For financial representative use only. Not for inspection by, distribution or quotation to, the general public. Demystifying Managed Accounts Audie Apple, CIMA Managing 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.
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Demystifying Managed Accounts - Revised · U.S. Dollar vs. Major Currencies Historical analysis does not guarantee future results. US trade-weighted index through February 28, 2006
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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Managed Accounts: Distinguishing Characteristics
You own shares in individual securities
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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Managed Accounts: Distinguishing Characteristics
You own shares in individual securities
Individual capital gains or losses enables strategic tax-planning
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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%
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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Managed Accounts: Distinguishing Characteristics
You own shares in individual securities
Individual capital gains or losses enables strategic tax-planning
Customization—Client may place restrictions on certain investments
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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Managed Accounts: Distinguishing Characteristics
You own shares in individual securities
Individual capital gains or losses enables strategic tax-planning
Customization—Client may place restrictions on certain investments
Transparency
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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Managed Accounts: Distinguishing Characteristics
You own shares in individual securities
Individual capital gains or losses enables strategic tax-planning
Customization—Client may place restrictions on certain investments
Transparency
Sponsor firm due-diligence
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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Managed Accounts: Distinguishing Characteristics
You own shares in individual securities
Individual capital gains or losses enables strategic tax-planning
Customization—Client may place restrictions on certain investments
Transparency
Sponsor firm due-diligence
Investment Limitations
International Equity – ADR’s only and no currency management
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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.
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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.
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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%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
MSCI-EAFE Hedged Returns
MSCI-EAFE Un-hedged Returns
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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%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
MSCI-EAFE Hedged Returns
MSCI-EAFE Un-hedged Returns
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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Managed Accounts: Distinguishing Characteristics
You own shares in individual securities
Individual capital gains or losses enables strategic tax-planning
Customization—Client may place restrictions on certain investments
Transparency
Sponsor firm due-diligence
Investment Limitations
International Equity – ADR’s only and no currency management
Fixed-Income – active management generally limited to yield curve management
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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Decomposing the Sources of Fixed-Income Alpha
Sector40%
Security40%
Yield-Curve / Duration
20%
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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Managed Accounts: Distinguishing Characteristics
You own shares in individual securities
Individual capital gains or losses enables strategic tax-planning
Customization—Client may place restrictions on certain investments
Transparency
Sponsor firm due-diligence
Investment Limitations
International Equity – ADR’s only and no currency management
Fixed-Income – active management generally limited to yield curve management
“High” minimum makes it difficult to implement the ideal portfolio
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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.
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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.
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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Success Stems from Surprisingly Low Batting Average
0 3%
53.9%
Single-Stock Return Distribution
% that Outperform
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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The Advisors’ Alpha
11.9%
2.0%
3.9%
Market Return ManagerSelection
Investor Return
*Timeframe: 1985-2006, Market Return is S&P 500Source: Dalbar, 2006
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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The Advisors’ Alpha
11.9%
2.0%
3.9%
10.0%
Market Return ManagerSelection
Investor Return Advisor AlphaOpportunity
Advisor Alpha Opportunity
*Timeframe: 1985-2006, Market Return is S&P 500Source: Dalbar, 2006
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor 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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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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”
AllianceBernsteinFor financial representative use only. Not for inspection by, distribution or quotation to , the general public.
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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