4q:2015 capital markets outlook · china: it’s about the economy equity sell-off was largely...
TRANSCRIPT
The information herein reflects prevailing market conditions and our judgments as of the date of this document, which are subject to change. In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Opinions and estimates may be changed without notice and involve a number of assumptions which may not prove valid. There is no guarantee that any forecasts or opinions in this material will be realized. Information should not be construed as investment advice.
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4Q:2015 Capital Markets OutlOOk
1|CMO 4Q 2015
Current assessment does not guarantee future results.As of September 30, 2015Source: AB
The Big Picture
Moderate growth and low inflation continue globally
The US and other developed economies are on solid footing; the emerging world is slowing
China’s economic slowdown illustrates a number of concerns across emerging markets
Expected returns are lower across asset classes, requiring a different approach
Investors should embrace adding alpha and incorporating downside protection
Fixed Income: balance rates and credit; be selective and global
Equities: capture growth through meaningful high-conviction active opportunities
Alternatives: valuations support downside protection and security-selection opportunities
2|CMO 4Q 2015
Past performance does not guarantee future results.As of September 30, 2015Global high yield, global corporates, and Japan and euro-area government bonds in hedged USD terms. All other non-US returns in unhedged USD terms. Emerging-market debt returns are for dollar-denominated bonds as represented by the J.P. Morgan Emerging Markets Bond Index Global. An investor cannot invest directly in an index, and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect the fees and expenses associated with the active management of a portfolio.*Europe, Australasia and the Far East†Returns reflect Morningstar US Open-End fund category averages.Source: Barclays, FactSet, FTSE, J.P. Morgan, Morningstar, MSCI, S&P Dow Jones and AB
Returns in US Dollars
–3.0–2.0
–4.4
2.60.91.81.7
0.4–2.4
–3.6
–17.9–10.2
–6.4–11.9
Risk Assets Weakened in the Third Quarter
Equities
Government Bonds
Credit
Alternatives†
2015 Returns (Percent)3Q:2015 Returns (Percent)
Japan
Global High Yield
US
Euro Area
Emerging-Market Debt
Long/Short Equity
MultialternativeNontraditional Bond
Global Corporate
EAFE*
US Small-Cap
Emerging Markets
US Large-Cap
–2.6–1.2
–3.7
1.20.5
1.81.8
–0.30.3
–0.4
–15.5–5.3–5.3
–7.7
Municipals
3|CMO 4Q 2015
Volatility Is Up from Unusual Lows
10
15
20
25
30
35
40
45
10 11 12 13 14 15
Perc
ent
Historical analysis and current forecasts do not guarantee future results.Left display through September 30, 2015; right display as of December 31, 2014*Data shown as month-end through July 31, 2015, then daily thereafter†Historical average for past 15 years‡Maximum drawdown refers to the largest market drops from a peak-to-trough during the year. Source: Bloomberg, J.P. Morgan, S&P Dow Jones and AB
Equities Have Gained in 29 of 34 Years Despite Significant DownturnsS&P 500 Index Calendar-Year Returns and Market Corrections (1980–2014)
–50
–40
–30
–20
–10
0
10
20
30
40
80 85 90 95 00 05 10
Maximum Drawdown Calendar Year‡
Volatility Sharply Higher, but Correction Not Out of Line
VIX*
Historical Average†
3-YearAverage
4|CMO 4Q 2015
China: It’s About the Economy
Equity Sell-Off Was Largely Leverage-Driven
Trade Activity Has DeclinedCurrency Decline Was Modest in Context
Left display through September 6, 2015; middle display through September 30, 2015; right display through August 2015*Appreciation reflects the period from July 21, 2005–January 15, 2014.†Decline reflects the period from January 16, 2014–September 30, 2015.Source: Bloomberg, CEIC Data and AB
6.0
6.5
7.0
7.5
8.0
8.500 02 04 06 08 10 12 14
CN
Y/U
SD
0
200
400
600
800
1,000
1,200
1,400
1,600
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan
14
Apr
14
Jul 1
4
Oct
14
Jan
15
Apr
15
Jul 1
5
US
D B
illions
Inde
x
Shanghai Composite(Left Scale)
Marginal Lending Outstanding(Shanghai Market)
–60
–40
–20
0
20
40
60
80
100
09 10 11 12 13 14 15
Year
-ove
r-Ye
ar P
erce
nt C
hang
e
Imports
Exports
Appreciation*34.1%
Decline†
–4.7%
5|CMO 4Q 2015
As of September 30, 2015Source: AB
China Isn’t the Only Emerging-Market Concern
Asia ex Japan Worsening export performance Sluggish domestic demand
Turkey Collapse of coalition talks Upcoming election Conflict with PKK
Russia/Ukraine Conflict Economic contraction amid declining oil prices Debt restructuring (Ukraine)
Brazil Growth contraction High inflation Need for fiscal adjustment Political corruption
6|CMO 4Q 2015
Country/ Region
GDP (%) Inflation (%)Expected
Policy Rate Path
FX Change (%)
FX Forecast
(%) The Latest2015 2016 2015 2016
Global 2.5 3.0 1.8 2.4 — — — Solid economic growth continues—but the pace isn’t uniform regionally
Developed Countries 2.0 2.5 0.4 1.9 — — — Developed-market growth is expected to
improve, driven by the US expansion
Emerging Countries 3.4 3.9 4.1 3.4 — — — While China makes headlines, emerging-
market concerns are broader
US 2.7 3.4 0.4 2.7 — — Fed rate hike is still possible before year-end
UK 2.6 2.8 0.1 1.1 –2.9 –0.9 Solid growth, but BoE likely on hold until 2016
Euro Area 1.5 1.7 0.1 1.2 –7.6 –6.7 ECB likely to continue QE; may increase it amid deflationary fears
Japan 0.9 1.7 0.9 1.3 –0.1 +4.3 Central bank likely to continue—but not increase—QE program
China 6.7 6.3 1.4 1.6 –2.4 –0.3 Still balancing policy stimulus with economic rebalancing
Brazil –2.6 0.8 9.2 6.6 –32.7 +2.7 Fiscal policy disappoints; further credit downgrades possible
Current forecasts do not guarantee future results. As of October 1, 2015GDP represents year-over-year change in real terms. Inflation represents year-over-year change in Consumer Price Index. Expectations for monetary policy are through end of 2016. FX change is currency spot return for last nine months vs. US dollar; FX forecast is AB economists’ return projections for next six months vs. US dollar.Source: AB
Developed Markets Picking Up Pace, Emerging Markets Decelerating
7|CMO 4Q 2015
US Economy Seems to Be on Solid Footing
Tax Receipts Paint Brighter Picture(Year-over-Year Percent Change)
Improving BackdropPolicy Accommodation Has Remained in Place Longer than Expected
Left display through September 1, 2015; middle display through July 31, 2015; right display as of September 30, 2015*Federal individual and corporateSource: Haver Analytics, Office of Management and Budget, US Bureau of Labor Statistics and US Federal Reserve Board
–30
–20
–10
0
10
20
30
–2.5
0.0
2.5
5.0
7.5
10.0
91 94 97 00 03 06 09 12 15
Federal Tax
Receipts*
Nominal GDP (Left Scale)
0
1
2
3
4
5
6
7
8
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
01 03 05 07 09 11 13 15
Percent
Thou
sand
s
Fed FundsTarget Rate
Job Openings (Left Scale)
MetricLevel/
ChangeBest
Since…
Real Consumer Spending (Five-Quarter Average)
3.4% 2005
Auto Sales (Light Vehicles)
17 million (SAAR) 2005
HomebuilderIndex 62 2005
Household Net Worth (2Q:15)
+$700bil. to
$85.7 tril.Ever
US Job Openings
+400K to 5.75 mil. 2000
8|CMO 4Q 2015
Neither past nor forecast performance is a guarantee of future results.Trailing returns as of June 30, 2015. Current yields as of September 30, 2015. Median forecast based on proprietary AB forecasts as of June 30, 2015.Current yield represented by yield-to-worst. Annualized returns in US dollars. Markets are represented from left to right by the Lipper/Intermediate Municipal Bond Fund Average, Barclays US Aggregate Index, Barclays US High Yield Index, S&P 500 Index, MSCI EAFE Index (unhedged). Median forecast based on proprietary AB forecasts. Source: Barclays, FactSet, Lipper, MSCI, Standard & Poor’s (S&P) and AB
Fixed Income
The Great Beta Trade Is Likely OverOutlook for Returns Is Below Average for Most Asset Classes (Percent)
Equities
2.2 2.3
8.0
4.53.4
8.6
USMunicipals
US Investment-Grade Bonds
USHigh-Yield
Bonds
Current Yield Past Five-Year Average Return
5.97.1
17.3
10.0
US Equities Developed InternationalEquities
Five-Year Median Forecast Past Five-Year Average Return
9|CMO 4Q 2015
Current analysis and forecasts do not guarantee future results.As of June 30, 2015Source: Barclays, Morningstar, S&P Dow Jones and AB
Passive Market Exposure Is a Weaker Prescription Today
An Inconvenient Beta TruthExpected Returns for a 60/40 Blend
Expected Return ~4%
Standard Deviation
Inflation and Taxes ?
Bonds40%
Stocks60%
Passive Investing Has Dominated
–40
–20
0
20
40
60
80
100
–200,000
–100,000
0
100,000
200,000
300,000
400,000
500,000
05 06 07 08 09 10 11 12 13 14
Share (P
ercent)
Bill
ions
Passive (ETF and Index) as Percent of Assets
Active as Percent of
Assets
Passive Flows (Left Scale)Flows into Active (Left Scale)
10|CMO 4Q 2015
Volatility Likely as Gap Between Fed and Market NarrowsFed vs. Market Rate Expectations (Percent)
–1
0
1
2
3
4
2015 2016 2017 2018
As Fed Hikes Interest Rates, What Should We Expect?
Historical analysis and current forecasts do not guarantee future results.As of September 30, 2015*Long-run expectations are for July 9, 2019. All other expectations are as of year-end. Long-run expectations by the market are defined as expectations for the official rates on March 31, 2019.†2017 expectations are defined as expectations for the official rates on July 9, 2017. ‡Basis point (b.p.): a unit equal to 1/100th of 1%, used to denote the change in a financial instrumentAn investor cannot invest directly in an index and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect fees and expenses associated with the active management of a portfolio. The time periods shown above are as of the month-end prior to the official rate hike and through the month-end following the last increase in official rates.Source: Bloomberg, MSCI, S&P, US Federal Reserve and AB
Bonds Fared Pretty Well in Last Fed Rate-Hike Cycle
June 30, 2004–June 30, 2006
Change in Yields (b.p.)‡
AnnualizedReturn (%)
Fed Funds Rate +425 —
10-Year US Treasury +52 +1.66
10-Year AAA Municipal +19 +3.61
US Aggregate Index +115 +2.93
High Yield +58 +7.79
10-Year BBB Municipal –4 +5.22
S&P 500 n/a +6.83
MSCI World n/a +13.44LongRun
†
Fed Funds Median
Market Expectations*
FOMC Member Expectations
11|CMO 4Q 2015
Credit: After Recent Volatility, Valuations Are More AttractiveOption-Adjusted Spreads: September 30, 2012, to September 30, 2015
Historical analysis does not guarantee future results.BBB CMBS is represented by CMBS New Issue from Barclays.All nongovernment sectors are represented by Barclays indices except for CRT (Credit Risk Transfer), which is represented by the STACR 2014-DN1, Class M-3 security.Source: Bank of America Merrill Lynch, Barclays and AB
630574
448
640
1,085
169222
439 447
258 241
127
421
0
200
400
600
800
1,000
1,200
US CorpHY
US CorpHY
ex Energy
US CorpHY BB
HY B HY CCC US CorpIG
US CorpIG
BBB
BBBCMBS
CRT EM CorpIG
EM SovIG
EURCorp IG
EUR HY
US High YieldInvestment-Grade
Corporate SecuritizedEmerging-
Market DebtEuropean
Credit
Current Spread
Low
Basi
s Po
ints
High
12|CMO 4Q 2015
Historical analysis does not guarantee future results.Left display for illustrative purposes only; middle display as of December 31, 2014; right display defaults as of August 31, 2015, and US home price index as of July 31, 2015A credit rating is a measure of the quality and safety of a bond or portfolio, based on the issuer’s financial condition. AAA is highest (best) and D is lowest (worst). Ratings are subject to change. Investment-grade securities are those rated BBB and above. The default rates are for global issuers, which were originally issued with the shown credit rating.*HY represents high yield. †IG represents investment grade. Source: Barclays, Bloomberg, Citigroup, Credit Suisse, Freddie Mac, Intex Solutions, Moody's Analytics, National Association of Realtors, S&P Capital IQ, S&P/ Case-Shiller Home Price Index, US Federal Reserve Board and AB
Opportunities in Corporates Differ Across Industries and Geographies
Defaults Should Magnify DifferencesFive-Year Cumulative Default Rates1983–2014 (Percent)
Credit: Attractive, but Investors Must Be Selective
10
23
44
76
BB B CCC CC&C
Repair
Latin America Corps
Recovery
European Financials
US Financials
Expansion
HY* ex Energy
US IG† Industrial ex Energy
Contraction Downturn
Energy
Mortgage-Related Debt Attractive as Home Prices Increase, Defaults Fall
120
130
140
150
160
170
180
0.5
1.0
1.5
2.0
2.5
3.0
3.5
08 09 10 11 12 13 14 15
Index
Cur
rent
to 3
0-D
ay D
efau
lt R
ate
(Per
cent
)
Default Rate
US Home Price Index
13|CMO 4Q 2015
Liquidity Environment Presents Risks and Opportunities
Historical analysis does not guarantee future results.Left display through December 31, 2014; middle display through May 1, 2014Source: Barclays, J.P. Morgan, Lipper and AB
Liquidity Is Challenged as Market Grows but Trading Declines…
…and Individual Investors Reach for Yield
Credit: Liquidity Risk Is High, but Investors Can Manage It
14
16
18
20
22
24
06 07 08 09 10 11 12 13 14
Per
cent
Create Opportunities
Manage Risks
LiquidityManagement
Tools
Research onMultiple Time
Horizons
BroadMulti-SectorApproach
80
100
120
140
160
180
200
0
300
600
900
1,200
1,500
1,800
05 06 07 08 09 10 11 12 13 14
Percent
US
D B
illio
ns
Volume Traded (Left Scale)Market Size (Left Scale)Turnover
US High-Yield Corporates Individual Investor Share of US High-Yield AUM
ContrarianInvestmentStrategies
EnhancedTrading
Infrastructure
PrivateCredit
Opportunities
14|CMO 4Q 2015
Rates: As US Policy Shifts, Time to Look Globally
No Country Always WinsGlobal Bond Returns Hedged to USD* (Percent)
Gap between best and worst
Current analysis does not guarantee future results. As of December 31, 2014*Returns are represented by Barclays government bond indices. An investor cannot invest directly in an index, and its performance does not reflect the performance of any ABportfolio. The unmanaged index does not reflect fees and expenses associated with the active management of a portfolio.Global Bonds Hedged is represented by the Barclays Global Aggregate Hedged to USD. US Bonds is represented by the Barclays US Aggregate. Global Bonds Unhedged is represented by the Barclays Global Aggregate USD Unhedged.Source: Barclays, Bloomberg, Morningstar and AB
Hedged Global Bonds Offer Attractive Risk/Return Profile1994–2014 (Percent)
5.8 5.85.4
2.9
3.6
5.5
Global BondsHedged
USBonds
Global BondsUnhedged
Returns Volatility
Global Outperforms When US FallsUp vs. Down Capture (Percent)Mar 1990–Dec 2014
2.3
–0.9
2.2
–0.6
Average QuarterlyReturn When
US Aggregate IndexWas Positive
Average Quarterly Return When
US Aggregate IndexWas Negative
US Aggregate Index Global Aggregate Index
Up Capture: 95%Down Capture: 67%
2010 2011 2012 2013 2014
UK7.2
UK16.1
Euro Area11.2
Euro Area2.5
UK14.2
US5.9
US9.8
UK2.4
Japan2.3
EuroArea13.1
Canada5.6
Australia8.9
Japan2.2
Australia–2.4
Australia8.3
Japan2.9
Canada8.3
US2.0
US–2.8
Canada6.5
Euro Area1.0
Japan2.6
Australia1.4
Canada–3.1
US5.1
Australia0.3
Euro Area2.6
Canada1.4
UK–4.4
Japan4.7
6.9 13.5 9.8 6.9 9.5
BestPerformer
Worst Performer
SharpeRatio 1.0 0.8 0.5
15|CMO 4Q 2015
Current analysis does not guarantee future results. For illustrative purposes only.As of September 30, 2015*Represents the median exposure of 418 factor regression analyses on advisors’ portfolios surveyed by AB over the period from March 1, 2015, to September 30, 2015The rates factor is proxied by the Barclays 10-Year Treasury Index; the credit factor is proxied by 50% Barclays US HY excess returns and 50% MSCI World monthly returns,rebalanced monthly; and the volatility factor is proxied by month-over-month change in the VIX. Numbers may not sum due to rounding.Source: Barclays, Morningstar, MSCI and AB
Many Investors Are Already Overexposed to CreditMedian Exposure to Key Risk Factors*
A Balance of Rates and Credit Is Optimal
Credit Is Somewhat More Attractive, but Balance Remains Critical
Rates27%
Credit66%
Volatility6%
Rates
Globalize and hedge currency
Use muni bonds if taxes are a consideration
Position along the yield curve: take advantage of roll
Credit
Be selective
Avoid stretching for yield
Loans
CCC-rated bonds
Diversify across sectors
Consider municipal credit
16|CMO 4Q 2015
Historical analysis does not guarantee future results.As of September 30, 2015Nominal yields. A credit rating is a measure of the quality and safety of a bond or portfolio, based on the issuer’s financial condition. AAA is highest (best) and D is lowest (worst). Ratings are subject to change. Investment-grade securities are those rated BBB and above. Barclays long indices are used for each respective rating category. Yield advantage shown is for 10-year municipal securities. *Roll is the natural price gain that a bond experiences as it ages, assuming interest rates are unchanged. Source: Barclays, Investment Company Institute, J.P. Morgan, Municipal Market Data, US Federal Reserve and AB
Muni Credit Continues to Offer ValueYield Advantage of BBB-Rated Debt over AAA-Rated Debt
Positioning Along the Curve MattersRoll Plus Yield (Percent)
0.74
1.65
2.32 2.45 2.583.14
3.42 3.66
0.52
1.30
1.37 0.991.09
0.77 0.420.08
Maturity (Years)
Municipals: Still Attractive, but Positioning Matters
A-Rated Municipal Roll* A-Rated Municipal Yield
30205 8 9 10 152
Munis Offer Attractive Yields vs. Taxable Bonds10-Year Municipal/Treasury Ratio
0
1
2
3
4
87 90 93 96 99 02 05 08 11 14
Per
cent
Sep 30, 20151.0%
Apr 1, 20093.5%
Jun 30, 20070.4%
70
80
90
100
110
120
130
140
150
160
90 92 94 96 98 00 02 04 06 08 10 12 14
Rat
io (×
)
Current Ratio
AverageJun 30, 2015
0.96%
17|CMO 4Q 2015
Historical analysis does not guarantee future results.Left display as of September 20, 2015; middle display as of December 31, 2013; right display as of September 30, 2015*Payment defaults onlySource: Barclays, Distressed Debt Securities Newsletter, J.P. Morgan, Moody’s Analytics and AB
Muni Defaults Have Been RareFive-Year Cumulative Average Default Rates 1970–2013 (Percent)*
Municipal Credit: Selective Opportunities Despite Recent Headlines
0.0 0.0 0.11.1
1.9
4.4
20.9
USTsy
IGMuni
BBBMuni
IGCorp
BBBCorp
HYMuni
HYCorp
What Investors Are NOT Reading About Total state and local tax revenue for
2Q:2015 was $339 billion, an increase of 8% on a nominal year-over-year basis
2Q:2015 was the 18th consecutive quarter of tax growth
44 states reported growth in the first half of fiscal year 2015
48 out of 50 states have enacted pension reform measures
The average level of pension funding is an adequate 75%
What Investors Are Reading About Puerto Rico and Chicago
Underfunded pensions
High-Yield Munis Have Fared Well Relative to Corporate High YieldMonthly Returns (Percent)
0.80.5
1.3
–0.6
–1.7
–2.6
Jul 15 Aug 15 Sep 15
Municipal HY ex Puerto RicoCorporate HY
18|CMO 4Q 2015
Not All Sectors Perform the SameSector Relative Returns During Taper Tantrum (Percent)‡
Low-Inflation Environment Supports Current ValuationsAverage S&P 500 P/FE by YoY CPI†
Past performance and historical analysis do not guarantee future results. Not all sectors perform the same.Left and right displays through September 30, 2015; middle display as of August 31, 2015*Average returns before and after fed funds initial rate increase within the Empirical US Large-Cap universe, equal-weighted six months before and one year after the initial increase in the fed funds rate, based on 20 episodes from 1952 to 2015†Based on quarterly CPI data from December 31,1977, to June 30, 2015 ‡Annualized returns relative to the S&P 500 from July 31, 2012, to December 31, 2013Source: Bloomberg, Empirical Research Partners, S&P and AB
Stocks Have Performed Well in Rising-Rate Environments
Equities Have Fared Well in Rate-Hike Cycles* Average Returns (Percent)
11.7
4.2
5.8
6 MonthsPrior
First 6Months After
Next6 Months
Year After Increase
15.2×
16.8×15.8×
11.6×
8.1×
–2–0% 0–2% 2–4% 4–6% 6–14%
August 31, 2015: 16.0×
–23.4
–21.5
–10.3
3.4
5.3
7.7
Industrial Commodities
Financials
Consumer Discretionary
Utilities
Telecom
Consumer Staples
19|CMO 4Q 2015
Equity Returns Are Driven by Different Factors over TimeS&P 500 Returns: Attribution by Source (Percent)
Past performance and current forecasts do not guarantee future results.As of September 30, 2015An investor cannot invest directly in an index, and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect fees and expenses associated with the active management of a portfolio. Numbers may not sum due to rounding. *Five-year annualized expected return for US equities uses proprietary AB forecasts. Display reflects composition of expected US equity returns.†Represents relative performance of Morningstar Open-End US Large-Cap managers vs. S&P 500 January 1, 1995–September 30, 2015, when the one-year (YoY) change in P/E was positive or negative when the market return was positive or negative over that same one-year period.Source: Morningstar, S&P Dow Jones and AB
Equity Returns Will Likely Be Modest, but Active Management Can Help
2.1
18.7
4.4
16.42.0 3.2
5.1
13.7
–4.3–0.6
Earnings Growth
Dividends
Valuation Change
Jun 2009–Jun 2012
Jul 2012–Dec 2014
Median Forecast*Jun 2015–Jul 2020
22.0
5.9
Active Management Likely Poised to OutperformRelative Return (Percent)†
P/ECompression
P/EExpansion
Market Up +0.8% –2.6%
Market Down +2.9% +2.6%
Environment for Recent Bull Market
20|CMO 4Q 2015
With Growth Slowing, Firms That Can Grow Are Poised to Lead
Sustainable Growth Is Uncommon, but RewardingTop 1,000 Companies with Earnings Growth Rates ≥10%*
Persistent Growth Is Cheap TodayRelative Price/Forward Earnings of High-Persistent-Return Growth Stocks vs. Market†
Historical analysis does not guarantee future results.Left display as of December 31, 2014; right display as of August 31, 2015*Universe consists of the top 1,000 companies by market cap each year from 1979 to 2014, with annual rebalancing.†Price to forward earnings of highest quintile of persistent profitability stocks relative to the Russell 1000 Index Source: Center for Research Security Prices, FactSet, Russell, S&P Compustat, S&P Dow Jones and AB
360
79
23
0.0
0.3
0.6
0.9
1.2
1.5
1.8
2.1
2.4
2.7
3.0
0
50
100
150
200
250
300
350
400
One Year Three Years Five Years
Excess (Percent)
Num
ber o
f Com
pani
es Annualized Excess
Returns vs. S&P 500
1.0%
1.4%
2.7%
Number of Companies(Left Scale)
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
90 93 96 99 02 05 08 11 14R
atio
(×)
Average
21|CMO 4Q 2015
Historical analysis and past performance does not guarantee future results.Left display through December 31, 2014; right displays as of June 30, 2015An investor cannot invest directly in an index and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect fees and expenses associated with the active management of a portfolio. *Average annual return of S&P 500 top quintiles by factor (1986–2014). Benchmark represented by equal-weighted Russell 1000 Index ex financials. Top quintile of valuation defined as cheapest companies based on price/free cash flow.†Average relative performance of Russell 1000 Index acquirers: one day before to one day after announcementSource: Barclays, BofA Merrill Lynch, Deutsche Bank, FactSet, Russell Investments, S&P Dow Jones, Yardeni Research, company reports and AB
High Free Cash Flow Gives Firms More Options to Generate Returns
Recently, Acquirers Have Outperformed†
Average Relative Return
Firms Have Put Cash to Shareholder-Friendly UseS&P 500 ex Financials Use of Available Cash
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
01 02 03 04 05 06 07 08 09 10 11 12 13 14
USD
Tril
lions
Capex Net Purchases Dividends Cash Acquisitions
Operating Cash Flow
Share Buybacks Have Helped Attractive Stocks Even MoreAverage Annual Return*
10.6% 12.2% 14.3%
Benchmark Top Quintile of ShareRepurchases
Top Quintile of ShareRepurchases and
Valuation
–0.1%
0.4%
1994–2011 2012–2015
22|CMO 4Q 2015
Estimate Dispersion†
Higher Exposure to US Markets and EconomyForeign Sales as Percent of Total Sales
Number of Analysts Covering Average Stock*
Left display as of December 31, 2014; right displays as of June 30, 2014*Average number of analysts covering the average stock in each index shown†Standard deviation of the consensus estimates for a stock divided by the average estimateSource: BofA Merrill Lynch, Evercore ISI, FactSet, Russell Investments, S&P, UBS and AB
Why Smaller Stocks Make Sense in This Environment
32
24
19
S&P 500 Russell 2500 Russell 2000
6.0
16.1
Russell 2000 Russell 1000
0.31
0.17
Russell 2000 Russell 1000
23|CMO 4Q 2015
Past performance does not guarantee future results.As of September 30, 2015Based on the Morningstar US Open-End Large Growth, Large Blend and Large Value universes (oldest share class only). Concentrated Growth managers are in the lowest half as sorted by number of stocks held in the combined US Large Cap category. Quality growth managers are the top quartile as sorted by ROE within the combined US large cap universe.Source: Morningstar, S&P and AB
Higher-Conviction Equity Strategies Can Make a Big Difference
To Date, Growth Has Been Rewarded% of Active Managers Outperforming During the Period
16%
41%
69%
81%
All Active 2014
All Active ConcentratedGrowth
QualityGrowth
Even a Little Alpha Can Go a Long WayBy Annual Equity Market Gains
100
125
150
175
200
225
250
1 2 3 4 5 6 7 8 9 10
US
Dol
lars
Year from Initial Investment
Equities at 6% Equities at 8% Equities at 9%
+21%
+32%
Jan-Sep 2015
24|CMO 4Q 2015
Historical analysis does not guarantee future results.Left display as of June 30, 2015; middle display through August 31, 2015; right display as of December 31, 2014. *Price/book spread is the ratio between the highest and lowest quintiles of stocks in the AB US Large-Cap universe based on price/book value. †Emerging-market debt local is represented by J.P. Morgan GBI-EM (since 2002) and J.P. Morgan ELMI+ (prior to 2002); emerging-market corporates by J.P. Morgan CEMBI Broad Diversified; Asia credit by J.P. Morgan Asia Credit; emerging-market high yield by J.P. Morgan EMBI Global Non-Investment Grade; US high yield by Barclays US Corporate High Yield; bank loans by Credit Suisse Leveraged Loan; Pan-European high yield by Barclays Pan-European High-Yield. An investor cannot invest directly in an index or average and neither includes sales charges or operating expenses associated with an investment in a mutual fund, which would reduce total returns. The low range is the fifth percentile and the high range is the 95th percentile of the yield-to-worst data for the indices. Source: Barclays, Credit Suisse, CRSP, Hedge Fund Research, J.P. Morgan, Morningstar, MSCI, Russell Investments and AB
Alternatives Can Enhance Up/Down Market Capture
Large-Dispersion in High Income Fixed-Income Yields (Percent)†
1.8 1.8 1.43.7 4.2 4.2
1.1
7.15.4
4.2
11.1
6.6 6.34.7
15.012.7
10.4
32.7
16.7
13.1
29.0
0
5
10
15
20
25
30
35
EMDLocal
EMCorps
AsiaCredit
EMHY
USHY
BankLoans
EuroHY
Stock Valuations Range WidelyPrice/Book Spread*
3
4
5
6
7
8
9
10
11
12
73 79 85 91 97 03 09 15
Rat
io (×
)
Tech Bubble(Truncated)
GlobalFinancial
Crisis
TypicalTrough:
5.4
Current:11.3
High
Low
Avg
Alternatives: Better Up/Down Capture
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0.0 0.5 1.0 1.5
Up/
Dow
n C
aptu
re
Beta
HFRI Equity Hedge Total USD
US OE Long/Short Equity
US OE Large Blend
US OE Large Blend
HFRI Equity Hedge Total
USD
US OE Long/Short
Equity
1990–2009 2010–Present
25|CMO 4Q 2015
What if There’s a Different Scenario?
Faster-than-Expected Growth
Equities: favor a more cyclical approach, such as value, as well as lower quality sectors like financials and energy
Fixed income: tilt a bit more toward credit risk, but still avoid stretching for yield
Slower-than-Expected Growth
Equities: emphasize income and quality attributes
Fixed Income: tilt more toward interest rates and remain global
Be BalancedRates: Combine Global Core and US Core
Manage yield curves/positioning
Hedge currencies
Credit: Use Global Multi-Sector
Diversify
Avoid crowded trades
Manage liquidity risk
Bar
bell
Current analysis does not guarantee future results.As of September 30, 2015Source: AB
Putting It All Together: Strategy for Moderate Growth, Low Inflation
Long/Short Equity Long/Short Credit
Opportunistic/Special Situations Risk-Balanced Fixed Income
Return Seeking
Risk ReducingRisk Reducing
Return Seeking
Be Selective
Fixed IncomeEquities
Alternatives
Be Active Be concentrated
Pursue stable and consistent sources of return
Seek downside protection
Maintain overweight to developed markets
26|CMO 4Q 2015
A Word About Risk
The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein L.P. or its affiliates.
Important Risk Information Related to Investing in Equity and Short Strategies
All investments involve risk. Equity securities may rise and decline in value due to both real and perceived market and economic factors as well as general industry conditions.
A short strategy may not always be able to close out a short position on favorable terms. Short sales involve the risk of loss by subsequently buying a security at a higher price than the price at which it sold the security short. The amount of such loss is theoretically unlimited (since it is limited only by the increase in value ofthe security sold short). In contrast, the risk of loss from a long position is limited to the investment in the long position, since its value cannot fall below zero. Short selling is a form of leverage. To mitigate leverage risk, a strategy will always hold liquid assets (including its long positions) at least equal to its short position exposure, marked-to-market daily.
Important Risk Information Related to Investing in Emerging Markets and Foreign Currencies
Investing in emerging-market debt poses risks, including those generally associated with fixed-income investments. Fixed-income securities may lose value due to market fluctuations or changes in interest rates. Longer-maturity bonds are more vulnerable to rising interest rates. A bond issuer’s credit rating may be lowered due to deteriorating financial condition; this may result in losses and potentially default, or failure to meet payment obligations. The default probability is higher in bonds with lower, noninvestment-grade ratings (commonly known as “junk bonds”).
There are other potential risks when investing in emerging-market debt. Non-US securities may be more volatile because of the associated political, regulatory, market and economic uncertainties; these risks can be magnified in emerging-market securities. Emerging-market bonds may also be exposed to fluctuating currency values. If a bond’s currency weakens against the US dollar, this can negatively affect its value when translated back into US-dollar terms.
Bond Ratings Definition
A measure of the quality and safety of a bond or portfolio, based on the issuer’s financial condition, and not based on the financial condition of the fund itself. AAA is highest (best) and D is lowest (worst). Ratings are subject to change. Investment-grade securities are those rated BBB and above. If applicable, the Pre-Refunded category includes bonds which are secured by US government securities and therefore are deemed high-quality investment grade by the advisor.
27|CMO 4Q 2015
Index Definitions
Following are definitions of the indices referred to in this presentation. It is important to recognize that all indices are unmanaged and do not reflect fees and expenses associated with the active management of a mutual fund portfolio. Investors cannot invest directly in an index, and its performance does not reflect the performance of any AB mutual fund.
Barclays Global Aggregate–Corporate Bond Index: Tracks the performance of investment-grade corporate bonds publicly issued in the global market found in the Global Aggregate. (Represents global corporate on slide 2.)
Barclays Global High Yield Index: Provides a broad-based measure of the global high-yield fixed-income markets. It represents the union of the US High Yield, Pan-European High Yield, US Emerging Markets High Yield, CMBS High Yield and Pan-European Emerging Markets High Yield indices. (Represents global high yield on slide 2.)
Barclays Global Treasury: Australia Bond Index: Includes fixed-rate, local-currency sovereign debt that makes up the Australian Treasury sector of the Global Aggregate Index.
Barclays Global Treasury Bond Index: Tracks fixed-rate, local-currency sovereign debt of investment-grade countries. The index represents the Treasury sector of the Global Aggregate Index and currently contains issues from 37 countries denominated in 23 currencies. The three major components of this index are the US Treasury Index, the Pan-European Treasury Index and the Asian-Pacific Treasury Index, in addition to Canadian, Chilean, Mexican and South African government bonds.
Barclays Global Treasury: Canada Bond Index: Includes fixed-rate, local-currency sovereign debt that makes up the Canadian Treasury sector of the Global Aggregate Index.
Barclays Global Treasury: Euro Bond Index: Includes fixed-rate, local-currency sovereign debt that makes up the Euro Area Treasury sector of the Global Aggregate Index. (Represents euro-area government bonds on slide 2.)
Barclays Global Treasury: Japan Bond Index: Includes fixed-rate, local-currency sovereign debt that makes up the Japanese Treasury sector of the Global Aggregate Index. (Represents Japan government bonds on slide 2.)
Barclays Global Treasury: United Kingdom Bond Index: Includes fixed-rate, local-currency sovereign debt that makes up the UK Treasury sector of the Global Aggregate Index.
Barclays Investment Grade CMBS Index: Designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3/BBB-/BBB- or above) using Moody’s, S&P and Fitch respectively, with maturity of at least one year.
28|CMO 4Q 2015
Index Definitions (continued)
Barclays Municipal Bond Index: A rules-based, market value–weighted index engineered for the long-term tax-exempt bond market. (Represents municipals on slide 2.)
Barclays US Aggregate Bond Index: A broad-based benchmark that measures the investment-grade, US dollar–denominated, fixed-rate, taxable bond market, including USTreasuries, government-related and corporate securities, mortgage-backed securities (MBS [agency fixed-rate and hybrid ARM pass-throughs]), asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS).
Barclays US Corporate Bond Index: A broad-based benchmark that measures the investment-grade, US dollar–denominated, fixed-rate, taxable corporate bond market. Itincludes US dollar–denominated securities publicly issued by US and non-US industrial, utility and financial issuers that meet specified maturity, liquidity and quality requirements.
Barclays US Corporate High-Yield 2% Issuer Capped Bond Index: A component of the US Corporate High-Yield Bond Index, which covers the universe of fixed-rate, noninvestment-grade corporate debt of issuers in developed-market countries. It is not market-capitalization weighted—each issuer is capped at 2% of the index.
Barclays US Corporate High Yield Index: Represents the corporate component of the Barclays US High Yield Index.
Barclays US Corporate Investment Grade Index: Represents the performance of US corporate bonds within the US investment-grade fixed-rate bond market.
Barclays US Treasury Index: Includes fixed-rate, local-currency sovereign debt that makes up the US Treasury sector of the Global Aggregate Index. (Represents US government bonds on slide 2.)
HFRI Equity Hedge Total USD Index: HFRI Strategy Indices include all qualifying funds grouped according to their main strategy. Equity Hedge strategies maintain positions both long and short in primarily equity and equity derivative securities.
J.P. Morgan Emerging Markets Bond Index Global (EMBI Global): Tracks total returns for traded external debt instruments in the emerging markets, and is an expanded version of the J.P. Morgan EMBI+.
Morningstar US OE Large Blend Category: Contains portfolios that are fairly representative of the overall US stock market in size, growth rates and price. Stocks in the top 70% of the capitalization of the US equity market are defined as large-cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate.
29|CMO 4Q 2015
Index Definitions (continued)
Morningstar US OE Long/Short Equity Category: A collection of funds that hold sizable stakes in both long and short positions in equities and related derivatives. Some funds that fall into this category will shift their exposure to long and short positions depending on their macro outlook or the opportunities they uncover through bottom-up research.
MSCI EAFE Index: A free float–adjusted, market capitalization–weighted index designed to measure developed-market equity performance, excluding the US and Canada. It consists of 22 developed-market country indices. (Represents EAFE on slide 2.)
MSCI Emerging Markets Index: A free float–adjusted, market capitalization–weighted index designed to measure equity market performance in the global emerging markets. It consists of 21 emerging-market country indices. (Represents Emerging Markets on slide 2.)
MSCI World Index: A market capitalization–weighted index that measures the performance of stock markets in 24 countries.
Russell 2000 Index: Measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. (Represents US small-cap on slide 2.)
S&P 500 Index: Includes a representative sample of 500 leading companies in leading industries of the US economy. (Represents US large-cap on slide 2.)
MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices, any securities or financial products. This report is not approved, reviewed or produced by MSCI.
15-2121 GEN–6340–1015
Investors should consider the investment objectives, risks, charges and expenses of the Fund/Portfolio carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.AllianceBernstein Investments, Inc. (ABI) is the distributor of the AB family of mutual funds. ABI is a member of FINRA and is an affiliate of AllianceBernstein L.P., the manager of the funds.
The [A/B] logo is a service mark of AllianceBernstein and AllianceBernstein® is a registered trademark used by permission of the owner, AllianceBernstein L.P.
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