Executive outflow may hit AllianceBernstein

Marc O. Mayer this month became the first big fish to swim away from AllianceBernstein LP since the abrupt departure last December of Lewis Sanders as chairman and CEO.

Some Bernstein alumni say Mr. Mayer won't be the last. Even with an accomplished leader such as former Goldman Sachs Asset Management co-CEO Peter S. Kraus as successor, the fallout from the loss of Mr. Sanders — the legendary value investor — could put the respected Bernstein culture and wavering institutional clients in play, they say.

Industry veterans say they'll be watching to see whether long-time Bernstein professionals such as Marilyn Fedak, vice chair of investment services; Gerald M. Lieberman, president and COO; Sharon E. Fay, executive vice president, value investing; Seth J. Masters, executive vice president, defined contribution, asset allocation; David A. Steyn, executive vice president, distribution; and John Mahedy, CIO, U.S. large-cap value services, can continue to thrive in the post-Sanders era.

Those anticipating the greatest fallout stress Mr. Sanders' role in nurturing — and retaining — the current generation of key Bernstein executives. “Marc Mayer was very loyal to Lew. He would never have left the firm if Lew was there,” said one former colleague of both men, who declined to be named.

Some disagree, noting that opportunities less attractive than the one Mr. Mayer assumed on March 2 — as the first CEO of Boston-based Grantham Mayo Van Otterloo & Co. LLC — have lured away senior Bernstein people before, including Gary Black, Steven Pisarkiewicz and Sally Krawcheck.

Mr. Mayer didn't respond to requests for an interview.

But others say the shock to AllianceBernstein's culture of losing an investment legend such as Mr. Sanders, coupled with the higher-profile role parent company AXA Financial Inc. appears to be assuming, could prompt more key defections.

“When a person as integral to the culture as Lew Sanders leaves, you would expect to see some departures,” said Mr. Black, a former Bernstein veteran now serving as CEO of Denver-based Janus Capital Management LLC.

Donald Putnam, the San Francisco-based managing partner of investment bank Grail Partners LLC, called AXA's removal of Mr. Sanders an “uncharacteristically clumsy move” for a firm that, a decade ago, brilliantly resolved succession issues at its Alliance Capital Management LP subsidiary by merging it with Bernstein. “I absolutely think they will see serious fallout, and not just among the value guys — the rest of the teams will view the new CEO as a guy who cracks the whip for the corporate parent,” he said.

AXA officials insist Mr. Sanders made his own decision to move on. Some observers say technically that might be true, with Mr. Sanders declining to accept what they characterized as an investment-focused role at an AllianceBernstein led by Mr. Kraus as chairman and CEO.

Christopher M. Condron, chairman and CEO of parent company AXA Financial Inc., declined to be interviewed. Mr. Sanders couldn't be reached for comment.

Former colleagues, depicting Mr. Sanders as someone who lives to invest, say it's hard to imagine him leaving voluntarily, and a number of investment consultants agree. “I'm waiting to see what other changes and fallout come from the AXA-engineered change at the top,” said a top executive with one leading investment consultant, who declined to be named.

Many industry veterans believe AXA dismissed Mr. Sanders after the deep value investment discipline he successfully led at Bernstein over the decades foundered last year.

The firm's assets under management fell 42% in 2008 to $462 billion, with a $294 billion drop in market valuation and net outflows of $44 billion — half of which were yanked in the final quarter alone. In its annual report issued Feb. 23, the firm said net outflows “continued to accelerate in January.”

For the year, AllianceBernstein's value equity business plunged 56% to $170 billion. Growth equity assets did almost as badly, dropping 55% to $88 billion, while fixed income suffered a more modest decline of 14% to $171 billion.

That drubbing, and the more than 65% plunge of AllianceBernstein's stock price in the first 11 months of 2008 left AXA's board “under a lot of pressure,” said one executive recruiter who declined to be named. In addition to owning a majority 63% stake in AllianceBernstein Holdings LP, AXA is also the money management firm's biggest institutional client, accounting for roughly 20% of assets under management and 15% of its revenue, according to the firm's latest annual report.

The plunge in revenue and stock price makes an executive suite shake-up understandable, but “we were disappointed that the change came so suddenly and abruptly,” said Soonyong Park, head of traditional manager research with Darien, Conn.-based investment consultant Rogerscasey Inc.

Mr. Kraus knows the money management industry very well, but where Mr. Sanders is viewed as an investor first then a business manager, Mr. Kraus is better known as a business manager, Mr. Park said. The question is what happens to the investment process if business decisions begin to override investment decisions, he added.

Mr. Kraus, a respected industry veteran, wasted no time in signaling his determination to maintain the Bernstein mystique. In a letter to clients soon after becoming chairman and CEO, he said the firm's culture, with its focus on research and disciplined investment processes, “must be preserved and built upon.”

“Nothing is broken,” Mr. Kraus said in a recent interview. He said he has been thankful to have Bernstein veterans such as Ms. Fay in charge of the firm's value equity business and Lisa A. Shalett in charge of growth equities. Both are executive vice presidents.

In the same interview, Ms. Fay said institutional clients are naturally concerned about both recent performance and Mr. Sanders' departure, but most appear to be coming away from due diligence visits this year satisfied that “we are sticking to our discipline.”

Ms. Fay added that Bernstein's senior team of investors “are still here, committed, and working our tails off now, I can assure you.” Their sense of purpose is “as high as it's ever been,” she said.

Sales and marketing alumni of AllianceBernstein, meanwhile, appear more open to the possibility that Mr. Kraus might be the right executive to position the firm for its next growth phase. One former executive, who declined to be named, said having a business-savvy leader who isn't tied to any particular segment of the firm's business could be an advantage going forward.

For institutional investors who had stuck with AllianceBernstein through what the firm's president, Mr. Lieberman, recently described as bleak underperformance in 2008, Mr. Kraus faces the tricky task of leading the firm out of its performance tailspin without bruising the investment culture.

The message coming out of meetings this year with Mr. Kraus has been one of continuity, although there are hints of likely changes on the periphery, said Robert Lee, an analyst with Keefe, Bruyette & Woods Inc., New York, who has an “outperform” rating for AllianceBernstein. For example, where Mr. Sanders felt that the firm could build any investment capability it needed in-house, Mr. Kraus seems more open to acquiring teams or unique investment talent, he said.