Before we get started, I've been asked to direct your attention to important disclosures on the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Morning everyone and welcome back to the Morgan Stanley's Financials Conference. I'm Mike Cypress, equity analyst covering brokers, asset managers and exchanges for Morgan Stanley Research. And welcome to our fireside chat with AllianceBernstein.
And we're excited to have with us today Ali Dibadj, AllianceBernstein's Chief Financial Officer and Head of Strategy. Alliance Bernstein, as many of you know, is a leading global investment management firm that offers research and diversified investment services. The firm has about $730,000,000,000 of client assets under management today. Ali, welcome. Thanks for joining us.
Thanks, Michael. Thanks for having us. Great. So Ali is going to kick off with a quick overview of Laurence Bernstein's investment opportunity and then I'm going to jump in with some questions and we'll see if we have time towards the end for any investor questions. You can feel free to submit that over the web portal.
So with that, over to you, Ali.
Okay. Thanks, Michael. Again, thanks everybody for joining. Really appreciate you being here. I'll just start off with a brief overview of the firm, updating a few key points and really talking about how we measure ourselves on behalf of investors.
For those of you who have access to the viewer, there's a slide you can reference, which is effectively our summary slide, our measurement slide. And if you don't have access to that directly, you can go to our AllianceBernstein Investor Relations webpage and it's in the Investor Relations presentation that we have. So, a few things just to highlight for us at least. First, we believe we can continue to drive sustained growth in our business. It's been a hallmark of our business.
In the first quarter, we drove about 4% active annual growth. We realized average active organic growth of about 3% over the last three years on average, with active equities in particular being a strong suit growing about 5% over that same timeframe. And that's remember in in a relatively challenged industry backdrop. That organic growth comes from really being maniacally focused on delivering on what clients want. That takes two pieces.
One is differentiated long term investment performance coupled with unparalleled client service. It's as simple as that and as complicated as that in the same breath. But it really is about being maniacally focused on delivering what our clients want. In our growth as well, we focus on inorganic capability building. That's our main thrust there, but again to support our growth trajectory is the broader point number one.
Second piece is that we continue to be focused on expanding our suite of alternative products. That's a key component of our strategic growth plan. We highlighted the private alternative space in our last earnings call with a lot of great detail. If you haven't taken a look at it, please do. It will walk through what we think about from a private alternatives perspective and our growth trajectory going forward.
We do that as well with our partner owner Equitable. Equitable Holdings, as you know, is a large life insurance company. They were just at this conference a few days ago. And we're focused together with the collective opportunity of building not just the private alternatives business, but building a broader asset management business even more diversified than we are today. If you think about it, Equitable Holdings is focused on accelerating and optimizing their general account, matching up durations, enhancing risk adjusted returns, and it's not lost on any of us that private alternatives is a way to do that and thus we can build that together.
It's what we and Equitable called building a virtuous cycle. In this virtuous cycle, we build a high multiple alternatives business and we deliver on needs for Equitable, again, our largest client and our partner in this endeavor. Throughout all that, all that growth that we want to build going for the future, we remain committed to driving strong incremental margins, improving our margins over time 45% to 50% is what our incremental margin targets are through leveraging scale, executing on some of our cost savings plans, whether that be our Nashville headquarter relocation or ongoing plans as well, and we continue to want to deliver that. Our margins won't go up every single year and every single quarter, but over time, we want to improve our margins and that trajectory so far has continued to be quite sustainable. For example, in the first quarter, our operating margins expanded year over year several hundred basis points and a lot of that was driven by our G and A growth being managed to roughly inflation levels, so call it in the low single digit range.
We also have a piercing structure that we think is beneficial to us. To us, we are a partnership structure. We're publicly traded partnerships. So, we continue to benefit from a durably low tax rate less than 10%. We think that's attractive whether or not corporate tax rates go up to 21% or 28%.
We do think that below 10% tax rate is something that's quite attractive and we want to deliver for our investors. Last couple of points. Given our structure as well, we continue to deliver from a distribution perspective, a high single digit distribution return, distribution yield. That's quite attractive, obviously, in a low rate environment. And that's because in our structure, our publicly traded partnership structure, we return 100% of our adjusted income to our unitholders.
All that together, we believe creates a unique brand, a differentiated brand, not only for our employees and importantly our clients, but also for importance in this conference, our investors and AllianceBernstein. So, that's how we measure ourselves along those seven metrics. And again, happy to take any of your questions, Michael, about those things or anything else that's on the line.
Great. Thank you for that great overview. Very comprehensive. Why don't we dig into a number of those different themes that you've mentioned starting out on growth? Can you help maybe frame the growth investments that AB is currently making and how those relate to your growth strategy as you look out over the next three to five years?
And then we'll dive into more detail on each of
those points as we go through. Absolutely. Look, as you mentioned, Michael, and as I mentioned in the outset, delivering growth to our investors is one of the most important things that we do. So, let's, if you indulge me, kind of look back first to look forward. And to set the stage, I mentioned some of these early, but if you think about our growth for the past three to five years, we've really been pretty successful, knock on wood, at driving organic growth above peer group levels.
Our average organic growth of 3% over the last three years is compared to down 4% for publicly traded peer group. We've grown both in fixed income and the equities business, of course, as well in our alternatives business that we're growing in multi asset. Our active equity business accelerated to about 5% average organic growth. And again, that compares quite favorably to what you've seen in public peers, which shrank 5%. That's again driven by diversification and balance of our businesses.
We have developed more businesses to offer to our clients, again driven by what our clients want and we do believe that's sustainable. All of this under that umbrella of delivering for our clients, we have delivered, we believe, differentiated performance, whether that be in our traditional equity businesses, whether that be in our fixed income businesses, again, all alternatives, our multi asset businesses, our Proposal of the Purpose more recently, which is a $20,000,000,000 business from AUM perspective, which was zero not that long ago. So again, trying to deliver differentiated services to our clients is what we've been very focused on, coupling that with incredible client service. So looking forward, right, Michael, to your question, where do we think we can kind of step off? We mentioned alternatives.
Alternatives is something again that we highlighted on our Q1 earnings call. It is a $20 plus billion business from an AUM perspective right now. Again, that was zero not too long ago. We see no reason why that can't be doubled or more over a reasonable period of time here, not overnight, over a reasonable period of time here. And part of that is the permit capital.
Again, the permit capital that we get from Equitable to grow that business aligned with their strategies that they have in terms of improving their yield and risk adjusted returns and at the same time building a business with us. So, alternatives is one of the areas where we're investing in. We're investing in Asia as well. We obviously have a strong retail presence and brand there and fixed income and now even beyond that in Asia. And we do see opportunities, for example, in China as well for us to invest there.
We are committed to growing in China and leveraging some of our skill sets in broader Asia in that marketplace, again, over a number of years, not overnight, but we do think that there's real potential there. A few other things that we're excited about, I guess, in order, ESG is something that we've continued to grow and think still has a lot of legs. We feel like our skill set there is very, very strong. And as I mentioned before, it's over $20,000,000,000 in AUM right now. We think that that can continue.
We're clearly seeing requests and demand from our clients there. We're also can't forget and certainly continuing to leverage our traditional active equities and fixed income businesses or multi asset portfolios. We're filling some holes to lower our clients. And then last, but certainly not least, we are investing our distribution, whether that be our U. S.
Retail distribution, our Asia retail distribution in Europe as well or institutional or private wealth channels. So, again, to your question, there are many areas we're excited about, there are many areas we're investing and that again bring it back to what we want to do for investors delivers both top line and bottom line growth that we believe on a sustainable manner.
So, on alternatives, you mentioned you think that can double, I guess, over the next couple of years from the $20,000,000,000 that you have today. You alluded to earlier more of a discussion you had on your first quarter call, but maybe you could just elaborate a little bit more around the growth strategy within alternatives and which particular strategies or products stand out where you're most optimistic about the growth side?
Sure, sure. Thanks, Michael. So first, I'd just be clear, a couple of years is probably too little of a time to double it. But for the next few years, right, so five ish years, seven ish years, think about it that way is what we're targeting from growing quite substantially from where we are today. And really it's driven, as I've said this a couple of times, I'll say it a couple of times more probably, because the clients are demanding it.
Clients want alternatives. As you pointed out, Matt Bass, who's done a phenomenal job leading our business in the private alternatives side, did a great job summarizing our position in alternatives on the first quarter earnings call. And again, it's an appealing set of categories because as clients are looking for idiosyncratic returns, they're looking more and more on the private markets. Clients are wanting it and so what you're seeing is the private market strategies from an industry perspective are growing two to four times what you're seeing in traditional public market strategies. Again, clients are demanding it and we're delivering for them.
One of our most important clients, again, our partner owner is Equitable. They're invaluable in terms of support they give us in building this private alternatives build business. They want to improve their yield with long dated alternative strategies. That's what we're building. Oh, and by the way, other clients want it too.
And so, we can actually grow that. We can deliver for our biggest client in Equitable and deliver this virtuous cycle to other clients as we build a high multiple business for us. Where we are right now is we're quite strong in the middle market lending business. That is still growing, but in the double digit of AUM and billions. Real estate debt as well is quite strong and global multi strat that we have as well.
And what we plan to do effectively with those businesses and with our alternatives plans going forward is again not just delivering for our clients for today, but delivering what they might look for for the future. So, we look at expanding from a geographic perspective, number one. For example, we took our U. S. Commercial real estate debt business and bolted on top of that a European commercial real estate debt business.
And that's something that we expect to grow. In middle market direct lending, we're in one kind of sleeve of the cash flow backed business. There are other areas we can get into within cash flow as the collateral and there are other areas as well we can get into in terms of the private lending and private credit area for us. So, there is a geographic and there is a skill set growth that we want to do. And again, as you mentioned, our growth aspiration and it's ambitious, right, to be clear, but we feel like we have the history and certainly the focus to deliver on this strategy is to be known as one of the global leaders in alternatives.
Again, more than doubling the business in a reasonable amount of time, not just through skill sets, not just through geographies, but in delivering to our clients, whether it be equitable, whether it be institutional, whether it be retail, whether it be in our private wealth channels. And certainly that is our plan going forward and we'd like to do that for investors.
Asia is another growth zone that you mentioned earlier, certainly represents a very large growth market for the overall asset management industry. Can you talk about AB's current positioning and growth plans for expansion in Asia? And if you could also touch upon any sort of views and perspectives on China as well?
On China. Okay, sure. So Asia is for us and AllianceBernstein one of the best kept secrets we don't want to be a secret effectively. We're over $100,000,000,000 in AUM in Asia, well over $100,000,000,000 in AUM in Asia right now. It's been growing in the high single digits from a CAGR perspective very consistently.
It's about 25% of our fee base. So, it's quite an enviable position. It's an enviable position that the great team that is there has built up over decades. And we've been ahead of the pack in many, many ways. And it's so enviable, again, I'm trying to make this not the best kept secret.
It's so enviable that if you look at many of the surveys out there from a brand perspective, whether you look at Ignite's Asia or Broadridge's top 50 funds, we end up being fourth, fourth from a brand perspective in all of APAC, right? And not to touch some of our competitors, but that's behind a BlackRock, a Fidelity, a JPMorgan, we're fourth. So, we're clearly punching above our weight there from a brand view. We're strong across Japan, Taiwan, Hong Kong. We're growing still in Singapore, Korea and Australia.
And we think each of those regions continue to have enormous opportunity for us. And you mentioned China. We believe China can offer us good growth over the long term. Again, that's not going to be overnight, as we all know, from that region or any growth trajectory in asset management, but over the long term. And we are committed to China for the long term.
That's not only because we see an enormous opportunity to serve 1,000,000,000 potential clients or trillions of dollars in terms of financial assets that are out there to try to deliver to our clients and try to get them to reach their financial goals. That's our mission is try to get our clients to reach their financial goals. It's not just that market opportunity, it's that we believe we have the right to win there. I mentioned our brand in all of overall Asia. That's not in China yet, but we certainly think that we can learn from other areas in Asia where we've built businesses and bring that to bear in China in particular with enormous amounts of opportunity.
It's also not just the brand itself. We're investing significantly in China. We're investing in teams. We're investing in understanding that ecosystem even more so than we do now. We've been there for quite some time.
We've been in Shanghai office for a very long time now. And so, we believe that coupling of what we've learned elsewhere, not that everything is the same, but what we've learned elsewhere, the investment in that marketplace and our brand will allow us to expand Asia even further and again China is being a backbone for that for the long term.
ESG, that's a topic that's getting a lot more tension these days. Can you update us on AllianceBernstein's ESG offerings and future plans as it relates to a growth opportunity that you see there? And how is ESG represented today from a channel perspective? From channel? Sure.
So, I
guess I'd say three things on ESG for us. The first one is ESG integration. We call it and folks call it that I think as well. It is so ESG has been integrated in about 80% of our assets under management on a global basis. What does that really mean, right?
So ESG integration perhaps although people use the same term and different definitions for people, we are the most conservative of definitions in some ways. Most of the things we do are most conservative in terms of our definitions. What that means for us is that the analysts and portfolio managers actually use ESG data to make their investment decisions, to build their models, to figure out what the discount rate is, to figure out what the risk is, positive or negative impact of ESG on their portfolio companies, on their portfolio more broadly. So, we really, when we say ESG integrated into the investment process, it is indeed integrated into 80% of our AUM and we expect that to continue to grow. We'll never get the 100% or things that are passive, for example, that we have a little bit about that won't be fully integrated.
But certainly, that's one leg of the stool from us from an ESG perspective. But that's just the bare minimum in our mind, right? And we encourage you to ask those types of questions of other companies as well. The second piece for us is what we call portfolios with a purpose. That's a strategy that we built from scratch, set of strategies, I guess I should say that we built from scratch.
It's now $21,000,000,000 of AUM as I mentioned before. And that's when a portfolio has a particular set of metrics that they're looking for targets and goals from ESG perspective. That's part of the mandate. So sustainable thematic is one of the strategies that you'll hear about us talking about growth. That will continue for us and we're seeing again the demand from the clients.
The third element of ESG for us is around corporate responsibility. We believe to be good at ESG. You don't just integrate. You don't just have portfolios with purpose that are focused on ESG, but also we have to be good corporate stewards, have good corporate responsibility. And that's something we've had that is always been part of our culture.
We've always conducted our business with the kind of maniacal focus as I mentioned on client and other stakeholders that's been in our culture. It's taken a little bit of different form, for example, signing on to different pledges like CO Action for diversity inclusion or other pledges that are out there. We continue to focus on that as another leg of our three pronged stool on ESG in terms of corporate responsibility. Again, we continue to see searches from clients increasing and it's important that we believe that that continues and it's certainly a place that I mentioned earlier and that you underline that we are investing in. You mentioned from a channel perspective, I guess a couple of things I'd say there.
One is it depends on the geography and depends on the channel, right? So think about it in Europe. Europe is and has been for a very long time all over the ESG landscape and we have because we're global, I've been lucky enough to see that evolve first and then been able to apply that to what's happening in The U. S. Right now, which has impacted private wealth from a retail perspective private wealth from an ESG perspective for sure, as well as retail and institutional growingly so focused on ESG.
Our proposal purpose is disproportionately in the retail channel and we find that that's probably going to continue to be successful. And then you mentioned Asia in the last question, that is just starting to be a focus for us from ESG perspective. We're getting great success on some of those purposes there and we expect that to continue. So, don't have a great holistic answer on channels, it will depend on geographies, but we are seeing growth everywhere in something that we're investing in, which is a fortuitous situation to be in.
Well, speaking of channels and geographies, maybe you could talk a little bit about some of your distribution initiatives and the investments that you're making in distribution in The U. S. And other key markets of yours?
So, I think less about the term distribution to be fair, Michael, and this is not to change your question, but I think more about it from a client service mentality. So that's what we focus on. Yes, distribution is kind of the almost logistical way to get a product to somebody, but we really think about it from a client service perspective. We are focused on the client. So, in that context, in terms of our client service channels, you mentioned that retail is a very, very big focus for us.
Certainly in The U. S. And in Asia, Japan is a good example of where we're really kind of beefing up our retail chops there, investing in people, investing in relationships and trying to continue to grow that business. We continue to see growth potential in our diversified offerings, active equity offerings for sure continue to grow. And we believe that there is a lot of untapped opportunity there.
We see things in fixed income and multi asset as well. So global high yield continues to do well. We think the municipal business has a lot of legs as well. One of the things in retail that's worth mentioning for us, it might be a little bit different than others, but certainly for us is that we're seeing quite strong growth in our SMA platform. SMA vehicles now are tens of billions of dollars in AUM.
Think about our muni offering, for example, or strategic research balance that we have out there. These SMA offerings continue to grow. And that's allowed us to really think about our retail offerings on a much more, I guess, vehicle agnostic manner, again, being focused maniacally on the client, whether that be the CITs or the SMAs or CCAS or ITMs and importantly on ETFs as well. So we are already active in ETF market, perhaps with less hullabaloo than others, but we're already active in ETF market, for example. And this idea of vehicle agnostic and trying to deliver for our clients most effectively, it does suggest that we could go into ETFs and deliver that for our retail clients and private wealth clients as well.
Two other client service elements that might be worth mentioning, one is on institutional. We continue to invest there as well, both in channels and geographies. We mentioned Asia as a big place. We're investing there certainly, but globally we are for sure in different channels, of course, as well. We're benefiting from that across the board.
You've seen that quarter over quarter, how we grow that business, whether it be in alternatives, whether it be customized retirement solutions and we hope more opportunities for us to grow institutional. And we'd be remiss in not mentioning the private wealth business that we have, the kind of north of $100,000,000,000 AUM business that continues to be one of our crown jewels in the company. We invest there in terms of hiring. We invest there in terms of training. We invest there in terms of just our pure research, which supports our brand, technology, other ways.
And so, we very much value our client service as you call it, right, distribution. We think it's externally it's a key foundation, right? A manufacturer is a manufacturer, but you have to have client service to deliver those to benefit our clients. So again, to your point, we're investing in distribution and we believe areas get the best return.
Maybe just shifting over to the product side, you mentioned active equities as an area of strength at AB. Despite some of the headwinds that the industry has seen AB has posted some very impressive organic growth across your active equity platform. Can you talk about what you think has driven that strength and performance there? And how is AB positioned would you say going forward here if the markets continue to rotate towards value?
So, look, you're right to point out that our active equities business has been quite strong. I mentioned some of these figures before, but we've had six consecutive quarters now of active equity inflows. We've had overall as a firm, we've had I think the number is sixteen quarters organic growth from our retail business and active equity inflows. So, we believe that that is something that is sustainable and we continue to deliver on it. Why and why we think it's sustainable?
Again, there are effectively two aspects to it. One is that we've diversified our offerings, right? We used to just be effectively two offerings, a value and a growth offering. Well, we have many more global teams. We have many, many more global teams to offer to our clients with differentiated returns.
And of course, we want to couple that with client service, client service to our partners, third party partners from distribution perspective, as well as our institutional and private wealth partners as well. So, coupling those two things. Again, it's as easy or as hard to say that we're maniacally focused on our clients. Now, we have enablers for that and what we've done is we've very much focused on idiosyncratic differentiated returns. We have analytics to look at our current teams and we really started this ten years ago.
We've become more sophisticated, but we've really started this ten years ago to look at our current teams and look at who is really delivering idiosyncratic returns, encouraging them incentive wise and otherwise to deliver idiosyncratic returns for our clients, the non systematic, non beta portion of returns that clients actually want. And so we've done that internally, developing new teams and improving teams that weren't delivering it, as well as looking at M and A, right, whether we buy a team, buy a company, do a team lift out on the inorganic side as well. So we've really leveraged that view that clients want idiosyncratic returns and that's what we want to deliver. So I guess one other aspect which is important to us from the active equities perspective, because call it, 85% of all institutional decisions are made with the help of consultants. We've really spent a lot of time on consultant advocacy.
We see consultants not just at this gatekeeper, right, that people are potentially fearful of, we really see them as valued partners, valued partners and valued people in ecosystem, right? So, we do our best to deliver for clients as consultants do as well. So, consultant advocacy remains quite strong. For example, we got seven upgrades during 2020, which all won't be delivering in the short term, but it does suggest that we're very focused with the ecosystem to deliver for again our clients. Just to note on value.
Yes, sure. So look on value, we have done quite well recently in terms of performing our overall global value franchise, outperformed benchmarks for the most part over the first quarter. A lot of that was because of idiosyncratic returns. Stock selection was positive. That's particularly the case in our small cap and mid cap value products where we do believe there's a differentiation that we can bring to bear.
The environment also benefits us because there just aren't that many value investors out there. We believe that that's an opportunity for us to continue to grow our active equities is to supporting our value franchises. Again, we think we have something special to add there.
Great. Maybe just shifting gears over to fixed income. Can we talk about your fixed income platform today and particularly given the potential for inflation and rising interest rates, how would you say that bodes for fixed income offerings that AP has?
So, look, there's generally a knee jerk reaction given inflation, given rates rising for outflows from fixed income. And we've not been immune to that as you've seen in some of their numbers. And there's no question about that, right? Of course, that's going to happen for us. Now, we are a little bit, I guess, better positioned than the average bear on this, given many of our products are a little bit more risk on centric.
So, as far as exposure to credit, for example, think about global high yield, think about American Income, which are our two flagship products, a little bit more risk on it. So, that should help. But look, there will be a knee jerk reaction and we're seeing the knee jerk reaction. And it will continue with some people with less quick reflexes and pulling money out of fixed income. And that's going to be the case, right?
However, what I'd say is, there are really three things to think about in the fixed income landscape, two which we can control, one of which we can't. We can control what types of products we have and our performances. Performance has been quite strong, for example. We have 91% of our assets outperforming for the one year period ending, I guess, last quarter, so it would have been March 31 or whatever it is. And that continues to be quite strong.
We do believe that that will continue to deliver from us from a performance perspective because the portfolio managers stuck by their guns even though a year ago, right, with what happened in March of twenty twenty, there's a big dislocation. So we can control that and hopefully we can continue. We can also control what strategies we lay out for our clients. Income continues to be one of the biggest drivers of our growth strategies and the businesses that we have right now in fixed income. Clearly, over time, when rates go up, we'd be expecting that to benefit, again, over time income strategies and we have a lot of those, particularly for our Asian investors who look for yield.
Now, there's a third thing that we can't really control and I kind of mentioned that a little bit, but it's the reasons you invest in fixed income, right? So, look, rates are a little bit lower than they were many years ago for sure and so you have lower returns. Diversification used to be why you're in fixed income. You need less fixed income to really be diversified given other opportunities out there. By the way, that's part of the reason we're going to private credit.
And I'd argue regulatory things haven't really changed. So the reasons people invest in fixed income, we can't really control, but we can try to control what products we have to offer and our performance for our clients.
Great. Well, we're almost out on time. So this is probably our final question here. Just a bigger picture question around M and A, the industry landscape continues to evolve here. How does M and A fit into your plans?
And should we expect AV to be an active participant given the industry consolidation trends?
Yes. So, a few things I'd say about M and A. One is, we are clearly in the flow. So, all these deals that you might hear about and see, etcetera,
we are very active in looking
at things. But at the same time, as you've seen in our track record and you'll continue that track record, we've been quite selective, right? We've been quite selective in terms of what we get involved in. And the reason for that is, we strongly believe and I think the market is right to having discussed this and laid this out in terms of how they value things. We think M and A, whose major vector of value creation is cost savings, is very low probability M and A.
On the flip side, we think M and A where there's complementariness and there's some big deals that are complementary and some that aren't that have happened. But we think M and A where there's complementariness, complementary channels, geographies, investment skill set, technology skill set, those aren't shoe ins for sure from an M and A perspective, but they certainly have higher probability. And that's where we're focused. That's what our track record has been, 14 lift outs of acquisitions in the past ten years. That's something we want to continue to do.
I'm a little bit more size agnostic. I'm really looking for complementary opportunities and we've accelerated some of those. We did four lift outs for acquisitions in 2020. We hadn't done a big one in the buy side since 2016. We have to remain disciplined, but we do see, Michael, to your point, some really interesting opportunities to find teams with great track records, a great cultural fit, good financial terms as well and most importantly, something that we can grow for our clients, whether they be equitable, private wealth, retail or institutional.
So we are active in the market and we look for opportunities that will benefit unitholders ultimately.
Great. Awesome. I'm afraid we'll have to leave it there, Ali. We're out of time. Thank you so much for joining
us today. Thank you. Thanks, everybody.