Thank you for standing by, and welcome to the AllianceBernstein Q3 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 Q3 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 Erzan, 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. 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. 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 Q3 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 continued to generate organic growth in alternatives and municipals. Our realized fee rate improved by 7% year over year, driven by the addition of CarVal 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 CarVal commitments, and an additional diversified mandates. Let's get into specifics, starting with a firm-wide overview on slide four.
Gross 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 AXA 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 five shows our quarterly flow trend by channel. Firm-wide Q3 net outflows were $10.5 billion or $6.6 billion excluding AXA redemptions. Retail gross 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 AXA's $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-wide, 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 Q3, 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 delivered 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 Q3 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 Q3 in local currency terms, and was down by 21.9% year-to-date. In developed markets, growth modestly outperformed value for the Q3, though both were negative and f or the year-to-date period, growth underperformed, with the Russell 1,000 Growth Index down 30.7%, lagging the Russell 1,000 Value Index at -17.8%.
While our active equities performance remains 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 US large cap growth managers and 30% of mid cap growth managers beating benchmarks year-to-date.
Importantly, our retail mutual funds continued to outperform 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, managements 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. 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 Q3'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 Q3. Of note, American Income sales were up $1 billion sequentially, generating $500 million in net inflows for that product. Still, the recovery inflows we saw in the first two months of the quarter unfortunately reversed in September.
Municipals, led by our SMA Muni Tax Aware product, continued to grow for the nine consecutive quarter, bucking industry-wide outflows, a story which Onur 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. Q3 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 AXA redemptions. In the quarter, we experienced record US and European CRE fundings driven by Equitable, which has now funded approximately half of its multi-year $10 billion commitment in permanent capital. This was the nine consecutive quarter of Alts & 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 CarVal's higher fee rate private alternatives AUM in addition to record CRE fundings. Our pipeline more than doubled to $24.7 billion at quarter end, up $14.5 billion sequentially, driven by a $7 and a half billion dollar custom target date mandate, $4.6 billion of CarVal commitments, and additional diversified active mandates.
As shown in the bottom left chart, private alternatives now represent over 80% 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. Q3 gross sales of $4.1 billion were even with prior year period and up 25% sequentially. Redemptions improved relative to the tax-driven sales in the Q2, 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 alternatives 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.
Q3 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 Research, 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 ten 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 in equities remained strong while fixed income performance moderated and near-term performance in both asset classes reflected challenging markets. Our Q3 growth was led by private wealth and our Alts & MAS offerings, while we continue to grow annuities as well. Our pipeline more than doubled to a record $24.7 billion with an active fee 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, Q3 adjusted operating income declined by 27%. Adjusted operating margin was 25.1%, and adjusted earnings and unitholder distributions of $0.64 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. Onur.
Thanks, Seth. It's a pleasure to be with you today to share with you the key strengths that differentiate our global distribution platform, known as the client group within AB. Integrated across sales, marketing, product, and client service functions, this includes both our institutional and retail distribution teams. The key points I wish to leave you with today are the following. We enjoy very strong global access with distinct capabilities across six unique pillars.
We have delivered profitable growth across asset classes, geographies, and vehicles. Building on this growth, we are investing in several high-growth conviction areas, including augmenting use of data and technology. Organic opportunities include the large insurance market. Our platform, in conjunction with our partner, Equitable, is structured to deliver continued organic and inorganic growth going forward.
Starting with slide 13, we had a wide global platform responsible for over half a trillion dollars of AUM across six continents. S plit relatively evenly between institutional retail with local presence in all major asset management geographies across APAC, EMEA, and Latin America, in addition to the US. We have regional expertise and local coverage, key elements that enable us to deliver complete solutions to clients.
For example, we have a strong competitively advantaged position in Asia-Pacific, having built local businesses over several decades. Supported by strong long-term investment performance from our tenured experienced investment teams, our global distribution platform has driven sustained organic growth in recent years, well in excess of the peer group. Active equities and alternatives and multi-asset offerings led the way. Within fixed income, tax-aware strategies in the US also have outgrown the peers.
In active equities, we have grown organically by over 4% annualized over both the three- and five-year period, or nearly 10 percentage points above the peer group average. In alternatives and multi-asset, our track record has accelerated in recent years to nearly double-digit annualized organic growth with both alternatives and custom-targeted mandates contributing.
Turning to slide 15, we believe our sustained growth has been achieved due to a set of several differentiating capabilities, including the following. Comprehensive local market coverage owned by over 250 sales professionals that have forged strong relationships with leading global and regional intermediaries, asset owners, and consultants. These sales professionals are supported by local market specialists across product and marketing.
A broad investment product range, which allows us to leverage and scale relationships with key clients. Examples include our award-winning sustainable platform with global and U.S. sustainable thematic equity, complemented by fixed income offerings as well. Vehicle flexibility enables us to meet global demand and local endpoint needs.
For example, we launched our OEIC range in 2019, enabling us to target U.K. markets with a local wrapper. Moving to the top right, we supplement with value-add services, including client capability building, such as our AB Advisor Institute, which provides practice management, wealth planning, and wealth management expertise to our partner firms.
Our institutional solutions group provides sophisticated capital markets research, strategies, tools, and solutions to optimize portfolio outcomes. Importantly, AB's strong brand maintains significant awareness globally. As Seth mentioned earlier, we were recently ranked the sixth most trusted financial company by Investor's Business Daily. The AB brand was ranked fourth in all of APAC last year in a study by Broadridge.
We continue to develop data analytics capabilities, such as our newly launched digital sales desk in US retail, enabling smart client prospecting, targeting, cross-selling, and servicing, utilizing our new Oculus platform. Leveraging these tools, we continue to build momentum and sustain growth in US retail, a historically under-penetrated market for us. On the next few slides, we highlight a few examples of our capabilities.
Our US Large Cap Growth service provides an excellent example of our differentiated distribution capabilities. Managed by a stable, tenured investment team with a strong long-term track record, we have expanded distribution of this globally relevant product in multiple vehicles to gain local access in diverse markets. This approach has led to nine consecutive years of organic growth and a service with now nearly $50 billion of global AUM.
As shown in the table on the bottom left, our relationships have enabled us to launch multiple local vehicles with large distribution partners, enabling global penetration across these platforms. At the same time, these vehicles give us the flexibility to work with regional partners for their local markets. The bottom right shows the progression of vehicle expansion with Korea local, U.S. Retail SMA, U.S. CIT, and Taiwan local vehicles all added in recent years.
The breadth of our U.S. retail footprint can be shown through the growth in municipal separately managed accounts, SMAs, across our U.S. retail platform. With over 10 consecutive years of organic growth, our Muni SMA business has grown to over $16 billion of AUM, led by Muni Tax-Aware and including high-quality Muni Income and Custom Muni.
The number of advisors who use these products has grown 15-fold over the last decade, with nearly twice that rate of growth in the number of accounts. In fact, SMAs across asset classes now make up 37% of our U.S. retail AUM, more than four times what they were in 2012. Our new Custom Muni platform, which is analogous to direct indexing and equity SMAs, uniquely positions us with the high net worth segment of financial advisors.
We are very excited about our new Custom Muni partnerships with multiple national and independent broker-dealers, as well as RIAs. Our newly launched AB Tax-Aware Short Duration Municipal ETF, the first potentially in a series, will also help us continue to build our market share in this category. The bottom right shows the strong compound growth rates we have experienced at several of our distribution partners over this period.
Our defined contribution, customer target date, and retirement income solutions provide another example of our differentiated distribution. We have grown this business organically by 15% annualized since 2011 to 2021 which we now manage over $60 billion AUM for 29 custom target date and Lifetime Income clients across the U.S. and U.K.
We are an early innovator in delivering an in-plan guaranteed income solution, our Lifetime Income Strategy celebrating its 10th anniversary, managing over $8 billion assets, including $3.4 billion in secured income benefits for more than 120,000 participants. Our proprietary technology platform provides us with the connectivity to 10 record keepers with plan for expansion and allows us to deliver a differentiated insurer benefits marketplace featuring five insurers, including our partner, Equitable.
These solutions enable us to pursue strategic client partnerships with a lineup that can be used across public and private DC plans. Specific strategic partnerships include a large state public fund for whom we manage the DC plan's custom target date fund, the Glide Path, as well as several underlying sleeves across asset classes, and are now being considered for their plan's core menu with an ESG-oriented equity strategy.
A large aerospace defense company, which also uses our custom target date services and has entrusted our firm with a fixed income allocation in the Glide Path. They're also now actively considering a custom lifetime income solution. Across products, vehicles, and geography, we are focusing our efforts and investments in growth markets. Private debt, a large market in which we recently expanded our position through the addition of CarVal, is expected to grow at a low double-digits rate going forward.
Insurance is an important opportunity given our well-developed capabilities with Equitable that we are investing to grow through additional third-party relationships. In terms of vehicles, we recently launched our first two active ETFs, AB Ultra Short Income and AB Tax-Aware Short Duration Municipal. The first step towards introducing an innovative and differentiated global ETF offering, which would supplement our core capabilities.
We have proven expertise in managing strategies in or similar to these categories, and consistent indications of interest from existing clients for liquidity tools in this space. Additionally, these ETFs will allow us to reach a wider client base over time. We will continue to grow our U.S. retail SMAs, as previously mentioned, and we are investing in China, EMEA, and U.S. retail, all large market opportunities for AB. China being a long-term view with EMEA and U.S. retail presenting substantial near-term opportunity to gain share.
A few words on the insurance opportunity we see. Our 40 years of experience in insurance management with significant client assets of Equitable Holdings, along with our experience managing AXA assets, positions us well to grow this business. We have over 60 dedicated experts globally who contribute to the $157 billion that we manage in this space. Capabilities span across public and private markets and include a dedicated insurance portfolio management team.
We offer a service-oriented engagement with insurance-specific solutions, analytics, client servicing and operations, and reporting. On the right side, we show examples of recent client partnerships where we have provided a range of solutions to a diverse set of institutions, including complex restructuring to optimize yields, private alternatives, and custom emerging market debt. Notably, 2/3 of our recent US CRE Debt Fund IV raise was from insurers, excluding Equitable.
Finally, our structure, including our ability to leverage our partnership with Equitable and our proprietary private wealth business, provides a strong track record of growing both organic and inorganic channels through a strong multiplier effect. We have successfully brought on multiple investment teams over the past decade and scaled them through localized relationships and vehicles and tailoring to specific channels.
As exemplified with CPH Capital, now our Global Core product, having grown four-fold to $13 billion AUM over the eight years since acquisition, Global Core is now diversified across geographies with exposure in both APAC and EMEA, in addition to US, and channels have grown across institutional, retail, and private wealth. Importantly, our partnership with Equitable Holdings has enabled our private alternatives business to grow third-party capital by four-fold from its original seed.
We look forward to growing this business further with the $10 billion that Equitable has committed to our private market strategies, as well as with the additional CarVal, to which Equitable has already committed $750 million.
In summary, AB has uniquely global access to diverse local markets with distinct distribution capabilities. We have delivered results driving profitable organic growth. We are investing in high conviction, high growth areas, and our platform, in conjunction with our partner, Equitable, is structured to deliver both organic and inorganic growth going forward. Now, I'll turn the call over to Kate, who will review the financials. Kate?
Thanks, Onur. Let's start with the GAAP income statement on slide 23. Q3 GAAP net revenues of $1 billion decreased 10% from the prior year period. Operating income of $170 million decreased 39%, and operating margin of 18.3% decreased by 740 basis points. GAAP EPU of $0.56 in the quarter decreased by 37% year over year.
As a reminder, this was the Q1 including CarVal, which added $12 billion of AUM at approximately a 1% fee rate and margins consistent with our mature private alternatives businesses. The deal remains slightly accretive to adjusted earnings in the second half of 2022 and the full year 2023. I'll focus my remarks from here on our adjusted results, which remove the effect of certain items that are not considered part of our core operating business.
We base our distribution to unit holders 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 10-Q.
Our adjusted financial highlights are shown on slide 24, which I'll touch on as we walk through the P&L shown on slide 25. On slide 25, beginning with revenues. Net revenues of $814 million decreased 8% versus the prior year period and were flat sequentially. Base fees decreased 7% versus the prior year period, as 13% lower average AUM was driven by market declines.
The Q3 fee rate of 41.4 basis points was up 7% year-over-year, driven by the addition of higher fee rate CarVal base fees and by asset mix, and up 5% sequentially. Q3 performance fees of $10 million declined by $8 million from the prior year period. Given current markets, we now see full year 2022 performance fees tracking below our prior guidance range or slightly below 2019 levels. Q3 revenues for Bernstein Research services decreased 19% from the prior year period, driven by lower customer trading activity in Europe and Asia due to the prevailing macroeconomic environment.
Investment gains were $10 million in the Q3, driven by the sale of our minority investment in NextCapital Group, as compared to a slight loss in the prior year period of less than $1 million. Moving to adjusted expenses, all in our total Q3 operating expenses of $610 million increased by 1% year-over-year and were up 3% sequentially.
Total compensation and benefits expense declined by 2% from the prior year period, reflecting lower AUM-driven revenues and performance fees, offset by a higher compensation ratio of 51% of adjusted net revenues, as compared with 48% in the prior year period. Lower incentive compensation reflected lower AUM, partially offset by higher base compensation, driven by an increase in average headcount.
As is typical in this time of year, in the Q4, we will true up our compensation ratio to balance market conditions and the year-to-date accrual rate. Through the first three quarters of the year, we accrued compensation at a 49% rate, comprised of 48% in each of the first two quarters and 51% in the Q3.
Given market conditions, which includes the S&P 500 and Barclays U.S. Aggregate, both down 5% in the Q3, we expect the compensation ratio should remain elevated in the Q4 of 2022. As always, we plan to pay competitively based on our performance, given that our people are our most important asset. As a reminder, the compensation ratio is sensitive to variability in the asset mix and to the mix due to year-end performance of performance fee-eligible funds.
Promotion and servicing costs increased by 8% from the prior year period, as T&E and sales and client-related meetings increased compared with depressed levels in the prior year period due to the pandemic, offset by lower trade execution and clearance costs. Sequentially, T&E and meeting expense declined. We continue to manage second half promotion and servicing spend to be below first half levels.
G&A expenses increased 7% in the Q3 versus the prior year period, reflecting the negative impact of a higher U.S. dollar, the addition of CarVal, and continued strategic investments in growth and efficiency technology projects. For the full year, we continue to target G&A growth in the mid-single digits. Q3 operating income of $204 million decreased by 27% versus the prior year period.
Q3 operating margin of 25.1% was down 670 basis points year-on-year. Our margin comparisons in 2022 reflect the meaningful impact of the year-to-date market correction. Additionally, higher inflation, continuation of select growth-related investments, rebounding T&E expenses from prior year COVID-induced lows, and lower performance fees are all impacting this year's performance.
As outlined in the appendix of our presentation, Q3 earnings exclude certain items which are not part of our core business operations. In the Q3, adjusted operating earnings were $24 million, or $0.08 per unit above GAAP operating earnings, due primarily to acquisition-related expenses. Amortization of intangible assets, which are included in acquisition-related expenses in our GAAP to adjusted earnings reconciliation, increased by $11 million due to the CarVal acquisition.
In the Q3, we realized a one-time tax benefit of $5 million, resulting in an effective tax rate for AllianceBernstein L.P. of 3.1%. We continue to expect an effective tax rate for 2022 of approximately 5% to 5.5%. We continue to expect the Nashville relocation will be accretive for the full year 2022, with compensation-related savings more than offsetting increased occupancy costs. Now we're pleased to answer your questions. Operator?
Thank you. As a reminder, to ask a question, please press star one one. Please limit your initial questions to two in order to provide all callers an opportunity to ask questions. You are welcome to return to the queue to ask any additional follow-up questions. Again, that's star one one to ask a question. One moment while we compile our Q&A roster. Our first question will come from Craig Siegenthaler from Bank of America. Your line is open.
Good morning, Seth.
Good morning, Craig.
My first one is on the potential for large client reallocations next year. This actually might be a good one for Onur Erzan, given that he joined us today. With interest rates expected to stabilize next year, can you talk about any pent-up demand from both retail and institutional investors to reallocate back into fixed income? Also kind of a second part, do you think your softer one-year investment performance in fixed income could limit your ability to win these reallocations, or though will they be more focused on the longer-term track records?
Let me start, and then I'm gonna ask Onur to add in where i'm missing stuff. Look, as rates have risen and yields have become pretty attractive, particularly in credit, we are seeing smatterings of interest, both retail and institutional. For example, AB American Income actually had positive flows in the Q3, which I think is an indication of people beginning to see value in credit. I do see the potential for more reallocations w hether that happens in the Q4 or the Q1, harder to say. I'd probably suspect it would be after the end of the year, as we're getting close to the end now.
I think with regard to performance, look, there has been deterioration in the fixed income performance, but our clients recognize that in risk off environments, we tend to underperform, just given our heavy allocations to credit generally. We had a weird situation this year, which I hope doesn't reoccur, and frankly hasn't in October, which is we've had rates and credit deteriorating at the same time t ypically, they have a negative correlation to one another.
The barbell we utilize in a number of our retail strategies tend to be hedged for that kind of event t his has been an unusual period. I don't know that October's trend will continue, but, I, you know, that's a more normalized behavior, so it's possible. Why don't you add in, Onur?
Absolutely. Stabilization of rates at a higher level will be, in general, a positive for us. If I were to comment on specific channels and products, in addition to what Seth mentioned, I would highlight a couple of other areas. One of our high-growth areas, as I highlighted in my remarks, is tax-exempt muni strategies. Definitely that category will have some momentum, and that should help us both grow market share and expand the platform.
Then in terms of taxable fixed income, we believe that should help us with our Asia franchise, given a large part of our retail taxable fixed income is Asia kind of centric and t hen, it's a much lower scale, but LATAM retail is another geography that was depressed this year, should benefit from that.
On the institutional side, definitely, there will be some reallocations, and definitely can help us in a couple of channels, both in insurance and pension plans. That being said, I think being precise about the timing is very hard w e don't know when the rates will stabilize precisely and at what level, and that uncertainty will create, I think, some lack of precision in the timing.
Thank you. Just as my follow-up, I wondered if you had any insight into tax loss harvesting activity, just given it's been such a bad year for both equities and bonds. I guess, you know, this would happen in the Q4, and it would impact equities and taxable fixed income, but any perspective on any kinda near-term flow headwinds from that would be appreciated.
Absolutely. We have been seeing that. Obviously, the Q4 is where you see the bulk of the tax loss harvesting activity. It tends to be temporary, so that's.... the good news. Given the declines in the indices and given tax-exempt and muni indices are not immune from that, we definitely see some elevated tax loss harvesting. That being said, as I mentioned, in most of the cases, that's a very temporary move, and that will be, in my opinion, more than offset by future flows a gain, timing is hard to predict. On a net basis, they're positive i n the short term, that will create definitely some pressure.
Thank you, Onur.
Thank you. One moment for our next question, please. Our next question will come from Alexander Blostein from Goldman Sachs. Your line is open.
Hi. Good morning, everybody t hank you for taking the question. Onur, I wanted to start with a question for you around the insurance business y ou highlighted that working with other insurance companies outside of Equitable is an opportunity you see for AllianceBernstein and obviously with a more expanded products, including carve-out, you guys should be well positioned to do that.
Maybe just expand on how you're going about the strategy, what vehicles and products you're likely to utilize. As you think about the relationship with Equitable, is that a tailwind or is that a headwind? Right, 'cause at the end of the day, you know, having a large insurance company and working with them side by side gives you a unique sort of knowledge base and perhaps a competitive advantage a t the same time, they have a large equity stake in you s o which one are these things kind of went out?
No, great questions. Let me start from the end and make my way through the beginning. Obviously, we think about the insurance opportunity on a global basis, and we think about it across insurance subsectors, life insurance, property and casualty, and health.
The good news is the space that Equitable participates in and a leader in is only a portion of the market, and that U.S. life market is quite concentrated, particularly if you focus on large entity providers. Obviously, we would be always sensitive to any perceived conflicts, but that is only a handful of insurers, and that doesn't necessarily reduce the appeal of the opportunity or the size of the addressable market.
In terms of how we are pursuing this opportunity, as I mentioned in my remarks, we created insurance-dedicated capabilities from the back office so that the insurance-dedicated services will help us to be very catered to a liability-driven investor audience, which is different.
When it comes to products and services, as you highlighted, we'll leverage both our alternatives platform, particularly private credits, not only AB CarVal, but the broader lending capabilities, real estate lending, being another one, which had good strengths in terms of fundings in the Q3, both US CRE and European CRE.
We are definitely working on a number of structures that makes our solutions more capital efficient for insurance balance sheets, and we have a pipeline of product opportunities that is coming. Watch us in the insurance space it 's a long-term strategy, but we will continue to focus on it.
Great. That's very helpful t hanks. My second question is around CarVal. I just was hoping if you could get into this a little bit more, given it's been under the AllianceBernstein umbrella for a couple of months now. I guess one specific question related to the $4.6 billion in commitments that you highlighted in the pipeline. Which products are those, and how should we think about translating that into fee growth? Do they bill uncommitted or deployed? If it is undeployed, I guess, how are they thinking about the opportunities for putting capital to work in this environment?
Sure. That will be diverse across several different strategies. It includes the flagship Credit Value. It includes the clean energy strategies and then some of the more bespoke other add-on services as well, emerging markets, et cetera. In terms of the funding periods, we'll see. We have seen some fundings in all of these kind of strategies, but obviously it will depend on the timing.
We don't have a clear sense for how the market environment will impact that. It's a little bit different thing for AB CarVal because opportunistic distress, as you know, can be countercyclical i t's a bit hard for us to be very precise. Particularly in some of these strategies like clean energy, et cetera, we expect more fundings.
Great. Thanks so much.
Thank you. One moment for our next question, please. Our next question will come from Bill Katz from Credit Suisse. Your line is open.
Okay. Thank you very much for taking the questions this morning and the extra discussion. Hope this is more of a qualification and not count as a question. Part one is just in terms of the incremental pickup in the fee rate, both in the institutional channel as well as overall. I'm guessing it's just a weighted average impact of CarVal, but are there any sort of catch-up fees underneath that? The broader question is..
As you think about your overall pipeline, which grew nicely, what's happening in terms of the deployment of that? Is that a couple quarters as has normally been the case, or is that getting elongated in any way? I was just wondering if you could answer Alex's question in terms of when do you pay fees on the $4 billion? Thank you.
Well, thanks for the question. I'll start on the fee rate side. Look, overall, I would just say we have confidence that over time, our fee rate is gonna continue to work its way higher. What we saw here during the quarter is that we experienced a positive fee rate in all three channels. That improvement was largely driven by a favorable mix, with alternatives..C arVal played a part in that, but was not all of it, as well as continued relatively inactive equities and outflows in some of our retail fixed income businesses.
Our view and when you look at the institutional pipeline, is that we're gonna get at that three times level that Seth mentioned in terms of the active pipeline fee rate versus our institutional average. We expect that that will be supportive over time. But we do also highlight that there could be volatility when we have those larger low fee DC mandates. This pipeline does include that $7.5 billion target date mandate that was added in the Q3. And as that one works its way through that will ultimately show up in the quarterly rates.
Okay j ust to follow up to that, if you could just answer the question in terms, sorry to belabor it, but just the pipeline itself in terms of the sort of timing, in terms of deployment, just given what seems to be a bit of a slowdown in decision making. Then on the CarVal, the $4 billion, are those paid fee rates, base fee rates paid on, committed capital, deployed capital, and there's an opportunity for any performance fees?
Yeah. In terms of the timing, as Seth and Kate mentioned the remarks, we typically take a nine to 12 month view. When we look at the nature of the pipeline, we are optimistic about the Q4, but it's hard to be certain. There's definitely uncertainty. In terms of the CarVal products, all of the CarVal products tend to have performance fees, and that's why you need to factor in both the management fees and the performance fees. There was another question in terms of the nature of the fundings, et cetera.
You know, again, it will depend on the underlying asset class in terms of the deployments. For instance, you know, we'll work with Equitable on the US residential mortgages. As you know, that was one of the synergies with Equitable. That's the $750 million. We have relatively high kind of certainty around that, but it will again get deployed based on the market opportunities. Those are a few highlights I would give you in terms of the nature of that, and it's a pretty diverse pipeline. The one thing I haven't mentioned in my previous remarks is also the kind of the CLO part of the overall platform.
Bill, just to be clear, the fees kick in on funding for the most part.
Okay, terrific. I think I still have a lot of questions there. Thank you.
Thank you. One moment for our next question, please. Our next question will come from John Dunn from Evercore ISI. Your line is open.
Hi. Maybe just to extend a little bit the global distribution piece. Can you give us the state of the conversations of advisors in each of the different major regional intermediary markets?
Nature of the advisors in terms of how, the nature of our distribution partnerships, that, did I interpret the question?
Trying to get at more like how the conversations are differing in each of the major intermediary markets.
Oh, by region s o the color by region. Yeah, so let me try to tackle that by geography. U.S. retail, we touched on it. Obviously, the tax loss harvesting and thinking about the asset reallocation is a big trend. We continue to see continued interest in short-term duration taxable fixed income as well as Muni strategies. Then some advisors actually find the entry point for the equity strategies attractive a gain, it varies slightly by distribution platform, so it would vary.
Then alternatives is, I think, a secular trend t hat said, I think we have seen a little slowdown looking at the markets. In Asia Pac, given some of the challenges also with the Chinese equity market, et cetera, it has been a tough market environment. Majority of Asia retail tends to be income-oriented. It is Asia ex Japan, definitely, that interest kind of continues, but there is a little bit of wait and see to make sure the rates stabilize before people jump back into very attractive yield -to-worst kind of strategies.
Japan, obviously the yen weakness. Kind of drives interest in US-denominated assets, w e definitely benefited from that in addition to our strong presence in equities in Japan. Although it slowed down on a relative basis, I think, the interest seems to be still relatively strong in Japan. EMEA and LATAM probably are the most challenged kind of geographies. EMEA, given the proximity to Russia-Ukraine situation, et cetera, I think it has been, s ales levels have been more depressed.
I don't think there has been a you know major kind of theme that I would call out at the product level other than a little bit of the depressed risk off kind of environments, and not to mention some of the government changes, et cetera, in multiple markets like U.K. and Italy.
LatAm, similar, a lot of changes in administrations, risk off environments, and given those are also high emerging markets and fixed income buyers, I think they've been on the sidelines. All in all, global trend is typically risk off, stay on the sidelines, stay on the short end of the duration curve and provide or stay liquid or have dry powder. That's how I would characterize.
Very helpful. Then can you just talk about the outlook for replenishment of the unfunded pipeline and are you at a point now where you guys can maintain a higher level relative to the past?
I mean, that's very difficult to predict, but we believe in the strength of our client franchise and the capabilities we highlighted in my presentation. There are a lot of large U.S. pension plans. I mean, can we win other retirement mandates? It's very possible, but it's very hard to give a very precise number. What I can tell you is that given the product mix we have and the fee levels that Kate have highlighted, I think the revenue contribution will definitely be attractive to our starting point, particularly outside retirement, but it's hard to be very precise on the AUM.
Thanks very much.
Thank you. One moment for our next question, please. We'll take our next question from Dan Fannon from Jefferies. Your line is open.
Thanks. Good morning. Was hoping to talk a little bit more about CarVal and the performance that they've been generating and, you know, thinking about it in some of their flagship strategies, if you could help, you know, kind of put some numbers around that or rankings to kind of get a sense of How that's tracking, and then, you know, again, this future kind of pipeline and opportunity, maybe the biggest buckets that you see in terms of future fundraising, in terms of styles, that would be helpful as well.
Well, let me start, and Onur may jump in again, but you know, they've raised roughly $2 billion, a little over $2 billion since our announcement, or actually since our closing. We're very pleased with that. I'm sorry, since announcement.
We're very pleased with the pace a lthough, as Onur Erzan alluded to, it's gotta be a more challenging market generally out there, just given the volatility that the world is seeing. We've been out marketing our energy opportunities fund to a pretty broad reception, and it's really the first time we're utilizing the AB Institutional sales force as part of that s o far, that's been beneficial to us. We've gotten more looks than CarVal had experienced in the past, but it's still early days in that process w e're also kind of setting up for there are more distressed strategies as we move forward.
There's interest in doing it, and I think that's important. It's a traditional strength of the firm, and the broader performance has continued to be in line and/or outperforming most of their competitors. I think on balance, the story is good there. I think finally, just to recognize that the mandate with Equitable on resi mortgages is in the process of being funded. Further, that opens the way for more opportunities with our insurance clients. You know, on balance, it's early, but we're pretty favorable on where we stand.
Yeah. The only add is the retail angle. Historically, AB CarVal has been more geared towards the institutional channel. I think one of the synergies we really like in the combination is our ability to go deeper into retail and high net worth channels. A, through our proprietary private wealth channel, but also more broadly through our intermediary partners.
We are working on a couple of more retail high net worth oriented products, leveraging our product structuring or expertise BDCs, REITs, interval funds, and we'll test the market with those kind of extensions. That opens yet another venue, which wouldn't be captured in the institutional pipeline typically w e are optimistic about the long-term prospects there.
Great. Thanks for taking my question.
Thank you. We do have time for one more question. We'll take our last question from Bill Katz from Credit Suisse. Your line is open.
Excellent. Thanks so much for taking the extra set of questions. Two, can you give me a sense of where you are in terms of alternative penetration into your wealth management platform today and where you think that that ratio can get to? Just given your commentary about, you know, all the growth initiatives as you look ahead, one of the themes coming out of this quarter certainly is the challenge of balancing lower revenues against sort of ongoing spend. How should we be thinking about expense growth rate into 2023? Thank you.
Okay. Thanks, Will let me take the alts penetration question. To confirm, you're interested in alts penetration in our private wealth channel, right?
Yes. Thank you, Onur Erzan.
Yeah, absolutely. Our alternatives platform in the private wealth channel currently represents roughly 10% of the AUM. We had very strong momentum, even without any fundings to CarVal y ear to date, the alternative raises have been up 95%. And 45% of our AUM is with accounts that have private alternative exposure.
I think it's a very solid story for two reasons o ne, we demonstrated that we can offer alternatives as part of our asset allocation to our client base. As we add more larger accounts, if you look at the inflows, net flows, more than three-quarters comes from 20-plus million accounts, which tend to be higher buyers of alternatives.
Given there's still runway with the clients that didn't invest in alternatives and 10% being probably lower than what you could think about as steady state, there's a lot of runway there. In some of the third-party channels, some of the third parties advocate for asset allocations of up to 30% into alternatives. If you can think about that, the runway is quite significant for us.
Just to clarify, I said energy opportunities i meant clean energy with regard to CarVal.
One clarification on my side on the performance fees. Majority of the CarVal strategies have performance fees i t might not be 100%.
I'll just follow up quickly on the balance between our strategic investments and our expense management. We are gonna continue on the path of trying to be very disciplined overall in our discretionary spending and cost base while continuing to sort of balance the strategic initiatives and capitalizing on our existing strengths.
Where we're looking more is on the margin of where we can reduce spending in the near term without jeopardizing those long-term goals. We have a number of technology investments, for example, underway to support our growth initiatives in terms of supporting our infrastructure, such as in the insurance space, as Onur Erzan was talking about, or the muni SMAs, multi-asset offerings, ETF launches. All of those we think are good long-term capabilities, and we're gonna continue to support that.
We've always maintained a very strong cost discipline and looked also to try to leverage automation, things like moving our systems to the public cloud. For the full year, we're gonna continue to target a G&A number in the mid-single digits. Then on the promotion and servicing side, you've seen us have some discipline there w e do expect it to continue to decline sequentially, so here in the second half of the year, as compared to the first, but still above the prior year because of the pandemic impact.
Ultimately, as we look ahead, it's gonna be and through the year-end about balancing those priorities as well as rewarding and retaining that talent team, the talented teams that we have. I think that that's the best answer i can give you, is that we're gonna continue to be very disciplined in our approach, but we are not gonna be short-sighted in supporting our longer term initiatives.
Terrific. Thank you so much.
Thank you. There are no further questions at this time. Mr. Griffin, I'll turn the call back to you.
Thank you, everyone, for joining us, today on our conference call. Feel free to reach out to Investor Relations with any further questions, and have a great day.
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