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May 31, 1995

Fund Management Profile: Alliance Capital Management

With total assets under management of over $120 bn, Alliance Capital Management is nothing if not big

Every year over 1,000 companies from all around the world, but mostly from the US, stop by to pay their respects to Alliance Capital Management. And so they should - even if the air ticket does have to allow for hops from New York to Minneapolis and then on to Cleveland.

With total assets of $121.3 bn, Alliance's 180-strong team has over $48.9 bn under active investment in equities, and a further $12.7 bn invested passively. With some $60 bn in fixed income securities, Alliance also has a debt market profile that few can match.

'We welcome companies coming to see us,' says Bruce Calvert, vice chairman and chief investment officer of Alliance Capital Management. 'If you are a company that believes it has an investment which meets the portfolio needs of Alliance, I suggest you touch base with our research side, notably a sectoral specialist. If they like what they see, they will mention the meeting to fund managers interested in the sector. Of course, you can always go directly to fund managers if you choose.'

In fact, when a company does make a presentation to Alliance, the meeting is usually open to all investment staff. 'If, for example, the Large Cap Growth Group had been contacted and we were having United Health Care management in, that meeting would be open to all analysts and portfolio managers,' says Calvert. Because of the overall scale of Alliance's business, such meetings can get pretty big: managements of larger corporations should expect an encounter with upwards of 30 people present.

Over the years, Alliance Capital Management has carved out a formidable presence for itself in comparison with its peers in the investment industry. The group manages capital for a range of domestic and international institutions, pension funds and endowments, as well as serving some 2 mn mutual fund shareholders. It is headquartered in New York, but has equity and debt teams in Minneapolis, Cleveland and San Francisco, in addition to major offices in the UK, Singapore and Japan.

'But then again, Alliance has always been big,' notes Calvert. 'When I first started here 22 years ago our assets were around $5 bn. But no one perceived us as a small firm then. We were seen as large. People used to wonder how we would perform when we became an $8 bn company. They said we would be too big to be flexible in the market. People forget that overall market value grows in the same way as GDP. And there are advantages in size. We can invest more in research and technology and analytical systems. In that sense, big firms have a significant advantage.'

In the past decade, Alliance's assets under management have increased by over 300 per cent. Organic growth has been boosted by acquisitions: two years back it added over $36 bn in assets under management with the transfer of the business of Equitable Capital Management Corp into its fold; and last year saw the purchase of Shields Asset Management, adding a further $8 bn.

The mutual fund business has been a tremendous boon to the Alliance growth curve. Alliance introduced its first load mutual fund to the public in 1983 and its first closed-end fund in 1987. Today it manages 16 closed-end funds traded on the NYSE and over 80 open-end mutual fund portfolios. Aggregate mutual funds assets amount to over $40 bn, up from $22 bn just two years ago.

But there is nothing recent about growth at Alliance: it has been a constant throughout the company's history. Originally launched in 1962 as the pension fund investment management arm of Donaldson, Lufkin & Jenrette (DLJ), Alliance went through an important metamorphosis in 1971, when DLJ bought Moody's Investor Service investment advisory business and merged the investment department with its own to form Alliance Capital Management Corp. In 1985, Alliance was acquired by The Equitable Life Assurance Society and three years later it went public as a master limited partnership, selling 32 per cent to the public (employees currently own 9 per cent) and listing on the Big Board.

As far as performance is concerned, Alliance has made the grade more often than not throughout its history. Last year may have produced disappointing results, but the group usually outperforms the S&P 500 index. Annualised investment returns over the last 15 years (1979-1994) for the $10.7 bn Large Cap Growth Equity Composite, for example, have been 17.6 per cent, against an S&P return of 14.5 per cent. And the five years from 1989 to 1994 saw the $6.1 bn Disciplined Growth fund composite rise 11.1 per cent, while the S&P only grew 8.7 per cent.

Several portfolio management teams operate within Alliance, each of which pursues a distinct investment approach. Along with an international group and an index group, three major units make up the bulk of the equity business: insurance fund manager Hudson River ($15 bn) is the biggest; the Large Capitalization Growth Equity Group (189 accounts) is second; and Disciplined Growth (57 accounts) is third.

A score of sub-groups exist within these larger units. For example, the Hudson River Group (see box), while concentrating on large and mid cap growth stocks, has embedded within it several asset allocation funds as well as money management groups dedicated to small caps and convertibles. By allowing smaller units and teams to emerge, Alliance cushions some of the challenges posed by its size. Smaller groups can be more nimble and responsive while not every portfolio manager at Alliance will be buying or selling the same stock at the same time.

There is a diverse investment culture, but fund management groups and teams do not operate in complete isolation. They are all serviced with centralised research, trading and systems services, for instance; and there are daily firm-wide investment forums, at which money managers and analysts exchange views. The portfolio management teams conduct more focused decision-making oriented meetings.

Bruce Calvert points to the primacy of fundamental research as one of the most important factors behind Alliance's investment success. 'We spend a significant amount of our fees building research capability,' he says. 'We're in a competitive field where we must beat the market indices or lose market share to somebody who does it better. It is true that research orientation is not unique in our business, but ours is exceptionally deep and broad.'

Indeed, Alliance has a power-packed buy-side research arm, with the firm's stock researchers devoting considerable time and effort to visiting companies and building financial models. The equity management team consists of 57 analysts and 41 portfolio managers. On the fixed-income side, rather than making future interest rate prediction a primary focus of the investment approach, 23 researchers and 32 managers look to minimise risk while attempting to enhance the upside.

Altogether, Alliance research, portfolio and trading staff number around 180. With such a large organisation, central management has to work hard to build and sustain the company-wide investment philosophy, which boils down, in essence, to early recognition of change combined with a growth-oriented approach seeking undervalued companies. Alliance does not 'time' markets; it maintains a long-term perspective.

Calvert says the modern day manager must keep in mind what constitutes a good investment. 'Good investments have a strong business position, good prospects for growth and business momentum. Of course, they should be attractively valued,' he adds. 'Investors who maintain a consistent perspective on who and what they are will continue to succeed.'

Calvert accepts that macro themes may have a place for some equity teams, but bottom-up analysis remains at the core of the decision-making process. 'Some managers will take thematic positions about a group of companies expected to benefit from a trend,' says Calvert. 'But these tend to evolve as a result of bottom-up analysis.'

As for bonds, corporate bonds are favoured and tend to be long-term holdings in the insurance area, mainly for regulatory and technical reasons. 'Insurance portfolios hold corporate bonds because they get a slightly higher yield,' notes Calvert.

Alliance maintains its focused view on what constitutes a good investment, but knows well that there is more than one way to skin a cat. The Large Capitalisation Growth strategy emphasises stock selection, portfolio concentration and opportunistic trading, with a focus on short-term evaluation. Its philosophy is to invest in relative earnings strength at an early stage and at a reasonable price. Portfolios in aggregate hold 35 to 45 securities.

As with most portfolios, stock selection and portfolio construction are based on a firm-wide stock list known as the Alliance 100, created by research analysts and portfolio managers. It is from the 100 list, which is dynamic and revised weekly, that the Large Cap Group selects its Favoured 25 list of companies with superior fundamentals, earnings momentum and valuation attraction. At least 65 per cent of each client portfolio is invested in Favoured 25 securities.

Stock selection by individual managers is constrained by various parameters agreed within the separate equity groups. 'We want portfolio managers to be creative and contribute to the idea flow,' says Calvert. 'But at the same time, we don't want one client getting a good result and another getting a mediocre one.'

As chief investment officer, Calvert has coordination responsibilities, but he also heads up the Disciplined Equity Team which has 40 accounts and $3.4 bn under management, representing some 2.8 per cent of total assets. The Disciplined Growth strategy is defined by early recognition of change using a judgemental and quantitative security scoring system for selection.

Disciplined Growth invests in companies with a combination of strong relative earnings momentum (its main focus) and value. The portfolio holds 50-60 stocks and remains fully-invested, or nearly so, at all times. The objective is to outperform growth benchmarks consistently and to outperform the S&P 500 significantly over time. Portfolios focus on the highest-ranking names in the Alliance 100; and the individual holdings and position sizes are determined by the team after debating the respective merits and contribution to portfolio risk of the various stocks.

Alliance uses quantitative techniques to help value attractive companies, but it does not have a pure black-box approach, according to Calvert. 'The idea is to rank the best traditional fundamental research using quantitative tools,' he says. 'But the final step is judgement.'

This applies to the actively managed assets, but around $10 bn of Alliance's equity and debt funds are passively managed. That may be a small proportion of the whole (around 8 per cent), but it's still a substantial sum for a non-bank indexer in a world in which most index fund business is controlled by banks. Many of Alliance's index products are customised to meet specific needs: it does run pure S&P index funds, but also creates customised indices tilted toward investment themes, such as smaller caps or low PE ratios.

In the complicated and split-second world of financial management, Alliance mostly sticks to its knitting as an active stock and bond picker. Calvert has seen plenty of change over the years, but says that much has remained the same. 'You must be willing to take advantage of changes in investment technology, but it is important to remember what your investment philosophy is, what you are trying to accomplish for clients,' says Calvert. 'Where new technologies and tools help you accomplish that, you use them. Where they distract you from that, you ignore them.'

Given its growth orientation, Alliance is always looking for the next opportunity to grow its assets and expand its reach. One of the natural extensions of Alliance is in the international arena. With total investments in foreign securities rising at a rapid rate, more and more foreign management teams are making the trek to Alliance's offices.

'Foreign stocks will play an even larger role in client allocation going forward,' says Calvert. 'That will present an important growth opportunity for Alliance.' Calvert is equally upbeat about emerging markets: 'The lustre came off emerging markets in 1994 but, in general, there will continue to be better opportunities for growth in many of them. There are several areas where, by adding new investment capabilities and by servicing new markets, we can continue to grow. And, more importantly, continue to provide good results.'