AllianceBernstein Is Holding Its Own in the Face of Ongoing Market Volatility

Business Strategy & Outlook

A confluence of several issues–poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel–has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive assets under management higher. While there will always be room for active management, the advantage when it comes to getting placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

With $687.0 billion in managed assets at the end of May 2022, AllianceBernstein has the size and scale necessary to be competitive in the asset-management industry and is structurally set up to hold on to assets regardless of market conditions, being diversified across its three main asset class segments: equities (44% of managed assets), fixed income (40%), and other investments (made up of the firm’s asset allocation services and certain other alternative investments) accounting for the remainder. However, this has not always translated into solid organic growth or above-average profitability, with AllianceBernstein’s adjusted GAAP operating margins of 23.4% on average during 2017-21 being well below the group average of 30%. During the past five (10) calendar years, AllianceBernstein’s organic AUM growth rate averaged positive 1.9% (positive 0.2%) with a standard deviation of 2.7% (2.9%). Even though the industry is anticipated to continue to face stiff headwinds, the firm is envisioned to produce organic AUM growth in a 0% to positive 2% range annually during 2022-26. However, revenue growth and operating margins will still be affected by industry fee compression and the need for more traditional asset managers like AB to spend more to enhance investment performance and product distribution.

Financial Strengths

AllianceBernstein is structured as a limited partnership, required to pay out essentially all of its available cash flows as dividends to unitholders (but allowing it to be taxed at a significantly lower rate than most corporations). The firm has traditionally managed a fairly conservative capital structure. This does not place the company at a competitive disadvantage relative to its peers, though, because most asset managers tend to carry little to no debt on their balance sheets. At the end of the March quarter, AB had $850 million in debt (tied primarily to its commercial paper program) and $1.1 billion in unrestricted cash and cash equivalents on its books.

The company maintains an $800 million revolving credit facility expiring September 2023, used primarily as backup liquidity for AB’s commercial paper program, and a $900 million committed unsecured senior credit facility with Equitable Holdings, which can be used for AB’s general business purposes (and where AB had $850 million outstanding at the end of March 2022 with an interest rate of approximately 0.3%). While the company’s structure as a limited partnership does limit the amount of capital that AB can allocate to other purposes, the firm does generally hold more cash than debt on its books, which along with substantial liquid investments and solid operational cash flows should enable AB to make investments in other assets/businesses from time to time.

Bulls Say

With nearly half of its AUM invested internationally, and 43% of managed assets sourced from non-U.S. domiciled clients, AB is one of the more global asset managers.

AB had $10 billion in its institutional pipeline at the end of March 2022, as well as a commitment from Equitable to invest $10 billion in the firm’s buildout of its private alternatives and private placements offerings.

Despite rising rates in the first quarter, AB’s bond fund performance held up with 64%, 72%, and 71% outperforming their benchmarks on a 1-, 3- and 5-year basis, respectively, at the end of the period.

Company Description

AllianceBernstein provides investment management services to institutional (45% of assets under management), retail (39%), and private (16%) clients through products that includes mutual funds, hedge funds, and separately managed accounts. At the end of May 2022, AB had $687.0 billion in managed assets, composed primarily of fixed-income (40% of AUM) and equity (44%) strategies, with other investments (made up of asset allocation services and certain other alternative investments) accounting for the remainder. The company also provides sell-side research and brokerage services through its Sanford Bernstein subsidiary.

(Source: Morningstar)

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