capital markets outlook - alliancebernstein · capital markets outlook first quarter 2016 are not...
TRANSCRIPT
CAPITAL MARKETS OUTLOOK
First Quarter 2016
● Are Not FDIC Insured ● May Lose Value ● Are Not Bank Guaranteed
The information herein reflects prevailing market conditions and our judgments, which are subject to change, as of the date of this document. 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 that 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.
Investment Products Offered:
1 | CMO 1Q 2016
Current assessment does not guarantee future results. As of December 31, 2015 Source: AB
The Big Picture
Moderate global economic growth should accelerate in 2016
US, other developed economies still on solid footing; emerging world faces challenges
After the Beta Trade theme seems to be playing out, with higher volatility and muted returns
Key recent volatility drivers include concerns about oil, China and rising US rates
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 1Q 2016
Neither past nor forecast performance is a guarantee of future results. Trailing returns as of June 30, 2015. Current yields as of December 31, 2015. Median forecast based on proprietary AB forecasts as of September 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). 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. Median forecast based on proprietary AB forecasts. Source: Barclays, FactSet, Lipper, MSCI, Standard & Poor’s (S&P) and AB
Lower Expected Returns… Outlook for Returns (Percent)
The Great Beta Trade Is Likely Over
…Result in An Inconvenient Beta Truth Expected Returns for a 60/40 Blend
Expected Return 4%–5%
Standard Deviation
Inflation and Taxes ??
Bonds 40%
Stocks 60%
2.1 2.6
8.7
6.2 7.7 4.5
3.4
8.6
17.3
10.0
USMunis
US IGBonds
US HYBonds
USEquities
DevelopedInt'l Equities
Past Five-Year Average Return
Fixed-Income Yield to Worst/Five-Year Equity Median Forecast
3 | CMO 1Q 2016
Past performance does not guarantee future results. As of December 31, 2015 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, JP Morgan, Morningstar, MSCI, S&P Dow Jones and AB
Returns in US Dollars
–0.1 –0.4
1.6
0.6 1.3
–0.9 1.5
0.1 1.0
–2.1
0.7 4.7
3.6 7.0
Market Returns Didn’t Move the Needle Much in 2015…
Equities
Government Bonds
Credit
Alternatives†
2015 Returns (Percent) 4Q:2015 Returns (Percent)
Japan
US High Yield
US
Euro Area
Emerging-Market Debt
Long/Short Equity
Multialternative Nontraditional Bond
Global Corporate
EAFE*
US Large-Cap
Emerging Markets
US Small-Cap
–2.6 –1.5 –2.1
1.8 1.7
0.8 3.3
–0.2 1.3
–4.5
–14.9 –0.8
–4.4 1.4
Municipals
4 | CMO 1Q 2016
Historical/current analysis and forecasts do not guarantee future results. Through December 31, 2015 Source: S&P, Barclays, Morningstar and AB
…but Were Volatile Along the Way
Equity Markets Saw Big Moves During the Year Number of Days Market Moved +/-1.5% or Greater
Despite a Lot of Movement, Markets Didn’t Advance Much Price Level of S&P 500
1,800
1,850
1,900
1,950
2,000
2,050
2,100
2,150
Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15
6
4
2 2
1
2
6
1
2
9
4
1
13
7
3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15
Three-Year Average
5 | CMO 1Q 2016
Left chart as of October 15, 2015; right chart as of January 6, 2016 *Excluding Construction 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 fees and expenses associated with the active management of a portfolio. Source: CEIC Data and AB
China, Oil, US Interest Rate Concerns Kept Investors on Edge
Commodity Prices Plunge Bloomberg Commodity Index
China’s Economy Rebalances GDP by Sector (Share)
30
32
34
36
38
40
42
44
46
48
50
90 92 94 96 98 00 02 04 06 08 10 12 14
Perc
ent
Secondary (Industry) Sector*
Tertiary (Services) Sector
60
70
80
90
100
110
120
130
140
Dec 13 Jun 14 Dec 14 Jun 15 Dec 15
USD
6 | CMO 1Q 2016
Country/ Region
GDP (%) Inflation (%) Expected
Policy Rate Path
FX Change (%)
FX
Forecast (%) The Latest 2015 2016 2015 2016
Global 2.6 2.9 1.6 2.2 — — — Moderate acceleration in global growth in 2016—but the pace isn’t uniform regionally
Developed Countries 1.9 2.4 0.3 1.5 —
—
—
Developed-market growth is expected to improve, with strongest growth in the US
Emerging Countries 3.6 3.9 3.9 3.4 —
—
—
Growth challenged by commodities, geopolitical risk and policy risk
US 2.6 3.2 0.1 2.3 — — Fed hiking cycle to continue, slowly, amid improving domestic conditions
UK 2.2 2.4 0.0 1.0 –5.4 –4.8 Solid growth, possible rate hikes, political noise
Euro Area 1.5 1.7 0.0 0.9 –10.2 –3.0 Expect more monetary easing in 2016
Japan 0.8 1.6 0.8 0.7 –0.4 -0.5 Bank of Japan to hold steady as growth and inflation improve
China 6.8 6.3 1.4 1.6 –4.4 –0.3 More policy stimulus as weak “old economy” sectors weigh on growth
Brazil –3.6 -2.6 9.3 8.4 –32.9 -2.3 Continued fiscal, political and monetary struggles
As of January 1, 2016 GDP 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 twelve months vs. US dollar; FX forecast is AB economists’ return projections for next six months vs. US dollar. Source: AB
Moderate Global Economic Growth Should Accelerate in 2016
7 | CMO 1Q 2016
Former Headwinds Beginning to Support US Recovery?
Public Spending Drag Could Be Over YoY Percent Change in Gov’t Spending
Big Potential Impact to US Economy Consumer Loans Rebounding YoY Percent Change in Household Loans
Through December 31, 2014 Source: Bureau of Economic Analysis, Haver Analytics and US Federal Reserve Board
1% Increase in…
= X% Change in Nominal
GDP Future Outlook
Government Spending 1.0%
Given recent congressional agreements, estimated increase of 200 b.p. in 2016—the largest acceleration since 1999
Household Borrowing
0.6%
Increase of 200 b.p. in 2016 if households resume borrowing proportionately to underlying income growth
–4
–2
0
2
4
6
8
10
12
14
60 66 72 78 84 90 96 02 08 14–5
0
5
10
15
20
60 66 72 78 84 90 96 02 08 14
8 | CMO 1Q 2016
Volatility Likely as Gap Between Fed and Market Narrows Fed vs. Market Rate Expectations (%)
Historical analysis and current forecasts do not guarantee future results. Left-hand chart updated as of January 6, 2016 *Long-run expectations by the market as of 9/30 are defined as expectations for the official rates on September 30, 2019. Long-run expectations by the market as of 12/31 are defined as expectations for the official rates on January 6, 2020. Long-run expectations by the FOMC are defined as expectations for the official rates on December 16, 2019. †Basis point (b.p.): a unit equal to 1/100th of 1%, used to denote the change in a financial instrument 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 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: Barclays, Bloomberg, MSCI, S&P, US Federal Reserve and AB
Long Run
As Fed Hikes Interest Rates, What Should We Expect?
Bonds Fared Pretty Well in Last Fed Rate-Hike Cycle
The Fed Historically Has Had Less Impact on Long Rates
Jun 30, 2004–Jun 30, 2006
Change in Yields (b.p.)†
Annualized Return (%)
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 — +6.83
MSCI World — +13.44
Periods of Rising Rates
Fed Funds Rate
Change
10-Yr US Treasury
Yield Change
Number of Months
Apr 83–Aug 84 +3.25% +2.15% 16
Nov 86–Feb 89 +3.88 +1.97 27
Feb 94–Feb 95 +3.00 +1.56 12
May 99–May 00 +1.75 +0.92 12
Jun 04– Jun 06 +4.25 +0.49 25
0
1
2
3
4
2015 2016 2017 2018
Fed Funds Median
Market Expectations*
9/30
FOMC Member Expectations*
Market Expectations
12/31*
9 | CMO 1Q 2016
Left display as of November 11, 2015; Right display as of December 31, 2015 *EM Local Currency Bond ETF is represented by the Market Vectors JP Morgan EM Local Currency Bond ETF Source: Barclays, Bloomberg and AB
Riskier Assets Have Seen a Selloff EM and CCC Corporate Values
The US Fed Has Eased Off the Gas Pedal 12 Month Percent Change in Fed Balance Sheet
Market Has Already Made Adjustments to Less Accommodative Policy
15
18
21
24
27
30
70
78
86
94
102
110
2012 2013 2014 2015
NAV
of EM
ETF P
rice
of C
CC
–6
0
6
12
18
24
30
36
42
2012 2013 2014 2015
Per
cent
Cha
nge
Average CCC Corporate High Yield Bond Price
EM Local Currency Bond ETF*
10 | CMO 1Q 2016
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. 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 fees and expenses associated with the active management of a portfolio. Source: Bank of America Merrill Lynch, Barclays and AB
Option-Adjusted Spreads: December 31, 2012 to December 31, 2015 Credit: After Recent Volatility, Valuations Are More Attractive
660 583
417
654
1,351
165 220
536 460
237 208 134
460
0
200
400
600
800
1,000
1,200
1,400
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 Yield Investment-Grade
Corporate Securitized Emerging-
Market Debt European
Credit
Current Spread
Low
Basi
s Po
ints
High
11 | CMO 1Q 2016
Historical analysis does not guarantee future results. Left display as of December 31, 2015; upper right display as of September 30, 2015; lower right display as of September 30, 2015 Source: Barclays, Bloomberg, Morgan Stanley and S&P Capital IQ
High-Yield Returns More Like 2002 Than 2008 High-Yield Sector Returns
Credit: High Yield Challenged, but Opportunities Exist
Leverage Has Increased… High-Yield Gross Leverage
3.0
3.3
3.6
3.9
4.2
4.5
04 06 08 10 12 14
Rat
io (×
)
…But Has Been More Organic than Financially Engineered Leveraged Buyout (LBO) Volumes
0
150
300
450
04 05 06 07 08 09 10 11 12 13 14 15U
SD B
illion
s
2002 2008 2015
US High Yield Corporates –1.4 –26.2 –4.5
Basic Industry 7.6 –33.6 –17.6
Capital Goods 15.6 –19.3 0.1
Communications –19.9 –28.9 –1.7
Consumer Cyclical 11.0 –32.5 1.7
Consumer Non-Cyclical 6.2 –13.7 2.1
Energy 8.2 –26.3 –23.5
Financial Institutions 5.7 –26.3 2.4
Technology –2.3 –34.9 0.7
Transportation –17.9 –29.5 –0.5
Utility –13.2 –16.7 –5.2
12 | CMO 1Q 2016
Liquidity Environment Presents Risks and Opportunities
Historical analysis does not guarantee future results. Left display through December 31, 2014; middle display through May 1, 2014 Source: 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
Liquidity Management
Tools
Research on Multiple Time
Horizons
Broad Multi-Sector Approach
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
Contrarian Investment Strategies
Enhanced Trading
Infrastructure
Private Credit
Opportunities
13 | CMO 1Q 2016
Percent Rates: As US Policy Shifts, Time to Look Globally
No Country Always Wins Global Bond Returns Hedged to USD*
Gap between best and worst
Current analysis does not guarantee future results. As of December 31, 2015 *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 AB portfolio. The unmanaged index does not reflect fees and expenses associated with the active management of a portfolio. **Credit rating is represented by the Barclays methodology. 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
Currency Hedging Can Make Low Yielding Bonds More Attractive
Global Outperforms When US Falls Up vs. Down Capture March 1990–December 2015
2.3
–0.9
2.2
–0.7
Average QuarterlyReturn When
US Aggregate IndexWas Positive
Average Quarterly Return When
US Aggregate IndexWas Negative
US Aggregate Index Global Aggregate Index
Up Capture: 96% Down Capture: 70%
2011 2012 2013 2014 2015
UK 16.1
Euro Area 11.2
Euro Area 2.5
UK 14.2
Canada 2.8
US 9.8
UK 2.4
Japan 2.3
Euro Area 13.1
Euro Area 1.8
Australia 8.9
Japan 2.2
Australia –2.4
Australia 8.3
Japan 1.7
Canada 8.3
US 2.0
US –2.8
Canada 6.5
US 0.8
Japan 2.6
Australia 1.4
Canada –3.1
US 5.1
Australia 0.1
Euro Area 2.6
Canada 1.4
UK –4.4
Japan 4.7
UK -0.3
13.5 9.8 6.9 9.5 3.1
Best Performer
Worst Performer
10-Year Bond Yield
10-Year Yield
(Hedged) Credit
Rating**
Australia 2.89 1.07 AAA
US 2.27 2.27 AAA
Canada 1.40 1.47 AAA
Germany 0.63 1.49 AAA
New Zealand 3.58 1.29 AA+
UK 1.96 2.05 AA+
France 0.99 1.85 AA+
Japan 0.26 1.04 A+
Spain 1.77 2.63 BBB
Italy 1.59 2.45 BBB
Portugal 2.5 3.36 BB
14 | CMO 1Q 2016
Current analysis does not guarantee future results. For illustrative purposes only. As of December 31, 2015 *Represents the median exposure of 474 factor regression analyses on advisors’ portfolios surveyed by AB over the period from March 1, 2015, to December 31, 2015 The 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 Credit Median Exposure to Key Risk Factors*
A Balance of Rates and Credit Is Optimal
Credit Is Somewhat More Attractive, but Balance Remains Critical
Rates 27.4%
Credit 65.3%
Volatility 5.5%
Rates
Globalize and hedge currency
Position along the yield curve: take advantage of roll
Credit
Be selective
Avoid stretching for yield
Loans
CCC-rated bonds
Diversify across sectors
Manage Liquidity
15 | CMO 1Q 2016
Historical analysis does not guarantee future results. As of December 31, 2015 Nominal 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. *Roll is the natural price gain that a bond experiences as it ages, assuming interest rates are unchanged. Yield advantage shown is for 10-year municipal securities. Credit rating is a measure of the quality and safety of a bond or portfolio, based on the issuer’s financial condition and not of the fund itself. AAA is highest (best) and D is lowest (worst). Investment grade securities are those rated BBB and above. Ratings are subject to change. Source: Barclays, Investment Company Institute, JP Morgan, Municipal Market Data, US Federal Reserve and AB
Muni Credit Continues to Offer Value Yield Advantage of BBB-Rated Debt over AAA-Rated Debt
Positioning Along the Yield Curve Matters Roll Plus Yield (Percent)
1.0 1.6
2.2 2.3 2.5 2.9 3.1 3.4
0.4
0.7
1.0 1.2 1.1 0.5
0.4 0.1
Maturity (Years)
Municipals: Still Attractive, but Positioning Matters
A-Rated Municipal Roll* A-Rated Municipal Yield
30 20 5 8 9 10 15 2
0
1
2
3
4
87 91 95 99 03 07 11 15
Per
cent
Dec 31, 2015: 0.95%
Apr 1, 2009: 3.5%
Jun 30, 2007: 0.4%
16 | CMO 1Q 2016
Municipals: Buoyed by Supportive Technicals and Strong Fundamentals
Past performance and current analysis do not guarantee future results. As of December 31, 2015 Source: Bloomberg, Federal Flow of Funds, J.P. Morgan, Moody’s, Municipal Market Data, SIFMA and AB
Credit Fundamentals Continue to Strengthen GDP and State and Local Tax Revenue
Net Issuance Remains Negative Change in Net Municipal Supply (Net Issuance—Billions)
–10
–5
0
5
10
15
20
80 83 86 89 92 95 98 01 04 07 10 13Pe
rcen
t
GDP
$168.3
$212.6
$92.4
$155.3
$99.6
–$52.7
–$5.0
–$43.2 –$40.2
–$15.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Tax Revenue
17 | CMO 1Q 2016
Not All Sectors Perform the Same Sector Relative Returns During Taper Tantrum (Percent)‡
Low-Inflation Environment Supports Current Valuations Average S&P 500 P/FE by YoY CPI†
Past performance and historical analysis do not guarantee future results. Not all sectors perform the same. As of December 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 September 30, 2015 ‡Annualized returns relative to the S&P 500 from July 31, 2012 to December 31, 2013 Source: 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
Six MonthsPrior
First SixMonths After
NextSix Months
Year After Increase
15.2×
16.7× 15.8×
11.6×
8.1×
–2–0% 0–2% 2–4% 4–6% 6–14% –23.4
–21.5
–10.3
3.4
5.3
7.7
Industrial Commodities
Financials
Consumer Discretionary
Utilities
December 31, 2015: 16.8×
Telecom
Consumer Staples
18 | CMO 1Q 2016
Equity Returns Are Driven by Different Factors over Time S&P 500 Returns: Attribution by Source (Percent)
Price Return
Income Return
Past performance and current forecasts do not guarantee future results. Left as of September 30, 2015; Right as of December 31, 2015 *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 starting January 1, 1995, 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. 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 fees and expenses associated with the active management of a portfolio. Numbers may not sum due to rounding. Source: Morningstar, S&P Dow Jones and AB
Equity Returns Will Likely Be Modest, but Active Management Can Help
2.3
18.7
3.9
16.4 2.0 3.2
5.1
13.7
–4.3
Earnings Growth
Dividends
Valuation Change
Jun 2009– Jun 2012
Jul 2012– Dec 2014
Median Forecast* Sept 2015– Sept 2020
22.0
6.2
Active Management Likely Poised to Outperform Relative Return (Percent)†
P/E Compression
P/E Expansion
Market Up +0.8% –2.5%
Market Down +2.9% +2.5%
Environment for Recent Bull Market
19 | CMO 1Q 2016
It’s Challenging for Companies to Find Growth Today
Historical analysis does not guarantee future results. Left display as of December 31, 2015; right display as of November 12, 2015 *Based on 457 of 502 companies reporting earnings for the third quarter of 2015. Forecasted sales per share based on Bloomberg reported consensus. 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. Source: Bloomberg, Center for Research Security Prices, FactSet, Russell, S&P Compustat, S&P Dow Jones and AB
S&P 500 Revenue Growth Is Generally Slowing… S&P 500 Trailing 12 Month Sales per Share
600
700
800
900
1,000
1,100
1,200
2000 2003 2006 2009 2012 2015
US
D
… and Half of the Index Has Negative Revenue Growth S&P 500 (Percent of Companies Reporting)*
22.0%
27.0%
33.0%
18.0%
–10%+
0% to –10%
0% to 10%
>10%
Rev
enue
Gro
wth
20 | CMO 1Q 2016
Firms That Can Grow Are Poised to Lead—and They’re Cheap
Persistent Growth Is Inexpensive Today Relative Price/Forward Earnings of High-Persistent-Return Growth Stocks vs. Market†
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
Historical analysis does not guarantee future results. Left display as of December 31, 2015; right display as of November 30, 2015 *Universe consists of the top 1,000 companies by market cap each year from 1979 to 2015, 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
Sustainable Growth Is Uncommon, but Rewarding Top 1,000 Companies with Earnings Growth Rates ≥10%*
350
77
22
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 YearsExcess (Percent)
Num
ber o
f Com
pani
es
0.9%
1.2%
2.7%
Number of Companies (Left Scale) Annualized
Excess Returns vs. S&P 500
21 | CMO 1Q 2016
Not an Abnormally Narrow Equity Market Top 10 Stocks as% of S&P 500 After Narrow Breadth*
Concentrated Market Doesn’t Mean Downturn Ahead 12-Month Return After Narrow Breadth*
Narrow Breadth Masked Dispersion, Need for Active†
Growth of $100
2015’s Narrow Equity Market in Perspective
Historical analysis does not guarantee future results. As of December 31, 2015 *The Goldman Sachs Breadth Index uses the S&P500 constituent weights and the 6-month returns to create this proprietary Index, which ranges from 0 to 100. Readings below 5 indicate especially narrow breadth, and the market average market breadth is 35. Based on 11 previous periods of especially narrow breadth between December 31, 1986–December 31, 2015. †Based on the top 10 largest stocks in the S&P 500 by market cap as of December 31, 2015. Source: FactSet, Goldman Sachs Global Investment Research, S&P Compustat, S&P Dow Jones and AB
15
20
25
30
Dec, 31, 2015: 19%
–40
50
Median: 8%
90
95
100
105
110
115
Jan15
Feb15
Mar15
Apr15
May15
Jun15
Jul15
Aug15
Sep15
Oct15
Nov15
Dec15
USD
0
Top 10: Apple Johnson & Johnson Google Amazon.com Microsoft Wells Fargo ExxonMobil Berkshire Hathaway GE JPMorgan Chase
S&P 500
Top 10
“S&P 490”
22 | CMO 1Q 2016
High-Conviction Strategies Have Outperformed Passive Factors Annualized Relative Performance vs. S&P 500, January 2004–December 2014
Higher-Conviction Equity Strategies Can Make a Big Difference
Even a Little Alpha Can Go a Long Way By 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%
1.9% 1.6%
2.0%
2.4%
3.0%
0.0%
–0.3%
0.6% 0.7%
1.4%
Dividend Yield Value Quality Low Beta Momentum
Active High-Conviction Strategy Passive Factor Index Strategy
Past performance does not guarantee future results. As of December 31, 2015 Using data from Style Research, high-conviction strategies are defined as the top 20% of managers who consistently display a high-conviction characteristic in the eVestment US Large Cap Equity universe. Within each high-conviction category universe, the representative performance of skilled high-conviction strategies is the average of all managers whose performance is greater than that of the median manager over the period in which they reported. Monthly outlier returns are capped at the fifth percentile. A manager may be classified in more than one category. These numbers do not represent the performance history of any AB-managed product, but do include AB services if they meet the criteria of one of the universes. Factor index performance represents the returns of the MSCI indices—dividend yield: MSCI USA High Dividend Yield; value: MSCI USA Value; quality: MSCI USA Quality; low beta: MSCI USA Minimum Volatility; momentum: MSCI USA Momentum. These indices may not be investable and do not take into account transaction costs. Source: eVestment, MSCI, S&P, Style Research and AB
23 | CMO 1Q 2016
Percent
Downside Protection in Declining Equity Markets… Cumulative Returns
Past performance does not guarantee future results. Left display: January 1, 2000 through September 30, 2015; right display as of December 31, 2015 Alternatives represented by HFRI Fund Weighted Composite, stocks by MSCI World NR; bonds by Barclays US Aggregate Bond. 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 fees and expenses associated with the active management of a portfolio. Source: Barclays, Hedge Fund Research, MSCI and AB
Alternatives: Downside Protection in 2015—But Mind the Dispersion
Higher-Than-Normal Dispersion Today Annualized Return Dispersion
…with Lower Volatility Than Traditional Assets Standard Deviation
–4.7 –2.3 –1.2 –1.3
–8.4 –6.0
–2.5 –1.6
2015 MaxDrawdown
August 2015 Return September 2015Return
December 2015Return
Multialternative S&P 500
1.4 2.2 4.1
6.4 8.5
13.7
MarketNeutral
NontraditionalBond
Multi-alternative
Long/ShortEquity
ManagedFutures
S&P500
1.8
5.9 4.0
5.7
10.7
4.1
13.5 11.4
15.3
26.2
IntermediateTerm Bond
LargeCap Blend
NontraditionalBond
Multi-alternative
Long/ShortEquity
Three Years July–December
Traditional Asset Classes Alternative Asset Classes
24 | CMO 1Q 2016
Prescription Within Asset Classes
Equities: Be Active
Be Concentrated
Seek downside protection
Maintain overweight to developed markets
Fixed Income: Be Balanced
Rates: Combine Global Core and US Core
Manage yield curves/positioning
Hedge currencies
Credit: Use Global Multi-Sector
Avoid crowded trades
Manage Liquidity Risk
Alternatives: Be Selective
Focus on relative value strategies
Focus on strong up/down capture structures/approaches
Contrarian’s Corner: If the Economy… Grows Faster-than-Expected
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
Grows Slower-than-Expected
Equities: emphasize income and quality attributes
Fixed Income: tilt more toward interest rates and remain global
Current analysis does not guarantee future results. As of December 31, 2015 Source: AB
Putting It All Together: Strategy for Moderate Growth, Low Inflation
Return Seeking
Risk Reducing Risk Reducing
Return Seeking
Fixed Income Equities
Alternatives
25 | CMO 1Q 2016
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 of the 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.
26 | CMO 1Q 2016
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 3.)
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 3.)
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 3.)
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 3.)
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.
27 | CMO 1Q 2016
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 3.)
Barclays US Aggregate Bond Index: A broad-based benchmark that measures the investment-grade, US dollar–denominated, fixed-rate, taxable bond market, including US Treasuries, 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. It includes 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.)
Bloomberg Commodities Index (formerly Dow Jones-UBS Commodity Index): Designed to be a highly liquid and diversified benchmark for commodities investment.
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.
28 | CMO 1Q 2016
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 3.)
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 3.)
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 3.)
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 3.)
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.
29 | CMO 1Q 2016
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. © 2016 AllianceBernstein L.P. www.abglobal.com 16-0037