1. Art and Diseño

European Growth Services
Portfolio Performance
Portfolios Underperform as Markets Surge
Display 1
Global equity markets continued to rally in the third quarter, as signs of an
Risk Appetite Rose in the Third
Quarter
economic recovery grew clearer. Our portfolios posted strong absolute gains,
but underperformed the benchmark as investors punished growth stocks.
3Q:2009 Returns for Selected Indices in Local
Currencies (Percent)*
22.4
20.2
16.8
Rally Gathers Momentum
from this sector, including Barclays and
Equities continued to surge ahead in the
HSBC.
15.6
14.8
third quarter (Display 1), as investors
Unicredit, Banco Bilbao Vizcaya, and
The MSCI Europe Index finished the period
Societe Generale.
Ja
pa
n
from not owning were financials, including
or
ld
were on the mend.
W
of the 10 stocks that we suffered most
US
Additionally—and highly unusually—nine
financial system and the global economy
Eu
Em
ro
er
pe
gi
ng
M
ar
ke
ts
grew increasingly confident that the
UK
(1.4)
*Emerging markets represents by MSCI Emerging Markets
Index, Europe represented by MSCI Europe, Japan by TOPIX, UK
by FTSE All Share, US by S&P 500 and World by MSCI World.
Source: FTSE, MSCI Barra, Tokyo Stock Exchange and Alliance
up 18%. It has now risen 25.1% since the
start of the year and more than 57% since
Within industrials, a number of holdings
its low point on March 9.
also detracted. Outsourcing provider
Capita Group underperformed, while BAE
Many sectors posted strong gains, though
Systems lagged due to investors’ concern
financial stocks led the rally (Display 2).
about its large pension fund deficit.
Economically sensitive sectors produced
the largest returns.
Display 2
Market Surge Lifted All Sectors
3Q Sector Returns in Euros*
33.0
Financials
22.0
Industrials
21.5
Materials
At the sector level, overweight positions in
IT and underweight positions in financials
Value stocks strongly outperformed
detracted from returns. However,
growth stocks during the quarter. The
underweight positions in the more
MSCI Europe Value Index returned 22.2%,
defensive utilities and telecom sectors
well ahead of the MSCI Europe Growth’s
modestly aided performance.
rise of 13.7%.
Contributors to portfolio returns over the
Despite strong absolute returns, our
quarter were diverse, but generally came
portfolios lagged the market for the
from cyclical sectors.
quarter. This was primarily the result of
17.4
Telecoms
17.0
Consumer Discretionary
15.4
Healthcare
Consumer Staples
14.8
Utilities
14.1
Energy
Information Technology
13.0
9.3
As of September 30, 2009
Source: MSCI Barra and Alliance
Chartered was among the largest
weak stock selection. Sector selection also
The portfolios’ largest contributor was
individual contributors, as investors began
detracted.
Volkswagen. The German car manufactur-
to realize that prospects were improving
er agreed to its takeover of Porsche during
for Asian consumer banking revenues.
Stock selection was weakest in the
the quarter, resulting in a gain in Volkswa-
financials and industrials sectors. The
gen preferred shares.
third-quarter value rally was particularly
Global diversified mining group Xstrata
rose due to strengthening demand for
evident in the financials sector. A number
Despite the overall negative impact of
ferrochrome and increased production
of our portfolios’ largest detractors came
financials on the portfolios, Standard
volumes of copper, thermal coal, mined
nickel and zinc for the first half of 2009.
These statements reflect the performance of the majority of accounts. Individual account performance may
vary due to a variety of factors, including benchmark, account guidelines, investment vehicle implementation
(if any), fees charged and timing of cash flows.
3Q 2009 QUARTERLY REPORT
1
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3Q 2009 QUARTERLY REPORT
Growth Equities
Market Overview
Risk Assets Continue to Rally as Signs of Recovery Proliferate
Equity and credit markets rallied further in the third quarter as investors
Display 1
Pools of Cash Remain on Sidelines
gained confidence that a sustainable economic recovery is under way. We
US Money-Market Assets
USD Trillions
expect a return to modest global economic growth in 2010. As the recovery
gains traction, remaining risks and uncertainty are keeping risk premiums
4
elevated and—in our view—attractive.
3
Risk Assets Rally
Recovery Is Under Way
Risk assets continued to rally in the third
The economic recovery—which began in
quarter as investors gained confidence that
China and other parts of Asia in the
the global economy was emerging from
second quarter—appeared to gain speed
a deep recession and appears on track for a
and traction globally in the third quarter.
return to modest economic growth. Stocks
2
1
0
2006
2007
2008
1Q:2009 2Q:2009
Source: Haver Analytics and AllianceBernstein
rallied globally for the second consecutive
Industrial production rebounded sharply
quarter; the MSCI World Index rose 17.5%
around the world (Display 2). The Global
in dollar terms and has recouped about half
Manufacturing Purchasing Managers’
its losses from the peaks of 2007.
Index (PMI) jumped to its highest level
Corporate bonds, commercial mortgage-
since early 2008 in August, and exceeded
backed securities and other nongovern-
50—the threshold indicating expan-
ment debt also rallied as spreads narrowed.
sion—for the second consecutive month.
Display 2
Manufacturing Has Rebounded
Industrial Production
3-Month % Change
30
15
Automakers and other manufacturers are
In sum, a sense of normality is returning to
boosting production to restock depleted
the economy and financial markets. While
inventories in anticipation of meeting
risk premiums remain high versus historical
pent-up demand.
0
(15)
Emerging Countries
norms, they have receded dramatically
Global
from their heights at the peak of the
Massive doses of coordinated monetary
recent crisis. Liquidity is returning, and
and fiscal stimulus from governments and
credit is becoming cheaper and more
central banks around the world have also
readily available as markets normalize.
provided impetus for the recovery—and
Corporate earnings look to have reached
there is much more stimulus to come. For
bottom after a two-year plunge, and
example, of the US$787 billion of
positive earnings surprises are increasing.
spending and tax cuts promised by the
(30)
99
01
budgeted for 2009, with much of the
dative monetary policies has supported the
balance due in 2010.
05
07
09
Display 3
Consumers Are Repairing Finances
Household Debt Burden
Percent
Obama administration, just a third was
The continuation of extremely accommo-
03
Through July 31, 2009
Source: Haver Analytics and AllianceBernstein
US
UK
60
22
20
rebound in risk assets: by keeping
45
short-term interest rates low, central banks
Similarly, while interest rates will eventually
are essentially raising the opportunity cost
have to rise, major central banks are not
18
30
16
of staying in “safe” assets such as cash
likely to dramatically reverse course as long
and short-term government bonds. Still,
as inflationary pressures remain benign.
Projected
Projected
14
15
87
94
01
08
87
94
01
08
despite extremely low yields, significant
pools of money remain on the sidelines
Is the Recovery Sustainable?
(Display 1). Reentry of these funds into
The global economic recovery has been led
the market could extend the current rally.
by China and other countries in emerging
3Q 2009 QUARTERLY REPORT
US household financial obligations as a percent of disposable
income, and UK average mortgage repayment (interest and
principal) as a share of average wage; historical data through
June 30, 2009; projections through 2010
Source: Haver Analytics, US Federal Reserve and
AllianceBernstein
3
Asia. Many observers wonder if the
healthier one; the shift toward increased
recovery can be sustained if the US
domestic demand from China and other
consumer continues to save more and
large emerging economies is a key
spend less. After all, the American
ingredient to sustaining global economic
consumer accounts for as much as 70% of
growth and addressing imbalances.
Display 4
Emerging Markets Increasingly
Important
Share of World GDP
US GDP, and in the decade leading up to
the recent crisis, the US consumer’s
In short, weak consumer spending in the
borrowing and consumption binge helped
US and other developed markets may not
underpin global economic growth.
be the roadblock to a sustainable global
20%
Emerging
Countries
31%
US
30%
24%
economic recovery that many expect.
24%
A Brighter 2010
15%
Japan
8%
10%
Other
11%
Euro Area/UK
27%
These concerns are not without foundation. Consumer spending remains
depressed by stubbornly high unemploy-
We expect emerging-market economies to
ment and continued deleveraging. But in
continue to lead the recovery in 2010
our view, these concerns are overstated.
(Display 5). Overall, we expect global
2000
2008
Source: Haver Analytics and International Monetary Fund
economic growth of 3.4%, close to its
Display 5
First, consumers in the US and other
long-term average. We see US economic
A Return to Modest Growth
developed markets, while still under
growth of 3.5%—higher than the
financial stress, have made significant
consensus expects but lower than previous
progress over the past year in rebuilding
periods of recovery following deep
their balance sheets. The portion of
AllianceBernstein Real GDP Forecasts
Percent
economic downturns.
Japan
disposable income eaten up by debt
service has fallen sharply in both the US
(2.2)
Global
1.5
(4.2)
UK
2.0
Nevertheless, significant risks and
and the UK since the peak of the crisis
challenges persist for the global economy
(Display 3, previous page). In fact, US
and financial markets. Many investors
households have cut this ratio to its lowest
worry about how governments and central
level since 2000.
banks around the world will wind down
3.4
(5.5)
Euro Area
2.4
programs as their economies recover. Will
particularly in the US, as consumers
they have the discipline to tighten
continue to reduce their debt burden and
monetary policy and rein in ballooning
save more. As a result, households should
fiscal deficits (Display 6)? If not, inflation
be in far better financial shape—and more
could surge.
2010F
(2.5)
Canada
2.5
(2.4)
US
3.5
1.0
Emerging Countries
6.2
their massive fiscal and monetary stimulus
We expect the deleveraging to continue,
2009F
(3.6)
As of October 1, 2009
Source: AllianceBernstein
Display 6
Fiscal Deficits Bear Watching
Fiscal Surplus/Deficit
Percent of GDP
5
willing to increase their spending—by late
2010, when the benefits of fiscal stimulus
The transition will be challenging, but the
start to wane.
creativity shown by policymakers during
0
the recent crisis gives us comfort in their
Second, after a decade of rapid economic
ability to adjust policy when necessary. In
expansion, emerging-market countries
our view, these risks bear close monitoring
now contribute more to global GDP than
but do not likely pose an economic threat
the United States—or the euro area and
this year or next.
(10)
Projected
UK
(15)
the UK combined (Display 4).
The upside of continued anxiety about the
4
US
(5)
The fact that emerging Asian economies
economic outlook is that attractive
started to rebound in the second quarter
opportunities remain for active managers
before consumption in developed
to add value. We see sizable opportunity
countries indicates that the current
for equity managers to generate excess
recovery in emerging-market economies is
returns through stock selection and for
driven mainly by domestic demand. In the
fixed-income managers to take advantage
past, exports were the main driver. In our
of the significant return potential in the
view, a more balanced global economy is a
credit sector.
60
70
80
90
00
10
Historical data through fiscal year 2008; US projections through
fiscal year 2019; UK projections through fiscal year 2009
Source: Office of Management and Budget, UK Office for
National Statistics and AllianceBernstein
3Q 2009 QUARTERLY REPORT
European Growth Services
Portfolio Positioning
Repositioning Portfolio as Growth Opportunity Develops
Display 1
There are signs that Europe is emerging from recession and that earnings
Exports Recover from Low Levels
growth estimates may start to recover. We have responded by adding to our
Euro-Area Exports
140
holdings in technology and financials, funding these additions through the
sale of stocks that had started to exhibit less attractive growth characteristics.
Outlook Improves as Recession
Fades
Earnings growth estimates have fallen
After the recession in Europe proved to be
Historically, after such dips, year-on-year
deeper than originally expected, recent
estimates have subsequently seen
economic data have started to look more
substantial growth, indicating a potentially
encouraging. Euro-area exports to
elevated opportunity in the coming
non-euro-area countries rose in the second
months (Display 2).
substantially in the last six months.
quarter, albeit from low levels (Display 1).
At the same time, the market’s unwilling-
(€ Billions)
130
120
110
100
2007
Positive Prospects for Earnings Growth
ness to pay for anticipated earnings
demand has started to pick up. There is
growth is at a low that is probably
mounting evidence that the recession is
unsustainable (Display 3). This creates an
60%
over, after a number of euro-area
elevated opportunity for growth investors.
40%
second quarter.
2009
Display 2
Simultaneously, euro-area domestic
economies returned to growth in the
2008
Through September 30, 2009
Source: Haver Analytics and AllianceBernstein
Year on Year Earnings Growth
+54% +52%
+50%
+34%
+40%
+34%
20%
Portfolio Implications
0%
Technology is one of our portfolios’ largest
(20)%
The same is true in the UK, where the
overweights. Over the quarter we added
(40)%
composite Purchasing Managers’ Index
to our position in ASML, which makes
(60)%
rose to its highest level in August since
capital equipment for use in the semicon-
2007, and export volumes have also
ductor industry. Our research suggests that
increased.
the market has underestimated the return
(12)%
(18)%
(29)%
(33)%
(33)%
(44)%
71 74 77 80 83 86 89 92 95 98 01 04 07
Through September 30, 2009
Source: Bank of America Merrill Lynch
of demand in the consumer electronics
Changes in asset prices have also been
industry in the second half of the year.
encouraging: after having fallen 20%
Display 3
MSCI Europe Value Assigned to Future
Growth
between mid-2007 and April this year, UK
We also initiated a position in Cap Gemini,
house prices have confounded expecta-
as we believe the company has successfully
tions of a protracted decline and have risen
reduced its cyclical exposure by outsourc-
by 5%.
ing much of its cost base. We additionally
100%
believe it is well positioned to benefit from
50%
Early indications from company meetings
that we have been holding since the end
a recovery in corporate IT spending over
Since end-1969
Expensive
Avg. 32%
0%
Avg. -1SD 8%
the coming year.
(50)%
of summer are supportive of these more
Inexpensive
encouraging data. Companies have been
We added DNA technology company
(100)%
reporting that their order books have
Qiagen, which our research suggests has
(150)%
stabilized, that restocking is starting, and
attractive growth characteristics.
that their outlook is more positive.
We also bought shares in Alcatel Lucent,
3Q 2009 QUARTERLY REPORT
Avg. +1 SD 56%
71
77
83
89
95
01
07 09
As of September 30, 2009
Source: Datastream, MSCI, Morgan Stanley Research
5
which offers mobile and fixed line network
India’s infrastructure needs alone could put
services, as our research suggests the
significant pressure on supplies of copper
company will benefit from increases in
and coking coal, which is used to make
mobile data usage due to the popularity of
steel.
smart phones. We partially funded these
new positions through the sale of Infineon
Meanwhile, both secular trends and
and SAP.
economic stimulus programs in China are
likely to sustain intense demand for
New Holdings in Financials
materials despite probable short-term
We have been modestly increasing our
fluctuations. Our investments in Rio Tinto
position in financials over the quarter
and ArcelorMittal offer exposure to a
(Display 4), having been underweight the
range of commodities.
Display 4
Gradually Closing Our Financials
Underweight
Active Weights Versus MSCI Europe
0.4%
(0.6)%
(0.9)%
(2.8)%
Q2
Q3
European Growth
sector for much of the credit crisis.
European Concentrated Growth
Xstrata is likely to be a key beneficiary of
Based on representative European Growth and European
Concentrated Growth accounts
As of September 30, 2009
Source: MSCI and Alliance
The market’s penchant for rewarding
the demand we see for copper and coal in
weaker companies at the expense of
particular. Its exposure to these key
stronger ones was most pronounced in
commodities and its history of sound
financials in the third quarter. Portfolio
management and effective cost control
holdings such as Credit Suisse underper-
create attractive potential for upside
Display 5
formed peers that had far less attractive
surprise (Display 6).
Standard Chartered: Well Diversified
Franchise in Growth Markets
fundamentals.
We repositioned our holdings within the
We see exceptional dynamic gap opportu-
healthcare sector, establishing a position in
nities in high quality capital-markets
Shire as our research suggests that the
companies such as Credit Suisse, which
market underestimates prospects for its
have market share advantages, minimal
attention deficit disorder and hyperactivity
exposure to government bailouts and
drugs.
rock-solid fundamentals.
1H:2009 Profit by Region
Europe + America 4%
Africa 8%
Hong Kong 17%
MESA** 18%
Singapore 12%
Korea 7%
India 16%
Other Asia Pac 18%
Regional Contribution to Growth (2012E vs 2008)
We funded this by selling our position in
We also are excited about Standard
AstraZeneca, which had outperformed in
Chartered, which has strong exposure to
recent months, and in Bayer, which posted
Asian markets (Display 5), where debt
weak earnings.
levels are far lower than in the West.
In the consumer discretionary sector, we
Over the quarter, we initiated a position in
closed our position in Greek lottery and
Barclays, following a reevaluation of the
betting agency OPAP due to worries about
growth potential of its acquisition of
the implications of new taxes on betting in
Lehman Brothers’ US assets. We also
Greece. We also exited our position in
bought ING Group and added to our
Compass Group, after it reported
holdings in HSBC.
disappointing revenues.
26% 23% 19%
10% 20% 14%
HongSingapore
India MESA**Africa
Hong
Singa- KoreaOther
Korea OtherAPIndia
MESA* Africa
Kong pore
Kong
AP
Display 6
Xstrata: Potential for Upside Surprise
Alliance 2010 Estimates vs. Consensus
Despite the style headwinds that have hurt
attractive opportunities.
our relative performance, we believe that
Return on Equity
165
Looking Ahead
and Man Group in favor of these more
superior rewards as the market regains
From both a secular and a company-specif-
equilibrium after both the trauma of the
ic standpoint, we are bullish on commodi-
recession and the bout of euphoria that
ties. Demand from developing nations
greeted the first signs of recovery.
remains clear despite a tumultuous year.
6
13.8%
136
superior growth fundamentals will reap
Opportunities in Commodities
(22)%
Eur
+
Eur+
Am***
Am**
As of September 30, 2009
*Middle East and South Asia
**Europe and Americas
Source: Citigroup, CSFB HOLT, company reports and
AllianceBernstein; see Disclosures and Important Information.
EPS (Pence)
We sold out of Hannover Re, Resolution
9%
12.1%
Consensus
Estimate
Alliance
Estimate
Consensus
Estimate
Alliance
Estimate
As of September 30, 2009
Source: Bloomberg and Alliance
3Q 2009 QUARTERLY REPORT
© 2009 AllianceBernstein L.P.
Note to All Readers:
The information contained herein reflects, as of the date hereof, the views of AllianceBernstein L.P. (or its applicable affiliate providing this
publication) (“AllianceBernstein”) and sources believed by AllianceBernstein to be reliable. No representation or warranty is made concerning
the accuracy of any data compiled herein. In addition, there can be no guarantee that any projection, forecast or opinion in these materials will
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3Q 2009 QUARTERLY REPORT
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3Q 2009 QUARTERLY REPORT