Dec 31, 2015 - Barclays US Aggregate Index, Barclays US High Yield Index, S&P 500 Index, ... Standard Deviation. Inf
First Quarter 2016
CAPITAL MARKETS OUTLOOK
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:
● Are Not FDIC Insured
● May Lose Value
● Are Not Bank Guaranteed
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
Current assessment does not guarantee future results. As of December 31, 2015 Source: AB
CMO 1Q 2016
|
1
The Great Beta Trade Is Likely Over
Lower Expected Returns… Outlook for Returns (Percent)
…Result in An Inconvenient Beta Truth Expected Returns for a 60/40 Blend 17.3
Bonds 40%
10.0 8.6
Stocks 60%
8.7
7.7
4.5 3.4
2.1
2.6
US Munis
US IG Bonds
6.2
US HY Bonds
US Equities
Developed Int'l Equities
Fixed-Income Yield to Worst/Five-Year Equity Median Forecast Past Five-Year Average Return
Expected Return
4%–5%
Standard Deviation Inflation and Taxes
??
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
CMO 1Q 2016
|
2
Market Returns Didn’t Move the Needle Much in 2015… Returns in US Dollars 4Q:2015 Returns (Percent)
Equities
Credit
US Large-Cap US Small-Cap EAFE* Emerging Markets US High Yield Emerging-Market Debt Global Corporate
Government Bonds
Municipals US Japan Euro Area
Alternatives†
Long/Short Equity Nontraditional Bond Multialternative
7.0 3.6 4.7 0.7 –2.1
2015 Returns (Percent) 1.4 –4.4 –0.8 –14.9 –4.5
1.0 0.1
1.3 –0.2
1.5
3.3 0.8 1.7 1.8
–0.9 1.3 0.6 1.6 –0.4 –0.1
–2.1 –1.5 –2.6
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
CMO 1Q 2016
|
3
…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 2,150 13 2,100
2,050 9 2,000 7
Three-Year Average
6
6
1,950 4
4 2
2
2
2
1
3Q12
1Q13
3Q13
1,900
1
1Q14
1,850
1
3Q14
1Q15
3Q15
1,800 Dec 14
Feb 15
Apr 15
Jun 15
Aug 15
Oct 15
Dec 15
Historical/current analysis and forecasts do not guarantee future results. Through December 31, 2015 Source: S&P, Barclays, Morningstar and AB
CMO 1Q 2016
|
4
China, Oil, US Interest Rate Concerns Kept Investors on Edge China’s Economy Rebalances GDP by Sector (Share)
Commodity Prices Plunge Bloomberg Commodity Index
50
140
48
130
Tertiary (Services) Sector
46
120 110
42 USD
Percent
44
40 38
100 90
36
Secondary (Industry) Sector*
80
34
70
32 30 90
92
94
96
98
00
02
04
06
08
10
12
14
60 Dec 13
Jun 14
Dec 14
Jun 15
Dec 15
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
CMO 1Q 2016
|
5
Moderate Global Economic Growth Should Accelerate in 2016 GDP (%)
Inflation (%)
2015
2016
2015
2016
Expected Policy Rate Path
Global
2.6
2.9
1.6
2.2
—
—
—
Developed Countries
1.9
—
—
—
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
–32.9
-2.3
Continued fiscal, political and monetary struggles
Country/ Region
2.4
0.3
1.5
8.4
FX Change (%)
FX Forecast (%)
The Latest Moderate acceleration in global growth in 2016—but the pace isn’t uniform regionally
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
CMO 1Q 2016
|
6
Former Headwinds Beginning to Support US Recovery? Public Spending Drag Could Be Over YoY Percent Change in Gov’t Spending
Consumer Loans Rebounding YoY Percent Change in Household Loans 20
14
Big Potential Impact to US Economy
1% Increase in…
= X% Change in Nominal Future Outlook GDP
12 15
10
Government Spending
8 10
1.0%
6 4
Given recent congressional agreements, estimated increase of 200 b.p. in 2016—the largest acceleration since 1999
5 2 0
0
Household Borrowing
–2 –5
–4 60 66 72 78 84 90 96 02 08 14
60 66 72 78 84 90 96 02 08 14
0.6%
Increase of 200 b.p. in 2016 if households resume borrowing proportionately to underlying income growth
Through December 31, 2014 Source: Bureau of Economic Analysis, Haver Analytics and US Federal Reserve Board
CMO 1Q 2016
|
7
As Fed Hikes Interest Rates, What Should We Expect? Volatility Likely as Gap Between Fed and Market Narrows Fed vs. Market Rate Expectations (%) 4
FOMC Member Expectations* 3
2
10-Yr US Treasury Yield Change
Jun 30, 2004–Jun 30, 2006
+425
—
10-Year US Treasury
+52
+1.66
10-Year AAA Municipal
+19
+3.61
US Aggregate Index
+115
+2.93
+58
+7.79
10-Year BBB Municipal
–4
+5.22
S&P 500
—
+6.83
MSCI World
—
+13.44
Fed Funds Rate
Apr 83– Aug 84
+3.25%
Nov 86– Feb 89
+3.88
+1.97
27
Feb 94– Feb 95
+3.00
+1.56
12
+2.15%
16
Market Expectations* 9/30
High Yield
Change in Annualized Yields (b.p.)† Return (%)
Number of Months
1
Fed Periods of Funds Rising Rate Rates Change
Bonds Fared Pretty Well in Last Fed Rate-Hike Cycle
Fed Funds Median
0
The Fed Historically Has Had Less Impact on Long Rates
Market Expectations 12/31*
May 99– May 00
+1.75
+0.92
12
Jun 04– Jun 06
+4.25
+0.49
25
2015
2016
2017
2018
Long Run
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
CMO 1Q 2016
|
8
Market Has Already Made Adjustments to Less Accommodative Policy The US Fed Has Eased Off the Gas Pedal 12 Month Percent Change in Fed Balance Sheet
Riskier Assets Have Seen a Selloff EM and CCC Corporate Values 110
42
30
Average CCC Corporate High Yield Bond Price
36
27
102
Price of CCC
24 18 12
24
94
21
86 EM Local Currency Bond ETF*
NAV of EM ETF
Percent Change
30
6 18
78 0 –6 2012
2013
2014
2015
70 2012
2013
2014
2015
15
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
CMO 1Q 2016
|
9
Credit: After Recent Volatility, Valuations Are More Attractive Option-Adjusted Spreads: December 31, 2012 to December 31, 2015
Investment-Grade Corporate
US High Yield 1,400
Current Spread
EmergingMarket Debt
Securitized
European Credit
1,351
1,200
Basis Points
1,000 800 600
660
654 583
536 460
417
400 200
High
165
460 237
220
208 134
Low 0 US Corp HY
US Corp US Corp HY HY BB ex Energy
HY B
HY CCC
US Corp IG
US Corp IG BBB
BBB CMBS
CRT
EM Corp IG
EM Sov IG
EUR Corp IG
EUR HY
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
CMO 1Q 2016
| 10
Credit: High Yield Challenged, but Opportunities Exist High-Yield Returns More Like 2002 Than 2008 High-Yield Sector Returns
Leverage Has Increased… High-Yield Gross Leverage
2008
2015
4.5
–1.4
–26.2
–4.5
4.2
Basic Industry
7.6
–33.6
–17.6
Capital Goods
15.6
–19.3
0.1
–19.9
–28.9
–1.7
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
–2.3
–34.9
0.7
Transportation
–17.9
–29.5
–0.5
Utility
–13.2
–16.7
–5.2
US High Yield Corporates
Communications
Ratio (×)
2002
3.9 3.6 3.3 3.0
Technology
04
06
08
10
12
14
…But Has Been More Organic than Financially Engineered Leveraged Buyout (LBO) Volumes USD Billions
Consumer Cyclical
450 300 150 0 04
05
06
07
08
09
10
11
12
13
14
15
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
CMO 1Q 2016
| 11
Credit: Liquidity Risk Is High, but Investors Can Manage It Liquidity Is Challenged as Market Grows but Trading Declines… US High-Yield Corporates
1,800
200
1,500
180
…and Individual Investors Reach for Yield Individual Investor Share of US HighYield AUM
Manage Risks
24
900
140
600
120
Percent
160 Percent
USD Billions
22 1,200
100 80
0
Liquidity Management Tools
Research on Multiple Time Horizons
Contrarian Investment Strategies
Enhanced Trading Infrastructure
Private Credit Opportunities
16
05 06 07 08 09 10 11 12 13 14 Volume Traded (Left Scale) Market Size (Left Scale) Turnover
Broad Multi-Sector Approach
20
18 300
Liquidity Environment Presents Risks and Opportunities
Create Opportunities 14 06
07
08
09
10
11
12
13
14
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
CMO 1Q 2016
| 12
Rates: As US Policy Shifts, Time to Look Globally Percent No Country Always Wins Global Bond Returns Hedged to USD* 2011
2012
2013
2014
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
Up Capture: 96% Down Capture: 70%
Best Performer
2.3
Australia Japan 8.9 2.2
Australia Australia Japan –2.4 8.3 1.7
Canada US 8.3 2.0
US –2.8
2.2
Canada US 6.5 0.8
Australia Canada US 1.4 –3.1 5.1
Australia 0.1
–0.7 –0.9
Euro Area 2.6
Canada UK 1.4 –4.4
Japan 4.7
UK -0.3
13.5
9.8
9.5
3.1
6.9
Gap between best and worst
Currency Hedging Can Make Low Yielding Bonds More Attractive 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
2015
UK 16.1
Japan 2.6
Global Outperforms When US Falls Up vs. Down Capture March 1990–December 2015
Worst Performer
Average Quarterly Return When US Aggregate Index Was Positive
US Aggregate Index
Average Quarterly Return When US Aggregate Index Was Negative
Global Aggregate Index
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 CMO 1Q 2016
| 13
Credit Is Somewhat More Attractive, but Balance Remains Critical A Balance of Rates and Credit Is Optimal
Rates
Credit
Globalize and hedge currency
Be selective
Position along the yield curve: take advantage of roll
Many Investors Are Already Overexposed to Credit Median Exposure to Key Risk Factors* Volatility 5.5%
Avoid stretching for yield Rates 27.4%
Loans CCC-rated bonds Diversify across sectors Credit 65.3%
Manage Liquidity
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
CMO 1Q 2016
| 14
Municipals: Still Attractive, but Positioning Matters Positioning Along the Yield Curve Matters Roll Plus Yield (Percent)
Muni Credit Continues to Offer Value Yield Advantage of BBB-Rated Debt over AAA-Rated Debt 4
0.1 1.2
1.1
0.5
Apr 1, 2009: 3.5%
0.4 3
0.7 0.4
2.2
2.3
2.5
2.9
3.1
3.4
Percent
1.0
2
1.6 1.0 2
1 5
8
9
10
15
20
30
Maturity (Years) A-Rated Municipal Roll*
A-Rated Municipal Yield
Jun 30, 2007: 0.4%
0 87
91
95
99
03
07
Dec 31, 2015: 0.95% 11
15
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
CMO 1Q 2016
| 15
Municipals: Buoyed by Supportive Technicals and Strong Fundamentals Net Issuance Remains Negative Change in Net Municipal Supply (Net Issuance—Billions)
Credit Fundamentals Continue to Strengthen GDP and State and Local Tax Revenue 20
$212.6
15
$168.3 $155.3
Tax Revenue 10 $99.6 Percent
$92.4
5 GDP 0
–5
–$5.0 –$15.0 –$43.2 –$40.2
–$52.7 2006
2007
2008
2009
2010
2011
–10 2012
2013
2014
2015
80
83
86
89
92
95
98
01
04
07
10
13
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
CMO 1Q 2016
| 16
Stocks Have Performed Well in Rising-Rate Environments Equities Have Fared Well in Rate-Hike Cycles* Average Returns (Percent)
Low-Inflation Environment Supports Current Valuations Average S&P 500 P/FE by YoY CPI†
Not All Sectors Perform the Same Sector Relative Returns During Taper Tantrum (Percent)‡
December 31, 2015: 16.8× 16.7×
11.7
Consumer Discretionary
15.8×
7.7
15.2× Financials 5.8
Industrial Commodities
11.6×
4.2
–10.3 8.1× Six Months Prior
First Six Months After
Next Six Months
Year After Increase
–21.5
–23.4 –2–0%
0–2%
2–4%
4–6%
5.3
3.4
Consumer Staples
Telecom
Utilities
6–14%
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
CMO 1Q 2016
| 17
Equity Returns Will Likely Be Modest, but Active Management Can Help Equity Returns Are Driven by Different Factors over Time S&P 500 Returns: Attribution by Source (Percent)
Active Management Likely Poised to Outperform Relative Return (Percent)†
22.0 16.4 Dividends
2.0
P/E Compression
P/E Expansion
Market Up
+0.8%
–2.5%
Market Down
+2.9%
+2.5%
3.2 5.1
Earnings Growth
18.7 13.7
Income Return Price Return
Valuation Change
6.2 2.3 3.9
Environment for Recent Bull Market
–4.3
Jun 2009– Jun 2012
Jul 2012– Dec 2014
Median Forecast* Sept 2015– Sept 2020
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
CMO 1Q 2016
| 18
It’s Challenging for Companies to Find Growth Today S&P 500 Revenue Growth Is Generally Slowing… S&P 500 Trailing 12 Month Sales per Share
… and Half of the Index Has Negative Revenue Growth S&P 500 (Percent of Companies Reporting)*
1,200 >10%
1,100 Revenue Growth
USD
1,000 900 800
18.0%
0% to 10%
0% to –10%
33.0%
27.0%
700 –10%+ 600 2000
2003
2006
2009
2012
22.0%
2015
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
CMO 1Q 2016
| 19
Firms That Can Grow Are Poised to Lead—and They’re Cheap Sustainable Growth Is Uncommon, but Rewarding Top 1,000 Companies with Earnings Growth Rates ≥10%* 3.0
400 350
2.7
Number of Companies
200
2.4 Annualized Excess Returns vs. S&P 500
2.1 1.8 1.5
1.2%
1.2
0.9%
0.9 100
77
1.4 Excess (Percent)
250
1.5
Ratio (×)
Number of Companies (Left Scale)
300
1.6
2.7%
350
150
Persistent Growth Is Inexpensive Today Relative Price/Forward Earnings of High-Persistent-Return Growth Stocks vs. Market†
1.3 Average 1.2 1.1
0.6 1.0
50
22
0
0.3 0.0
One Year
Three Years
Five Years
0.9 90
93
96
99
02
05
08
11
14
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
CMO 1Q 2016
| 20
2015’s Narrow Equity Market in Perspective 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 $100 115
50
30
110
25 Median: 8%
Top 10
S&P 500
100 “S&P 490”
0 20
Johnson & Johnson Amazon.com Wells Fargo Berkshire Hathaway JPMorgan Chase
USD
105
Top 10: Apple Google Microsoft ExxonMobil GE
95
Dec, 31, 2015: 19%
90 15
–40
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 15 15 15 15 15 15 15 15 15 15 15 15
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
CMO 1Q 2016
| 21
Higher-Conviction Equity Strategies Can Make a Big Difference High-Conviction Strategies Have Outperformed Passive Factors Annualized Relative Performance vs. S&P 500, January 2004– December 2014 3.0%
Even a Little Alpha Can Go a Long Way By Annual Equity Market Gains 250
2.4% 2.0%
200
1.6%
1.4%
0.6%
0.7%
+21% 175 150 125
0.0%
100
–0.3% Dividend Yield
US Dollars
1.9%
+32%
225
Value
1 Quality
Active High-Conviction Strategy
Low Beta
2
Momentum
Passive Factor Index Strategy
3
4
5
6
7
8
9
10
Year from Initial Investment Equities at 6%
Equities at 8%
Equities at 9%
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
CMO 1Q 2016
| 22
Alternatives: Downside Protection in 2015—But Mind the Dispersion Percent Downside Protection in Declining Equity Markets… Cumulative Returns –1.2
–2.3 –4.7
–1.3
–2.5
Higher-Than-Normal Dispersion Today Annualized Return Dispersion –1.6
Traditional Asset Classes
Alternative Asset Classes 26.2
–6.0 –8.4
2015 Max Drawdown
August 2015 Return September 2015 Return Multialternative
December 2015 Return
S&P 500 15.3 13.5
…with Lower Volatility Than Traditional Assets Standard Deviation
11.4 13.7 5.9
8.5 6.4
Market Neutral
5.7
4.1
4.0
1.8
4.1 1.4
10.7
2.2
Nontraditional MultiBond alternative
Long/Short Equity
Managed Futures
S&P 500
Intermediate Large Term Bond Cap Blend
Nontraditional MultiBond alternative Three Years
Long/Short Equity
July–December
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
CMO 1Q 2016
| 23
Putting It All Together: Strategy for Moderate Growth, Low Inflation
Prescription Within Asset Classes Equities: Be Active Be Concentrated
Grows Faster-than-Expected
Seek downside protection
Equities: favor a more cyclical approach, such as value, as well as lower quality sectors like financials and energy
Maintain overweight to developed markets Fixed Income: Be Balanced
Risk Reducing Risk Reducing Equities
Fixed Income
Rates: Combine Global Core and US Core Manage yield curves/positioning Hedge currencies
Return Seeking
Return Seeking
Fixed income: tilt a bit more toward credit risk, but still avoid stretching for yield
Credit: Use Global Multi-Sector Avoid crowded trades Manage Liquidity Risk
Alternatives
Contrarian’s Corner: If the Economy…
Alternatives: Be Selective
Grows Slower-than-Expected Equities: emphasize income and quality attributes
Focus on relative value strategies Focus on strong up/down capture structures/approaches
Fixed Income: tilt more toward interest rates and remain global
Current analysis does not guarantee future results. As of December 31, 2015 Source: AB
CMO 1Q 2016
| 24
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 PreRefunded category includes bonds which are secured by US government securities and therefore are deemed high-quality investment grade by the advisor.
CMO 1Q 2016
| 25
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 PanEuropean 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.
CMO 1Q 2016
| 26
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.
CMO 1Q 2016
| 27
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.
CMO 1Q 2016
| 28
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
CMO 1Q 2016
| 29
