AllianceBernstein fights against passive tide

Institutional capital might be flowing steadily into passively managed strategies, but active managers are refusing to throw in the towel.

AllianceBernstein LP is perhaps the most recent success story among active managers, experiencing steady institutional inflows after reorganizing their business and making acquisitions.

“We've been focusing on high-conviction strategies and differentiating ourselves from the competition over the last several years,” said Dianne F. Lob, AllianceBernstein's senior managing director for equities and head of global business development in New York.

She added AllianceBernstein has been working to diversify its lineup of equity offerings, having launched a suite of global, international and U.S. strategic core equity strategies and acquiring boutique specialty managers beginning in 2011.

“It's a combination of services we've developed internally with existing employees and some services we've acquired,” Ms. Lob said.

Other firms, such as BlackRock Inc. and Eaton Vance Management, also have been proactive in strengthening their active management capabilities.

BlackRock, for example, has been boosting its factor-based investing capabilities since June 2015. Eaton Vance is offering non-transparent exchange-traded managed funds through its NextShares Solutions LLC subsidiary.

And a number of money managers, including Fidelity Investments, Goldman Sachs Asset Management and Vanguard Group Inc., are beginning to market actively managed ETFs (Pensions & Investments, Sept. 5).

AllianceBernstein developed a defensive core investment platform in 2011 for clients concerned with managing downside risk called Strategic Core Equities. The platform currently has $2 billion in assets.

In 2013, it launched European Opportunities and Emerging Consumer equity portfolios, which have $1.5 billion in assets.

On the acquisition side, the firm in 2011 completed the acquisition of Caxton Alternative Management's long-only and long-short equity growth strategies and relaunched it as Select Equities. Caxton's platform had $1 billion in AUM when it was acquired; it now has $13.5 billion.

In 2013, the firm acquired concentrated U.S. and global growth firm WP Stewart & Co. Ltd. And just in August, AllianceBernstein agreed to acquire Ramius Alternative Solutions LLC, a manager with more than $3 billion in assets under management that specializes in factor-based and multiasset and alternative risk premium strategies.

A recent report from Moody's Investors Service shows that while many active managers failed to respond to what it called “the passive threat,” AllianceBernstein “has taken a number of steps over the last few years to respond to the threat from passive investing and to make the firm more broadly adaptive to shifting industry terrain.”

“The results so far are modest but encouraging,” the report added.

Dean Ungar, a vice president and senior analyst at Moody's and author of the report, said in a phone interview that the New York-based manager is “trying to respond to the challenge of passive investing” by “creating an investment platform that is customer-centric and goes places where passive doesn't go.”

Examples of said places that Mr. Ungar provided include unique alpha opportunities and opportunities that have downside risk protection — “things you wouldn't have in a passive platform,” he said.

AllianceBernstein's distribution previously was focused on strategies regardless of investor demand, Moody's report said. Now, the firm's sales efforts are determined by investor demand, making its platform responsive to the needs of its clients.While most publicly traded money managers saw their assets under management decline during the second quarter, AllianceBernstein was one of the few firms to see its AUM rise on a quarterly and yearly basis — albeit slightly.

AllianceBernstein reported $490 billion in AUM as of June 30, up 2.2% from March 31 and 1% from June 30, 2015.Of that $490 billion, $267 billion was in active fixed income; $109 billion in active equities; $56 billion in multiasset-class solutions and alternatives; $46 billion in passive equities; and $12 billion in passive fixed income.

The company's institutional net inflows during the second quarter were $1 billion, compared to net inflows of $1.8 billion in the first quarter and $3.5 billion during the second quarter of 2015.

But they're not out of the woods yet. A lot of AllianceBernstein's future success — and the success of other similarly innovative active managers — depends on performance. “You have to outperform,” AllianceBernstein's Ms. Lob said.

Mr. Ungar added: “AllianceBernstein has taken the lead (in active management). Whether it'll be a success or not is still an open question. It will require good performance; and performance so far has been uneven.”

This growth in AUM and net inflows is the result of AllianceBernstein's leaders working to pull the firm out of a nosedive. Following the global financial crisis in 2008, the firm was plagued by consistently poor returns and client redemptions.

“They had a terrible history coming out of the financial crisis,” Mr. Ungar said of AllianceBernstein. “Their active equity portfolios declined almost by 80%. So they had a crisis to solve.”

At year-end 2007, global AUM was $800.4 billion. Four years later, that figure had dropped nearly in half, to $405.9 billion. AllianceBernstein experienced institutional net outflows of $7.9 billion for the quarter ended Dec. 31, 2011.Chairman and CEO Peter S. Kraus' plan to course-correct the ship included building a broader, more balanced and client-focused institutional platform.

All of which started to pay off. In the second quarter of 2014, AllianceBernstein reported quarterly institutional net inflows of $6.8 billion and its highest quarterly total net inflows since 2007 of $8.3 billion.

“Passive is definitely seeing increased inflows,” said Jeffrey Levi, a principal at Casey Quirk by Deloitte in Darien, Conn. “But you're still seeing increased flows into (active) strategies that offer value propositions, like liability-driven investing, outsourced CIO, illiquids and insurance outsourcing.”

Mr. Levi added: “The firms we see continuing to grow in the institutional space are evolving their investment capabilities against specific industry headwinds and by getting ahead of these headwinds.”

Active managers, according to Mr. Levi, need to evolve and adapt and should be asking themselves how to tackle specific groups of buyers to thrive in the current market environment. Managers should be thinking about not only in terms of investment strategies but also in terms of regions.

“Managers that offer high conviction see decent growth as well,” he added.

Noel O'Neill, head of global investment research at investment consulting firm Cambridge Associates in Boston, said some active managers are trying to convince their clients there's cyclicality to performance. Others, he said, are becoming more willing to reduce fees.

“There are some asset classes where passive will always be a more pleasing alternative,” Mr. O'Neill said. “That said, there's cyclicality to investment performance in general. Those that can survive this period of underperformance can see a change; those that experience headwinds will see them turn into tailwinds.” n