New York based money manager, Alliance Bernstein, has built a reputation of being one of the leading investment experts. They currently manage $490 Billion in assets, have 47 locations across 21 different countries, have close to 3,500 employees, and is currently traded on the New York Stock Exchange (NYSE: AB).
But not all of their news has been good news. In October of 2003, a lawsuit was filed against the money manager for engaging in, “improper trading practices, in concert with certain institutional traders, which caused financial injury to the shareholders of the Alliance Bernstein Funds.” Specifically, the firm, “permitted certain investors, including defendants Canary Capital Partners, LLC and Canary Investment Management, LLC to illegally engage in “timing” of the Alliance Bernstein Funds whereby these favored investors were permitted to conduct short-term, “in and out” trading of mutual fund shares, despite explicit restrictions on such activity in the Alliance Bernstein Funds’ prospectuses.”
This incident was part of a much wider class action lawsuit against 27 individual fund management companies that were engaging in similar behavior. It has become known as the “2003 mutual fund scandal.” Alliance Bernstein (formerly known as Alliance Capital) settled with the Securities and Exchange Commission for $250 Million in December of 2003.
Although they have been involved in class action lawsuits that defrauded certain investors, it doesn’t quite speak to their actual investment acumen. Firms may make mistakes, but are still excellent money managers, right? This article is going to dissect Alliance Bernstein’s fund lineup in attempts to uncover the truth about how great of money managers they actually are.
Just a quick spoiler alert: they aren’t that great.
We have taken a deeper look at the performance of several other mutual fund companies and have come to one universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark. You can review by clicking any of the links below:
Fees & Expenses
Our analysis begins with an examination of the costs associated with the strategies. It should go without saying that if investors are paying a premium for investment “expertise,” then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.
The costs we examine include expense ratios, front end (A), level (B) and deferred (C) loads, and 12b-1 fees. These are considered the “hard” costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades taken by portfolio managers. We can estimate the amount of cost associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities to short term and long term capital gains distributions relative to incurred by passively managed funds.
The table below details the hard costs as well as the turnover ratio for all 62 active funds offered by Alliance Bernstein that have at least 3 years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also remember that this is what is considered an in-sample test, the next level of analysis is to do an out-of-sample test (for more information see here).
On average, an investor who utilized an equity strategy from Alliance Bernstein experienced a 1.15% expense ratio, a 0.31% 12b-1 fee, and a 4.25% max front-end load for equity funds with a load. Similarly, an investor who utilized a bond strategy from Alliance Bernstein experienced a 0.65% expense ratio, a 0.25% 12b-1 fee, and a 4.25% max front-end load for bond funds with a load. This can have a substantial impact on an investor’s overall accumulated wealth if it is not backed by superior performance. The average turnover ratios for equity and bond strategies from Alliance Bernstein were 88.28% and 47.69%, respectively. This implies an average holding period of about 11 to 24 months, on average. It is safe to say that Alliance Bernstein makes investment decisions based on short-term outlooks, which means they trade quite often. Again, this is a cost that is not itemized to the investor, but is definitely embedded in the overall performance. In contrast, most index funds have very long holding periods--decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long term.
The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Alliance Bernstein’s “expertise.” We compare each of the 62 strategies that have at least 3 years of performance history since inception and against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition. We have included alpha charts for each strategy at the bottom of this article. Here is what we found:
- 70% (43 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
- 30% (19 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
- 0% (0 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes
It is important to mention that these performance figures do NOT include the front-end load. If an investor paid the front-end load, their return is worse than the results we show here. Not all investors pay the front-end load depending on who sold the fund to the investor, if the fund is in a qualified retirement plan, etc.
In general, we conclude that Alliance Bernstein has no reasonable expectation of producing above-average returns for their investors. The vast majority (70%) of their funds didn’t beat the Morningstar assigned benchmark since inception. The inclusion of statistical significance is key to this exercise as it indicates which outcome is the most likely vs. random-chance outcomes.
Now some readers may believe that we are not properly analyzing performance since we do not take into account risk (Beta). We understand your concern. Because Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio. A better way of controlling for these possible discrepancies is to run multiple regressions where we account for the known dimensions (Betas) of expected return in the US (market, size, relative price, etc.). For example, if we were to look at all of the US based strategies from Alliance Bernstein who have been around for at least the last 10 years, we could run multiple regressions to see what their alpha looks like once we control for Beta. The chart below displays the average alpha and standard deviation of that alpha for the last 10 years ending 12/31/2015.
As you can see, not a single fund produced an alpha that was statistically significant at the 95% confidence level (green shaded area). This is what we would expect in a well functioning capital market.
Like many of the other largest financial institutions, a deep analysis into the performance of Alliance Bernstein has yielded a not so surprising result: active management is failing many of its investors. We believe this is due to market efficiency, costs, and increased competition in the financial services sector. As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold, and rebalance a globally diversified portfolio of index funds.
Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.
The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.
About the Authors
Tom Allen is an Accredited Investment Fiduciary (AIF®), Certified Cash Balance Consultant (CBC) and a Chartered Financial Analyst (CFA®) Level III Candidate. Tom received his Bachelor of Science in Management Science as well as his Bachelor of Art in Philosophy from the University of California, San Diego.
Mark Hebner - Founder, Index Fund Advisors, Inc.
Founder and President of Index Fund Advisors, Inc., and author of Index Funds: The 12-Step Recovery Program for Active Investors. He is a Wealth Advisor, with an MBA from the University of California at Irvine and a BS in Pharmacy from the University of New Mexico with a specialization in Nuclear Pharmacy.