Q1 2023 AllianceBernstein Holding L.P. Earnings Call

Thank you for standing by and welcome to the Alliance Bernstein first quarter 2023 earnings review.

At this time all participants are in a listen only mode. After the remarks, there will be a question and answer session and I will give you instructions on how to ask questions at that time.

As a reminder, this conference is being recorded and will be available for replay on our website. Shortly after the conclusion of this call I would now like to turn the conference over to the host of this call head of Investor Relations. Mr. Marc Griffin. Please go ahead.

Thank you operator, good morning, everyone and welcome to our first quarter 2023 earnings review.

This call is being webcast and accompanied by a slide presentation that is posted in the Investor Relations section of our website Www Dot Alliance Bernstein Dot com with us today to discuss the company's results for the quarter are Seth Bernstein, our president and CEO , Keith Burke, CLO and CFO and our co head of fixed income Scott to measure Gershon distant felt.

<unk> had a global quiet group, a private wealth will join us for questions. After our prepared remarks.

Some of the information we'll present today is forward looking and subject to certain SEC rules and regulations regarding disclosure so I'd like to point out the safe Harbor language on slide two of our presentation. You can also find our safe Harbor language in the MD&A of our 10-Q.

Under regulation FD management may only address questions of material nature from the investment community in a public forum. So please ask all such questions. During this call now I'll turn it over to Scott.

Good morning, and thank you for joining us today.

The first quarter to a positive return in both equities and fixed income markets. The equity leadership is relatively narrow and yields and bond markets were volatile.

Our global platform generated positive net flows as retail and high net worth investors became more comfortable taking on risk and we can take advantage of higher fixed income yield.

Our realized rate improved by 4% year over year, driven by the addition of carve out.

And we executed on several focus growth investments launching three new active equity ETF filing for RV carve out interval funds and continuing to grow market penetration of our customized Muni SMA platform.

Let's get into the specifics starting with a firm wide overview on slide four.

Gross sales were $25 6 billion.

Down $5 7 billion or 18% from the year ago period, excluding last year's large custom target date.

Firm wide active net inflows were $1 8 billion or 1% annualized positive in two or three channels.

Quarter end assets under management of 676 billion declined 8% versus the prior year and were up 5% sequentially.

An average AUM of 667 billion was down 11% year over year and up 5% sequentially.

Slide five shows our quarterly promotion by channel.

Firm wide first quarter net inflows were $800 million.

Retail gross sales of $16 8 billion were down year over year improved sequentially driving net inflows of $1 6 billion in the mix of strong demand for tactical on municipal fixed income up 15% and 21% on an annualized basis respectively.

Our institutional channel had gross sales of 3 billion declining from prior quarters, both of which included large custom target date.

Net outflows were $2 7 billion.

In private wealth gross sales were strong at $5 8 billion with clients inclined to invest that into money market funds given market volatility.

Net inflows were $1 9 billion now positive eight of the last 11 quarters.

Investment performance as shown on slide six.

Starting with fixed income.

During the first quarter developed markets government bond yields fell in all major markets.

Yields remain volatile as investors factored in shifting inflation and growth assumptions global developed market Treasury returns rose three 1% as measured by the Bloomberg Global Treasury index on a hedged basis.

Fixed income performance improved in all periods, notably the percentage of assets outperforming over the three year period improved to 83% driven by our flagship global high yield fund, which posted top quartile performance.

At least 75% of our fixed income assets are outperforming over the five year period.

Our one year under performance continues to reflect our broader positioning in global credit during a period in which the U S is outperform challenging some peer comparisons.

Turning to equities.

Global equities were volatile during the quarter as turmoil in the banking sector jolted markets in March.

After recovering towards quarter end, the MSCI World Index has advanced by seven 4% in local currency terms.

In a reversal of last year's performance patterns growth stock outperformed value stocks with the Russell 1000 growth index up 14%, while the Russell 1000 value index was flat.

Our equity performance was generally strong one year, improving 74% as global core and several small cap strategies outperformed.

Three year performance reverted back to 38% rebounding in the prior quarter.

Our U S large cap growth portfolio beat the morning from our peer group, but lagged the Russell 1000 growth benchmark, which remains heavily weighted and mega cap technology presenting concentration there.

73% in Barra AUM outperformed over the five year period.

Versus the Morningstar peer group.

68%, 61% and 70% of our equity assets outperformed over the one three and five year periods respectively.

Now I'll review our client channel.

With retail on slide seven.

Gross sales of $16 8 billion in our retail channel declined by $3 8 billion from last year and were up $2 6 billion sequentially.

Net inflows were $1 6 billion or two 6% annualized organic growth, reflecting strong taxable fixed income and municipal demand.

The overall redemption rate improved to 25% the lowest rate in the last 12 quarters.

Taxable fixed income more than doubled year over year and rose, 80% sequentially led by meaningful acceleration in our American income fund.

This translated to <unk>, 15% annualized organic growth in taxable fixed income.

Unit sales and flows were also robust with sales up over strong prior periods and net inflows of $1 4 billion or 21% annualized organic growth.

This was the 10th quarter in the last 11 of Muni net inflows.

As shown in the lower left we handedly outpaced the industry growth rates to gain market share in the quarter.

Sales grew sequentially and we had net inflows in all regions U S. Retail grew by 11, 5% annualized organically.

Notably <unk> ranked in the top 2% for cross border flows for fixed income.

During the quarter, we filed for our first interval fund the AEP carve out opportunistic credit fund a continuation of an existing multi strategy private credit hedge fund strategy offered since 2014.

Over time, we plan to offer this to U S distribution partners to broad third party retail.

Turning to institutional on slide eight.

First quarter gross sales were 3 billion well diversified across asset classes, so down substantially from the comparable prior periods, which both saw large custom target date itself.

Net outflows were $2 7 billion concentrated in non U S value strategies alternatives and multi asset demand grew for the 12th consecutive quarter to.

This asset class now represents a third of our channel AUM, having posted a 24% compound annual organic growth rate over the last three years.

Our pipeline with $13 1 billion at quarter end, essentially flat with the prior quarter.

This year included $1 2 billion from equitable for our U S commercial real estate debt service, along with a number of active equity mandates.

Equitable $10 billion commitment split into private alternatives and private placements with approximately 70% deployed at quarter end.

Private alternatives continue to represent over 80% of the pipeline's annualized fee base, resulting in a pipeline fee rates three times the channel average.

During the quarter, we received an upgrade from a large global consultant fees for our sustainable global thematic platform.

Power portfolio purpose, which now stands at $25 2 billion in assets under management.

That said in the month of April we expect to incur a few large low fee redemptions totaling about $6 billion.

At a blended rate of about six basis points.

Between our custom target date and fixed income businesses.

<unk> and this rebalancing of a large custom target date account for which the vast majority of the AUM will remain at <unk>.

As a reminder, we had $16 billion of new fundings in our custom target date business in 2022 and expect to see continued growth over the longer term.

Offsetting the vast majority of the revenue impact from these low fee redemption in April we were awarded a higher fee billion dollars equity mandate in our U S. Large cap growth strategy, which we expect will fund over the next few months.

Moving to private wealth on slide nine.

First quarter gross sales were $5 8 billion down 3% year over year and up 41% sequentially.

Productivity improved sequentially and <unk> 12, net inflows of $1 9 billion now positive for eight of the last 11 quarters.

We experienced strong inflows in money market funds, which were elevated during the March banking dislocation.

We continue to generate gross liquidity events, which are pipeline transaction planning remains solid.

Our mix continues to shift towards our ultra high net worth $20 million over clients. The fastest growing client segment, which grew at a high single digit rate this quarter.

We had a strong quarter for alternative commitment up 52% versus the prior year period. This quarter included races in Abb's carve outs second clean energy plan.

And our proprietary direct indexing strategy grew to $2 5 billion posting strong annualized organic growth of 40%.

I'll finish our business overview with the sell side on slide 10.

First quarter Bernstein research revenues of $100 million decreased by 15% year over year and were essentially flat with the prior quarter.

While institutional trading volumes picked up sequentially, there was still generally soft industry wide.

We grew our leading share in research checks, which were up year over year and down seasonally as expected from the prior quarter.

We launched coverage on poor global factors for this past quarter and continue to innovate an event holding our first ever technology media and telecom and consumer one on one forum was 21 companies and 65 clients participating.

Our joint venture with Societe Generale announced last November is proceeding on plan.

To expect the transaction to close before the end of 2023 subject to regulatory consultation and approval in several countries and we anticipate disclosing financial details closer to that time.

Ill conclude by reviewing the status of our strategic initiatives on slide 11.

Performance in fixed income improved in every period.

<unk> remained solid and more than 70% of assets outperforming over five years in both equities and fixed income.

First quarter growth was led by private wealth and retail each of which experienced strong double digit annualized organic growth in fixed income.

We launched three active equity Etfs U S low volatility equity U S high dividend and Disruptors.

In private alternatives carve out cielo seven raised $420 million.

Fundraising for AB carve out much nice and clean energy fund continues at pace with over $1 billion raised in a final close as expected in the second quarter.

Lower market versus the prior year impacted our financial comparison.

First quarter adjusted operating income declined by 21% adjusted operating margin was 27% and adjusted earnings and unit holder distributions were <unk> 66 per unit down 27% versus the prior year.

Finally, I'd like to invite you to tune into the upcoming inaugural equitable Holdings Investor day to be held on Wednesday may 10th where I will present, a view of our longer term horizon and our partnership with equitable.

Now Im pleased to introduce the Scott the Magellan Gershon <unk> co heads of our fixed income platform Scott will take it from here. Thanks, Seth it's a pleasure to be with you today to share with you the key strengths that differentiate avs global fixed income platform.

The key points I want to leave you with today are we firmly believe that bonds are back with historically attractive yields that offer value to our clients.

Our global fixed income offering with a 50 year heritage led by experienced and tenured team.

Differentiated among peers, driven by our culture of innovation and market leading positions in tax exempt.

High quality global multi sector and high income as well as our investment grade strategy.

Our investment performance positions us well to garner flows as fixed income demand return.

And we have a clear growth strategy based on building market, leading positions in municipal income and third party insurance all areas, we have a proven edge and a right to win.

Starting with slide 13, where our global platform with $263 billion AUM, well diversified by channel strategy and client domicile.

We are proud of our tenured team of investment professionals, who have an average of 25 years in the industry and 17 at AB.

Our team of 38 portfolio managers call. This the whole spectrum of global fixed income sectors, and Subsectors and are supported by experienced analysts traders and APM with significant expertise.

Coffee industry.

In addition, we have over 130 technology experts, who help us maintain an edge and supporting our portfolio managers and our clients.

We think bonds are back as entry points are extremely attractive following the aggressive interest rate tightening cycles by the fed and other global central banks.

Our cycle, which it should be acknowledged resulted in some of the worst performance across fixed income in 40 years.

Slide 14 shows evidence of recent strengthening demand.

We started to witness a training tied in the fourth quarter of 2022 with a clear return to positive flows in the first quarter of this year driven by both our retail and our private wealth channel.

Our American income strategies drove strong inflows in the first quarter with investor allocation responding to the higher interest rate.

The following factors differentiate our offerings, we have developed a highly integrated investment and risk management approach driven by an experienced and tenured investment team.

We have demonstrated a multi decade culture of innovation, which we're excited to highlight for you.

We have a successful track record developing and building scale in a range of products with market leading positions in tax exempt.

Mutual funds and SMA.

Income strategy, which include a uniquely successful barbell approach to balancing rate and credit exposure.

And a multi sector high income platform investing across investment grade high yield and emerging market.

Across these areas, we have deep experience and knowledge structure and talent separate accounts.

This global multi sector investment grade high yield emerging markets, we have a franchise with enduring capability.

A hallmark of <unk> fixed income platform is our culture and focus on innovation.

Allowing us to better identify sources of alpha for our clients.

Leading to enhanced risk adjusted returns.

Innovation has allowed us to introduce new products and services for our clients capturing evolving market opportunities.

This year, we're excited to celebrate the <unk> anniversary of one of our groundbreaking multi sector strategy the American income portfolio.

Alongside global high yield has defined multi sector investing offshore.

The marriage of quantitative and fundamental research combined with technology has been a powerful company.

Enabling improved performance for clients and a better client experience.

This slide contains just a few highlighted examples among our larger brands.

Prism, our credit research database improves our decision, making on individual issuers and makes those credit recommendations available to all applicable accounts.

We have continued to evolve the prism platform and will soon be launching version three point out.

Upgrading our ESG.

Analytical capabilities across the portfolio.

Alpha lab, our hub for quantitative intelligence emphasizes our quantitative model output and makes it readily available to our portfolio managers analysts and traders in real time.

Alpha our liquidity aggregator provides us a real time view of the entire bond market and the trading levels of individual issues, enabling client liquidity needs to be met.

All of these inputs are processed inside our patented abbvie optimizer, which includes our virtual assistant Abbvie Chad.

Next generation portfolio construction platform quickly and efficiently automates our trade construction.

Increases our speed of investment decisions and execution.

The interoperability of these tools and systems improved the client experience and has emerged as a powerful and transformative competitive advantage for AB.

In the spirit of innovation, we are excited to have created a suite of systematic fixed income offerings.

Led by our systematic investment grade offering which marries up fixed income technology with our quantitative research we will have a three year track record in June .

With top quartile performance, we believe this will be a compelling offering to a large addressable at that pool.

The product offers low correlation to traditional strategy, hence good diversification and are seeing increased interest from prospects.

With almost a 30 year track record of American income is designed to provide attractive income while balancing the two major risks in fixed income duration or interest rate risk and credit.

Government and credit Bond rally underperform at the same time in fact less than 10% of the time in recent years.

We expect to see less of going forward as central banks, bringing inflation under control.

We continue to believe in the benefits of diversifying high quality bonds with the strategic allocation to markets, such as high yield and emerging market to enhance income and damp and interest rate risk.

A second element of our franchise is our multi sector approach simply put it is very.

Very rare that one bond sector leads all the time.

Sector leadership changes, which is why high yield securitized in emerging market can help provide a diversified and balanced against Czech government bonds.

And of course, our culture of collaboration with key since most of our tech resided multi sector product offerings, we don't bolt on asset classes, rather the various teams work in partnership to achieve these client objectives.

On slide 18, we show our relative performance of our key strategy over time.

In retail our global fund shelf strong three year performance versus peers with global high yields diversified approach, including allocation to investment grade and securitize securities providing outperformance.

Our Muni fund performance has consistently been very strong.

And institutional while we have a number of strategies available to clients, we have seen particularly competitive performance and global core and core plus high yield both broad market and short duration and an emerging markets dollar denominated sovereign and corporate debt now.

Now I will turn it over to Gary to discuss our growth strategy.

Thanks, Scott, it's a pleasure to be with everyone. This morning looking forward our fixed income growth strategy resides primarily on three pillars Muni income and insurance while at the same time, maintaining an unwavering commitment across the breadth of our fixed income platform, let's start with beauty.

We have generated strong organic growth over the last five years, driven by our market leading performance product innovation and our scalable technology. We are focused on becoming a top five provider of municipals through accelerating the build out of our next generation solutions oriented investment platform.

Under management led by Muni tax aware and including high quality Muni income and custom unit. We also believe that we can become a top three provider in SMA.

Finally, we are very excited about our new custom unique partnerships with multiple national and independent broker dealers as well as <unk>.

Let's turn to our second pillar our income franchise, we plan to continue to capitalize on our existing brand recognition and 30 year track record managing income strategies.

<unk> come back into fixed income, we expect investors to continue to be attracted to our three decade track record of delivering superior investment results for income investors. While 2022 was a challenging year performance wise as Scott alluded to our three year relative numbers are strong with a <unk>.

Key product like global high yield in the top quartile, we are focused on matching our APAC market share success in the U S and European retail diversifying our product offering and presence in key distribution channels, our existing income capabilities give investors product offering across the term structure of interest rates.

Providing both short and intermediate duration strategies with the ability to focus on specific regional services or global options, our newly launched <unk> taxpayer ETF symbol year. The first potentially in the series will also help us to continue to build our market share in this category. We believe we can substantially grew.

In this franchise over the course of time and finally, our third pillar insurance, we are focused on becoming a top 10 insurance solutions provider for the insurance sector through all of the following leveraging our substantial expertise with our partner equitable for whom we have been addressing insurance solutions for nearly 40 years and under allocation.

Could sort of unpack the other revenue other expense line, a little bit and maybe bifurcate between sort of alliance Bernstein balance sheet impact versus the private wealth cash and within the private wealth cash.