Quantitative Investment Strategies: The Unintended Consequences Vadim Zlotnikov Chief Investment Strategist and Director o...
Agenda <ul><li>Quantitative Equity Investment </li></ul><ul><ul><li>Growth in Quantitative Research — Why Now? </li></ul><...
Growth in Quantitative Research — Why Now?
Acceptance of Financial Engineering Concepts Is Reshaping Our Industry <ul><li>Technology/databases </li></ul><ul><li>Mark...
Broad Penetration of Quant Tools Among Money Managers is Evident; Growth Continues Effective Use of Quantitative Tools (St...
Factor Characteristics – The Building Blocks
Our Approach to Identifying Quantitative Stock Selection Signals <ul><li>Sources of Excess Returns: Melding of Behavioral ...
Stock Characteristics That Lead to Excess Returns Are Generally Well Understood, but Efficacy Is Episodic Excess Returns f...
Even the Best Individual Stock Screens Are Right Only Half the Time Source: Bernstein analysis May, 2007 Share of Companie...
Some Screens Work Very Well In the Short Term but Generate Perverse Returns Longer Term Cumulative Returns to Long/Short S...
Factor Efficacy Varies Significantly By Sector Excess Returns from Buying 20% of Top-Ranked Stocks and Shorting 20% of the...
Returns to Price Momentum are Fairly Linear  1979–June YTD Relative Annual Returns (%) Source:  Bernstein Analysis.
Returns to Changes in Current Accruals are Non-linear 1979–June YTD Relative Annual Returns (%) Source:  Bernstein Analysi...
Constructing Models – Critical Considerations
Critical Aspects of Stock-Selection Model Construction <ul><li>Investment Management’s Issues </li></ul><ul><ul><li>Univer...
Analysis of Quant Models: Factors Are Similar, but... Source: Bernstein survey of 25 buy-side quantitative models, where r...
… Completely Different Buy/Sell Recommendations - Model Construction Is Key Survey Results Degree of Overlap in the Rankin...
“Controversy” Stocks Illustrate the Problem &quot;Controversy&quot; Stocks: Simultaneously Ranked as Q1 and Q5 by More tha...
Limitations and Challenges of Quantitative Approaches <ul><li>Battling the Efficient Market Hypothesis </li></ul><ul><ul><...
Issues in Quantitative Research <ul><li>What are the new factors? </li></ul><ul><li>When should they work? </li></ul><ul><...
What Are the New Factors? Moving Beyond the Compustat/FactSet <ul><li>Nature of investor ownership; attention </li></ul><u...
When They Should Work? Dynamic Factor Timing <ul><li>Changes in macro-economic setting; risk regimes </li></ul><ul><li>Sea...
Where Are They Most Likely to be Effective? Universe and Factor Conditioning <ul><li>Static vs. dynamic universe definitio...
Integration and Updating of Factor Weights <ul><li>Numerous approaches for determining  initial  factor weights: </li></ul...
Portfolio Construction and Factor Timing Are Primary Areas for Future Research Most Promising Research Area to Deliver Fut...
Models Are Being Actively Modified to Incorporate Findings During the Next 12 Months, the Most Significant,  Revolutionary...
Summary <ul><li>Growth in deployment of quantitative tools is likely to persist </li></ul><ul><li>&quot;Commoditization&qu...
Quantitative Approaches:  What Went Wrong?
Margin Sustainability is Key to Investment Outlook S&P 500:  Price-to-Sales v s. FCF Yield Minus 10-Year Treasury 1965 Thr...
Collective Extrapolation of Historically Lowest Volatility Drove Turmoil and Failure of Quantitative Strategies S&P 500:  ...
Volatility Shock Drove “Anti-value” Market Large-Cap Core Universe Discriminate Analysis of Top/Bottom 10% of Stocks,  Pas...
Only Modest Misvaluations Emerged Among Large Caps Large-Cap Universe Dispersion of Book-to-Price vs. Free Cash Flow Yield...
However, Illiquidity Premium Up Sharply Dispersion Across Stocks in Book/Price and Free Cash Flow Yield  vs. Past 7 Years ...
Low Multiple Stocks with High Turnover Underperformed – Capitulation and De-leveraging are the Culprits Annualized Monthly...
Value Opportunities Emerged Among Early-Cyclicals Dispersion of Book-to-Price Financials Vs Consumer Cyclicals vs. Technol...
Factors worth monitoring to determine persistence of stability Key Risks to the Persistence of Stability high dividend pay...
What is Next?  Adaptive Systems at Work <ul><li>Re-emergence of exploitable illiquidity premium </li></ul><ul><li>Greater ...
Disclosures <ul><ul><li>SRO REQUIRED DISCLOSURES </li></ul></ul><ul><ul><li>References to &quot;Bernstein&quot; relate to ...
Disclosures (cont’d) <ul><ul><li>Sanford C. Bernstein & Co., LLC currently makes a market in AAPL / Apple Computer Inc, AI...
Disclosures (cont’d) <ul><li>This research report covers six or more companies. For price chart disclosures, please visit ...
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Quantitative Investment Strategies: The Unintended Consequences

  1. 1. Quantitative Investment Strategies: The Unintended Consequences Vadim Zlotnikov Chief Investment Strategist and Director of Quantitative Research Sanford C. Bernstein & Co. LLC. January 8, 2008 See Disclosure Appendix of this report for important disclosures and analyst certifications.
  2. 2. Agenda <ul><li>Quantitative Equity Investment </li></ul><ul><ul><li>Growth in Quantitative Research — Why Now? </li></ul></ul><ul><ul><li>Factor Characteristics – The Building Blocks </li></ul></ul><ul><ul><li>Constructing Models – Critical Considerations </li></ul></ul><ul><li>Quantitative Approaches – What Went Wrong? </li></ul><ul><ul><li>Stability Bubble </li></ul></ul><ul><ul><li>Factor Failure </li></ul></ul><ul><ul><li>Emerging Opportunities </li></ul></ul>
  3. 3. Growth in Quantitative Research — Why Now?
  4. 4. Acceptance of Financial Engineering Concepts Is Reshaping Our Industry <ul><li>Technology/databases </li></ul><ul><li>Markets/liquidity </li></ul><ul><li>Education by FoF </li></ul><ul><li>Academic validation </li></ul>Supply-Side <ul><li>Disciplined </li></ul><ul><li>Scalable </li></ul><ul><li>Customizable </li></ul><ul><li>Easier to monitor? </li></ul>Benefits <ul><li>Asset-liability matching to reduce volatility </li></ul><ul><li>Retail acceptance of pre-packaged advice (e.g., lifecycle) </li></ul><ul><li>Separation of alpha and beta — search for skill </li></ul><ul><li>Search for uncorrelated alphas </li></ul><ul><li>Demand for LIBOR + 300 bps returns </li></ul>Sources of Growth
  5. 5. Broad Penetration of Quant Tools Among Money Managers is Evident; Growth Continues Effective Use of Quantitative Tools (Stock Selection Only) by Fundamental PMs and Analysts in My Company Is: (%) Source: Bernstein Survey of Analysts and Portfolio Managers 2007
  6. 6. Factor Characteristics – The Building Blocks
  7. 7. Our Approach to Identifying Quantitative Stock Selection Signals <ul><li>Sources of Excess Returns: Melding of Behavioral Finance and Microeconomics </li></ul><ul><ul><li>Fundamental analysis is part of signal evaluation (controversial) </li></ul></ul><ul><ul><li>Test statistical validity: data mining, spurious correlations, data errors </li></ul></ul><ul><ul><li>Time horizons, turnover, linearity, volatility shape notion of efficacy </li></ul></ul><ul><li>Each factor should capture meaningful incremental information </li></ul><ul><ul><li>Principal components analysis </li></ul></ul><ul><ul><li>Regressions, correlations with other factors </li></ul></ul><ul><ul><li>“ Value-added” differences by stock universe </li></ul></ul>
  8. 8. Stock Characteristics That Lead to Excess Returns Are Generally Well Understood, but Efficacy Is Episodic Excess Returns from Buying 20% of Top Ranked Stocks and Shorting 20% of the Worst Ranked Large-Capitalization Stocks; Monthly Rebalancing Valuation Enterprise Value/EBIT 8.9% 0.5 8.3% 1.6 Price/Book Value 3.3 0.2 1.5 0.3 Capital Use Net Accruals 7.0% 1.0 0.5% 0.1 YoY Change in Shares 6.3 0.6 1.3 0.2 Growth Dynamics Price Momentum 7.9% 0.4 (0.7)% (0.1) Investor Sentiment Institutional Ownership Level 4.5%* 0.6* 1.6% 0.5 Other Return on Invested Capital 1.0% 0.1 2.5% 0.5 Beta (0.5) 0.0 (1.5) (0.1) *Since 1979 Source: Bernstein analysis May, 2007 1978 –2007 Annualized Return Annualized Return Information Ratio Information Ratio 2005 –2007
  9. 9. Even the Best Individual Stock Screens Are Right Only Half the Time Source: Bernstein analysis May, 2007 Share of Companies Outperforming During Next Year Companies Ranked Based on Enterprise Value-to-EBITDA (%) Highest 20% Lowest 20% Months
  10. 10. Some Screens Work Very Well In the Short Term but Generate Perverse Returns Longer Term Cumulative Returns to Long/Short Strategy Using Price Momentum to Pick Stocks 1965 – 2007 Months Since the Trade (%) Source: Bernstein analysis May, 2007
  11. 11. Factor Efficacy Varies Significantly By Sector Excess Returns from Buying 20% of Top-Ranked Stocks and Shorting 20% of the Worst-Ranked Stocks 1980 – Late May 2007 Source: Bernstein analysis, May, 2007
  12. 12. Returns to Price Momentum are Fairly Linear 1979–June YTD Relative Annual Returns (%) Source: Bernstein Analysis.
  13. 13. Returns to Changes in Current Accruals are Non-linear 1979–June YTD Relative Annual Returns (%) Source: Bernstein Analysis.
  14. 14. Constructing Models – Critical Considerations
  15. 15. Critical Aspects of Stock-Selection Model Construction <ul><li>Investment Management’s Issues </li></ul><ul><ul><li>Universe/style </li></ul></ul><ul><ul><li>Time horizon/turnover/liquidity </li></ul></ul><ul><ul><li>Hit rates, persistence, IR </li></ul></ul><ul><ul><li>Fundamental analysis/transparency </li></ul></ul><ul><li>Analytical Issues </li></ul><ul><ul><li>Negatively correlated factors </li></ul></ul><ul><ul><li>Simplicity (“good enough”) </li></ul></ul><ul><ul><li>Avoidance of data mining/overfitting </li></ul></ul><ul><ul><li>Updating of factors/weights </li></ul></ul>
  16. 16. Analysis of Quant Models: Factors Are Similar, but... Source: Bernstein survey of 25 buy-side quantitative models, where rankings for S&P 500 stocks were provided; January, 2007 Survey Results Factor Exposure of Quantitative Models Deviation from Average Traditional Factors Less Traditional Factors
  17. 17. … Completely Different Buy/Sell Recommendations - Model Construction Is Key Survey Results Degree of Overlap in the Rankings of S&P 500 Stocks First Quintile and Fifth Quintile Based on Quantitative Models Degree of Overlap in Rankings # of Stocks Ranked Source: Bernstein survey of 25 buy-side quantitative models, where rankings for S&P 500 stocks were provided; January, 2007
  18. 18. “Controversy” Stocks Illustrate the Problem &quot;Controversy&quot; Stocks: Simultaneously Ranked as Q1 and Q5 by More than 25% of Models Ranked as of 6/30/06 DHI D R Horton Inc. 38.1% 38.1% KBH KB Home 33.3 33.3 WPI Watson Pharmaceuticals Inc. 23.8 23.8 XTO Xto Energy Inc. 23.8 23.8 MWV Meadwestvaco Corp. 23.8 23.8 WHR Whirlpool Corp. 33.3 23.8 JBL Jabil Circuit Inc. 23.8 23.8 AIG American International Group 23.8 23.8 DELL Dell Inc. 28.6 23.8 CZN Citizens Communications Co. 28.6 23.8 AAPL Apple Computer Inc. 23.8 28.6 PFG Principal Financial Group Inc. 33.3 23.8 NVLS Novellus Systems Inc. 33.3 23.8 PHM Pulte Homes Inc. 23.8 33.3 Average 28.0% 27.1% Ticker Company Name Q1 by % of Models Q5 by % of Models Source: Bernstein analysis June 30, 2006 The companies discussed are for illustrative purposes only. Any fund managed by AllianceBernstein L.P. and distributed through its subsidiaries securities or investment interests in these companies at any given time.
  19. 19. Limitations and Challenges of Quantitative Approaches <ul><li>Battling the Efficient Market Hypothesis </li></ul><ul><ul><li>Data mining and spurious correlations </li></ul></ul><ul><ul><li>Risk factor vs. source of excess return </li></ul></ul><ul><ul><li>Rational agents with constraints vs. behavioralists </li></ul></ul><ul><li>&quot;Knowing&quot; When a Strategy Failed, Is Failing or Will Fail </li></ul><ul><ul><li>Can't always wait for statistical significance </li></ul></ul><ul><ul><li>Sometimes don't know why it worked </li></ul></ul><ul><ul><li>Easier if you have robust expectations </li></ul></ul><ul><li>Underwriting volatility (or risk) for short-term profit </li></ul>
  20. 20. Issues in Quantitative Research <ul><li>What are the new factors? </li></ul><ul><li>When should they work? </li></ul><ul><li>Where are they most effective? </li></ul><ul><li>Methods for integrating signals and constructing portfolios </li></ul>
  21. 21. What Are the New Factors? Moving Beyond the Compustat/FactSet <ul><li>Nature of investor ownership; attention </li></ul><ul><li>Internet as source of fundamental data, e.g., Webcrawlers </li></ul><ul><li>Alternative asset classes as signals, e.g., options, futures, swaps… </li></ul><ul><li>Third-party market share, patent and other data </li></ul>
  22. 22. When They Should Work? Dynamic Factor Timing <ul><li>Changes in macro-economic setting; risk regimes </li></ul><ul><li>Seasonality/cyclicality </li></ul><ul><li>Technical: serial correlation vs. mean reversion </li></ul><ul><li>Bayesian updating </li></ul><ul><li>Presence of an opportunity (e.g., dispersion) </li></ul>
  23. 23. Where Are They Most Likely to be Effective? Universe and Factor Conditioning <ul><li>Static vs. dynamic universe definition </li></ul><ul><li>Level of granularity: style, sector, industry, stock </li></ul><ul><li>Tails of the returns distribution; shorts vs. longs </li></ul>
  24. 24. Integration and Updating of Factor Weights <ul><li>Numerous approaches for determining initial factor weights: </li></ul><ul><ul><li>In-sample regressions </li></ul></ul><ul><ul><li>Principal component analysis </li></ul></ul><ul><ul><li>Optimizer of factor weights </li></ul></ul><ul><li>Likewise, several approaches for updating the factor weights: </li></ul><ul><ul><li>Bayesian updating </li></ul></ul><ul><ul><li>Rebalancing of the conditional universes </li></ul></ul><ul><li>Desirable to match target portfolio turnover and factor efficacy duration </li></ul><ul><li>Integration of investment and trading alphas – explicit trading costs </li></ul>
  25. 25. Portfolio Construction and Factor Timing Are Primary Areas for Future Research Most Promising Research Area to Deliver Future Outperformance in U.S. Equity Market Is: (%) Source: Bernstein Survey of Analysts and Portfolio Managers 2007
  26. 26. Models Are Being Actively Modified to Incorporate Findings During the Next 12 Months, the Most Significant, Revolutionary Change to Our Quantitative Models Will Include: (%) Source: Bernstein Survey of Analysts and Portfolio Managers 2007
  27. 27. Summary <ul><li>Growth in deployment of quantitative tools is likely to persist </li></ul><ul><li>&quot;Commoditization&quot; of factors means a shift in the nature of value-added </li></ul><ul><li>Integration of quantitative and fundamental research is still suboptimum </li></ul>
  28. 28. Quantitative Approaches: What Went Wrong?
  29. 29. Margin Sustainability is Key to Investment Outlook S&P 500: Price-to-Sales v s. FCF Yield Minus 10-Year Treasury 1965 Through Early-November 2007 Source: Bernstein Analysis.
  30. 30. Collective Extrapolation of Historically Lowest Volatility Drove Turmoil and Failure of Quantitative Strategies S&P 500: Market Volatility* 1874 Through End-October 2007 Source: Bloomberg, Ibbotson, Robert Shiller, Bernstein Analysis. * Standard deviation of trailing-six-months of S&P500 monthly total returns; data smoothed over trailing-12-months.
  31. 31. Volatility Shock Drove “Anti-value” Market Large-Cap Core Universe Discriminate Analysis of Top/Bottom 10% of Stocks, Past 3 Months Source: Bernstein Analysis. * &quot;+&quot; sign represent that factor correlates positively with performance; &quot;-&quot; sign represents that factor correlates negative with performance ** top quintile is lowest roe volatility -0.5% 1.4% + ROE Volatility** 3.5% 1.5% + YoY Sales Growth 3.0% 2.6% + Five-Year Sales Stability 2.7% 2.4% + Monthly Earnings Revisions -3.9% 5.9% - EBIT-to-Enterprise Value 3.1% 7.6% + Market Cap (Log) -4.2% 17.3% - Book-to-Price Spread R-Square Coefficient* Factor Avg. Monthly Partial Function Q1-Q5 Discriminant Past Three Months
  32. 32. Only Modest Misvaluations Emerged Among Large Caps Large-Cap Universe Dispersion of Book-to-Price vs. Free Cash Flow Yield* Through Late-October 2007 Source: Bernstein Analysis. * Data smoothed over three-months.
  33. 33. However, Illiquidity Premium Up Sharply Dispersion Across Stocks in Book/Price and Free Cash Flow Yield vs. Past 7 Years Small-/Mid-Cap Universe 1968-Mid-October 2007 Source: Bernstein Analysis.
  34. 34. Low Multiple Stocks with High Turnover Underperformed – Capitulation and De-leveraging are the Culprits Annualized Monthly Returns Crosstabs of Abnormal Turnover December 2006 through October 2007 Source: Bernstein Analysis. 12.1 12.1 0.4% 8.7% 4.4% -1.0% -4.8% -4.7% All 11.3 11.7 -4.2% -0.1% 1.9% -6.4% -0.1% -13.2% Highest 11.9 11.9 -4.5% 2.9% -0.1% -3.7% -10.9% -7.3% Q4 11.7 11.7 -0.6% 6.5% -0.8% -2.8% -2.6% -1.0% Q3 Turnover 13.2 12.2 8.9% 22.3% 13.0% 2.2% 1.0% 6.2% Q2 Abnormal 13.1 13.3 3.4% 10.4% 8.5% 8.1% -10.2% -4.5% Lowest Q3:07 Q1:07 All Highest Q4 Q3 Q2 Lowest -to-EBIT as of Enterprise Value-to-EBIT Enterprise Value
  35. 35. Value Opportunities Emerged Among Early-Cyclicals Dispersion of Book-to-Price Financials Vs Consumer Cyclicals vs. Technology Through Early-November 2007 Source: Bernstein Analysis.
  36. 36. Factors worth monitoring to determine persistence of stability Key Risks to the Persistence of Stability high dividend payers tax rate increases dividend tax rate at lower rates; negative for Congressional support for income, capital gains and attempt to lock-in capital gains sentiment revival; candidate favors higher income disparity Market sell-off as investors Signs of protectionist Every Democratic Dysfunctional policy for 4. reignites inflation concerns importers Rise in prices on goods of historically peak margins; on key outsourcers and Strength in Euro, Rupee weaker dollar Raises doubt as to sustainability Size of margin pressure Chinese wages rising 15-20% Wage inflation in Asia and 3. and reduce Fed's flexibility on long-bond dollar as dollar weakens exacerbate housing problems economy and yields contributed to declining US fixed income instruments Higher long-term rates Strengthening in Japanese US/Euro rate narrowed and Slower foreign inflows into 2. lower consumer spending credit; state-level data Adverse impact on housing to accelerating defaults and Contagion to prime Credit tightening Drop in housing wealth leads Housing inventory rise Delinquencies rising Contagion from subprime 1. Potential Path to Instability Variables to Monitor Current Situation Risk
  37. 37. What is Next? Adaptive Systems at Work <ul><li>Re-emergence of exploitable illiquidity premium </li></ul><ul><li>Greater emphasis on: </li></ul><ul><ul><li>Earnings quality, stability </li></ul></ul><ul><ul><li>Relative growth </li></ul></ul><ul><ul><li>Absolute, as opposed to relative, value </li></ul></ul><ul><li>Avoidance of recent mistakes, pursuit of ones from log ago </li></ul><ul><ul><ul><li>Financial, consumer leverage stable-to-down </li></ul></ul></ul><ul><ul><ul><li>Increases risk aversion </li></ul></ul></ul>
  38. 38. Disclosures <ul><ul><li>SRO REQUIRED DISCLOSURES </li></ul></ul><ul><ul><li>References to &quot;Bernstein&quot; relate to Sanford C. Bernstein & Co., LLC and Sanford C. Bernstein Limited, collectively. </li></ul></ul><ul><ul><li>Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues. </li></ul></ul><ul><ul><li>Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for U.S. listed stocks and versus the MSCI Pan Europe Index for stocks listed on the European exchanges - unless otherwise specified. We have three categories of ratings: </li></ul></ul><ul><ul><li>Outperform: Stock will outpace the market index by more than 15 pp in the year ahead. </li></ul></ul><ul><ul><li>Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead. </li></ul></ul><ul><ul><li>Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead. </li></ul></ul><ul><ul><li>As of 10/10/2007, our ratings were distributed as follows: Outperform/Buy – 41.5%; Market-Perform/Hold – 47.1%; Underperform/Sell – 11.5%. </li></ul></ul><ul><ul><li>Ann Marie Larson maintains a long position in Exxon Mobil Corp. (XOM). </li></ul></ul><ul><ul><li>On May 4, 2007, an action by a purported Lehman Brothers Holdings Inc. shareholder was filed in the U.S. District Court, Southern District of New York, against Lehman and twenty-five individual defendants, all of whom are current or former officers or directors of Lehman, including Mr. Hintz. Mr. Hintz was employed as the CFO of Lehman from March 1996 to August 1998. Generally, the complaint alleges that Lehman backdated and manipulated the timing of certain options grants from 1995 to 2002 and that this was not disclosed in certain SEC filings for Lehman, including several filed while Mr. Hintz was CFO. The complaint does not allege that Mr. Hintz received any of the options grants. In connection with a related lawsuit filed on April 13, 2007, Lehman has stated that allegations of options backdating are completely without merit and it will defend against them vigorously. </li></ul></ul><ul><ul><li>Sanford C. Bernstein & Co., LLC and Sanford C. Bernstein Limited are subsidiaries of AllianceBernstein L.P. AllianceBernstein L.P. sponsors a family of mutual funds and has reached terms with the Securities and Exchange Commission and the Office of the New York State Attorney General for the resolution of regulatory claims with respect to market timing in some of its mutual funds. Civil suits concerning these regulators' allegations remain pending. </li></ul></ul><ul><ul><li>Claude Bebear is the chairman of the Supervisory Board of AXA, a controlling affiliate of Sanford C. Bernstein & Co., LLC, and is also a non-executive Director of Vivendi SA. </li></ul></ul><ul><ul><li>Accounts over which Sa ford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of AAL.LN / Anglo American PLC, AAPL / Apple Computer Inc, AAUK / Anglo American PLC, ABF.LN / Associated British Foods PLC, ACA.FP / Credit Agricole SA, ACE / ACE Ltd, ACN / Accenture Ltd, AEP / American Electric Power Co Inc, AET / Aetna Inc, AGN.NA / AEGON NV, AH.NA / Koninklijke Ahold NV, AIG / American International Group, ALL / The Allstate Corporation, ASBFY / Associated British Foods PLC, AV/.LN / Aviva PLC, AZN / AstraZeneca PLC, AZN.LN / AstraZeneca PLC, BA / Boeing Co, BAC / Bank of America Corp, BARC.LN / Barclays PLC, BBL / BHP Billiton PLC, BHI / Baker Hughes Inc, BLT.LN / BHP Billiton PLC, BNP.FP / BNP Paribas, BP / BP PLC, BP/.LN / BP PLC, C / Citigroup Inc, CBS / CBS Corp, CBS/A / CBS Corp, CCE / Coca-Cola Enterprises Inc, CELG / Celgene Corp, CL / Colgate-Palmolive Co, CLX / Clorox Co, CMA / Comerica Inc, CMCSA / Comcast Corp, COP / ConocoPhillips, CPB / Campbell Soup Co, CRM / Salesforce.com Inc, CSCO / Cisco Systems Inc, CSGN.VX / Credit Suisse Group, CTSH / Cognizant Technology Solutions Corp, CVX / ChevronTexaco Corp, DAI.GR / DaimlerChrysler AG, DB1.GR / Deutsche Boerse AG, DBK.GR / Deutsche Bank AG, DE / Deere & Co, DIS / Disney, DNA / Genentech Inc, E / ENI SpA, EAD.FP / European Aeronautic Defense, EBAY / eBay Inc, ECA / EnCana Corp, ECA.CN / EnCana Corp, EDS / Electronic Data Systems Corp, EIX / Edison International, ENI.IM / ENI SpA, EPC / EPCOS AG, EPC.GR / EPCOS AG, ERIC / Telefonaktiebolaget LM Ericsson, ESV / ENSCO International Inc, ETN / Eaton Corp, F.IM / Fiat, FITB / Fifth Third Bancorp, FME.GR / Fresenius Medical Care AG & Co KGaA, FMS / Fresenius Medical Care AG & Co KGaA, FTE.FP / France Telecom, G / Genpact Ltd, GILD / Gilead Sciences Inc, GIS / General Mills Inc, GLE.FP / Societe Generale, GNW / Genworth Financial Inc, GOOG / Google Inc, GS / Goldman Sachs, GSK / GlaxoSmithKline PLC, GSK.LN / GlaxoSmithKline PLC, HBOS.LN / HBOS PLC, HIG / The Hartford, HNT / Health Net Inc, HPQ / Hewlett Packard, HUM / Humana Inc, IACI / IAC/InterActiveCorp, IBM / IBM, ICE / IntercontinentalExchange Inc, IFX / Infineon Technologies AG, IFX.GR / Infineon Technologies AG, INGA.NA / ING Groep NV, IPG / Interpublic Group of Cos Inc, IR / Ingersoll-Rand Co Ltd, ITV.LN / ITV PLC, ITX.SM / Inditex SA, JAVA / Sun Microsystems Inc, JDSU / JDS Uniphase Corp, JNPR / Juniper Networks Inc, JPM / JPMorgan Chase & Co, K / Kellogg Co, KEY / Keycorp, KFT / Kraft Foods Inc, KSS / Kohl's Corp, LEH / Lehman Brothers Holdings Inc, LXK / Lexmark, M / Macy's Inc, MER / Merrill Lynch, MET / MetLife, ML.FP / Michelin, MRK / Merck & Co Inc, MRK.GR / Merck KGaA, MRO / Marathon Oil Corp, MS / Morgan Stanley, MSFT / Microsoft, NBR / Nabors Industries Ltd, NCC / National City Corp, NE / Noble Corp, NESN.VX / Nestle SA, NOC / Northrop Grumman Corp, NOK / Nokia Corp, NOK1V.FH / Nokia Corp, NSRGY / Nestle SA, ODP / Office Depot, PCG / PG&E Corp, PEP / PepsiCo Inc, PER / Perot Systems Corp, PFE / Pfizer Inc, PG / Procter & Gamble Co, PH / Parker Hannifin Corp, POR3.GR / Porsche AG, PRU / Prudential Financial, PRU.LN / Prudential PLC, PSON.LN / Pearson PLC, QCOM / Qualcomm Inc, RBS.LN / Royal Bank of Scotland Group PLC, RDC / Rowan Cos Inc, RDS/A / Royal Dutch Shell PLC, RDS/B / Royal Dutch Shell PLC, RDSA.LN / Royal Dutch Shell PLC, RDSA.NA / Royal Dutch Shell PLC, RDSB.LN / Royal Dutch Shell PLC, RDSB.NA / Royal Dutch Shell PLC, RHHBY / Roche Holding AG, RIO.LN / Rio Tinto PLC, RNO.FP / Renault, RNR / RenaissanceRe Ltd, ROG.VX / Roche Holding AG, RTN / Raytheon Co, RTP / Rio Tinto PLC, S / Sprint Nextel Corp, SAN.SM / Banco Santander SA, SCAB.SS / Svenska Cellulosa AB, SGP / Schering-Plough Corp, SL/.LN / Standard Life PLC, SLB / Schlumberger Ltd, SLE / Sara Lee Corp, STAN.LN / Standard Chartered PLC, SUN / Sunoco Inc, T / AT&T Inc, TAP / Molson Coors Brewing Co, TEVA / Teva Pharmaceutical Industries Ltd, TGT / Target Corp, TIT.IM / Telecom Italia SpA, TITR.IM / Telecom Italia SpA, TKA.GR / ThyssenKrupp AG, TLSN.SS / TeliaSonera AB, TOT / Total SA, TRV / Travelers Companies Inc, TSCO.LN / Tesco PLC, TWX / Time Warner Inc, UBSN.VX / UBS AG, UL / Unilever PLC, ULVR.LN / Unilever PLC, UN / Unilever NV, UNA.NA / Unilever NV, UTX / United Technologies Corp, VIA / Viacom Inc, VIA/B / Viacom Inc, VLO / Valero Energy Corp, VMW / VMware Inc, VOW.GR / Volkswagen, VZ / Verizon, WLP / WellPoint Inc, WPP.LN / WPP Group PLC, WWY / WM Wrigley Jr Co, WYE / Wyeth, XL / XL Capital Ltd, XOM / Exxon Mobil Corp, XTA.LN / Xstrata PLC. </li></ul></ul>
  39. 39. Disclosures (cont’d) <ul><ul><li>Sanford C. Bernstein & Co., LLC currently makes a market in AAPL / Apple Computer Inc, AIG / American International Group, AMGN / Amgen Inc, AMZN / Amazon.Com Inc, ARM.LN / ARM Holdings PLC, ARMHY / ARM Holdings PLC, ASML.NA / ASML Holding NV, ASMLD / ASML Holding NV, BBBY / Bed Bath & Beyond Inc, BEAS / BEA Systems, BIIB / Biogen IDEC Inc, CBH / Commerce Bancorp Inc, CELG / Celgene Corp, CEPH / Cephalon Inc, CMCSA / Comcast Corp, COF / Capital One, COMS / 3Com Corp, COST / Costco Wholesale Corp, CRM / Salesforce.com Inc, CSCO / Cisco Systems Inc, CTSH / Cognizant Technology Solutions Corp, DELL / Dell Inc, DISH / EchoStar Communications Corp, DNA / Genentech Inc, EBAY / eBay Inc, EMC / EMC, ERIC / Telefonaktiebolaget LM Ericsson, ERICA.SS / Ericsson Tel, FITB / Fifth Third Bancorp, GENZ / Genzyme Corp, GILD / Gilead Sciences Inc, GIVN.VX / Givaudan, HGSI / Human Genome Sciences Inc, IACI / IAC/InterActiveCorp, IMCL / ImClone Systems Inc, INFY / Infosys Technologies Ltd, JAVA / Sun Microsystems Inc, JDSU / JDS Uniphase Corp, JNPR / Juniper Networks Inc, LOW / Lowes, MSFT / Microsoft, NBIX / Neurocrine Biosciences Inc, NOVN.VX / Novartis AG, ORCL / Oracle, OSIP / OSI Pharmaceuticals Inc, PAYX / Paychex Inc, PFE / Pfizer Inc, PGR / Progressive, PTEN / Patterson-UTI Energy Inc, QCOM / Qualcomm Inc, SAPE / Sapient Corp, SCHW / Charles Schwab Corp, SEPR / Sepracor Inc, SHP.LN / Shire PLC, SHPGY / Shire PLC, SIRI / Sirius Satellite Radio Inc, SPLS / Staples, TEVA / Teva Pharmaceutical Industries Ltd, TGT / Target Corp, TWX / Time Warner Inc, UNH / UnitedHealth Group inc, USB / US Bancorp, VRTX / Vertex Pharmaceuticals Inc, WMT / Wal-Mart Stores Inc, XMSR / XM Satellite Radio Holdings Inc, YHOO / Yahoo! Inc. </li></ul></ul><ul><ul><li>The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for such services AAPL / Apple Computer Inc, ACA.FP / Credit Agricole SA, ACE / ACE Ltd, ADP / Automatic Data Processing, AEP / American Electric Power Co Inc, AET / Aetna Inc, AGN / Allergan Inc, AGN.NA / AEGON NV, AIG / American International Group, AL/.LN / Alliance & Leicester PLC, ALL / The Allstate Corporation, ALU / Alcatel-Lucent, ALU.FP / Alcatel-Lucent, AMP / Ameriprise Financial Inc, APA / Apache Corp, AV / Avaya Inc, AVP / Avon Products Inc, AZN / AstraZeneca PLC, AZN.LN / AstraZeneca PLC, BA / Boeing Co, BAC / Bank of America Corp, BARC.LN / Barclays PLC, BBL / BHP Billiton PLC, BBT / BB&T Corp, BMW.GR / BMW, BNP.FP / BNP Paribas, BRGYY / BG Group PLC, BSC / Bear Stearns, C / Citigroup Inc, CAT / Caterpillar Inc, CBH / Commerce Bancorp Inc, CBS / CBS Corp, CBS/A / CBS Corp, CC / Circuit City, CI / Cigna Corp, CL / Colgate-Palmolive Co, CMA / Comerica Inc, CNA / CNA Financial Corp, COP / ConocoPhillips, CPB / Campbell Soup Co, CSCO / Cisco Systems Inc, CSG / Cadbury Schweppes PLC, CSGN.VX / Credit Suisse Group, CVX / ChevronTexaco Corp, D / Dominion Resources Inc, DBK.GR / Deutsche Bank AG, DE / Deere & Co, DELL / Dell Inc, DGE.LN / Diageo PLC, DIS / Disney, DSGI.LN / DSG International PLC, DTE.GR / Deutsche Telekom, DUK / Duke Energy Corp, EDS / Electronic Data Systems Corp, EIX / Edison International, EL / Estee Lauder, ERIC / Telefonaktiebolaget LM Ericsson, ERICA.SS / Ericsson Tel, EXC / Exelon Corp, FITB / Fifth Third Bancorp, FO / Fortune Brands Inc, GD / General Dynamics Corp, GIS / General Mills Inc, GLE.FP / Societe Generale, GS / Goldman Sachs, GSK / GlaxoSmithKline PLC, GSK.LN / GlaxoSmithKline PLC, HEN.GR / Henkel KGaA, HEN3.GR / Henkel KGaA, HENKY / Henkel KGaA, HENOY / Henkel KGaA, HIG / The Hartford, HNZ / HJ Heinz Co, HPQ / Hewlett Packard, HSBA.LN / HSBC Holdings PLC, HSY / Hershey Co, IBM / IBM, INGA.NA / ING Groep NV, IPG / Interpublic Group of Cos Inc, IR / Ingersoll-Rand Co Ltd, ITW / Illinois Tool Works Inc, JCP / JC Penney Co Inc, JPM / JPMorgan Chase & Co, K / Kellogg Co, KEY / Keycorp, KFT / Kraft Foods Inc, KMB / Kimberly-Clark Corp, KO / Coca-Cola Co, LEH / Lehman Brothers Holdings Inc, LLOY.LN / Lloyds TSB Group PLC, LMT / Lockheed Martin Corp, LNC / Lincoln National, LOW / Lowes, MER / Merrill Lynch, MET / MetLife, MI / Marshall & Ilsley Corp, MKS.LN / Marks & Spencer Group PLC, MOT / Motorola, MRK / Merck & Co Inc, MRK.GR / Merck KGaA, MRO / Marathon Oil Corp, MS / Morgan Stanley, MSFT / Microsoft, MTB / M&T Bank Corp, MUR / Murphy Oil Corp, NCC / National City Corp, NOC / Northrop Grumman Corp, NSRGY / Nestle SA, NT / Nortel Networks, OR.FP / L'Oreal SA, PCG / PG&E Corp, PEP / PepsiCo Inc, PFG / Principal Financial, PH / Parker Hannifin Corp, PHG / Philips Electronics NV, PHIA.NA / Philips Electronics NV, PNC / PNC Financial Services Group Inc, PRU / Prudential Financial, PRU.LN / Prudential PLC, PSON.LN / Pearson PLC, QCOM / Qualcomm Inc, RB/.LN / Reckitt Benckiser PLC, RBS.LN / Royal Bank of Scotland Group PLC, REL.LN / Reed Elsevier PLC, REN.NA / Reed Elsevier NV, RF / Regions Financial Corp, RIG / Transocean Inc, RKBKF / Reckitt Benckiser PLC, RTN / Raytheon Co, RTP / Rio Tinto PLC, RTR.LN / Reuters Group PLC, S / Sprint Nextel Corp, SAN.SM / Banco Santander SA, SBRY.LN / Sainsbury PLC, SCHW / Charles Schwab Corp, STI / SunTrust Banks Inc, STZ / Constellation Brands Inc, SUN / Sunoco Inc, T / AT&T Inc, TAP / Molson Coors Brewing Co, TGT / Target Corp, TKA.GR / ThyssenKrupp AG, TOT / Total SA, TRV / Travelers Companies Inc, TWX / Time Warner Inc, UBSN.VX / UBS AG, UL / Unilever PLC, ULVR.LN / Unilever PLC, UN / Unilever NV, UNA.NA / Unilever NV, UNH / UnitedHealth Group inc, USB / US Bancorp, UTX / United Technologies Corp, VIA / Viacom Inc, VIA/B / Viacom Inc, VLO / Valero Energy Corp, VOW.GR / Volkswagen, VZ / Verizon, WB / Wachovia Corp, WFC / Wells Fargo & Co, WYE / Wyeth, XOM / Exxon Mobil Corp. </li></ul></ul><ul><ul><li>An affiliate of Bernstein received compensation for non-investment banking-securities related services from ACE / ACE Ltd, ACN / Accenture Ltd, AEP / American Electric Power Co Inc, AET / Aetna Inc, AGN.NA / AEGON NV, ALL / The Allstate Corporation, AMP / Ameriprise Financial Inc, AV / Avaya Inc, BA / Boeing Co, BAC / Bank of America Corp, BARC.LN / Barclays PLC, BB/.LN / Bradford & Bingley PLC, BBL / BHP Billiton PLC, BMW.GR / BMW, BMY / Bristol-Myers Squibb Co, BNP.FP / BNP Paribas, BSY.LN / British Sky Broadcasting PLC, CBH / Commerce Bancorp Inc, CL / Colgate-Palmolive Co, COP / ConocoPhillips, CPB / Campbell Soup Co, CSGN.VX / Credit Suisse Group, CVX / ChevronTexaco Corp, D / Dominion Resources Inc, DAI.GR / DaimlerChrysler AG, DUK / Duke Energy Corp, DVN / Devon Energy Corp, EIX / Edison International, F.IM / Fiat, FE / FirstEnergy Corp, GIS / General Mills Inc, GIVN.VX / Givaudan, GS / Goldman Sachs, GSK / GlaxoSmithKline PLC, GSK.LN / GlaxoSmithKline PLC, HAL / Halliburton Co, HBOS.LN / HBOS PLC, HEIA.NA / Heineken NV, HEIO.NA / Heineken Holding NV, HPQ / Hewlett Packard, HSBA.LN / HSBC Holdings PLC, IBM / IBM, INGA.NA / ING Groep NV, IPG / Interpublic Group of Cos Inc, ITV.LN / ITV PLC, JCP / JC Penney Co Inc, JPM / JPMorgan Chase & Co, KO / Coca-Cola Co, LEH / Lehman Brothers Holdings Inc, LLOY.LN / Lloyds TSB Group PLC, LLY / Eli Lilly, LMT / Lockheed Martin Corp, MER / Merrill Lynch, MET / MetLife, MKS.LN / Marks & Spencer Group PLC, MRK / Merck & Co Inc, MRK.GR / Merck KGaA, MS / Morgan Stanley, MSFT / Microsoft, NFS / Nationwide Financial, NOC / Northrop Grumman Corp, NSRGY / Nestle SA, NT / Nortel Networks, NVS / Novartis AG, ORCL / Oracle, OXY / Occidental Petroleum Corp, PBG / Pepsi Bottling Group Inc, PCG / PG&E Corp, PEP / PepsiCo Inc, PFE / Pfizer Inc, PH / Parker Hannifin Corp, PRU / Prudential Financial, PRU.LN / Prudential PLC, RBS.LN / Royal Bank of Scotland Group PLC, REL.LN / Reed Elsevier PLC, REN.NA / Reed Elsevier NV, RTN / Raytheon Co, RTP / Rio Tinto PLC, RTR.LN / Reuters Group PLC, SBRY.LN / Sainsbury PLC, SCHW / Charles Schwab Corp, SL/.LN / Standard Life PLC, SLB / Schlumberger Ltd, STI / SunTrust Banks Inc, T / AT&T Inc, TAP / Molson Coors Brewing Co, TGT / Target Corp, TWX / Time Warner Inc, UBSN.VX / UBS AG, UL / Unilever PLC, ULVR.LN / Unilever PLC, UN / Unilever NV, UNA.NA / Unilever NV, UTX / United Technologies Corp, VOD / Vodafone Group PLC, VOW.GR / Volkswagen, VZ / Verizon, WB / Wachovia Corp, WFC / Wells Fargo & Co, WYE / Wyeth, XOM / Exxon Mobil Corp. </li></ul></ul>
  40. 40. Disclosures (cont’d) <ul><li>This research report covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com. You can also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or Sanford C. Bernstein Limited, Director of Compliance, Devonshire House, One Mayfair Place, London W1J8AJ, United Kingdom. </li></ul><ul><li>OTHER DISCLOSURES </li></ul><ul><li>To our readers in the United States: Sanford C. Bernstein & Co., LLC is distributing this report in the United States and accepts responsibility for its contents. Any U.S. person receiving this report and wishing to effect securities transactions in any security discussed herein should do so only through Sanford C. Bernstein & Co., LLC. </li></ul><ul><li>To our readers in the United Kingdom: This report has been issued or approved for issue in the United Kingdom by Sanford C. Bernstein Limited, authorised and regulated by the Financial Services Authority and located at Devonshire House, 1 Mayfair Place, London W1J 8SB, +44 (0)20-7170-5000. </li></ul><ul><li>To our readers in member states of the EEA: This report is being distributed in the EEA by Sanford C. Bernstein Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority and holds a passport under the Investment Services Directive. </li></ul><ul><li>To our readers in Australia: Sanford C. Bernstein & Co., LLC and Sanford C. Bernstein Limited are exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the provision of the following financial services to wholesale clients: </li></ul><ul><ul><li>providing financial product advice; </li></ul></ul><ul><ul><li>dealing in a financial product; </li></ul></ul><ul><ul><li>making a market for a financial product; and </li></ul></ul><ul><ul><li>providing a custodial or depository service. </li></ul></ul><ul><ul><li>Sanford C. Bernstein & Co., LLC and Sanford C. Bernstein Limited are regulated by the Securities and Exchange Commission under U.S. laws and by the Financial Services Authority under U.K. laws, respectively, which differ from Australian laws. </li></ul></ul><ul><li>One or more of the officers, directors, or employees of Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited and/or its affiliates may at any time hold, increase or decrease positions in securities of any company mentioned herein. </li></ul><ul><li>Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, or its or their affiliates may provide investment management or other services to the pension or profit sharing plans, or employees of any company mentioned herein, and may give advice to others as to investments in such companies. These entities may effect transactions that are similar to or different from those recommended herein. </li></ul><ul><li>Bernstein Research Reports are disseminated to our customers through posting on the firm's password protected website, www.bernsteinresearch.com. Additionally, Bernstein Research Reports are available through email, postal mail and commercial research portals. If you wish to alter your current distribution method, please contact your salesperson for details. </li></ul><ul><li>CERTIFICATIONS </li></ul><ul><li>I/(we), Vadim Zlotnikov, Senior Analyst(s), certify that all of the views expressed in this report accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this report. </li></ul><ul><ul><li>____________________________________________________________________________________________________________________________________________________ </li></ul></ul><ul><ul><li>Copyright 2007, Sanford C. Bernstein & Co., LLC, a subsidiary of AllianceBernstein L.P. ~ 1345 Avenue of the Americas ~ NY, NY 10105 ~ 212/756-4400. All rights reserved.This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited or any of their subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This report is based upon public sources we believe to be reliable, but no representation is made by us that the report is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein. This research was prepared and issued by Sanford C. Bernstein & Co., LLC and/or Sanford C. Bernstein Limited for distribution to market counterparties or intermediate or professional customers. This report is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance. </li></ul></ul>

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