AllianceBernstein's competitive position in asset management markets

Alliance Bernstein: SWOT Competitive Analysis

AllianceBernstein Holding LP is one of the world's leading asset management companies, having built a significant franchise in both institutional and retail markets in the face of relentless competition from direct mass-market fund complexes (Vanguard, Fidelity, T. Rowe Price), institutional managers (Legg Mason, BlackRock), broker-sold and captive families (American, Franklin, Morgan Stanley), and niche vendors (Calvert, Winslow). However, despite its reputation, the company remains a relatively small player in the profoundly fragmented retail mutual fund industry, and only has a 4% share of the overall market.

Strengths

Alliance Bernstein's greatest strength is its reputation -- only somewhat blemished by its oversights during the credit crash -- for being one of the smartest firms on Wall Street, possibly second only to Goldman Sachs itself. The firm maintains a deep research effort and literally every one of its analysts are Institutional Investor-ranked. This allows the firm to offer a differentiated, value-added offering and so protect itself from the relentless margin pressures facing mass-market competitors like Fidelity, Vanguard, and Charles Schwab.

Thanks in large part to its high reputation, the firm has also built a significant share of the institutional fund market. While this has waned in recent years, it still gives Alliance Bernstein access to an exclusive and relatively lucrative client base as well as opportunities to cross-sell its trading and proprietary research services to other buyside firms.

Current management has expressed a strong interest in expanding the firm's private client operation. This would bring Alliance Bernstein into direct competition with the money center banks, which are likewise competing more aggressively in the high-end private banking arena in the wake of the recent dislocations on Wall Street. However, the firm retains a mystique that few surviving Wall Street brands have preserved and so may be better positioned to win high-net-worth clients from wirehouse and independent brokers alike.

As an affiliate of the gigantic insurance firm AXA, Alliance Bernstein also has (at least theoretically) access to deep corporate pockets if cash is needed to fund expansion. This makes it somewhat unique among top-tier asset management firms and puts it on more equal footing in some ways with its larger peers. Hypothetically, it also gives the firm access to synergies in terms of product line and expertise (retirement annuities, for example), which it has yet to exploit.

Opportunities

Alliance Bernstein is in a fundamentally solid business that will only expand as the global economy starts generating wealth again and global investors regain confidence in the financial markets. In the near-term, the firm is poised to expand its AUM as institutional investors reallocate their portfolios out of cash and minimally yielding fixed-income assets. Roughly $3 trillion remains on the sidelines and as a known quantity in the institutional market (albeit a somewhat faded one), the firm stands to capture at least a portion of that capital when it finally goes back to work.

The firm also has a chance to benefit from the great demographic shift from wealth accumulation (retirement saving) to wealth distribution (retirement income) in the United States and Western Europe. Provided Alliance Bernstein has retirement income products in place, it stands to go on generating fees from its existing accounts for decades to come, or even win flows from other fund complexes that have not considered the need to deliver income.

Unlike many U.S. asset managers, the firm also has a viable brand identity outside North America. Alliance Bernstein is actively expanding its presence in U.K. retirement plans and while it has pulled out of some marginal markets like New Zealand, it retains a relatively vibrant Pacific Rim presence. This gives the firm a foothold in regions where both mutual funds and retirement saving vehicles are explosive growth products compared to the more mature U.S. market.

Threats

Ongoing chatter about re-regulating the U.S. securities industry hangs heavy over all domestic asset managers, but this threat would pose somewhat more serious challenges for Alliance Bernstein than it would for some of its peers. First, presumptive caps on executive compensation in the industry may make it more difficult for the firm to retain research talent and other key personnel; since management has invested substantially in talent over the years and the firm's research effort in particular is still its primary differentiating proposition, increased defections to hedge funds or other non-regulated shops would pose a more serious problem for Alliance Bernstein than its more commoditized peers.

Second, AXA Chairman Henri de Castries has demonstrated his distaste for operating in heavily regulated environments by pulling significant capital from markets that restrict financial firms from pursuing the highest possible profits and fees. It is relatively unlikely that a broad-based "Consumer Financial Protection Agency" would drive him away from the vast U.S. market. However, given the depth of de Castries' distaste, the risk is not negligible that Alliance Bernstein's corporate parent may not be disposed to invest too aggressively in the firm when and if such investment becomes necessary for growth.

More specific regulatory threats could endanger the firm's lucrative target-date mutual fund business, hedge funds, or other more-or-less controversial products. However, these threats apply to the entire asset management industry; in particular, while target funds have been a growth product and sometime source of pride for the firm, they are irrelevant to the institutional client and do not constitute a major part of the overall business.

Overhanging social transformation could also pose appreciable franchise risk. For example, it is possible to envision a future where ETFs and other unmanaged portfolios have eclipsed the firm's conventional managed approach (and fee structures), or one in which a shift in buyside operations renders the Bernstein Equity Trading unit obsolete and thus weakens the research desk's revenue proposition. These threats are somewhat remote, but given the virtual extinction of regional brokerage and other once-vital segments of the financial industry, they should be at least seriously considered.

Conclusion

While Alliance Bernstein's research efforts have made it a fixture of Institutional Investor polls and a legendary brand on Wall Street, legendary brands simply do not survive without visionary leadership to keep them vital and relevant to shifting market conditions. The firm's value-added approach has proved its ability to generate alpha during certain phases of the economic cycle, but when conviction bets turn sour, they cost shareholders and the firm dear. Moreover, this approach is resource-intensive and so leaves the firm exposed after a setback in ways that more nimble peers would easily reorient their operations to recover from (or avoid).

That said, new management has already made strides to shift the business in the right direction. Targeting the private client market is an obvious bridge from Alliance Bernstein's institutional offering to the most lucrative retail segments; since the unofficial motto of the private client channel is "institutional-grade products for retail investors" this should naturally provide leverage into retail portfolios without compromising the brand.