Since joining investment manager AllianceBernstein (AB) as chairman and chief executive officer in December 2008, Peter Kraus has worked diligently to stem client defections. He recruited money managers, tied compensation more closely to stock performance, and rolled out new products in areas such as inflation protection and asset allocation. The measures haven't worked so far.
Clients, mainly institutions, pulled $126 billion from the company's funds in 2009 and 2010. That's 28 percent of assets and represents the highest withdrawal rate for any publicly traded U.S. mutual-fund manager during the same period. In February, AllianceBernstein ranked last among 23 rivals in an institutional investor brand-loyalty survey by Cogent Research, a research and consulting firm in Cambridge, Mass. "Their clients are walking out the door, and a lot of institutional investors don't have a positive impression of them," says Christy White, a principal at Cogent. "It doesn't bode well."
When Alliance Capital Management acquired Sanford C. Bernstein in 2000, the $3.5 billion deal combined Alliance's focus on investing in fast-growing companies with Bernstein's specialty in stocks its managers deemed undervalued. Bernstein also ran a highly regarded investment-research unit. The combined firm's assets peaked at $837 billion in 2007, and have since tumbled 42 percent, to $487 billion, as of Feb. 28.
Kraus, 58, blames the withdrawals on "poor" stockpicking in 2008 and what he called "episodic and volatile" performance in some of the firm's equity funds over the past two years. AllianceBernstein's equity funds trailed 67 percent of peers in the three years ended Feb. 28, data from Lipper show, a period that includes most of 2008, when the MSCI All Country World Index fell 42 percent. For the past year, the funds beat 51 percent of rivals. "I see no reason why our returns in the future won't be consistent and better than the competition," Kraus says in an interview at the company's midtown Manhattan headquarters. "I also understand why some people are saying they will wait for the proof."
The firm suffered dearly from its exposure to financial stocks that collapsed in the second half of 2008, according to Katie Rushkewicz, an analyst for Morningstar (MORN). AllianceBernstein Global Value had 29 percent of its assets in the sector, including Fannie Mae (FNMA), American International Group (AIG), and Citigroup (C), on May 31, 2008, regulatory filings show. The fund lost 52 percent that year, more than 91 percent of peers, according to data compiled by Bloomberg.
The firm's relative returns will improve as 2008 results drop out of three-year performance numbers, Kraus says. "I don't think our clients believe we have become somehow mentally incapacitated or that we are not good stockpickers," he says.
Among the investors that have pulled money from AllianceBernstein are New York state's pension system and Vanguard Group, the largest U.S. mutual-fund manager, which uses the firm to help manage some of its funds. At the end of February, 57 percent of AllianceBernstein's assets were from institutions, 27 percent from retail investors, and the rest from high-net-worth individuals, according to a Mar. 10 statement.
Like AllianceBernstein, Janus Capital Group (JNS) and Legg Mason (LM) have struggled to limit redemptions. Legg Mason had outflows of $179 billion in 2009 and 2010, equal to 26 percent of its assets at the end of 2008. Janus had outflows of $9.9 billion, or 8 percent.
Kraus, a former Merrill Lynch executive, has put his stamp on the firm's lineup of money managers. Last year he promoted Sharon Fay, a 20-year company veteran, to chief investment officer of equities, hired Laurent Saltiel from Janus to manage international large-cap stocks, and brought in Ashish Shah from Barclays Capital, (BCS) to be co-head of global credit investment. "Peter Kraus is turning the franchise around," says Macrae Sykes, an analyst at Gabelli & Co. Gamco Asset Management, Gabelli's money-management arm, and Gabelli Funds own 831,000 AllianceBernstein shares, data compiled by Bloomberg show.
AllianceBernstein is majority-owned by France's Axa, which continues to back Kraus, who got restricted stock worth $52 million at the time he was hired. "We are pleased with the steps Peter is taking to position AllianceBernstein to take advantage of the opportunities the market is providing," says Chris Winans, a spokesman for Axa Financial, a subsidiary of Axa.
Kraus says that withdrawals should slow this year, "assuming our performance continues to be positive. What we are doing is executing. We are out there hitting singles." Regaining credibility with investors may take time. "Investors have long memories, and it takes a while to regain their favor," says Burton Greenwald, an independent mutual-fund consultant in Philadelphia. "There is no shortage of other choices in this business."
The bottom line: Poor performance by AllianceBernstein stock funds led investors to pull $126 billion from the company in 2009 and 2010.