Alliance Capital Management Holding L.P. Business Information, Profile, and History

Company Perspectives:

Diverse products, consistent investment style, solid performance. Alliance Capital's mission is to be the premier global research and investment management organization through superior performance across a broad range of investment disciplines for a diverse group of clients.

History of Alliance Capital Management Holding L.P.

Alliance Capital Management Holding L.P., a publicly traded limited partnership, holds about 30 percent ownership of Alliance Capital Management L.P. Alliance Capital is a leading global investment management firm with about $489 billion in assets under management. AXA Financial, Inc., a subsidiary of the global French insurer AXA, holds about 55 percent. The company serves both the retail and institutional markets. The Bernstein unit focuses on high-net-worth individuals.

Establishing a Presence: 1960s-80s

William H. Donaldson, Dan W. Lufkin, and Richard H. Jenrette established a partnership in 1959, buying a seat on the New York Stock Exchange and opening up a small office. In 1962 Donaldson took over the investment banking area, marking the beginning of the firm's asset management department. Donaldson, Lufkin & Jenrette's (DLJ) pension fund business flourished, and Alliance Capital Management L.P. began operating as a subsidiary in 1971.

During the first half of the decade, two of DLJ's principals left the company. Jenrette, now at the helm, faced a challenging economic environment. During a period of restructuring, DLJ announced that it would sell off Alliance Capital for $7 million. The sale did not materialize and the subsidiary remained in the fold.

Alliance Capital continued to grow its offerings and geographic reach. In 1978, its first money market fund was introduced. That same year a London office opened--its first overseas. Beginning in 1983, a load mutual fund was offered to the public. The company also expanded through the purchases of other companies.

In 1984, the company had $18 billion under management, according to American Banker. The bulk of the assets were for corporate employee benefits plans, endowment funds, foundations, and public employee retirement systems. As a DLJ subsidiary, Alliance Capital had grown into one of the largest pension fund managers on Wall Street. Moreover, it provided its parent company with its chief source of income.

Jenrette agreed, in late 1984, to sell majority control of DLJ to The Equitable Life Assurance Society of the United States, the third largest insurer in the country. The next year, Alliance Capital was split off from DLJ and began operating as an independent subsidiary of The Equitable. In 1987, Alliance opened an office in Tokyo. The company was taken public on the New York Stock Exchange, in 1988, as a master limited partnership, a structure that yielded tax and liquidity advantages.

Building Worth: 1990-2000

In the spring of 1993, Alliance acquired the business of Equitable Capital Management Corporation, a wholly owned subsidiary of The Equitable. The deal put Alliance Capital among the top three money management companies in the country, with assets under management approaching $100 billion. Prior to the deal, Alliance had about $62 billion in assets under management.

Alliance planned on keeping half of Equitable Capital's ten mutual funds--those that added diversity to the company's offerings. The remaining five would be rolled into other Alliance funds. Alliance, ranked 20th in mutual fund assets, had been positioning itself to expand mutual fund sales made through banks. Alliance had been an early player in bank sales, beginning them in 1987.

Alliance also pitched mutual funds in developing markets. A joint venture in Hong Kong was entered into in 1997 to offer funds owning both local and U.S. stock. During the year, similar operations were established in Brazil, Russia, South Africa, and South Korea. Meanwhile, the Alliance Japanese operation had begun to flourish, thanks to a combination of economic conditions and regulatory changes. Investors held $1.6 billion in Alliance funds, up from just $100 million the prior year. Conversely, a four-year-old joint venture in Bombay had only $40 million in assets under management. "That's less than Alliance collects in a single day from U.S. investors," observed Jon Birger in Crain's New York Business.

Emerging markets looked good to Alliance in light of a number of factors, according to Crain's. The U.S. mutual fund market was maturing and was unlikely to sustain its decade-long 18 to 25 percent growth rate. Capital investment to start a new business in these markets was relatively low. The demographics in countries such as India and Brazil held positive indications, such as high rates of savings. In addition, early entry in emerging markets gave Alliance first crack at developing local financial management partners. On the down side, evaluation of local stock was more difficult due to accounting practices. But Alliance felt that its solid research capabilities were up to the task.

In 1998, according to the Bond Buyer, Alliance had nearly $7 billion in assets in 27 tax-free bond portfolios and institutional accounts. The company had begun building up this area of the business beginning in 1984, when it had just $90 million in money market funds. The addition of five municipal portfolios pushed the class of assets above the $1 billion mark in 1990. When the bond market collapsed in 1994, Alliance saw it as a time of opportunity instead of panic.

The company bought up fixed-income investments others had abandoned. Denver International Airport bonds, suffering from lengthy construction delays and baggage system woes, looked like a poor deal, but Alliance took a chance and invested heavily. "The deal is a tale of almost mythical proportions within the fund complex. It has all the elements of Alliance's approach at its best--the undervalued credit, the cash-rich fund ready to pounce, and finally, the market vindication," Ilana Polyak, wrote for the Bond Buyer.

Alliance moved to strengthen its position in Europe with the purchase of Whittingdale Holdings, Limited, London-based fixed income manager. According to an October 1998 Financial Times article, Alliance was making the move "ahead of monetary union and anticipated growth in funded pension schemes."

In 1999, The Equitable changed its name to AXA Financial, Inc., when it became a part of AXA Group, a global French insurer. Alliance, in turn, reorganized into a two-tier partnership. Alliance Capital Management Holding L.P. traded on the New York Stock Exchange and owned an interest in Alliance Capital Management L.P.

Alliance and Sanford C. Bernstein Inc. would merge in 2000 in a $3.5 billion deal, according to a June Investment News report. The cost to Alliance was slightly more than 4 percent of the assets under management for Bernstein, on the upper end of the industry range for such an acquisition. The companies held disparate philosophies: Alliance was growth driven and Bernstein was value driven. Together the pair held $475 billion under management. Institutional clients numbered 2,600 and private clients totaled 15,000.

Turning Point: 2001-04

Alliance entered 2001 facing changing market conditions. In late 2000, technology and growth stocks fell off, hurting the company's fourth quarter earnings. Circumstances continued to deteriorate. Alliance lost millions on Enron stock. Three shareholder lawsuits and the loss of a pair of institutional investors and their $343 million in assets compounded the problem.

The situation evolved from the purchase of Enron stock by large-cap growth fund Premier Growth. The fund bought heavily in October and November 2001, in the wake of a slide in Enron stock. An expected purchase of the Houston-based Enron fell apart; bankruptcy soon followed. The stock Premier accumulated was sold off at a large loss.

Longtime client and major investor the Florida Retirement Fund took a huge hit and dumped Alliance. According to Investment News, Alliance, like many others caught in the fiasco, maintained that Enron had been misleading investors by providing inaccurate information.

Alliance stock took a tumble during the fray. A decline in assets under management translated to lower revenue from related fees. Moreover, the company had fallen behind its peers in fund performance, weakening its competitive position.

Bad news continued to surface. In late 2003, Alliance was faced with investigation for improper trading. The company had suspended two employees at the end of September. In one case, a portfolio manager was "allowing investors in Alliance hedge funds to make money trading in and out of Alliance mutual funds," according to Crain's. Because the company allowed a single manager to oversee both hedge and mutual funds, there was concern that the practice was widespread. In November, Alliance asked for the resignation of two top executives over the matter.

New York State Attorney General Eliot Spitzer had begun investigating market-timing practices in the fall of 2003. The Securities and Exchange Commission (SEC) set up its own probe of the matter. U.S. lawmakers began pushing greater oversight of the $7 trillion mutual fund industry, in which about 95 million Americans had put their savings. Alliance was not the only company under the spotlight. Bank of America, Putnam Investments, Strong Capital Management, and Bank One already had been examined and more would follow.

In December 2003, Alliance agreed to cut management fees by an average of 20 percent over the next five years as part of a settlement with Spitzer involving improper trading. In an agreement made jointly with Spitzer and the SEC, Alliance would pay $250 million to reimburse investors hurt by its activities.

Critics of the agreement, according to the New York Times, said fee adjustment should not be a part of the deal. Market forces, not government agencies, should set fee levels. The action dropped Alliance fees below the industry average; prior to the agreement, fees were on the high side of average.

In March 2004, Alliance reported an increase in assets under management. Companies responding less quickly to the mutual fund scandal had not fared as well.

Principal Subsidiaries: Alliance Capital Management L.P.

Principal Competitors: FMR Corp.; ING, B.V.; Merrill Lynch & Co., Inc.

Chronology

• Key Dates:
• 1962: The firm is established originally as the investment management department of Donaldson, Lufkin & Jenrette (DLJ).
• 1971: Alliance Capital Management Corporation begins operating as a DLJ subsidiary.
• 1978: The first overseas office is opened, in London.
• 1985: Alliance Capital is acquired by The Equitable Life Assurance Society of the United States.
• 1987: The Tokyo office is opened.
• 1988: A minority interest is offered to the public.
• 1993: Equitable Capital Management Corporation business is acquired.
• 1997: A joint venture is formed in Hong Kong.
• 1999: The firm is reorganized into a two-tier partnership.
• 2000: Sanford C. Bernstein Inc. is acquired.
• 2003: An investigation hits the mutual fund business.