-up from Q1 and Q2. On the marks, I should reiterate that the marks are not related to credit events; these are unrealized marks that we get third-party valuation services to mark the portfolio each quarter, and that is what is driving the reduction in the guidance that we are providing now.
Okay. Understood. Maybe a follow-up on the partnership with Brookfield and Carlyle earlier in the quarter. What are your near-term expectations and how should we think about things evolving over the next 12 to 18 months? Could this start to rotate more private markets into target date funds?
We are very excited about our partnership with Brookfield and Carlyle on the new multi-manager, multi-alts product we launched for the defined contribution channel. We also have several other products in the pipeline in private credit. Ultimately, DC adoption is a slower-moving part of the industry given trustee and committee dynamics; it takes a long time from consideration to deployment. It's hard to put precise numbers over a 12- to 18-month horizon. That said, we are strongly positioned in the DC channel given our custom retirement platform, glide-path expertise, and ability to create differentiated alternatives products ourselves and with partners. As the DC market adopts private, we expect to be a formidable competitor. This is likely a more medium-term opportunity versus immediate near-term scale over the next few quarters.
There are no further questions at this time. Mr. Jorgali, I will now turn the call back over to you.
Thank you, Tracy, and thank you to everyone joining our call. We look forward to catching up with you next quarter. Have a great day.
This concludes today's call. Thank you for attending. You may now disconnect.