New York-based money manager, AllianceBernstein, has built a reputation of being one of the leading investment experts. They currently manage $490 Billion in assets, have 47 locations across 21 different countries, have close to 3,500 employees, and are currently traded on the New York Stock Exchange (NYSE: AB).
But not all of their news has been good news. In October of 2003, a lawsuit was filed against the money manager for engaging in "improper trading practices, in concert with certain institutional traders, which caused financial injury to the shareholders of the AllianceBernstein Funds." Specifically, the firm "permitted certain investors, including defendants Canary Capital Partners, LLC and Canary Investment Management, LLC to illegally engage in 'timing' of the AllianceBernstein Funds whereby these favored investors were permitted to conduct short-term, 'in and out' trading of mutual fund shares, despite explicit restrictions on such activity in the AllianceBernstein Funds' prospectuses."
This incident was part of a much wider class action lawsuit against 27 individual fund management companies that were engaging in similar behavior. It has become known as the "2003 mutual fund scandal." AllianceBernstein (formerly known as Alliance Capital) settled with the Securities and Exchange Commission for $250 Million in December of 2003.
Although they have been involved in class action lawsuits that defrauded certain investors, it doesn't quite speak to their actual investment acumen. Firms may make mistakes, but are still excellent money managers, right? This article is going to dissect AllianceBernstein's fund lineup in attempts to uncover the truth about what kind of money managers they actually are.
Just a quick spoiler alert: They aren't that great.
We have taken a deeper look at the performance of several other mutual fund companies and have come to one universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk-comparable benchmark. You can review by clicking any of the links below:
Fees & Expenses
Our analysis begins with an examination of the costs associated with the strategies. It should go without saying that if investors are paying a premium for investment "expertise," then they should be receiving above-average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.
The costs we examine include expense ratios, front end (NYSE:A), level (NYSE:B) and deferred (NYSE:C) loads, and 12b-1 fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades taken by portfolio managers. We can estimate the amount of cost associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities to short term and long term capital gains distributions relative to what is incurred by passively managed funds.
The table below details the hard costs as well as the turnover ratio for all 62 active funds offered by AllianceBernstein that have at least 3 years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also remember that this is what is considered an in-sample test, the next level of analysis is to do an out-of-sample test (for more information see here).
|Fund Name||Ticker||Turnover Ratio %||Prospectus Net Expense Ratio||12b-1 Fee||Deferred Load||Max Front Load||Global Category|
|AB High Income Municipal Advisor||ABTYX||14.00||0.55||US Municipal Fixed Income|
|AB Municipal Income||MISHX||8.00||0.00||US Municipal Fixed Income|
|AB Municipal Income II Arizona A||AAZAX||11.00||0.78||0.25||3.00||US Municipal Fixed Income|
|AB Municipal Income II Massachusetts A||AMAAX||15.00||0.77||0.25||3.00||US Municipal Fixed Income|
|AB Municipal Income II Michigan A||AMIAX||12.00||0.85||0.25||3.00||US Municipal Fixed Income|
|AB Municipal Income II Minnesota A||AMNAX||10.00||0.85||0.25||3.00||US Municipal Fixed Income|
|AB Municipal Income II New Jersey A||ANJAX||14.00||0.82||0.25||3.00||US Municipal Fixed Income|
|AB Municipal Income II Ohio A||AOHAX||13.00||0.80||0.25||3.00||US Municipal Fixed Income|
|AB Municipal Income II Pennsylvania A||APAAX||11.00||0.85||0.25||3.00||US Municipal Fixed Income|
|AB Municipal Income National A||ALTHX||13.00||0.75||0.25||3.00||US Municipal Fixed Income|
|AB Municipal Income II Virginia A||AVAAX||7.00||0.80||0.25||3.00||US Municipal Fixed Income|
|AB Diversified Municipal||SNDPX||11.00||0.55||US Municipal Fixed Income|
|AB Municipal Bond Inflation Strategy Adv||AUNYX||17.00||0.50||US Municipal Fixed Income|
|Bernstein CA Municipal||SNCAX||12.00||0.63||US Municipal Fixed Income|
|Bernstein NY Municipal||SNNYX||17.00||0.61||US Municipal Fixed Income|
|Bernstein Short Duration CA Municipal||SDCMX||34.00||0.83||US Municipal Fixed Income|
|Bernstein Short Duration Divers Muni||SDDMX||42.00||0.63||US Municipal Fixed Income|
|Bernstein Short Duration NY Municipal||SDNYX||35.00||0.70||US Municipal Fixed Income|
|AB Municipal Income California A||ALCAX||13.00||0.75||0.25||3.00||US Municipal Fixed Income|
|AB Municipal Income New York A||ALNYX||16.00||0.75||0.25||3.00||US Municipal Fixed Income|
|AB Corporate Income||ACISX||59.00||0.00||US Fixed Income|
|AB Income Advisor||ACGYX||0.63||US Fixed Income|
|AB Intermediate Bond A||ABQUX||198.00||0.85||0.25||4.25||US Fixed Income|
|Bernstein Intermediate Duration||SNIDX||146.00||0.59||US Fixed Income|
|Bernstein Intermediate Duration Instl||SIIDX||146.00||0.45||US Fixed Income|
|AB Short Duration||SNSDX||76.00||0.64||US Fixed Income|
|AB Bond Inflation Strategy I||ANBIX||51.00||0.50||Inflation Linked|
|AB Taxable Multi-Sector Income||CSHTX||109.00||0.00||US Fixed Income|
|AB High Income A||AGDAX||53.00||0.85||0.25||4.25||High Yield Fixed Income|
|AB High Yield Z||HIYZX||44.00||0.80||High Yield Fixed Income|
|AB Limited Duration High Income I||ALIHX||57.00||0.75||High Yield Fixed Income|
|AB Unconstrained Bond A||AGSAX||149.00||0.90||0.25||4.25||Other Fixed Income|
|AB Global Bond A||ANAGX||113.00||0.85||0.25||4.25||Global Fixed Income|
|AB Tax-Managed Cnsrv Wlth Strat A||ACIAX||28.00||1.15||0.25||4.25||Cautious Allocation|
|AB All Market Real Return I||AMTIX||53.00||0.96||Allocation|
|AB Global Risk Allocation A||CABNX||250.00||1.27||0.25||4.25||Moderate Allocation|
|AB Conservative Wealth Strategy Advisor||ABPYX||5.00||0.89||Cautious Allocation|
|AB Tax Managed Balanced Wealth Strat A||AGIAX||25.00||1.30||0.25||4.25||Cautious Allocation|
|AB Balance Wealth Strategy Advisor||ABWYX||14.00||0.90||Moderate Allocation|
|AB International Growth A||AWPAX||45.00||1.35||0.25||4.25||Global Equity Large Cap|
|AB International||SIMTX||77.00||1.20||Global Equity Large Cap|
|AB Tax-Managed International||SNIVX||69.00||1.16||Global Equity Large Cap|
|AB International Value Advisor||ABIYX||71.00||1.14||Global Equity Large Cap|
|AB Sustainable Global Thematic A||ALTFX||40.00||1.45||0.25||4.25||Global Equity|
|AB Tax-Managed Wealth Apprec Strat Adv||ATWYX||47.00||0.92||Global Equity|
|AB Wealth Appreciation Strategy Advisor||AWAYX||9.00||1.04||Global Equity|
|AB Emerging Markets||SNEMX||71.00||1.49||Emerging Markets Equity|
|AB Emerging Markets Multi-Asset I||ABIEX||108.00||1.35||Emerging Markets Equity|
|AB Concentrated Growth Advisor||WPSGX||44.00||0.99||US Equity Large Cap Growth|
|AB Core Opportunities A||ADGAX||96.00||1.15||0.25||4.25||US Equity Large Cap Growth|
|AB Growth B||AGBBX||47.00||2.08||1.00||4.00||US Equity Large Cap Growth|
|AB Large Cap Growth A||APGAX||59.00||1.16||0.25||4.25||US Equity Large Cap Growth|
|AB Select US Equity I||AUUIX||269.00||1.18||US Equity Large Cap Growth|
|AB Equity Income A||AUIAX||117.00||0.98||0.25||4.25||US Equity Large Cap Value|
|AB Growth and Income A||CABDX||71.00||0.90||0.25||4.25||US Equity Large Cap Value|
|AB Value Advisor||ABVYX||91.00||0.73||US Equity Large Cap Value|
|AB Small Cap Growth A||QUASX||70.00||1.28||0.25||4.25||US Equity Small Cap|
|AB Discovery Growth A||CHCLX||67.00||0.99||0.23||4.25||US Equity Mid Cap|
|AB Discovery Value Advisor||ABYSX||47.00||0.90||US Equity Mid Cap|
|AB Select US Long/Short I||ASILX||519.00||1.77||Long/Short Equity|
|AB Global Real Estate Investment Advisor||ARSYX||73.00||1.04||Real Estate Sector Equity|
|AB Global Real Estate Investment II I||ARIIX||78.00||0.68||Real Estate Sector Equity|
On average, an investor who utilized an equity strategy from AllianceBernstein experienced a 1.15% expense ratio, a 0.31% 12b-1 fee, and a 4.25% max front-end load for equity funds with a load. Similarly, an investor who utilized a bond strategy from AllianceBernstein experienced a 0.65% expense ratio, a 0.25% 12b-1 fee, and a 4.25% max front-end load for bond funds with a load. This can have a substantial impact on an investor's overall accumulated wealth if it is not backed by superior performance. The average turnover ratios for equity and bond strategies from AllianceBernstein were 88.28% and 47.69%, respectively. This implies an average holding period of about 11 to 24 months. It is safe to say that AllianceBernstein makes investment decisions based on short-term outlooks, which means they trade quite often. Again, this is a cost that is not itemized to the investor, but is definitely embedded in the overall performance. In contrast, most index funds have very long holding periods--decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long term.
The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with AllianceBernstein's "expertise." We compare each of the 62 strategies that have at least 3 years of performance history since inception and against their current Morningstar-assigned benchmark to see just how well each has delivered on their perceived value proposition. We have included alpha charts for each strategy at the bottom of this article. Here is what we found:
- 70% (43 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
- 30% (19 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha
- 0% (0 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence (t-stat>1.96) that such outperformance will persist as opposed to being based on random outcomes
It is important to mention that these performance figures do NOT include the front-end load. If an investor paid the front-end load, their return is worse than the results we show here. Not all investors pay the front-end load depending on who sold the fund to the investor, if the fund is in a qualified retirement plan, etc.
In general, we conclude that AllianceBernstein has no reasonable expectation of producing above-average returns for their investors. The vast majority (70%) of their funds didn't beat the Morningstar assigned benchmark since inception. The inclusion of statistical significance is key to this exercise as it indicates which outcome is the most likely vs. random-chance outcomes.
Now some readers may believe that we are not properly analyzing performance since we do not take into account risk (Beta). We understand your concern. Because Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio. A better way of controlling for these possible discrepancies is to run multiple regressions where we account for the known dimensions (Betas) of expected return in the US (market, size, relative price, etc.). For example, if we were to look at all of the US based strategies from AllianceBernstein that have been around for at least the last 10 years, we could run multiple regressions to see what their alpha looks like once we control for Beta. The chart below displays the average alpha and standard deviation of that alpha for the last 10 years ending 12/31/2015.
As you can see, not a single fund produced an alpha that was statistically significant at the 95% confidence level (green-shaded area). This is what we would expect in a well functioning capital market.
Like many of the other largest financial institutions, a deep analysis into the performance of AllianceBernstein has yielded a not so surprising result: Active management is failing many of its investors. We believe this is due to market efficiency, costs, and increased competition in the financial services sector. As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold, and re-balance a globally diversified portfolio of index funds.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.