Alliance Capital’s global vice chairman Alfred Harrison is playing down expectations of the group’s joint venture with AXA.
“The key thing about the joint venture is to understand that Alliance doesn’t perform miracles,” Harrison says. “We are coming to provide sensible, appropriate products that will give people returns.”
Speaking exclusively to Money Management on his first trip to Australia since the announcement of the joint venture, Harrison says Alliance is a conservative manager, but bullish when it is appropriate.
“Alliance has the idea that it wants to be the best professional organisation and cut a fine line between fiduciary duties and imaginative investing,” he says. “We have time-tested principles that make us a growth stock manager.”
The key behind Alliance’s management philosophy is getting the fundamentals and price right in a stock. Harrison admits this is no different to many other managers globally, but he argues the company’s long track record of above-average returns differentiates it from the rest.
“My experience is too many investors are momentum players, buying and selling with the latest trends,” he says. “They tend to panic and sell at the wrong time, such as the tech stock crash or the Asian crisis.”
Alliance uses what Harrison calls the ‘V-factor’. The manager analyses 1500 companies in the US and reduces that to 25 stocks it wants to have in a portfolio.
“The V factor with these stocks is we buy low and sell high,” Harrison says.
In the current climate, Alliance stopped buying in the third quarter of 1999 because prices became ridiculous, he says.
The V factor is used on a daily basis at the company with Alliance buying and selling stock, but the fundamentals still have to be in place to enable the stock to remain in the portfolio.
“The trick is to think price and we constantly look at where the stock relates to the V,” Harrison says.
This approach beats the index managers every time, Harrison argues, an approach to funds management he is not too keen on.
“The only reason for indexing is because a fund manager has screwed up,” he says.
But things are not easy for a value manager either. Harrison says for the first time in 40 years he doesn’t know where the markets are heading.
“A year ago when we applied our formula, the earnings of equities were great but the price was wrong,” he says. “That provided a market peak and slide, especially with the NASDAQ.”
Alliance then bought stock that had good fundamentals as the price came down; Harrison quotes Intel as an example. Alliance held onto the stocks expecting some upside.
Harrison says that in the current market, Alliance is erring on the side of caution.
“The price has come down, but the fundamentals of stocks are not right and I am not sure the Federal Reserve will turn the economy around.”
Harrison’s track record of prediction is good. Late in 1999, he spoke at a Melbourne FPA lunch and warned there was going to be a crash in tech stocks. A few months later he was proved correct.
“We have got enough credibility as a manager to sit on our hands, waiting for the fundamentals to be right,” he says. “When they are right, we must be ready to buy for the upturn.”
Alliance never runs cash in its portfolios as Harrison believes it is a wrong bet in any market situation. His argument is that the money is better invested in stocks, which can be a long play, to achieve a better return than cash.
The joint venture with AXA Australia will bring a global company to local investors. Alliance has $US450 billion under management with offices dotted around the globe.
In the future, global products for AXA Australia will be sourced from centres in New York, London or Tokyo, depending on the investment mix. Australia will provide local equity products using analysts based in Sydney. Melbourne is still running the fixed interest of locally created products.
Harrison says the local analysts will be part of the global team as internationally favoured Australian equities, such as Telstra and News Corp, will need reporting on to managers in places like New York or London.
“Many companies are global and we must get the weighting right in our portfolios. We will need global research from the countries where they are based,” he says.
Harrison is bullish about the joint venture as he says it is “one of those few occasions where two plus two equals five.
“You can see sense in the joint venture in that AXA has certain strengths whereas Alliance Capital has a brand and a deep investment talent,” he says.
“It is a great opportunity to bring the talents of both organisations to the Australian market and it is certainly not an exercise in cutting costs as the goal is to provide an array of products to suit individual and institutional investors globally.”
