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									                                                                                    May 2010




Betting on the Benchmark
Timing is the Key




                    Sasho Bogoevski Managing Director – Institutional Investments
 Background

 Big flow into passive assets

 Performance doesn’t really justify this, but you may be missing an opportunity

 Why is Passive so popular?
      Low management costs – yes!
      Simpler investment strategy
                Timing – can swamp any direct savings
                Index Construction – needs careful consideration
                Strategic context


 What are the opportunities for active today?




     AllianceBernstein.com                                                         Quartile Charts   1
     Active Managers did not perform well in 2008



                                                                           Active managers' performance vs MSCI World

                                                                   8%    7.2%
                              Annualised performance premium (%)




                                                                   6%


                                                                   4%

                                                                                   1.8%                              2.0%
                                                                   2%


                                                                   0%

                                                                                                                            -1.0%
                                                                   -2%
                                                                                2000 - 2009 -1.9%                           2008
                                                                   -4%
                                                                                                                                    -4.0%

                                                                   -6%

                                                                                      Q1 manager    Median manager    Q3 manager



Source : Mercer

            AllianceBernstein.com                                                                                                           Quartile Charts
Institutional Investors Are Making A Large Shift From Active to Passive . . .


                                            Estimated Rolling 1-Year Institutional Net Flows in $ Billions

                               400
                               300
                               200
        Flows in $ Billions




                               100
                                 0
                              (100)
                              (200)
                              (300)
                              (400)
                              (500)
                                      Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep
                                      05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09

                                                               Index            Structured   Active   Aggressive



  Source : Casey Quirk, US Institutional Asset Flows, including Equity and fixed Income

            AllianceBernstein.com                                                                                  Quartile Charts   3
. . .as are Retail investors, especially via ETFs



                                  Percent Fund Assets for Active, Index and Exchange Traded Funds

                         100%    1.5%    3.2%      3.5%
                                                            4.5%      5.3%     6.0%      7.3%       9.5%
                                 9.8%                                                                       10.2%
                           90%           9.3%      9.7%     10.5%     10.5%    10.6%    10.7%       11.1%   11.3%
                           80%
                           70%

                           60%

                           50%
                                 88.7%   87.5%    86.8%     85.0%     84.2%
                           40%                                                 83.4%    82.0%       79.4%   78.5%
                           30%
                           20%

                           10%
                            0%
                                 2001    2002      2003     2004      2005     2006      2007       2008    2009

                                                 % in Active Funds   % in Index Funds   % in ETFs




Source : Morningstar


        AllianceBernstein.com                                                                                       Quartile Charts
Compared to Active Managers, Global Index Returns Are Unimpressive


                                                           Percentile Ranking of Global Indexes

                             0




                            25
         Percentile Rank




                            50




                            75




                           100
                                 00   01          02          03           04          05           06      07      08       09   00–09

                                                            MSCI World Free                   FTSE World         MSCI ACWI



Percentile ranking of Index – MSCI World Free, MSCI AC World and FTSE World for calendar years 2000–2009.
Source: Mercer

       AllianceBernstein.com                                                                                                        Quartile Charts   5
“Less Efficient” Emerging Markets Are Indeed Inefficient…


                                                 Percentile Ranking of Emerging Market Indexes

                             0




                            25
         Percentile Rank




                            50




                            75




                           100
                                 00   01         02           03          04           05   06    07     08    09   .   00–09

                                                                         MSCI EM            S&P Emerging BMI



Percentile ranking of Index – MSCI EM and S&P Emerging BMI for calendar years 2000–2009.
Source: Mercer

       AllianceBernstein.com                                                                                              Quartile Charts
…But the Same Pattern Holds in “More Efficient” Markets (eg UK) . . .


                                                              Percentile Ranking of UK Indexes

                             0




                            25
         Percentile Rank




                            50




                            75




                           100
                                 00   01          02           03          04           05         06    07        08   09   00–09

                                                          FTSE All Share                  MSCI UK       FTSE 100



Percentile ranking of Index – FTSE 100, FTSE All Share and MSCI UK for calendar years 2000–2009.
Source: Mercer

       AllianceBernstein.com                                                                                                   Quartile Charts   7
…And Across Other Asset Classes (eg Global Bonds)


                                                                Percentile Ranking of Bond Index

                             0




                            25
         Percentile Rank




                            50




                            75




                           100
                                 00    01           02           03           04           05   06     07       08   09   00–09

                                                                            Barclays Capital Global Aggregate



Percentile ranking of Index – Barclays Capital Global Aggregate for calendar years 2000–2009.
Source: Mercer

       AllianceBernstein.com                                                                                                Quartile Charts
Why is Passive Indexing so Popular?


 Low management costs                “Active management is a loser’s game”




 Simpler investment strategy         “Passive invests in the market portfolio”
       Timing
       Index Objectivity
       Strategic context

 Simpler manager selection           “I won’t get fired for going passive”




    AllianceBernstein.com                                                         Quartile Charts   9
Direct costs of Passive are Lower… But this is only part of the story!


                                                                           Estimated Annual Costs


                                                140
                                                         Management Fees                      Trading Costs   Governance
                                                120
                        Annualised Cost (bps)




                                                100

                                                 80

                                                 60

                                                 40

                                                 20

                                                  0
                                                                  Passive                                          Active




Source: AllianceBernstein analysis, based on a typical $100m institutional Global Equity account.

       AllianceBernstein.com                                                                                                Quartile Charts   10
Fund Flows Seem to chase performance – for retail and institutional
                                                                                                            Funds Flow - US Active vs Passive Equities
                                                                  Retail                                                                            Institutional

                                                   300                                                                                  15                                                  18                                                                               3

                                                                                                                                                                                            12                                                                               2




                                                                                                                                               Median fund Annual Premium vs S&P 500 (%)
                                                   200                                                                                  10
                                                                                                                                                                                             6                                                                               1
    Net Flow into Active from Passive ($ Bn).




                                                   100                                                                                  5                                                    0                                                                               0

                                                                                                                                                                                            (6)                                                                              (1)
                                                      0                                                                                 0
                                                                                                                                                                                           (12)                                                                              (2)

                                                 (100)                                                                                  (5)                                                (18)                                                                              (3)

                                                                                                                                                                                           (24)                                                                              (4)
                                                 (200)                                                                                  (10)




                                                                                                                                                                                               00

                                                                                                                                                                                                     01

                                                                                                                                                                                                            02

                                                                                                                                                                                                                  03

                                                                                                                                                                                                                         04

                                                                                                                                                                                                                                05

                                                                                                                                                                                                                                      06

                                                                                                                                                                                                                                             07

                                                                                                                                                                                                                                                    08

                                                                                                                                                                                                                                                          09
                                                                                                                                                                                             20

                                                                                                                                                                                                   20

                                                                                                                                                                                                         20

                                                                                                                                                                                                                20

                                                                                                                                                                                                                       20

                                                                                                                                                                                                                             20

                                                                                                                                                                                                                                     20

                                                                                                                                                                                                                                          20

                                                                                                                                                                                                                                                 20

                                                                                                                                                                                                                                                        20
                                                 (300)                                                                                  (15)
                                                           1999

                                                                  2000

                                                                         2001

                                                                                2002

                                                                                       2003

                                                                                              2004

                                                                                                     2005

                                                                                                            2006

                                                                                                                   2007

                                                                                                                          2008

                                                                                                                                 2009




                                                                                                                                                                                              Funds flow to passive (% opening AUM)

                                                                                                                                                                                              Funds flow to active (% opening AUM)
                                                                            Fund flow (P to A)                Premium                                                                         Median Active Manager 3Y historic premium (annualised, net 70bps fees) (Right
                                                                                                                                                                                              scale)

Source: Retail data - Morningstar, S&P, MSCI. Funds flow and performance data based on Morningstar US Broad Asset Class classifications.
Institutional data - eVestment, Mercer. Data represent the subset of managers reporting AUM data from 2000-2009, and are adjusted for market movements. 4 US passive, 34 US Large Cap Core
Active managers


                                                AllianceBernstein.com                                                                                                                                                                                      Quartile Charts         11
Manager Selection Process: Sell Low, Buy High…

                                                           Three-Year Cumulative Excess Return

                                  Prior Period



                                                           10.4%




                      2.3%




              Fired Managers                         Hired Managers




Source: Amit Goyal and Sunil Wahal, “The Selection and Termination of Investment Managers by Plan Sponsors.” Journal of Finance, August 2008.

       AllianceBernstein.com                                                                                                                    Quartile Charts   12
 …Which Ensures Bad Timing

                                                            Three-Year Cumulative Excess Return

                                   Prior Period                                                                                 Forward Period



                                                             10.4%




                                                                                                                       3.3%
                       2.3%
                                                                                                                                                    1.9%




               Fired Managers                         Hired Managers                                           Fired Managers                   Hired Managers



Source: Amit Goyal and Sunil Wahal, “The Selection and Termination of Investment Managers by Plan Sponsors.” Journal of Finance, August 2008.



        AllianceBernstein.com                                                                                                                              Quartile Charts   13
…So they can result in very concentrated portfolios


                                                                      Weight of Top 25 Stocks
        % of Index
            90

                                                                                                                  Australia
                                                                                                                  UK
            70
                                                                                                                  Canada



            50


                                                                                                                  Japan
                                                                                                                  US
            30


                                                                                                                  MSCI World*

            10
                 80                   85                     90                    95              00   05   10


*MSCI World Index data prior to 2000 are based on a combination of MSCI World ex US and S&P 500.
Source: MSCI, S&P and AllianceBernstein


        AllianceBernstein.com                                                                                             Quartile Charts   14
                                    0%
                                         10%
                                               20%
                                                          30%
                                                                                                    40%
                                                                                                                               50%
                                                                                                                                                                           60%
                                                                                                                                                                                                                     70%
                                                                                                                                                                                                                                 80%
                                                                                                                                                                                                                                       90%
                                                                                                                                                                                                                                             100%
                          12/1979
                          10/1980
                          08/1981
                          06/1982
                          04/1983




  AllianceBernstein.com
                          02/1984
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                                                                                                                                                                                                                                                                 S&P 500 Sector Weight over Time




                          10/1995
                          08/1996
                          06/1997
                          04/1998
                          02/1999
                                                                                                                                                                                                                                                    S&P Weight




                          12/1999
                          10/2000
                          08/2001
                          06/2002
                          04/2003
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                          12/2004
                          10/2005
                          08/2006
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                          04/2008
                          02/2009
                          12/2009
                                                                                                 Energy
                                                                                                                                                                                                                     Utilities


                                                                                                                                                                            Materials




                                                                                                          Financials
                                                                                                                                    Industrials
                                                                                                                       Healthcare



                                                                              Consumer Staples




Quartile Charts
                                                                                                                                                  Information Technology




                                                     Consumer Discretionary




15
                                                                                                                                                                                        Telecommunication Services
S&P 500 Sector Weight over Time

                                                                                                                                                                                                      S&P Weight

100%


90%


80%
                                                                                                                                                                                                                                                                  34.5%

70%                                                                                                                                                                                                                                                                                                                                                                                       Utilities
                                                                                                                                                                                                                                                                                                                                                                                          Telecommunication Services
                                                                                                                                                                                                                                                                                                                                                                                          Materials
60%
                                                                                                                                                                                                                                                                                                                                                                                          Information Technology
                                                                                                                                                                                                                                                                                                                                                                                          Industrials
50%
                                                                                                                                                                                                                                                                                                                                                                                          Healthcare

                                                                                                                                                                                                                                                                                                                                                  20.6%                                   Financials
40%
                                                                                                                                                                                                                                                                                                                                                                                          Energy
                           33.8%                                                                                                                                                                                                                                                                                                                                                          Consumer Staples
30%                                                                                                                                                                                                                                                                                                                                                                                       Consumer Discretionary


20%


10%


 0%
       12/1979
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       AllianceBernstein.com                                                                                                                                                                                                                                                                                                                                                                      Quartile Charts   16
   Bond Indexes Are Constructed To Concentrate on Largest Issuers


                                  Composition of European Government Bond index, Jan 2010

                                                                Greece
                                                     Portugal
                                                                  5%
                                                       2%
Shade PIGS and others similar colours
                                             Spain                            Germany
                                             10%                               22%




                       40% in “PIGS”


                                         Italy
                                         23%
                                                                                       France
                                                                                        20%


                                                     Ireland             Netherlands
                                                       2% Au/Be/F
                                                                             5%
                                                             11%
                                                            Other



   Source: Barclays

          AllianceBernstein.com                                                                 Quartile Charts   17
Significant Opportunity to Win Two Ways

                                                                                              Global Growth and Value Opportunities
Ratio of Most Expensive to Cheapest P/B Quintile (×)*




                                                                                                                                                                                  (70)
                                                        20

                                                                                                                                                                                  (50)




                                                                                                                                                                                              Global Index Price Attributable
                                                        15                                                                                                                        (30)




                                                                                                                                                                                                  to Future Growth (%)**
                                                                                                         More Opportunity

                                                                                                                                                                                  (10)
                                                        10
                                                                                                                                                                                  10

                                                                                                                                                                                  30
                                                         5

                                                                                                                                                                                  50
                                                                                                         Less Opportunity
                                                         0                                                                                                                        70
                                                             71   75 79 83 87 91         95 99 03 07              71   75   79   83   87     91   95    99      03     07

                                                                                Value Opportunity*                                         Growth Opportunity**

Through March 31, 2010
*Ratio of most expensive quintile to cheapest quintile on price to book
**Share of index price attributable to future earnings. Results for the S&P 500, MSCI Japan and MSCI Europe were cap weighted to create a proxy for global developed equities
Source: FactSet, MSCI, S&P and AllianceBernstein; see Disclosures and Important Information.

                                                        AllianceBernstein.com                                                                                               Quartile Charts
AllianceBernstein.com   Quartile Charts
     Index Construction rules create arbitrage opportunities

  Berkshire Hathaway: An Example of Index Distortions

  Performance of Berkshire Hathaway vs. the S&P500 Index                                 S&P500 Index Changes 1989–2002
                                                                                         Price Change from Announcement Date to Effective Date *


     115

     110                                                                                              8.4%

     105

     100

       95
        26/01/2010             01/02/2010           05/02/2010           11/02/2010


                                                                                                                               (14.1)%
       Announcement                                                  Effective Date                 Additions                  Deletions
       Date                                                          (02/12/2010)
       26/01/2010




* Index Changes and Losses to Fund Investors, Chen, Noronha, SIngal, FAJ Julu/Aug 2006
Sources: AllianceBernstein, S&P



            AllianceBernstein.com                                                                                                     Quartile Charts   20
Leading to Big Differences in Performance and Risk…


                                      Annual Performance Dispersion between Regional Indices

                          4

                          3

                          2

                          1

                          0

                         (1)

                         (2)

                         (3)

                         (4)

                         (5)
                               2001      2002      2003      2004       2005      2006      2007      2008    2009

                                          FTSE All Share - MSCI UK   TOPIX - MSCI Japan   MSCI World - ACWI




All returns are in USD
Source: Factset

       AllianceBernstein.com                                                                                         Quartile Charts   21

								
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