INVESTMENT-MANAGEMENT
  SERVICES AND POLICIES
TABLE OF CONTENTS




Foreword ..............................................................................................
FOREWORD
Bernstein Investment Research and Management                                         3. Combining domestic and fo...
IMPORTANT INFORMATION ON CHANGES IN ASSET ALLOCATION AND ACCOUNT CLOSINGS
A client may change his or her asset allocation ...
securities, REITs, and other assets—your asset allocation.       the disadvantages of selling a concentrated stock positio...
relation to their realistic earnings prospects, attempting       selecting securities are regularly reevaluated for histor...
depth understanding of these companies’ products, services,        further purchases. Moreover, our business activities (o...
DECISION-MAKING RESPONSIBILITY                                    respect to asset allocation, tax management, rebalancing...
will actually be attained. Over time, investing in stocks has    falls out of favor (if your account is concentrated in ou...
and industry. While by definition global diversification                            and fixed-income portions of your bala...
predetermined parameters to pursue stronger-than-usual          Stock Exchange and American Stock Exchange, as well
opport...
differ from those of the U.S. stock indexes, the performance    to provide a modest annualized premium to either the
of th...
styles abroad, and generate a more consistent premium to         Prominent risks attend investments in emerging-markets
th...
priced relative to their future earnings power and dividend-    of higher-quality securities, and high-yield bonds may be
...
greater the expected return, but also the greater the price      and agency securities, with agency securities normally
vo...
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
Investment Management Services and Policies
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Investment Management Services and Policies

  1. 1. INVESTMENT-MANAGEMENT SERVICES AND POLICIES
  2. 2. TABLE OF CONTENTS Foreword ..............................................................................................................................................................................1 Important Information on Changes in Asset Allocation and Account Closings ....................................................................................... 2 Investment-Management Services .............................................................................................................................................. 2 Investment-Management Decision Making ................................................................................................................................... 3 Portfolio Construction and Your Asset Allocation ........................................................................................................................... 6 How to Open an Investment Account ........................................................................................................................................ 16 How to Open a Pension, Profit-Sharing, Endowment or Foundation Account ....................................................................................... 16 Policies for Opening or Closing an Account and Communicating Instructions to Us.............................................................................. 16 Portfolio Information Systems and Review ................................................................................................................................. 18 Client Communications ......................................................................................................................................................... 18 Tax-Related Strategies and Communications............................................................................................................................... 19 Proxy Voting ....................................................................................................................................................................... 20 Execution and Allocation ....................................................................................................................................................... 20 Investment-Management Fees and Transaction Charges ................................................................................................................ 23 Brokerage Placement Practices ............................................................................................................................................. 24 Policy Review ..................................................................................................................................................................... 25 Other Business Activities ....................................................................................................................................................... 25 Alliance Capital Management Corporation—Executive Committee .................................................................................................. 28 Chief Investment Officers ..................................................................................................................................................... 29 Investment Performance Auditors ............................................................................................................................................ 30
  3. 3. FOREWORD Bernstein Investment Research and Management 3. Combining domestic and foreign investments, and the (“Bernstein”), a unit of Alliance Capital Management L.P. value-based and growth-oriented approaches to stock (“Alliance Capital” or “Alliance”),* provides a variety of investing, should further reduce your long-term risk and investment-management services for portfolios consisting, enhance your long-term return. The reason, again, is low in whole or part, of equity, fixed income, real estate correlations: Markets in different parts of the world tend investment trusts (“REITs”), and other securities—suitable to perform relatively independently of one another, and to individual risk/reward objectives. This Investment- value stocks tend to have their best and worst periods Management Services and Policies manual describes our at opposite times from growth stocks. It’s also true that investment-management philosophy and methods in detail. foreign securities carry risks of their own—that the For further information, clients should speak directly with currencies they’re denominated in will decline against their Bernstein Advisor. your home currency, hence lowering the value of your Investing is risky. It may involve fluctuations in the market foreign investments; that foreign governments will value of your invested capital, failure to meet your particular impose currency-exchange-control or other regulations objectives, permanent loss, and possibly even negative that will prevent you from cashing out; that investor effects on your lifestyle. Before offering you a particular safeguards of various other kinds will be inadequate, and service, we consider all the relevant information we have that political, economic, regulatory, and similar concerns about your circumstances, objectives, and constraints, (which can be more extreme outside than within the U.S.) including your investment temperament and tax status, in will affect you adversely. In any given year, international addition to everything we’ve learned through decades of diversification may result in reduced portfolio returns research on and experience with capital-markets behavior. and/or higher volatility. All these risks are heightened Nevertheless, we cannot ensure that your objectives will be in the emerging markets, as are general market volatility attained or that you’ll suffer no adverse consequences. and trading costs. Your returns abroad may also be affected by foreign taxes or withholdings on dividends With that in mind, our services are based on the following and interest. We take pains to guard against as many of tenets: these dangers as we can, through steps including locking 1. The most important determinant of your investment in exchange rates through currency hedging (using results is your asset allocation, or how your capital is foreign-currency forward contracts) where practicable apportioned among stocks, bonds, and other securities. and advisable. But we can’t and don’t claim to be able to Stocks provide the best long-term growth potential, but eliminate all the risks of foreign investing. their market value fluctuates widely. Bonds provide the 4. Finally, your returns will be affected not only by best current investment income, but they hold little, if movements of the capital markets in general but by our any, growth potential above inflation. And REITs offer particular strategies in each market. Our value-oriented dividend income similar to that of some bonds with services concentrate in industries and companies that our modest dividend growth potential. research suggests are underpriced in the market, but our 2. Diversifying among the major asset classes should reap research may be mistaken. Our growth-oriented services more long-term return for the risk you take, or a similar concentrate in companies and industries that our research long-term return with less risk, than investing solely in indicates have growing profits that will continue to grow any one market. faster than elsewhere, but this research, too, may be mistaken. The performance of your account is likely to The reason is that stocks, bonds, and REITs tend to differ from that of broad market indexes. Your account perform differently under similar circumstances—that may even underperform such indexes, particularly when is, they exhibit relatively low correlations of returns. For value-oriented investing falls out of favor (if your example, bonds often make money when stocks are doing account is concentrated in value-oriented services), or poorly, and REITs go through their own performance when growth-oriented investing falls out of favor (if cycles, with low correlations against stocks and bonds. your account is concentrated in the Strategic Growth With gains in one market offsetting losses in another, service), although a combination of these services may a portfolio diversified among a range of low-correlated tend to lessen volatility over time. Nonetheless, our assets should grow more steadily than one invested in a active strategies have largely been successful in the long single asset class. run, and they’re balanced in our accounts with systematic * Alliance Capital Management L.P. is an investment adviser registered under the Investment Advisers Act of 1940 (SEC File #801-56720). Investment-Management Services and Policies 1
  4. 4. IMPORTANT INFORMATION ON CHANGES IN ASSET ALLOCATION AND ACCOUNT CLOSINGS A client may change his or her asset allocation or instruct us to partially or completely liquidate his or her account at any time by sending us written notice signed by all relevant parties. Prior to receiving written notice, if a client orally requests that we discontinue management, we will do so and confirm these instructions to the client in writing. Notice becomes effective upon our receipt if it is signed by all relevant account parties and sent by U.S. mail, certified mail, express mail or facsimile transmission. However, we will not accept notice by electronic transmission over the Internet or some other electronic system (other than facsimile transmission) or by messages left on our voice-mail system. We recommend that all transmissions via facsimile be confirmed by a phone call to ensure adequate and timely delivery, since we will not be responsible for any mechanical or other failure in transmission. A notice of discontinuance of management should specify whether you wish securities and other positions that are in your account to be liquidated. Under normal market conditions, a change in asset allocation or a partial or complete liquidation of your positions is commenced by the close of business on the business day following our receipt of the notice. While this is our policy, there are times when immediate accommodation of a client request may not be possible—notably, periods of high volatility and extreme trading volume. During such periods, which can occur anywhere in the world, it may take longer for an asset-allocation change or liquidation to be initiated, and the prices of securities may be significantly different at the time of liquidation than at the time of notice. Our concern is that short-term tactical decision making based on current events or market extremes can be difficult to implement—another reason that we advise clients to take a long-term approach to investing. When we discontinue management of a client’s account, we will refund the portion of the fee that has not been earned. risk controls, albeit not to a degree that would neutralize in the private-placement memoranda. Our investment- all risk. management services are (1) discretionary, (2) disciplined and (3) individualized. We create and maintain separate Further information on specific risk factors is contained in accounts tailored to the individual investment needs and this brochure under the descriptions of the various services objectives of each of our clients. and products we offer. Depending on the type or types of portfolios a client selects, different types of risk/reward considerations will apply. Clients should carefully consider USE OF DISCRETION the specific risk factors associated with our different services Accounts are managed on a discretionary basis. This means when evaluating their investment objectives. we have the authority and responsibility to formulate investment strategy on your behalf, including deciding INVESTMENT-MANAGEMENT SERVICES which securities to buy and sell, when to buy and sell, and in what amounts, in accordance with agreed-upon We manage investment portfolios for individuals, objectives. endowments, trusts and estates, charitable foundations, partnerships, corporations, investment companies, and tax- exempt funds such as pension and profit-sharing plans. DISCIPLINED INVESTMENT DECISION MAKING Portions of our clients’ accounts may be invested in the Our investment decision making is systematic, disciplined, portfolios of the Sanford C. Bernstein Fund, Inc. (the “Fund”), and based on rigorous estimates of investment value. Our a registered investment company offering nine fixed- process and philosophy are described in the section entitled income portfolios, two developed-markets international- “Investment-Management Decision Making” below. equity portfolios and an emerging-markets equity portfolio. The Fund’s prospectus describes the investment policies and INDIVIDUAL TREATMENT AND INVESTMENT PLANNING procedures regarding these portfolios. We also offer REIT Each account is maintained separately and invested securities in our AllianceBernstein Real Estate Investment according to your particular financial needs and goals, Institutional Fund (the “REIT Fund”), and the investment tax situation, investment temperament, and tolerance for policies and procedures for that Fund are described in risk. We assist most clients in setting investment goals that Fund’s prospectus. Finally, we offer certain of our appropriate to their circumstances. The role of our Bernstein investment-management services in private-placement Advisors is to assist clients in determining the appropriate collective vehicles for eligible clients. These are described mix of domestic and international stocks, fixed-income 2 Bernstein Investment Research and Management
  5. 5. securities, REITs, and other assets—your asset allocation. the disadvantages of selling a concentrated stock position We offer investment-management services that span the include the immediate recognition of taxable gain and the world’s capital markets. With the limited exceptions loss of any potential upside in the stock—both of which described throughout this booklet, the equity portion of may be considerable. Certain transactions used to deal with your account is managed and individual security selections concentrated portfolios may give rise to substantial risk and are made by or under the supervision of our Investment are not suitable for all clients. Policy Groups. The fixed-income portion of your account is supervised by portfolio management teams under the INVESTMENT-MANAGEMENT DECISION MAKING supervision of the Investment Strategy Committee chaired by the Chief Investment Officer of Fixed Income. For all We base our investment-management activities on our services, within the context of our investment approach, and investment-research findings as supplemented by third- supported by our in-house research and trading departments, party research. In so doing, we follow the separate but our Portfolio Management staff applies disciplined money- related disciplines described below. management techniques in order to maintain portfolios that we believe are appropriate to each client’s individual VALUE EQUITY ANALYSIS situation. In our U.S. value portfolios, our goal is to purchase stocks that trade at a significant discount to their long-term We provide global asset-allocation guidance through our investment-planning tools. We may utilize an investment- earnings power as determined by our investment research. Accordingly, forecasting corporate earnings and cash flow is planning analysis to illustrate a probable range of outcomes the heart of our value style equity-management process, and for your asset values over time if invested with different stock and fixed-income mixes. In these analyses, we utilize we employ a large staff of analysts devoted to this task. assumptions about the risk and reward potential of different Our forecasting method involves quantifying what we categories of financial assets, and we illustrate a probable believe to be the critical variables that control business range of outcomes after your anticipated withdrawals performance and analyzing the results in order to forecast and after deduction of taxes at your tax rates to help you the long-term prospects of the companies we follow and to determine whether a particular asset allocation is suitable to develop expected returns for their securities. your financial requirements and tolerance for risk. Although We employ industry and company specialists and general assumptions about risks and returns are necessary decision- analysts. Our analysts do fundamental market and company making tools in these analyses, actual risks and returns may research and draw on such diverse sources of information differ since they will be subject to a variety of economic, as company reports, press releases, prospectuses, regulatory market, and other variables, and you should not construe filings, financial and trade newspapers and magazines, these analyses as a promise of the actual future results corporate rating services, scholarly journals, on-line you may receive. You should review your asset-allocation quotation services and databases compiled by governmental decision with us at least annually, so that any changes in our agencies and others, and conversations with managements, assumptions or your financial circumstances and objectives suppliers, clients, competitors, and industrial consultants. can be taken into account. Industry and company forecasts are made within the As part of our asset-allocation guidance, we also provide framework of long-term economic settings. We typically special resources through our Wealth Management Group, measure companies’ financial performance over a full whose purpose is to counsel high net worth private clients economic cycle, including a trough and a peak, and forecast who may have special needs, such as strategies for dealing financial performance within the context of our projections with specific trust and estate vehicles and concentrated for real economic growth, inflation, and interest-rate positions in low-basis stock. We provide tools to help such change. clients compare the implications of holding a large position of a single equity versus selling all or a portion of that position, as well as other strategies. However, before making GROWTH EQUITY ANALYSIS any decision about wealth-transfer or single-stock strategies, Our approach to growth-oriented U.S. equity investing including selling a concentrated position and options-based employs a systematic, disciplined, research-based process transactions, clients should review the implications of those to identify large-capitalization companies with superior strategies with their tax and legal advisors. For example, earnings growth that seems sustainable. We seek to identify such companies before their stocks become overpriced in Investment-Management Services and Policies 3
  6. 6. relation to their realistic earnings prospects, attempting selecting securities are regularly reevaluated for historical to avoid companies whose fast growth seems likely to efficacy. Our goal is always to refine an analytical process slow. The process focuses on the future rather than the that, in disciplined fashion, synthesizes quantitative and past, and conceives of growth broadly rather than within fundamental research. Account turnover will vary, as would any particular market segment or industry. Our ability be expected under our account-by-account management to predict superior earnings growth depends upon the approach. For 2003 and 2002, historical turnover for correctness of our views on company fundamentals. Strategic Value accounts under the direction of the Investment Policy Group throughout the year, including With regard to our growth strategy, we rely on research cash flow into these accounts, was approximately .25 and analysts in the U.S. and overseas who collectively cover .26, respectively, and for Diversified Value accounts was roughly 500 large-capitalization stocks. These growth approximately .24 and .19, respectively. analysts hold meetings with company management, key suppliers, competitors, customers, and Wall Street analysts In the case of the Strategic Growth service, the portfolio seeks following the stocks so as to increase their understanding of long-term growth of capital by investing predominantly business strategies and competitive responses. in the equity securities of a number of large, carefully selected, high-quality U.S. companies that are judged by STOCK SELECTION AND PORTFOLIO CONSTRUCTION the investment professionals as likely to achieve superior growth. We attempt to determine the future share price We use a variety of tools to evaluate stocks and portfolios based on the price-to-earnings ratio likely to prevail at the in an attempt to maximize return, given the risk levels conclusion of the forecast period. This investment strategy appropriate to our clients. For our large-capitalization emphasizes stock selection and investment in the securities U.S. value services, we use an internal-rate-of-return of a limited number of issuers. We rely heavily on the methodology—i.e., a dividend discount model—which fundamental analysis and research of our large internal links the present value of our analysts’ forecasts of company research staff, which generally follows a primary research cash flows to the current stock price in order to compute universe of approximately 500 companies that have strong an “expected return” for each security in our universe of management, superior industry positions, excellent balance primarily U.S.-traded large-capitalization companies. We sheets, and superior earnings-growth prospects. Each week, rank a large number of stocks based on this expected- our research analysts with responsibility for following return measure. In addition, we rank a large number of growth companies compile a list of the top 100 companies stocks in our universe of U.S.-traded small-capitalization (the “Alliance 100”) that they consider the best investments companies on the basis of price relative to forecasted average at that time. A team of investment professionals distills the earnings power. Average earnings power for these small- analysts’ lists down to the Strategic Growth portfolio. capitalization companies is defined as the average earnings that we expect the company to generate over a full business The research analyses supporting buy and sell decisions for cycle. Rankings change continually as price and forecast our International and Tax-Managed International Portfolios information change. We may use a variety of valuation (benchmarked to a Morgan Stanley Capital International techniques from multiple services before making decisions [“MSCI”] EAFE Index) are based largely on specific for a particular service. company and industry findings rather than on broad economic forecasts. We diversify the portfolios between In addition to the expected-return analysis, our assessment growth and value equity investment styles, drawing from of portfolio risk influences our portfolio-construction our growth and value investment disciplines to produce decisions. To this end, we may consider aggregate portfolio blended portfolios. Investment decision-making for these characteristics (such as sector and security concentration, portfolios is systematic and centralized, pursued by an price/book and price/earnings ratios, and dividend yields) investment policy group working in concert with, and when deciding how much of each security we wish to guided by, the findings of our international growth and purchase for each client. We also may monitor Wall Street value research teams. analysts’ earnings-estimate revisions and relative return trends so as to better time new purchases and sales of The International portfolios’ international growth stocks securities. Other client- or portfolio-specific considerations are selected using Alliance’s research-driven international may also influence our tactical decisions. For example, in growth investment discipline, which relies heavily upon global portfolios, country and currency risk are among our large international growth research staff to follow the additional risk factors we consider. All our tools in over 500 non-U.S. companies. We seek to have an in- 4 Bernstein Investment Research and Management
  7. 7. depth understanding of these companies’ products, services, further purchases. Moreover, our business activities (or those markets, and competition, as well as a good knowledge of of a related person), such as the acquisition of a publicly the management of most of the companies. International traded company, could prevent additional transactions in growth analysts prepare their own earnings estimates and the securities of that company. All of the above limitations financial models for each company followed, and place may prevent us from purchasing securities for our clients research emphasis on identifying companies whose strong during periods in which it might otherwise be desirable to management, superior industry positions and excellent buy. balance sheets may contribute to substantially above- average future earnings growth. The international growth FIXED-INCOME SECURITY SELECTION AND PORTFOLIO CONSTRUCTION investment team constructs a portfolio of equity securities We view fixed-income investments on a total-return basis, of a limited number of carefully selected, high-quality considering capital appreciation or depreciation—that is, companies that are judged likely to achieve superior earnings change in the securities’ market prices (including currency growth. The International portfolios’ international value exposure)—as well as interest income. We utilize a variety stocks are chosen from stocks perceived to be underpriced of quantitatively and qualitatively based techniques to —those with low price/earnings ratios, low price/book- evaluate the relative attractiveness of government, mortgage- value ratios and high dividend yields. Our international related, corporate fixed-income, and asset-backed securities value analysts identify and quantify the critical variables denominated in many currencies, along with futures and that influence a business’s performance, analyze the results options on futures and other derivative instruments issued in order to forecast each company’s long-term prospects from developed and emerging markets. Utilizing similar and meet regularly with company management, suppliers, techniques, we evaluate municipal securities that are clients and competitors. As a result, analysts have an in- candidates for purchase or sale based upon their relative depth understanding of the products, services, markets expected returns. Our analysis includes allowances for and competition of these companies and a good knowledge callability, issuer, quality, sector, and the like. The effective of the management of most companies in the research duration of an account may depend upon our sense of the universe. general direction of interest rates, although it may be As in the International Portfolios, the research analyses changed to facilitate other strategies. Effective duration, a supporting buy and sell decisions in our Emerging Markets statistic that is expressed in time periods, is a measure of the Value Portfolio (benchmarked to an “MSCI” Emerging exposure of an account to changes in interest rates. While Markets Free Index) are based largely on specfic company we do not respond actively to changes in interest rates, when and industry findings rather than on broad economic we expect interest rates to rise, we may shorten the effective forecasts. We invest in underpriced stocks—those with duration of accounts. When we expect interest rates to low price/book-value ratios and high dividend yields. fall, we may lengthen the effective duration. The maturity Investment decision-making for the Emerging Markets composition of these accounts may vary, depending upon Value Portfolio is systematic and centralized, pursued by the shape of the yield curve and opportunities in the bond an investment policy group working in concert with, and market, at times being concentrated in the middle part of guided by, the findings of a global value equity research an account’s targeted range while at other times consisting staff. of a greater number of securities with maturities that are shorter and others that are longer than the targeted range. We may from time to time invest in securities subject to various ownership limitations. These limitations include, but are not limited to: (i) charter provisions; (ii) shareholder REIT SECURITY SELECTION AND PORTFOLIO CONSTRUCTION rights plans (commonly known as “poison pills”); and Our approach to REITs is to own a broadly diversified (iii) regulatory restrictions on ownership that govern the group of high-quality companies that appear poised to issuer. We take precautions to comply with any ownership deliver superior earnings growth over time. This group limitations applicable to any specific security as failure to includes shopping centers, office space, and profitable monitor such levels could lead to adverse regulatory action industrial and health-care facilities, as well as investments or the dilution of our client holdings. In addition, we have in hotel properties. Although rising interest rates can lead adopted procedures whereby we restrict further purchases of to short-term declines in REIT share prices, over time, equity securities when our aggregate holdings of our client higher interest rates usually coincide with rising economic amounts (and those of our related persons) reaches 17.5% of activity, which ultimately spurs rather than impedes REIT the shares outstanding. At that time, we determine if there performance. are risk management or other concerns that would preclude Investment-Management Services and Policies 5
  8. 8. DECISION-MAKING RESPONSIBILITY respect to asset allocation, tax management, rebalancing, Investment decision-making responsibility lies with the investment planning, and trust and estate strategies. following: The Risk Advisory Group is chaired by our chief investment officer of structured equities and includes the Value Equity Services chief investment officer of global value equities, the chief The Investment Policy Groups are responsible for the investment officer of style-blend equities, the director of investment strategies, individual security selections, and quantitative research, the chief international economist, target sector weightings, as well as general policies governing and senior portfolio managers. The role of the Risk asset allocation and portfolio construction for our value Advisory Group is to study risk and to bring its views equity services. The respective Value Equity Investment and conclusions to the various product-level Investment Policy Groups are chaired by the co-chief investment officer Policy Groups so that they can incorporate them into their of U.S. value equities, the chief investment officer of global investment decision-making process, evaluating risk versus equities, our chief investment officer of emerging markets return at the product level. value equities, our chief investment officer of small- capitalization value equities, our chief investment officer of Not all members of the Investment Policy Groups participate structured equities, our chief investment officer of Canadian in individual security selections or other portfolio strategy value equities and our chief investment officer of European or policy decisions. value equities. They may also include our chief executive officer, other chief investment officers, our director of U.S. Investment-Management Administration value equities research, our director of global value equities Approved investment decisions are implemented on research, our chief international economist, our director of an account-by-account basis by senior equity portfolio quantitative research, our director of global value equities, managers, our managing director of global equity, managers other research directors, and senior portfolio managers. of our global equity portfolio management group, portfolio managers, associate portfolio managers, and members of our Growth Equity Service fixed-income portfolio-management teams. This includes The Strategic Growth equity service relies on a group of establishing positions in selected securities, monitoring the investment professionals including portfolio managers and tax implications of potential security sales for each taxable research analysts who confer on strategic decision making. client in most of our services, adjusting cash balances and/ This large-cap growth team votes weekly on security or investing cash balances according to investment policy, selection. Team members with the greatest seniority, years and all other matters relating to the implementation of of investment experience, and track record have the greatest investment strategy. proportional impact on the vote. In certain cases, clients may specify that portfolio decisions or recommendations be made by Stanley M. Bogen, whose Fixed-Income Services security analysis is primarily fundamental and is not Our fixed-income portfolio management teams are responsible determined by the methodology and investment disciplines for investment strategies, target sector weightings, and set forth in this section or the procedures described in the duration structure strategy, as well as portfolio construction section “Execution and Allocation” on page 20. for the fixed-income services. Relative sector views and our investment professionals’ overall view of economic and PORTFOLIO CONSTRUCTION AND YOUR ASSET ALLOCATION market direction are discussed by the Investment Strategy Committee chaired by our co-chief investment officers of We offer a variety of portfolio constructions—equity, fixed fixed income. income, REIT, and balanced (a mix of assets)—suitable to individual risk/reward objectives, and we base investment tactics for your account on our knowledge of your unique The Private-Client Investment Policy Group is chaired by situation and objectives. Investing in securities can be risky— the senior investment officer of private-client investments you can lose money on your investments. Investment tactics and includes the chief investment officer of U.S. value we utilize for your account take into consideration the basic equities, the senior quantitative analyst, and senior risk/reward character of various financial assets, your own portfolio managers. The role of this group is to oversee investment temperament, and your tax status. Nevertheless, the investment of all private-client assets, especially with there can be no assurance that your investment objectives 6 Bernstein Investment Research and Management
  9. 9. will actually be attained. Over time, investing in stocks has falls out of favor (if your account is concentrated in our achieved more long-term growth than investing in bonds or growth services), although a combination of these services money-market securities, but there is a price for this greater may tend to lessen volatility over time. If our perception of growth potential: volatility of your portfolio’s market value, a company’s intrinsic worth is not realized in the time frame with appreciable chance of loss along the way, which could we expect, or, in the case of growth stocks, if a company’s even extend for a number of years. As a result, individual expected growth rate is overestimated, or if the market retirement and spending plans may be adversely affected. value of a company owned in your account declines, the With this in mind, we believe that the most important performance of your account may suffer. determinant of investment returns is asset allocation—how Accounts with lower risk/reward orientations, with lesser your invested capital is apportioned among stocks, bonds, commitment to stocks and more to fixed-income assets, and other securities in a portfolio. No one investment or while designed to provide some protection against inflation, market can always win; the best course almost always is generally emphasize capital preservation and/or income more to be in many markets. Combining investments that often than high returns, and their value tends to fluctuate less in behave differently from one another can reduce risk and rising and falling markets, although fixed-income assets enhance long-term growth. For example, adding bonds also fall in value when interest rates rise, and are subject to a stock portfolio reduces risk. In contrast to stocks, to credit risks of the issuers. We may use futures, options generally, bonds pay interest regularly and fluctuate less in on futures, and other derivatives to manage equity and market value—although bonds may also decline in market interest-rate exposure and to add to expected return where value when interest rates rise or the real or perceived credit appropriate. Derivatives can be volatile and involve various quality of an issuer deteriorates. But the relative stability types and degrees of risks, such as limited liquidity and the of bonds also exacts a price: limited growth potential over risk that a party will default on payment obligations. time, particularly after inflation. There are no absolute answers in investing, only trade- GLOBAL DIVERSIFICATION offs. The risk tolerance and financial circumstances of each Our asset-management capabilities extend to the worldwide client are unique—and hence his or her optimal risk/return stock and bond markets, and we believe that for most trade-off is also unique. Our investment-planning process is clients adding an international component to their designed to identify a portfolio suitable to each client. That domestic portfolios is a prudent strategy. For example, for is largely a task of determining an appropriate mix of stocks a U.S. investor, casting one’s investment net to encompass and fixed-income securities, since over time a portfolio’s many non-U.S. markets greatly expands the pool of asset allocation exerts the most important influence on opportunities—many industries are now dominated by investment results. non-U.S. companies—and may confer a diversification In general, our higher risk/reward accounts, with their benefit as well. Because the non-U.S. markets do not march larger commitment to stocks, are designed to earn higher in lockstep either with one another or the U.S. market, cumulative returns over time and to beat inflation investing globally tends to reduce fluctuations in returns significantly over the long run; they are more likely to over time. appreciate or depreciate in market value than lower- International investing carries additional risks relative risk accounts, and they exhibit greater volatility—larger to domestic investing: Foreign currencies may decline fluctuations in value in rising and falling markets. Certain against a client’s base currency; foreign securities markets of our stock accounts also tend to concentrate in sectors may be more volatile and less liquid than the domestic and securities that we believe are undervalued, and this market, making trading more difficult; and foreign markets may cause them to be more volatile than the market as a may experience political, economic, regulatory or other whole. Our growth-oriented accounts, on the other hand, difficulties that can affect your account’s performance. concentrate in securities that we believe are likely to These risk factors mean that at some future date, an investor grow in price at an above-average rate, and they also may may be unable to liquidate certain holdings in a foreign tend to be more volatile than the market as a whole. The portfolio. Some countries, particularly in the emerging performance of your account is likely to differ from that of world, may even expropriate assets. We try to minimize broad market indexes. Your account may even underperform these risks by performing extensive research, focusing such indexes, particularly when value-oriented investing on established companies and market sectors and, in our falls out of favor (if your account is concentrated in our stock accounts, always broadly diversifying by country value-oriented services), or when growth-oriented investing Investment-Management Services and Policies 7
  10. 10. and industry. While by definition global diversification and fixed-income portions of your balanced portfolio. means that you won’t capture all the benefit of the best Portions of your account may be invested in one or more performer in any year—whether it’s a developed market or of the portfolios of the Sanford C. Bernstein Fund, Inc. an emerging market—neither will you be in thrall to the (the “Fund”)* or in the REIT Fund or managed separately, poorest performer. On balance, we believe that this strategy depending on the structure and/or size of the account. may improve your portfolio’s risk/reward profile. To limit Shares of funds or portfolios of funds that we develop in currency risk in the developed markets, we may use forward the future may be purchased unless you advise us to the contracts, which derive their value from the underlying contrary. We manage and provide shareholder servicing currencies, to manage or hedge currency exposure to the and administrative services to the Fund. The Fund’s extent feasible and to the extent there is opportunity to 12 portfolios—five short-duration fixed-income portfolios do so. Hedging mechanisms in the emerging countries (Government Short Duration, Short Duration Plus, Short currently tend to be unavailable or too expensive, although Duration New York Municipal, Short Duration California they may be used in the future if feasible. Municipal, and Short Duration Diversified Municipal), four intermediate-duration fixed-income portfolios (Intermediate BALANCED PORTFOLIOS Duration, New York Municipal, California Municipal, and Diversified Municipal) and three international-equity Holdings portfolios (two International portfolios, one of which is Balanced accounts hold stocks and fixed-income investments tax-managed for taxable clients, and one Emerging Markets in accordance with your individual objectives, risk/reward Value portfolio)—are designed to meet different client orientation, tax status, and financial experience. The greater objectives and tax situations, as more fully described in the the commitment of a balanced account to a particular asset Fund prospectus. category, the more the account will take on the risk/reward orientation of that asset category, although diversification RISK/REWARD CONSIDERATIONS among asset categories may tend to reduce risk in some We manage balanced portfolios along the following lines: cases, since returns on certain asset categories may not move in tandem with returns on others. Global Balanced Portfolios aim for long-term capital growth on a total-return basis (appreciation and interest/dividends) In line with our clients’ increasingly global orientation and performance superior to a global balanced benchmark toward investing, we encourage the consideration of over a full market cycle (a rising and falling market taken balanced global portfolios, which exploit opportunities in together). An appropriate benchmark is established with stocks and bonds worldwide. Allocation among the assets each client, reflecting individual objectives for capital depends on each client’s financial objectives. growth and risk, and the client’s country of domicile. For Most balanced accounts are managed with a view to example, a U.S. client’s account benchmark would typically maintaining the agreed-upon asset allocation. This is include a mix of indexes covering U.S. and non-U.S. stocks accomplished through investment of cash flows, dividends, and bonds in the same proportions as the account’s targeted and interest and by reinvestment of funds generated by construction. These accounts are typically invested in the sales pursuant to the agreed-upon asset allocation. At times, U.S. and in as few as seven or as many as 12 or more major when we believe it advisable, we may also sell a security non-U.S. markets, depending on the aggressiveness of the in order to generate funds to reinvest for the purpose of account construction; a small portion of the account may maintaining the agreed-upon asset allocation. In certain also be invested in emerging markets, if the client desires. cases, clients may give us authority to vary the percentage Non-U.S. stock and bond markets often have higher invested in domestic and international equity and fixed- volatilities than the U.S. markets and the additional risk income assets, and the percentages invested in each of the that comes from currency movements. But differences in international markets, based on our opinion of the relative the performance of individual markets can produce lower attractiveness of the asset class and the market. volatility across a globally diversified portfolio than for a U.S.-only portfolio—although all stock and bond portfolios The portfolio-construction rules of one or more of our equity are vulnerable to absolute-value declines. These accounts are services may serve as the model for the equity portion of our typically rebalanced periodically to fixed proportions of U.S. clients’ balanced accounts. Your account’s size and your risk/ and non-U.S. stocks and bonds. In certain circumstances, reward orientation determine the structure of the equity however, it may be agreed to vary these proportions within *Our subsidiary, Sanford C. Bernstein & Co., LLC, acts as the Fund’s distributor. 8 Bernstein Investment Research and Management
  11. 11. predetermined parameters to pursue stronger-than-usual Stock Exchange and American Stock Exchange, as well opportunities in particular markets or assets. as over-the-counter issues. Holdings in our clients’ U.S. portfolios, and the U.S. portions of balanced portfolios, may U.S. Balanced Portfolios aim for long-term capital growth include American Depositary Receipts (ADRs) and other on a total-return basis (appreciation and interest/dividends) non-U.S. stocks that trade on U.S. exchanges. We invest and performance superior to a U.S. balanced benchmark international-equity accounts (generally benchmarked to an over a full market cycle (a rising and falling market MSCI EAFE index) and the international portion of global taken together)—although all stock and bond portfolios accounts in the equity markets of up to 21 industrialized are vulnerable to absolute-value declines. An appropriate countries. These countries encompass Europe, Australasia, benchmark is established with each client, reflecting and the Far East, plus Canada. Depending on account individual objectives for capital growth and risk, and size, International accounts may be invested in one of the typically includes a mix of indexes covering U.S. stocks and International Portfolios of the Fund, as described above. We bonds (such as the S&P 500 stock index and the Lehman invest Emerging Markets Value accounts and the emerging- Brothers Aggregate Bond Index) in the same proportions markets portion of global balanced accounts in equities as the account’s targeted construction. Balanced accounts in up to 30 countries in the developing world. Currently, bring together the potentially high returns of stocks and the we invest only in the more advanced emerging nations— stabilizing influence of bonds to deliver higher long-term those with relatively more established political and legal potential return than fixed income at lower risk than an all- infrastructures and more liquid markets. Emerging Markets equities portfolio. These accounts are typically rebalanced Value accounts may be invested in the Emerging Markets periodically to fixed proportions of stocks and bonds. Value Portfolio of the Fund, as described above, or separately Canadian Balanced Portfolios aim for long-term capital managed, depending on account size. We invest Canadian growth on a total-return basis (appreciation and interest/ Value Equity portfolios in companies listed on the Toronto dividends) and performance superior to a Canadian balanced Stock Exchange, primarily larger-capitalization companies benchmark over a full market cycle (a rising and falling included in the S&P/TSX Composite Index. Although the market taken together)—although all stock and bond situation occurs infrequently, we may include fixed-income portfolios are vulnerable to absolute-value declines. An securities in place of equities when we believe fixed-income appropriate benchmark is established with each client, securities will provide returns comparable to those of reflecting individual objectives for capital growth and risk, equity securities. For certain accounts, we may purchase and typically includes a mix of indexes covering Canadian other instruments, such as warrants, private placements, stocks and bonds (such as the S&P/TSX Composite Stock financial futures, options on financial futures (including Index and the Scotia MacLeod Bond Index) in the same index futures), and currency forward contracts, as well as proportions as the account’s targeted construction. Balanced other derivative instruments. Derivatives can be volatile accounts bring together the potentially high returns of and involve various types and degrees of risks, such as the stocks and the stabilizing influence of bonds to deliver risk that a party will default on payment obligations and higher long-term potential return than fixed income at limited liquidity. lower risk than an all-equities portfolio. These accounts are typically rebalanced periodically to fixed proportions of Risk/Reward Considerations stocks and bonds. We manage equity-oriented portfolios along the following lines: EQUITY PORTFOLIOS U.S. Strategic Value Accounts aim for long-term capital Holdings growth on a total-return basis (appreciation and dividends) and performance superior to the S&P 500 and the Russell We invest U.S. Strategic Value portfolios, U.S. Diversified 1000 Value Index over a full market cycle (a rising Value™ portfolios, Strategic Growth portfolios, Enhanced and falling market taken together)—although all equity Equity portfolios, Structured Equity portfolios, and the portfolios are vulnerable to absolute-value declines. Your U.S. equity portions of balanced portfolios under our account will typically be invested in about 50 stocks management generally in larger-capitalization companies (though the number can vary meaningfully in different listed on the New York Stock Exchange, the American market environments), concentrated in sectors we consider Stock Exchange, and other exchanges, as well as over-the- most undervalued, and diversified within sectors. Since counter issues. We invest small-cap equity portfolios in your account will have weightings in stocks and sectors that smaller-capitalization companies listed on the New York Investment-Management Services and Policies 9
  12. 12. differ from those of the U.S. stock indexes, the performance to provide a modest annualized premium to either the of the account may be significantly better or worse than S&P 500, the Russell 1000, the Russell 1000 Value, or that of the market, and the account’s volatility may also be the S&P/Barra Value Index, with relatively tight tracking greater. to the index returns—although all equity portfolios are vulnerable to absolute-value declines. The Enhanced Equity U.S. Strategic Growth Accounts aim for long-term capital Services are designed to track the relevant benchmark more growth on a total-return basis (appreciation and dividends) closely than the Structured Services. Your account will be and performance superior to the S&P 500 and the Russell broadly diversified, including about 170–300 stocks on 1000 Growth Index over a full market cycle (a rising and average, at position weights that never vary widely from falling market taken together). Like all equity portfolios, benchmark weights. We also control portfolio deviation these accounts are vulnerable to declines in value. Your from benchmark concentrations in industry sectors and account will typically hold approximately 35 stocks at a other risk factors. We overweight those stocks we find time, chosen from a group of roughly 500 of the largest- attractive on the basis of our long- and short-term valuation capitalization stocks trading in the U.S. Since your account models, but only to a limited degree. We also hold some will have weightings in stocks and sectors that differ from stocks at or below their benchmark weights to provide those of the U.S. stock indexes, the performance of the diversification. account may be significantly better or worse than that of the market, and the account’s volatility may also be greater. U.S. Small-Cap Value Equity Portfolios aim for long- term capital growth on a total-return basis (appreciation Many of our clients choose to diversify their portfolios by and dividends) and performance superior to the Russell investment style to include Strategic Value and Strategic 2000 Index over a full market cycle (a rising and falling Growth accounts. We aim for performance superior to the market taken together)—although all equity portfolios are S&P 500 for each of these portfolio style constructions vulnerable to absolute-value declines. A small-cap account over a full market cycle (a rising and falling market taken tends to have higher volatility and less liquidity than together). portfolios composed of larger-capitalization companies. It is possible that either of these accounts might Your account will typically be invested in 70–90 stocks underperform the S&P 500 at any given time, since growth to diversify company-specific risk. At times, the account and value style investing have historically tended to move may concentrate in sectors we consider to be the most in and out of favor at different times. We believe that when undervalued. If permitted, stock-index futures are used these accounts are held in combination, it is more likely to participate in appreciation and/or depreciation of the that their combined performance will outperform the S&P stock market during the buy-in period, generally up to 12 500 on a more consistent basis over full market cycles. weeks. Accordingly, we generally advocate a 50/50 mix of growth International Equity Portfolios seek long-term capital and value, although we ultimately tailor each portfolio to growth on a total-return basis (appreciation and dividends) meet a client’s specific needs. through investments in stocks of established foreign U.S. Diversified Value™ Accounts are broadly diversified, companies making up the MSCI EAFE Index (Europe, holding approximately 150 stocks that emphasize sectors and Australasia, and the Far East), plus Canada. Our performance securities we consider undervalued, but the overweightings goal is to outperform the MSCI EAFE Index over full are generally more modest than in the Strategic Value market cycles (a rising and falling market taken together), portfolios. The goal is to outperform the S&P 500 or although all equity portfolios are vulnerable to absolute the Russell 1000 Value Index over a full market cycle (a value declines. Typically, the portfolios are invested in a rising and falling market taken together) while limiting well-diversified group of 40–50 value stocks (selected using the divergence from the market’s performance to moderate our fundamental international value discipline, which looks levels in most environments—although all equity portfolios for stocks that are attractively priced relative to their future are vulnerable to absolute-value declines. earnings power and dividend-paying capability) and 40–50 Structured and Enhanced Equity Services are risk- growth stocks (selected using our international growth controlled, large-cap U.S. equity services that draw upon investment discipline, which looks for companies with fundamental stock research and quantitative tools to meet strong management, superior industry positions, excellent their performance objectives. Both the Enhanced Equity balance sheets, and superior earnings-growth prospects). Services and the Structured Equity Services are designed The portfolios combine growth and value equities in an effort to take advantage of the cyclicality of investment 10 Bernstein Investment Research and Management
  13. 13. styles abroad, and generate a more consistent premium to Prominent risks attend investments in emerging-markets the Index. Depending on market conditions, the actual countries: The markets have been more volatile and less weightings of growth and value stocks will normally liquid than in the developed world; information about them range from 45%–55%. In extraordinary circumstances, is more limited; and social and political instability has been when our research determines that conditions favoring one greater. For these reasons, trading can be more difficult; an investment style are compelling, the range may be up to investor may be unable to liquidate certain holdings in an 40%–60%. In all cases, our international-equity portfolios emerging-markets portfolio, and in the case of the Emerging are diversified by industry and country, but not necessarily Markets Value Portfolio of the Fund, the risk exists that at in the same proportions as they are represented in the EAFE some future point you may not be able to redeem your Index. As international-equity accounts are required to shares. Currently, currency hedging is generally unavailable maintain modest cash balances, stock-index futures in the or prohibitively expensive, so the portfolio will typically be major developed markets outside the U.S. are used to more exposed to foreign-currency movements, though currency fully invest the portfolio. Currency exposure is actively hedging may be used in the future if feasible. managed. Investment decisions concerning currencies are Canadian Value Accounts aim for long-term capital made independently of equity investments, or they may growth on a total-return basis (appreciation and dividends) be used to hedge securities positions. By their nature, and performance superior to the S&P/TSX Composite Index currencies carry their own investment risk. Returns of all over a full market cycle (a rising and falling market taken non-U.S. securities are vulnerable to adverse movement of together)—although all equity portfolios are vulnerable foreign currencies in relation to the U.S. dollar and the risk to absolute-value declines. Your account will typically that non-U.S. governments will impose currency-exchange be invested in about 30–40 stocks listed on the Toronto control regulations or other restrictions that would prevent Stock Exchange, primarily larger-capitalization companies cash from being brought back to the United States. Since included in the S&P/TSX Composite Stock Index and your account will have weightings in stocks and sectors that broadly diversified by sector and industry. At times, the differ from those of the MSCI EAFE Index, the performance account may concentrate in sectors we consider to be the of the account may be significantly better or worse than most undervalued. If permitted, stock index futures are that of the market, and the account’s volatility may also used to participate in appreciation and/or depreciation of be greater. Returns of non-U.S. securities are subject to the stock market during periods when the cash component other risks not associated with U.S. investing, including a of the account may be high, such as initial funding or generally lower degree of market volume and liquidity than following a large cash contribution. Since your account will that available in U.S. markets, which may result in greater have weightings in stocks and sectors that differ from the price volatility, and settlement practices that may include S&P/TSX Composite Index, the performance of the account delays and otherwise differ from those in U.S. markets. may be significantly better or worse than that of the market, Returns may also be affected by foreign tax or withholding and the account’s volatility may also be greater. on dividends and interest. You should consult your tax advisor about whether you are entitled to claim foreign tax Global Value Equity Accounts, including Global Strategic credits or deductions on your income-tax returns. Value Equity, Global Value Equity, and Global Diversified Value Equity, seek long-term capital growth on a total-return Emerging Markets Value Equity Portfolios aim for long- basis (appreciation and dividends) through investments in term capital growth on a total-return basis (appreciation stocks of established companies around the world. We tailor and dividends) and performance superior to broad indexes the global value services to the specific characteristics of of the emerging markets. Typically, your portfolio will be each client; this is possible because we are able to adjust well diversified, with about 80–100 stocks of established stock selection, country allocation, currency management, companies from up to 30 countries of the developing world. and benchmark selection to meet the client’s mandate with Country weights are generally broadly diversified. Stocks no change in our investment process. are chosen for low purchase price in relation to measures like book value, earnings power, and dividend-paying capability. The primary source of our expected performance premium Capital-market performance in the emerging-markets for our global value services is research-driven security countries has been imperfectly correlated with that in the selection. We use a disciplined portfolio construction industrialized world. Hence, for clients already invested in framework to develop a portfolio with the desired risk/ U.S. stocks and those of the major non-U.S. markets, the reward tradeoff. We look for securities that are attractively emerging markets should represent further diversification. Investment-Management Services and Policies 11
  14. 14. priced relative to their future earnings power and dividend- of higher-quality securities, and high-yield bonds may be paying capability. particularly susceptible to economic downturns. Where we have not been given authority to purchase high-yield bonds Global value portfolios are diversified by industry and in an account, securities that have been downgraded to country, but not necessarily in the same proportion as non-investment-grade subsequent to purchase may be held the benchmark. Stock-index futures in the major global in the account. We continually monitor the investments markets may be used to more fully invest the transactional in the account and evaluate whether to dispose of or retain cash balances. Investment decisions concerning currencies securities whose credit rating or credit quality may have are made independently of equity investments. Depending changed. on the client mandate, currency forward contracts may be used to hedge currency exposures or to go long currencies Depending on account size and type of service, our clients’ in excess of underlying equity investments. The same accounts may be invested in one or more portfolios of unique risks as described above for the International Equity the Fund, as described above. We take clients’ tax status Portfolios and the Emerging Markets Value Portfolios and tolerance for risk into account in determining the pertain to global value portfolios. Since your account will appropriate fixed-income service. have weightings in stocks, sectors, countries, and currencies When appropriate and authorized by the client, we may that differ from the benchmark’s weight, the performance of use financial futures and options on financial futures. We the account may be significantly better or worse that that of may also use other derivatives for certain accounts whose the market, and the account’s volatility may also be greater. objectives, in our view, make their use advisable. Derivatives Returns may also be affected by foreign tax or withholding can be volatile and involve various types and degrees of on dividends and interest. You should consult your tax risks, such as the risk that a party will default on payment advisor about whether you are entitled to claim foreign tax obligations and limited liquidity. When appropriate and credits or deductions on your income tax returns. authorized by the client, we may invest in fixed-income securities denominated in currencies other than the client’s FIXED-INCOME PORTFOLIOS domestic currency. Foreign-currency forward agreements Holdings as well as futures and options on futures on foreign fixed- income securities and currencies may also be used. Financial Fixed-income accounts may be invested in a wide variety instruments denominated in other currencies are subject of securities issued throughout the world, including but to foreign-currency risks. By their nature, currencies carry not limited to U.S. Treasury instruments, securities of their own investment risk. Returns of foreign securities are U.S. agencies and instrumentalities, issues of governments vulnerable to adverse movement of foreign currencies in and related entities, supranational institutions such as relation to the client’s domestic currency and the risk that the World Bank, corporate debt securities, obligations of foreign governments will impose currency-exchange control state and local governments, mortgage-related securities regulations or other restrictions that would prevent cash and other asset-backed securities, convertible debt (which from being removed from their countries. There are special may be converted into the underlying shares of common risk factors associated with investing in non-U.S. markets. stock), preferred stock, private placements, and repurchase Such markets generally are not as developed or efficient as and reverse repurchase agreements. We also invest in a those in the U.S. Securities of some non-U.S. issuers are less variety of U.S.-dollar-denominated fixed-income securities liquid and more volatile than securities of comparable U.S. issued by such entities from the developed and emerging issuers. The risk of investing in foreign securities may be markets that may or may not be registered in the United intensified in the case of investments in emerging markets States. Investments may include debt of issuers located or countries with limited or developing capital markets. in, and sovereigns of, newly developed and emerging Returns may also be affected by foreign tax or withholding markets. Where appropriate and authorized by the client, on dividends and interest. You should consult your tax our clients’ fixed-income accounts may also be invested in advisor about whether you are entitled to claim foreign tax high-yield bonds, (i.e., debt rated below investment-grade, credits or deductions on your income-tax returns. or, if unrated, of comparable quality). These lower-quality debt securities are generally considered to be speculative Risk/Reward Considerations and involve greater risk of default or price change due to The investment spectrum ranges from overnight instruments changes in the issuer’s creditworthiness. The secondary to issues maturing in 100 years or more. The longer market for high-yield bonds may be less liquid than that the maturity, the more stable the income level and the 12 Bernstein Investment Research and Management
  15. 15. greater the expected return, but also the greater the price and agency securities, with agency securities normally volatility—that is, the greater the vulnerability of market constituting no more than half of the portfolio. price to interest-rate change. The probability of a negative U.S. Government Short Duration Accounts attempt to annual return on 20- and 30-year bonds is considerable achieve a higher return than money-market instruments because of their price volatility. In contrast, short-term and inflation, while seeking a high probability of positive investments—those maturing in less than a year—have an annual return. While the maturities of individual securities extremely high probability of exhibiting positive annual in these accounts may vary widely, the accounts are returns, although their income levels are volatile and their designed generally to maintain a level of risk comparable expected returns are usually relatively low. to that of a portfolio with an average effective duration There are other risks associated with the various financial of one to three years. Normally, these accounts will be instruments in which fixed-income accounts may be invested. largely or exclusively invested in U.S. Treasury and agency For example, mortgage-related securities are subject to securities, and the income earned by the accounts will for prepayment risk: A borrower is more likely to prepay a the most part be exempt from state and local taxes. Other mortgage that bears a relatively high rate of interest. Thus, fixed-income securities may be purchased, but only if the value of the securities may not increase as much as other their expected returns are higher than those available from debt securities when interest rates fall. However, when Treasury or agency issues. interest rates rise, the rate of prepayments may slow and the U.S. Short Duration Plus Accounts share many of the value of the mortgage-related securities may decrease like objectives and techniques of the Government Short Duration other debt securities. In addition, commercial mortgage- Accounts, but they should produce higher returns than backed securities are subject to credit risks associated the Government Short Duration Accounts because their with the performance of the underlying properties. Asset- investments will normally include a higher percentage of backed securities present certain additional risks that are nongovernment securities, such as corporate bonds and not presented by mortgage-backed securities. There is the mortgages. When authorized by the client, we may invest possibility that recoveries on the underlying collateral may in non-U.S.-currency-denominated securities when, in our not, in some cases, be available to support payments on judgment, they hold high return potential relative to U.S.- these securities. Reverse repurchase agreements present dollar-denominated securities. Risk-control guidelines may the risk that the underlying securities will gain value limit the non-U.S.-dollar-denominated bond weightings during the time they are lent and the opposite parties will in the account, both in aggregate and for any individual then default. Zero coupon and payment-in-kind securities, country. We actively manage currency exposure separately whose prices may react more strongly to changes in interest from security selection; here as well, risk-control guidelines rates than the prices of comparable-maturity cash-payment may limit the size of our positions. coupon bonds, may also be purchased for your account. Your account may also include variable- and floating- CORE/CORE Plus Accounts attempt to outperform the rate securities, as well as inflation-protected securities. bond market as a whole, the median fixed-income manager, Decreases in the inflation rate or in investors’ expectations and inflation, while seeking a moderate-to-high probability about inflation could cause inflation-protected securities to of positive annual return. Investments can include securities underperform non-inflation-adjusted securities on a total- from a wide range of market sectors. While the maturities return basis. In addition, these securities may have limited of the individual securities in these accounts may vary liquidity in the secondary market. widely, the accounts are designed generally to maintain a level of risk comparable to that of an intermediate We offer the following fixed-income alternatives, which portfolio with an average effective duration of three to six may be combined in a bond or balanced account: years. Because CORE/CORE Plus Accounts are managed U.S. Government Cash Accounts attempt to achieve without regard to potential tax consequences, they may be a higher return than three-month Treasury bills and particularly appropriate for investors not subject to current inflation, and to limit state and local taxes, nearly assuring taxation, such as IRAs. When authorized by the clients, we a positive annual return. These accounts hold no securities may invest in non-U.S.-currency-denominated securities with maturities greater than 12 months and are designed (including emerging markets) and high-yield securities generally to maintain a level of risk comparable to that of a when, in our judgment, they hold high return potential portfolio with an effective duration of two to four months. relative to U.S.-dollar-denominated securities. Risk-control These accounts will be invested exclusively in U.S. Treasury guidelines may limit the non-U.S.-dollar-denominated Investment-Management Services and Policies 13

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