AllianceBernstein Holding L.P. (AB) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome back to the BofA Securities Future Financials Conference. I am Mike Carrier, the research analyst at BofA, covering the brokers, asset managers and exchanges. I hope you are all doing well. Our next coming up is AllianceBernstein, and with us today, is Ali Dibadj, Head of Finance and Strategy. Ali is going to take us through a strategic slide, and then we'll get into some Q&A. And towards the end, I'll also take audience Q&A, which you can submit through the portal. And then also on the line we have Mark Griffin, who is the Head of Investor Relations. And so, Ali I'll turn it over to you. Thanks for being here today, and then we'll get into Q&A after you're done with the slide.

Sure. Thanks, Mike, and thanks for having us. I did want to go through just before we start, a little bit of a level set on AllianceBernstein and a slide that we've been using to both communicate why we think AllianceBernstein should be something to consider investors' portfolios and also check ourselves on what our progress is. So hopefully, one of you can put up the slide. But it's really 7 points that we think about. The first one is really around sustained growth. We think we've delivered pretty reasonable sustained growth over the past little while, call it, 2% over the past 5 years or so of net organic flows for us. We have accelerated that a little bit since 2017. We think we can continue to do that, it's really continue to outperform our peers in terms of the growth trajectory. But part of the reason we've been able to do that is because of Alternatives business. So yes, absolutely, our core business, our core equity business, fixed income business, our multi-asset business, our private wealth business, but also our Alternatives business, which we are quite proud of. It's grown quite well. We believe we can continue to grow that business. That's obviously higher fees, but very importantly, it's something that we can bring to our clients, a set of products that our clients actually want in the private alternative space and the public alternative space. So we think we can continue to do that. A big part, point #3, of how we're expanding Alternatives business is our partnership with Equitable. Equitable, obviously, a large life insurance company. Their mandate is to improve their yields. We think that we can help them do that. And it's not a coincidence that we work together in doing that. For example, very recently, we've partnered them on a European commercial real estate debt launch, which fits their needs, fits our needs and certainly fits not just Equitable, but our broader client needs and hopefully thus our unitholders needs as well. So we continue to look for committed capital from Equitable. We -- on top of all that kind of revenue-driven drivers that we keep ourselves, monitored and [indiscernible]. We also look from a margin perspective. Our target is to improve incremental margins every year, have a 45% to 50% incremental margin. That's higher than our average margin as a company. And so we expect to see margin growth that as long as the top line kind of continues to flow in here. So that's, that's very much what we do. That's part of our move to Nashville in our cost-cutting, in an environment where we believe the asset management industry has to think a little bit differently about costs. We've taken those steps. We believe we can continue to take those steps to improve from a margin perspective. Again, incremental margin is how we think about it. That's all -- kind of moving down to the P&L, that's all in the context of also having a preferred tax rate. We're a public-traded partnership. We're grandfathered in for a years. We are one of the few that is remaining. And we think it's a huge advantage right now to be in the kind of 10% all-in type tax range, go from an AB L.P. perspective and AB Holdings perspective in that kind of less than 10% range. We think we can drive benefit for our unitholders, particularly no matter who ends up being the President of whatever timeframe, taxes likely go up over time. And so we think that, that's an advantage place to be in. Two other things, another benefit that we have from being a publicly traded partnership is that we give out all the cash flow that we don't invest back into business to shareholders. That's what we do to our unitholders. And that delivers something like a 9% distribution yield, which is pretty attractive. I'm proud to be and happy to be a shareholder, partly because that distribution yield. And we do think that adds a lot of value and is an incremental piece to how we can deliver until shareholder returns for our unitholders over longer periods of time. And then lastly, we're obviously very proud of our brand. The AllianceBernstein brand is something that we've seen in the research side. We have seen our equity fixed income businesses, strongly in our private wealth business. We think all of the things that we do focus very much on the client delivers on our brand proposal and brand proposition, thus delivering on unitholders as well. So that's kind of the 7 points that we'd like you to think about. It's certainly what we think about and how we measure ourselves, bye. So Mike, I hand it over to you for any questions, and then we can go from there.

Great, thanks. And for anyone that was using the slide, I think, as you know, if it wasn't shown up, you can shift the button on the screen to show the second slide in case anyone have any challenges there. So thanks. Maybe first, just flows at AB held up relatively well versus the industry. And you mentioned in the last call, a healthy institutional pipeline. It's just been part of it. What have been some of the key drivers, the healthy organic growth? And how optimistic are you on the longer-term outlook?

Yes. No, look, thanks for the question. It's something that we are proud of, right, in terms of some of the things that I was talking about before. We've delivered 2% net organic flows over the past 5 years on average. That's better than the industry. Again, we've accelerated that since 2017, when Seth Bernstein, our CEO, came on board and invested with forethought in the distribution channel. We've delivered pretty good numbers from that this past quarter. In fact, we had about 5% organic flow, if you exclude some of the AXA redemptions that are there. And so look, we feel that we are on the right track here and consider to believe that we can outperform the market from a net flow perspective. That's not going to happen every single quarter. That's not going to happen at all times. In fact, you recall from our last quarter, we talked about October being a tough slow month and that was late in the quarter, that was late in the month of October. And part of those reasons were because of defensiveness. People worried about COVID. People worried about elections in the U.S. And so you don't get a lot of that flow, when there's a lot of uncertainty there and defensiveness there. People at some of our Asian markets were looking for equities as an opportunity. So certainly, there will be fits and starts, but over the long-term, and when we deliver so far, we believe we can continue to deliver that, Mike, back to your question. Now part of your question was also how, right? So how do we deliver this? And why we feel comfortable that we continue to deliver it? The reality is we deliver those type of net flows because we offer our clients something that they want. That's very client-centric. That's all we're focusing on, right? And what is that? Well, we're unabashedly client service-oriented. We're unabashedly active, right? We want to deliver something that's differentiated to our clients. And so if you look at what we've been able to deliver to our clients, it's the differentiated product, not just investment performance, to be clear, but product more broadly. Client service product, other products as well, for example, in our private wealth channel. But if you think about differentiated service in our equities business, look, we think we delivered very good differentiated products in our large-cap growth businesses. And also for our ESG products that are growing, growing rapidly these days. We believe we can continue to do that, and we're bringing differentiated services to bear from that perspective. Certainly, from an alternatives perspective, we continue to build that business. Multi-asset as well has developed new products. And of course, we can't forget fixed income, right, which the high-yield kind of -- legacy high-yield foundation that we have continues to be in demand even when rates are a little bit lower. So again, it's all about delivering differentiated products to our clients. We believe we will continue to do that. We have a pipeline of doing that, and we think we can continue to deliver outperforming versus our peers. You mentioned pipeline in there, just worth mentioning quickly. But if you look at our pipeline, that last count is -- last quarter was $16.9 billion of pipeline in the institutional channel. The mix of that pipeline is maybe very favorable to us over the longer-term for our business and net flows. I think you've got to remember that there are big pieces of that pipeline, which will come through as well, which are not necessarily the alternatives businesses, but some of them are more traditional businesses as well. But we're very happy with what we see in the pipeline at this point.

Okay. Great. And then just on pricing, that's been an area that most firms are seeing some pressure from time to time. AB seems a bit better positioned just given where some of the growth areas are. But how do you see, whether it's the business mix or the growth trajectory impacting the fee rate going forward?

Yes. No, look, it's a good question. It's a question that all of us in the asset management industry have to wrestle with. But the reality is that no, it is going to be immune. We are not immune from these pricing pressures. Like there's just no question about it. And it'd be foolish to say that anybody is in need for it. We're not. The kind of good old, traditional fixed income equity services that can be passivized, right, are going to feel the pressure. If they're not differentiated, they're commoditized, guess what, you're certainly going to feel the pressure. We believe, and we've demonstrated it so far that we've been able to offset some of that inherent fee pressure that all of us feel through mix. I mentioned some of this earlier, right? Alternatives, for example, as a higher fee-based product, we will continue to deliver that to our clients, good products that they want. And because it's a good product that our clients want, we have more pricing power, right? Almost taking a step back, clients are willing to pay for stuff if it meets their needs. Clients are willing to pay for stuff if it's differentiated in any industry, that's the case. And we want to be that service provider to our clients where we can differentiate our products. And alternatives is a great example of that. Active equities is another great example of that. There's no question that we believe that we can continue to deliver on that and offset the negative fee pressure that the whole industry faces, and we face as well. A second ago we mentioned pipeline. And look, the pipeline -- just to give an example, the pipeline's e-rate on average, right, for our institutional business is significantly higher their institutional kind of run rate fee rate. So that means that over time, we're going to get positive fee momentum, right? That's what we should see, certainly offsetting some pressure on the other parts of the business. The thing that one has to be conscious of, to be fair, is that, again, that too isn't going to be linear. We've disclosed some, for example, CRS mandates and customized retirement solution mandates, for example, which are really chunky. And if that falls in one quarter versus the other quarter or day 1 of the quarter versus the last day of the quarter, that will make the fees look a little bit more volatile, right? Because they're big chunky mandates at lower fees, that doesn't change our view. And in fact, what the facts are that over time, we see our fees continuing to progress to offset those trends, the negative trends elsewhere in our business and in the business more broadly and also hopefully get us to even more positive trends in fee rates going forward.

Okay. Great. And maybe just shifting over to performance. I think when we look at AB, like the long-term investment performance remains strong. There are some pockets of short-term like weakness, whether it's in fixed income or equities. What have been some of the -- maybe the near-term issues and have you seen some turnaround and have you seen much of an impact on the client side?

Yes. So look, I think it's totally fair to say both things, right, which is our performance over the long-term has actually been quite strong. Look our 3-year, look our 5-year, we've put that up against anybody. We feel very, very comfortable with what's happened there, right? And I think it's also fair, right? Hopefully, folks on the call, we'll get to know more and more in my role here. I'm extremely transparent and open to things. Look, our performance over the past short-term, i.e., year hasn't been that strong, clearly on the fixed income side. Now let me be very specific about it. It's particularly because of Q1, right, for the fixed income business in particular. And I'll talk about it in a little bit more detail. But the way we think about it, the way we build our businesses and we build our portfolios, our portfolio managers think almost always around the long-term, right? We have some portfolios that are more short-term focused and doing really, really well today. But I think you have to think of us as long-term investors on behalf of our clients. And so we set up most of our portfolios built for the long-term, not built for some strange stuff to happen in March or might happen from time to time. We build it for the 99% of the time where things are a little bit more normalized, and we certainly hope that we deliver on clients' expectations. And to be fair to your point, Mike, we have that on the long-term. So that's going to happen to some of our portfolios, right? So do disagree that a little bit, think about the equity portfolios and a little bit of the performance hick-up that happened recently. Look, that's a large-cap growth, as an example. The portfolio managers of that business have, I think, made the right call, and their call to make, right, that being as exposed to the benchmarks as the FAANG stocks are in those benchmarks, is probably not the right risk for war. Now that's their prerogative to do that, but it seems to be logical, right, in terms of how they're thinking about their businesses as they think about it for the long-term. I mean, the FAANG stocks have been up, I don't know after today, but call it 50%, 60% this year, right? They've driven all of the S&P performance. If you're focused on the long-term, yes, it makes sense for asking not to expose there and deal with some short-term performance issues for the long-term risk reward that you're trying to capture for our clients. So that's the specific issue in our equity portfolio. On the fixed income side, look, we are experts, right, not to pat ourselves in the back. It's not really a culture to pat ourselves in the back too much. But just to be clear, we think we're pretty good at high-yield and noninvestment-grade debt. That's kind of what we do. That's our high-yield product, that's our AIP product, et cetera. And book by wave, those portfolios being built, again, in that context for the longer-term. When something like a March happens, it's usually not good for us, right? But what you've seen for that business, in particular, is really outstanding performance because the portfolio managers stuck by their guns -- stuck to their guns. And they've really rebounded quite well over the past couple of quarters as this has continued. And look, I don't know the numbers from today, but you can imagine if things get back to normal again for the longer-term, we would do well. So again, we'd love to perform as well in the short-term, but we build our portfolios for the long-term, and that's very much what the portfolio managers are focused on for the most part at.

Okay. Great. And maybe just shifting to the fixed income part of the business. So for AB and for the industry, flows have been fairly strong for quite a while, despite the low-rate backdrop. How do you guys see it? Because on 1 hand, you've got demographic trends and even risk tolerance where there's -- there continues to be a ton of demand for fixed income. On the other hand, rates are low, so that creates its own set of challenges. And so are you seeing more of a shift into higher-yielding riskier areas? Or is there still a decent amount of demand in the core?

Yes. Look, it's a great question. And careful is how we think about it, right? And I'm not sure this is perfect or perfectly comprehensive. The lease here is how we think about it, which is -- which if you take a step back and you say, okay, why does anybody own fixed income, right? Just to start from the first principles there. Why does anybody own any fixed income? It's a call 3 things, maybe more, but call 3 things, right? One is income. Okay? Well, with rates this low, income is less exciting out of the fixed income area on average. And so what do you do? Well, if you're an institution or you're individual, right? What you'll do? You'll try to go to high yields, right? So that's exactly where we're focused, to answer your earlier question, that's exactly where we're focused. That's exactly where we still continue to see potential. Yes, it would be better if rates were higher for us in our fixed income portfolio, but at least we can eke out a little bit more because we're focused on high-yields for sure. So that's 1 thing you do from an income perspective. The other thing you do, by the way, is move away from the -- I guess liquid fixed income world, the traditional fixed income world, and go into private alternatives and private credit. Well, guess what, we're building that business, too. We've kind of knock on wood, hopefully, continue to be successful in that business as well. So again, if income is a driver, it will be less of a driver, but we'd like to think that we have some options, some menu items for folks who are looking for that kind of drive our fixed income to buy into, which is private alternatives or high yield. The other reasons -- 2 other reasons. The other reason that you buy fixed income is because you want diversification or defensiveness. Look, I think you're in the private alts world or you're in the high-yield world, given liquidity constraints, it's probably not as defensives as it used to be. Against your earlier question, I think March would suggest that a little bit. But there is some role of defensiveness in that need for a fixed income that is still there, probably less than it was before. You probably need less of that fixed income as a diversification tool. But certainly, there's some need there. And then the last piece, which I'd argue, hasn't really changed very much is on the regulatory requirement. So if you're an insurance company or something and you might as well own some fixed income because the charges are lower -- capital charges are lower. That's still probably there. Of course, the private alternatives is an important piece of that story as well. But I'd say that there, you're probably pretty standard in terms of where you are. So income definitely less, a lot less; diversification, probably a little bit less; and regulatory hasn't been achieved that much as we think about. That's our framework, I think, through it.

Great. Okay. And just if we do get into an environment where we do see higher interest rates, more inflation, how do you guys think about that given like a lot of the strategies that are offered?

Yes. Look, for us, overall, it would be good, right? I mean that's the headline answer to your question. But overall, we'd certainly be better off because our fixed income and exposure to where we're exposed to if interest rates were higher that would be definitely a positive for us broadly as a firm. And again, in the sake of transparency, that's not always the case for every piece of our business, right? So we certainly benefited from growth being invoked. We've done better than growth benchmarks. Thanks to the great team that we have. But the growth has certainly benefited from us -- benefited us over the past several years. If things were to shift towards value, look, that's a little bit of our heritage as value. We're starting to do much better on performance on -- I do think, sorry about that, but I do think that we will see that net-net, right, it should improve for us if you see a more normalized environment on value as well. So overall, it would be much better for us if we continue to deliver in an environment where rates go up.

Okay. Great. And then let me shift in just the distribution. AB probably has one of the more unique distribution channels in terms of having a fairly significant distribution opportunity in Asia. But when you look at it broader, if you think about whether it's outside the U.S., within the U.S. on the retail side of the business or even the institutional when you look at the pipeline, where do you see some of the bigger opportunities for AB, whether it's because of investments that you guys have been making? Or just when you look at the industry, you need to say, we should be bigger there?

Yes. So look, I think there are plenty of opportunities. But the first thing that I'd say, and this is not any way changing how you may ask the question, but we try not to think about it as solely distribution, right, which sounds like a logistical tool?

Yes.

It's very much client service. Right? So we think about this as client service, how do we get our products to our clients in the way that our clients want to see it in the channels where that we can provide a trusting relationship. That's how we think about it. We're maniacally client-centric when we think about distribution and call it cloud client service. Now don't change your question at all, right, to be clear, Mike, but that's how we think about it just to give you a sense of our culture. What I would say is that if you look at distribution investments we made, right, we think we have enormous opportunity to continue to invest in those areas, whether it be, for example, in the U.S. in retail, particularly around RIAs. Whether it be in Asia and build on the success that we've had, for example, in Japan, where we done okay from a large-cap growth perspective going into retail. We think if you look at the ROI on those investments, they're still quite positive. And so that suggests that you should continue to spend more back in those areas, right? Again, Asia, U.S., across the board, I'd argue. We are particularly fond of China. We're not in China for the short-term. We're in China for the long-term. We think there is a real market opportunity there. That I'm sure other people see. I know other people see as well, given just the transformation of the asset management industry in that very large country, obviously. But also, we think we have a right to win because the teams that we have in adjacent, not the same, but adjacent experiences in Taiwan, in Hong Kong, in Singapore and Greater Asia, right? We definitely think we have the right to win in the marketplace as well. So that's going to be a big investment for us from a client service perspective for some time to come. And we think we have a lot of potential there. I would be remiss in not also measuring private wealth, right? Private wealth is a business we really like quite a bit. We think we are delivering for our clients. And the look of our clients say think about us, and we'd like to think we can continue on that path. And that's a place for us where we have quite a small share with a really good business. We want to continue to invest in that area as well.