demystifying managed accounts - revised · u.s. dollar vs. major currencies historical analysis...

For financial representative use only. Not for inspection by, distribution or quotation to, the general public.

Demystifying Managed Accounts

Audie Apple, CIMAManaging Director

Separately Managed Accounts

There is no guarantee that any forecasts or opinions in this material will be realized. Information should not be construed as investment advice. For financial representative use only. Not for inspection by, distribution or quotation to, the general public.

AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.

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Agenda

Demystify Separately Managed Accounts

Position annuities as an attractive complement to managed accounts

Re-frame the annuity fee discussion


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Managed Accounts: Distinguishing Characteristics

You own shares in individual securities


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Individual capital gains or losses enables strategic tax-planning


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SMA Assets with Tax-Advantaged Accounts, 2Q 2005

Tax-Advantaged accounts

30%

Taxable accounts

70%

Source: Cerulli Associates

Average % of accounts requesting tax treatment 9%


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Customization—Client may place restrictions on certain investments


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Transparency


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Transparency

Sponsor firm due-diligence


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Transparency


Investment Limitations

International Equity – ADR’s only and no currency management


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ADR Mandates: Opportunity Set By Market Cap

74%4,589,5226,232,906Euro-Zone

35%670,1401,911,182Japan

Total

Emerging Markets

Other Developed

Markets

Canada

Country

64%6,706,38510,570,067

43%489,7141,138,941

54%379,467709,494

100%577,541577,541

% of Ordinary ShareUniverse Available

ADR MandateOrdinary Shares Market

Cap ($MM US)

* The data is representative of the MSCI- ACWI ex-United States. All Canadian companies are listed as trading in ADR format due to their general availability to US investors.


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ADR Mandates: Opportunity Set By Security

40%226566Euro-Zone

14%48344Japan

Total

Emerging Markets

Other Developed

Markets

Canada

Country

32%5981,891

28%170729

39%62160

100%9292

% of Ordinary ShareUniverse Available

ADR MandateNumber of Ordinary

Shares

* The data is representative of the MSCI- ACWI ex-United States. All Canadian companies are listed as trading in ADR format due to their general availability to US investors.


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Currency Moves Often Large and Sustained

U.S. Dollar vs. Major Currencies

Historical analysis does not guarantee future results.US trade-weighted index through February 28, 2006Source: Datastream, IMF and AllianceBernstein

40

60

80

100

120

140

160

180

80 83 86 89 92 95 98 01 05

Index

(44)%(24)%

+56%+40%

Dollar Appreciates

Dollar Declines


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Historical analysis does not guarantee future results.As of February 28, 2006All returns are in USDSource: Datastream, MSCI and AllianceBernstein

Currency: A Major Impact on Stock Returns

212%

125%86%

29%

Nov 78–Feb 85

Strong Dollar

Mar 85–Apr 95

Weak Dollar

May 95–Jan 02

Strong Dollar

Feb 02–Feb 06

Weak Dollar

MSCI-EAFE Hedged Returns

MSCI-EAFE Un-hedged Returns


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212%

125%86%

29%58%

10%

Nov 78–Feb 85

Strong Dollar

Mar 85–Apr 95

Weak Dollar

May 95–Jan 02

Strong Dollar

Feb 02–Feb 06

Weak Dollar




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212%

125%86%

29%58%

424%

10%68%

Nov 78–Feb 85

Strong Dollar

Mar 85–Apr 95

Weak Dollar

May 95–Jan 02

Strong Dollar

Feb 02–Feb 06

Weak Dollar




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Transparency




Fixed-Income – active management generally limited to yield curve management


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Decomposing the Sources of Fixed-Income Alpha

Sector40%

Security40%

Yield-Curve / Duration

20%


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ceActive Fixed-Income Management:An Example of Greater Opportunity = Greater Return…

As of December 31, 2005Past performance does not guarantee future results. See performance disclosure at the end of this presentation.*U.S. Strategic Core Plus performance is before fees and is represented by the Strategic Core Plus Composite. The Buy & Hold performance is represented by the Lehman Intermediate Government Index, which is an unmanaged portfolio of Treasury and agency securities. Time period reflects since inception of the U.S. Core Plus strategy, 6/30/01.**Maximum separate account fee; fee will vary depending on account size.

Average Rolling 5-Year Returns10 Years Ending June 2006

7.3%

6.4%

5%

6%

7%

8%Govt Bond Mgrs Core Plus Mgrs

High

Average

Low

PercentileRanking


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…with Similar Risk

As of December 31, 2005Past performance does not guarantee future results. See performance disclosure at the end of this presentation.*U.S. Strategic Core Plus performance is before fees and is represented by the Strategic Core Plus Composite. The Buy & Hold performance is represented by the Lehman Intermediate Government Index, which is an unmanaged portfolio of Treasury and agency securities. Time period reflects since inception of the U.S. Core Plus strategy, 6/30/01.**Maximum separate account fee; fee will vary depending on account size.

3.2% 3.3%

0%

2%

4%

6%

8%Govt Bond Mgrs Core Plus Mgrs

High

Average

Low

PercentileRanking

Average Rolling 5-Year Standard Deviation10 Years Ending June 2006


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Transparency




Fixed-Income – active management generally limited to yield curve management

“High” minimum makes it difficult to implement the ideal portfolio


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SMA Client Average Relationship Size

$869,858

$299,951

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

Average account size Average separate account relationship size

2.9 managers per client

Source: Cerulli Associates


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SMA Asset Allocation Shift

25%

12% 11% 10%

6%

13%

18% 20% 18%

30%

2001 2002 2003 2004 2Q 2005

Large Cap Value

Large Cap Growth

Source: Cerulli


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Performance Sells

82%67%International

68%43%LCV

83%64%LCC

86%89%LCG

Wirehouse #2Wirehouse #1Style

Percentage of Category Sales Directed to Top 3 Performing Products*

*Percentage of total ‘category’ sales directed to the 3 managers with the highest trailing 3-year performance.


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The Advisors’ Alpha

11.9%

2.0%

0.0%Market Return Manager

Selection

*Timeframe: 1985-2006, Market Return is S&P 500Source: Dalbar, 2006


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Manager Performance Is Mean Reverting

Performance Premium of 5-Star Managers

4.3%

-5.3%

Prior Three Years Next Three Years

85% of 5-Star Managers

Deteriorated

Past performance is no guarantee of future results.Source: Matthew Morey, 2005 “The Kiss of Death: A 5-Star Morningstar Mutual Fund Rating?” Pace University


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Even the Best Managers Experience Poor Performance

Rolling 1-Year Periods96%

85%76%

-5% -8% -10% or Worse

Top Quartile Managers Q2 1997- Q2 2006:Periods of Relative Underperformance versus S&P500

Past performance does not guarantee future results.

Source: PSN and Alliance Capital. Universe – Large-Cap domestic equity; 155 large cap managers whose 10 year average annualized performance ranked in the top quartile from July 1, 1995 – June 30, 2006 were analyzed.


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Success Stems from Surprisingly Low Batting Average

0 3%

53.9%

Single-Stock Return Distribution

% that Outperform


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Bernstein DDM Performance Decomposition

Source of Alpha

Batting Average 52.4% +120 b.p.

Contributionto Alpha

+295 b.p.

Decomposition of Bernstein DDM Performance Premium to S&P 500*

Slugging AverageWinners +28.0%Losers (22.0)

Total +415 b.p.

Past performance is no guarantee of future results.*1973–2002Batting average is percent of the cheapest quintile of stocks ranked by Bernstein dividend discount model that outperformed the S&P 500 in the next 12 months; slugging average is the premium to the S&P 500 of the winners and losers within the first quintile ranked by the DDM.Source: Center for Research in Security Prices and Bernstein


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11.9%

2.0%

3.9%

Market Return ManagerSelection

Investor Return



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11.9%

2.0%

3.9%

10.0%

Market Return ManagerSelection

Investor Return Advisor AlphaOpportunity

Advisor Alpha Opportunity



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Data Frequency Distorts Perception

S&P 500 Index 2004 Calendar Year Return

10.6%

2004

Past performance is no guarantee of future results.Source: Standard & Poor’s


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S&P 500 Index 2004 Monthly Returns

1.8%1.4%

-1.5% -1.6%

1.4%1.9%

-3.3%

0.4%1.1%

1.5%

4.0%3.4%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Data Frequency Distorts Perception

Past performance is no guarantee of future results.Source: Standard & Poor’s


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Loss Aversion Distorts Asset Allocation

Annual Returns

Monthly Returns

Stock Allocation 41% 70%

Investors Receiving:

Source: National Bureau of Economic Research, A Survey of Behavioral Finance—Working Paper 9222 © 2002, Nicholas Barberis and Richard Thaler


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Loss Aversion Distorts Asset Allocation

Annual Returns

Monthly Returns


Frequency of Negative Reports 39% 14%

Investors Receiving:



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Eliminate Loss Aversion and Rational Choice Predominates


All Returns Inflated

Annual Returns

Monthly Returns



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Eliminate Loss Aversion and Rational Choice Predominates



All Returns Inflated

Annual Returns

Monthly Returns



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Asset Allocation Comparison

Forecast Returns

Bonds 5%

Stocks 10%

40/60 Portfolio 7%

70/30 Portfolio 8.5%

70/30 Portfolio less 1% 7.5%

Given an expected return advantage of stocks over bonds of 5%, the expected portfolio return increases by 50 bps for each additional 10% allocated to stocks

Source: AllianceBernstein, 2006


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Investor Fee and Compensation Analysis

1.99% 2.35%

SMA SMA/VA Blend

$870,000 Account20% SMA Fee Discount

*Effective Fee represents the fee based on the average account balance during the first year initially funded with $870,000. Annuity fees are assumed to be 3%

**Advisor compensation represents the cumulative compensation over 4 years assuming 40% advisor payout for both the SMA and the annuity. Annuity compensation is 2.5% of the initial amount funded to the annuity plus .80% trail on the average account balance in years 1 through 4.

$21,446$22,316

SMA SMA/VA Blend

Advisor Compensation**Effective Client Fee*

Note: SMA/VA Blend represents an 80% allocation to the SMA account and 20% allocation to the L-Share Variable Annuity


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Summary

Few SMA investors actually benefit from the ability to customize their portfolio or implement tax-oriented trading strategies

SMA investors exhibit the same wealth-destroying behaviors as mutual fund investors

VA expenses should be framed in the terms of the cost of Investor timing decisions – not versus manager alpha

Variable Annuities are an effective complement to an SMA portfolio encouraging more appropriate asset allocation and…

…improving the chance investors “stay the course”


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The Capital Gains Objection

Source: Citizens for Tax Justice, May 2004

Capital Gains Rates Have Changed 16 times in the last 40 years

1966

1969

1970

19711981

19791976

1982

1987

1988

1991

1972

1997

1993

2003

2006

28%39.9%

36.5%

34.3%

32.3%

27.5%

26.9%

29.2%

28.9%

33%

28%

20%

23.7%

15.7%

16.1%

21.2%

demystifying managed accounts - revised · u.s. dollar vs. major currencies historical analysis...

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