Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- AllianceBernstein Holding LP (AB, Financial) reported a 42% increase in second quarter gross sales, reaching $31.9 billion.
- The company's private markets business grew to $64 billion, driven by private credit and real estate equity.
- AB's adjusted operating margin improved to 30.8%, up 380 basis points year-over-year.
- Investment performance improved in equities and remained healthy in fixed income, with 89% of fixed income assets outperforming over the one-year period.
- The firm launched two additional active ETFs, bringing the total to 15 with $4.6 billion in AUM.
Negative Points
- Institutional channel saw net outflows of $1.8 billion, as active equity outflows outweighed insurance-led fixed income growth.
- Despite improvements, the company continues to experience outflows in equities, particularly in institutional strategies like concentrated growth and global core.
- GAAP revenues included a $28 million investment loss from the joint venture with Bernstein Research Services.
- The effective fee rate declined by 2% year-over-year, driven by asset mix changes including growth in lower fee rate munis and money markets.
- Seasonal tax-related selling led to slight net outflows in the private wealth segment, turning an otherwise net inflowing quarter into a $100 million net outflow.
Q & A Highlights
Q: Where do you think the money for longer-duration fixed income assets will come from?
A: Seth Bernstein, President and CEO: Some of it will come from the trillions of dollars currently sitting in money market funds. Retail investors are becoming more comfortable with the idea that the Fed will ease interest rates. Additionally, pension defined benefit schemes in the US, which are now or near fully funded, will trigger both annuitization and de-risking, leading to some allocation to longer-duration assets. Offshore demand also continues to be strong.
Q: How should we think about the end state for margins given the faster progress and relocations coming in sooner?
A: Jackie Marks, CFO: We remain committed to our guidance, which did not include market performance. The guidance is specific to our relocation strategy and the improved performance from the deconsolidation of Bernstein Research Services. Most resources from Bernstein Research Services have already transferred, and we are rationalizing costs as transitional services agreements roll off.
Q: Can you provide perspective on the size and timing of elevated bond inflows if the Fed starts cutting rates?
A: Onur Erzan, Head of Private Wealth, Institutions, and Retail: We expect strong demand from liability-driven investors like insurance companies and retail segments. Money is expected to flow from money market funds into higher-yielding taxable and tax-exempt strategies. We are confident about continued fixed income strength across institutional, retail, US, and offshore markets.
Q: What are the cash sweep options you offer inside of Bernstein, especially for ultra-high net worth clients?
A: Onur Erzan, Head of Private Wealth, Institutions, and Retail: We offer very competitive cash rates between 4.5% to 5%, depending on the client type. Our platform is less dependent on interest income, with over 90% of our revenue coming from advisory and service fees. We also offer strong money market options, both proprietary and third-party.
Q: Can you provide more color on the overall equity complex and the outlook for potential momentum and headwinds?
A: Seth Bernstein, President and CEO: We have seen continuing strength in active equities in retail, particularly in large-cap growth. There is also growing interest in US value equities. However, we have struggled with institutional strategies like concentrated growth and global core due to performance issues. We are more optimistic about retail equities than institutional equities but see improving consultant demand.
Q: How did your Asia fixed income franchise perform during past rate reduction cycles?
A: Onur Erzan, Head of Private Wealth, Institutions, and Retail: The performance depends on the size and speed of the rate reduction. Given our barbell and high-yield strategies, we believe our relative performance and demand should remain strong even with rate cuts. Local alternatives also play a role in determining demand.
Q: What other products are you marketing in Japan, and how much of a focus is Japan for you?
A: Seth Bernstein, President and CEO: Japan remains a strong focus for us, both in retail and institutional channels. We have seen success in systematic fixed income and global high yield. The new NISA accounts regulation has led to strong sales expansion, and we have seen significant fundings from Japanese institutional clients for our systematic fixed income capabilities.
Q: Can you talk about the pace of deployment and fee rates for the next $10 billion from your insurance partnership?
A: Onur Erzan, Head of Private Wealth, Institutions, and Retail: Our institutional pipeline remains strong, with around $10 billion in the pipeline. 82% of the fees are attributed to alternatives, with a blended fee rate of around 49 basis points, significantly higher than our current run rate.
Q: Do you have all the pieces necessary to serve the private credit and private fixed income space, especially for insurance clients?
A: Seth Bernstein, President and CEO: We believe we have most of the tools we need. We are making strong progress in investment-grade private credit services for insurance clients and have significant commitments in NAV financing and US residential home loans. We continue to build out our platform with CarVal, PCI, and Cred.
Q: Can you clarify the impact of seasonal tax-related redemptions on private wealth in the second quarter?
A: Onur Erzan, Head of Private Wealth, Institutions, and Retail: The impact was similar to the second quarter of 2023, with less than $100 million of outflows. Despite this, sales momentum remains strong, with a record private alts capital raise and high advisor productivity. However, high rates and market conditions may keep some clients on the sidelines.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
