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

Good morning, everyone. Let's get started. This is Craig Siegenthaler from Crédit Suisse, and it's my pleasure to introduce Seth Bernstein from AllianceBernstein. Seth is the firm's President and CEO, and he's held these positions since 2017. Prior to AllianceBernstein, Seth spent 32 years at JPMorgan, including leadership roles in wealth management and fixed income. We also have AB's CFO, Ali Dibadj, in the virtual presentation, too. Thank you both for joining us.

Thank you. Thank you, Craig, for having us. It's always a pleasure to have the opportunity to speak to you, and we really enjoy this conference. I thought I would start, however, with a brief overview and update you on some key points that we measure ourselves against for investors. First, we remain confident in our ability to drive sustained growth driven by differentiated investment returns. In 2020, we drove 3% active annual organic growth. That's ex the AXA health flows. Over the past 5 years, our average active organic growth of 2%, which I think compares favorably to what has been a pretty challenging industry backdrop. And frankly, more recently, we've seen acceleration in active equities. We also remain focused, secondly, on identifying investment capabilities to add to inorganic growth. Thirdly, we continue to focus on expanding our suite of higher fee alternatives, a key component of our strategic growth plan. As noted on Equitable's earnings call yesterday, they too are focused on this collective opportunity as they look to accelerate the optimization of their general account. To -- and they want to do that to enhance risk-adjusted returns, and they're doing that through seeding growth in our alternatives. In the fourth quarter, for example, we launched our European commercial real estate debt business, and we closed our first CLO, both with Equitable's support. We remain committed to driving strong incremental margins of 45% to 50% through leveraging scaled growth and executing on our national relocation and cost savings initiatives. While 2020 spend was reduced due to COVID-19-related travel and meeting restrictions, we drove good incremental margin growth and expanded operating margins by 260 basis points year-over-year, with G&A up less than 2%. As a partnership, we continue to benefit from a durably low tax rate of less than 10%. We think that's pretty attractive in an environment where we contend that tax rates may well rise. And we continue to pay out 100% of our adjusted income, which was $2.91 per unit in 2020, which I think is a pretty robust yield of 8% in a low rate environment. And finally, we're excited to share with you our progress in 2021 as it evolves. So with that, Craig, we're happy to take your questions.

Excellent. So let's begin the fireside with your private markets business. Remind us, what is your growth strategy today? And also, you have a unique opportunity with Equitable on the insurance side, how can you leverage them to maybe grow this business and maybe participate in some of the growth that we're seeing at some of the old firms?

Sure, Craig. Thanks for the question, and thanks again for having us. I guess let me say 3 things about the private markets business. The first thing is, and you heard this a lot about AllianceBernstein and how we think about things, client is first and last in everything that we think about and everything that we do. And it was, point number one, really a client demand that made us look into private markets. They were looking at it in a low yield environment. Even if yields go up a little bit, rates go up a little bit, it's not going to change their needs. So there is an enormous client need and client ask of us to figure out the private markets opportunity. That happened, call it, a decade ago, and we deliver that for clients. And whether that be in our private wealth channel, whether that be in our institutional channel, including insurance, which we'll get back to you in your question, or whether it be starting to show up in our retail channel as well, it was a client need that we met, point number one. Point number 2 is exactly as you describe it from Equitable, we have a client, a very, very large client of ours, which is Equitable. And as Seth mentioned at the outset, I'd encourage you to listen to their earnings call yesterday, which was a very clear articulation of, exactly to your point, how this relationship and ecosystem could continue to improve and evolve. And I think that the terminology the CEO of Equitable, Mark Pearson, used is app, right, which is it's a virtuous cycle here. Equitable is looking to improve their yield. They're seeding investments in alternatives with us and that makes a business for all unitholders that is a higher multiple business. And that's how we envision it with them and what they've done in the predecessor, AXA, over the past few years to build up this business. The last thing that I'd say is that -- just to dimensionalize things a little bit for you. It's a $20 billion AUM business. It's growing in the high single digits for us. That's going to be lumpy, right, depending on when things fund, et cetera, but CAGR, that's about right. And it's in the kind of high single digits, call it, of our total fee base. And so it's a really big business for us that started essentially from scratch, essentially from seeding of Equitable and, again, AXA before them. And we think we have enormous potential going forward. I think what's probably most important for people on this call is that there's a lot of gas left in the tank, so to speak, in terms of how much there is that Equitable wants to improve its yield and how much it wants to partner with us. And the great thing is we have a fantastic team doing that at AllianceBernstein, which is working hand-in-hand with a fantastic team at Equitable to make this happen, and we have aspirations to be one of the leading alternatives businesses in the world.

Thank you, Ali. Let's pivot into Asia. The asset management industry is obviously growing very quickly in Asia. What do you see as AB's growth opportunity there today? And I'm especially interested in any commentary or color around China.

Sure. Another growth thing -- growth opportunity. I can certainly chat about it, Craig. So first, I guess, to level set the size of that business for us. And it's kind of a best kept secret in some sense. Even, by the way, internally, when people think about AllianceBernstein, they should certainly think about Asia. It's a $100 billion business for us in terms of AUM. It's growing in the high single digits CAGR from an AUM perspective as well. So it's a very robust business. And it's diverse, right? It's diverse, not just from a geographical perspective, so we have Hong Kong, Singapore, Taiwan, Japan. We're really diverse in the major hubs there. And it's diverse growingly so from an asset class perspective. So less on the alts, less on the multi-assets, but fixed income and equities, pretty well diversified in those regions. So it's something that we're proud of and, frankly, I think we need to communicate more about the Asia business. Now you mentioned China. I'll spend a little time there. We -- AllianceBernstein is committed long-term to China. We know there's going to be ups and downs. We know there's going to be a long time coming for some efforts that we're making there in that region, but it makes all the sense in the world for us to be there. And not just because of the market opportunity, not just because, again, it's client term, not just because we have more than 1 billion individual clients to serve in that market with what we think we can bring to bear from a differentiated asset management perspective, not just because there's over $1 trillion of assets looking for more formalized asset management environment that we think we can bring to bear, but also to the first part of your question and first part of my answer, we have developed strength in Asia that we think we can adapt in China. Every region in Asia and all the successes we have in Asia are certainly separate, right, but there are common themes that we think we can bring to bear in China. And so we have a right to win in that marketplace as well. And I guess maybe the last thing I'd say is, from a technical perspective, we filed for our FMC license, our fund management company license. We're in the process to get that, and we certainly hope to continue down that path and get approval as soon as we can and build out those operations.

All right. Very helpful. Let me pivot to expenses for a moment. So AB has been very focused on managing costs. This was probably illustrated the best from your headquarter move to Nashville from New York. How should we think about the incremental operating margin opportunity from here?

So what we said on the earnings call and what we've said over the past little while and continue to believe is that a 45% to 50% incremental margin target for us, maybe not every year, but over time, is what we're targeting. And we believe that continues to be the opportunity that we have in front of us. And again, there may be some years we invest more, some years we invest less, some years the markets move us in directions, but that's the right number. If you think about that number, Craig, the math is that, that is higher than our average margins, right, which is roughly 30% right now. And so we do expect long-term trajectory upward from margins for us. Now why do we feel that comfort, right? The first one is leveraging our revenue growth, right? As Seth said at the outset, a 2% organic growth for us, which is much higher than the industry for the past 5 years, accelerated slightly recently, but let's just call it low single digits, certainly begets leverage, leverage on our expense line -- on the fixed cost line for sure. So top line leverage is driver #1 of margin expansion and that incremental margin. Driver #2, and you mentioned this, is expense control. And expense control in Nashville is a great example of that, right? So we see this industry as being one that's under pressure, actually traditional pieces to it under pressure for a very long time, and we're acting on that. Seth's decision to move the headquarters to Nashville has brought many, many benefits, not just expenses, and we can certainly talk about that. But from an expense perspective, post-2025, right, 2025 beyond, we're expecting $75 million to $80 million of cost savings to come out of that move. And we're very pleased with the progress so far. So look, we are trying to tackle it both from a top line growth perspective and an expense control perspective. And again, we're coming from a position of strength. And we said this on the earnings call. We're coming from a position of strength this year, and there are pockets we think we can invest in to juice our growth going forward. But over the long term, we certainly expect that 45% to 50% incremental margin target to stand.

Great. Let's move on to insurance. AB has a unique opportunity here with the Equitable relationship, but it's not just that. You also have other insurance companies that are your clients too. What is the opportunity to grow through the insurance channel, especially given where rates are today? A lot of these insurers are looking to meet liability yields, they need higher-yielding assets. How does AB fit into this? Have we -- Seth, you may need to unmute.

Sorry. Look, it's been -- can you hear me now? Sorry.

Yes.

Look, to me, it's been a particularly interesting opportunity with insurers. You would think that we have had a natural in just given the relationship with Equitable historically and with AXA. And we have, and that relationship is really quite extensive outside the U.S., less so in the U.S. But it's an increasing focus for us for exactly the reason, Craig, that you said, which is that as I think [ Apollo with Venerable ] have demonstrated that linkage to permanent capital to who are the most logical and efficient holders of private credit provide an interesting opportunity for us, which we intend to expand upon through building on our resources, in terms of engaging with insurers on their level, how they want to be engaged with a -- cognizant of the importance of both the broader portfolio management questions they face, the capital constraints they have to deal with, but also expanding our outreach to insurers with respect to our broader offering, private alternatives being a cornerstone of that. So we've had some success, most recently with Venerable as Equitable sold off or is in the process of reducing its own VA exposure. We continue to speak with a number of managers around this space and looking for talent to enhance our capabilities. So we see it as an important growth area for us.

Got it. I wanted to move on to your fixed income business, which became a very big business over the last decade. And we've all seen the continued strong demand for fixed income. And this goes across vehicle, it goes across product, active and passive. Do you think this migration, first, from an industry standpoint, is going to continue?

Well, look, I think everybody has been surprised at the -- just the magnitude of the move to fixed income. The one part of it that I do think is secular is the fact that the demographic demand for income is real. The demographic demand for safety is important. And so I do think there is a continuing bid out there, but there are more cyclical, and some of these cycles are very long in nature, that are also impacting demand. The most notable being that we're in an era of financial repression. And we've been in that era really post the '08 -- '07, '09 financial crisis, but it has accelerated enormously since the pandemic. And I think that does pose pretty fundamental concerns with respect to the role of fixed income to a multi-asset manager because, in fact, for a given unit of duration, you need less fixed income to provide the same diversification benefit that you would have had when treasuries were at 3% rather than -- 10 years were at 3% rather than at 1.5. And I don't -- while we think that this reflation trade we're seeing right now has legs to it, we do think at the end of the day, 1.5 is probably a place that 10 years could rest for a while. But we'll overshoot that because we have 2 underlying factors here. One, you have base effects with respect to your comparisons year-over-year because you have 2 of the -- from an inflation perspective, you have the only pair of months with negative CPI REITs in the past 40 years that will be rolling off when May pulls around or June rolls around. And secondly, you've seen increasing inflationary expectations, which we think are correct, arising from the fact that we are going to have a demand pull surge later on this year arising from the fact that there's a lot of cash in people's hands, and we know there's a lot of pent-up demand to spend it. And that was before the likelihood of this additional stimulus plan that the Biden administration is intending to utilize. So it's going to be a pretty volatile year for fixed income. Higher yields at the end will benefit us, but there will be short-term capital losses as a consequence. But at the end of the day, I think that the demand for fixed income in all sort of G10 markets will diminish over time unless rates structurally are higher. But the truth is, and this is really one of our key dilemmas as an industry, there is no diversifying alternative so far in size with the liquidity that fixed income has provided to equities. And until and when you've identified that or we've identified that, alternatives aren't going to fill that role. So fixed income continues to have a place, but its relative returns and appeal have diminished.

Got it. So when I take that industry question and I bring it down to sort of AB and I think about your investment performance, I think about your broad product menu, especially in higher-yielding areas like high-yield bond, American income, global bond, how do you think AB is positioned for this continued migration?

AB has always been a credit-oriented shop. Alliance was well-known for it and maybe, I think, it's taken it further post the merger. And so I think we're in exactly the right place in terms of our skill set. We're very good at credit. We're very good at structured securities and we're good at managing it. All of that being said, Craig, we took a spill at the advent of the pandemic and we're still working our way out of it. We've made real progress there, but we have more to go. Our U.S. high-yield performance is quite strong. American income, which is a flagship for us, is quite strong. Global high-yield is coming back. But it's certainly, at least in my view, had -- it certainly was a headwind for us, I think, in terms of our fixed income flows in 2020. And one of the things that I take comfort in is that if you look at that, and you know better than most how volatile those flows have been historically, we haven't seen massive outflows. And more interestingly, from a diversification perspective, we've seen equities, particularly in Asia, picking up, certainly not to the scale of the big fixed income numbers, but certainly picking up just alluding back to Ali's point earlier. So I think we're quite well positioned because we're in the higher-yielding areas of the market, but I still think it's going to be tough sledding just given where we are with spreads and everything else over the course of this year.