AllianceBernstein LP appears to have dug itself out of the hole it's been in since the global financial crisis, reporting its highest quarterly institutional net inflows during its second quarter since 2007.
“The biggest equity market was in 2009, and our traditional services outperformed that year,” Chairman and CEO Peter S. Kraus said in a telephone interview. “The challenge was in 2010, 2011 and 2012, when equity markets didn't do so well. Remember, this is when the European banking crisis and the Japanese earthquake took place.”
During the latest earnings call, Mr. Kraus said the New York-based firm's efforts to “build a broader, more balanced and client-focused institutional platform are paying off.”
In addition to providing more diverse strategies to its clients, Mr. Kraus said in the interview that “we didn't abandon our core business. We stuck to our knitting, kept our head down and produced attractive returns.”
The firm's strong total second-quarter inflows of $8.3 billion and growing assets under management, which hit $480.2 billion as of June 30 and are up 5.7% from the previous quarter and up 10.5% from a year earlier, are the result of Mr. Kraus and company steadily working to improve and expand AllianceBernstein's investment capabilities.
“This is something we've been working on for a long time. But the institutional business can be a lumpy one, and sometimes it takes a big quarter for people to pay attention to what's happening,” said Robert Keith, executive managing director and head of the global client group at AllianceBernstein.
“They've been diversifying their product offering and building out their services,” added William Katz, analyst at Citigroup Global Markets, New York. “They repaired their relationships with the consultant community and broadened themselves out to offer more to their institutional client base.”
The firm had a lot to recover from. At year-end 2007, global AUM was $800.4 billion. Four years later, that figure had dropped nearly in half, to $405.9 billion.
“In the institutional channel, (asset owners) tend to put managers in a box, and it's hard to break out of that,” said Domonkos Koltai, a partner at investment bank PL Advisors, New York. Mr. Koltai added, however, that because of the firm's diligence in improving performance and expanding its strategic offerings to clients, asset owners and consultants “are moving AllianceBernstein out of the "bad manager' box and into the "good manager' box.”
Institutions that use AllianceBernstein include the $50.4 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, which has $300 million in a non-U.S. developed markets fixed-income separate account with the firm since October 2011 and $195 million in the AllianceBernstein Risk Factor Premium Fund since August 2013; the $16.7 billion Louisiana Teachers' Retirement System, Baton Rouge, which hired the manager in January 2013 to run $250 million in active domestic small-cap growth equities and again in August 2013 to manage $400 million in a global high-yield allocation; and the $25.1 billion Mississippi Public Employees' Retirement System, Jackson, which hired AllianceBernstein in February 2013 to manage $350 million in global fixed income.
Prior to the crisis, AllianceBernstein had a “great deal of success in large-cap equities,” Mr. Keith said, adding “a disproportionate amount” of the firm's AUM was “dominated by large-cap equities” in 2007. So when the equities market hit tough times in 2008, the firm's legacy strategies struggled with underperformance, and AUM started to decline.
Mr. Kraus said three years of poor returns had a negative effect on net flows. He added, however, that many of the firm's legacy strategies have “now had 15 months of very good performance.”
The firm also dealt with some leadership and portfolio management changes, which didn't help with investor confidence. The most dramatic of those took place in late 2008, when Mr. Kraus became chairman and CEO of AllianceBernstein, replacing Lewis A. Sanders, who had been at the firm for about 40 years. In addition, several senior sales and client service professionals departed in 2009 and 2010.
The Oregon Investment Council, Tigard, which manages the $70 billion Oregon Public Employees Retirement Fund, Salem, in 2010 terminated AllianceBernstein from two global equity mandates totaling $424 million citing staff turnover as the reason.
“If you think back to the pre-crisis years, AllianceBernstein's institutional business was heavily dominated by a relative handful of equity strategies,” said Robert Lee, equity research analyst at investment banking firm Keefe, Bruyette & Woods in New York.
Added Mr. Lee: “They didn't have a diversified enough business to moderate the negative impact of flows.”
Mr. Kraus has worked to broaden the firm's suite of strategies and investment capabilities for its institutional clients. AllianceBernstein expanded its fixed-income business and added alternatives and passive capabilities. The firm now offers 129 strategies, 36 of which have launched since Mr. Kraus joined in December 2008, according to data from Marietta, Ga.-based eVestment LLC.
In addition to expanding its global fixed-income capabilities, Mr. Kraus added absolute return, target-date funds and multiasset strategy services, as well as adding to asset allocation strategies.
As of June 30, the firm managed $247 billion in total fixed income; $111.1 billion in balanced/multiasset (which includes more than $21 billion in target-date funds); $102.9 billion in equities; and $19.2 billion in alternatives, according to eVestment and AllianceBernstein.
“Its equity business has been a drag on institutional flows (for years),” PL Advisors' Mr. Koltai said. “But while that was languishing, Peter Kraus has built a very good fixed-income business almost from the ground up.”
Citigroup's Mr. Katz added: “These (legacy equity) strategies saw catastrophic declines from 2008 to 2013. Now that headwind is slowing significantly.”
AllianceBernstein has seen improvement in its AUM while adding senior personnel, expanding its footprint via strategic acquisitions, and seeing better performance. Senior personnel additions were George Yepes and Jeff Saltzman joining the firm as managing directors and alternatives specialists in 2012; and Christine Johnson, joining as senior vice president and head of alternatives product management at the firm in 2013. Strategic acquisitions include SunAmerica's alternative investments group in 2010, W.P. Stewart & Co. Ltd. in 2013 and CPH Capital in June. n