AllianceBernstein's CEO foresees rebound

Peter Kraus' efforts to pull AllianceBernstein LP out of the hole it fell into during the financial crisis have yet to charm institutional investors, but the CEO insists the changes his team is putting in place are positioning the firm to turn the tide.

For October, analysts estimate the New York-based money manager saw $4 billion to $5 billion of institutional net outflows — a pace similar to the $15.2 billion in institutional outflows AllianceBernstein reported for the third quarter. Mr. Kraus declined to provide outflow data.

After signs of improvement in the first half of 2010, the pickup in outflows led a number of sell-side analysts to scale back their earnings and price target estimates for the company's stock, AllianceBernstein's shares have tumbled 6.7% since the new quarter began, while the broader Standard & Poor's 500 index jumped 5.1%.

In a Nov. 11 research note on AllianceBernstein's October assets announcement, Citigroup Global Markets' analyst William R. Katz wrote: “We estimate $8 billion to $9 billion of equities attrition ... (mostly institutional); $1 billion of fixed-income inflows ... and more than $4 billion of other (passive/index inflows).”

For AllianceBernstein, those institutional outflows are “their Achilles' heel right now,” said Greggory Warren, who covers stocks of publicly traded money managers for Chicago-based Morningstar Inc. Even with lower fees than retail, money managers want to have those “sticky” assets, he said.

In an interview, Mr. Kraus tied the spike in third-quarter outflows to “poor performance in some of our equity products” during the previous quarter. Performance has improved since then, while a decline in stock correlations is providing an environment in which AllianceBernstein's stock pickers can sustain that improvement, he said. Performance, he said, is where “we have to hang our hat.”

AllianceBernstein continues to gather assets in segments such as emerging markets and small-cap equities, where performance has remained strong, as well as in fixed income, where returns have been “stellar,” Mr. Kraus said.

Among the firm's bond offerings, the $26 billion global high income strategy has outpaced its Citigroup World Global Bond index unhedged benchmark by an annualized 3.25 percentage points for the five years through Sept. 30, according to Marietta, Ga.-based data tracker eVestmentAlliance, which provided all of the performance and flow data. The strategy pulled in $322.3 million in net inflows during the first three quarters of the year.

The firm's $1.2 billion U.S. "smidcap' growth equity strategy, meanwhile, has outperformed its Russell 2500 Growth equity benchmark by an annualized 4.03 points over the same period, garnering inflows of $76 million,

In key segments such as domestic large-cap growth and value equities, however, performance has continued to suffer.

For example, the $11.3 billion Alliance large-cap growth equity strategy has lagged its Russell 1000 benchmark by an annualized 2.03 points for the five years through Sept. 30, with the loss of 18 institutional accounts year to date and net outflows of $4.5 billion.

On the value side, the $14.3 billion Bernstein U.S. strategic value equity strategy has trailed its Russell 1000 Value benchmark by an annualized 2.83 points over the same period, with net outflows of $739.1 million.

The fact that institutional investors — including recently Vanguard Group and the Oregon Investment Council — continue to defect almost two years after Mr. Kraus replaced Lewis A. Sanders, the architect of the investment culture he inherited, reflects the tricky balancing act Mr. Kraus faces. He needs to rebuild a firm with proud traditions — and many clients who were fans of Mr. Sanders — at a time when big swathes of its business remain in out-of-favor asset classes.

Another sell-side analyst, who declined to be named, said Mr. Kraus picked an extremely difficult moment to try to engineer a rebound in the firm's U.S. value and growth equity strategies, which began struggling even before the financial crisis reached fever pitch in 2008.

“No one is interested in U.S. stocks,” agreed Mr. Warren, who noted that net outflows from stock mutual funds have topped $60 billion for the first 10 months of the year.

Many observers give Mr. Kraus credit for the changes he has pursued, including:

c lowering the barriers between the firm's value and growth equity businesses, which remained largely separate almost a decade after growth equity firm Alliance Capital acquired value equity shop Bernstein & Co. In July, he promoted value equities head Sharon E. Fay to chief investment officer of equities after Lisa A. Shalett, who had led the firm's growth equity business, left to become CIO of Merrill Lynch Global Wealth Management.

c introducing a partnership structure and boosting the importance of AllianceBernstein stock within overall compensation;

c working to restructure the firm's damaged growth equity business with the help of new leadership such as Laurent Saltiel, former Janus Capital Management star portfolio manager hired in May as team leader of AllianceBernstein's international large-cap growth equity strategies; and

c working to expand the firm's alternatives business, with the October acquisition of SunAmerica's hedge fund-of-funds and private equity fund-of-funds business, which had $8 billion in subadvised assets.

Still, the scale of ongoing changes has left the environment at AllianceBernstein fragile, and many people there remain unsettled even if they agree with the direction Mr. Kraus is moving the firm, according to executive recruiters.

AllianceBernstein employees respect Mr. Kraus as well as other senior executives such as Ms. Fay, but when performance is struggling, “it really wears you down” especially for the people in sales and consultant relations, said a New York-based executive recruiter familiar with AllianceBernstein who declined to be named.

Over the past year, a parade of senior sales and client service professionals has left the firm:

• David Levi, senior managing director and head of global business development and marketing, left in November 2009 to join Nuveen Investments as managing director for global business development;
  



• c Frank D. Speno, senior managing director, institutional sales, left last January to rejoin Mr. Sanders as director of marketing and client service at Sanders Capital;

  
  



• c Michael S. Palmer, the firm's London-based head of blend equity product sales for the European market, left in May to become president of Winslow Capital Management Inc.;

  
  



• c Heidi Richardson, a managing director and client-facing senior portfolio manager, left in July to join the product services and analytics group of BlackRock Inc.'s iShares business;

  
  



• c Greg Murphy, senior vice president, client relations, left in July to join Invesco as a San Francisco-based managing director of institutional sales;

  
  



• c Robert Sheetz, senior vice president and portfolio manager with responsibilities for consultant relations and sales, left in August to become a managing director and head of U.S. consultant relations at Invesco; and

  
  



• c Oscar Isoba, a managing director in charge of AllianceBernstein's Latin American business, left in October to join Nuveen Investments as a senior vice president and head of Latin American business development.

A firm with an established culture is better placed to roll with these performance punches, “but this is a culture in flux,” the recruiter said.

The continued departures of investment and sales professionals alike have many investment consultants taking a wait-and-see attitude for now.

Almost two years after the changing of the guard at AllianceBernstein, there are signs that the firm's culture is regaining some stability, said Steve F. Charlton, a managing partner and director of consulting services with Cambridge, Mass.-based NEPC. Still, considering the scale of the changes, it will take more time before a judgment can be made on whether all of the pieces at the firm have come together, he said.

Here too, Mr. Kraus sees progress. “Consultants are more comfortable with us than they've been since I started with the company” in December 2008, he said.

Asked if the bulk of investment professionals and clients tempted to depart because they were wedded to the investment culture under Mr. Sanders had already left, Mr. Kraus said it's difficult to know, but many longtime clients are sticking with the firm.

The CEO said he doesn't expect outflows to continue at their recent pace, but even if they do so for a while, his team will continue with the changes they've been pushing: putting research to work on new solutions, such as the risk-focused dynamic asset allocation products the firm has introduced this year; attracting new investment talent, in areas that are being revamped such as growth equities; and building the firm's alternatives business.

Asked whether the alternatives business could eventually become a central focus for the firm, Mr. Kraus said the firm will continue to be “dominated by its long-only businesses: value, growth and fixed income.”

Mr. Kraus likewise shot down speculation that he's looking to spruce up the firm in order to sell it at some point. “We're happy being an independent company,” and that status will prove beneficial to the company's shareholders, he said. n