Alliance Bernstein: SWOT Competitive Analysis

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.

Weaknesses

Compared to larger competitors like BlackRock, momentum is negative, or at best flat. Alliance Bernstein lost significant AUM and market share during the recession. The firm's managed assets sank 31% between the end of 2006 and the end of 2009 as investors recoiled from truly dismal performance; highly publicized bad bets on Lehman Brothers and the GSEs damaged the firm's reputation as some of the smartest investors on Wall Street.

In particular, the crucial institutional client base (60% of total AUM) has continued to deteriorate from month to month. This is especially damaging for Alliance Bernstein for several reasons. First, institutional clientele are normally easier to retain and thus harder to woo away from other firms. Second, negative flows often become self-perpetuating as word of mouth turns against a firm. Third, the institutional market is relatively small (reportedly about $1.3 trillion in aggregate managed assets compared to $10 trillion for retail) and given BlackRock's entrenched leadership and far-reaching distribution, growth and additional scale will be difficult to achieve.

The firm has so far abstained from participating in the $1 trillion ETF market that has done so well for BlackRock (iShares), Invesco (PowerShares), State Street Global Advisors (SPDR), and other asset managers. While conventional mutual funds still dwarf ETFs in terms of overall flows, the very existence of exchange-traded funds in the investment marketplace has intensified downward price pressure on fees throughout the industry. If this continues, fund complexes without the scale to support their margins will need to find non-price ways to differentiate themselves in order to compete. (Some boutique managers have done well with socially responsible portfolios, for example, but Alliance Bernstein has likewise failed to play in this space.)

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.