AllianceBernstein: A Tale of Two Cities


New York – In the Sunday, July 15th edition of the New York Times, Business Section, columnist Barry Rehfeld pointed out that asset management companies have outperformed the mutual funds they run by a wide margin over the past five years.

According to this article, the five largest publicly traded asset management firms gained an average of 30 percent annualized, more than double the growth of the U.S. equity market over the same time frame.  These companies (Legg Mason, AllianceBernstein, Black Rock, Franklin Resources and T. Rowe Price) were consequently identified as good investment opportunities.

Of these five companies, AllianceBernstein is the only firm that provides institutional equity research in addition to asset management services (through its Sanford C. Bernstein division).  AllianceBernstein was also the slowest growing of the five firms, with a five year annual percentage growth rate of roughly 18%.

Even so, the article notes that two sell-side analysts (Chris Spahr of Deutsche Bank and Marc Irizarry of Goldman) are “recommending” AllianceBerstein – the third largest publicly traded asset management firm in the US.  They are recommending the firm on the basis that it has a strong worldwide presence, which will enable it to capture business from investors in developing markets.

While AllianceBernstein may be positioned to gain asset management revenues by tapping into the global markets, its Sanford C. Bernstein unit (which sells fundamental research, portfolio strategy and brokerage-related services) has been on the decline in recent years.

Between 2004 and 2006, revenues from this department have gone down by more than 10%, from $420 million to $375 million.  Revenues grew slightly in the last year after a big drop from 2004 to 2005, but they grew at a substantially slower rate than the firm’s asset management services.  While both institutional and private asset management service revenues grew at a range of over 30% from 2005-6, investment research services grew at a slothful 6.3%.

Given current industry trends, there is cause to believe that Sanford C. Bernstein will continue to face market pressures.  As research and execution services become increasingly unbundled, institutional investors will have greater incentives to move their execution business to ECNs or the bulge bracket firms, which may be able to offer lower costs of execution and / or higher levels of service than middle tier brokerage firms.

Moreover, as the research industry continues to mature, Sanford C. Bernstein will certainly face greater competition from niche research providers that can offer unique and innovative services that are better tailored to the specific needs of institutional clients.

These trends are certainly factors that hampered the growth prospects of firms like Prudential Equity Group.  Consequently, its parent decided to close down its research, sales, and trading business when a buyer for the firm could not be found.

The Institutional Research Services unit (Sanford C. Bernstein) contributes only 10% of AllianceBernstein’s revenue, so it is unclear how its performance in the coming years will affect the firm’s bottom line (and hence the stock price).

While Sanford Bernstein may continue to face troubles, AllianceBernstein’s asset management services may in fact benefit from the unbundling trend, which will favor large asset managers that have the economies of scale to pay hard dollars for research.

Whatever the case, Sanford C. Bernstein could be facing some challenging times ahead — a trend which could eventually prompt Alliance to seek strategic alternatives for its vaunted research division.


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