May 2, 2017

Active war

by Breakingviews.

Investors of the world unite! You have nothing to lose but your chains to poor performance!

That’s one way to interpret the somewhat radical May Day upheaval at AllianceBernstein. The U.S. investment-management firm once renowned for its stock-and-bond-picking skills ousted Chairman and Chief Executive Peter Kraus in a move that suggests steady decline is no longer acceptable in a market dominated by indexers, exchange-traded funds and other lighter-touch strategies.

His tenure was bookended by crisis. The firm controlled by French insurer AXA tapped Kraus, a former co-head of asset management at Goldman Sachs, to replace veteran Lewis Sanders in December 2008 after the financial crisis battered its equity holdings, which included big stakes in financial stocks. AllianceBernstein went from handling $800 billion to $462 billion in a year.

Like many throughout the industry, Kraus sought solace in new approaches, starting funds focused on everything from real estate to direct lending to mid-size companies. Such alternative vehicles now hold $53 billion. He also built up index products to nearly 30 percent of the firm’s equity assets, but eschewed ETFs, the most popular investing trend of the past decade. Kraus contended they’re riskier and costlier than they seem.

AllianceBernstein now manages about a half trillion dollars, little more than when Kraus arrived. By contrast, Goldman’s asset-management arm has grown assets by 77 percent over the same period. And AllianceBernstein’s stock has flat-lined under Kraus.

Sticking with the existing program, as was suggested would be the case by AXA Chairman Denis Duverne, hardly seems prudent. Robert Zoellick, the former World Bank president just appointed as AllianceBernstein’s chairman, and Seth Bernstein, the JPMorgan executive hired to be CEO, may need some time to figure out how to adapt.

Other underperforming investors will be watching. U.S. investors withdrew another $340 billion out of actively managed mutual funds last year and put some $500 billion into passive ones, according to Morningstar. The shakeup at AllianceBernstein is a strong sign that there is a ways to go before the revolution runs its course.


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