Attached files
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| 8-K - ALLIANCEBERNSTEIN L.P. 8K 12-8-2009 - ALLIANCEBERNSTEIN L.P. | form8k.htm |
| EX-99.01 - EXHIBIT 99.01 - ALLIANCEBERNSTEIN L.P. | ex99_01.htm |
EXHIBIT 99.02
AllianceBernstein
12/8/2009
- 11:35 AM ET
Speaker
ID 23
Page
1
AllianceBernstein
Presents at the 2009 Goldman Sachs Financial Services Conference
December
8, 2009
11:35
AM ET
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Marc
Irizarry:
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Okay.
All right. We're going to get started. I'd like to welcome David Steyn,
Chief Operating Officer of AllianceBernstein. As many of may know,
AllianceBernstein manages over $490 billion in retail, institutional and
high-net-worth assets on a global
basis.
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So
David is here to share a lot of his comments and then we will take some
Q&A from the audience, as well. So welcome,
David.
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David
Steyn:
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Thank
you, Marc. My instructions from Marc in advance of today were to speak for
25 minutes and then 15 minutes of questions. My instructions from Marc
when I walked into the room had changed to speak for 10 minutes and then
take questions, because I'm not allowed to hold you up for lunch. So I'm
going to fly through this and devote as much time to questions as
possible.
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I’ll
start with the most clichéd slide in the financial services industry,
which is a map of the world. That's not really the point of this slide.
The point is I'm going to talk a little bit about how did we get to where
we are as a firm.
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And
if you look at the headline of this, this was a question I was asked by a
Wall Street journalist a few days ago, which is “what is the core brand of
AllianceBernstein?” And we scratched our heads long and hard and turned
around and said the core brand is recruiting and mentoring people to
produce world-class research. Now the point of the story was that it is
that core brand which allowed us to change the firm beyond recognition,
post the merger of Alliance and
Bernstein.
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Alliance
and Bernstein merged in 2000. At the time of that merger, if you had added
up the pro forma clients and the services of AllianceBernstein, just short
of 90% of all of the clients of AllianceBernstein were in the United
States of America and just short of 90% of all of the services of the firm
were U.S. money management.
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You
married the largest U.S. value manager to the largest U.S. growth money
manager, which Alliance and Bernstein were at the time, and our view was
the only place to go would be outside the U.S. We also thought that the
greatest opportunity in investment management in the next decade would lie
in global investment, but global of a very different type -- bottom-up,
one-world investing as opposed to top-down, risk-diversifying investment,
because we as a firm had a view that the rising correlations around the
world in 2000 had very little to do with the TMT bubble, but had a great
deal to do with long-term secular shifts, which were not going to go
away.
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If
you look at the firm today, we are a bigger global firm than we are a
domestic firm, however you measure us. If you look at us by total
services, just under 60% of our total services are global services,
compared to just over 40% being U.S. money
management.
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If
we break that down by categories, we have three basic platforms -- value,
growth and fixed income. The value, the old Bernstein, just under 75% of
all its services today are global.
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For
growth, the old Alliance, over 60% of all of its services are global. And
fixed income, it's still got a bias towards the U.S. with some 43% of its
services being global services.
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AllianceBernstein
12/8/2009
- 11:35 AM ET
Speaker
ID 23
Page
2
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Okay.
So that was then. 2008 came along, which was a challenging market for all
of us, but a very challenging market for
AllianceBernstein.
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We
had very high exposure to financials across the board. We had high
exposure to financials in our value services, we had high exposure to
financials in our growth services and we had high exposure to financials
in our fixed income services. It is possibly fair to characterize that as,
“we got it slightly wrong.”
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So
as we entered 2009, the firm had four priorities or four things which I'm
going to talk about. The first one was to turn around performance. The
second one was to turn around asset flows. The third one was to exploit
what I call here, slightly pompously, the sell-side research dominance.
But we often give these presentations without talking about the sell side.
Today I am going to talk a bit about the sell side. And the fourth was to
restore operating leverage to the
model.
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Let
me kick off by talking about performance. About a third to a quarter of
our '08 performance was because of our exposure to financials. When I say
performance, I mean underperformance. The balance of the rest was risk. We
as a firm take risk. We took risk in growth, we took risk in value and we
took risk in fixed income. And risk was brutally punished, being driven by
asset flows -- retail, hedge funds and even DB. Peter Kraus recently
described the DB schemes of the time as viewing risky equity assets as
being their ATM as they had to meet cash commitments
elsewhere.
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As
we entered this year, the first question was to ask, how much is broken?
And our view was, not that much. The fundamental philosophy which governed
our underlying investment services, the fundamental process which governed
it, we thought was robust. These are 40-year traditions of running money
in certain ways.
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Rather,
what we sought to do was at the margin. The first was to elevate talent
within the firm. So particular examples of that would be Sharon Fay, who
had been my co-head of London operations and built the global presence of
value, was appointed formally head of value. A second example would be
Andrew Chin, who has also been in London with us building up the
quantitative services, was appointed head of quantitative services. And
that was the first time we centralized
quant.
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That
brought us on to a second thing. As we looked around '08 and said what did
we do wrong and what could do we better, risk was a primary area -- not
taking less risk, but understanding risk better so you can take more of it
and deliver alpha. So we created the infrastructure for the CIOs across
all of our services to meet on a biweekly basis, simply and purely to look
at risk, where we were taking risk, where did we think the risk was in the
marketplaces, where were the risks in our services. And, as I mentioned,
we centralized quant under Andrew
Chin.
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The
picture today on performance has markedly improved. What we're showing
here are not the services which necessarily had the best returns, but the
services which had the greatest AUM within the firm. So that's been the
governing decisions to put services in each of these
boxes.
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Value
performance, as you would expect, bounced back very, very fast in '09.
Global value relative return, 4.4%, international value 4.1%, U.S.
diversified value, 1.3%. I would add something else here. Our more
concentrated versions – for most of our value services we have two or
three iterations: the standard iteration; a diversified iteration and a
strategic iteration. As you would expect, the strategic iterations have
even better performance
numbers.
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AllianceBernstein
12/8/2009
- 11:35 AM ET
Speaker
ID 23
Page
3
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Fixed
income, on my far right, also bounced back very, very fast and very, very
strongly in 2009. The laggard in 2009, time-wise, was growth and it is in
the last couple of months that growth has begun to bounce back across the
board, as opposed to what we'd initially seen signs of it coming back in
the U.S. Now it's a more broad-based global presence. With that, our blend
services have recovered, blend being the amalgamation of value and growth
into 50/50 portfolios.
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So
the first task of the year was to begin to turn around performance. The
second task was to turn around flows. Now the flows picture is complex. It
is complex between our three distribution channels. And it is complex
within those three channels.
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What
we saw in ’08 in our private client business was an immediate flight to
safety. Forget worrying about alpha being taken off the table; what was
being taken off the table was beta and private clients were heading for
cash and munis and fixed income and anything which didn't have the words
equity or risk attached to it. That has
reversed.
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Obviously,
the flows have reversed but much more to the point, private clients are
re-engaging. By private clients, I'm not talking about mass affluent, I'm
talking about high net worth, $5 million, $10 million, $20 million private
clients.
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There
is a hangover effect in this channel. Two years ago, if you were pitching
a private client for $20 million, you won it or you didn't win it. Today
you're pitching to a high net worth individual in the U.S. with $20
million and he's saying, I'm keeping $10 million in the bank, but here's
$10 million for you to pitch for. So there's still a hangover effect, but
if I could generalize across the private client channel, it is a channel
which is re-engaging in risk.
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It
is also the channel where we see, potentially, the greatest commercial
opportunity right now, not because of us but because of the carnage in the
competitive environment. I might not say carnage, perhaps that's an
overstatement, but the instability in the competitive environment. Bank of
America/Merrill Lynch, Morgan Stanley/Smith Barney, Wells Fargo/Wachovia,
the uncertainties about the future of UBS -- this is an industry with
built-in volatility now. Volatility leads to advisors in motion. Advisors
in motion leads to money in motion.
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So
as I look forward, two, three, four years, it is the private client
channel where I see the greatest single opportunity for AllianceBernstein
today and where you'll see us making
investments.
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Retail
is a harder story to summarize, because we've really got two different
businesses. We have “retail retail”, or mutual funds. Like most of our
industry, we began to see that turn around, but particularly driven by
fixed income. Initially, in our case, it was fixed income in Asia, but
that fixed income in Asia story has spread to the United States of
America.
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We
don't yet see that many green shoots on the equity side of the retail
investor and that's something which causes us some-- you know, as we look
out at the industry -- causes us some concern. And I'm sure in Q&A
we'll talk about what is happening with the retail investors in the United
States of America.
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The
second part of our retail business, accounting for about 40% of our retail
AUM is sub-advisory, dominated by insurance companies. This is
quasi-institutional and the behavior, redemption behavior, of it or the
cash flow behavior of it reflects our institutional story, which I'll come
on to in a second, with one idiosyncratic exception for the
insurance-dominated sub-advisory, which is de-risking, moving towards
passive by insurance companies as they respond to heavy hedging costs and
liabilities of the last 18
months.
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AllianceBernstein
12/8/2009
- 11:35 AM ET
Speaker
ID 23
Page
4
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We've
seen those shifts stop but we have not seen those shifts reverse. So
whilst at the private client business we're seeing re-risking, in the
sub-advisory business in the United States of America it's far too early
for us to say.
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One
comment I would make -- and this is an institutional and retail comment --
is in some senses, the best-behaved investors post this crisis have been
the 401(k) participants because they've done nothing. And those assets
have turned out to be very sticky, stable and sensible. And it'll be--
it's very encouraging, as we look at the 401(k) business to sort of see
people have done nothing. I mean, if you think about it, think about what
you yourselves have done with your 401(k) and I suspect the vast majority
of people in this room will turn around and say they've done nothing with
their 401(k)s.
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The
most challenged of our businesses is the institutional one, which is also
the biggest of our businesses, just short of $300 billion of AUM. By the
way, as a point of reference, institutional is just short of $300 billion,
private client's about $75 billion and retail, $106 billion, give or take
a rounding error.
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Here
we have a longer sales cycle. On the redemption side, the most pain has
been felt in blend, which was also the category killer we had in the two,
three years leading up to this
crash.
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As
value has come back, the redemptions in value and fixed income, those have
definitely receded. Our hope is if we can sustain the improvement in
growth and value and thus the resultant improvement in the blend story,
going forward, that, too, will
improve.
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In
the interest of time, I'm going to skip over the next slide here. It's
more an advertorial about what we're doing on product innovation, but
there are a number of new products which we have or are launching, all of
which -- all of which have been launched -- are showing some early signs
of success.
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Let
me move on to the sell side, which actually was the original Bernstein. If
you go back to Bernstein in 1967, when it was created, it had two
businesses: a private client business and a sell-side business. We're
sometimes asked, what is the connection with the sell
side?
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Well,
go back to my original statement about what is the core brand of the firm.
The core brand of the firm is cultivating research. We monetize that
research two ways, obviously on the buy side I've just been talking about.
The other way we monetize it is on the sell
side.
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The
sell side gives us a number of positives. First of all, it is a financial
diversifier. Its best results ever were in 2008. As a financial
diversifier, the bigger it is, the better it is for
us.
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It
gives us a second benefit, which is brand equity. When I joined Bernstein,
I knew it more, after 20 years in fund management, I knew it more as a
sell-side firm than I knew it as a competitor on the buy side. I knew it
because it was black books. Anyone who wants to go to sleep, read a
Bernstein Blackbook, it'll put you to sleep pretty fast, but I thought of
it as the best research in the
business.
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So
there's a brand equity effect and the third effect it gives to us is as a
source of talent. Very many of the senior people in the buy side of our
firm have come through the sell
side.
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The
sell side is enjoying its best-ever years. I mean, revenue this year is a
bit down from last year, but it'll be its second-best
year.
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The
metric of success, apart from financial, for our sell side is the
footprint. The footprint of the business is how many published analysts we
have. We've had these-- first of all, we have the largest number of
published analysts we've ever had. Secondly, a few years ago we
diversified into Europe. This year we diversified into Asia with our first
published analyst. Thirdly, we've had the highest recognition of our
published analysts. Ten out of our 22 analysts in the United States of
America were ranked number one for their sector coverage. So this is a
fantastic part of the franchise of the
firm.
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AllianceBernstein
12/8/2009
- 11:35 AM ET
Speaker
ID 23
Page
5
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I'm
going to shut off in a minute and hand over to questions. I said that if
the first priority was to restore performance, turn around performance,
the second one was to turn around flows, the third one was to restore
operating leverage. We've done this in a number of ways, the most high
profile of which has been headcount with a reduction of headcount of over
20%. Give or take, we will end the year at 4,400. We have no further plans
for 2010, 4,300, 4,500, who knows? Who cares? The firm will be run at
something like that sort of level.
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We've
done that through meritocracy, through capacity, through refocusing,
through reengineering and also by outsourcing. And outsourcing has been a
major initiative and if I were looking forward, that's the one area where
I think we can continue to add
value.
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The
purpose of this is to restore leverage to the firm. And this is somewhat--
for all the analysts in the audience, this is a somewhat simplistic way of
showing it.
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So
annualized expense reductions of $122 million in base comp and fringes,
$85 million in other controllables, which includes $34 million in
promotions and servicing, $24 million in G&A, $27 million in other
employment costs, as well as $28 million in incentive compensation. So
what we're showing on the right hand side here is what our margins would
have been -- you know, this is very simplistic, back-of-the-envelope stuff
-- what our margins were excluding the cost savings, 11%, and what they
would have been had all the cost savings on a rolling previous 12-month
basis been there, some 20%.
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What
we have to do going forward is run the business with that type of leverage
built into it.
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So,
Marc, my 25 minute presentation was reduced to, give or take,
15.
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Marc
Irizarry:
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Can
you talk about institutional investor allocations? Where do you think
institutional investors are planning to shift, tactically, in 2010? And
then strategically, what changes would you note in institutional investor
allocations?
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David
Steyn:
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Great
question. I've been in this business 30 years. Up until a few years ago,
my entire background was in the institutional money management business
and I’ve never known it to be in such a state of
flux.
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Let's
start with the big picture. I think the '08 crash was the final nail in
the coffin of corporate defined pension schemes in much of the West. That
trend has been underway for a long time. It has just
accelerated.
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One
small problem -- corporate DB schemes here in the United States of America
have never been as underfunded as they are today. You cannot exit the DB
business with an underfunded pension scheme. So we have an ironic
situation. The long-term future for DB, it is dead. I am 50 years old. It
will possibly see me into retirement. People much younger than 50, it
won't exist -- corporate DB, as public sector's a whole different ball
game.
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The
next four or five years could be a totally different story. Could be very,
very hefty cash-- could be meaningful cash flows into corporate DB as they
try to restore their funding rates. The big question is: what do they do
with that money? And here we're seeing a bifurcation within the
industry.
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AllianceBernstein
12/8/2009
- 11:35 AM ET
Speaker
ID 23
Page
6
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The
flows are clearly into fixed income today. But you have a number of
larger, sophisticated plans who are saying, “We want to re-risk; this is
the right time to do it and we're going to go into high-risk assets.” That
is manifesting itself in global and manifesting itself in alternatives.
What it is not manifesting itself in is domestic asset
classes.
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So
the big trend is domestic into global. That trend has been under way for a
long time and that trend has not stopped. Second trend is active into
passive. That trend continues and we should talk about passive in other
channels, as well. And the bulk of the passive is happening in the
domestic asset class sleeves, so you almost need a set of
quadrants.
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Thirdly,
I think there will be more flows back into alternatives, but you've got a
bit of a sort of hangover right now with alternatives and particularly
thinking about private equity, you've got liquidity considerations. So
it's really, really hard to
generalize.
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Yes,
there will be cash flows into pension funds, rather higher than anyone
anticipated a few years ago, but some people are just LDI,
liability-driven investing, long-term fixed income, some of duration
matching and others are saying that this is the opportunity to be taking
risk. Tough call.
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Marc
Irizarry:
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And
if you think about the institutional distribution, have you-- you know,
obviously, there's the recent underperformance, probably meant you had to
strengthen some of your relationships with consultants and perhaps were
put on watch lists with some. Where are we in that process of the
consultant community?
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David
Steyn:
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Again,
it's a mixed picture. Some consultants have been very supportive. There
are some-- I mean, the consultant community is traditionally seen as being
anchored to three and five-year numbers. As I was saying earlier in a
meeting, it's much easier to handle a three and five year number if you
can localize your underperformance and say here was where we
underperformed, this four-month period for this reason and this is what
we've done about it. That is a much easier debate to have with a
consultant than to say, well, actually, each one of these five years we
underperformed.
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So,
you know, we are very actively engaged with consultants and some are being
very, very supportive and they're saying, “we don't want to miss you on
the upside.” Others are saying, “hey, look we burnt our fingers in '08.”
So if I were to generalize, the more dominated an institutional market by
consultants, the tougher it'll be to turn around quickly and we all know
that, as my accent probably suggests, the market most dominated by
consultants is the U.K. But the U.S. is a much, much more open market - a
much less intermediated market.
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Marc
Irizarry:
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And
where are we in the process of manager replacement in that
context?
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David
Steyn:
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Now
that's a really interesting question, because I think '08 was an
abnormally quiet market for institutions. And it wasn't because pension
funds generally were turning around-- it wasn't because pension funds were
like the deer in the oncoming headlights. It was because they were saying,
“we want to see where the dust settles before we do
anything.”
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The
problem is a corporate governance problem. You could do that for up to a
certain amount of time, but the market crash had imposed an asset
allocation fundamentally at variance with what your trustees or board had
said they wanted their asset allocation to be. You can run that mismatch
only so long.
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So
then we entered '09 and you're saying, “okay, we've got to decide do we
accept a market-imposed asset allocation or do we rebound this back to
what we said we were going to do or do we go somewhere else totally?” And
so '08 was a very, very quiet period. '09 has been a period of catch-up,
with a vengeance.
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AllianceBernstein
12/8/2009
- 11:35 AM ET
Speaker
ID 23
Page
7
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Now,
is that process over? You can never say a process is over, but, you know,
I think most pension schemes have worked out where they want to be at this
stage of the recovery from the
cycle.
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Alex
Blostein:
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Thanks.
David, can you talk a little bit more about your plans for the capital
market business that you guys recently announced with your sell-side shop?
And, you know, what kind of resources they require there, what areas
you're looking to go into, et
cetera?
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David
Steyn:
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It
doesn't require big resources. I'm going to put this in a way which sounds
very, very crass, so don't quote me. Our business is a research business
and then we find ways of being paid for it. On the buy side, it's easy,
you get paid an asset management fee. On the sell side, you get paid
through execution.
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What
we have to constantly do is find ways that can increase the ability of our
sell-side clients to pay us. And I would think of equity capital markets
in that context, program trading in that context, electronic trading in
that context, derivatives in that context. What are the different ways? We
want to make it easier for traditional and hedge fund investors to write
checks to us.
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Now
the infrastructure to do ECM is already there, because we're researching
companies-- we're doing ECM on companies we're already researching. The
additional costs of having an ECM presence-- by the way, the firm had an
ECM presence until 2002 and it was just-- it was post the TMT bubble we
said to hell with this.
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So
it's not-- I don't see it as a meaningful cost base. I just see it as an
added service to our sell-side clients. And I think we'll keep exploring
other such added services.
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What
we will not get into is putting our balance sheet at risk in any
meaningful way. And so, you know, you're not going to see an announcement
of us entering the proprietary trading business or anything like
that.
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Marc
Irizarry:
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And
just following up on that question, if you think back to when Lew was
around, you would have thought the sell-side business was more of a sacred
cow and now you're becoming even more involved in capital markets. Is it
sort of a strategic imperative for you to diversify the
business?
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David
Steyn:
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No,
no, no. When you say for Lew the sell-side business was a sacred cow, if
you meant in the sense that for as long as Lew was chairman of the firm we
had been in the sell-side business, that is absolutely correct. For as
long as Peter's chairman of the firm, we're going to be in the sell-side
business. That's also correct. I think, if anything, we see the
opportunity in the sell side as being greater
today.
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Lew
was quite happy being in the ECM business until the ECM business dried up
post the TMT bubble. So we're just going back to a niche we were
in.
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We
are totally committed to the sell-side
business.
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Marc
Irizarry:
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And
then you did mention U.S. retail, so I've got to ask a question, what's
going on in U.S. retail?
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David
Steyn:
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You
know, this is the $64,000, the $64 million question for the financial
services industry. What happens to the retail investor in the United
States of America? If you look at our industry as a whole, arguably the
single biggest driver of its growth over the past decades has been the
retail investor in America.
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AllianceBernstein
12/8/2009
- 11:35 AM ET
Speaker
ID 23
Page
8
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Now,
assume you're 50 years old. You have just had two bear markets in the past
nine years and you've got ten years left of your working life. Do you
return to equities? That is a very difficult question and I don't think
any of us know the answer to that
question.
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If
you look at 1974 mutual fund flows in the United States of America, they
look not that different to mutual fund flows today. There's one very big
difference. There wasn't a 401(k) business in 1974. So the 401(k) business
today is flattering mutual fund
flows.
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This
feels much more like, from a saver perspective -- I've got to be really
careful what I say -- elements of Japan in 1990 where a segment of the
demographic just left the marketplace. Now it's too early for us to say,
but if John and Jane Doe don't come back to the equity marketplace in the
United States of America, that will have reasonably profound consequences
on our financial industry.
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You
know, you look at a Bank of America/Merrill Lynch or a Morgan
Stanley/Smith Barney, these complexes are predicated upon a savings model
which is going to be challenged. I really don't know what's going to
happen. I wish I did, I'd be a very wealthy person if I knew the answer to
that question.
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Marc
Irizarry:
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Well,
I'll ask you one more, then, that might be in that same vein. The move
from active to passive, you know, it seems to be a secular move. Some
might argue it's a bit more cyclical. A) Where do you come out on that
front? And then B), if you think about AllianceBernstein in terms of how
active you are as a manager?
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David
Steyn:
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Yeah,
it's a secular move, but it's got some really interesting recent dynamics
to it. You know, for 20-30 years, it's been a secular move in DB
management. That's not changing.
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It's
definitely taking market share in DC. It's the low-risk option. You used
to say that no one got fired for buying IBM. Well, no HR professional gets
fired for hiring Vanguard as your passive, default option. So it is taking
market share in DC and I think will continue to take market
share.
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Whether
that's right or wrong is a totally different issue. It's just a statement
of fact.
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I
think what is really interesting is to see it beginning to take market
share at the upper end of the RIA marketplace here in the States. As RIAs
reposition themselves to offer holistic investment advice, and they want
to retain their margins -- so they're not doing it to cut costs, they're
doing it to retain margins. And ETF’s, et cetera, et cetera, allow that to
happen in a way that's never been possible in the past and I think that
will be an interesting trend to
watch.
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But
to your question, I think it's a secular phenomenon, which is here to
stay. Timing may be lousy, but that's a whole different
question.
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We
do, by the way, have a passive business. We have $20-plus billion of
passive assets under management. It's not been a strategic priority for us
historically. No one, you know, says “AllianceBernstein means passive.” I
mean, one of the reasons was because our brand was one of risk-taking,
active managers.
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But
it's definitely an area where we see ourselves building up a greater
presence, in part because clients want it, so we'd rather offer it than
have them go to BGI.
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Marc
Irizarry:
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Okay.
Any other questions? On that note, thank you very
much.
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