Investors in most AllianceBernstein funds had a less successful second quarter. Turbulent markets weighed down fund performance in varied asset classes and investing styles. In particular, investors in AllianceBernstein's growth and emerging-market product offerings suffered negative returns, while value and fixed-income investors had generally flat returns.
This disconnect between the manager's profitability and the fund investors' pain reaffirms the attractiveness of the asset-management business model. Since an asset manager generates most of its revenues on fees it earns as a percentage of assets under management, investment performance has less impact on revenue than does the manager's ability to attract and retain the funds of investment clients. AllianceBernstein is proving itself effective at salesmanship.
In addition, the second-quarter results revealed the positive effect of operating leverage on the asset manager's profitability. The incremental cost of managing another dollar of assets is relatively small. Moreover, much of the extra expense is related to front-end sales loads, which compensates the broker who sold the manager's product, but is a non-recurring expense. In practice, this dynamic operating leverage allowed AllianceBernstein to increase net earnings by more than 30%, when revenue increased by only 23%.
AllianceBernstein's recent success is due in part to the firm's breadth of international product offerings. Approximately 49% of the firm's assets under management are now invested in global and international funds, a hot asset class until recently. AllianceBernstein also attracts a large number of foreign clients -- non-U.S. clients now represent more than 40% of the firm's customers. This high degree of diversification would be an increasingly important competitive strength if weakness in the U.S. economy were to undermine market performance or U.S. clients' willingness to invest.
Going forward, AllianceBernstein's management expects expenses to increase as a result of the company's efforts to expand distribution. While this investment in marketing might strengthen the firm's long-run competitive position, it promises to hurt margins in the short run. That potential slowdown in earnings makes asset-management rivals such as T. Rowe Price
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