Reputation is a critical asset for asset management companies, and a few years of bad performance can take a very long time to reverse. That's one of the key challenges for AllianceBernstein Holding L.P. (NYSE:AB), as this partnership is seeing ongoing outflows fueled by underwhelming fund performance. While these shares do offer a high yield and performance could improve if higher rates drive investors back into equity funds, the poor performance and rankings of the company's funds will likely weigh on results for some time.
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Investors Continue to Flee
AllianceBernstein derives the majority of its revenue and income from the fees it charges on the funds it manages for clients. Unfortunately, that revenue base has been shrinking at a worrisome rate. From a peak of about $800 billion in assets under management in 2007, AUM has plunged to $400 billion.
While average AUM was down 13% in the first quarter, there was at least one glimmer of positive news - retail flows were positive for the first time in two years. Results from the month of May showed a basic continuation of the recent theme - AUM was down 4% sequentially and the company saw continued institutional outflows, but the pace of decline is moderating and the company continues to see improved retail inflows.
Part of the problem for AllianceBernstein isn't just the absolute level of AUM, but also its make-up. Over half of the company's AUM is in fixed income and more than three-quarters of the AUM is either in fixed income or passively managed strategies. Unfortunately, these strategies command much lower advisory fees, and the company's poor relative performance in actively managed equity management limits the near-term potential here.
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Problems Likely to Linger
The unfortunate reality for AllianceBernstein is that its funds just don't stack up well. In both fixed income and equity, AB's funds do not stand out for their performance. Fewer than 10% of the company's equity funds garner four- or five-star ratings from Morningstar (Nasdaq:MORN), while rivals like Franklin Resources (NYSE:BEN), Janus Capital (NYSE:JNS), and T.Rowe Price (Nasdaq:TROW) score much higher. While AB's fixed income performance isn't quite so dismal, the company still trails those comps and the money-making potential in fixed-income is lower.
There's also a little bit of irony to these performance numbers. Bernstein research has been a solid performer lately and Bernstein's sell-side research is generally pretty well-respected. So here's a situation where rival buy-side managers respect the quality of Bernstein's research, but AB's own managers don't seem to get much benefit from that insight.
The Bottom Line
AXA (OTC:AXAHF) owns the majority of AllianceBernstein and unit holders have minimal say in how this company will be run. That may bother some investors or even be a deal-breaker, but many other investors ignore proxy statements and simply focus on the dividend yield and potential capital gains.
It's hard to be optimistic about the total return potential. Yes, AB's financial results have likely troughed (barring another major downturn in the markets), but the company is looking at a tough fight to get back to reporting good returns. Many potential clients demand either solid fund performance data or meaningful concessions on advisory fees, so every quarter of lagging fund performance just drags out the turnaround timeline.
I don't believe that AB is at risk of a major cut in its distributions, but I likewise believe that distribution growth will be challenging in the absence of AUM growth. Accordingly, this is a stock with a fair bit of potential value, but not a lot of near-term excitement.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.