Volatile Markets And Flagging Fixed Income Pressuring AllianceBernstein

Summary

• Ongoing industry-wide pressure on fees and a mix shift brought second quarter revenue in below expectations, though management did partly offset that with better expense performance.
• Excluding the loss of a low-fee mandate from AXA, AllianceBernstein's flows have been pretty healthy on a relative basis, and particularly so in active equity.
• Active equity fund performance has been getting better, and the business is growing, but a recent downturn in the performance of the fixed income business could create some near-term challenges.
• AllianceBernstein looks undervalued on the basis of long-term AUM growth, an improving fee mix, and improving operating leverage.

The last eight or so months have not been particularly easy for AllianceBernstein (NYSE:AB), and the shares have been more of a middle-of-the-road performer compared to other asset managers like Artisan Partners (APAM), BlackRock (BLK), Janus Henderson (JHG), Invesco (IVZ), and T.Rowe Price (TROW), though the strong distributions have pushed up the total returns to above-peer levels.

While relatively weak fixed income fund performance is a concern, given the sheer size of the business, the ongoing growth and outperformance in active equity is an important offset. The move to Nashville will help on costs, but I would like to see the company to move to build up its offering in alternative investments (like requiring some modest M&A). All told, I believe AllianceBernstein is meaningfully undervalued today and offers an attractive distribution, but the recent distribution cut doesn't help sentiment, and volatility in the credit markets is going to continue to create some near-term challenges.

An "Okay" Second Quarter

AB's second quarter results were okay, with the primary sources of the downside relative to Street expectations being largely outside of management control. Importantly, adjusted net flows were positive, and the company continues to see pretty healthy trends in its active equity business.

Adjusted net revenue declined 2% yoy and 6% qoq in the second quarter, missing expectations by about 3%. Base fees declined 5%, driving the miss, with AB seeing both ongoing base fee pressure (an industry-wide challenge) and a mix shift between funds. Research revenue improved 7% in the quarter.

Operating costs declined 6%, with compensation down 5%, and management did a better-than-expected job here, leading to almost 9% adjusted operating income and a smaller miss (about 1.5%) relative to Street expectations. While the distribution for the second quarter was 10% higher than in the year-ago quarter, it was down 4% on a sequential basis.

Analyst’s 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.