(Bloomberg News) Peter Kraus has worked for more than two years to stem client defections from New York-based investment manager AllianceBernstein LP.

Since joining the company as chairman and chief executive officer in December 2008, with a pay package valued at $52 million, he has recruited money managers, tied compensation more closely to stock performance and rolled out new products in areas such as inflation protection and asset allocation. It hasn't stopped the bleeding.

Clients pulled $126 billion in the two years ended Dec. 31, mostly institutions exiting its stock funds. At 28% of assets, the withdrawal rate was the highest for any publicly traded U.S. mutual-fund manager. In February, AllianceBernstein ranked last among 23 rivals in an institutional investor brand- loyalty survey by Cogent Research, a research and consulting firm in Cambridge Massachusetts.

"Their clients are walking out the door and a lot of institutional investors don't have a positive impression of them," said Christy White, a principal at Cogent. "It doesn't bode well for the future."

When Alliance Capital Management LP acquired Sanford C. Bernstein & Co. in 2000, the $3.5 billion deal combined Alliance's focus on investing in fast-growing companies with Bernstein's specialty in stocks its managers deemed undervalued. Bernstein also ran a highly regarded investment-research unit.

The combined firm's assets peaked at $837 billion in 2007, and have since tumbled 42% to $487 billion as of Feb. 28.

'Episodic' Performance

AllianceBernstein's equity funds trailed 67% of peers in the three years ended Feb. 28, data from Denver-based Lipper show, a period that includes most of 2008, when the MSCI AC World Index fell 42%. For the past year, the funds beat 51% of rivals.

Kraus, 58, blamed the withdrawals on "poor" stockpicking in 2008 and what he called "episodic and volatile" performance in some of the firm's equity funds over the past two years.

"I see no reason why our returns in the future won't be consistent and better than the competition," he said in an interview at the company's Midtown Manhattan headquarters. "I also understand why some people are saying they will wait for the proof."

The firm's relative returns will improve as 2008 results drop out of three-year performance numbers, Kraus said.

"I don't think our clients believe we have become somehow mentally incapacitated or that we are not good stockpickers," he said.

The firm suffered because many of its funds held a lot of financial stocks that collapsed in the second half of 2008, Katie Rushkewicz, an analyst for Chicago-based Morningstar Inc., said in a telephone interview.

52% Loss

AllianceBernstein Global Value had 29% of its assets in the group, including Fannie Mae, American International Group Inc. and Citigroup Inc., on May 31, 2008, regulatory filings show. The fund lost 52% that year, more than 91% of peers, according to data compiled by Bloomberg.

"Investors have long memories and it takes a while to regain their favor," Burton Greenwald, an independent mutual- fund consultant in Philadelphia, said in a telephone interview. "There is no shortage of other choices in this business, and there is always someone out there with a pretty good record."

Big investors that have pulled money from AllianceBernstein include New York state's pension system and Vanguard Group Inc., the largest U.S. mutual-fund manager, which uses the firm as a subadviser. As of Feb. 28, 57% of AllianceBernstein's assets were from institutions, 27% from retail investors and the rest from high net-worth individuals, according to a March 10 statement.

Shares Trail Rivals

Like AllianceBernstein, Janus Capital Group Inc. and Legg Mason Inc. have struggled to limit redemptions. Assets at all three firms remain below the peaks reached before the financial crisis, which erased $37 trillion in value from global equity markets from November 2007 through March 2009.

Still, since world stocks bottomed out on March 9, 2009, Legg Mason's shares have returned an annual average of 84% including dividends, while Janus's gain is 71%. Shares of AllianceBernstein Holding LP, the New York Stock Exchange-listed partnership that holds a 38% stake in AllianceBernstein LP, have returned 54%.

In a March presentation, Chief Operating Officer David Steyn said AllianceBernstein hoped to build its business in 401(k)-style retirement plans from $30 billion in assets to $100 billion, though he didn't give a specific timeframe. He also said the firm wants to add more alternative assets, a category that includes hedge funds and private equity. Alliance oversees $12 billion in such funds, he said.

Support From Gabelli

"Peter Kraus is turning the franchise around," Macrae Sykes, an analyst at Rye, N.Y.-based Gabelli & Co., said in a telephone interview. Gamco Asset Management, Gabelli's money- management arm, and Gabelli Funds LLC own a combined 831,000 AllianceBernstein shares, according to data compiled by Bloomberg.

Kraus succeeded Lewis Sanders, a well-known value investor, who sold Sanford C. Bernstein to Alliance Capital. Sanders ran the combined company from 2003 until he retired in 2008. He is now chief executive officer of Sanders Capital LLC, a New York-based asset manager.

Kraus spent 22 years at Goldman Sachs, working both in investment banking and money management. When he left in 2008, he was co-head of the New York-based company's investment- management division.

Restricted Stock

In September 2008, Kraus joined Merrill Lynch & Co. as an executive vice president with a compensation package originally valued at as much as $95 million, people with knowledge of the matter said at the time. Merrill Lynch, based in New York, announced his departure a month later, after its takeover by Bank of America Corp. of Charlotte, North Carolina.

Kraus left Merrill Lynch with as much as $25 million, the Wall Street Journal reported at the time. With the change in control, Merrill Lynch was "obligated to fulfill the terms of its contract with Peter," John Meyers, an AllianceBernstein spokesman, wrote in an e-mail,

When he was hired by AllianceBernstein, Kraus got 2.7 million shares of restricted stock that vest over five years. The grant was valued at the time at $52 million, according to a regulatory filing.

Kraus has put his stamp on the firm's lineup of money managers. Last year he promoted Sharon Fay, a 20-year company veteran, to chief investment officer of equities, hired Laurent Saltiel from Janus to manage international large-cap stocks and brought in Ashish Shah from Barclays Capital to be co-head of global credit investment.

Personnel Turnover

Departing last year were Lisa Shalett, head of growth equities, and brothers James and Michael Reilly, who managed large-cap growth stocks. Chief Financial Officer John Howard left in February after less than a year on the job.

Shalett, Michael Reilly and Howard didn't return messages seeking comment. James Reilly couldn't be reached.

"The high turnover rate (relative to competitors) will make the product even more difficult to sell," Roger Smith, a Macquarie USA analyst, wrote in a February research note.

Kraus dismissed concerns that the personnel changes will affect fund sales, saying that the senior people who left had either been reassigned or given different responsibilities prior to their departures.

"Of those who left, we knew we were taking some risk," he said.

AllianceBernstein LP is majority-owned by French insurer Axa SA. The firm earned $427.1 million in 2010, a decline of 26% from the previous year. Revenue climbed 1.4% to $2.95 billion.

Better With Bonds

AllianceBernstein's large-cap equity funds continue to struggle. Its large-cap international and U.S. strategies rank in the bottom 5% of peers over the past three years, according to data from eVestment Alliance, an Atlanta-based researcher that tracks the performance of money managers serving institutional clients.

AllianceBernstein has fared better with bonds. Its bond funds beat 68% of peers over the past year and 50% over three years, Lipper data show. The company's global high- yield products beat 76% of rivals in the three years ended Dec. 31, eVestment numbers show.

"We continue to see a healthy pipeline in fixed income," Steyn, the operating chief, said in his presentation last month.

AllianceBernstein managed $206 billion in bonds at the end of 2010, up 26% from the end of 2008, regulatory filings show. Equity assets fell 16% to $219 billion in the same period, even as the S&P 500 gained 39%.

Cogent Survey

Investors pulled $56.2 billion from the company last year, down from $69.7 billion the year before. Withdrawals were $1.4 billion in January, the company said in a conference call with investors in February. Redemptions continued in February, the company said, without providing details.

The client defections may not be over, said White of Cogent Research. Cogent's survey, based on questions sent to 590 institutional investors, found 23% of AllianceBernstein customers who responded said they planned to leave in the next 12 months, the highest rate of any firm.

"They have some real perception problems to face," she said. Because the survey was done for the first time this year, there is no way to know how accurately it will reflect investor decisions, according to White.

Art Collector

Pacific Investment Management Co., the Newport Beach, Calif.-based manager of the world's largest bond mutual fund, got the highest marks in the Cogent survey.

Kraus said withdrawals should slow this year, "assuming our performance continues to be positive."

"We are pleased with the steps Peter is taking to position AllianceBernstein to take advantage of the opportunities the market is providing," Chris Winans, a spokesman for Axa Financial, a subsidiary of Axa SA, said in an e-mail about Kraus' tenure as CEO.

ARTnews Magazine named Kraus and his wife Jill to its 2010 list of the world's top 200 art collectors for his holdings of contemporary art. Assembling an art collection, Kraus said, is not mainly a matter of having money.

"It takes perseverance, tenacity and a good eye," he said in the interview. Similarly, perseverance will lead to better performance at AllianceBernstein, Kraus said.

"Asset management companies aren't built overnight and they don't decline overnight," he said. "What we are doing is executing. We are out there hitting singles."