Peter Kraus' efforts to pull
AllianceBernstein LP out of the hole it fell into during the financial crisis have yet to steady anxious institutional investors, but the chief executive insists that the changes his team is putting in place are positioning the firm to turn the tide.
For October, analysts estimate that the money manager saw $4 billion to $5 billion in 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 fourth quarter began, while the S&P 500 has 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 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.”
GATHERING ASSETS
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 unhedged benchmark, the Citigroup World Global Bond Index, by an annualized 3.25 percentage points for the five-year period ended Sept. 30, according to 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 large-cap-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-year period ended 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
The Vanguard Group Inc. and the Oregon Investment Council — continue to defect almost two years after Mr. Kraus replaced Lewis A. Sanders 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 swaths of its business remain in out-of-favor asset classes.
Another sell-side analyst, who declined to be identified, 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,” said 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:
• 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 Sanford C. Bernstein & Co. LLC. 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 chief investment officer at Merrill Lynch Global Wealth Management.
• Introducing a partnership structure and boosting the importance of AllianceBernstein stock within overall compensation.
• Working to restructure the firm's damaged growth equity business with the help of new leaders including Laurent Saltiel, a star portfolio manager from Janus Capital Management LLC. He was hired in May as team leader of AllianceBernstein's international large-cap-growth equity strategies.
• Working to expand the firm's alternatives business, with the October acquisition of SunAmerica's hedge- and private-equity-fund-of-funds businesses, which had $8 billion in subadvised assets.
Still, the scale of the 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.
"WEARS YOU DOWN'
AllianceBernstein employees respect Mr. Kraus as well as other senior executives such as Ms. Fay, but when performance suffers, “it really wears you down,” especially for the people in sales and consultant relations, said an executive recruiter familiar with AllianceBernstein, who asked not to be identified.
A firm with an established culture is better able 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.
REGAINING STABILITY
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 NEPC LLC. 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 now than they've been since I started with the company” in December 2008, he said.
Asked whether the bulk of investment professionals and clients who considered departing 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 eventually could 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.
Douglas Appell is a reporter at sister publication Pensions & Investments.
