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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

SEE: Paying Your Investment Advisor - Fees Or Commissions?

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.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Stock Analysis

    Tech Stocks Vs. Financial Stocks in 2016

    Consider the arguments for allocating more of your investment portfolio to either the technology sector or the financial sector for 2016.
  6. Stock Analysis

    The Top 5 Financial Penny Stocks for 2016 (CPSS, ASRV)

    Learn about some of the most promising penny stocks in the financial services sector that investors can consider adding to their portfolio for 2016.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  1. How can insurance companies find out about DUIs and DWIs?

    An insurance company can find out about driving under the influence (DUI) or driving while intoxicated (DWI) charges against ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center