Morningstar | Fixed-Income Outflows Can't Dampen AB's Improved 2Q Results; No Change to $26 per Share FVE
There was little in narrow-moat AllianceBernstein's second-quarter results that would alter our long-term view of the firm. We are retaining our $26 per share fair value estimate. AB closed out the June quarter with $539.8 billion in assets under management, or AUM, down 1.8% sequentially but up 4.5% on a year-over-year basis. Net outflows of $7.7 billion during the period were better than our forecast of $9.6 billion. On the plus side, AB generated $3.4 billion in inflows from its active equity operations, marking the second straight quarter of positive flows (which is having a positive impact on the firm's realization rate). The firm also saw positive flows from its passive equity ($300 million), tax-exempt fixed-income ($300 million), and passive fixed-income ($200 million) offerings. Taxable fixed-income outflows of $5.9 billion, however, followed $9.6 billion in outflows during the first quarter, halting what had been a steady positive flow driver for the past two years (with a positive $2.3 billion quarterly run rate coming into the March quarter).While average AUM increased 6.8% year over year, adjusted first-quarter revenue increased 9.2%, owing primarily to stronger performance fee income and an increase in the firm's base fee realization rate to 0.414% (from 0.407% in the year-ago period). First-half top-line growth of 10.9% is much stronger than our forecast of mid- to high-single-digit revenue growth for 2018 (which we may have to revisit if AUM growth and product mix continue to change in AB's favor). As for profitability, adjusted operating margins of 22.3% through the first six months of 2018 were nearly 350 basis points higher year over year, as operating expenses increased at a much lower rate than revenue. Going forward, we believe AB will gradually improve its operating margins, especially if it can gain more meaningful traction with its active equity offerings.
AllianceBernstein Holding provides research, investment management and related services to a range of clients. The company's principal services include: institutional, which services institutional clients, including private and public pension plans, foundations and endowments, insurance companies, and central banks and governments; retail, which services retail clients, primarily by means of retail mutual funds; private wealth management, which services private clients, including high-net-worth individuals and families, trusts and estates, and partnerships; and Bernstein research services, which services institutional investors, such as pension fund, and hedge fund and mutual fund managers.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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