CEO champions global investing and DC plans

NEW YORK — Lewis Sanders, chief executive officer and chairman of AllianceBernstein LP, is a self-confessed evangelist.

This quietly spoken man says he and his firm like to tell clients that global mandates are far superior in performance terms than local country mandates. And judging from recent growth in the firm's global and international assets under management, he has won some converts.

But the firm is also looking hard at the U.S. defined contribution market and recently entered the hedge fund business.

Global and international mandates now account for more than half the firm's $680 billion in total assets under management, while just over a third of the firm's overall business comes from non-U.S. clients. Indeed, assets managed for its foreign client base grew 23% organically for the year ended Sept. 30. Organic growth for the firm's total client base was 9% for the same period. The firm now manages total assets of $436 billion for U.S. clients.

"Our client base is globalizing; our product set is definitely global and is seen as that by our clients," Mr. Sanders said.

The firm's decision to preach the virtues of global investing comes at a time when many more institutional investors are seeking alpha from international sources, according to Rich Nuzum, worldwide partner at Mercer Investment Consulting, New York.

Mr. Sanders described the firm's timing as fortuitous. "We got here because we thought it was a better way to manage money, and our clients are agreeing."

In terms of investment decisions, the firm's focus has shifted to industry and company factors, with country factors far less of an issue than in the past.

"There are now some industries that don't exist in geographies but have moved for economic reasons," due to technology and work-force issues, he said. (One example would be industries that shifted call centers to India to take advantage of lower costs.) Index-based country weightings become obsolete constraints in this environment and can obscure the importance of an individual stock within a global portfolio, he said. Mr. Sanders cited Samsung Electronics — the South Korean conglomerate, as an example.

Geography appears to be of little importance within AllianceBernstein. David Steyn, head of AllianceBernstein's institutional business, is based in London and spends almost half his time in the U.S.

Jet lag doesn't faze Mr. Steyn, which is good because he also spends considerable time in Australia and the Far East working with some of the firm's core clients. Australia, Japan, Canada and the U.K. are currently the center of the firm's non-U.S. institutional client base of $194 billion. Over the last two years, the firm opened offices across continental Europe to strengthen its presence in this region as well, said Mr. Steyn.

When Alliance Capital Management LP acquired Sanford Bernstein C. Bernstein Inc. in 2000, the combined company was primarily focused on serving U.S. defined benefit pension plans, he said. Since then, the firm has evolved to become a money manager with a global client base that is now intent on building an institutional DC business.

Mr. Sanders has targeted defined contribution as a key growth area for AllianceBernstein.

"There is now a chance for investment service-based competitors to take market share, and that is our mission," said Mr. Sanders. He predicts that up to $1 trillion will move out of DC stable-value default options and into target-date funds over the next five to 10 years. AllianceBernstein already has a set of target-date funds managed in-house. Those funds are part of the $15 billion in defined contribution assets under management, "but it ought to be a much larger portion of the firm, and we are emphasizing this greatly," said Mr. Sanders.

The firm's new DC operation is housed in the institutional business and is Mr. Steyn's responsibility. "We think the DC marketplace in the U.S. is about to undergo an upheaval of perhaps the scale of that seen in global markets over the last five years," said Mr. Steyn. But the investment of DC assets needs to become more institutional if plan sponsors want to avoid some of the mistakes of the past, he added.

Mr. Sanders believes AllianceBernstein is well placed to offer both investment management and advisory services around target-date funds. The firm is also willing to step into consulting territory and advise clients on asset allocation without managing any of the assets itself.

He is keenly aware of the need to manage asset gathering to protect investment performance. In fact, certain strategies such as small-cap value and growth and emerging markets value and growth are closed to new business for the foreseeable future, he said.

On the other hand, AllianceBernstein has unveiled a hedge fund arm and announced the launch of a venture capital unit during the past year. Both are seen by Mr. Sanders as offshoots of the firm's investment research.

He is resolute that the hedge fund business is a derivative of the firm's core business of research and bats aside concerns that product proliferation could dilute the value of its brand and core investment products.

The hedge fund business, which had $6.5 billion in assets as of Sept. 30, does not create tension in the firm and is run by the core portfolio management team. "We are taking our core intellectual capacity and applying it. … If we are successful in hedge funds, then everyone benefits," he said.

"Everything we do is a derivative of performance. If we don't hold out on performance, we don't serve the client."