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Tuesday, February 12, 2013

Three Things to Know From AllianceBernstein's Earnings

Reported by Tommy Fernandez

After a year of cutting staff, retooling business models and product offerings, the AllianceBernstein [profile] comeback, led by chief executive Peter Kraus may be picking up steam.

When looking at the SeekingAlpha and the company's earnings information, you'll see a good bit of evidence that the troubled value investor is indeed righting itself. You also get at least three powerful takeaways regarding the drivers behind its sales turnaround.

But first the basics. The company reported net fourth quarter 2012 revenues of $705 million, up 13 percent compared to the fourth quarter of 2011, driven by higher distribution revenue on non-US retail products, higher retail base fees, higher performance fees on the Company's fund of funds offerings and higher Bernstein Research Services revenues.

Meanwhile, the company reported adjusted net revenues of $578 million-- which were were up 9 percent compared to the fourth quarter of 2011. This was driven primarily by higher advisory fees and Bernstein Research Services revenues and current quarter investment gains compared to investment losses in the prior period.

The company's operating expenses were $627 million for the fourth quarter, down 46% year-over-year, driven primarily by lower compensation and benefits expense partially offset by higher promotion and servicing and general and administrative (G&A) expenses. For example, the company ended the fourth quarter with 3318 employees-- down 12% for the year.

Now before we go into the takeaways, let's look at what Kraus had to see at various points regarding his company's sales turnaround:
In our fifth consecutive quarter of sequential growth, total gross sales for the fourth quarter of 24 billion were up 13% for the third quarter and were highest since the second quarter of 2008, a truly terrific result. Annual growth sales of 82 billion were up 46% from 2011 and our highest since 2007. Not only that our 5 billion in fourth quarter net flows were positive for the first time since the fourth quarter of 2007 and our annual net outflows declined by 77%.

Here is what you can see the tremendous run we had in retail which finished the year on a high, fourth quarter retail sales of 16.4 billion were up 8% sequentially and are highest since the first quarter of 2000 and net inflows of 5.3 billion were highest since the second quarter of 2000.

In institutions fourth quarter gross sales were up 29% sequentially and are highest since the second quarter of 2010 driven by continued strong fixed income sales in EMEA, Japan and North America.

Krau's conference call statements are peppered with even more declarations regarding various sales milestones.

Now, here are three important takeaways regarding the how's and why's of this sales turnaround:

POINT #1: The Market May Have Hit the Tipping Point With Regards to Equities
POINT #2: AllianceBernstein Has Expanded Outside its Comfort Zone
POINT #3: AllianceBernstein Has Embraced Asia

Now to elaborate on these points:

POINT #1: The Market May Have Hit the Tipping Point With Regards to Equities
Kraus was clear that the stars are aligning for active managers, particularly stock pickers. During various points in the conference call, he had this to say on the subject:
High correlations make active management difficult since stocks are moving similarly even if their fundamentals are different. With correlations down stock pickings have a chance to work again as you can see from the chart at the bottom right, the performance of U.S. active managers improved significantly in the fourth quarter relative to the first three quarters of 2012 and well exceeded the prior 12 year average. We said for a while that the markets will ultimately reward our investment discipline and consistently exposure to these value factors. This could be the beginning of that turn.

But our big performance shift came on the value side in the fourth quarter, every one of our largest strategies outperformed by at least 100 basis points. Two things happened in the fourth quarter which we layout on slide nine, correlations came down and fundamentals became more relevant.

We have discussed in previous calls that value factors such as low price to book, price to earnings and enterprise value to EBIT have performed poorly in the past few years. In the fourth quarter these factors surged outperforming even low correlation periods on average over the long term.

POINT #2: AllianceBernstein Has Expanded Outside its Comfort Zone
Kraus also made it clear that AllianceBernstein was hard at work expanding its product lineup. He had this to say at various moments:
Our clients want three things, more diversification, more consistency and better risk management. So we have launched a series of enhancements to meet those needs, dynamic asset allocation is designed to mitigate volatility while maintaining returns and appropriate allocation alternatives can approve portfolio outcomes overtime offering like real asset and bond inflation help protect against inflation spikes and taking in multi-style all cap approach to equity investing with strategic equities offerings can deliver stable performance in different market environments. They are working; DAA has reduced volatility and client portfolios by 11% since inception while maintaining returns. Another way to look at this is that DAA has allowed our 60% equity portfolios to maintain the return with the volatility of a 50% equity portfolio.

Strategic equities has added important diversification U.S. stock portfolios and clients are responding well to our alternatives offering which we have made more broadly available through our new way. We are not done, we will keep enhancing our service offering our best advice, investment insight in a flexible approach where clients come first and because we have kept clients properly allocated to equities throughout the market cycle.

POINT #3: AllianceBernstein Has Embraced Asia
Asia was, of course, a huge factor behind many of AllianceBernstein's sales successes. Kraus described the importance of this region in this way.
I canít mention our retail franchise without mentioning Asia. A region where we truly dominate in fixed income. Look at the chart at the bottom left, we have grown our AUM there by more than 580% since 2008 and now command a leading market share in Taiwan and Hong Kong. Iím impressed by what our client group has been able to accomplish in Asia. I know we have only begun to capitalize on the opportunity to serve this important fast growing client base.

I spend a fair bit of time myself in Asia and not just Japan or Australia but Taiwan, Hong Kong, Singapore and Korea and the firm has built a terrific brand throughout Asia, Japan and non-Japan Asia and you could see it in the growth sales and it's not just in Taiwan where we have a very significant share and it's not just in Hong Kong where we have significant share and it's not just in Singapore where we are also building a big business, it is not just in Korea, we are actually well known. You know it's been all of those places and in a way they are all connected because I mean the distributors in those markets operate in many of the same markets, the global bank UBS, HSBC, Credit Suisse to name three are obviously distributing in many of those markets and the strong Chinese banks in Taiwan and in Hong Kong were also in many of those markets and those platforms are broad and diversified. So we have a strong brand, a strong set of products and a strong opportunity with partners who are growing rapidly throughout that region and that is a big opportunity for us and for our partners in offering their clients broaden investment services.

For more information, turn to the SeekingAlpha and the company's earnings information

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