Presentation to Chicago Quantitative Alliance

Presentation to Chicago Quantitative AllianceIn Search of a Breakthrough

Business Strategy Issues in Investment Management

Guillermo MacLeanSenior Research Analyst

Sanford C. Bernstein & Co., LLC

April 14, 2005

Copyright 2003, Sanford C. Bernstein & Co., LLC, a subsidiary of Alliance Capital Management L.P. ~ 1345 Avenue of the Americas ~ NY, NY 10105 ~ 212/486-5800. All rights reserved.This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited or any of their subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This report is based upon public sources we believe to be reliable, but no representation is made by us that the report is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein. This research was prepared and issued by Sanford C. Bernstein & Co., LLC and/or Sanford C. Bernstein Limited for distribution to market counterparties or intermediate or professional customers. This report is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance. Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, or one or more of its or their officers, directors, members, affiliates or employees, or accounts over which they have discretion, may at any time hold, increase or decrease positions in securities of any company mentioned herein. Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, or its or their affiliates may provide investment management or other services for such companies or employees of such companies or their pension or profit sharing plans, and may give advice to others as to investments in such companies. These entities may effect transactions that are similar to or different from those mentioned herein. To our readers in the United States: Sanford C. Bernstein & Co., LLC is distributing this report in the United States and accepts responsibility for its contents. Any U.S. person receiving this report and wishing to effect securities transactions in any security discussed herein should do so only through Sanford C. Bernstein & Co., LLC. To our readers in the United Kingdom: This report has been issued or approved for issue in the United Kingdom by Sanford C. Bernstein Limited, regulated by the Financial Services Authority and located at Devonshire House, 1 Mayfair Place, London W1J 8SB, +44 (0)20-7170-5000. To our readers in member states of the EEA: This report is being distributed in the EEA by Sanford C. Bernstein Limited, which is regulated in the United Kingdom by the Financial Services Authority and holds a passport under the Investment Services Directive. See disclosure appendix of this report for analyst certifications and important disclosures.

April 14, 20052Sanford C. Bernstein & Co., LLC

Why am I here? (after lunch, 2nd day, in Sin

City!!)

What value can I possibly add to a group of

Quants?


Introduction

Who are we, what do we do

In Search of a Breakthrough

Two Innovative Ideas

−Expectation-matching Testing

−Client/Advisor Two-way Relationship Management

Service

Outlook


Sanford C. Bernstein & Co., LLC , a subsidiary of Alliance Capital Management L.P.

A Unique Firm

As a firm, it practices a lot of what it preaches to others:

−Claims “industrial strength” research: Hires analysts with

industry track records

−Focuses on the long-term: Long analyst incubating periods

−Is independent: No investment banking and acts solely as

an agent

−Is innovative and cutting edge: It remains competitive in an

increasingly electronic trading world


Sanford C. Bernstein & Co., LLC , a subsidiary of Alliance Capital Management L.P.

Fundamental Equity Research 46 Senior Analysts

Over 250 stocks

In 40 industries

Bernstein Disciplined Strategies Monitor

Bernstein Quantitative Handbook

Technology Sector Strategy


Stock recommendations

Industry “Blackbooks”

Strategy & Quant Team

U.S. equity

U.S. & global quantitative

Technology

We provide investment research to institutional investors



Mission “To identify and analyze issues that could potentially reshape the dynamics and/or economics of the asset management industry”

Relevance Issues that affect our clients and/or the markets in which we operate

Abstract issues are becoming predominant

Potential value of early-mover advantage

Opportunities may require long-lead times and/or high resource commitment

As flip side to gaining scale, many players have inherited huge franchise risks that need to be guarded closely and permanently

Process Analytical : Quantitative & qualitative

Holistic : Investment, marketing, operations, and other considerations

Practical : Research complimented with exhaustive interviews and surveys

Topics : Hedge fund industry, individual investors, corporate governance, innovation, real estate, and others


Introduction






Service

Outlook


In Search of a Breakthrough – Project objective and methodology

Objective

Identify and discuss a few innovative ideas that may, in the long term, revolutionize the industry

By “revolutionize”, we refer to the potential to generate drastic and far reaching changes in the ways of thinking and behaving

Methodology

A sociological mapping out of relationships in the business

Extensive one-on-one interviews with constituents

Anonymous surveys (individual investors, 401(k) participants, financial advisors, regular individuals)


In Search of a Breakthrough – Findings & Conclusions

The highest opportunities for a true breakthrough in investment management may lie less in “sexy” areas such as financial engineering and more in creatively readdressing mundane social relationships in the business

For all the money that investment organizations spend in the pursuit of alpha generation “inside their shops”, they spend very little resources tracking its fate “outside” of it

Ironically, on one end investment organizations use individual’s decision making flaws as a source of alpha to the benefit of their clients, but on the other end they exploit those flaws in order to “distribute” it to them, frequently to their clients’ detriment

Traditionally, the incentive has been for firms to partially (sometimes completely) detach themselves from this responsibility


In Search of a Breakthrough – Findings & Conclusions (cont.)

We believe this is changing, mainly because of increasing progress in information technology applications and a creep in regulatory reach

We have developed the business case for three innovative solutions (only two discussed today conceptually). We believe value propositions are compelling

Although she source of first mover is still uncertain, we expect two of them to be implemented at an observable scale within two to three years


Introduction






Service

Outlook


Simplified Generic Version of A Supply Chain of Investment Products/Services –

Participants along the Chain


A: Individual Investor (or Client)B: Intermediary (e.g. Advisor, Broker, Sales Respresentative)C: Intermediary Firm (e.g. Advisory Firm, Brokerage House)D: Manufacturing Representative (e.g. Portfolio Manager, Relationship Manager)E: Manufacturing Firm (e.g. Mutual Fund Company, Pension Fund Manager)

A B

C

D1

52

4

3

E

A B

C

D1

52

4

3

E

AA BB

CC

DD1

52

4

3

EE

Source: Bernstein Research


Simplified Generic Version of A Supply Chain of Investment Products/Services –

Potential Weak Links or Discontinuities


Description/ Examples

1 Client - Intermediary Rep --

-

2 Intermediary Rep - Firm -

-

3 Client - Manufacturing Rep --

--

4 Intermediary Rep - Manufacturing Rep ---

-

5 Manufacturing Rep - Firm -

-

The manufacturing representative may not communicate changes to characteristics of existing products/services or their terms and conditions

The manufacturer or intermediary (and/or respective representatives) may have conflicts of interest or ill intent

The intermediary representative can only operate within the boundaries established by the intermediary firm and therefore may not be able to fulfill the client’s expectations Quality controls established by the intermediary firm do not guarantee the quality of representative behavior (The Rep may behave in a manner that does not reflect the firm’s views or policies)

The manufacturer has conflicts of interest or ill intent The manufacturer may have limited/no visibility of the end user of the product/service

The intermediary representative has limited skill to understand the products/services provided by the manufacturer The manufacturing representative has limited skill to educate the intermediary representative about the products/services

The intermediary representative can only operate within the boundaries established by the intermediary firm and therefore may not be able to fulfill the client’s expectations Quality controls established by the intermediary firm do not guarantee the quality of representative behavior (The Rep may behave in a manner that does not reflect the firm’s views or policies)

The client has limited skill to understand the products/services by themselves or in the context of his/her overall wealth The manufacturing representative has limited skill to educate the client about the products/services by themselves or in the context of the client’s overall wealth

Potential Weak Links or Discontinuities

The client has limited skill to understand the products/services by themselves or in the context of his/her overall wealth The intermediary representative has limited skill to educate the client about the products/services by themselves or in the context of the client’s overall wealth The intermediary has conflicts of interest or ill intent

A B

C

D1

52

4

3

E

A B

C

D1

52

4

3

E

AA BB

CC

DD1

52

4

3

EE


More Realistic Generic Version of A Supply Chain of Investment Products/Services –




A: Individual Investor (or Client)B: Intermediary (e.g. Advisor, Broker, Sales Respresentative)C: Intermediary Firm (e.g. Advisory Firm, Brokerage House)D: Manufacturing Representative (e.g. Portfolio Manager, Relationship Manager)E: Manufacturing Firm (e.g. Mutual Fund Company, Pension Fund Manager)F: Non-personal Interface (e.g. TV, webpage)G: Informal Networks (e.g. Friends, Family, Colleagues)

A

B

B

C

C

D

D

D

D

D

D

D

D

E

E

E

EC

F

FF

G

A

B

B

C

C

D

D

D

D

D

D

D

D

E

E

E

EC

F

FF

G


Various Perspectives About Weak Links or Discontinuities Along the Supply Chain of

Investment Products/Services


Subject No Problem Problem

Client - Client is accepting e.g. "Such is life" - Client feels dissatisfied and will take action- Client feels he/she has plenty of choices- -

Existing Businesses Intermediary Rep Intermediary Firm Manufacturing Rep Manufacturing Firm

- Firm/Rep feels it does not create client retention issues, as client is unable to articulate a solution or find alternative product/serviceFirm/Rep feels it does not hinder its ability to attract new business (offsetting any business lost due to client dissatisfaction)

- Firm/Rep believe client dissatisfaction will visibly erode business in the long termFirm/Rep estimate client dissatisfaction is costly (New client acquisition is costlier than retaining existing clients)Firm/Rep believe client dissatisfaction increases risk of costly legal or regulatory intervention- -

Regulators/Other - Regulators/other take a consumer-world approach: Investment products/services are no different in essence than any other consumer product/service

- Regulators/other take a social-utility approach: Providers of investment products/services exercise a key social function and must ensure to provide the product/service at lowest cost possible

Perspective/Argument


Dollars spent by Individuals on Lottery vs. Mutual Funds*

Source: US Census Bureau, Federal Reserve Board, Bernstein Research

0

10

20

30

40

50

60

70

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Sp

en

din

g (

$ B

illi

on

)

State lottery LT Mutual Funds

* assumes 1.2% average expense ratio for long-term mutual funds


Introduction






Service

Outlook


Real Case 1: Cell Phone Vendor

Real Case 2: Credit Card Company

Hypothetical Case 1: Gym Owner


Investors' Expectations of a Mutual Fund Portfolio Manager

Source: Bernstein Research investor and 401(k) participant surveys (400 pre-qualified respondents)

Survey Question:

Response PercentageYes, that would save me a lot of money 13%Maybe, only if he/she is certain of the downturn 50%No, he/she should be fully or almost fully invested at all times 14%No opinion 24%

Imagine that the portfolio manager of a mutual fund anticipates a significant market downturn. Would you expect the portfolio manager of the fund to sell a large portion of its holdings and raise cash?


Investors' Worst-Case Scenario 12-month Return Expectations

Source: Bernstein Research investor survey (400 respondents)

Survey Question:In your opinion, what is the worst that each type of investment could return in the next 12-months?

Response Negative 0% 1-5% 6-10% 11-20% Higher Not ApplicableStocks 38% 17% 16% 10% 3% 6% 10%Bonds 24% 23% 31% 2% 2% 5% 12%Other 18% 25% 32% 6% 1% 5% 14%


401(k) Participants Basic Understanding of a 401(k) Plan

Source: Bernstein Research 401(k) participant survey (515 respondents)

Survey Question: What does a 401(k) plan mean to you? (please choose one)

Response PercentageAn amount of money that I choose to deduct from my paycheck, pre-tax, and that I invest in an assortment of investments provided in my company-sponsored plan. Some companies match employee contributions.

62%

A company sponsored plan that allows me to invest, over a 10-year period, up to $401,000, free of capital gains.

1%

A company sponsored plan that has 401 investment options with special tax benefits.

9%

All of the above 24%None of the above 4%


A Measure of Investors' Basic Market Knowledge

Source: NASD investor literacy research, NASD Investor Knowledge Quiz (1,086 respondents)

Percent Answered

Basic Market Knowledge Questions Correctly1. Relative safety of different kinds of bonds 84%2. Definition of a stock 19%3. Relationship between risk and return 72%4. Definition of a bond 70%5. Definition of a "junk bond" 51%6. Type of investment yielding best average return 51%7. Reasonable long-term annual return from mutual fund 40%8. Relationship between bond prices and interest rates 39%9. Lack of insurance against stock market losses 38%10. Definition of a "no load" mutual fund 21%

Answered at least 7 out of 10 questions correctly 35%


Investors' Sentiment Regarding Information Load

Survey Question:Do you ever feel overwhelmed by the excessive amount of investment information and advice out there? You don't know who to trust?

Response PercentageYes, often 40%Once in while 35%Never 25%



Investors' Opinion About the Value Added of Mutual Fund Prospectuses


Survey Question:Have you ever read a mutual fund prospectus? And, do you find it useful?

Response PercentageI have never read a prospectus 14%I have never read a prospectus because they are too confusing 9%I have read a prospectus but they are not useful, or limited 40%I always read the prospectus and find it very helpful 18%No opinion 20%


Investors' Opinion About the Value Added of Disclosure of a Mutual Fund's

Portfolio Manager's Name


Survey Question:Do you know the name of the portfolio manager of any of the funds you invest in?

Response PercentageYes, it is very important to me 17%No, it is unimportant to me 33%It is managed by a team 31%I do not own a mutual fund 19%


Investors' Sentiment Regarding "Suitability" of Their Investments


Survey Question: Have you ever felt that you invested in a wrong or "inappropriate" investment product?

Response PercentageYes, often 10%Once in while 70%Never 21%


Investors' Self-Evaluation Regarding How Their Investments Are Organized

Source: Bernstein Research investor survey (400 respondents)

Survey Question:Do you ever feel you could be more organized with your investments?

Response PercentageYes, often 29%Once in a while 51%Never 20%


If Einstein, Goethe and Beethoven had been born during the Stone Age, wouldn’t they likewise have had only the cultural ability and education of men of the Stone Age? The converse is also true…

Oh – Why, Japanese children can all speak Japanese!...At my excitement, half of my listeners were startled, and others just thought me absurd. Nevertheless, my discovery actually had great significance; it made me realize that any child is able to display superior abilities if only correct methods are used in training…

Nurtured by Love, Shinichi Suzuki


EM Testing Process


Pre-sale events Ready toPurchase

Determine and Execute

Appropriate Tests

SellerTakes

Test “A”

BuyerTakes

Test “B”

DetermineMatch/ Mismatch

and Provide Results& Recommended

Next Steps

Seller Decides Next Steps

Buyer DecidesNext Steps

CompleteSale/Purchase



Appropriate Tests

SellerTakes

Test “A”

BuyerTakes

Test “B”



Next Steps






Appropriate Tests

SellerTakes

Test “A”

BuyerTakes

Test “B”



Next Steps





Value in Seamless Client Education

Clients want it

The value proposition to them is

compelling

It’s a fiduciary responsibility

It may have high ROI


Introduction






Service

Outlook


Grown ups are like that…Fortunately, however, for the reputation of Asteroid B-612, a Turkish dictator made a law that his subjects, under pain of death, should change to European costume. So in 1920 the astronomer gave his demonstration all over again, dressed with impressive style and elegance. And this time everybody accepted his report.

The Little Prince, Antoine St. Exupery


Real Case 1: The Acupuncturist


Financial Advisors' Self Described Influence on their Clients' Investment Portfolio

Source: Bernstein Research Financial Advisor survey (100 pre-qualified panel members)

Summary of

Survey Question1 ResponsesA On average, what percentage of wallet share (of investable assets) of your clients do you think you

manage or advise for?Mean 61%

Stdev 20%

B Please select all that apply:Most of my clients seek my advice mostly about their entire portfolio of investments 69%I believe asset allocation advice is a key aspect of my role as an advisor 81%

1/ Questions were not necessarily asked in this order nor in the same section of the survey


A Measure of Intended/Unintended Consequences of Style Purity Constraints

Source: Bernstein analysis

R-square\1 % of AUM\2

> 97.5 16%95 - 97.5 12%90 - 95 23%80 - 90 32%

< 80 18%

1/ R-square of mutual fund performance explained by an investbale index2/ Percentage of Long-term mutual funds' assets under management


Financial Advisors' Self Described Alignment of Interests with that of their Clients


Summary of Please select all that apply: ResponsesI believe the interests of my clients and myself are well aligned 85%I believe strongly in the quality of the firm I work for 69%I believe the interests of my firm and myself are very well aligned 52%I believe there are a lot of unethical financial advisors 58%

1/ Questions were not necessarily asked in this order nor in the same section of the survey


Financial Advisors' Quiz About the Concept of "Correlation"


Survey Question:When people say "two stocks are highly correlated", what do you believe they mean?

Responses PercentageWhen one stock moves up the other most likely moves up too 36%When one stock moves up 10% the other most likely moves up by about the same 29%When one stock moves up the other moves down 6%Both stocks have similar movement patterns because they are in the same industry 23%They both have similar weighting in an index 1%Other, please specify 4%None of the above 1%


Individuals' Assessment of Their Doctors' Competence

Source: Bernstein Research Adult Population survey (300 respondents)

Survey Question:What is the primary reason you believe you have a good Doctor?

Adult Population

ResponsesI He/She is highly recommended 28%II He/She graduated from a prestigious medical school and/or

practices in a prestigious institution5%

III All Doctors are good within a small range. They all go through rigorous training and not just anybody can obtain a medical license

11%

IV I know someone who had a medical problem and my Doctor cured him/her

3%

V Beyond some basics, I don't know how good is my Doctor 29%

VI I can tell by myself after one or a few visits 18%VII Other 6%

InterpretationA Personal Networks (I+IV) 31%B Self Assessment (VI) 18%C Branding/ Categorization (II+III) 16%D Aware/ Healthy Skepticism (V) 29%E Other (VII) 6%


Individuals' Most Desired Information About Prospective Surgeon Prior to Surgery

Source: Bernstein Research Adult Population survey (300 respondents)

Adult Information Population

I The number of surgeries performed each year by your Surgeon, and all his patients' actual evaluations immediately following surgery, and one and three years after the surgery (and comparison vs. surgeon population)

26%

II The number of official complaints, if any, filed against your Surgeon 14%

III The number of surgeries that your Surgeon has performed each year, and the number of official complaints, if any, filed against him

14%

IV The number of surgeries performed each year by your Surgeon, and all his patients' actual evaluations immediately following surgery (and comparison vs. surgeon population)

11%

V The number of surgeries that your Surgeon has performed each year 10%

VI The Surgeon's ranking among a ranking of Surgeons that perform similar surgeries. The ranking is done by a governmental institution

9%

VII The Surgeon's ranking among a ranking of Surgeons that perform similar surgeries. The ranking is done by a well-read for-profit medical magazine

8%

VIII Your Surgeon's grades in medical school 1%

IX Other 7%

Interpretation (By category)A Client satisfaction (I+IV) 37%B Criminal record approach (II+III) 28%C Third-party rankings (VI+VII) 17%D Longevity/ Experience (V) 10%E Certifications/ Seal of Approval (VIII) 1%F Other (IX) 7%


Demand for Most Desired Information About Prospective Surgeon

Source: Bernstein Research estimates

Price of Information $0 $10 $50 $100 $300 $500 $1,000 or above% of Adult Population Willing to Pay 100.0% 57.1% 48.4% 43.5% 39.1% 35.4% 31.7%


eBay Buyers' Opinion About Seller Information

Source: Bernstein Research survey (300 respondents)

Survey Question:What do you think of the information eBay provides about the seller?(e.g. Seller history, feedback, other items sold, etc.)

Response PercentatgeExcellent 19%Good 54%Okay 21%Medicore 5%Bad 0.6%Horrible 0.6%


Amazon Marketplace Buyers' Opinion About Sellers' Rating Information


Survey Question:How important to you is the (Amazon Marketplace) rating of the seller?

Responses PercentageVery important. If the seller has a low rating I am not buying 42%Of medium importance. If the seller has a low rating but the price is very low, I would probably buy anyway

32%

Not very important. You always take risks with the merchandise anyway 17%Completely irrelevant. Ratings are probably bogus 9%


Price Sensitivity of Amazon Seller "Quality" Characteristics


Percentage of respondents who chose the particular given price and seller characteristics

19%15%

5%3%

7%

4%

47%

Legend:

3 1 1 = High number of lifetime ratings, and high number of ratings in last 12 months

4 2 2 = High number of lifetime ratings and low number of ratings in last 12 months

3 = Low number of lifetime ratings and high number of ratings in last 12 months

4 = Low number of lifetime ratings and low number of ratings in last 12 months

Price

Sel

ler

Rat

ing

$80

5.0

4.8

4.5

$120 $110 $100 $90

4.3

4.0


Value in engineering a better Proxy for Trust

Clients want it

The value proposition to them is

compelling

It’s a fiduciary responsibility (?)

It may have high ROI


Introduction






Service

Outlook


What we are recommending:

−“Integrate” R&D and “own” the chain, even if

virtually

vs. What holds many firms back

−History (externalities, slow mover advantage)

vs. What’s going to happen

−Technology, entrepreneurship, regulation


He hypothesized that the Earth was borne around the Sun…Yet philosophers completely abandoned this largely accurate vision of the Solar System, and the idea of a Sun-centered world disappeared for the next fifteen hundred years…Their traditional model was perfectly sensible, rational and self-consistent. They were content with their vision of the universe and their place within it…

Big Bang, Simon Singh


Total Household Assets and Selected Financial Assets* as a Share of Total

(Q1:52 Through Q2:04)

Source: Federal Reserve Board, Bernstein Research

10

20

30

40

50

60Q

1:5

2

Q1:5

4

Q1:5

6

Q1:5

8

Q1:6

0

Q1:6

2

Q1:6

4

Q1:6

6

Q1:6

8

Q1:7

0

Q1:7

2

Q1:7

4

Q1:7

6

Q1:7

8

Q1:8

0

Q1:8

2

Q1:8

4

Q1:8

6

Q1:8

8

Q1:9

0

Q1:9

2

Q1:9

4

Q1:9

6

Q1:9

8

Q1:0

0

Q1:0

2

Q1:0

4

Ho

us

eh

old

To

tal A

ss

ets

($

Tri

llio

n)

0%

10%

20%

30%

40%

50%

60%

Sh

are

of

To

tal

As

se

ts (

%)

Household Total Assets Selected Financial Assets as a Share of Total

* Includes money market funds, corporate equities, mutual funds, life insurance reserves, pension fund reserves and investment in bank personal trusts


Market Value of Corporate Equities: Level and a Share of GDP

(Q1:52 Through Q2:04)

Source: BEA, Federal Reserve Board, Bernstein Research

5

10

15

20

25Q

1:52

Q1:

54

Q1:

56

Q1:

58

Q1:

60

Q1:

62

Q1:

64

Q1:

66

Q1:

68

Q1:

70

Q1:

72

Q1:

74

Q1:

76

Q1:

78

Q1:

80

Q1:

82

Q1:

84

Q1:

86

Q1:

88

Q1:

90

Q1:

92

Q1:

94

Q1:

96

Q1:

98

Q1:

00

Q1:

02

Q1:

04

Mar

ket

Val

ue

($ T

rilli

on

)

0%

50%

100%

150%

200%

250%

Sh

are

of

GD

P (

%)

Market Value As a Share of GDP


Market Share Concentration of Investment Managers in Nelson Database

Source: Nelson Marketplace, Bernstein Research

Number of Cummulative

Managers Market Share\1

1 4%10 28%20 42%50 64%

100 77%500 96%

1,000 99%1,500 99%2,000 100%

1/ Of assets under management


Product Proliferation: The Expansion of Mutual Fund Offerings (1985 - 2004)

Source: Strategic Insight, Bernstein Analysis

1985 1990 1995 2000 2003Mutual Fund Families 231 389 553 681 636Annualized Growth Rate 11% 7% 4% -2%

Mutual Funds (one share class per fund) 1,404 3,389 5,941 7,629 7,345Annualized Growth Rate 19% 12% 5% -1%

Mutual Funds (all share classes per fund) 1,426 3,596 9,769 16,904 18,572Annualized Growth Rate 20% 22% 12% 3%

Memo:Average # of Funds/ Fund Family 6.1 8.7 10.7 11.2 11.5 Average # of Share Classes per Fund 1.0 1.1 1.6 2.2 2.5

NYSE Listed Companies 1,541 1,774 2,675 2,862 2,798Equity Mutual Funds (one share class per fund) 659 1,339 2,540 4,278 4,117

as percentage of NYSE listed companies 43% 75% 95% 149% 147%

Equity Mutual Funds (all shares) 671 1,399 4,086 9,838 10,976

as percentage of NYSE listed companies 44% 79% 153% 344% 392%


M&A Deals Where Target or Acquirer Was a U.S. Investment Management or

Investment Banking Firm (1993 Through 2004)

Source: Dealogic, Bernstein analysis

Deal Size PercentageUnder $25m 37%$25m to $50m 12%$50m to $100m 16%$100m to $200m 11%$200m to $300m 7%$300m to $500m 5%$500m to $1b 7%Over $1b 6%


Conclusion

As far-fetched as they seem, and although status of first-mover is

uncertain we believe their implementation is in the works

We expect significant visibility within two to three years

We believe there is tremendous opportunity in them, and tremendous

risk in not embracing them

We believe senior business managers should allocate some time and

resources in exploring these issues for their firms, today


[THIS PAGE IS INTENTIONALLY BLANK]


Guillermo MacLean, Senior Research Analyst

Mr. MacLean is a senior research analyst at Sanford C. Bernstein & Co., LLC. Together with Chief Investment Strategist, Vadim Zlotnikov, he focuses on business strategy issues affecting the investment management industry. This, with the purpose of serving not only as investment advisors to their clients (portfolio managers in investment management organizations), but also as business strategy consultants to those clients who may also have corporate strategy responsibilities. Their occasional research publications on the topic include “Hedge Fund Industry: Products, Services, or Capabilities?”, May 2003, “Reengineering Investment Management & Advice to the Individual”, March 2004, and “In Search of a Breakthrough”, January 2005.

Prior to joining Bernstein in 2003, Mr. MacLean worked as a business analyst in Putnam Investment's corporate development group. Prior to Putnam, he was a research analyst and assistant portfolio manager in Credit Suisse Asset Management's emerging markets team. He has also held various positions in equity research and corporate finance at Merrill Lynch, Morgan Stanley and the International Finance Corporation of The World Bank Group, focusing on a variety of industries including telecommunications, media, and electric utilities. During each of his years in equity research he was ranked among the top in his field according to Institutional Investor Magazine yearly surveys.

Mr. MacLean holds a BA in Economics from Georgetown University and an MBA from The Tuck School of Business at Dartmouth College.


SRO REQUIRED DISCLOSURES

• References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC and Sanford C. Bernstein Limited, collectively.

• Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues.

• Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for U.S. listed stocks and versus the MSCI Pan Europe Index for stocks listed on the European exchanges — unless otherwise specified. We have three categories of ratings:

Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.

Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.

Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.

• As of 09/03/04, our ratings were distributed as follows: Outperform/Buy - 51.0%; Market-Perform/Hold - 45.2%; Underperform/Sell - 3.8%.

OTHER DISCLOSURES

To our readers in the United States: Sanford C. Bernstein & Co., LLC is distributing this report in the United States and accepts responsibility for its contents. Any U.S. person receiving this report and wishing to effect securities transactions in any security discussed herein should do so only through Sanford C. Bernstein & Co., LLC.

To our readers in the United Kingdom: This report has been issued or approved for issue in the United Kingdom by Sanford C. Bernstein Limited, regulated by the Financial Services Authority and located at Devonshire House, 1 Mayfair Place, London W1J 8SB, +44 (0)20-7170-5000.

To our readers in member states of the EEA: This report is being distributed in the EEA by Sanford C. Bernstein Limited, which is regulated in the United Kingdom by the Financial Services Authority and holds a passport under the Investment Services Directive.

To our readers in Australia: Sanford C. Bernstein & Co., LLC and Sanford C. Bernstein Limited are exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 in respect of the provision of the following financial services to wholesale clients:

• providing financial product advice;

• dealing in a financial product;

• making a market for a financial product; and

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Sanford C. Bernstein & Co., LLC and Sanford C. Bernstein Limited are regulated by the Securities and Exchange Commission under US laws and by the Financial Services Authority under UK laws, respectively, which differ from Australian laws.

One or more of the officers, directors, or employees of Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited and/or its affiliates may at any time hold, increase or decrease positions in securities of any company mentioned herein.

Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, or its or their affiliates may provide investment management or other services to the pension or profit sharing plans, or employees of any company mentioned herein , and may give advice to others as to investments in such companies. These entities may effect transactions that are similar to or different from those recommended herein.

CERTIFICATIONS

• I/(we), Vadim Zlotnikov, certify that all of the views expressed in this report accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this report.

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