UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21497
AB CORPORATE SHARES
(Exact name of registrant as specified in charter)
1345 Avenue of the Americas, New York, New York 10105
(Address of principal executive offices) (Zip code)
Joseph J. Mantineo
AllianceBernstein L.P.
1345 Avenue of the Americas
New York, New York 10105
(Name and address of agent for service)
Registrant’s telephone number, including area code: (800) 221-5672
Date of fiscal year end: April 30, 2016
Date of reporting period: October 31, 2015
| ITEM 1. | REPORTS TO STOCKHOLDERS. |
OCT 10.31.15
SEMI-ANNUAL REPORT
AB CORPORATE INCOME SHARES
Investment Products Offered
• Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed |
Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
This shareholder report must be preceded or accompanied by the Fund’s prospectus for individuals who are not current shareholders of the Fund.
You may obtain a description of the Fund’s proxy voting policies and procedures, and information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, without charge. Simply visit AB’s website at www.abglobal.com, or go to the Securities and Exchange Commission’s (the “Commission”) website at www.sec.gov, or call AB at (800) 227-4618.
The Fund files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s
Forms N-Q are available on the Commission’s website at www.sec.gov. The Fund’s Forms N-Q may also be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. AB publishes full portfolio holdings for the Fund monthly at www.abglobal.com.
AllianceBernstein Investments, Inc. (ABI) is the distributor of the AB family of mutual funds. ABI is a member of FINRA and is an affiliate of AllianceBernstein L.P., the Adviser of the funds.
The [A/B] logo is a registered service mark of AllianceBernstein and AllianceBernstein® is a registered service mark used by permission of the owner, AllianceBernstein L.P.
December 11, 2015
Semi-Annual Report
This report provides management’s discussion of fund performance for AB Corporate Income Shares (the “Fund”) for the semi-annual reporting period ended October 31, 2015. Please note, shares of this Fund are offered exclusively through registered investment advisers approved by AllianceBernstein L.P. (the “Adviser”). Effective January 20, 2015, the Fund’s name changed from AllianceBernstein Corporate Income Shares to AB Corporate Income Shares.
Investment Objective and Policies
The Fund’s investment objective is to earn high current income. The Fund invests, under normal circumstances, at least 80% of its net assets in US corporate bonds. The Fund may also invest in US government securities (other than US government securities that are mortgage-backed or asset-backed securities), repurchase agreements and forward contracts relating to US government securities. The Fund normally invests all of its assets in securities that are rated, at the time of purchase, at least BBB- or the equivalent. The Fund will not invest in unrated corporate debt securities. The Fund has the flexibility to invest in long- and short-term fixed-income securities. In making decisions about whether to buy or sell securities, the Adviser will consider, among other things, the strength of certain sectors of the fixed-income market relative to others, interest rates and other general market conditions and the credit quality of individual issuers.
The Fund also may invest in convertible debt securities; invest up to
10% of its assets in inflation-indexed securities; invest up to 5% of its net assets in preferred stock; purchase and sell interest rate futures contracts and options; enter into swap transactions; invest in zero-coupon securities and “payment-in-kind” debentures; make secured loans of portfolio securities; and invest in US dollar-denominated fixed-income securities issued by non-US companies.
Investment Results
The table on page 5 shows the Fund’s performance compared to its benchmark, the Barclays US Credit Bond Index, for the six- and 12-month periods ended October 31, 2015.
The Fund underperformed its benchmark for the six-month period, yet outperformed for the 12-month period. For both periods, sector positioning contributed to performance, specifically an underweight to governments—sovereign bonds and agencies, and an overweight to banking and insurance industries, relative to the benchmark. An allocation to Treasuries also contributed to returns; security selection within investment-grade corporates detracted for both periods, mainly within energy and technology issuers. Yield-curve positioning along the five- and 10-year parts of the curve contributed to performance.
The Fund utilized derivatives in the form of interest rate swaps for hedging purposes and credit default swaps for investment purposes during both periods, which had an immaterial impact on performance, in absolute terms.
| AB CORPORATE INCOME SHARES • | 1 |
Market Review and Investment Strategy
Bond markets were volatile for the 12-month period ended October 31, 2015, as growth trends and monetary policies in the world’s biggest economies headed in different directions. Inflation continued to fall throughout the developed world, driven primarily by decreasing commodity prices. While oil prices began to rebound in April, they again fell in August, remaining well below their price range in late 2014. These dynamics caused volatility within government bond yields, with the yield on the 10-year US Treasury ranging from 1.7% to 2.5%, ultimately ending the period at 2.2%. Adding to the volatility, the US Federal Reserve postponed its long expected interest-rate hike, alluding to emerging market turmoil as one of the reasons.
In other markets, including many in Europe where the European Central
Bank implemented its quantitative easing program, some yields ended the period in negative territory. In emerging markets, political and economic instability across regions negatively affected the investment environment. Slower growth in China, Brazil and other emerging market economies caused further pressure on credit markets at the end of the 12-month period. Against this backdrop, fixed-income returns diverged between regions and sectors. Credit securities generally underperformed developed market Treasuries; developed market Treasuries generally outperformed emerging market local currency Treasuries; and investment-grade securities generally outperformed high-yield, which posted some of the worst returns across the fixed-income market, specifically within the energy and commodities sectors.
| 2 | • AB CORPORATE INCOME SHARES |
DISCLOSURES AND RISKS
Benchmark Disclosure
The unmanaged Barclays US Credit Bond Index does not reflect fees and expenses associated with the active management of a fund. The Barclays US Credit Bond Index represents the performance of the US credit securities within the US fixed-income market. An investor cannot invest directly in an index, and its results are not indicative of the performance for any specific investment, including the Fund.
A Word About Risk
Market Risk: The value of the Fund’s assets will fluctuate as the stock or bond market fluctuates. The value of the Fund’s investments may decline, sometimes rapidly and unpredictably, simply because of economic changes or other events that affect large portions of the market.
Credit Risk: An issuer or guarantor of a fixed-income security, or the counterparty to a derivatives or other contract, may be unable or unwilling to make timely payments of interest or principal, or to otherwise honor its obligations. The issuer or guarantor may default, causing a loss of the full principal amount of a security. The degree of risk for a particular security may be reflected in its credit rating. There is the possibility that the credit rating of a fixed-income security may be downgraded after purchase, which may adversely affect the value of the security. Investments in fixed-income securities with lower ratings tend to have a higher probability that an issuer will default or fail to meet its payment obligations.
Interest Rate Risk: Changes in interest rates will affect the value of investments in fixed-income securities. When interest rates rise, the value of existing investments in fixed-income securities tends to fall and this decrease in value may not be offset by higher income from new investments. The Fund may be subject to a heightened risk of rising interest rates due to the current period of historically low interest rates and the potential effect of government fiscal and central bank monetary policy initiatives, including Federal Reserve actions, and market reactions to such actions. Interest rate risk is generally greater for fixed-income securities with longer maturities or durations.
Inflation Risk: This is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the value of the Fund’s assets can decline as can the value of the Fund’s distributions. This risk is significantly greater for fixed-income securities with longer maturities.
Foreign (Non-US) Risk: Investments in securities of non-US issuers may involve more risk than those of US issuers. These securities may fluctuate more widely in price and may be less liquid due to adverse market, economic, political, regulatory or other factors.
Derivatives Risk: Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Fund, and may be subject to counterparty risk to a greater degree than more traditional investments.
Management Risk: The Fund is subject to management risk because it is an actively-managed investment fund. The Adviser will apply its investment techniques and risk analyses in making investment decisions, but there is no guarantee that its techniques will produce the intended results.
These risks are fully discussed in the Fund’s prospectus. As with all investments, you may lose money by investing in the Fund.
An Important Note About Historical Performance
The performance shown on the following pages represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance information shown. You may obtain performance
(Disclosures, Risks and Note about Historical Performance continued on next page)
| AB CORPORATE INCOME SHARES • | 3 |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
information current to the most recent month-end by calling (800) 227-4618. The investment return and principal value of an investment in the Fund will fluctuate, so that your shares, when redeemed, may be worth more or less than their original cost. Performance assumes reinvestment of distributions and does not account for taxes.
Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For copies of our prospectus and/or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AllianceBernstein Investments representative. Please read the prospectus and/or summary prospectus carefully before investing.
| 4 | • AB CORPORATE INCOME SHARES |
Disclosures and Risks
HISTORICAL PERFORMANCE
| THE FUND VS. ITS BENCHMARK PERIODS ENDED OCTOBER 31, 2015 (unaudited) | NAV Returns | |||||||||
| 6 Months | 12 Months | |||||||||
| AB Corporate Income Shares | -1.47% | �� | 1.33% | |||||||
| ||||||||||
| Barclays US Credit Bond Index | -1.33% | 0.90% | ||||||||
| ||||||||||
| AVERAGE ANNUAL RETURNS AS OF OCTOBER 31, 2015 (unaudited) | ||||
| NAV Returns | ||||
1 Year | 1.33 | % | ||
5 Years | 4.82 | % | ||
Since Inception* | 6.15 | % | ||
| SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END SEPTEMBER 30, 2015 (unaudited) | ||||
| SEC Returns | ||||
1 Year | 1.88 | % | ||
5 Years | 4.75 | % | ||
Since Inception* | 6.15 | % | ||
The prospectus fee table shows the fees and the total fund operating expenses of the Fund as 0.00% because the Adviser does not charge any fees or expenses and reimburses Fund operating expenses. Participants in a wrap fee program or other investment program eligible to invest in the Fund pay fees to the program sponsor and should review the program brochure or other literature provided by the sponsor for a discussion of fees and expenses charged.
| * | Inception date: 12/11/2006. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
| AB CORPORATE INCOME SHARES • | 5 |
Historical Performance
EXPENSE EXAMPLE
(unaudited)
As a shareholder of the Fund, you may incur various ongoing non-operating and extraordinary costs. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period as indicated below.
Actual Expenses
The table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed annual rate of return of 5% before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds by comparing this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), or contingent deferred sales charges on redemptions. Therefore, the hypothetical example is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning Account Value May 1, 2015 | Ending Account Value October 31, 2015 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Actual | $ | 1,000 | $ | 985.30 | $ | – 0 | – | 0.00 | % | |||||||
Hypothetical** | $ | 1,000 | $ | 1,025.14 | $ | – 0 | – | 0.00 | % | |||||||
| * | Expenses are equal to the Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). The Fund’s operating expenses are borne by the Adviser or its affiliates. |
| ** | Assumes 5% annual return before expenses. |
| 6 | • AB CORPORATE INCOME SHARES |
Expense Example
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $61.4
| * | All data are as of October 31, 2015. The Fund’s security type breakdown is expressed as a percentage of total investments and may vary over time. The Fund also enters into derivative transactions, which may be used for hedging or investment purposes (see “Portfolio of Investments” section of the report for additional details). |
| AB CORPORATE INCOME SHARES • | 7 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
October 31, 2015 (unaudited)
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
CORPORATES – INVESTMENT | ||||||||
Industrial – 49.3% | ||||||||
Basic – 6.0% | ||||||||
Agrium, Inc. | $ | 45 | $ | 42,045 | ||||
Alpek SAB de CV | 200 | 200,000 | ||||||
Barrick Gold Corp. | 153 | 142,113 | ||||||
Barrick North America Finance LLC | 205 | 203,685 | ||||||
Celulosa Arauco y Constitucion SA | 200 | 201,598 | ||||||
CF Industries, Inc. | 130 | 151,483 | ||||||
Dow Chemical Co. (The) | 186 | 199,868 | ||||||
Eastman Chemical Co. | 160 | 159,139 | ||||||
Freeport-McMoran Oil & Gas LLC/FCX Oil & Gas, Inc. | 284 | 257,375 | ||||||
Freeport-McMoRan, Inc. | 195 | 155,317 | ||||||
5.45%, 3/15/43 | 75 | 53,531 | ||||||
Georgia-Pacific LLC | 110 | 122,265 | ||||||
Glencore Funding LLC | 79 | 68,927 | ||||||
4.00%, 4/16/25(a) | 75 | 58,125 | ||||||
International Paper Co. | 98 | 97,791 | ||||||
4.75%, 2/15/22 | 145 | 155,668 | ||||||
5.15%, 5/15/46 | 26 | 25,496 | ||||||
LyondellBasell Industries NV | 230 | 247,454 | ||||||
6.00%, 11/15/21 | 200 | 227,202 | ||||||
Monsanto Co. | 145 | 141,759 | ||||||
Mosaic Co. (The) | 65 | 68,153 | ||||||
Newmont Mining Corp. | 90 | 71,707 | ||||||
Rio Tinto Finance USA Ltd. | 262 | 257,765 | ||||||
Vale Overseas Ltd. | 250 | 228,000 | ||||||
| 8 | • AB CORPORATE INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Weyerhaeuser Co. | $ | 120 | $ | 127,408 | ||||
|
| |||||||
| 3,663,874 | ||||||||
|
| |||||||
Capital Goods – 1.7% | ||||||||
BAE Systems Holdings, Inc. | 76 | 76,872 | ||||||
Caterpillar Financial Services Corp. | 200 | 200,984 | ||||||
Embraer SA | 200 | 200,500 | ||||||
Molex Electronic Technologies LLC | 130 | 127,023 | ||||||
Owens Corning | 110 | 125,059 | ||||||
9.00%, 6/15/19 | 210 | 247,011 | ||||||
Yamana Gold, Inc. | 52 | 47,711 | ||||||
|
| |||||||
| 1,025,160 | ||||||||
|
| |||||||
Communications - Media – 5.3% | ||||||||
21st Century Fox America, Inc. | 55 | 67,162 | ||||||
8.875%, 4/26/23 | 125 | 164,225 | ||||||
CBS Corp. | 140 | 136,427 | ||||||
4.90%, 8/15/44 | 80 | 74,357 | ||||||
5.75%, 4/15/20 | 184 | 206,212 | ||||||
CCO Safari II LLC | 150 | 152,472 | ||||||
6.484%, 10/23/45(a) | 120 | 124,439 | ||||||
Comcast Cable Communications Holdings, Inc. | 110 | 152,913 | ||||||
Comcast Corp. | 165 | 185,696 | ||||||
5.70%, 5/15/18 | 100 | 110,503 | ||||||
Discovery Communications LLC | 84 | 74,274 | ||||||
Grupo Televisa SAB | 80 | 87,525 | ||||||
McGraw Hill Financial, Inc. | 140 | 139,072 | ||||||
4.40%, 2/15/26(a) | 111 | 113,611 | ||||||
Moody’s Corp. | 79 | 80,487 | ||||||
Scripps Networks Interactive, Inc. | 68 | 66,926 | ||||||
TCI Communications, Inc. | 250 | 342,382 | ||||||
| AB CORPORATE INCOME SHARES • | 9 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Time Warner Cable, Inc. | $ | 65 | $ | 52,648 | ||||
5.875%, 11/15/40 | 30 | 28,531 | ||||||
6.55%, 5/01/37 | 39 | 39,080 | ||||||
Time Warner, Inc. | 250 | 247,783 | ||||||
4.00%, 1/15/22 | 140 | 146,571 | ||||||
4.70%, 1/15/21 | 60 | 65,305 | ||||||
6.25%, 3/29/41 | 85 | 97,001 | ||||||
Viacom, Inc. | 250 | 243,574 | ||||||
5.25%, 4/01/44 | 50 | 43,453 | ||||||
|
| |||||||
| 3,242,629 | ||||||||
|
| |||||||
Communications - | ||||||||
America Movil SAB de CV | 120 | 132,075 | ||||||
American Tower Corp. | 40 | 41,343 | ||||||
4.00%, 6/01/25 | 95 | 93,753 | ||||||
4.50%, 1/15/18 | 40 | 41,993 | ||||||
5.05%, 9/01/20 | 120 | 130,446 | ||||||
7.25%, 5/15/19 | 150 | 172,116 | ||||||
Ameritech Capital Funding Corp. | 130 | 145,320 | ||||||
AT&T, Inc. | 615 | 605,831 | ||||||
3.875%, 8/15/21 | 230 | 239,728 | ||||||
BellSouth Corp. | 145 | 157,108 | ||||||
British Telecommunications PLC | 175 | 263,858 | ||||||
DIRECTV Holdings LLC/DIRECTV Financing Co., Inc. | 90 | 92,152 | ||||||
4.45%, 4/01/24 | 200 | 206,231 | ||||||
4.60%, 2/15/21 | 200 | 214,629 | ||||||
5.00%, 3/01/21 | 110 | 120,251 | ||||||
Rogers Communications, Inc. | 190 | 197,064 | ||||||
Telefonica Emisiones SAU | 175 | 179,489 | ||||||
5.462%, 2/16/21 | 145 | 161,817 | ||||||
Verizon Communications, Inc. | 215 | 217,136 | ||||||
3.50%, 11/01/21 | 585 | 603,013 | ||||||
3.85%, 11/01/42 | 245 | 205,218 | ||||||
4.272%, 1/15/36 | 185 | 169,567 | ||||||
6.55%, 9/15/43 | 154 | 184,342 | ||||||
| 10 | • AB CORPORATE INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Verizon New York, Inc. | $ | 170 | $ | 198,407 | ||||
Vodafone Group PLC | 70 | 61,165 | ||||||
|
| |||||||
| 4,834,052 | ||||||||
|
| |||||||
Consumer Cyclical - Automotive – 2.7% | ||||||||
Ford Motor Co. | 225 | 250,923 | ||||||
Ford Motor Credit Co. LLC | 250 | 249,178 | ||||||
5.875%, 8/02/21 | 575 | 655,430 | ||||||
General Motors Co. | 170 | 178,348 | ||||||
General Motors Financial Co., Inc. | 230 | 232,462 | ||||||
4.00%, 1/15/25 | 46 | 45,102 | ||||||
4.30%, 7/13/25 | 50 | 50,884 | ||||||
|
| |||||||
| 1,662,327 | ||||||||
|
| |||||||
Consumer Cyclical - Entertainment – 0.3% | ||||||||
Carnival Corp. | 180 | 180,985 | ||||||
|
| |||||||
Consumer Cyclical - Other – 0.4% | ||||||||
Marriott International, Inc./MD | 151 | 154,164 | ||||||
Wyndham Worldwide Corp. | 115 | 115,162 | ||||||
|
| |||||||
| 269,326 | ||||||||
|
| |||||||
Consumer Cyclical - Retailers – 1.8% | ||||||||
Advance Auto Parts, Inc. | 115 | 119,529 | ||||||
Dollar General Corp. | 114 | 113,252 | ||||||
Gap, Inc. (The) | 100 | 106,328 | ||||||
Home Depot, Inc. (The) | 130 | 153,838 | ||||||
5.875%, 12/16/36 | 30 | 37,119 | ||||||
Kohl’s Corp. | 102 | 101,220 | ||||||
Macy’s Retail Holdings, Inc. | 250 | 254,441 | ||||||
Walgreens Boots Alliance, Inc. | 193 | 192,878 | ||||||
|
| |||||||
| 1,078,605 | ||||||||
|
| |||||||
| AB CORPORATE INCOME SHARES • | 11 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Consumer Non-Cyclical – 8.8% | ||||||||
AbbVie, Inc. | $ | 100 | $ | 96,772 | ||||
3.60%, 5/14/25 | 59 | 57,999 | ||||||
Actavis Funding SCS | 90 | 90,305 | ||||||
3.80%, 3/15/25 | 212 | 210,079 | ||||||
Actavis, Inc. | 130 | 129,760 | ||||||
Altria Group, Inc. | 370 | 407,386 | ||||||
Amgen, Inc. | 175 | 182,711 | ||||||
4.40%, 5/01/45 | 90 | 83,351 | ||||||
Baxalta, Inc. | 100 | 101,847 | ||||||
Becton Dickinson and Co. | 42 | 42,477 | ||||||
3.25%, 11/12/20 | 79 | 80,191 | ||||||
3.734%, 12/15/24 | 36 | 36,834 | ||||||
Biogen, Inc. | 92 | 93,539 | ||||||
Celgene Corp. | 110 | 109,811 | ||||||
3.875%, 8/15/25 | 100 | 100,263 | ||||||
ConAgra Foods, Inc. | 40 | 38,138 | ||||||
5.819%, 6/15/17 | 200 | 212,875 | ||||||
Express Scripts Holding Co. | 85 | 92,026 | ||||||
Forest Laboratories LLC | 105 | 110,467 | ||||||
Grupo Bimbo SAB de CV | 100 | 104,231 | ||||||
Imperial Tobacco Finance PLC | 200 | 200,957 | ||||||
JM Smucker Co. (The) | 42 | 41,974 | ||||||
3.00%, 3/15/22 | 65 | 65,041 | ||||||
Kraft Foods Group, Inc. | 200 | 203,960 | ||||||
Kraft Heinz Foods Co. | 58 | 59,110 | ||||||
5.20%, 7/15/45(a) | 60 | 63,610 | ||||||
Kroger Co. (The) | 180 | 186,867 | ||||||
Laboratory Corp. of America Holdings | 42 | 41,468 | ||||||
3.60%, 2/01/25 | 41 | 39,906 | ||||||
| 12 | • AB CORPORATE INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
McKesson Corp. | $ | 105 | $ | 121,781 | ||||
Medtronic, Inc. | 150 | 152,385 | ||||||
3.15%, 3/15/22 | 130 | 132,974 | ||||||
Mylan, Inc. | 140 | 140,052 | ||||||
PepsiCo, Inc. | 230 | 229,906 | ||||||
Perrigo Co. PLC | 200 | 196,341 | ||||||
Procter & Gamble Co. (The) | 55 | 68,067 | ||||||
Reynolds American, Inc. | 61 | 60,692 | ||||||
3.75%, 5/20/23(a) | 45 | 45,393 | ||||||
4.00%, 6/12/22 | 71 | 74,425 | ||||||
4.45%, 6/12/25 | 210 | 219,133 | ||||||
4.85%, 9/15/23 | 40 | 43,288 | ||||||
Tyson Foods, Inc. | 24 | 24,188 | ||||||
3.95%, 8/15/24 | 75 | 76,569 | ||||||
4.50%, 6/15/22 | 110 | 116,975 | ||||||
Whirlpool Corp. | 120 | 120,692 | ||||||
Wyeth LLC | 100 | 118,401 | ||||||
Zimmer Biomet Holdings, Inc. | 90 | 89,737 | ||||||
3.55%, 4/01/25 | 70 | 68,880 | ||||||
|
| |||||||
| 5,383,834 | ||||||||
|
| |||||||
Energy – 9.3% | ||||||||
Anadarko Petroleum Corp. | 35 | 37,684 | ||||||
6.375%, 9/15/17 | 265 | 285,345 | ||||||
Apache Corp. | 105 | 92,031 | ||||||
Boardwalk Pipelines LP | 65 | 59,473 | ||||||
Canadian Natural Resources Ltd. | 245 | 232,524 | ||||||
Cenovus Energy, Inc. | 300 | 325,047 | ||||||
Columbia Pipeline Group, Inc. | 120 | 115,479 | ||||||
ConocoPhillips Holding Co. | 166 | 209,754 | ||||||
Devon Energy Corp. | 100 | 92,774 | ||||||
| AB CORPORATE INCOME SHARES • | 13 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Diamond Offshore Drilling, Inc. | $ | 90 | $ | 63,389 | ||||
Enbridge Energy Partners LP | 100 | 97,108 | ||||||
Encana Corp. | 125 | 116,247 | ||||||
5.15%, 11/15/41 | 85 | 66,788 | ||||||
Energy Transfer Partners LP | 65 | 57,193 | ||||||
4.65%, 6/01/21 | 277 | 274,875 | ||||||
EnLink Midstream Partners LP | 95 | 76,613 | ||||||
Ensco PLC | 120 | 100,221 | ||||||
Enterprise Products Operating LLC | 90 | 85,544 | ||||||
3.75%, 2/15/25 | 265 | 255,208 | ||||||
4.90%, 5/15/46 | 45 | 41,245 | ||||||
5.25%, 1/31/20 | 140 | 153,202 | ||||||
Hess Corp. | 36 | 33,549 | ||||||
5.60%, 2/15/41 | 95 | 93,013 | ||||||
7.875%, 10/01/29 | 59 | 70,439 | ||||||
Husky Energy, Inc. | 50 | 48,907 | ||||||
4.00%, 4/15/24 | 59 | 55,906 | ||||||
Kinder Morgan Energy Partners LP | 170 | 152,167 | ||||||
7.40%, 3/15/31 | 145 | 146,576 | ||||||
Kinder Morgan, Inc./DE | 33 | 33,396 | ||||||
5.05%, 2/15/46 | 100 | 79,261 | ||||||
Marathon Oil Corp. | 35 | 36,663 | ||||||
Marathon Petroleum Corp. | 120 | 130,914 | ||||||
Noble Energy, Inc. | 100 | 95,188 | ||||||
4.15%, 12/15/21 | 65 | 65,742 | ||||||
5.625%, 5/01/21 | 153 | 155,140 | ||||||
ONEOK Partners LP | 190 | 168,037 | ||||||
4.90%, 3/15/25 | 30 | 27,658 | ||||||
Phillips 66 | 54 | 57,306 | ||||||
Plains All American Pipeline LP/PAA Finance Corp. | 156 | 145,696 | ||||||
4.65%, 10/15/25 | 90 | 89,818 | ||||||
Spectra Energy Capital LLC | 23 | 26,437 | ||||||
| 14 | • AB CORPORATE INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Spectra Energy Partners LP | $ | 77 | $ | 77,663 | ||||
3.50%, 3/15/25 | 70 | 65,367 | ||||||
4.50%, 3/15/45 | 50 | 41,875 | ||||||
4.60%, 6/15/21 | 75 | 78,361 | ||||||
Suncor Energy, Inc. | 100 | 120,459 | ||||||
Sunoco Logistics Partners Operations LP | 164 | 147,964 | ||||||
Valero Energy Corp. | 70 | 79,218 | ||||||
6.625%, 6/15/37 | 67 | 74,113 | ||||||
Western Gas Partners LP | 100 | 91,322 | ||||||
Williams Partners LP | 200 | 180,437 | ||||||
3.90%, 1/15/25 | 69 | 58,646 | ||||||
4.125%, 11/15/20 | 145 | 144,728 | ||||||
|
| |||||||
| 5,709,710 | ||||||||
|
| |||||||
Technology – 4.1% | ||||||||
Apple, Inc. | 175 | 180,209 | ||||||
3.45%, 2/09/45 | 70 | 60,384 | ||||||
Cisco Systems, Inc. | 150 | 155,701 | ||||||
Fidelity National Information Services, Inc. | 245 | 234,632 | ||||||
Hewlett Packard Enterprise Co. | 215 | 216,786 | ||||||
Hewlett-Packard Co. | 14 | 14,257 | ||||||
4.30%, 6/01/21 | 80 | 82,245 | ||||||
4.375%, 9/15/21 | 25 | 25,591 | ||||||
4.65%, 12/09/21 | 89 | 92,485 | ||||||
Intel Corp. | 120 | 124,616 | ||||||
KLA-Tencor Corp. | 134 | 134,932 | ||||||
Lam Research Corp. | 115 | 112,911 | ||||||
Motorola Solutions, Inc. | 220 | 202,508 | ||||||
Oracle Corp. | 250 | 269,170 | ||||||
Seagate HDD Cayman | 255 | 233,484 | ||||||
4.875%, 6/01/27(a) | 80 | 69,539 | ||||||
Texas Instruments, Inc. | 115 | 114,066 | ||||||
| AB CORPORATE INCOME SHARES • | 15 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Total System Services, Inc. | $ | 105 | $ | 104,934 | ||||
Xerox Corp. | 95 | 90,182 | ||||||
|
| |||||||
| 2,518,632 | ||||||||
|
| |||||||
Transportation - Railroads – 0.4% | ||||||||
Burlington Northern Santa Fe LLC | 85 | 84,146 | ||||||
CSX Corp. | 180 | 173,557 | ||||||
|
| |||||||
| 257,703 | ||||||||
|
| |||||||
Transportation - Services – 0.6% | ||||||||
FedEx Corp. | 40 | 47,375 | ||||||
Penske Truck Leasing Co. LP/PTL Finance Corp. | 120 | 123,339 | ||||||
Ryder System, Inc. | 185 | 186,313 | ||||||
5.85%, 11/01/16 | 28 | 29,250 | ||||||
|
| |||||||
| 386,277 | ||||||||
|
| |||||||
| 30,213,114 | ||||||||
|
| |||||||
Financial Institutions – 37.0% | ||||||||
Banking – 21.8% | ||||||||
Abbey National Treasury Services | 115 | 115,141 | ||||||
ABN AMRO Bank NV | 200 | 201,677 | ||||||
Series E | 255 | 269,662 | ||||||
Bank of America Corp. | 140 | 139,595 | ||||||
3.875%, 8/01/25 | 125 | 127,176 | ||||||
4.00%, 1/22/25 | 465 | 458,446 | ||||||
4.10%, 7/24/23 | 200 | 209,019 | ||||||
4.20%, 8/26/24 | 60 | 60,329 | ||||||
5.00%, 5/13/21 | 235 | 258,275 | ||||||
Barclays PLC | 200 | 193,425 | ||||||
BB&T Corp. | 275 | 302,479 | ||||||
BPCE SA | 200 | 206,397 | ||||||
Capital One Bank USA, NA | 275 | 269,095 | ||||||
Citigroup, Inc. | 170 | 166,996 | ||||||
3.875%, 3/26/25 | 90 | 87,534 | ||||||
| 16 | • AB CORPORATE INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
5.875%, 1/30/42 | $ | 110 | $ | 128,605 | ||||
6.625%, 1/15/28 | 210 | 256,119 | ||||||
Compass Bank | 250 | 248,819 | ||||||
3.875%, 4/10/25 | 250 | 232,807 | ||||||
5.50%, 4/01/20 | 110 | 117,303 | ||||||
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA/Netherlands | 250 | 255,064 | ||||||
Credit Suisse AG/New York NY | 110 | 122,407 | ||||||
Credit Suisse Group Funding Guernsey Ltd. | 250 | 249,035 | ||||||
Discover Bank/Greenwood DE | 250 | 252,205 | ||||||
Fifth Third Bancorp | 31 | 31,573 | ||||||
5.45%, 1/15/17 | 105 | 109,443 | ||||||
Goldman Sachs Group, Inc. (The) | 130 | 132,026 | ||||||
3.75%, 5/22/25 | 95 | 95,690 | ||||||
3.85%, 7/08/24 | 350 | 357,039 | ||||||
Series D | 480 | 549,863 | ||||||
Series G | 75 | 87,411 | ||||||
HSBC Holdings PLC | 350 | 385,063 | ||||||
HSBC USA, Inc. | 300 | 301,825 | ||||||
Huntington National Bank (The) | 300 | 300,100 | ||||||
JPMorgan Chase & Co. | 440 | 427,457 | ||||||
3.875%, 9/10/24 | 110 | 109,883 | ||||||
3.90%, 7/15/25 | 120 | 122,878 | ||||||
Morgan Stanley | 177 | 178,185 | ||||||
2.80%, 6/16/20 | 200 | 201,680 | ||||||
5.625%, 9/23/19 | 604 | 672,970 | ||||||
Series G | ||||||||
4.00%, 7/23/25 | 103 | 105,920 | ||||||
4.35%, 9/08/26 | 50 | 50,722 | ||||||
5.50%, 7/24/20 | 395 | 443,728 | ||||||
6.625%, 4/01/18 | 100 | 111,086 | ||||||
People’s United Bank NA | 250 | 247,907 | ||||||
People’s United Financial, Inc. | 83 | 82,110 | ||||||
| AB CORPORATE INCOME SHARES • | 17 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
PNC Bank NA | $ | 400 | $ | 420,850 | ||||
Rabobank Capital Funding Trust III | 100 | 101,860 | ||||||
Regions Financial Corp. | 300 | 299,772 | ||||||
Santander Holdings USA, Inc. | 200 | 197,787 | ||||||
3.45%, 8/27/18 | 130 | 133,591 | ||||||
Standard Chartered PLC | 245 | 248,484 | ||||||
State Street Corp. | 240 | 255,138 | ||||||
SunTrust Bank/Atlanta GA | 145 | 161,876 | ||||||
Synchrony Financial | 110 | 108,470 | ||||||
3.75%, 8/15/21 | 200 | 201,703 | ||||||
UBS Group Funding Jersey Ltd. | 200 | 200,702 | ||||||
Wells Fargo & Co. | 270 | 271,172 | ||||||
3.30%, 9/09/24 | 200 | 199,766 | ||||||
Series G | 150 | 154,791 | ||||||
Series N | 375 | 373,941 | ||||||
Zions BanCorporation | 13 | 13,415 | ||||||
|
| |||||||
| 13,375,487 | ||||||||
|
| |||||||
Brokerage – 0.2% | ||||||||
TD Ameritrade Holding Corp. | 115 | 114,544 | ||||||
|
| |||||||
Finance – 1.2% | ||||||||
GE Capital Trust I | 170 | 181,815 | ||||||
General Electric Capital Corp. | 140 | 172,787 | ||||||
HSBC Finance Capital Trust IX | 370 | 370,370 | ||||||
|
| |||||||
| 724,972 | ||||||||
|
| |||||||
Insurance – 8.7% | ||||||||
Allstate Corp. (The) | 200 | 200,648 | ||||||
6.125%, 5/15/37 | 78 | 78,341 | ||||||
| 18 | • AB CORPORATE INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
American International Group, Inc. | $ | 225 | $ | 228,597 | ||||
6.40%, 12/15/20 | 285 | 336,522 | ||||||
8.175%, 5/15/58 | 65 | 85,800 | ||||||
Anthem, Inc. | 255 | 290,000 | ||||||
Aon PLC | 70 | 67,378 | ||||||
4.75%, 5/15/45 | 100 | 97,850 | ||||||
Aquarius & Investments PLC for Swiss | 200 | 207,123 | ||||||
Assurant, Inc. | 105 | 105,943 | ||||||
Cigna Corp. | 175 | 182,132 | ||||||
7.875%, 5/15/27 | 65 | 86,428 | ||||||
Guardian Life Insurance Co. of America (The) | 42 | 55,160 | ||||||
Hartford Financial Services Group, Inc. (The) | 190 | 199,923 | ||||||
5.50%, 3/30/20 | 100 | 111,753 | ||||||
6.10%, 10/01/41 | 45 | 53,926 | ||||||
Humana, Inc. | 180 | 203,429 | ||||||
Lincoln National Corp. | 265 | 258,589 | ||||||
4.85%, 6/24/21 | 200 | 217,981 | ||||||
8.75%, 7/01/19 | 82 | 100,235 | ||||||
Markel Corp. | 59 | 68,642 | ||||||
MetLife Capital Trust IV | 150 | 186,000 | ||||||
MetLife, Inc. | 91 | 91,853 | ||||||
Nationwide Mutual Insurance Co. | 90 | 136,055 | ||||||
Peachtree Corners Funding Trust | 110 | 110,707 | ||||||
Principal Financial Group, Inc. | 170 | 170,863 | ||||||
Progressive Corp. (The) | 112 | 112,560 | ||||||
Prudential Financial, Inc. | 239 | 258,967 | ||||||
5.375%, 5/15/45 | 200 | 201,000 | ||||||
5.625%, 6/15/43 | 93 | 97,325 | ||||||
Series B | 135 | 154,764 | ||||||
| AB CORPORATE INCOME SHARES • | 19 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Reliance Standard Life Global Funding II | $ | 140 | $ | 140,431 | ||||
Swiss Re Solutions Holding Corp. | 90 | 112,500 | ||||||
UnitedHealth Group, Inc. | 170 | 182,250 | ||||||
XLIT Ltd. | 70 | 67,146 | ||||||
6.25%, 5/15/27 | 75 | 88,597 | ||||||
|
| |||||||
| 5,347,418 | ||||||||
|
| |||||||
REITS – 5.1% | ||||||||
Alexandria Real Estate Equities, Inc. | 100 | 99,531 | ||||||
Brixmor Operating Partnership LP | 120 | 120,238 | ||||||
DDR Corp. | 105 | 108,145 | ||||||
EPR Properties | 175 | 176,244 | ||||||
Essex Portfolio LP | 56 | 54,541 | ||||||
3.375%, 1/15/23 | 125 | 122,220 | ||||||
HCP, Inc. | 160 | 176,068 | ||||||
Healthcare Trust of America Holdings LP | 140 | 136,884 | ||||||
Hospitality Properties Trust | 210 | 216,853 | ||||||
Host Hotels & Resorts LP | 91 | 87,952 | ||||||
Kimco Realty Corp. | 70 | 81,217 | ||||||
Mid-America Apartments LP | 115 | 112,541 | ||||||
Omega Healthcare Investors, Inc. | 108 | 105,673 | ||||||
Realty Income Corp. | 210 | 235,489 | ||||||
Trust F/1401 | 230 | 238,050 | ||||||
Ventas Realty LP | 120 | 120,063 | ||||||
Ventas Realty LP / Ventas Capital Corp. | 216 | 216,682 | ||||||
Vornado Realty LP | 215 | 230,519 | ||||||
Washington Real Estate Investment Trust | 140 | 149,205 | ||||||
| 20 | • AB CORPORATE INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Welltower, Inc. | $ | 107 | $ | 107,342 | ||||
4.00%, 6/01/25 | 85 | 84,167 | ||||||
5.25%, 1/15/22 | 140 | 152,323 | ||||||
|
| |||||||
| 3,131,947 | ||||||||
|
| |||||||
| 22,694,368 | ||||||||
|
| |||||||
Utility – 3.4% | ||||||||
Electric – 3.1% | ||||||||
Berkshire Hathaway Energy Co. | 150 | 180,075 | ||||||
CMS Energy Corp. | 165 | 188,854 | ||||||
Consolidated Edison Co. of New York, Inc. | 100 | 109,470 | ||||||
Series 07-A | 30 | 37,302 | ||||||
Dominion Resources, Inc./VA | 135 | 133,434 | ||||||
Empresa Nacional de Electricidad SA/Chile | 33 | 33,678 | ||||||
Entergy Corp. | 153 | 157,242 | ||||||
Exelon Corp. | 250 | 257,310 | ||||||
Exelon Generation Co. LLC | 185 | 192,860 | ||||||
4.25%, 6/15/22 | 150 | 152,849 | ||||||
Jersey Central Power & Light Co. | 196 | 204,364 | ||||||
Pacific Gas & Electric Co. | 50 | 50,856 | ||||||
PacifiCorp | 70 | 86,794 | ||||||
Potomac Electric Power Co. | 65 | 85,069 | ||||||
Trans-Allegheny Interstate Line Co. | 15 | 15,046 | ||||||
|
| |||||||
| 1,885,203 | ||||||||
|
| |||||||
Natural Gas – 0.3% | ||||||||
AGL Capital Corp. | 105 | 114,353 | ||||||
NiSource Finance Corp. | 100 | 113,699 | ||||||
|
| |||||||
| 228,052 | ||||||||
|
| |||||||
| 2,113,255 | ||||||||
|
| |||||||
Total Corporates – Investment Grade | 55,020,737 | |||||||
|
| |||||||
| AB CORPORATE INCOME SHARES • | 21 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
GOVERNMENTS – TREASURIES – 6.0% | ||||||||
United States – 6.0% | ||||||||
U.S. Treasury Bonds | $ | 1,170 | $ | 1,183,818 | ||||
3.125%, 11/15/41-2/15/42 | 740 | 774,678 | ||||||
3.625%, 8/15/43 | 215 | 245,643 | ||||||
U.S. Treasury Notes | 345 | 343,239 | ||||||
2.125%, 5/15/25 | 1,125 | 1,122,627 | ||||||
|
| |||||||
Total Governments – Treasuries | 3,670,005 | |||||||
|
| |||||||
CORPORATES – NON-INVESTMENT | ||||||||
Industrial – 0.6% | ||||||||
Basic – 0.5% | ||||||||
Commercial Metals Co. | 80 | 85,900 | ||||||
Teck Resources Ltd. | 250 | 170,000 | ||||||
5.20%, 3/01/42 | 80 | 42,800 | ||||||
|
| |||||||
| 298,700 | ||||||||
|
| |||||||
Energy – 0.1% | ||||||||
Transocean, Inc. | 45 | 35,606 | ||||||
|
| |||||||
| 334,306 | ||||||||
|
| |||||||
Financial Institutions – 0.2% | ||||||||
Banking – 0.1% | ||||||||
UniCredit Luxembourg Finance SA | 100 | 105,245 | ||||||
|
| |||||||
Finance – 0.1% | ||||||||
Navient Corp. | 46 | 44,505 | ||||||
|
| |||||||
| 149,750 | ||||||||
|
| |||||||
Utility – 0.2% | ||||||||
Electric – 0.2% | ||||||||
FirstEnergy Transmission LLC | 115 | 117,580 | ||||||
|
| |||||||
Total Corporates – Non-Investment Grade | 601,636 | |||||||
|
| |||||||
QUASI-SOVEREIGNS – 0.8% | ||||||||
Quasi-Sovereign Bonds – 0.8% | ||||||||
Mexico – 0.8% | ||||||||
Petroleos Mexicanos | 372 | 352,216 | ||||||
| 22 | • AB CORPORATE INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
4.875%, 1/24/22 | $ | 95 | $ | 96,881 | ||||
5.50%, 6/27/44(a) | 15 | 12,783 | ||||||
6.625%, 6/15/35 | 70 | 68,863 | ||||||
|
| |||||||
Total Quasi-Sovereigns | 530,743 | |||||||
|
| |||||||
| Shares | ||||||||
PREFERRED STOCKS – 0.6% | ||||||||
Financial Institutions – 0.6% | ||||||||
Banking – 0.3% | ||||||||
US Bancorp | 6,550 | 175,540 | ||||||
|
| |||||||
Insurance – 0.3% | ||||||||
Allstate Corp. (The) | 6,950 | 178,823 | ||||||
|
| |||||||
Total Preferred Stocks | 354,363 | |||||||
|
| |||||||
| Principal Amount (000) | ||||||||
GOVERNMENTS – SOVEREIGN | ||||||||
Brazil – 0.1% | ||||||||
Petrobras Global Finance BV | $ | 50 | 40,688 | |||||
|
| |||||||
Colombia – 0.1% | ||||||||
Ecopetrol SA | 77 | 77,770 | ||||||
|
| |||||||
Total Governments – Sovereign Agencies | 118,458 | |||||||
|
| |||||||
SHORT-TERM INVESTMENTS – 0.9% | ||||||||
Certificates of Deposit – 0.9% | ||||||||
State Street Time Deposit | 586 | 586,472 | ||||||
|
| |||||||
Total Investments – 99.2% | 60,882,414 | |||||||
Other assets less liabilities – 0.8% | 467,934 | |||||||
|
| |||||||
Net Assets – 100.0% | $ | 61,350,348 | ||||||
|
| |||||||
| AB CORPORATE INCOME SHARES • | 23 |
Portfolio of Investments
CENTRALLY CLEARED INTEREST RATE SWAPS (see Note C)
| Rate Type | ||||||||||||||||
| Clearing Broker/ (Exchange) | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | $ | 930 | 5/06/20 | 1.656% | 3 Month LIBOR | $ | (16,700 | ) | ||||||||
Citigroup Global Markets, Inc./(CME Group) | 320 | 5/02/34 | 3 Month LIBOR | 3.363% | 51,798 | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | 60 | 11/04/44 | 3 Month LIBOR | 3.049% | 7,510 | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | 60 | 5/05/45 | 3 Month LIBOR | 2.562% | 1,041 | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 770 | 11/29/23 | 2.793% | 3 Month LIBOR | (60,753 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 345 | 1/28/24 | 2.861% | 3 Month LIBOR | (27,728 | ) | ||||||||||
|
| |||||||||||||||
| $ | (44,832 | ) | ||||||||||||||
|
| |||||||||||||||
CREDIT DEFAULT SWAPS (see Note C)
| Swap Counterparty & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at October 31, 2015 | Notional Amount (000) | Market Value | Upfront Premiums Paid (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||
Sale Contracts | ||||||||||||||||||||||||
Credit Suisse International: | ||||||||||||||||||||||||
Kohl’s Corp., | 1.00 | % | 0.97 | % | $ | 34 | $ | 20 | $ | (334 | ) | $ | 354 | |||||||||||
| * | Termination date |
INTEREST RATE SWAPS (see Note C)
| Rate Type | ||||||||||||||||
| Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
Deutsche Bank AG | $ | 600 | 6/10/43 | 3 Month LIBOR | 3.191% | $ | 90,405 | |||||||||
JPMorgan Chase Bank, NA | 350 | 6/10/33 | 3 Month LIBOR | 3.027% | 36,681 | |||||||||||
|
| |||||||||||||||
| $ | 127,086 | |||||||||||||||
|
| |||||||||||||||
| 24 | • AB CORPORATE INCOME SHARES |
Portfolio of Investments
| (a) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities are considered liquid and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At October 31, 2015, the aggregate market value of these securities amounted to $5,433,321 or 8.9% of net assets. |
| (b) | Floating Rate Security. Stated interest rate was in effect at October 31, 2015. |
| (c) | Securities are perpetual and, thus, do not have a predetermined maturity date. The date shown, if applicable, reflects the next call date. |
| (d) | Coupon rate adjusts periodically based upon a predetermined schedule. Stated interest rate in effect at October 31, 2015. |
Glossary:
CME – Chicago Mercantile Exchange
LIBOR – London Interbank Offered Rates
REIT – Real Estate Investment Trust
See notes to financial statements.
| AB CORPORATE INCOME SHARES • | 25 |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
October 31, 2015 (unaudited)
| Assets | ||||
Investments in securities, at value (cost $60,807,354) | $ | 60,882,414 | ||
Cash | 6,197 | |||
Cash collateral due from broker | 46,815 | |||
Interest receivable | 716,735 | |||
Receivable for investment securities sold | 248,529 | |||
Unrealized appreciation on interest rate swaps | 127,086 | |||
Receivable for shares of beneficial interest sold | 53,297 | |||
Unrealized appreciation on credit default swaps | 354 | |||
|
| |||
Total assets | 62,081,427 | |||
|
| |||
| Liabilities | ||||
Payable for investment securities purchased | 483,525 | |||
Dividends payable | 194,911 | |||
Payable for shares of beneficial interest redeemed | 51,884 | |||
Payable for variation margin on exchange-traded derivatives | 425 | |||
Upfront premium received on credit default swaps | 334 | |||
|
| |||
Total liabilities | 731,079 | |||
|
| |||
Net Assets | $ | 61,350,348 | ||
|
| |||
| Composition of Net Assets | ||||
Shares of beneficial interest, at par | $ | 56 | ||
Additional paid-in capital | 61,842,535 | |||
Undistributed net investment income | 62,417 | |||
Accumulated net realized loss on investment transactions | (712,328 | ) | ||
Net unrealized appreciation on investments | 157,668 | |||
|
| |||
| $ | 61,350,348 | |||
|
| |||
Net Asset Value Per Share—unlimited shares of beneficial interest authorized, $.00001 par value (based on 5,580,471 common shares outstanding) | $ | 10.99 | ||
|
|
See notes to financial statements.
| 26 | • AB CORPORATE INCOME SHARES |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Six Months Ended October 31, 2015 (unaudited)
| Investment Income | ||||||||
Interest | $ | 1,059,680 | ||||||
Dividends | 9,343 | |||||||
|
| |||||||
Total investment income | $ | 1,069,023 | ||||||
|
| |||||||
| Realized and Unrealized Gain (Loss) on Investment Transactions | ||||||||
Net realized gain on: | ||||||||
Investment transactions | 34,283 | |||||||
Swaps | 8,428 | |||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | (1,616,178 | ) | ||||||
Swaps | (27,664 | ) | ||||||
|
| |||||||
Net loss on investment transactions | (1,601,131 | ) | ||||||
|
| |||||||
Net Decrease in Net Assets from Operations | $ | (532,108 | ) | |||||
|
|
See notes to financial statements.
| AB CORPORATE INCOME SHARES • | 27 |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
| Six Months Ended October 31, 2015 (unaudited) | Year Ended April 30, 2015 | |||||||
| Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 1,069,023 | $ | 1,682,832 | ||||
Net realized gain on investment transactions | 42,711 | 407,457 | ||||||
Net change in unrealized appreciation/depreciation of investments | (1,643,842 | ) | 461,999 | |||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | (532,108 | ) | 2,552,288 | |||||
| Dividends to Shareholders from | ||||||||
Net investment income | (1,069,247 | ) | (1,671,364 | ) | ||||
| Transactions in Shares of Beneficial Interest | ||||||||
Net increase (decrease) | 18,013,095 | (1,931,634 | ) | |||||
|
|
|
| |||||
Total increase (decrease) | 16,411,740 | (1,050,710 | ) | |||||
| Net Assets | ||||||||
Beginning of period | 44,938,608 | 45,989,318 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $62,417 and $62,641, respectively) | $ | 61,350,348 | $ | 44,938,608 | ||||
|
|
|
| |||||
See notes to financial statements.
| 28 | • AB CORPORATE INCOME SHARES |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
October 31, 2015 (unaudited)
NOTE A
Significant Accounting Policies
AB Corporate Shares (the “Trust”) was organized as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated January 26, 2004. Prior to January 20, 2015, the Trust was known as AllianceBernstein Corporate Shares. The Trust is registered under the Investment Company Act of 1940, as an open-end, diversified management investment company. The Trust operates as a “series” company currently offering three separate portfolios: AB Corporate Income Shares (the “Portfolio”), AB Municipal Income Shares and AB Taxable Multi-Sector Income Shares. Each Portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to AB Corporate Income Shares. Prior to January 20, 2015, the Portfolio was known as AllianceBernstein Corporate Income Shares.
Shares of the Portfolio are offered exclusively to holders of accounts established under wrap-fee programs sponsored and maintained by certain registered investment advisers approved by AllianceBernstein L.P. (the “Adviser”). The Portfolio’s shares may be purchased at the relevant net asset value without a sales charge or other fee. The financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) which require management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Trust is an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies. The following is a summary of significant accounting policies followed by the Portfolio.
1. Security Valuation
Portfolio securities are valued at their current market value determined on the basis of market quotations or, if market quotations are not readily available or are deemed unreliable, at “fair value” as determined in accordance with procedures established by and under the general supervision of the Trust’s Board of Trustees (the “Board”).
In general, the market values of securities which are readily available and deemed reliable are determined as follows: securities listed on a national securities exchange (other than securities listed on the NASDAQ Stock Market, Inc. (“NASDAQ”)) or on a foreign securities exchange are valued at the last sale price at the close of the exchange or foreign securities exchange. If there has been no sale on such day, the securities are valued at the last traded price from the previous day. Securities listed on more than one exchange are valued by reference to the principal exchange on which the securities are traded; securities listed only on NASDAQ are valued in accordance with the NASDAQ Official Closing Price; listed or over the counter (“OTC”) market put or call options are
| AB CORPORATE INCOME SHARES • | 29 |
Notes to Financial Statements
valued at the mid level between the current bid and ask prices. If either a current bid or current ask price is unavailable, the Adviser will have discretion to determine the best valuation (e.g. last trade price in the case of listed options); open futures are valued using the closing settlement price or, in the absence of such a price, the most recent quoted bid price. If there are no quotations available for the day of valuation, the last available closing settlement price is used; U.S. Government securities and any other debt instruments having 60 days or less remaining until maturity are generally valued at market by an independent pricing vendor, if a market price is available. If a market price is not available, the securities are valued at amortized cost. This methodology is commonly used for short term securities that have an original maturity of 60 days or less, as well as short term securities that had an original term to maturity that exceeded 60 days. In instances when amortized cost is utilized, the Valuation Committee (the “Committee”) must reasonably conclude that the utilization of amortized cost is approximately the same as the fair value of the security. Such factors the Committee will consider include, but are not limited to, an impairment of the creditworthiness of the issuer or material changes in interest rates. Fixed-income securities, including mortgage-backed and asset-backed securities, may be valued on the basis of prices provided by a pricing service or at a price obtained from one or more of the major broker-dealers. In cases where broker-dealer quotes are obtained, the Adviser may establish procedures whereby changes in market yields or spreads are used to adjust, on a daily basis, a recently obtained quoted price on a security. Swaps and other derivatives are valued daily, primarily using independent pricing services, independent pricing models using market inputs, as well as third party broker-dealers or counterparties. Investment companies are valued at their net asset value each day.
Securities for which market quotations are not readily available (including restricted securities) or are deemed unreliable are valued at fair value. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, analysis of the issuer’s financial statements or other available documents. In addition, the Portfolio may use fair value pricing for securities primarily traded in non-U.S. markets because most foreign markets close well before the Portfolio values its securities at 4:00 p.m., Eastern Time. The earlier close of these foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim and may materially affect the value of those securities.
2. Fair Value Measurements
In accordance with U.S. GAAP regarding fair value measurements, fair value is defined as the price that the Portfolio would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a framework for measuring fair value, and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability (including those valued based on their market values as described in Note A.1 above). Inputs may be
| 30 | • AB CORPORATE INCOME SHARES |
Notes to Financial Statements
observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Portfolio. Unobservable inputs reflect the Portfolio’s own assumptions about the assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances. Each investment is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below.
| • | Level 1—quoted prices in active markets for identical investments |
| • | Level 2—other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| • | Level 3—significant unobservable inputs (including the Portfolio’s own assumptions in determining the fair value of investments) |
The fair value of debt instruments, such as bonds, and over-the-counter derivatives is generally based on market price quotations, recently executed market transactions (where observable) or industry recognized modeling techniques and are generally classified as Level 2. Pricing vendor inputs to Level 2 valuations may include quoted prices for similar investments in active markets, interest rate curves, coupon rates, currency rates, yield curves, option adjusted spreads, default rates, credit spreads and other unique security features in order to estimate the relevant cash flows which are then discounted to calculate fair values. If these inputs are unobservable and significant to the fair value, these investments will be classified as Level 3. In addition, non-agency rated investments are classified as Level 3.
Other fixed income investments, including non-U.S. government and corporate debt, are generally valued using quoted market prices, if available, which are typically impacted by current interest rates, maturity dates and any perceived credit risk of the issuer. Additionally, in the absence of quoted market prices, these inputs are used by pricing vendors to derive a valuation based upon industry or proprietary models which incorporate issuer specific data with relevant yield/spread comparisons with more widely quoted bonds with similar key characteristics. Those investments for which there are observable inputs are classified as Level 2. Where the inputs are not observable, the investments are classified as Level 3.
| AB CORPORATE INCOME SHARES • | 31 |
Notes to Financial Statements
The following table summarizes the valuation of the Portfolio’s investments by the above fair value hierarchy levels as of October 31, 2015:
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Corporates – Investment Grade | $ | – 0 | – | $ | 55,020,737 | $ | – 0 | – | $ | 55,020,737 | ||||||
Governments – Treasuries | – 0 | – | 3,670,005 | – 0 | – | 3,670,005 | ||||||||||
Corporates – Non-Investment Grade | – 0 | – | 601,636 | – 0 | – | 601,636 | ||||||||||
Quasi-Sovereigns | – 0 | – | 530,743 | – 0 | – | 530,743 | ||||||||||
Preferred Stocks | 354,363 | – 0 | – | – 0 | – | 354,363 | ||||||||||
Governments – Sovereign Agencies | – 0 | – | 118,458 | – 0 | – | 118,458 | ||||||||||
Short-Term Investments | – 0 | – | 586,472 | – 0 | – | 586,472 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 354,363 | 60,528,051 | – 0 | – | 60,882,414 | |||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets: | ||||||||||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | 60,349 | – 0 | – | 60,349 | # | |||||||||
Credit Default Swaps | – 0 | – | 354 | – 0 | – | 354 | ||||||||||
Interest Rate Swaps | – 0 | – | 127,086 | – 0 | – | 127,086 | ||||||||||
Liabilities: | ||||||||||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | (105,181 | ) | – 0 | – | (105,181 | )# | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total^ | $ | 354,363 | $ | 60,610,659 | $ | – 0 | – | $ | 60,965,022 | |||||||
|
|
|
|
|
|
|
| |||||||||
| * | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
| # | Only variation margin receivable/payable at period end is reported within the statement of assets and liabilities. This amount reflects cumulative appreciation/(depreciation) of exchange-traded derivatives as reported in the portfolio of investments. |
| ^ | There were no transfers between any levels during the reporting period. |
The Portfolio recognizes all transfers between levels of the fair value hierarchy assuming the financial instruments were transferred at the beginning of the reporting period.
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the Portfolio. The Committee operates under pricing and valuation policies and procedures established by the Adviser and approved by the Board, including pricing policies which set forth the mechanisms and processes to be employed on a daily basis to implement these policies and procedures. In particular, the pricing policies describe how to determine market quotations for securities and other instruments. The Committee’s responsibilities include: 1) fair value and liquidity determinations (and oversight of any third parties to whom any responsibility for fair value and liquidity determinations is delegated), and 2) regular monitoring of the Adviser’s pricing and valuation policies and procedures and modification or enhancement of these policies and procedures (or recommendation of the modification of these policies and procedures) as the Committee believes appropriate.
| 32 | • AB CORPORATE INCOME SHARES |
Notes to Financial Statements
The Committee is also responsible for monitoring the implementation of the pricing policies by the Adviser’s Pricing Group (the “Pricing Group”) and a third party which performs certain pricing functions in accordance with the pricing policies. The Pricing Group is responsible for the oversight of the third party on a day-to-day basis. The Committee and the Pricing Group perform a series of activities to provide reasonable assurance of the accuracy of prices including: 1) periodic vendor due diligence meetings, review of methodologies, new developments and processes at vendors, 2) daily comparison of security valuation versus prior day for all securities that exceeded established thresholds, and 3) daily review of unpriced, stale, and variance reports with exceptions reviewed by senior management and the Committee.
In addition, several processes outside of the pricing process are used to monitor valuation issues including: 1) performance and performance attribution reports are monitored for anomalous impacts based upon benchmark performance, and 2) portfolio managers review all portfolios for performance and analytics (which are generated using the Adviser’s prices).
3. Taxes
It is the Portfolio’s policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its investment company taxable income and net realized gains, if any, to shareholders. Therefore, no provisions for federal income or excise taxes are required.
In accordance with U.S. GAAP requirements regarding accounting for uncertainties in income taxes, management has analyzed the Portfolio’s tax positions taken or expected to be taken on federal and state income tax returns for all open tax years (the current and the prior three tax years) and has concluded that no provision for income tax is required in the Portfolio’s financial statements.
4. Investment Income and Investment Transactions
Dividend income is recorded on the ex-dividend date or as soon as the Portfolio is informed of the dividend. Interest income is accrued daily. Investment transactions are accounted for on the date the securities are purchased or sold. Investment gains or losses are determined on the identified cost basis. The Portfolio amortizes premiums and accretes discounts as adjustments to interest income.
5. Dividends and Distributions
Dividends and distributions to shareholders, if any, are recorded on the ex-dividend date. Income dividends and capital gains distributions are determined in accordance with federal tax regulations and may differ from those determined in accordance with U.S. GAAP. To the extent these differences are permanent, such amounts are reclassified within the capital accounts based on their federal tax basis treatment; temporary differences do not require such reclassification.
| AB CORPORATE INCOME SHARES • | 33 |
Notes to Financial Statements
NOTE B
Advisory Fee and Other Transactions with Affiliates
Under the terms of the Advisory Agreement, the Portfolio pays no advisory fee to the Adviser and the Adviser reimburses or pays for the Portfolio’s operating expenses. The Portfolio is an integral part of separately managed accounts in wrap-fee programs. Typically, participants in these programs pay a fee to their investment adviser for all costs and expenses of the separately managed account, including costs and expenses associated with the Portfolio, and a fee paid by their investment adviser to the Adviser. The Adviser serves as investment manager and adviser of the Portfolio and continuously furnishes an investment program for the Portfolio and manages, supervises and conducts the affairs of the Portfolio, subject to the supervisions of the Portfolio’s Board. The Advisory Agreement provides that the Adviser or an affiliate will furnish, or pay the expenses of the Portfolio for, office space, facilities and equipment, services of executive and other personnel of the Portfolio and certain administrative services.
The Portfolio has entered into a Distribution Agreement with AllianceBernstein Investments, Inc., the Portfolio’s principal underwriter (the “Underwriter”), to permit the Underwriter to distribute the Portfolio’s shares, which are sold at their net asset value without any sales charge. The Portfolio does not pay a fee for this service. The Underwriter is a wholly owned subsidiary of the Adviser.
AllianceBernstein Investor Services, Inc. (“ABIS”), a wholly-owned subsidiary of the Adviser, acts as the Portfolio’s registrar, transfer agent and dividend-disbursing agent. ABIS registers the transfer, issuance and redemption of Portfolio shares and disburses dividends and other distributions to Portfolio shareholders. The Portfolio does not pay a fee for this service.
NOTE C
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the six months ended October 31, 2015 were as follows:
| Purchases | Sales | |||||||
Investment securities (excluding | $ | 23,838,062 | $ | 7,551,567 | ||||
U.S. government securities | 14,254,449 | 12,765,185 | ||||||
The cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation are as follows:
Gross unrealized appreciation | $ | 1,070,334 | ||
Gross unrealized depreciation | (995,274 | ) | ||
|
| |||
Net unrealized appreciation | $ | 75,060 | ||
|
|
| 34 | • AB CORPORATE INCOME SHARES |
Notes to Financial Statements
1. Derivative Financial Instruments
The Portfolio may use derivatives in an effort to earn income and enhance returns, to replace more traditional direct investments, to obtain exposure to otherwise inaccessible markets (collectively, “investment purposes”), or to hedge or adjust the risk profile of its portfolio.
The principal types of derivatives utilized by the Portfolio, as well as the methods in which they may be used are:
| • | Swaps |
The Portfolio may enter into swaps to hedge its exposure to interest rates, credit risk, or currencies. The Portfolio may also enter into swaps for non-hedging purposes as a means of gaining market exposures, including by making direct investments in foreign currencies, as described below under “Currency Transactions”. A swap is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to changes in specified prices or rates for a specified amount of an underlying asset. The payment flows are usually netted against each other, with the difference being paid by one party to the other. In addition, collateral may be pledged or received by the Portfolio in accordance with the terms of the respective swaps to provide value and recourse to the Portfolio or its counterparties in the event of default, bankruptcy or insolvency by one of the parties to the swap.
Risks may arise as a result of the failure of the counterparty to the swap to comply with the terms of the swap. The loss incurred by the failure of a counterparty is generally limited to the net interim payment to be received by the Portfolio, and/or the termination value at the end of the contract. Therefore, the Portfolio considers the creditworthiness of each counterparty to a swap in evaluating potential counterparty risk. This risk is mitigated by having a netting arrangement between the Portfolio and the counterparty and by the posting of collateral by the counterparty to the Portfolio to cover the Portfolio’s exposure to the counterparty. Additionally, risks may arise from unanticipated movements in interest rates or in the value of the underlying securities. The Portfolio accrues for the interim payments on swaps on a daily basis, with the net amount recorded within unrealized appreciation/depreciation of swaps on the statement of assets and liabilities, where applicable. Once the interim payments are settled in cash, the net amount is recorded as realized gain/(loss) on swaps on the statement of operations, in addition to any realized gain/(loss) recorded upon the termination of swaps. Upfront premiums paid or received are recognized as cost or proceeds on the statement of assets and liabilities and are amortized on a straight line basis over the life of the contract. Amortized upfront premiums are included in net realized gain/(loss) from swaps on the statement of operations. Fluctuations in the value of swaps are recorded as a component of net change in unrealized appreciation/depreciation of swaps on the statement of operations.
| AB CORPORATE INCOME SHARES • | 35 |
Notes to Financial Statements
Certain standardized swaps, including certain interest rate swaps and credit default swaps, are (or soon will be) subject to mandatory central clearing. Cleared swaps are transacted through futures commission merchants (“FCMs”) that are members of central clearinghouses, with the clearinghouse serving as central counterparty, similar to transactions in futures contracts. Centralized clearing will be required for additional categories of swaps on a phased-in basis based on requirements published by the Securities and Exchange Commission and Commodity Futures Trading Commission.
At the time the Portfolio enters into a centrally cleared swap, the Portfolio deposits and maintains as collateral an initial margin with the broker, as required by the clearinghouse on which the transaction is effected. Such amount is shown as cash collateral due from broker on the statement of assets and liabilities. Pursuant to the contract, the Portfolio agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as variation margin and are recorded by the Portfolio as unrealized gains or losses. Risks may arise from the potential inability of a counterparty to meet the terms of the contract. The credit/counterparty risk for centrally cleared swaps is generally less than non-centrally cleared swaps, since the clearinghouse, which is the issuer or counterparty to each centrally cleared swap, has robust risk mitigation standards, including the requirement to provide initial and variation margin. When the contract is closed, the Portfolio records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the time it was closed.
Interest Rate Swaps:
The Portfolio is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. Because the Portfolio holds fixed rate bonds, the value of these bonds may decrease if interest rates rise. To help hedge against this risk and to maintain its ability to generate income at prevailing market rates, the Portfolio may enter into interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional amount. The Portfolio may elect to pay a fixed rate and receive a floating rate, or, receive a fixed rate and pay a floating rate on a notional amount.
In addition, the Portfolio may also enter into interest rate swap transactions to preserve a return or spread on a particular investment or portion of its portfolio, or protecting against an increase in the price of securities the Portfolio anticipates purchasing at a later date. Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed rate payments) computed based on a contractually-based principal (or “notional”) amount. Interest rate swaps are entered into on a net basis (i.e., the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments).
| 36 | • AB CORPORATE INCOME SHARES |
Notes to Financial Statements
During the six months ended October 31, 2015, the Portfolio held interest rate swaps for hedging purposes.
Credit Default Swaps:
The Portfolio may enter into credit default swaps, including to manage its exposure to the market or certain sectors of the market, to reduce its risk exposure to defaults by corporate and sovereign issuers held by the Portfolio, or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. The Portfolio may purchase credit protection (“Buy Contract”) or provide credit protection (“Sale Contract”) on the referenced obligation of the credit default swap. During the term of the swap, the Portfolio receives/(pays) fixed payments from/(to) the respective counterparty, calculated at the agreed upon rate applied to the notional amount. If the Portfolio is a buyer/(seller) of protection and a credit event occurs, as defined under the terms of the swap, the Portfolio will either (i) receive from the seller/(pay to the buyer) of protection an amount equal to the notional amount of the swap (the “Maximum Payout Amount”) and deliver/(take delivery of) the referenced obligation or (ii) receive/(pay) a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation.
In certain circumstances Maximum Payout Amounts may be partially offset by recovery values of the respective referenced obligations, upfront premium received upon entering into the agreement, or net amounts received from settlement of buy protection credit default swaps entered into by the Portfolio for the same reference obligation with the same counterparty. As of October 31, 2015, the Portfolio did not have Buy Contracts outstanding with respect to the same referenced obligation and counterparty as certain Sale Contracts outstanding.
Credit default swaps may involve greater risks than if a Portfolio had invested in the referenced obligation directly. Credit default swaps are subject to general market risk, liquidity risk, counterparty risk and credit risk. If the Portfolio is a buyer of protection and no credit event occurs, it will lose the payments it made to its counterparty. If the Portfolio is a seller of protection and a credit event occurs, the value of the referenced obligation received by the Portfolio coupled with the periodic payments previously received, may be less than the Maximum Payout Amount it pays to the buyer, resulting in a net loss to the Portfolio.
During the six months ended October 31, 2015, the Portfolio held credit default swaps for non-hedging purposes.
Implied credit spreads over U.S. Treasuries of comparable maturity utilized in determining the market value of credit default swaps on issuers as of period end are disclosed in the portfolio of investments. The implied spreads serve as an indicator of the current status of the payment/
| AB CORPORATE INCOME SHARES • | 37 |
Notes to Financial Statements
performance risk and typically reflect the likelihood of default by the issuer of the referenced obligation. The implied credit spread of a particular reference obligation also reflects the cost of buying/selling protection and may reflect upfront payments required to be made to enter into the agreement. Widening credit spreads typically represent a deterioration of the referenced obligation’s credit soundness and greater likelihood of default or other credit event occurring as defined under the terms of the agreement. A credit spread identified as “Defaulted” indicates a credit event has occurred for the referenced obligation.
The Portfolio typically enters into International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreement”) or similar master agreements (collectively, “Master Agreements”) with its OTC derivative contract counterparties in order to, among other things, reduce its credit risk to counterparties. ISDA Master Agreements include provisions for general obligations, representations, collateral and events of default or termination. Under an ISDA Master Agreement, the Portfolio typically may offset with the counterparty certain derivative financial instrument’s payables and/or receivables with collateral held and/or posted and create one single net payment (close-out netting) in the event of default or termination.
Various Master Agreements govern the terms of certain transactions with counterparties, including transactions such as derivative transactions, repurchase and reverse repurchase agreements. These Master Agreements typically attempt to reduce the counterparty risk associated with such transactions by specifying credit protection mechanisms and providing standardization that improves legal certainty. Cross-termination provisions under Master Agreements typically provide that a default in connection with one transaction between the Portfolio and a counterparty gives the non-defaulting party the right to terminate any other transactions in place with the defaulting party to create one single net payment due to/due from the defaulting party. In the event of a default by a Master Agreements counterparty, the return of collateral with market value in excess of the Portfolio’s net liability, held by the defaulting party, may be delayed or denied.
The Portfolio’s Master Agreements may contain provisions for early termination of OTC derivative transactions in the event the net assets of the Portfolio decline below specific levels (“net asset contingent features”). If these levels are triggered, the Portfolio’s counterparty has the right to terminate such transaction and require the Portfolio to pay or receive a settlement amount in connection with the terminated transaction. For additional details, please refer to netting arrangements by counterparty tables below.
| 38 | • AB CORPORATE INCOME SHARES |
Notes to Financial Statements
At October 31, 2015, the Portfolio had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of | Fair Value | Statement of | Fair Value | ||||||||
Interest rate contracts | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 60,349 | * | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 105,181 | * | ||||
Interest rate contracts | Unrealized appreciation on interest rate swaps |
| 127,086 |
| ||||||||
Credit contracts | Unrealized appreciation on credit default swaps | 354 | ||||||||||
|
|
|
| |||||||||
Total | $ | 187,789 | $ | 105,181 | ||||||||
|
|
|
| |||||||||
| * | Only variation margin receivable/payable at period end is reported within the statement of assets and liabilities. This amount reflects cumulative appreciation/(depreciation) of exchange-traded derivatives as reported in the portfolio of investments. |
The effect of derivative instruments on the statement of operations for the six months ended October 31, 2015:
Derivative Type | Location of Gain | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | $ | 5,827 | $ | (24,045 | ) | ||||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 2,601 | (3,619 | ) | ||||||
|
|
|
| |||||||
Total | $ | 8,428 | $ | (27,664 | ) | |||||
|
|
|
| |||||||
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the six months ended October 31, 2015:
Interest Rate Swaps: | ||||
Average notional amount | $ | 950,000 | ||
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 2,375,714 | ||
Credit Default Swaps: | ||||
Average notional amount of sale contracts | $ | 71,220 |
| AB CORPORATE INCOME SHARES • | 39 |
Notes to Financial Statements
For financial reporting purposes, the Portfolio does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the statement of assets and liabilities.
All derivatives held at period end were subject to netting arrangements. The following table presents the Portfolio’s derivative assets and liabilities by counterparty net of amounts available for offset under Master Agreements (“MA”) and net of the related collateral received/ pledged by the Portfolio as of October 31, 2015:
Counterparty | Derivative Assets Subject to a MA | Derivative Available for Offset | Cash Collateral Received | Security Collateral Received | Net Amount of Derivatives Assets | |||||||||||||||
Exchange-Traded Derivatives: |
| |||||||||||||||||||
Citigroup Global Markets, Inc.** | $ | 2,300 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 2,300 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 2,300 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 2,300 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Credit Suisse International | $ | 20 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 20 | |||||||
Deutsche Bank AG | 90,405 | – 0 | – | – 0 | – | – 0 | – | 90,405 | ||||||||||||
JPMorgan Chase Bank, NA | 36,681 | – 0 | – | – 0 | – | – 0 | – | 36,681 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 127,106 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 127,106 | ^ | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged* | Security Collateral Pledged | Net Amount of Derivatives Liabilities | |||||||||||||||
Exchange-Traded Derivatives: |
| |||||||||||||||||||
Morgan Stanley & Co., LLC** | $ | 2,725 | $ | – 0 | – | $ | (2,725 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 2,725 | $ | – 0 | – | $ | (2,725 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| * | The actual collateral received/pledged may be more than the amount reported due to overcollateralization. |
| ** | Cash has been posted for initial margin requirements for exchange traded derivatives outstanding at October 31, 2015. |
| ^ | Net amount represents the net receivable/payable that would be due from/to the counterparty in the event of default or termination. The net amount from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same counterparty. |
| 40 | • AB CORPORATE INCOME SHARES |
Notes to Financial Statements
2. Currency Transactions
The Fund may invest in non-U.S. dollar securities on a currency hedged or unhedged basis. The Fund may seek investment opportunities by taking long or short positions in currencies through the use of currency-related derivatives, including forward currency exchange contracts, futures and options on futures, swaps, and other options. The Fund may enter into transactions for investment opportunities when it anticipates that a foreign currency will appreciate or depreciate in value but securities denominated in that currency are not held by the Fund and do not present attractive investment opportunities. Such transactions may also be used when the Adviser believes that it may be more efficient than a direct investment in a foreign currency-denominated security. The Fund may also conduct currency exchange contracts on a spot basis (i.e., for cash at the spot rate prevailing in the currency exchange market for buying or selling currencies).
NOTE D
Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
| Shares | Amount | |||||||||||||||||||
| Six Months Ended October 31, 2015 (unaudited) | Year Ended April 30, 2015 | Six Months Ended (unaudited) | Year Ended April 30, 2015 | |||||||||||||||||
|
| |||||||||||||||||||
| Class A | ||||||||||||||||||||
Shares sold | 2,141,777 | 425,490 | $ | 23,746,332 | $ | 4,856,525 | ||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (517,928 | ) | (602,104 | ) | (5,733,237 | ) | (6,788,159 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 1,623,849 | (176,614 | ) | $ | 18,013,095 | $ | (1,931,634 | ) | ||||||||||||
| ||||||||||||||||||||
NOTE E
Risks Involved in Investing in the Portfolio
Interest Rate Risk and Credit Risk—Interest rate risk is the risk that changes in interest rates will affect the value of the Portfolio’s investments in fixed-income debt securities such as bonds or notes. Increases in interest rates may cause the value of the Portfolio’s investments to decline. Credit risk is the risk that the issuer or guarantor of a debt security, or the counterparty to a derivative contract, will be unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. The degree of risk for a particular security may be reflected in its credit rating. Credit risk is greater for medium quality and lower-rated securities. Lower-rated debt securities and similar unrated securities (commonly known as “junk bonds”) have speculative elements or are predominantly speculative risks.
Inflation Risk—This is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the value of the Portfolio’s assets can decline as can the value of the Portfolio’s distributions. This risk is significantly greater for fixed-income securities with longer maturities.
| AB CORPORATE INCOME SHARES • | 41 |
Notes to Financial Statements
Foreign (Non-U.S.) Risk—Investment in securities of non-U.S. issuers may involve more risk than those of U.S. issuers. These securities may fluctuate more widely in price and may be less liquid due to adverse market, economic, political, regulatory or other factors.
Derivatives Risk—The Portfolio may enter into derivative transactions such as forwards, options, futures and swaps. Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Portfolio, and subject to counterparty risk to a greater degree than more traditional investments. Derivatives may result in significant losses, including losses that are far greater than the value of the derivatives reflected on the statement of assets and liabilities.
Indemnification Risk—In the ordinary course of business, the Portfolio enters into contracts that contain a variety of indemnifications. The Portfolio’s maximum exposure under these arrangements is unknown. However, the Portfolio has not had prior claims or losses pursuant to these indemnification provisions and expects the risk of loss thereunder to be remote. Therefore, the Portfolio has not accrued any liability in connection with these indemnification provisions.
NOTE F
Distributions to Shareholders
The tax character of distributions to be paid for the year ending April 30, 2016 will be determined at the end of the current fiscal year. The tax character of distributions paid during the fiscal years ended April 30, 2015 and April 30, 2014 were as follows:
| 2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 1,671,364 | $ | 1,755,639 | ||||
|
|
|
| |||||
Total distributions paid | $ | 1,671,364 | $ | 1,755,639 | ||||
|
|
|
| |||||
As of April 30, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 207,343 | ||
Accumulated capital and other losses | (723,068 | )(a) | ||
Unrealized appreciation/(depreciation) | 1,759,685 | (b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | 1,243,960 | (c) | |
|
|
| (a) | On April 30, 2015, the Portfolio had a capital loss carryforward of $723,068. During the fiscal year, the Portfolio utilized $439,530 of capital loss carryforwards to offset current year net realized gains. |
| (b) | The differences between book-basis and tax-basis unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses on wash sales and the tax treatment of swaps. |
| (c) | The difference between book-basis and tax-basis components of accumulated earnings/(deficit) is attributable primarily to dividends payable. |
| 42 | • AB CORPORATE INCOME SHARES |
Notes to Financial Statements
For tax purposes, net capital losses may be carried over to offset future capital gains, if any. Funds are permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an indefinite period. These post-enactment capital losses must be utilized prior to the pre-enactment capital losses, which are subject to expiration. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous regulation. As of April 30, 2015, the Portfolio had a net short-term capital loss carryforward of $723,068 which will expire in 2018.
NOTE G
Subsequent Events
Management has evaluated subsequent events for possible recognition or disclosure in the financial statements through the date the financial statements are issued. Management has determined that there are no material events that would require disclosure in the Portfolio’s financial statements through this date.
| AB CORPORATE INCOME SHARES • | 43 |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Beneficial Interest Outstanding Throughout Each Period
Six Months (unaudited) | Year Ended April 30, | |||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 11.36 | $ 11.13 | $ 11.42 | $ 10.83 | $ 10.59 | $ 10.30 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a) | .20 | .43 | .42 | .43 | .46 | .54 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | (.37 | ) | .22 | (.29 | ) | .59 | .27 | .29 | ||||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.17 | ) | .65 | .13 | 1.02 | .73 |
| .83 |
| |||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.20 | ) | (.42 | ) | (.42 | ) | (.43 | ) | (.49 | ) | (.54 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.99 | $ 11.36 | $ 11.13 | $ 11.42 | $ 10.83 | $ 10.59 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(b) | (1.47 | )% | 5.94 | %* | 1.31 | %* | 9.53 | %* | 7.02 | % | 8.28 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $61,350 | $44,939 | $45,989 | $42,799 | $46,848 | $29,520 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Net investment income | 3.63 | %^ | 3.76 | % | 3.89 | % | 3.79 | % | 4.42 | % | 5.20 | % | ||||||||||||
Portfolio turnover rate. | 36 | % | 42 | % | 61 | % | 89 | % | 91 | % | 33 | % | ||||||||||||
| (a) | Based on average shares outstanding. |
| (b) | Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and redemption on the last day of the period. Total return does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Total investment return calculated for a period of less than one year is not annualized. |
| * | Includes the impact of proceeds received and credited to the Portfolio resulting from class action settlements, which enhanced the Portfolio’s performance for the years ended April 30, 2015, April 30, 2014 and April 30, 2013 by 0.01%, 0.05% and 0.03%, respectively. |
| ^ | Annualized. |
See notes to financial statements.
| 44 | • AB CORPORATE INCOME SHARES |
Financial Highlights
BOARD OF TRUSTEES
Marshall C. Turner, Jr.(1), Chairman John H. Dobkin(1) Michael J. Downey(1) William H. Foulk, Jr.(1) D. James Guzy(1) | Nancy P. Jacklin(1) Robert M. Keith, President and Chief Executive Officer Garry L. Moody(1) Earl D. Weiner(1) |
OFFICERS
Philip L. Kirstein, Senior Vice President and Independent Compliance Officer Douglas J. Peebles, Senior Vice President Shawn E. Keegan(2), Vice President | Ashish C. Shah(2), Vice President Emilie D. Wrapp, Secretary Joseph J. Mantineo, Treasurer and Chief Financial Officer Phyllis J. Clarke, Controller Vincent S. Noto, Chief Compliance Officer |
Custodian and Accounting Agent State Street Bank and Trust Company
Principal Underwriter AllianceBernstein Investments, Inc.
Transfer Agent AllianceBernstein Investor Services, Inc. | Legal Counsel Seward & Kissel LLP One Battery Park Plaza New York, NY 10004
Independent Registered Public Accounting Firm Ernst & Young LLP 5 Times Square New York, NY 10036 |
| (1) | Member of the Audit Committee, the Governance and Nominating Committee and the Independent Directors Committee. |
| (2) | The day-to-day management of, and investment decisions for, the Trust’s Portfolio are made by the Corporate Income Shares Investment Team. Messrs. Shawn E. Keegan and Ashish C. Shah are the investment professionals primarily responsible for the day-to-day management of the Trust’s Portfolio. |
| AB CORPORATE INCOME SHARES • | 45 |
Board of Trustees
THE FOLLOWING IS NOT PART OF THE SHAREHOLDER REPORT OR THE FINANCIAL STATEMENTS
SUMMARY OF SENIOR OFFICER’S EVALUATION OF INVESTMENT ADVISORY AGREEMENT1
The following is a summary of the evaluation of the Investment Advisory Agreement between AllianceBernstein L.P. (the “Adviser”) and AB Corporate Shares (the “Trust”) with respect to AB Corporate Income Shares (the “Portfolio”).2 The evaluation of the Investment Advisory Agreement was prepared by Philip L. Kirstein, the Senior Officer of the Trust, for the Trustees of the Trust, as required by the September 1, 2004 Assurance of Discontinuance (“AoD”) between the Adviser and the New York State Attorney General (the “NYAG”). The Senior Officer’s evaluation of the Investment Advisory Agreement is not meant to diminish the responsibility or authority of the Board of Trustees to perform its duties pursuant to Section 15 of the Investment Company Act of 1940 Act (the “40 Act”) and applicable state law. The purpose of this summary is to provide shareholders with a synopsis of the independent evaluation of the reasonableness of the advisory fees proposed to be paid by the Portfolio which was provided to the Trustees in connection with their review of the proposed approval of the continuance of the Investment Advisory Agreement.
The Senior Officer’s evaluation considered the following factors:
| 1. | Advisory fees charged to institutional and other clients of the Adviser for like services; |
| 2. | Advisory fees charged by other mutual fund companies for like services; |
| 3. | Costs to the Adviser and its affiliates of supplying services pursuant to the advisory agreement, excluding any intra-corporate profit; |
| 4. | Profit margins of the Adviser and its affiliates from supplying such services; |
| 5. | Possible economies of scale as the Portfolio grows larger; and |
| 6. | Nature and quality of the Adviser’s services including the performance of the Portfolio. |
These factors, with the exception of the first factor, are generally referred to as the “Gartenberg factors,” which were articulated by the United States Court of Appeals for the Second Circuit in 1982. Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F. 2d 923 (2d Cir. 1982). On March 30, 2010, the Supreme Court held the Gartenberg decision was correct in its basic formulation of what Section 36(b) requires: to face liability under Section 36(b), “an
| 1 | The Senior Officer’s fee evaluation was completed on October 22, 2015 and discussed with the Board of Trustees on November 3-5, 2015. |
| 2 | Future references to the Portfolio do not include “AB.” |
| 46 | • AB CORPORATE INCOME SHARES |
investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining”Jones v. Harris Associates L.P., 130 S. Ct. 1418 (2010). In Jones, the Court stated the Gartenberg approach fully incorporates the correct understanding of fiduciary duty within the context of Section 36(b) and noted with approval that “Gartenberg insists that all relevant circumstances be taken into account” and “uses the range of fees that might result from arm’s-length bargaining as the benchmark for reviewing challenged fees.”3
PORTFOLIO’S EXEMPTION FROM ADVISORY FEES OR EXPENSES
The Portfolio pays no advisory fee to the Adviser for receiving the services to be provided pursuant to the Investment Advisory Agreement. The Portfolio is designed to serve the needs of providers of separately managed accounts (“SMAs”).4 Since SMA clients pay their wrap program provider a unitary fee for managing all investments of their portfolio, the Portfolio will not pay an advisory fee. The Adviser will also reimburse the Portfolio for all of its other operating expenses, except certain extraordinary expenses, taxes, brokerage costs and the interest on borrowed money.
The Portfolio’s net assets on September 30, 2015 are set forth below:
| Portfolio | 9/30/15 Net Assets ($MM) | |
| Corporate Income Shares | $ 61.4 |
The Portfolio, which offers only one no-load class of shares, is distributed through its principal underwriter, AllianceBernstein Investments, Inc. (“ABI”). Since the Portfolio is reimbursed by the Adviser for its operating expenses, the Portfolio does not have a distribution plan pursuant to Rule 12b-1 under the 40 Act.
| I. | ADVISORY FEES CHARGED TO INSTITUTIONAL AND OTHER CLIENTS |
The advisory fees charged to investment companies which the Adviser manages and sponsors are normally higher than those charged to similar sized institutional accounts, including pension plans and sub-advised investment companies. The fee differential reflects, among other things, different services provided to such clients, and different liabilities assumed. Services provided by the Adviser to the Portfolio that are not provided to non-investment company clients include providing office space and personnel to serve as Fund Officers, who among other responsibilities make the certifications required under the Sarbanes–Oxley Act of 2002, and coordinating with and monitoring the Portfolio’s third party service
| 3 | Jones v. Harris at 1427. |
| 4 | The wrap program providers that offer SMAs currently employ the Adviser as one of several investment managers, and compensate the Adviser on the basis of all SMA assets managed by it, which would include assets of Corporate Income Shares. |
| AB CORPORATE INCOME SHARES • | 47 |
providers such as Fund counsel, auditors, custodians, transfer agents and pricing services. The accounting, administrative, legal and compliance requirements for the Portfolio are more costly than those for institutional client assets due to the greater complexities and time required for investment companies. The Adviser also believes that it incurs substantial entrepreneurial risk when offering a new mutual fund since establishing a new mutual fund requires a large upfront investment and it may take a long time for the fund to achieve profitability since the fund must be priced to scale from inception in order to be competitive and assets are acquired one account at a time. In addition, managing the cash flow of an investment company may be more difficult than that of a stable pool of assets, such as an institutional account with little cash movement in either direction, particularly if the Portfolio is in net redemption and the Adviser is frequently forced to sell securities to raise cash for redemptions. However, managing a fund with positive cash flow may be easier at times than managing a stable pool of assets. Finally, in recent years, investment advisers have been sued by institutional clients and have suffered reputational damage both by the attendant publicity and outcomes other than complete victories. Accordingly, the legal and reputational risks associated with institutional accounts are greater than previously thought, although arguably still not equal to those related to the mutual fund industry.
Notwithstanding the Adviser’s view that managing an investment company is not comparable to managing other institutional accounts because the services provided are different, the Supreme Court has indicated consideration should be given to the advisory fees charged to institutional accounts with a similar investment style as the Portfolio.5 However, with respect to the Portfolio, the Adviser represented that there is no institutional product in the Adviser’s Form ADV that has a similar investment style as the Portfolio.
The Adviser represented that it does provide sub-advisory services to other companies that have a substantially similar investment style as the Portfolio.
| II. | MANAGEMENT FEES CHARGED BY OTHER MUTUAL FUND COMPANIES FOR LIKE SERVICES. |
Broadridge Financial Solutions, Inc. (“Broadridge”), an analytical service that is not affiliated with the Adviser, compared the fees charged to the Portfolio with fees charged to other investment companies for similar services by other
| 5 | The Supreme Court stated that “courts may give such comparisons the weight that they merit in light of the similarities and differences between the services that the clients in question require, but the courts must be wary of inapt comparisons.” Among the significant differences the Supreme Court noted that may exist between services provided to mutual funds and institutional accounts are “higher marketing costs.” Jones v. Harris at 1428. |
| 48 | • AB CORPORATE INCOME SHARES |
investment advisers.6, 7, 8 Each peer selected by Lipper had a similar fee arrangement as the Portfolio, which is to say that with respect to the Portfolio’s peers, all of their fund expenses, including management fees, were reimbursed by their respective investment advisers.9
The Portfolio does not pay an advisory fee to the Adviser since the SMA clients pay their wrap program provider a unitary fee for managing all investments of their portfolios. In addition, the Adviser reimburses the Portfolio for all of its operating expenses, except certain extraordinary expenses, taxes, brokerage costs and interest on borrowed money.
| III. | COSTS TO THE ADVISER AND ITS AFFILIATES OF SUPPLYING SERVICES PURSUANT TO THE ADVISORY FEE ARRANGEMENT, EXCLUDING ANY INTRA-CORPORATE PROFIT. |
The Adviser utilizes two profitability reporting systems, which operate independently but are aligned with each other, to estimate the Adviser’s profitability in connection with investment advisory services provided to the Portfolio. The Senior Officer has retained a consultant to provide independent advice regarding the alignment of the two profitability systems as well as the methodologies and allocations utilized by both profitability systems. See Section IV for additional discussion.
| IV. | PROFIT MARGINS OF THE ADVISER AND ITS AFFILIATES FOR SUPPLYING SUCH SERVICES. |
The profitability information for the Portfolio, prepared by the Adviser for the Board of Trustees, was reviewed by the Senior Officer and the consultant. The
| 6 | The Supreme Court cautioned against accepting mutual fund fee comparisons without careful scrutiny since “these comparisons are problematic because these fees, like those challenged, may not be the product of negotiations conducted at arm’s length.” Jones v. Harris at 1429. |
| 7 | On June 5, 2015, Broadridge acquired the Fiduciary Services and Competitive Intelligence unit, i.e., the group responsible for providing the Portfolio’s 15(c) reports, from Thomson Reuters’ Lipper division. The group that maintains Lipper’s expense and performance databases and investment classifications/objectives remain a part of Thomson Reuters’ Lipper division. Accordingly, the Portfolio’s investment classification/objective continued to be determined by Lipper. |
| 8 | Only zero fee no-load funds that participate in a wrap fee program were considered for inclusion in the Fund’s EG, regardless of the Lipper investment class ification/objective of the Funds’ peers. The Fund’s EG peers include two BBB-rated Corporate Debt (“BBB” funds, three Multi-Sector Income (“MSI”) funds, one Short-Intermediate Investment Grade Debt (“SII”) fund, four General Bond (“GB”) funds, two Core Bond (“IID”) funds, one General & Insured Municipal Debt (“GM”) fund, one Inflation-Protected Bond (“IUT”) fund, two Global Income (“GLI”) funds, and one Intermediate Municipal Debt (“IMD”) fund. The Fund is classified by Lipper as a BBB fund. |
| 9 | “Management Fee” is the fee attributable to the management and bearing of expenses of the funds (not the management of the wrap fee program). In each case, the advisory contract provides for an advisory or management fee of zero. |
| AB CORPORATE INCOME SHARES • | 49 |
Portfolio does not pay an advisory fee to the Adviser. However, the Adviser does profit indirectly through the advisory fees that it receives from the wrap program providers whose SMA clients invest in the Portfolio. The Adviser’s profitability with respect to the Portfolio, which was negative in 2014, was calculated using a weighted average of the profitability of the relevant SMA assets, in addition to any fund specific revenue or expense items.
ABI and AllianceBernstein Investor Services, Inc. (“ABIS”), affiliates of the Adviser, serve as the Portfolio’s underwriter and transfer agent, respectively. The courts have referred to this type of business relationships as “fall-out benefits” to the Adviser and indicated that such benefits should be factored into the evaluation of the total relationship between the Portfolio and the Adviser. Neither case law nor common business practice precludes the Adviser’s affiliates from earning a reasonable profit on this type of relationship provided the affiliates’ charges and services are competitive. However, neither ABI nor ABIS receive a fee for serving as the Portfolio’s underwriter and transfer agent.
| V. | POSSIBLE ECONOMIES OF SCALE |
The Adviser has indicated that economies of scale are being shared with shareholders through pricing to scale, breakpoints, fee reductions/waivers and enhancement to services.
In May 2012, an independent consultant, retained by the Senior Officer, provided the Board of Trustees information on the Adviser’s firm-wide average costs from 2005 through 2011 and the potential economies of scale. The independent consultant noted that from 2005 through 2007 the Adviser experienced significant growth in assets under management (“AUM”). During this period, operating expenses increased, in part to keep up with growth, and in part reflecting market returns. However, from 2008 through the first quarter of 2009, AUM rapidly and significantly decreased due to declines in market value and client withdrawals. When AUM rapidly decreased, some operating expenses categories, including base compensation and office space, adjusted more slowly during this period, resulting in an increase in average costs. Since 2009, AUM has experienced less significant changes. The independent consultant noted that changes in operating expenses reflect changes in business composition and business practices in response to changes in financial markets. Finally, the independent consultant concluded that the increase in average cost and the decline in net operating margin across the Adviser since late 2008 are inconsistent with the view that there are currently reductions in average costs due to economies of scale that can be shared with the AllianceBernstein Mutual Funds managed by the Adviser through lower fees.
| 50 | • AB CORPORATE INCOME SHARES |
Previously, in February 2008, the independent consultant provided the Board of Trustees an update of the Deli10 study on advisory fees and various fund characteristics.11 The independent consultant first reiterated the results of his previous two dimensional comparison analysis (fund size and family size) with the Board of Trustees.12 The independent consultant then discussed the results of the regression model that was utilized to study the effects of various factors on advisory fees. The regression model output indicated that the bulk of the variation in fees predicted were explained by various factors, but substantially by fund AUM, family AUM, index fund indicator and investment style. The independent consultant also compared the advisory fees of the AllianceBernstein Mutual Funds to similar funds managed by 19 other large asset managers, regardless of the fund size and each Adviser’s proportion of mutual fund assets to non-mutual fund assets.
| VI. | NATURE AND QUALITY OF THE ADVISER’S SERVICES INCLUDING THE PERFORMANCE OF THE PORTFOLIO |
With assets under management of approximately $463 billion as of September 30, 2015, the Adviser has the investment experience to manage and provide non-investment services (described in Section I) to the Portfolio.
The information below, prepared by Broadridge, shows the 1,3 and 5 year gross performance returns and rankings of the Portfolio relative to its Broadridge Performance Universe (“PU”)13 for the period ended July 31, 2015:
Portfolio Return | PU Median (%) | PU Rank | ||||||||
| Corporate Income Shares | ||||||||||
1 Year | 2.27 | 2.74 | 12/16 | |||||||
3 Year | 3.40 | 2.88 | 4/13 | |||||||
5 Year | 5.47 | 5.24 | 4/11 | |||||||
| 10 | The Deli study, originally published in 2002 based on 1997 data and updated for the February 2008 Presentation, may be of diminished value due to the age of the data used in the presentation and the changes experienced in the industry since 2008. |
| 11 | As mentioned previously, the Supreme Court cautioned against accepting mutual fund fee comparisons without careful scrutiny since the fees may not be the product of negotiations conducted at arm’s length. See Jones V. Harris at 1429. |
| 12 | The two dimensional analysis showed patterns of lower advisory fees for funds with larger asset sizes and funds from larger family sizes compared to funds with smaller asset sizes and funds from smaller family sizes, which according to the independent consultant is indicative of a sharing of economies of scale and scope. However, in less liquid and active markets, such is not the case, as the empirical analysis showed potential for diseconomies of scale in those markets. The empirical analysis also showed diminishing economies of scale and scope as funds surpassed a certain high level of assets. |
| 13 | The Portfolio’s PU includes peers with the same Lipper investment classification/objective and load type as the Portfolio. |
| AB CORPORATE INCOME SHARES • | 51 |
Set forth below are the 1, 3 and 5 year and since inception net performance returns of the Portfolio (in bold)14 versus its benchmark.15 Portfolio and benchmark volatility and reward-to-variability ratio (“Sharpe Ratio”) information is also shown.16
| Period Ending July 31, 2015 Annualized Net Performance | ||||||||||||||||||||||||||||
1 Year (%) | 3 Year (%) | 5 Year (%) | Since (%) | Volatility (%) | Sharpe (%) | Risk Period (Year) | ||||||||||||||||||||||
| Corporate Income Shares | 2.27 | 3.40 | 5.47 | 6.30 | 4.34 | 1.22 | 5 | |||||||||||||||||||||
| Barclays Capital U.S. Credit Index | 1.61 | 2.33 | 4.67 | 5.47 | 4.10 | 1.11 | 5 | |||||||||||||||||||||
| Inception Date: December 11, 2006 | ||||||||||||||||||||||||||||
CONCLUSION:
Based on the factors discussed above the Senior Officer’s conclusion is that the Investment Advisory Agreement for the Portfolio is reasonable and within the range of what would have been negotiated at arm’s-length in light of all the surrounding circumstances. This conclusion with respect to the Portfolio is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: November 25, 2015
| 14 | The performance returns of the Portfolio were provided Broadridge. |
| 15 | The Adviser provided Portfolio and benchmark performance return information for the periods through July 31, 2015. |
| 16 | Portfolio and benchmark volatility and Sharpe Ratio information was obtained through Lipper LANA, a database maintained by Lipper. Volatility is a statistical measure of the tendency of a market price or yield to vary over time. A Sharpe Ratio is a risk adjusted measure of return that divides a fund’s return in excess of the riskless return by the fund’s standard deviation. A portfolio with a greater volatility would be viewed as more risky than a portfolio with equivalent performance but lower volatility; for that reason, a greater return would be demanded for the more risky fund. A portfolio with a higher Sharpe Ratio would be viewed as better performing than a fund with a lower Sharpe Ratio. |
| 52 | • AB CORPORATE INCOME SHARES |
THIS PAGE IS NOT PART OF THE SHAREHOLDER REPORT OR THE FINANCIAL STATEMENTS
AB FAMILY OF FUNDS
US EQUITY
US Core
Core Opportunities Fund
Select US Equity Portfolio
US Growth
Concentrated Growth Fund
Discovery Growth Fund
Growth Fund
Large Cap Growth Fund
Small Cap Growth Portfolio
US Value
Discovery Value Fund
Equity Income Fund
Growth & Income Fund
Small Cap Value Portfolio
Value Fund
INTERNATIONAL/ GLOBAL EQUITY
International/Global Core
Global Core Equity Portfolio
Global Equity & Covered Call Strategy Fund
Global Thematic Growth Fund
International Portfolio
Tax-Managed International Portfolio
International/Global Growth
International Growth Fund
International/Global Value
Asia ex-Japan Equity Portfolio
International Value Fund
FIXED INCOME
Municipal
High Income Municipal Portfolio
Intermediate California Municipal Portfolio
Intermediate Diversified Municipal Portfolio
Intermediate New York Municipal Portfolio
Municipal Bond Inflation Strategy
FIXED INCOME (continued)
Tax-Aware Fixed Income Portfolio
National Portfolio
Arizona Portfolio
California Portfolio
Massachusetts Portfolio
Michigan Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
Taxable
Bond Inflation Strategy
Global Bond Fund
High Income Fund
High Yield Portfolio
Intermediate Bond Portfolio
Limited Duration High Income Portfolio
Short Duration Portfolio
ALTERNATIVES
All Market Real Return Portfolio*
Credit Long/Short Portfolio
Global Real Estate Investment Fund
Long/Short Multi-Manager Fund
Multi-Manager Alternative Strategies Fund
Select US Long/Short Portfolio
Unconstrained Bond Fund
MULTI-ASSET
All Market Growth Portfolio*
All Market Income Portfolio
Emerging Markets Multi-Asset Portfolio
Global Risk Allocation Fund
MULTI-ASSET (continued)
Target-Date
Multi-Manager Select Retirement Allocation Fund
Multi-Manager Select 2010 Fund
Multi-Manager Select 2015 Fund
Multi-Manager Select 2020 Fund
Multi-Manager Select 2025 Fund
Multi-Manager Select 2030 Fund
Multi-Manager Select 2035 Fund
Multi-Manager Select 2040 Fund
Multi-Manager Select 2045 Fund
Multi-Manager Select 2050 Fund
Multi-Manager Select 2055 Fund
Wealth Strategies
Balanced Wealth Strategy
Conservative Wealth Strategy
Wealth Appreciation Strategy
Tax-Managed Balanced Wealth Strategy
Tax-Managed Conservative Wealth Strategy
Tax-Managed Wealth Appreciation Strategy
CLOSED-END FUNDS
AB Multi-Manager Alternative Fund
Alliance California Municipal Income Fund
AllianceBernstein Global High Income Fund
AllianceBernstein Income Fund
AllianceBernstein National Municipal Income Fund
We also offer Exchange Reserves, which serves as the money market fund exchange vehicle for the AB mutual funds. An investment in Exchange Reserves is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
* Prior to December 15, 2014, All Market Growth Portfolio was named Dynamic All Market Fund; All Market Real Return Portfolio was named Real Asset Strategy.
| AB CORPORATE INCOME SHARES • | 53 |
AB Family of Funds
NOTES
| 54 | • AB CORPORATE INCOME SHARES |
NOTES
| AB CORPORATE INCOME SHARES • | 55 |
NOTES
| 56 | • AB CORPORATE INCOME SHARES |
NOTES
| AB CORPORATE INCOME SHARES • | 57 |
NOTES
| 58 | • AB CORPORATE INCOME SHARES |
NOTES
| AB CORPORATE INCOME SHARES • | 59 |
NOTES
| 60 | • AB CORPORATE INCOME SHARES |
AB CORPORATE INCOME SHARES
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
CIS-0152-1015 
OCT 10.31.15
SEMI-ANNUAL REPORT
AB MUNICIPAL INCOME SHARES
Investment Products Offered
• Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed |
Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
This shareholder report must be preceded or accompanied by the Fund’s prospectus for individuals who are not current shareholders of the Fund.
You may obtain a description of the Fund’s proxy voting policies and procedures, and information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, without charge. Simply visit AB’s website at www.abglobal.com, or go to the Securities and Exchange Commission’s (the “Commission”) website at www.sec.gov, or call AB at (800) 227-4618.
The Fund files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website at www.sec.gov. The Fund’s Forms N-Q may also be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. AB publishes full portfolio holdings for the Fund monthly at www.abglobal.com.
AllianceBernstein Investments, Inc. (ABI) is the distributor of the AB family of mutual funds. ABI is a member of FINRA and is an affiliate of AllianceBernstein L.P., the Adviser of the funds.
The [A/B] logo is a registered service mark of AllianceBernstein and AllianceBernstein® is a registered service mark used by permission of the owner, AllianceBernstein L.P.
December 15, 2015
Semi-Annual Report
This report provides management’s discussion of fund performance for AB Municipal Income Shares (the “Fund”) for the semi-annual reporting period ended October 31, 2015. Please note, shares of this Fund are offered exclusively through registered investment advisers approved by AllianceBernstein L.P. (the “Adviser”). Effective January 20, 2015, the Fund’s name changed from AllianceBernstein Municipal Income Shares to AB Municipal Income Shares.
Investment Objectives and Policies
The investment objective of the Fund is to earn the highest level of current income, exempt from federal taxation, that is available consistent with what the Adviser considers to be an appropriate level of risk. The Fund pursues its objective by investing principally in high-yielding municipal securities that may be non-investment grade or investment grade. As a matter of fundamental policy, the Fund invests, under normal circumstances, at least 80% of its net assets in municipal securities that pay interest that is exempt from federal income tax. These securities may pay interest that is subject to the federal alternative minimum tax (“AMT”) for certain taxpayers.
The Adviser selects securities for purchase or sale based on its assessment of the securities’ risk and return characteristics as well as the securities’ impact on the overall risk and return characteristics of the Fund. In making this assessment, the Adviser takes into account various factors including the credit quality and sensitivity to interest rates of the securities under consideration and of the Fund’s other holdings.
The Fund may invest without limit in lower-rated securities (“junk bonds”),
which may include securities having the lowest rating, and in unrated securities that, in the judgment of the Adviser, would be lower-rated securities if rated. The Fund may invest in fixed income securities with any maturity or duration. The Fund will seek to increase income for shareholders by investing in longer maturity bonds. Consistent with its objective of seeking a higher level of income, the Fund may experience greater volatility and a higher risk of loss of principal than other municipal funds.
The Fund may also invest in tender option bond transactions (“TOBs”); forward commitments; zero coupon municipal securities and variable, floating and inverse floating-rate municipal securities; certain types of mortgage related securities; and derivatives, such as options, futures contracts, forwards and swaps.
The Fund may make short sales of securities or maintain a short position, and may use other investment techniques. The Fund may use leverage for investment purposes to increase income through the use of TOBs and derivative instruments, such as interest rate swaps.
Investment Results
The table on page 5 shows the Fund’s performance compared to its benchmark, the Barclays Municipal Bond Index, for the six- and 12-month periods ended October 31, 2015.
The Fund outperformed its benchmark for both periods. The Fund is used generally to provide exposure to lower rated municipal bonds within separately managed account strategies. As such, the Fund is overweight lower-rated bonds relative to the
| AB MUNICIPAL INCOME SHARES • | 1 |
broad municipal market, as represented by the benchmark. For the six-month period, security selection in the industrials, health care and transportation sectors contributed relative to the benchmark. An overweight in the health care sector and security selection in the education sector detracted from performance. For the 12-month period, security selection in the industrials, health care and water sectors contributed to returns, as did an overweight in the health care, industrials and leasing sectors. Security selection in the local general obligation bond sector detracted from performance. Holdings in both investment-grade and non-investment grade securities contributed for both periods.
The Fund’s use of derivatives in the form of credit default swaps for investment purposes had no material impact on absolute performance over the six-month period and contributed to performance during the 12-month period. Interest rate and inflation (“CPI”) swaps used for hedging purposes had no material impact on performance during either period.
Market Review and Investment Strategy
During the reporting period Treasury yields generally fell as the slowdown in China clouded the picture for economic growth in the United States. Commodity prices fell, emerging market economies sputtered, stock prices were volatile and the US dollar strengthened. Over both periods, municipal bonds have generally had positive returns and even mid-grade and high-yield municipals performed well, in sharp contrast to the investment-grade and high-yield corporate bond markets. A general
scarcity of municipal credit issuance and an abundance of corporate-debt issuance partly explain the divergent returns in the markets.
Tax revenues for municipal issuers have been positive and the creditworthiness of municipal mid-grade and high-yield issuers continues to improve modestly in step with the domestic economy. The Municipal Bond Investment Team has structured the Fund to be modestly overweight medium grade credit quality bonds.
The Fund may purchase municipal securities that are insured under policies issued by certain insurance companies. Historically, insured municipal securities typically received a higher credit rating, which meant that the issuer of the securities paid a lower interest rate. As a result of declines in the credit quality and associated downgrades of most fund insurers, insurance has less value than it did in the past. The market now values insured municipal securities primarily based on the credit quality of the issuer of the security with little value given to the insurance feature. In purchasing such insured securities, the Adviser evaluates the risk and return of municipal securities through its own research. If an insurance company’s rating is downgraded or the company becomes insolvent, the prices of municipal securities insured by the insurance company may decline. As of October 31, 2015, the Fund’s percentages of investments in municipal bonds that are insured and in insured municipal bonds that have been prerefunded or escrowed to maturity were 2.01% and 0.07%, respectively.
| 2 | • AB MUNICIPAL INCOME SHARES |
DISCLOSURES AND RISKS
Benchmark Disclosure
The unmanaged Barclays Municipal Bond Index does not reflect fees and expenses associated with the active management of a fund. The Barclays Municipal Bond Index represents the performance of the long-term tax-exempt bond market consisting of investment grade bonds. An investor cannot invest directly in an index, and its results are not indicative of the performance for any specific investment, including the Fund.
A Word About Risk
Market Risk: The value of the Fund’s assets will fluctuate as the stock or bond market fluctuates. The value of the Fund’s investments may decline, sometimes rapidly and unpredictably, simply because of economic changes or other events that affect large portions of the market.
Credit Risk: An issuer or guarantor of a fixed-income security, or the counterparty to a derivatives or other contract, may be unable or unwilling to make timely payments of interest or principal, or to otherwise honor its obligations. The issuer or guarantor may default, causing a loss of the full principal amount of a security. The degree of risk for a particular security may be reflected in its credit rating. There is the possibility that the credit rating of a fixed-income security may be downgraded after purchase, which may adversely affect the value of the security. Investments in fixed-income securities with lower ratings tend to have a higher probability that an issuer will default or fail to meet its payment obligations.
Municipal Market Risk: This is the risk that special factors may adversely affect the value of municipal securities and have a significant effect on the yield or value of the Fund’s investments in municipal securities. These factors include economic conditions, political or legislative changes, uncertainties related to the tax status of municipal securities, or the rights of investors in these securities. To the extent that the Fund invests more of its assets in a particular state’s municipal securities, the Fund may be vulnerable to events adversely affecting that state, including economic, political and regulatory occurrences, court decisions, terrorism and catastrophic natural disasters, such as hurricanes or earthquakes. The Fund’s investments in certain municipal securities with principal and interest payments that are made from the revenues of a specific project or facility, and not general tax revenues, may have increased risks. Factors affecting the project or facility, such as local business or economic conditions, could have a significant effect on the project’s ability to make payments of principal and interest on these securities.
Interest Rate Risk: Changes in interest rates will affect the value of investments in fixed-income securities. When interest rates rise, the value of existing investments in fixed-income securities tends to fall and this decrease in value may not be offset by higher income from new investments. The Fund may be subject to a heightened risk of rising interest rates due to the current period of historically low interest rates and the potential effect of government fiscal and central bank monetary policy initiatives, including Federal Reserve actions, and market reactions to such actions. Interest rate risk is generally greater for fixed-income securities with longer maturities or durations.
Inflation Risk: This is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the value of the Fund’s assets can decline as can the value of the Fund’s distributions. This risk is significantly greater for fixed-income securities with longer maturities.
Leverage Risk: To the extent the Fund uses leveraging techniques, its net asset value (“NAV”) may be more volatile because leverage tends to exaggerate the effect of changes in interest rates and any increase or decrease in the value of the Fund’s investments.
(Disclosures, Risks and Note about Historical Performance continued on next page)
| AB MUNICIPAL INCOME SHARES • | 3 |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
Liquidity Risk: Liquidity risk exists when particular investments, such as lower-rated securities, are difficult to purchase or sell, possibly preventing the Fund from selling out of these illiquid securities at an advantageous price. The Fund is subject to liquidity risk because the market for municipal securities is generally smaller than many other markets. Derivatives and securities involving substantial market and credit risk tend to involve greater liquidity risk.
Derivatives Risk: Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Fund, and may be subject to counterparty risk to a greater degree than more traditional investments.
Management Risk: The Fund is subject to management risk because it is an actively-managed investment fund. The Adviser will apply its investment techniques and risk analyses in making investment decisions, but there is no guarantee that its techniques will produce the intended results.
These risks are fully discussed in the Fund’s prospectus. As with all investments, you may lose money by investing in the Fund.
An Important Note About Historical Performance
The performance shown on the following pages represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 227-4618. The investment return and principal value of an investment in the Fund will fluctuate, so that your shares, when redeemed, may be worth more or less than their original cost. Performance assumes reinvestment of distributions and does not account for taxes.
Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For copies of our prospectus and/or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AllianceBernstein Investments representative. Please read the prospectus and/or summary prospectus carefully before investing.
| 4 | • AB MUNICIPAL INCOME SHARES |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE FUND VS. ITS BENCHMARK PERIODS ENDED OCTOBER 31, 2015 (unaudited) | NAV Returns | |||||||||
| 6 Months | 12 Months | |||||||||
| AB Municipal Income Shares | 2.47% | 5.49% | ||||||||
| ||||||||||
| Barclays Municipal Bond Index | 1.68% | 2.87% | ||||||||
| ||||||||||
| AVERAGE ANNUAL RETURNS AS OF OCTOBER 31, 2015 (unaudited) | ||||||||
| NAV Returns | ||||||||
1 Year | 5.49 | % | ||||||
5 Years | 7.57 | % | ||||||
Since Inception* | 7.44 | % | ||||||
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END | ||||||||
SEC Returns | ||||||||
1 Year | 5.60 | % | ||||||
5 Years | 7.41 | % | ||||||
Since Inception* | 7.34 | % | ||||||
The prospectus fee table shows the fees and the total fund operating expenses of the Fund as 0.00% (excluding interest expense of 0.01%), because the Adviser does not charge any fees or expenses and reimburses or pays for fund operating expenses. Participants in a wrap fee program or other investment program eligible to invest in the Fund pay fees to the program sponsor and should review the program brochure or other literature provided by the sponsor for a discussion of fees and expenses charged.
| * | Inception date: 9/1/2010. |
See Disclosures, Risks and Note about Historical Performance on page 3-4.
| AB MUNICIPAL INCOME SHARES • | 5 |
Historical Performance
EXPENSE EXAMPLE
(unaudited)
As a shareholder of the Fund, you may incur various ongoing non-operating and extraordinary costs. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period as indicated below.
Actual Expenses
The table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed annual rate of return of 5% before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds by comparing this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), or contingent deferred sales charges on redemptions. Therefore, the hypothetical example is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning Account Value May 1, 2015 | Ending Account Value October 31, 2015 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Actual | $ | 1,000 | $ | 1,024.70 | $ | 0.05 | 0.01 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,025.09 | $ | 0.05 | 0.01 | % | ||||||||
| * | Expenses are equal to the Fund’s annualized expense ratio (interest expense incurred), multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). The Fund’s operating expenses are borne by the Advisor or its affiliates. |
| ** | Assumes 5% annual return before expenses. |
| 6 | • AB MUNICIPAL INCOME SHARES |
Expense Example
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $775.3
| * | All data are as of October 31, 2015. The Fund’s quality rating breakdown is expressed as a percentage of the Portfolio’s total investments in municipal securities and may vary over time. The quality ratings are determined by using the Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Services, Inc. (“Moody’s”) and Fitch Ratings, Ltd.(“Fitch”). The Fund considers the credit ratings issued by S&P, Moody’s, and Fitch and uses the highest rating issued by the agencies, including when there is a split rating. These ratings are a measure of the quality and safety of a bond or portfolio, based on the issuer’s financial condition. AAA is the highest (best) and D is the lowest (worst). If applicable, the pre-refunded category includes bonds which are secured by U.S. Government Securities and therefore are deemed high-quality investment grade by the Adviser. If applicable, Not Applicable (N/A) includes non credit worthy investments; such as, equities, currency contracts, futures and options. If applicable, the Not Rated category includes bonds that are not rated by a nationally recognized statistical rating organization. The Adviser evaluates the creditworthiness of non-rated securities based on a number of factors including, but not limited to, cash flows, enterprise value and economic environment. |
| AB MUNICIPAL INCOME SHARES • | 7 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
October 31, 2015 (unaudited)
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
MUNICIPAL OBLIGATIONS – 98.5% | ||||||||
Long-Term Municipal Bonds – 98.0% | ||||||||
Alabama – 2.5% | ||||||||
County of Jefferson AL | $ | 2,000 | $ | 2,013,020 | ||||
County of Jefferson AL Sewer Revenue | 11,645 | 13,071,280 | ||||||
Cullman County Health Care Authority | 400 | 428,444 | ||||||
Selma Industrial Development Board | 200 | 221,948 | ||||||
Special Care Facilities Financing Authority of the City of Pell City Alabama | 3,000 | 3,285,510 | ||||||
|
| |||||||
| 19,020,202 | ||||||||
|
| |||||||
Alaska – 0.0% | ||||||||
City of Koyukuk AK | 100 | 114,130 | ||||||
|
| |||||||
Arizona – 1.4% | ||||||||
Arizona Health Facilities Authority | 180 | 181,807 | ||||||
5.20%, 10/01/37 | 5,070 | 4,981,934 | ||||||
Downtown Phoenix Hotel Corp. | 150 | 151,146 | ||||||
Industrial Development Authority of the City of Phoenix (The) | 3,875 | 3,912,704 | ||||||
Mohave County Industrial Development Authority | 100 | 110,293 | ||||||
| 8 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Quechan Indian Tribe of Fort Yuma | $ | 100 | $ | 114,554 | ||||
Salt Verde Financial Corp. | 150 | 167,384 | ||||||
University of Arizona | 1,000 | 1,138,720 | ||||||
|
| |||||||
| 10,758,542 | ||||||||
|
| |||||||
California – 7.7% | ||||||||
Abag Finance Authority for Nonprofit Corps. | 100 | 113,144 | ||||||
Anaheim Public Financing Authority | 1,460 | 1,666,882 | ||||||
Bay Area Toll Authority | 1,000 | 1,162,220 | ||||||
California Educational Facilities Authority | 11,845 | 13,458,014 | ||||||
California Educational Facilities Authority | 100 | 106,763 | ||||||
California Municipal Finance Authority | 85 | 107,859 | ||||||
California Municipal Finance Authority | 1,000 | 1,078,550 | ||||||
Series 2014 | 1,335 | 1,321,930 | ||||||
California Municipal Finance Authority | 1,025 | 1,058,907 | ||||||
California Municipal Finance Authority | 1,200 | 1,337,472 | ||||||
7.25%, 6/01/43 | 2,075 | 2,310,533 | ||||||
| AB MUNICIPAL INCOME SHARES • | 9 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
California Municipal Finance Authority | $ | 765 | $ | 822,421 | ||||
California Pollution Control Financing Authority | 7,465 | 7,874,903 | ||||||
California School Finance Authority | 3,000 | 3,395,250 | ||||||
California School Finance Authority | 740 | 789,972 | ||||||
California Statewide Communities Development Authority | 530 | 565,892 | ||||||
California Statewide Communities Development Authority | 100 | 102,031 | ||||||
California Statewide Communities Development Authority | 1,200 | 1,199,940 | ||||||
California Statewide Communities Development Authority | 100 | 118,539 | ||||||
California Statewide Communities Development Authority | 140 | 158,119 | ||||||
California Statewide Communities Development Authority | 250 | 264,590 | ||||||
City of San Buenaventura CA | 100 | 120,864 | ||||||
| 10 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
City of San Jose CA Airport Revenue | $ | 100 | $ | 103,981 | ||||
Golden State Tobacco Securitization Corp. | 5,695 | 4,802,764 | ||||||
Los Angeles CA Dept Wtr Pwr | 1,000 | 1,165,650 | ||||||
Oakland Unified School District/Alameda County | 6,215 | 6,868,952 | ||||||
San Francisco City & County Redevelopment Agency | 1,000 | 1,079,980 | ||||||
San Joaquin Hills Transportation Corridor Agency | 1,450 | 1,531,983 | ||||||
Series 2014B | 1,000 | 1,053,600 | ||||||
Southern California Logistics Airport Authority | 1,685 | 1,610,351 | ||||||
Tobacco Securitization Authority of Southern California | 1,500 | 1,313,295 | ||||||
University of California CA Revenues | 1,000 | 1,145,510 | ||||||
|
| |||||||
| 59,810,861 | ||||||||
|
| |||||||
Colorado – 2.2% | ||||||||
Colorado Educational & Cultural Facilities Authority | 775 | 820,198 | ||||||
5.375%, 7/01/44(a) | 1,360 | 1,406,009 | ||||||
Colorado Health Facilities Authority | 5,910 | 6,450,115 | ||||||
Colorado Health Facilities Authority | 2,910 | 3,068,100 | ||||||
| AB MUNICIPAL INCOME SHARES • | 11 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Colorado Health Facilities Authority | $ | 1,150 | $ | 1,278,156 | ||||
Copperleaf Metropolitan District No 2 | 1,000 | 1,033,180 | ||||||
E-470 Public Highway Authority | 1,000 | 1,118,290 | ||||||
Park Creek Metropolitan District | 200 | 202,212 | ||||||
Plaza Metropolitan District No 1 | 1,500 | 1,507,935 | ||||||
Regional Transportation District | 200 | 224,048 | ||||||
|
| |||||||
| 17,108,243 | ||||||||
|
| |||||||
Connecticut – 0.9% | ||||||||
State of Connecticut | 1,000 | 1,136,340 | ||||||
State of Connecticut Special Tax Revenue | 5,000 | 5,667,250 | ||||||
|
| |||||||
| 6,803,590 | ||||||||
|
| |||||||
Delaware – 0.5% | ||||||||
Delaware State Economic Development Authority | 2,440 | 2,541,795 | ||||||
Delaware State Economic Development Authority | 1,310 | 1,352,182 | ||||||
|
| |||||||
| 3,893,977 | ||||||||
|
| |||||||
District of Columbia – 0.2% | ||||||||
District of Columbia | 100 | 113,290 | ||||||
| 12 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
District of Columbia | $ | 1,420 | $ | 1,465,170 | ||||
|
| |||||||
| 1,578,460 | ||||||||
|
| |||||||
Florida – 11.6% | ||||||||
Alachua County Health Facilities Authority | 100 | 117,917 | ||||||
Alachua County Health Facilities Authority | 1,100 | 1,188,132 | ||||||
Alachua County Health Facilities Authority | 435 | 531,787 | ||||||
Alachua County Health Facilities Authority | 1,000 | 1,076,240 | ||||||
Brevard County Health Facilities Authority | 1,000 | 1,106,110 | ||||||
Cape Coral Health Facilities Authority | 1,400 | 1,388,702 | ||||||
6.00%, 7/01/45-7/01/50(a) | 4,015 | 3,990,416 | ||||||
Capital Trust Agency, Inc. | 3,200 | 3,024,448 | ||||||
Citizens Property Insurance Corp. | 6,725 | 7,962,131 | ||||||
Series 2015A | 10,000 | 11,416,700 | ||||||
City of Lakeland FL | 2,350 | 2,453,187 | ||||||
City of Lakeland FL | 5,610 | 6,071,422 | ||||||
| AB MUNICIPAL INCOME SHARES • | 13 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
City of Tampa FL Solid Waste System Revenue | $ | 3,000 | $ | 3,477,360 | ||||
Collier County Industrial Development Authority | 2,000 | 2,337,260 | ||||||
County of Miami-Dade FL Aviation Revenue | 10,000 | 11,123,000 | ||||||
Series 2015A | 1,100 | 1,234,178 | ||||||
Florida Development Finance Corp. | 2,900 | 2,993,156 | ||||||
Marshall Creek Community Development District | 1,685 | 1,690,038 | ||||||
Martin County Health Facilities Authority | 1,950 | 2,112,843 | ||||||
Martin County Industrial Development Authority | 1,150 | 1,165,364 | ||||||
Miami Beach Health Facilities Authority | 2,885 | 3,196,205 | ||||||
Series 2014 | 1,000 | 1,077,520 | ||||||
Miami-Dade County Expressway Authority | 4,000 | 4,473,160 | ||||||
Mid-Bay Bridge Authority | 80 | 106,181 | ||||||
Series 2015A | 2,000 | 2,155,420 | ||||||
Series 2015C | 2,750 | 2,971,585 | ||||||
Palm Beach County Health Facilities Authority | 100 | 110,523 | ||||||
Reedy Creek Improvement District | 3,000 | 3,592,380 | ||||||
| 14 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Town of Davie FL | $ | 3,765 | $ | 4,212,621 | ||||
Volusia County School Board COP | 1,625 | 1,835,844 | ||||||
|
| |||||||
| 90,191,830 | ||||||||
|
| |||||||
Georgia – 0.5% | ||||||||
City of Atlanta Department of Aviation | 1,390 | 1,573,591 | ||||||
Series 2014A | 1,820 | 2,053,524 | ||||||
|
| |||||||
| 3,627,115 | ||||||||
|
| |||||||
Idaho – 0.3% | ||||||||
Idaho Health Facilities Authority | 2,050 | 2,144,874 | ||||||
Idaho Housing & Finance Association | 200 | 235,232 | ||||||
|
| |||||||
| 2,380,106 | ||||||||
|
| |||||||
Illinois – 11.9% | ||||||||
Chicago Board of Education | 5,375 | 4,826,965 | ||||||
Chicago O’Hare International Airport | 1,665 | 1,799,499 | ||||||
Chicago Transit Authority | 4,285 | 4,821,782 | ||||||
Chicago Transit Authority | 1,170 | 1,273,662 | ||||||
City of Chicago IL | 1,050 | 980,459 | ||||||
Series 2015 | 2,320 | 2,328,468 | ||||||
| AB MUNICIPAL INCOME SHARES • | 15 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Illinois Finance Authority | $ | 3,600 | $ | 3,932,136 | ||||
Illinois Finance Authority | 3,000 | 3,150,660 | ||||||
Illinois Finance Authority | 465 | 449,091 | ||||||
Illinois Finance Authority | 400 | 427,676 | ||||||
Illinois Finance Authority | 2,010 | 2,078,380 | ||||||
Illinois Finance Authority | 430 | 245,311 | ||||||
8.125%, 5/15/40 | 975 | 587,252 | ||||||
8.25%, 5/15/45 | 2,350 | 1,415,029 | ||||||
Series 2010B | 305 | 174,054 | ||||||
Illinois Finance Authority | 3,500 | 3,791,060 | ||||||
Series 2015 | 2,000 | 1,993,620 | ||||||
Illinois Finance Authority | 4,750 | 5,183,342 | ||||||
Illinois Municipal Electric Agency | 6,700 | 7,847,978 | ||||||
Illinois State Toll Highway Authority | 3,125 | 3,567,560 | ||||||
Metropolitan Pier & Exposition Authority | 13,300 | 13,704,054 | ||||||
State of Illinois | 11,760 | 12,758,649 | ||||||
| 16 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Series 2014 | $ | 8,985 | $ | 9,368,824 | ||||
Village of Pingree Grove IL Special Service Area No 7 | 1,275 | 1,276,148 | ||||||
5.00%, 3/01/36 | 2,965 | 2,969,181 | ||||||
Series 2015B | 1,040 | 1,041,362 | ||||||
|
| |||||||
| 91,992,202 | ||||||||
|
| |||||||
Indiana – 1.6% | ||||||||
Indiana Finance Authority | 1,000 | 1,098,140 | ||||||
5.50%, 8/15/40-8/15/45 | 3,020 | 3,264,442 | ||||||
Indiana Finance Authority | 1,000 | 1,069,110 | ||||||
Indiana Finance Authority | 6,980 | 7,240,014 | ||||||
|
| |||||||
| 12,671,706 | ||||||||
|
| |||||||
Iowa – 0.1% | ||||||||
Iowa Tobacco Settlement Authority | 1,110 | 1,050,471 | ||||||
|
| |||||||
Kentucky – 3.5% | ||||||||
Kentucky Economic Development Finance Authority | 1,750 | 1,759,345 | ||||||
5.75%, 11/15/45 | 3,350 | 3,367,654 | ||||||
Kentucky Economic Development Finance Authority | 1,685 | 1,667,190 | ||||||
5.50%, 11/15/45 | 1,000 | 992,710 | ||||||
Kentucky Economic Development Finance Authority | 10,335 | 11,115,034 | ||||||
| AB MUNICIPAL INCOME SHARES • | 17 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Kentucky Economic Development Finance Authority | $ | 200 | $ | 226,324 | ||||
6.375%, 6/01/40 | 1,525 | 1,743,807 | ||||||
6.50%, 3/01/45 | 1,000 | 1,146,710 | ||||||
Kentucky Municipal Power Agency | 4,745 | 5,249,014 | ||||||
|
| |||||||
| 27,267,788 | ||||||||
|
| |||||||
Louisiana – 1.4% | ||||||||
Jefferson Parish Hospital Service District No 2 | 2,130 | 2,376,462 | ||||||
Louisiana Local Government Environmental Facilities & Community Development Auth | 2,100 | 2,092,671 | ||||||
Louisiana Local Government Environmental Facilities & Community Development Auth | 400 | 464,480 | ||||||
Louisiana Public Facilities Authority | 2,750 | 3,044,580 | ||||||
Series 2014A | 1,250 | 1,290,875 | ||||||
Port New Orleans Board of Commissioners | 1,540 | 1,666,292 | ||||||
|
| |||||||
| 10,935,360 | ||||||||
|
| |||||||
Maine – 0.1% | ||||||||
Maine Health & Higher Educational Facilities Authority | 1,000 | 1,183,920 | ||||||
|
| |||||||
Maryland – 0.6% | ||||||||
City of Westminster MD | 1,125 | 1,146,308 | ||||||
| 18 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Maryland Health & Higher Educational Facilities Authority | $ | 3,245 | $ | 3,601,528 | ||||
|
| |||||||
| 4,747,836 | ||||||||
|
| |||||||
Massachusetts – 0.7% | ||||||||
Massachusetts Development Finance Agency | 2,550 | 2,714,934 | ||||||
Massachusetts Development Finance Agency | 745 | 773,757 | ||||||
Massachusetts Development Finance Agency | 2,053 | 2,055,074 | ||||||
|
| |||||||
| 5,543,765 | ||||||||
|
| |||||||
Michigan – 5.4% | ||||||||
City of Detroit MI Sewage Disposal System Revenue | 4,400 | 4,737,304 | ||||||
5.25%, 7/01/39 | 2,575 | 2,792,691 | ||||||
City of Detroit MI Water Supply System Revenue | 1,060 | 1,113,148 | ||||||
Detroit City School District | 120 | 130,590 | ||||||
Michigan Finance Authority | 2,000 | 2,136,660 | ||||||
Series 2014C-1 | 1,750 | 1,846,093 | ||||||
Michigan Finance Authority | 2,100 | 2,297,106 | ||||||
Michigan Finance Authority | 2,300 | 2,320,654 | ||||||
Series 2015E | 3,500 | 3,499,020 | ||||||
| AB MUNICIPAL INCOME SHARES • | 19 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Michigan Finance Authority | $ | 2,000 | $ | 2,187,960 | ||||
Michigan Finance Authority | 7,950 | 8,653,382 | ||||||
Michigan State Hospital Finance Authority | 300 | 312,101 | ||||||
Michigan Strategic Fund | 2,410 | 2,287,644 | ||||||
Michigan Strategic Fund | 2,000 | 2,081,500 | ||||||
Michigan Tobacco Settlement Finance Authority | 5,775 | 5,124,273 | ||||||
|
| |||||||
| 41,520,126 | ||||||||
|
| |||||||
Minnesota – 0.9% | ||||||||
City of Minneapolis MN | 1,000 | 1,129,570 | ||||||
Housing & Redevelopment Authority of The City of St Paul Minnesota | 4,105 | 4,412,136 | ||||||
Western Minnesota Municipal Power Agency | 1,030 | 1,206,243 | ||||||
|
| |||||||
| 6,747,949 | ||||||||
|
| |||||||
Missouri – 0.5% | ||||||||
Health & Educational Facilities Authority of the State of Missouri | 100 | 106,838 | ||||||
Missouri Joint Municipal Electric Utility Commission | 3,240 | 3,674,905 | ||||||
|
| |||||||
| 3,781,743 | ||||||||
|
| |||||||
| 20 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Nebraska – 0.4% | ||||||||
Central Plains Energy Project | $ | 2,975 | $ | 3,245,113 | ||||
|
| |||||||
Nevada – 0.0% | ||||||||
City of Reno NV | 130 | 139,461 | ||||||
|
| |||||||
New Hampshire – 0.4% | ||||||||
New Hampshire Health and Education Facilities Authority Act | 2,940 | 3,037,285 | ||||||
|
| |||||||
New Jersey – 7.8% | ||||||||
New Jersey Economic Development Authority | 3,600 | 3,678,804 | ||||||
New Jersey Economic Development Authority | 3,500 | 3,783,885 | ||||||
Series 2015X | 15,920 | 17,245,181 | ||||||
New Jersey Economic Development Authority | 735 | 767,832 | ||||||
New Jersey Economic Development Authority | 2,850 | 3,099,460 | ||||||
Series 2000B | 2,075 | 2,328,399 | ||||||
New Jersey Health Care Facilities Financing Authority | 100 | 107,459 | ||||||
New Jersey Transportation Trust Fund Authority | 1,000 | 1,006,910 | ||||||
| AB MUNICIPAL INCOME SHARES • | 21 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
New Jersey Turnpike Authority | $ | 3,500 | $ | 3,998,915 | ||||
Series 2015E | 15,400 | 17,277,218 | ||||||
Tobacco Settlement Financing Corp./NJ | 8,910 | 7,166,848 | ||||||
|
| |||||||
| 60,460,911 | ||||||||
|
| |||||||
New Mexico – 0.1% | ||||||||
New Mexico Hospital Equipment Loan Council | 1,060 | 1,075,179 | ||||||
|
| |||||||
New York – 7.7% | ||||||||
Build NYC Resource Corp. | 2,000 | 2,126,640 | ||||||
Build NYC Resource Corp. | 1,900 | 1,844,729 | ||||||
City of Newburgh NY | 245 | 264,527 | ||||||
Metropolitan Transportation Authority | 5,125 | 5,999,069 | ||||||
Series 2013E | 4,425 | 5,052,376 | ||||||
Metropolitan Trnsp Auth NY | 190 | 220,706 | ||||||
Nassau County Industrial Development Agency | 75 | 74,962 | ||||||
6.70%, 1/01/49 | 454 | 445,174 | ||||||
Series 2014B | 908 | 909,297 | ||||||
Series 2014C | 514 | 61,653 | ||||||
Nassau County Local Economic Assistance Corp. | 300 | 319,896 | ||||||
| 22 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
New York City Industrial Development Agency | $ | 100 | $ | 105,170 | ||||
Series 2015B | 3,500 | 3,506,895 | ||||||
New York Liberty Development Corp. | 100 | 106,781 | ||||||
New York Liberty Development Corp. | 1,325 | 1,564,918 | ||||||
New York NY GO | 500 | 584,375 | ||||||
New York State Dormitory Authority | 2,250 | 2,581,267 | ||||||
New York State Energy Research & Development Authority | 3,200 | 2,900,752 | ||||||
XLCA Series 2004A | 4,100 | 3,667,967 | ||||||
New York State Thruway Authority | 2,000 | 2,252,060 | ||||||
Orange County Funding Corp. | 1,125 | 1,117,519 | ||||||
Otsego County Capital Resource Corp. | 4,435 | 4,809,460 | ||||||
Port Authority of New York & New Jersey | 3,900 | 4,329,975 | ||||||
Series 2013178 | 5,000 | 5,605,650 | ||||||
Triborough Bridge & Tunnel Authority | 1,950 | 2,300,882 | ||||||
| AB MUNICIPAL INCOME SHARES • | 23 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Ulster County Capital Resource Corp. | $ | 360 | $ | 276,764 | ||||
Series 2014B | 410 | 426,544 | ||||||
Ulster County Industrial Development Agency | 20 | 20,282 | ||||||
6.00%, 9/15/27-9/15/37 | 2,225 | 2,223,655 | ||||||
Westchester County Local Development Corp. | 3,840 | 4,059,648 | ||||||
|
| |||||||
| 59,759,593 | ||||||||
|
| |||||||
North Carolina – 0.5% | ||||||||
North Carolina Medical Care Commission | 2,250 | 2,380,815 | ||||||
North Carolina Medical Care Commission | 1,735 | 1,736,110 | ||||||
|
| |||||||
| 4,116,925 | ||||||||
|
| |||||||
Ohio – 2.9% | ||||||||
Buckeye Tobacco Settlement Financing Authority | 8,485 | 7,258,154 | ||||||
County of Erie OH | 1,115 | 1,122,794 | ||||||
County of Franklin OH | 2,300 | 2,158,090 | ||||||
County of Hamilton OH | 1,030 | 1,059,890 | ||||||
County of Muskingum OH | 1,450 | 1,466,298 | ||||||
| 24 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Dayton-Montgomery County Port Authority | $ | 2,500 | $ | 2,501,325 | ||||
Ohio Air Quality Development Authority | 1,400 | 1,434,902 | ||||||
Ohio Water Development Authority | 5,000 | 5,164,200 | ||||||
|
| |||||||
| 22,165,653 | ||||||||
|
| |||||||
Oklahoma – 0.2% | ||||||||
Tulsa Airports Improvement Trust | 1,125 | 1,197,979 | ||||||
|
| |||||||
Oregon – 0.1% | ||||||||
Hospital Facilities Authority of Multnomah County Oregon | 535 | 568,325 | ||||||
|
| |||||||
Pennsylvania – 4.9% | ||||||||
Allegheny County Higher Education Building Authority | 230 | 243,887 | ||||||
Bensalem Township School District | 8,570 | 10,045,583 | ||||||
City of Philadelphia PA | 1,200 | 1,399,236 | ||||||
Cumberland County Municipal Authority | 180 | 191,038 | ||||||
Series 2012 | 1,000 | 1,023,150 | ||||||
Montgomery County Industrial Development Authority/PA | 200 | 228,924 | ||||||
| AB MUNICIPAL INCOME SHARES • | 25 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Montgomery County Industrial Development Authority/PA | $ | 1,040 | $ | 1,050,587 | ||||
5.25%, 1/01/40 | 4,740 | 4,726,775 | ||||||
Moon Industrial Development Authority | 5,135 | 5,098,695 | ||||||
Norristown Area School District COP | 100 | 104,450 | ||||||
Northeastern Pennsylvania Hospital & Education Authority | 265 | 272,293 | ||||||
Pennsylvania Economic Development Financing Authority | 1,620 | 1,716,941 | ||||||
Pennsylvania Economic Development Financing Authority | 2,830 | 3,042,873 | ||||||
Pennsylvania Economic Development Financing Authority | 3,500 | 3,657,920 | ||||||
Pennsylvania Economic Development Financing Authority | 1,000 | 977,960 | ||||||
Pennsylvania Turnpike Commission | 4,000 | 4,295,240 | ||||||
|
| |||||||
| 38,075,552 | ||||||||
|
| |||||||
Puerto Rico – 0.4% | ||||||||
Puerto Rico Industrial Tourist Educational Medical & Envirml Ctl Facs Fing Auth | 3,045 | 2,801,431 | ||||||
| 26 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Puerto Rico Industrial Tourist Educational Medical & Envirml Ctl Facs Fing Auth | $ | 335 | $ | 284,321 | ||||
|
| |||||||
| 3,085,752 | ||||||||
|
| |||||||
Rhode Island – 0.5% | ||||||||
Rhode Island Health & Educational Building Corp. | 3,150 | 3,725,127 | ||||||
|
| |||||||
South Carolina – 0.3% | ||||||||
South Carolina Jobs-Economic Development Authority | 1,000 | 1,005,580 | ||||||
5.125%, 5/01/48 | 1,000 | 1,005,860 | ||||||
South Carolina State Public Service Authority | 400 | 420,760 | ||||||
|
| |||||||
| 2,432,200 | ||||||||
|
| |||||||
Tennessee – 0.9% | ||||||||
Johnson City Health & Educational Facilities Board | 4,890 | 5,225,503 | ||||||
Shelby County Health Educational & Housing Facilities Board | 1,000 | 1,014,110 | ||||||
5.375%, 12/01/47 | 800 | 814,320 | ||||||
|
| |||||||
| 7,053,933 | ||||||||
|
| |||||||
Texas – 10.2% | ||||||||
Central Texas Regional Mobility Authority | 120 | 139,572 | ||||||
Series 2013 | 3,500 | 3,702,405 | ||||||
Central Texas Turnpike System | 6,800 | 7,319,792 | ||||||
| AB MUNICIPAL INCOME SHARES • | 27 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
City of Houston TX | $ | 1,965 | $ | 2,244,718 | ||||
City of Houston TX Airport System Revenue | 3,155 | 3,334,109 | ||||||
Series 2015B | 2,960 | 3,137,851 | ||||||
Clifton Higher Education Finance Corp. | 530 | 553,172 | ||||||
Series 2013 | 1,000 | 1,143,300 | ||||||
Dallas County Flood Control District No 1 | 1,150 | 1,169,780 | ||||||
Dallas/Fort Worth International Airport | 1,500 | 1,601,520 | ||||||
Decatur Hospital Authority | 3,150 | 3,320,289 | ||||||
Houston TX Util Sys | 400 | 472,336 | ||||||
New Hope Cultural Education Facilities Corp. | 1,700 | 1,689,596 | ||||||
North Texas Education Finance Corp. | 280 | 295,890 | ||||||
North Texas Tollway Authority | 8,975 | 10,010,535 | ||||||
Series 2015A | 7,000 | 7,770,000 | ||||||
Series 2015B | 3,500 | 3,922,730 | ||||||
Red River Health Facilities Development Corp. | 1,790 | 2,042,587 | ||||||
| 28 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Red River Health Facilities Development Corp. | $ | 1,315 | $ | 1,521,310 | ||||
Red River Health Facilities Development Corp. | 1,740 | 1,818,300 | ||||||
Sanger Industrial Development Corp. | 2,180 | 2,356,624 | ||||||
Tarrant County Cultural Education Facilities Finance Corp. | 200 | 210,180 | ||||||
Tarrant County Cultural Education Facilities Finance Corp. | 4,000 | 4,226,120 | ||||||
Tarrant County Cultural Education Facilities Finance Corp. | 3,325 | 3,321,983 | ||||||
Tarrant County Cultural Education Facilities Finance Corp. | 1,065 | 1,103,681 | ||||||
Texas Municipal Gas Acquisition & Supply Corp. I | 1,000 | 1,211,260 | ||||||
Texas Private Activity Bond Surface Transportation Corp. | 660 | 780,490 | ||||||
Texas Private Activity Bond Surface Transportation Corp. | 200 | 233,656 | ||||||
| AB MUNICIPAL INCOME SHARES • | 29 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Texas Private Activity Bond Surface Transportation Corp. | $ | 3,600 | $ | 4,386,312 | ||||
Travis County Health Facilities Development Corp. | 1,200 | 1,360,836 | ||||||
7.125%, 1/01/46 | 2,430 | 2,709,887 | ||||||
Viridian Municipal Management District | 75 | 90,395 | ||||||
|
| |||||||
| 79,201,216 | ||||||||
|
| |||||||
Utah – 0.1% | ||||||||
Timber Lakes Water Special Service District | 95 | 103,035 | ||||||
Utah Charter School Finance Authority | 100 | 121,553 | ||||||
Utah Charter School Finance Authority | 100 | 115,307 | ||||||
Utah Charter School Finance Authority | 100 | 109,893 | ||||||
|
| |||||||
| 449,788 | ||||||||
|
| |||||||
Vermont – 0.0% | ||||||||
Vermont Economic Development Authority | 200 | 203,722 | ||||||
|
| |||||||
Virginia – 1.9% | ||||||||
Cherry Hill Community Development Authority | 1,000 | 1,003,600 | ||||||
Chesterfield County Economic Development Authority | 1,030 | 1,052,557 | ||||||
| 30 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
City of Chesapeake VA Chesapeake Expressway Toll Road Revenue | $ | 300 | $ | 316,914 | ||||
Fairfax County Economic Development Authority | 1,955 | 1,978,245 | ||||||
Tobacco Settlement Financing Corp/VA | 6,790 | 5,104,858 | ||||||
Virginia College Bldg Auth | 550 | 646,118 | ||||||
Virginia College Building Authority | 1,000 | 1,035,170 | ||||||
Virginia Small Business Financing Authority | 3,580 | 3,871,412 | ||||||
|
| |||||||
| 15,008,874 | ||||||||
|
| |||||||
Washington – 2.9% | ||||||||
King County Public Hospital District No 4 | 2,235 | 2,238,420 | ||||||
Port of Seattle WA | 5,035 | 5,543,787 | ||||||
Washington Health Care Facilities Authority | 1,000 | 1,085,390 | ||||||
Washington Health Care Facilities Authority | 3,350 | 3,647,312 | ||||||
Washington St GO | 1,000 | 1,164,730 | ||||||
Washington State Housing Finance Commission | 2,650 | 2,792,994 | ||||||
| AB MUNICIPAL INCOME SHARES • | 31 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Washington State Housing Finance Commission | $ | 3,215 | $ | 3,617,904 | ||||
Washington State Housing Finance Commission | 2,265 | 2,131,176 | ||||||
|
| |||||||
| 22,221,713 | ||||||||
|
| |||||||
West Virginia – 0.3% | ||||||||
West Virginia Hospital Finance Authority | 2,100 | 2,355,024 | ||||||
|
| |||||||
Wisconsin – 1.0% | ||||||||
University of Wisconsin Hospitals & Clinics | 4,155 | 4,624,432 | ||||||
Wisconsin Public Finance Authority | 1,250 | 1,243,900 | ||||||
Wisconsin Public Finance Authority | 1,000 | 1,055,440 | ||||||
Wisconsin Public Finance Authority | 545 | 549,605 | ||||||
|
| |||||||
| 7,473,377 | ||||||||
|
| |||||||
Total Long-Term Municipal Bonds | 759,782,624 | |||||||
|
| |||||||
SHORT-TERM MUNICIPAL NOTES – 0.5% | ||||||||
Wyoming – 0.5% | ||||||||
County of Lincoln WY | 3,480 | 3,480,000 | ||||||
|
| |||||||
Total Municipal Obligations | 763,262,624 | |||||||
|
| |||||||
| 32 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
| Company | Shares | U.S. $ Value | ||||||
| ||||||||
SHORT-TERM INVESTMENTS – 3.2% | ||||||||
Investment Companies – 3.2% | ||||||||
AB Fixed Income Shares, Inc.– Government STIF Portfolio, 0.13%(j)(k) | 24,863,536 | $ | 24,863,536 | |||||
|
| |||||||
Total Investments – 101.7% | 788,126,160 | |||||||
Other assets less liabilities – (1.7)% | (12,851,524 | ) | ||||||
|
| |||||||
Net Assets – 100.0% | $ | 775,274,636 | ||||||
|
| |||||||
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note C)
| Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate | Implied Credit Spread at October 31, 2015 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Sale Contracts | ||||||||||||||||||||
Morgan Stanley & Co., LLC/(INTRCONX): | ||||||||||||||||||||
CDX-NAHY Series 24, | 5.00 | % | 3.59 | % | $ | 23,635 | $ | 1,498,584 | $ | 326,707 | ||||||||||
| * | Termination date |
INFLATION (CPI) SWAPS (see Note C)
| Rate Type | ||||||||||||||||
| Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
Citibank, NA | $ | 3,600 | 9/15/20 | 1.455% | CPI# | $ | (3,541 | ) | ||||||||
JPMorgan Chase Bank, NA | 3,600 | 9/04/20 | 1.465 | CPI# | (5,605 | ) | ||||||||||
|
| |||||||||||||||
| $ | (9,146 | ) | ||||||||||||||
|
| |||||||||||||||
# Variable interest rate based on the rate of inflation as determined by the Consumer Price Index (CPI).
INTEREST RATE SWAPS (see Note C)
|
| |||||||||||||||
| Rate Type | ||||||||||||||||
| Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
Barclays Bank PLC | $ | 13,000 | 9/22/21 | 1.103% | SIFMA* | $ | (62,905 | ) | ||||||||
JPMorgan Chase Bank, NA | 11,000 | 9/03/22 | 1.319 | SIFMA* | (136,316 | ) | ||||||||||
|
| |||||||||||||||
| $ | (199,221 | ) | ||||||||||||||
|
| |||||||||||||||
| AB MUNICIPAL INCOME SHARES • | 33 |
Portfolio of Investments
| * | Variable interest rate based on the Securities Industry & Financial Markets Association (SIFMA) Municipal Swap Index. |
| (a) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities are considered liquid and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At October 31, 2015, the aggregate market value of these securities amounted to $44,649,193 or 5.8% of net assets. |
| (b) | Security represents the underlying municipal obligation of an inverse floating rate obligation held by the Fund (see Note G). |
| (c) | Illiquid security. |
| (d) | Coupon rate adjusts periodically based upon a predetermined schedule. Stated interest rate in effect at October 31, 2015. |
| (e) | When-Issued or delayed delivery security. |
| (f) | Security is in default and is non-income producing. |
| (g) | An auction rate security whose interest rate resets at each auction date. Auctions are typically held every week or month. The rate shown is as of October 31, 2015 and the aggregate market value of these securities amounted to $6,568,719 or 0.85% of net assets. |
| (h) | Indicates a security that has a zero coupon that remains in effect until a predetermined date at which time the stated coupon rate becomes effective until final maturity. |
| (i) | Variable Rate Demand Notes are instruments whose interest rates change on a specific date (such as coupon date or interest payment date) or whose interest rates vary with changes in a designated base rate (such as the prime interest rate). This instrument is payable on demand and is secured by letters of credit or other credit support agreements from major banks. |
| (j) | To obtain a copy of the fund’s financial statements, please go to the Securities and Exchange Commission’s website at www.sec.gov, or call AB at (800) 227-4618. |
| (k) | Investment in affiliated money market mutual fund. The rate shown represents the 7-day yield as of period end. |
As of October 31, 2015, the Fund’s percentages of investments in municipal bonds that are insured and in insured municipal bonds that have been pre-refunded or escrowed to maturity are 2.0% and 0.1%, respectively.
Glossary:
AGC – Assured Guaranty Corporation
AMBAC – Ambac Assurance Corporation
CDX-NAHY – North American High Yield Credit Default Swap Index
COP – Certificate of Participation
ETM – Escrowed to Maturity
FGIC – Financial Guaranty Insurance Company
GO – General Obligation
INTRCONX – Inter-Continental Exchange
NATL – National Interstate Corporation
UPMC – University of Pittsburgh Medical Center
XLCA – XL Capital Assurance Inc.
See notes to financial statements.
| 34 | • AB MUNICIPAL INCOME SHARES |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
October 31, 2015 (unaudited)
| Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $735,322,782) | $ | 763,262,624 | ||
Affiliated issuers (cost $24,863,536) | 24,863,536 | |||
Cash collateral due from broker | 1,282,387 | |||
Interest receivable | 11,179,113 | |||
Receivable for shares of beneficial interest sold | 2,049,081 | |||
Receivable for investment securities sold | 917,000 | |||
|
| |||
Total assets | 803,553,741 | |||
|
| |||
| Liabilities | ||||
Due to custodian | 529,184 | |||
Payable for investment securities purchased | 18,351,582 | |||
Payable for floating rate notes issued* | 5,265,000 | |||
Dividends payable | 2,980,820 | |||
Payable for variation margin on exchange-traded derivatives | 781,168 | |||
Unrealized depreciation on interest rate swaps | 199,221 | |||
Payable for shares of beneficial interest redeemed | 145,789 | |||
Unrealized depreciation on inflation swaps | 9,146 | |||
Other liabilities | 17,195 | |||
|
| |||
Total liabilities | 28,279,105 | |||
|
| |||
Net Assets | $ | 775,274,636 | ||
|
| |||
| Composition of Net Assets | ||||
Shares of beneficial interest, at par | $ | 695 | ||
Additional paid-in capital | 756,178,450 | |||
Distributions in excess of net investment income | (381,978 | ) | ||
Accumulated net realized loss on investment transactions | (8,580,713 | ) | ||
Net unrealized appreciation on investments | 28,058,182 | |||
|
| |||
| $ | 775,274,636 | |||
|
| |||
Net Asset Value Per Share—unlimited shares of beneficial interest authorized, $.00001 par value (based on 69,472,753 common shares outstanding) | $ | 11.16 | ||
|
|
| * | Represents short-term floating rate certificates issued by tender option bond trusts (see Note G). |
See notes to financial statements.
| AB MUNICIPAL INCOME SHARES • | 35 |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Six Months Ended October 31, 2015 (unaudited)
| Investment Income | ||||||||
Interest | $ | 15,512,056 | ||||||
Dividends—Affiliated issuers | 7,869 | $ | 15,519,925 | |||||
|
| |||||||
| Expenses | ||||||||
Interest expense | 20,596 | |||||||
|
| |||||||
Total expenses | 20,596 | |||||||
|
| |||||||
Net investment income | 15,499,329 | |||||||
|
| |||||||
| Realized and Unrealized Gain (Loss) on Investment Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | 337,723 | |||||||
Swaps | (2,541 | ) | ||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | 2,586,338 | |||||||
Swaps | (112,344 | ) | ||||||
|
| |||||||
Net gain on investment transactions | 2,809,176 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 18,308,505 | ||||||
|
|
See notes to financial statements.
| 36 | • AB MUNICIPAL INCOME SHARES |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
| Six Months Ended October 31, 2015 (unaudited) | Year Ended April 30, 2015 | |||||||
| Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 15,499,329 | $ | 22,847,190 | ||||
Net realized gain (loss) on investment transactions | 335,182 | (2,350,558 | ) | |||||
Net change in unrealized appreciation/depreciation of investments | 2,473,994 | 21,934,385 | ||||||
|
|
|
| |||||
Net increase in net assets from operations | 18,308,505 | 42,431,017 | ||||||
| Dividends to Shareholders from | ||||||||
Net investment income | (15,910,656 | ) | (23,167,660 | ) | ||||
| Transactions in Shares of Beneficial Interest | ||||||||
Net increase | 138,210,191 | 233,735,649 | ||||||
|
|
|
| |||||
Total increase | 140,608,040 | 252,999,006 | ||||||
| Net Assets | ||||||||
Beginning of period | 634,666,596 | 381,667,590 | ||||||
|
|
|
| |||||
End of period (including distributions in excess of net investment income and undistributed net investment income of ($381,978) and $29,349, respectively) | $ | 775,274,636 | $ | 634,666,596 | ||||
|
|
|
| |||||
See notes to financial statements.
| AB MUNICIPAL INCOME SHARES • | 37 |
Statement of Changes in Net Assets
STATEMENT OF CASH FLOWS
For the Six Months Ended October 31, 2015 (unaudited)
Net increase in net assets from operations | $ | 18,308,505 | ||||||
|
| |||||||
| Reconciliation of Net Increase in Net Assets from Operations to Net Decrease in Cash from Operating Activities: | ||||||||
Increase in interest and dividends receivable | $ | (2,126,232 | ) | |||||
Decrease in receivable for investments sold | 1,246,625 | |||||||
Net accretion of bond discount and amortization of bond premium | 1,388,416 | |||||||
Increase in payable for investments purchased | 18,351,582 | |||||||
Increase in other liabilities | 1,020 | |||||||
Increase in cash collateral due from broker | (148,930 | ) | ||||||
Purchases of long-term investments | (210,579,564 | ) | ||||||
Purchases of short-term investments | (163,684,717 | ) | ||||||
Proceeds from disposition of long-term investments | 38,390,581 | |||||||
Proceeds from disposition of short-term investments | 174,716,470 | |||||||
Payments on swaps, net | (3,171 | ) | ||||||
Proceeds for exchange-traded derivatives settlements | 822,033 | |||||||
Net realized gain on investment transactions | (335,182 | ) | ||||||
Net change in unrealized appreciation/depreciation on investment transactions | (2,473,994 | ) | ||||||
|
| |||||||
Total adjustments | (144,435,063 | ) | ||||||
|
| |||||||
Net decrease in cash from operating activities | $ | (126,126,558 | ) | |||||
|
| |||||||
| Financing Activities: | ||||||||
Subscriptions in shares of beneficial interest, net | 141,138,876 | |||||||
Increase in due to custodian | 486,175 | |||||||
Cash dividends paid | (15,218,493 | ) | ||||||
Decrease in payable for floating rate notes issued | (280,000 | ) | ||||||
|
| |||||||
Net increase in cash from financing activities | 126,126,558 | |||||||
|
| |||||||
Net increase in cash | – 0 | – | ||||||
Net change in cash | ||||||||
Cash at beginning of period | – 0 | – | ||||||
|
| |||||||
Cash at end of period | $ | – 0 | – | |||||
|
| |||||||
Supplemental disclosure of cash flow information: | ||||||||
Interest expense paid during the period | $ | 20,596 | ||||||
|
|
In accordance with U.S. GAAP, the Fund has included a Statement of Cash Flows as a result of its significant investments in Level 3 securities throughout the period.
See notes to financial statements.
| 38 | • AB MUNICIPAL INCOME SHARES |
Statement of Cash Flows
NOTES TO FINANCIAL STATEMENTS
October 31, 2015 (unaudited)
NOTE A
Significant Accounting Policies
AB Corporate Shares (the “Trust”) was organized as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated January 26, 2004. Prior to January 20, 2015, the Trust was known as AllianceBernstein Corporate Shares. The Trust is registered under the Investment Company Act of 1940, as an open-end, diversified management investment company. The Trust operates as a “series” company currently offering three separate portfolios: AB Corporate Income Shares, AB Municipal Income Shares (the “Portfolio”) and AB Taxable Multi-Sector Income Shares. Each Portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to AB Municipal Income Shares. Prior to January 20, 2015, the Portfolio was known as AllianceBernstein Municipal Income Shares.
Shares of the Portfolio are offered exclusively to holders of accounts established under wrap-fee programs sponsored and maintained by certain registered investment advisers approved by AllianceBernstein L.P. (the “Adviser”). The Portfolio’s shares may be purchased at the relevant net asset value without a sales charge or other fee. The financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) which require management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Trust is an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies. The following is a summary of significant accounting policies followed by the Portfolio.
1. Security Valuation
Portfolio securities are valued at their current market value determined on the basis of market quotations or, if market quotations are not readily available or are deemed unreliable, at “fair value” as determined in accordance with procedures established by and under the general supervision of the Trust’s Board of Trustees (the “Board”).
In general, the market values of securities which are readily available and deemed reliable are determined as follows: securities listed on a national securities exchange (other than securities listed on the NASDAQ Stock Market, Inc. (“NASDAQ”)) or on a foreign securities exchange are valued at the last sale price at the close of the exchange or foreign securities exchange. If there has been no sale on such day, the securities are valued at the last traded price from the previous day. Securities listed on more than one exchange are valued by reference to the principal exchange on which the securities are traded; securities listed only on NASDAQ are valued in accordance with the NASDAQ Official
| AB MUNICIPAL INCOME SHARES • | 39 |
Notes to Financial Statements
Closing Price; listed or over the counter (“OTC”) market put or call options are valued at the mid level between the current bid and ask prices. If either a current bid or current ask price is unavailable, the Adviser will have discretion to determine the best valuation (e.g. last trade price in the case of listed options); open futures are valued using the closing settlement price or, in the absence of such a price, the most recent quoted bid price. If there are no quotations available for the day of valuation, the last available closing settlement price is used; U.S. Government securities and any other debt instruments having 60 days or less remaining until maturity are generally valued at market by an independent pricing vendor, if a market price is available. If a market price is not available, the securities are valued at amortized cost. This methodology is commonly used for short term securities that have an original maturity of 60 days or less, as well as short term securities that had an original term to maturity that exceeded 60 days. In instances when amortized cost is utilized, the Valuation Committee (the “Committee”) must reasonably conclude that the utilization of amortized cost is approximately the same as the fair value of the security. Such factors the Committee will consider include, but are not limited to, an impairment of the creditworthiness of the issuer or material changes in interest rates. Fixed-income securities, including mortgage-backed and asset-backed securities, may be valued on the basis of prices provided by a pricing service or at a price obtained from one or more of the major broker-dealers. In cases where broker-dealer quotes are obtained, the Adviser may establish procedures whereby changes in market yields or spreads are used to adjust, on a daily basis, a recently obtained quoted price on a security. Swaps and other derivatives are valued daily, primarily using independent pricing services, independent pricing models using market inputs, as well as third party broker-dealers or counterparties. Investment companies are valued at their net asset value each day.
Securities for which market quotations are not readily available (including restricted securities) or are deemed unreliable are valued at fair value. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, analysis of the issuer’s financial statements or other available documents. In addition, the Portfolio may use fair value pricing for securities primarily traded in non-U.S. markets because most foreign markets close well before the Portfolio values its securities at 4:00 p.m., Eastern Time. The earlier close of these foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim and may materially affect the value of those securities.
2. Fair Value Measurements
In accordance with U.S. GAAP regarding fair value measurements, fair value is defined as the price that the Portfolio would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a framework for measuring fair value, and a three-level hierarchy for fair value measurements based upon the
| 40 | • AB MUNICIPAL INCOME SHARES |
Notes to Financial Statements
transparency of inputs to the valuation of an asset or liability (including those valued based on their market values as described in Note A.1 above). Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Portfolio. Unobservable inputs reflect the Portfolio’s own assumptions about the assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances. Each investment is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below.
| • | Level 1—quoted prices in active markets for identical investments |
| • | Level 2—other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| • | Level 3—significant unobservable inputs (including the Portfolio’s own assumptions in determining the fair value of investments) |
The fair value of debt instruments, such as bonds, and over-the-counter derivatives is generally based on market price quotations, recently executed market transactions (where observable) or industry recognized modeling techniques and are generally classified as Level 2. Pricing vendor inputs to Level 2 valuations may include quoted prices for similar investments in active markets, interest rate curves, coupon rates, currency rates, yield curves, option adjusted spreads, default rates, credit spreads and other unique security features in order to estimate the relevant cash flows which are then discounted to calculate fair values. If these inputs are unobservable and significant to the fair value, these investments will be classified as Level 3. In addition, non-agency rated investments are classified as Level 3.
Other fixed income investments, including non-U.S. government and corporate debt, are generally valued using quoted market prices, if available, which are typically impacted by current interest rates, maturity dates and any perceived credit risk of the issuer. Additionally, in the absence of quoted market prices, these inputs are used by pricing vendors to derive a valuation based upon industry or proprietary models which incorporate issuer specific data with relevant yield/spread comparisons with more widely quoted bonds with similar key characteristics. Those investments for which there are observable inputs are classified as Level 2. Where the inputs are not observable, the investments are classified as Level 3.
| AB MUNICIPAL INCOME SHARES • | 41 |
Notes to Financial Statements
The following table summarizes the valuation of the Portfolio’s investments by the above fair value hierarchy levels as of October 31, 2015:
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Long-Term Municipal Bonds | ||||||||||||||||
Alaska | $ | – 0 | – | $ | – 0 | – | $ | 114,130 | $ | 114,130 | ||||||
Arizona | – 0 | – | 5,594,801 | 5,163,741 | 10,758,542 | |||||||||||
California | – 0 | – | 40,899,772 | 18,911,089 | 59,810,861 | |||||||||||
Colorado | – 0 | – | 14,567,128 | 2,541,115 | 17,108,243 | |||||||||||
Florida | – 0 | – | 77,142,554 | 13,049,276 | 90,191,830 | |||||||||||
Idaho | – 0 | – | 235,232 | 2,144,874 | 2,380,106 | |||||||||||
Illinois | – 0 | – | 75,745,898 | 16,246,304 | 91,992,202 | |||||||||||
Kentucky | – 0 | – | 19,480,889 | 7,786,899 | 27,267,788 | |||||||||||
Louisiana | – 0 | – | 4,507,234 | 6,428,126 | 10,935,360 | |||||||||||
Maryland | – 0 | – | 3,601,528 | 1,146,308 | 4,747,836 | |||||||||||
Massachusetts | – 0 | – | 3,488,691 | 2,055,074 | 5,543,765 | |||||||||||
Michigan | – 0 | – | 39,232,482 | 2,287,644 | 41,520,126 | |||||||||||
New Jersey | – 0 | – | 56,782,107 | 3,678,804 | 60,460,911 | |||||||||||
New York | – 0 | – | 50,591,678 | 9,167,915 | 59,759,593 | |||||||||||
North Carolina | – 0 | – | – 0 | – | 4,116,925 | 4,116,925 | ||||||||||
Ohio | – 0 | – | 17,506,238 | 4,659,415 | 22,165,653 | |||||||||||
Oklahoma | – 0 | – | – 0 | – | 1,197,979 | 1,197,979 | ||||||||||
Oregon | – 0 | – | – 0 | – | 568,325 | 568,325 | ||||||||||
Pennsylvania | – 0 | – | 25,985,307 | 12,090,245 | 38,075,552 | |||||||||||
Rhode Island | – 0 | – | – 0 | – | 3,725,127 | 3,725,127 | ||||||||||
South Carolina | – 0 | – | 420,760 | 2,011,440 | 2,432,200 | |||||||||||
Tennessee | – 0 | – | 5,225,503 | 1,828,430 | 7,053,933 | |||||||||||
Texas | – 0 | – | 62,938,218 | 16,262,998 | 79,201,216 | |||||||||||
Utah | – 0 | – | 109,893 | 339,895 | 449,788 | |||||||||||
Vermont | – 0 | – | – 0 | – | 203,722 | 203,722 | ||||||||||
Virginia | – 0 | – | 10,974,472 | 4,034,402 | 15,008,874 | |||||||||||
Washington | – 0 | – | 11,441,219 | 10,780,494 | 22,221,713 | |||||||||||
Wisconsin | – 0 | – | 6,417,937 | 1,055,440 | 7,473,377 | |||||||||||
Other | – 0 | – | 73,296,947 | – 0 | – | 73,296,947 | ||||||||||
Short-Term Municipal Notes | – 0 | – | 3,480,000 | – 0 | – | 3,480,000 | ||||||||||
Short-Term Investments | 24,863,536 | – 0 | – | – 0 | – | 24,863,536 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 24,863,536 | 609,666,488 | 153,596,136 | 788,126,160 | ||||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets: | ||||||||||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | 326,707 | – 0 | – | 326,707 | # | |||||||||
Liabilities: | ||||||||||||||||
Inflation (CPI) Swaps | – 0 | – | (9,146 | ) | – 0 | – | (9,146 | ) | ||||||||
Interest Rate Swaps | – 0 | – | (199,221 | ) | – 0 | – | (199,221 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total+ | $ | 24,863,536 | $ | 609,784,828 | $ | 153,596,136 | $ | 788,244,500 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| * | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
| # | Only variation margin receivable/payable at period end is reported within the statement of assets and liabilities. This amount reflects cumulative appreciation/(depreciation) of exchange-traded derivatives as reported in the portfolio of investments. |
| + | There were no transfers between Level 1 and Level 2 during the reporting period. |
| 42 | • AB MUNICIPAL INCOME SHARES |
Notes to Financial Statements
The Portfolio recognizes all transfers between levels of the fair value hierarchy assuming the financial instruments were transferred at the beginning of the reporting period.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value.
| Long-Term Municipal Bonds | Total | |||||||
Balance as of 4/30/15 | $ | 122,712,395 | $ | 122,712,395 | ||||
Accrued discounts/(premiums) | (25,572 | ) | (25,572 | ) | ||||
Realized gain (loss) | 103,118 | 103,118 | ||||||
Change in unrealized appreciation/depreciation | (501,343 | ) | (501,343 | ) | ||||
Purchases | 43,094,614 | 43,094,614 | ||||||
Sales | (9,210,564 | ) | (9,210,564 | ) | ||||
Transfers in to Level 3 | 1,095,810 | 1,095,810 | ||||||
Transfers out of Level 3 | (3,672,322 | ) | (3,672,322 | ) | ||||
|
|
|
| |||||
Balance as of 10/31/15 | $ | 153,596,136 | $ | 153,596,136 | + | |||
|
|
|
| |||||
Net change in unrealized appreciation/depreciation from investments held as of 10/31/15* | $ | (269,600 | ) | $ | (269,600 | ) | ||
|
|
|
| |||||
| + | There were de minimis transfers under 1% of net assets during the reporting period. |
| * | The unrealized appreciation/depreciation is included in net change in unrealized appreciation/depreciation of investments in the accompanying statement of operations. |
As of October 31, 2015, all Level 3 securities were priced by third party vendors.
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the Portfolio. The Committee operates under pricing and valuation policies and procedures established by the Adviser and approved by the Board, including pricing policies which set forth the mechanisms and processes to be employed on a daily basis to implement these policies and procedures. In particular, the pricing policies describe how to determine market quotations for securities and other instruments. The Committee’s responsibilities include: 1) fair value and liquidity determinations (and oversight of any third parties to whom any responsibility for fair value and liquidity determinations is delegated), and 2) regular monitoring of the Adviser’s pricing and valuation policies and procedures and modification or enhancement of these policies and procedures (or recommendation of the modification of these policies and procedures) as the Committee believes appropriate.
The Committee is also responsible for monitoring the implementation of the pricing policies by the Adviser’s Pricing Group (the “Pricing Group”) and a third party which performs certain pricing functions in accordance with the pricing policies. The Pricing Group is responsible for the oversight of the third party on a day-to-day basis. The Committee and the Pricing Group perform a series of activities to provide reasonable assurance of the accuracy of prices including: 1) periodic
| AB MUNICIPAL INCOME SHARES • | 43 |
Notes to Financial Statements
vendor due diligence meetings, review of methodologies, new developments and processes at vendors, 2) daily comparison of security valuation versus prior day for all securities that exceeded established thresholds, and 3) daily review of unpriced, stale, and variance reports with exceptions reviewed by senior management and the Committee.
In addition, several processes outside of the pricing process are used to monitor valuation issues including: 1) performance and performance attribution reports are monitored for anomalous impacts based upon benchmark performance, and 2) portfolio managers review all portfolios for performance and analytics (which are generated using the Adviser’s prices).
3. Taxes
It is the Portfolio’s policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its investment company taxable income and net realized gains, if any, to shareholders. Therefore, no provisions for federal income or excise taxes are required.
In accordance with U.S. GAAP requirements regarding accounting for uncertainties in income taxes, management has analyzed the Portfolio’s tax positions taken or expected to be taken on federal and state income tax returns for all open tax years (the current and the prior three tax years) and has concluded that no provision for income tax is required in the Portfolio’s financial statements.
4. Investment Income and Investment Transactions
Dividend income is recorded on the ex-dividend date or as soon as the Portfolio is informed of the dividend. Interest income is accrued daily. Investment transactions are accounted for on the date the securities are purchased or sold. Investment gains or losses are determined on the identified cost basis. The Portfolio amortizes premiums and accretes discounts as adjustments to interest income.
5. Dividends and Distributions
Dividends and distributions to shareholders, if any, are recorded on the ex-dividend date. Income dividends and capital gains distributions are determined in accordance with federal tax regulations and may differ from those determined in accordance with U.S. GAAP. To the extent these differences are permanent, such amounts are reclassified within the capital accounts based on their federal tax basis treatment; temporary differences do not require such reclassification.
NOTE B
Advisory Fee and Other Transactions with Affiliates
Under the terms of the Advisory Agreement, the Portfolio pays no advisory fee to the Adviser and the Adviser reimburses or pays for the Portfolio’s operating expenses. The Portfolio is an integral part of separately managed accounts in wrap-fee programs and other investment programs. Typically, participants in
| 44 | • AB MUNICIPAL INCOME SHARES |
Notes to Financial Statements
these programs pay a fee to their investment adviser for all costs and expenses of a separately managed account, including costs and expenses associated with the Portfolio, and a fee paid by their investment adviser to the Adviser. The Adviser serves as investment manager and adviser of the Portfolio and continuously furnishes an investment program for the Portfolio and manages, supervises and conducts the affairs of the Portfolio, subject to the supervisions of the Portfolio’s Board. The Advisory Agreement provides that the Adviser or an affiliate will furnish, or pay the expenses of the Portfolio for, office space, facilities and equipment, services of executive and other personnel of the Portfolio and certain administrative services.
The Portfolio has entered into a Distribution Agreement with AllianceBernstein Investments, Inc., the Portfolio’s principal underwriter (the “Underwriter”), to permit the Underwriter to distribute the Portfolio’s shares, which are sold at their net asset value without any sales charge. The Portfolio does not pay a fee for this service. The Underwriter is a wholly owned subsidiary of the Adviser.
AllianceBernstein Investor Services, Inc. (“ABIS”), a wholly-owned subsidiary of the Adviser, acts as the Portfolio’s registrar, transfer agent and dividend-disbursing agent. ABIS registers the transfer, issuance and redemption of Portfolio shares and disburses dividends and other distributions to Portfolio shareholders. The Portfolio does not pay a fee for this service.
The Portfolio may invest in the AB Fixed-Income Shares, Inc.—Government STIF Portfolio (“Government STIF Portfolio”), an open-end management investment company managed by the Adviser. The Government STIF Portfolio is offered as a cash management option to mutual funds and other institutional accounts of the Adviser, and is not available for direct purchase by members of the public. The Government STIF Portfolio pays no investment management fees but does bear its own expenses. A summary of the Portfolio’s transactions in shares of the Government STIF Portfolio for the six months ended October 31, 2015 is as follows:
Market Value April 30, 2015 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value October 31, 2015 (000) | Dividend Income (000) | ||||||||||||||
| $ | 3,807 | $ | 157,853 | $ | 136,796 | $ | 24,864 | $ | 8 | |||||||||
NOTE C
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the six months ended October 31, 2015 were as follows:
| Purchases | Sales | |||||||
Investment securities (excluding | $ | 210,579,564 | $ | 38,392,098 | ||||
U.S. government securities | – 0 | – | – 0 | – | ||||
| AB MUNICIPAL INCOME SHARES • | 45 |
Notes to Financial Statements
The cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation are as follows:
Gross unrealized appreciation | $ | 30,182,486 | ||
Gross unrealized depreciation | (2,242,644 | ) | ||
|
| |||
Net unrealized appreciation | $ | 27,939,842 | ||
|
|
1. Derivative Financial Instruments
The Portfolio may use derivatives in an effort to earn income and enhance returns, to replace more traditional direct investments, to obtain exposure to otherwise inaccessible markets (collectively, “investment purposes”), or to hedge or adjust the risk profile of its portfolio.
The principal types of derivatives utilized by the Portfolio, as well as the methods in which they may be used are:
| • | Swaps |
The Portfolio may enter into swaps to hedge its exposure to interest rates, credit risk, or currencies. The Portfolio may also enter into swaps for non-hedging purposes as a means of gaining market exposures, including by making direct investments in foreign currencies. A swap is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to changes in specified prices or rates for a specified amount of an underlying asset. The payment flows are usually netted against each other, with the difference being paid by one party to the other. In addition, collateral may be pledged or received by the Portfolio in accordance with the terms of the respective swaps to provide value and recourse to the Portfolio or its counterparties in the event of default, bankruptcy or insolvency by one of the parties to the swap.
Risks may arise as a result of the failure of the counterparty to the swap to comply with the terms of the swap. The loss incurred by the failure of a counterparty is generally limited to the net interim payment to be received by the Portfolio, and/or the termination value at the end of the contract. Therefore, the Portfolio considers the creditworthiness of each counterparty to a swap in evaluating potential counterparty risk. This risk is mitigated by having a netting arrangement between the Portfolio and the counterparty and by the posting of collateral by the counterparty to the Portfolio to cover the Portfolio’s exposure to the counterparty. Additionally, risks may arise from unanticipated movements in interest rates or in the value of the underlying securities. The Portfolio accrues for the interim payments on swaps on a daily basis, with the net amount recorded within unrealized appreciation/depreciation of swaps on the statement of assets and liabilities, where applicable. Once the interim payments are settled in cash, the net amount is recorded as realized gain/(loss) on swaps on the statement of
| 46 | • AB MUNICIPAL INCOME SHARES |
Notes to Financial Statements
operations, in addition to any realized gain/(loss) recorded upon the termination of swaps. Upfront premiums paid or received are recognized as cost or proceeds on the statement of assets and liabilities and are amortized on a straight line basis over the life of the contract. Amortized upfront premiums are included in net realized gain/(loss) from swaps on the statement of operations. Fluctuations in the value of swaps are recorded as a component of net change in unrealized appreciation/depreciation of swaps on the statement of operations.
Certain standardized swaps, including certain interest rate swaps and credit default swaps, are (or soon will be) subject to mandatory central clearing. Cleared swaps are transacted through futures commission merchants (“FCMs”) that are members of central clearinghouses, with the clearinghouse serving as central counterparty, similar to transactions in futures contracts. Centralized clearing will be required for additional categories of swaps on a phased-in basis based on requirements published by the Securities and Exchange Commission and Commodity Futures Trading Commission.
At the time the Portfolio enters into a centrally cleared swap, the Portfolio deposits and maintains as collateral an initial margin with the broker, as required by the clearinghouse on which the transaction is effected. Such amount is shown as cash collateral due from broker on the statement of assets and liabilities. Pursuant to the contract, the Portfolio agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as variation margin and are recorded by the Portfolio as unrealized gains or losses. Risks may arise from the potential of a counterparty to meet the terms of the contract. The credit/counterparty risk for centrally cleared swaps is generally less than non-centrally cleared swaps, since the clearinghouse, which is the issuer or counterparty to each centrally cleared swap, has robust risk mitigation standards, including the requirement to provide initial and variation margin. When the contract is closed, the Portfolio records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the time it was closed.
Interest Rate Swaps:
The Portfolio is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. Because the Portfolio holds fixed rate bonds, the value of these bonds may decrease if interest rates rise. To help hedge against this risk and to maintain its ability to generate income at prevailing market rates, the Portfolio may enter into interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional amount. The Portfolio may elect to pay a fixed rate and receive a floating rate, or, receive a fixed rate and pay a floating rate on a notional amount.
| AB MUNICIPAL INCOME SHARES • | 47 |
Notes to Financial Statements
In addition, the Portfolio may also enter into interest rate swap transactions to preserve a return or spread on a particular investment or portion of its portfolio, or protecting against an increase in the price of securities the Portfolio anticipates purchasing at a later date. Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed rate payments) computed based on a contractually-based principal (or “notional”) amount. Interest rate swaps are entered into on a net basis (i.e., the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments).
During the six months ended October 31, 2015, the Portfolio held interest rate swaps for hedging purposes.
Inflation (CPI) Swaps:
Inflation swaps are contracts in which one party agrees to pay the cumulative percentage increase in a price index (the Consumer Price Index with respect to CPI swaps) over the term of the swap (with some lag on the inflation index), and the other pays a compounded fixed rate. Inflation swaps may be used to protect the net asset value, or NAV, of a Portfolio against an unexpected change in the rate of inflation measured by an inflation index since the value of these agreements is expected to increase if unexpected inflation increases.
During the six months ended October 31, 2015, the Portfolio held inflation (CPI) swaps for hedging purposes.
Credit Default Swaps:
The Portfolio may enter into credit default swaps, including to manage its exposure to the market or certain sectors of the market, to reduce its risk exposure to defaults by corporate and sovereign issuers held by the Portfolio, or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. The Portfolio may purchase credit protection (“Buy Contract”) or provide credit protection (“Sale Contract”) on the referenced obligation of the credit default swap. During the term of the swap, the Portfolio receives/(pays) fixed payments from/(to) the respective counterparty, calculated at the agreed upon rate applied to the notional amount. If the Portfolio is a buyer/(seller) of protection and a credit event occurs, as defined under the terms of the swap, the Portfolio will either (i) receive from the seller/(pay to the buyer) of protection an amount equal to the notional amount of the swap (the “Maximum Payout Amount”) and deliver/(take delivery of) the referenced obligation or (ii) receive/(pay) a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation.
| 48 | • AB MUNICIPAL INCOME SHARES |
Notes to Financial Statements
In certain circumstances Maximum Payout Amounts may be partially offset by recovery values of the respective referenced obligations, upfront premium received upon entering into the agreement, or net amounts received from settlement of buy protection credit default swaps entered into by the Portfolio for the same reference obligation with the same counterparty. As of October 31, 2015, the Portfolio did not have Buy Contracts outstanding with respect to the same referenced obligation and counterparty Sale Contracts outstanding.
Credit default swaps may involve greater risks than if a Portfolio had invested in the referenced obligation directly. Credit default swaps are subject to general market risk, liquidity risk, counterparty risk and credit risk. If the Portfolio is a buyer of protection and no credit event occurs, it will lose the payments it made to its counterparty. If the Portfolio is a seller of protection and a credit event occurs, the value of the referenced obligation received by the Portfolio coupled with the periodic payments previously received, may be less than the Maximum Payout Amount it pays to the buyer, resulting in a net loss to the Portfolio.
During the six months ended October 31, 2015, the Portfolio held credit default swaps for non-hedging purposes.
Implied credit spreads over U.S. Treasuries of comparable maturity utilized in determining the market value of credit default swaps on issuers as of period end are disclosed in the portfolio of investments. The implied spreads serve as an indicator of the current status of the payment/performance risk and typically reflect the likelihood of default by the issuer of the referenced obligation. The implied credit spread of a particular reference obligation also reflects the cost of buying/selling protection and may reflect upfront payments required to be made to enter into the agreement. Widening credit spreads typically represent a deterioration of the referenced obligation’s credit soundness and greater likelihood of default or other credit event occurring as defined under the terms of the agreement. A credit spread identified as “Defaulted” indicates a credit event has occurred for the referenced obligation.
The Portfolio typically enters into International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreement”) or similar master agreements (collectively, “Master Agreements”) with its derivative contract counterparties in order to, among other things, reduce its credit risk to counterparties. ISDA Master Agreements include provisions for general obligations, representations, collateral and events of default or termination. Under an ISDA Master Agreement, the Portfolio typically may offset with the counterparty certain derivative financial instrument’s payables and/or receivables with collateral held and/or posted and create one single net payment (close-out netting) in the event of default or termination.
| AB MUNICIPAL INCOME SHARES • | 49 |
Notes to Financial Statements
Various Master Agreements govern the terms of certain transactions with counterparties, including transactions such as derivative transactions, repurchase and reverse repurchase agreements. These Master Agreements typically attempt to reduce the counterparty risk associated with such transactions by specifying credit protection mechanisms and providing standardization that improves legal certainty. Cross-termination provisions under Master Agreements typically provide that a default in connection with one transaction between the Portfolio and a counterparty gives the non-defaulting party the right to terminate any other transactions in place with the defaulting party to create one single net payment due to/due from the defaulting party. In the event of a default by a Master Agreements counterparty, the return of collateral with market value in excess of the Portfolio’s net liability, held by the defaulting party, may be delayed or denied.
The Portfolio’s Master Agreements may contain provisions for early termination of OTC derivative transactions in the event the net assets of the Portfolio decline below specific levels (“net asset contingent features”). If these levels are triggered, the Portfolio’s counterparty has the right to terminate such transaction and require the Portfolio to pay or receive a settlement amount in connection with the terminated transaction. For additional details, please refer to netting arrangements by counterparty tables below.
At October 31, 2015, the Portfolio had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of Location | Fair Value | Statement of | Fair Value | ||||||||
Credit contracts | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 326,707 | * | ||||||||
Interest rate contracts | Unrealized depreciation on interest rate swaps | $ | 199,221 | |||||||||
Interest rate contracts | Unrealized depreciation on inflation swaps | 9,146 | ||||||||||
|
|
|
| |||||||||
Total | $ | 326,707 | $ | 208,367 | ||||||||
|
|
|
| |||||||||
| * | Only variation margin receivable/payable at period end is reported within the statement of assets and liabilities. This amount reflects cumulative appreciation/(depreciation) of exchange-traded derivatives as reported in the portfolio of investments. |
| 50 | • AB MUNICIPAL INCOME SHARES |
Notes to Financial Statements
The effect of derivative instruments on the statement of operations for the six months ended October 31, 2015:
Derivative Type | Location of Gain | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | $ | (1,911 | ) | $ | (208,367 | ) | |||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (630 | ) | 96,023 | ||||||
|
|
|
| |||||||
Total | $ | (2,541 | ) | $ | (112,344 | ) | ||||
|
|
|
| |||||||
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the six months ended October 31, 2015:
Interest Rate Swaps: | ||||
Average notional amount | $ | 24,000,000 | (a) | |
Inflation Swaps: | ||||
Average notional amount | $ | 7,200,000 | (a) | |
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of sale contracts | $ | 23,413,609 |
| (a) | Positions were open for two months during the period. |
For financial reporting purposes, the Portfolio does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the statement of assets and liabilities.
All derivatives held at period end were subject to netting arrangements. The following table presents the Portfolio’s derivative assets and liabilities by counterparty net of amounts available for offset under Master Agreements (“MA”) and net of the related collateral received/ pledged by the Portfolio as of October 31, 2015:
Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged* | Security Collateral Pledged | Net Amount of Derivatives Liabilities | |||||||||||||||
Exchange-Traded Derivatives: | ||||||||||||||||||||
Morgan Stanley & Co., LLC** | $ | 781,168 | $ | – 0 | – | $ | 781,168 | $ | – 0 | – | $ | – 0 | – | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 781,168 | $ | – 0 | – | $ | 781,168 | $ | – 0 | – | $ | – 0 | – | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| AB MUNICIPAL INCOME SHARES • | 51 |
Notes to Financial Statements
Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged | Security Collateral Pledged | Net Amount of Derivatives Liabilities | |||||||||||||||
OTC Derivatives: | ||||||||||||||||||||
Barclays Bank PLC | $ | 62,905 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 62,905 | |||||||
Citibank, NA | 3,541 | – 0 | – | – 0 | – | – 0 | – | 3,541 | ||||||||||||
JPMorgan Chase Bank, NA | 141,921 | – 0 | – | – 0 | – | – 0 | – | 141,921 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 208,367 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 208,367 | ^ | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| * | The actual collateral received/pledged may be more than the amount reported due to overcollateralization. |
| ** | Cash has been posted for initial margin requirements for exchange traded derivatives outstanding at October 31, 2015. |
| ^ | Net amount represents the net receivable/payable that would be due from/to the counterparty in the event of default or termination. The net amount from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same counterparty. |
NOTE D
Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
| Shares | Amount | |||||||||||||||||||
| Six Months Ended October 31, 2015 (unaudited) | Year Ended April 30, 2015 | Six Months Ended October 31, 2015 (unaudited) | Year Ended April 30, 2015 | |||||||||||||||||
|
| |||||||||||||||||||
| Class A | ||||||||||||||||||||
Shares sold | 19,032,789 | 28,246,209 | $ | 210,097,717 | $ | 312,777,509 | ||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (6,517,787 | ) | (7,159,367 | ) | (71,887,526 | ) | (79,041,860 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 12,515,002 | 21,086,842 | $ | 138,210,191 | $ | 233,735,649 | ||||||||||||||
| ||||||||||||||||||||
NOTE E
Risks Involved in Investing in the Portfolio
Municipal Market Risk and Concentration of Credit Risk—This is the risk that special factors may adversely affect the value of municipal securities and have a significant effect on the yield or value of the Portfolio’s investments in municipal securities. These factors include economic conditions, political or legislative changes, uncertainties related to the tax status of municipal securities, or the rights of investors in these securities. An issuer or guarantor of a fixed-income security, or the counterparty to a derivatives or other contract, may be unable or unwilling to make timely payments of interest or principal, or to otherwise honor its obligations. The issuer or guarantor may default, causing a loss of the full principal amount of a security. The degree of risk for a particular security may be reflected in its credit rating. There is the possibility that the credit rating of a fixed-income security may be downgraded after purchase, which may adversely affect the value of the security. To the extent that the Portfolio invests
| 52 | • AB MUNICIPAL INCOME SHARES |
Notes to Financial Statements
more of its assets in a particular state’s municipal securities, the Portfolio may be vulnerable to events adversely affecting that state, including economic, political and regulatory occurrences, court decisions, terrorism and catastrophic natural disasters, such as hurricanes or earthquakes. The Portfolio’s investments in certain municipal securities with principal and interest payments that are made from the revenues of a specific project or facility, and not general tax revenues, may have increased risks. Factors affecting the project or facility, such as local business or economic conditions, could have a significant effect on the project’s ability to make payments of principal and interest on these securities.
Interest Rate Risk—Changes in interest rates will affect the value of investments in fixed-income securities. When interest rates rise, the value of existing investments in fixed-income securities tends to fall and this decrease in value may not be offset by higher income from new investments. The Fund may be subject to a heightened risk of rising interest rates due to the current period of historically low interest rates and the potential effect of government fiscal and central bank monetary policy initiatives, including Federal Reserve actions, and market reactions to such actions. Interest rate risk is generally greater for fixed-income securities with longer maturities or durations.
Inflation Risk—This is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the value of the Portfolio’s assets can decline as can the value of the Portfolio’s distributions. This risk is significantly greater for fixed-income securities with longer maturities.
Derivatives Risk—The Portfolio may enter into derivative transactions such as forwards, options, futures and swaps. Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Portfolio, and subject to counterparty risk to a greater degree than more traditional investments. Derivatives may result in significant losses, including losses that are far greater than the value of the derivatives reflected on the statement of assets and liabilities.
Financing and Related Transactions; Leverage and Other Risks—The Portfolio may utilize financial leverage, including tender option bond transactions, to seek to enhance the yield and net asset value. These objectives may not be achieved in all interest rate environments. Leverage creates certain risks for shareholders, including the likelihood of greater volatility of the net asset value. If income from the securities purchased from the funds made available by leverage is not sufficient to cover the cost of leverage, the Portfolio’s return will be less than if leverage had not been used. As a result, the amounts available for distribution as dividends and other distributions will be reduced. During periods of rising short-term interest rates, the interest paid on the floaters in tender option bond transactions would increase, which may adversely affect the Portfolio’s income
| AB MUNICIPAL INCOME SHARES • | 53 |
Notes to Financial Statements
and distribution to shareholders. A decline in distributions would adversely affect the Portfolio’s yield. If rising short-term rates coincide with a period of rising long-term rates, the value of the long-term municipal bonds purchased with the proceeds of leverage would decline, adversely affecting the net asset value.
In a tender option bond transaction, the Portfolio may transfer a highly rated fixed-rate municipal security to a broker, which, in turn, deposits the bond into a special purpose vehicle (typically, a trust) usually sponsored by the broker. The Portfolio receives cash and a residual interest security (sometimes referred to as an “inverse floater”) issued by the trust in return. The trust simultaneously issues securities, which pay an interest rate that is reset each week based on an index of high-grade short-term seven-day demand notes. These securities, sometimes referred to as “floaters”, are bought by third parties, including tax-exempt money market funds, and can be tendered by these holders to a liquidity provider at par, unless certain events occur. The Portfolio continues to earn all the interest from the transferred bond less the amount of interest paid on the floaters and the expenses of the trust, which include payments to the trustee and the liquidity provider and organizational costs. The Portfolio also uses the cash received from the transaction for investment purposes or to retire other forms of leverage. Under certain circumstances, the trust may be terminated and collapsed, either by the Portfolio or upon the occurrence of certain events, such as a downgrade in the credit quality of the underlying bond, or in the event holders of the floaters tender their securities to the liquidity provider. See Note G to the Financial Statements “Floating Rate Notes in Connection with Securities Held” for more information about tender option bond transactions.
The Portfolio may also purchase inverse floaters from a tender option bond trust in a secondary market transaction without first owning the underlying bond. The income received from an inverse floater varies inversely with the short-term interest rate paid on the floaters issued by the trust. The prices of inverse floaters are subject to greater volatility than the prices of fixed-income securities that are not inverse floaters. Investments in inverse floaters may amplify the risks of leverage. If short-term interest rates rise, the interest payable on the floaters would increase and income from the inverse floaters decrease.
Liquidity Risk—Liquidity risk exists when particular investments, such as lower-rated securities, are difficult to purchase or sell, possibly preventing the Fund from selling out of these illiquid securities at an advantageous price. The Fund is subject to liquidity risk because the market for municipal securities is generally smaller than many other markets. Derivatives and securities involving substantial market and credit risk tend to involve greater liquidity risk.
Indemnification Risk—In the ordinary course of business, the Portfolio enters into contracts that contain a variety of indemnifications. The Portfolio’s maximum exposure under these arrangements is unknown. However, the
| 54 | • AB MUNICIPAL INCOME SHARES |
Notes to Financial Statements
Portfolio has not had prior claims or losses pursuant to these indemnification provisions and expects the risk of loss thereunder to be remote. Therefore, the Portfolio has not accrued any liability in connection with these indemnification provisions.
NOTE F
Distributions to Shareholders
The tax character of distributions to be paid for the year ending April 30, 2016 will be determined at the end of the current fiscal year. The tax character of distributions paid during the fiscal years ended April 30, 2015 and April 30, 2014 were as follows:
| 2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 754,583 | $ | 113,917 | ||||
Long-term capital gains | – 0 | – | 27,570 | |||||
|
|
|
| |||||
Total taxable distributions | 754,583 | 141,487 | ||||||
Tax-exempt distributions | 22,413,077 | 13,640,346 | ||||||
|
|
|
| |||||
Total distributions paid | $ | 23,167,660 | $ | 13,781,833 | ||||
|
|
|
| |||||
As of April 30, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed tax-exempt income | $ | 2,548,690 | ||
Accumulated capital and other losses | (8,832,746 | )(a) | ||
Unrealized appreciation/(depreciation) | 25,270,355 | (b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | 18,986,299 | (c) | |
|
|
| (a) | As of April 30, 2015, the Portfolio had a net capital loss carryforward of $8,832,746. |
| (b) | The differences between book-basis and tax-basis unrealized appreciation/(depreciation) are attributable primarily to the tax treatment of swaps, the tax deferral of losses on wash sales and the tax treatment of tender option bonds. |
| (c) | The difference between book-basis and tax-basis components of accumulated earnings/(deficit) is attributable primarily to dividends payable. |
For tax purposes, net capital losses may be carried over to offset future capital gains, if any. Funds are permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an indefinite period, and such losses will retain their character as either short-term or long-term capital losses. As of April 30, 2015, the Portfolio had a net short-term capital loss carryforward of $5,835,285 and a net long-term carryforward of $2,997,461 which may be carried forward for an indefinite period.
NOTE G
Floating Rate Notes Issued in Connection with Securities Held
The Portfolio may engage in tender option bond transactions in which the Portfolio may transfer a fixed rate bond (“Fixed Rate Bond”) to a broker for cash.
| AB MUNICIPAL INCOME SHARES • | 55 |
Notes to Financial Statements
The broker deposits the Fixed Rate Bond into a Special Purpose Vehicle (the “SPV”, which is generally organized as a trust), organized by the broker. The Portfolio buys a residual interest in the assets and cash flows of the SPV, often referred to as an inverse floating rate obligation (“Inverse Floater”). The SPV also issues floating rate notes (“Floating Rate Notes”) which are sold to third parties. The Floating Rate Notes pay interest at rates that generally reset weekly and their holders have the option to tender their notes to a liquidity provider for redemption at par. The Inverse Floater held by the Portfolio gives the Portfolio the right (1) to cause the holders of the Floating Rate Notes to tender their notes at par, and (2) to have the trustee transfer the Fixed Rate Bond held by the SPV to the Portfolio, thereby collapsing the SPV. The SPV may also be collapsed in certain other circumstances. In accordance with U.S. GAAP requirements regarding accounting for transfers and servicing of financial assets and extinguishments of liabilities, the Portfolio accounts for the transaction described above as a secured borrowing by including the Fixed Rate Bond in its portfolio of investments and the Floating Rate Notes as a liability under the caption “Payable for floating rate notes issued” in its statement of assets and liabilities. Interest expense related to the Portfolio’s liability with respect to Floating Rate Notes is recorded as incurred. The interest expense is also included in the Portfolio’s expense ratio. At October 31, 2015, the amount of the Fund’s Floating Rate Notes outstanding was $5,265,000 and the related interest rate was 0.02%.
The Portfolio may also purchase Inverse Floaters in the secondary market without first owning the underlying bond. Such an Inverse Floater is included in the Portfolio’s portfolio of investments but is not required to be treated as a secured borrowing and reflected in the Portfolio’s financial statements as a secured borrowing.
NOTE H
New Accounting Pronouncement
In May 2015, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”), ASU 2015-07, which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The ASU also removes the disclosure requirement for investments not valued at net asset value. The ASU is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. At this time, management is evaluating the implications of these changes on the financial statements.
NOTE I
Subsequent Events
Management has evaluated subsequent events for possible recognition or disclosure in the financial statements through the date the financial statements are issued. Management has determined that there are no material events that would require disclosure in the Portfolio’s financial statements through this date.
| 56 | • AB MUNICIPAL INCOME SHARES |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Beneficial Interest Outstanding Throughout Each Period
Six Months (unaudited) | Year Ended April 30, | September 1, 2011 | ||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 11.14 | $ 10.64 | $ 11.22 | $ 10.50 | $ 9.24 | $ 10.00 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(b) | .24 | .51 | .52 | .47 | .59 | .32 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | .03 | .51 | (.59 | ) | .77† | 1.27 | (.77 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .27 | 1.02 | (.07 | ) | 1.24 | 1.86 | (.45 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.25 | ) | (.52 | ) | (.51 | ) | (.52 | ) | (.60 | ) | (.31 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.25 | ) | (.52 | ) | (.51 | ) | (.52 | ) | (.60 | ) | (.31 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 11.16 | $ 11.14 | $ 10.64 | $ 11.22 | $ 10.50 | $ 9.24 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 2.47 | % | 9.73 | % | (.28 | )% | 11.98 | % | 20.74 | % | (4.42 | )% | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period | $775,275 | $634,667 | $381,668 | $205,258 | $17,606 | $9,419 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses(e) | .01 | %^ | .01 | % | .01 | % | .03 | % | .05 | % | .02 | %^ | ||||||||||||
Net investment income | 4.38 | %^ | 4.62 | % | 5.03 | % | 4.41 | % | 6.06 | % | 5.03 | %^ | ||||||||||||
Portfolio turnover rate | 6 | % | 10 | % | 29 | % | 7 | % | 17 | % | 14 | % | ||||||||||||
See footnote summary on page 58.
| AB MUNICIPAL INCOME SHARES • | 57 |
Financial Highlights
| (a) | Commencement of operations. |
| (b) | Based on average shares outstanding. |
| (c) | Amount is less than $.005. |
| (d) | Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and redemption on the last day of the period. Total return does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Total investment return calculated for a period of less than one year is not annualized. |
| (e) | The expense ratios, excluding interest expense are .00%, .00%, .00%, .00%, .00% and .00%, respectively. |
| † | Due to timing of sales and repurchase of capital shares, the net realized and unrealized gain (loss) per share is not in accord with the Portfolio’s change in net realized and unrealized gain (loss) on investment transactions for the period. |
| ^ | Annualized. |
See notes to financial statements.
| 58 | • AB MUNICIPAL INCOME SHARES |
Financial Highlights
BOARD OF TRUSTEES
Marshall C. Turner, Jr.(1), Chairman John H. Dobkin(1) Michael J. Downey(1) William H. Foulk, Jr.(1) D. James Guzy(1) | Nancy P. Jacklin(1) Robert M. Keith, President and Chief Executive Officer Garry L. Moody(1) Earl D. Weiner(1) | |
OFFICERS
Philip L. Kirstein, Senior Vice President and Independent Compliance Officer Michael G. Brooks(2), Vice President Robert “Guy” B. Davidson III(2) , Vice President Wayne D. Godlin(2) , Vice President | Terrance T. Hults(2) , Vice President Emilie D. Wrapp, Secretary Joseph J. Mantineo, Treasurer and Chief Financial Officer Phyllis J. Clarke, Controller Vincent S. Noto, Chief Compliance Officer |
Custodian and Accounting Agent State Street Bank and Trust Company
Principal Underwriter AllianceBernstein Investments, Inc.
Transfer Agent AllianceBernstein Investor Services, Inc. | Legal Counsel Seward & Kissel LLP One Battery Park Plaza New York, NY 10004
Independent Registered Public Accounting Firm Ernst & Young LLP 5 Times Square New York, NY 10036 |
| (1) | Member of the Audit Committee, the Governance and Nominating Committee and the Independent Directors Committee. |
| (2) | The day-to-day management of, and investment decisions for, the Trust’s Portfolio are made by the Municipal Bond Investment Team. Messrs. Michael G. Brooks, Robert “Guy” B. Davidson III, Wayne D. Godlin and Terrance T. Hults are the investment professionals primarily responsible for the day-to-day management of the Trust’s Portfolio. |
| AB MUNICIPAL INCOME SHARES • | 59 |
Board of Trustees
THE FOLLOWING IS NOT PART OF THE SHAREHOLDER REPORT OR THE FINANCIAL STATEMENTS
SUMMARY OF SENIOR OFFICER’S EVALUATION OF INVESTMENT ADVISORY AGREEMENT1
The following is a summary of the evaluation of the Investment Advisory Agreement between AllianceBernstein L.P. (the “Adviser”) and AB Corporate Shares (the “Trust”) with respect to AB Municipal Income Shares (the “Portfolio”).2 The evaluation of the Investment Advisory Agreement was prepared by Philip L. Kirstein, the Senior Officer of the Trust, for the Trustees of the Trust, as required by the September 1, 2004 Assurance of Discontinuance (“AoD”) between the Adviser and the New York State Attorney General (the “NYAG”). The Senior Officer’s evaluation of the Investment Advisory Agreement is not meant to diminish the responsibility or authority of the Board of Trustees to perform its duties pursuant to Section 15 of the Investment Company Act of 1940 Act (the “40 Act”) and applicable state law. The purpose of this summary is to provide shareholders with a synopsis of the independent evaluation of the reasonableness of the advisory fees proposed to be paid by the Portfolio which was provided to the Trustees in connection with their review of the proposed approval of the continuance of the Investment Advisory Agreement.
The Senior Officer’s evaluation considered the following factors:
| 1. | Advisory fees charged to institutional and other clients of the Adviser for like services; |
| 2. | Advisory fees charged by other mutual fund companies for like services; |
| 3. | Costs to the Adviser and its affiliates of supplying services pursuant to the advisory agreement, excluding any intra-corporate profit; |
| 4. | Profit margins of the Adviser and its affiliates from supplying such services; |
| 5. | Possible economies of scale as the Portfolio grows larger; and |
| 6. | Nature and quality of the Adviser’s services including the performance of the Portfolio. |
These factors, with the exception of the first factor, are generally referred to as the “Gartenberg factors,” which were articulated by the United States Court of Appeals for the Second Circuit in 1982. Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F. 2d 923 (2d Cir. 1982). On March 30, 2010, the Supreme Court held the Gartenberg decision was correct in its basic formulation of what Section 36(b) requires: to face liability under Section 36(b), “an
| 1 | The Senior Officer’s fee evaluation was completed on October 22, 2015 and discussed with the Board of Trustees on November 3-5, 2015. |
| 2 | Future references to the Portfolio do not include “AB.” |
| 60 | • AB MUNICIPAL INCOME SHARES |
investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining” Jones v. Harris Associates L.P., 130 S. Ct. 1418 (2010). In Jones, the Court stated the Gartenberg approach fully incorporates the correct understanding of fiduciary duty within the context of Section 36(b) and noted with approval that “Gartenberg insists that all relevant circumstances be taken into account” and “uses the range of fees that might result from arm’s-length bargaining as the benchmark for reviewing challenged fees.”3
PORTFOLIO’S EXEMPTION FROM ADVISORY FEES OR EXPENSES
The Portfolio pays no advisory fee to the Adviser for receiving the services to be provided pursuant to the Investment Advisory Agreement. The Portfolio is designed to serve the needs of providers of separately managed accounts (“SMAs”).4 Since SMA clients pay their wrap program provider a unitary fee for managing all investments of their portfolio, the Portfolio will not pay an advisory fee. The Adviser will also reimburse the Portfolio for all of its other operating expenses, except certain extraordinary expenses, taxes, brokerage costs and the interest on borrowed money.
The Portfolio’s net assets on September 30, 2015 are set forth below:
| Portfolio | 9/30/15 Net Assets ($MM) | |||
Municipal Income Shares | $ | 739.0 | ||
The Portfolio, which offers only one no-load class of shares, is distributed through its principal underwriter, AllianceBernstein Investments, Inc. (“ABI”). Since the Portfolio is reimbursed by the Adviser for its operating expenses, the Portfolio does not have a distribution plan pursuant to Rule 12b-1 under the 40 Act.
| I. | ADVISORY FEES CHARGED TO INSTITUTIONAL AND OTHER CLIENTS |
The advisory fees charged to investment companies which the Adviser manages and sponsors are normally higher than those charged to similar sized institutional accounts, including pension plans and sub-advised investment companies. The fee differential reflects, among other things, different services provided to such clients, and different liabilities assumed. Services provided by the Adviser to the Portfolio that are not provided to non-investment company clients include providing office space and personnel to serve as Fund Officers, who among other responsibilities make the certifications required under the Sarbanes–Oxley Act of
| 3 | Jones v. Harris at 1427. |
| 4 | The wrap program providers that offer SMAs currently employ the Adviser as one of several investment managers, and compensate the Adviser on the basis of all SMA assets managed by it, which would include assets of Municipal Income Shares. |
| AB MUNICIPAL INCOME SHARES • | 61 |
2002, and coordinating with and monitoring the Portfolio’s third party service providers such as Fund counsel, auditors, custodians, transfer agents and pricing services. The accounting, administrative, legal and compliance requirements for the Portfolio are more costly than those for institutional client assets due to the greater complexities and time required for investment companies. The Adviser also believes that it incurs substantial entrepreneurial risk when offering a new mutual fund since establishing a new mutual fund requires a large upfront investment and it may take a long time for the fund to achieve profitability since the fund must be priced to scale from inception in order to be competitive and assets are acquired one account at a time. In addition, managing the cash flow of an investment company may be more difficult than that of a stable pool of assets, such as an institutional account with little cash movement in either direction, particularly if the Portfolio is in net redemption and the Adviser is frequently forced to sell securities to raise cash for redemptions. However, managing a fund with positive cash flow may be easier at times than managing a stable pool of assets. Finally, in recent years, investment advisers have been sued by institutional clients and have suffered reputational damage both by the attendant publicity and outcomes other than complete victories. Accordingly, the legal and reputational risks associated with institutional accounts are greater than previously thought, although arguably still not equal to those related to the mutual fund industry.
Notwithstanding the Adviser’s view that managing an investment company is not comparable to managing other institutional accounts because the services provided are different, the Supreme Court has indicated consideration should be given to the advisory fees charged to institutional accounts with a similar investment style as the Portfolio.5 However, with respect to the Portfolio, the Adviser represented that there is no institutional product in the Adviser’s Form ADV that has a similar investment style as the Portfolio.
The Adviser manages AB High Income Municipal Portfolio (“High Income Municipal Portfolio”), a retail mutual fund that has a somewhat similar investment style as the Portfolio. Set forth in the table below are the advisory fee schedule of High Income Municipal Portfolio and what would have been the
| 5 | The Supreme Court stated that “courts may give such comparisons the weight that they merit in light of the similarities and differences between the services that the clients in question require, but the courts must be wary of inapt comparisons.” Among the significant differences the Supreme Court noted that may exist between services provided to mutual funds and institutional accounts are “higher marketing costs.” Jones v. Harris at 1428. |
| 62 | • AB MUNICIPAL INCOME SHARES |
effective advisory fee of the Portfolio had the advisory fee schedule of the retail mutual fund been applicable to the Portfolio based on September 30, 2015 net assets:
| Portfolio | AB Mutual Funds (“ABMF”) | Fee Schedule | ABMF Effective | |||||
| Taxable Multi-Sector Income Shares | High Income Municipal Portfolio | 0.50% on first $2.5 billion 0.45% on next $2.5 billion 0.40% on the balance | 0.500% | |||||
The Adviser represented that it does provide sub-advisory services to other companies that have a substantially similar investment style as the Portfolio.
| II. | MANAGEMENT FEES CHARGED BY OTHER MUTUAL FUND COMPANIES FOR LIKE SERVICES. |
Broadridge Financial Solutions, Inc. (“Broadridge”), an analytical service that is not affiliated with the Adviser, compared the fees charged to the Portfolio to the fees charged to other investment companies for similar services by other investment advisers.6,7,8 Each peer selected by Broadridge had a similar fee arrangement as the Portfolio, which is to say that with respect to the Portfolio’s peers, all of their fund expenses, including management fees, were reimbursed by their respective investment advisers.9
The Portfolio does not pay an advisory fee to the Adviser since the SMA clients pay their wrap program provider a unitary fee for managing all investments of
| 6 | The Supreme Court cautioned against accepting mutual fund fee comparisons without careful scrutiny since “these comparisons are problematic because these fees, like those challenged, may not be the product of negotiations conducted at arm’s length.” Jones v. Harris at 1429. |
| 7 | Only zero fee no-load funds that participate in a wrap fee program were considered for inclusion in the Fund’s EG, regardless of the Lipper investment classification/objective of the Funds’ peers. The Fund’s EG peers includes two BBB-rated Corporate Debt (“BBB”) funds, three Multi-Sector Income (“MSI”) fund, one Short-Intermediate Investment Grade Debt (“SII”) fund, four General Bond (“GB”) funds, two Core Bond (“IID”) funds, one General & Insured Municipal Debt (“GM”) fund, one Inflation-Protected Bond (“IUT”) fund, two Global Income (“GLI”) funds and one Intermediate Municipal Debt (“IMD”) fund. The Fund is classified by Lipper as a High Yield Municipal Debt Fund (“HM”). |
| 8 | On June 5, 2015, Broadridge acquired the Fiduciary Services and Competitive Intelligence unit, i.e., the group responsible for providing the Portfolio’s 15(c) reports, from Thomson Reuters’ Lipper division. The group that maintains Lipper’s expense and performance databases and investment classification/objective remains a part of Thomson Reuters’ Lipper division. Accordingly, the Portfolio’s investment classifications/objectives continued to be determined by Lipper. |
| 9 | “Management Fee” is the fee attributable to the management and bearing of expenses of the funds (not the management of the wrap fee program). In each case, the advisory contract provides for an advisory or management fee of zero. |
| AB MUNICIPAL INCOME SHARES • | 63 |
their portfolios. In addition, the Adviser reimburses the Portfolio for all of its operating expenses, except certain extraordinary expenses, taxes, brokerage costs and interest on borrowed money.
| III. | COSTS TO THE ADVISER AND ITS AFFILIATES OF SUPPLYING SERVICES PURSUANT TO THE ADVISORY FEE ARRANGEMENT, EXCLUDING ANY INTRA-CORPORATE PROFIT. |
The Adviser utilizes two profitability reporting systems, which operate independently but are aligned with each other, to estimate the Adviser’s profitability in connection with investment advisory services provided to the Portfolio. The Senior Officer has retained a consultant to provide independent advice regarding the alignment of the two profitability systems as well as the methodologies and allocations utilized by both profitability systems. See Section IV for additional discussion.
| IV. | PROFIT MARGINS OF THE ADVISER AND ITS AFFILIATES FOR SUPPLYING SUCH SERVICES. |
The profitability information for the Portfolio, prepared by the Adviser for the Board of Trustees, was reviewed by the Senior Officer and the consultant. The Portfolio does not pay an advisory fee to the Adviser. However, the Adviser does profit indirectly through the advisory fees that it receives from the wrap program providers whose SMA clients invest in the Portfolio. The Adviser’s profitability with respect to the Portfolio, which was negative in 2014, was calculated using a weighted average of the profitability of the relevant SMA assets, in addition to any fund specific revenue or expense items.
ABI and AllianceBernstein Investor Services, Inc. (“ABIS”), affiliates of the Adviser, serve as the Portfolio’s underwriter and transfer agent, respectively. The courts have referred to this type of business relationships as “fall-out benefits” to the Adviser and indicated that such benefits should be factored into the evaluation of the total relationship between the Portfolio and the Adviser. Neither case law nor common business practice precludes the Adviser’s affiliates from earning a reasonable profit on this type of relationship provided the affiliates’ charges and services are competitive. However, neither ABI nor ABIS receive a fee for serving as the Portfolio’s underwriter and transfer agent.
| V. | POSSIBLE ECONOMIES OF SCALE |
The Adviser has indicated that economies of scale are being shared with shareholders through pricing to scale, breakpoints, fee reductions/waivers and enhancement to services.
In May 2012, an independent consultant, retained by the Senior Officer, provided the Board of Trustees information on the Adviser’s firm-wide average costs from 2005 through 2011 and the potential economies of scale. The independent
| 64 | • AB MUNICIPAL INCOME SHARES |
consultant noted that from 2005 through 2007 the Adviser experienced significant growth in assets under management (“AUM”). During this period, operating expenses increased, in part to keep up with growth, and in part reflecting market returns. However, from 2008 through the first quarter of 2009, AUM rapidly and significantly decreased due to declines in market value and client withdrawals. When AUM rapidly decreased, some operating expenses categories, including base compensation and office space, adjusted more slowly during this period, resulting in an increase in average costs. Since 2009, AUM has experienced less significant changes. The independent consultant noted that changes in operating expenses reflect changes in business composition and business practices in response to changes in financial markets. Finally, the independent consultant concluded that the increase in average cost and the decline in net operating margin across the Adviser since late 2008 are inconsistent with the view that there are currently reductions in average costs due to economies of scale that can be shared with the AB Mutual Funds managed by the Adviser through lower fees.
Previously, in February 2008, the independent consultant provided the Board of Trustees an update of the Deli10 study on advisory fees and various fund characteristics.11 The independent consultant first reiterated the results of his previous two dimensional comparison analysis (fund size and family size) with the Board of Trustees.12 The independent consultant then discussed the results of the regression model that was utilized to study the effects of various factors on advisory fees. The regression model output indicated that the bulk of the variation in fees predicted were explained by various factors, but substantially by fund AUM, family AUM, index fund indicator and investment style. The independent consultant also compared the advisory fees of the AB Mutual Funds to similar funds managed by 19 other large asset managers, regardless of the fund size and each Adviser’s proportion of mutual fund assets to non-mutual fund assets.
| 10 | The Deli study, originally published in 2002 based on 1997 data and updated for the February 2008 Presentation, may be of diminished value due to the age of the data used in the presentation and the changes experienced in the industry since 2008. |
| 11 | The Supreme Court cautioned against accepting mutual fund fee comparisons without careful scrutiny since the fees may not be the product of negotiations conducted at arm’s length. See Jones v. Harris at 1429. |
| 12 | The two dimensional analysis showed patterns of lower advisory fees for funds with larger asset sizes and funds from larger family sizes compared to funds with smaller asset sizes and funds from smaller family sizes, which according to the independent consultant is indicative of a sharing of economies of scale and scope. However, in less liquid and active markets, such is not the case, as the empirical analysis showed potential for diseconomies of scale in those markets. The empirical analysis also showed diminishing economies of scale and scope as funds surpassed a certain high level of assets. |
| AB MUNICIPAL INCOME SHARES • | 65 |
| VI. | NATURE AND QUALITY OF THE ADVISER’S SERVICES INCLUDING THE PERFORMANCE OF THE PORTFOLIO |
With assets under management of approximately $463 billion as of September 30, 2015, the Adviser has the investment experience to manage and provide non-investment services (described in Section I) to the Portfolio.
The information below, prepared by Broadridge, shows the 1 and 3 year gross performance returns and rankings of the Portfolio relative to its Broadridge Performance Universe (“PU”)13 for the period ended July 31, 2015:14
Portfolio Return | PU Median (%) | PU Rank | ||||||||||
| Municipal Income Shares | ||||||||||||
1 Year | 6.85 | 6.69 | 18/38 | |||||||||
3 Year | 5.39 | 4.79 | 5/26 | |||||||||
Set forth below are the 1, 3 year and since inception net performance returns of the Portfolio (in bold) versus its benchmark.15 Portfolio and benchmark volatility and reward-to-variability ratio (“Sharpe Ratio”) information is also shown.16
Period Ending July 31, 2015 Annualized Net Performance (%) | ||||||||||||||||||||||||
| 1 Year (%) | 3 Year (%) | Since (%) | Volatility (%) | Sharpe (%) | Risk Period (Year) | |||||||||||||||||||
| Municipal Income | 6.81 | 5.35 | 7.32 | 6.58 | 0.81 | 3 | ||||||||||||||||||
| Shares | ||||||||||||||||||||||||
| Barclays Capital | 3.56 | 2.81 | 3.99 | 3.55 | 0.77 | 3 | ||||||||||||||||||
| Municipal Bond Index | ||||||||||||||||||||||||
| Inception Date: September 1, 2010 | ||||||||||||||||||||||||
| 13 | The Portfolio’s PU includes peers with the same Lipper investment classification/objective and load type as the Portfolio. |
| 14 | The performance returns of the Portfolio were provided Broadridge. |
| 15 | The Adviser provided Portfolio and benchmark performance return information for the periods through July 31, 2015. |
| 16 | Portfolio and benchmark volatility and Sharpe Ratio information was obtained through Lipper LANA, a database maintained by Lipper. Volatility is a statistical measure of the tendency of a market price or yield to vary over time. A Sharpe Ratio is a risk adjusted measure of return that divides a fund’s return in excess of the riskless return by the fund’s standard deviation. A fund with a greater volatility would be viewed as more risky than a fund with equivalent performance but lower volatility; for that reason, a greater return would be demanded for the more risky fund. A fund with a higher Sharpe Ratio would be viewed as better performing than a fund with a lower Sharpe Ratio. |
| 66 | • AB MUNICIPAL INCOME SHARES |
CONCLUSION:
Based on the factors discussed above the Senior Officer’s conclusion is that the Investment Advisory Agreement for the Portfolio is reasonable and within the range of what would have been negotiated at arm’s-length in light of all the surrounding circumstances. This conclusion with respect to the Portfolio is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: November 25, 2015
| AB MUNICIPAL INCOME SHARES • | 67 |
THIS PAGE IS NOT PART OF THE SHAREHOLDER REPORT OR THE FINANCIAL STATEMENTS
AB FAMILY OF FUNDS
US EQUITY
US Core
Core Opportunities Fund
Select US Equity Portfolio
US Growth
Concentrated Growth Fund
Discovery Growth Fund
Growth Fund
Large Cap Growth Fund
Small Cap Growth Portfolio
US Value
Discovery Value Fund
Equity Income Fund
Growth & Income Fund
Small Cap Value Portfolio
Value Fund
INTERNATIONAL/ GLOBAL EQUITY
International/Global Core
Global Core Equity Portfolio
Global Equity & Covered Call Strategy Fund
Global Thematic Growth Fund
International Portfolio
Tax-Managed International Portfolio
International/Global Growth
International Growth Fund
International/Global Value
Asia ex-Japan Equity Portfolio
International Value Fund
FIXED INCOME
Municipal
High Income Municipal Portfolio
Intermediate California Municipal Portfolio
Intermediate Diversified Municipal Portfolio
Intermediate New York Municipal Portfolio
Municipal Bond Inflation Strategy
FIXED INCOME (continued)
Tax-Aware Fixed Income Portfolio
National Portfolio
Arizona Portfolio
California Portfolio
Massachusetts Portfolio
Michigan Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
Taxable
Bond Inflation Strategy
Global Bond Fund
High Income Fund
High Yield Portfolio
Intermediate Bond Portfolio
Limited Duration High Income Portfolio
Short Duration Portfolio
ALTERNATIVES
All Market Real Return Portfolio*
Credit Long/Short Portfolio
Global Real Estate Investment Fund
Long/Short Multi-Manager Fund
Multi-Manager Alternative Strategies Fund
Select US Long/Short Portfolio
Unconstrained Bond Fund
MULTI-ASSET
All Market Growth Portfolio*
All Market Income Portfolio
Emerging Markets Multi-Asset Portfolio
Global Risk Allocation Fund
| 68 | • AB MUNICIPAL INCOME SHARES |
AB Family of Funds
MULTI-ASSET (continued)
Target-Date
Multi-Manager Select Retirement Allocation Fund
Multi-Manager Select 2010 Fund
Multi-Manager Select 2015 Fund
Multi-Manager Select 2020 Fund
Multi-Manager Select 2025 Fund
Multi-Manager Select 2030 Fund
Multi-Manager Select 2035 Fund
Multi-Manager Select 2040 Fund
Multi-Manager Select 2045 Fund
Multi-Manager Select 2050 Fund
Multi-Manager Select 2055 Fund
Wealth Strategies
Balanced Wealth Strategy
Conservative Wealth Strategy
Wealth Appreciation Strategy
Tax-Managed Balanced Wealth Strategy
Tax-Managed Conservative Wealth Strategy
Tax-Managed Wealth Appreciation Strategy
CLOSED-END FUNDS
AB Multi-Manager Alternative Fund
Alliance California Municipal Income Fund
AllianceBernstein Global High Income Fund
AllianceBernstein Income Fund
AllianceBernstein National Municipal Income Fund
We also offer Exchange Reserves, which serves as the money market fund exchange vehicle for the AB mutual funds. An investment in Exchange Reserves is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
* Prior to December 15, 2014, All Market Growth Portfolio was named Dynamic All Market Fund; All Market Real Return Portfolio was named Real Asset Strategy.
AB MUNICIPAL INCOME SHARES
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
MIS-0152-1015 
OCT 10.31.15
SEMI-ANNUAL REPORT
AB TAXABLE MULTI-SECTOR INCOME SHARES
Investment Products Offered
• Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed |
Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
This shareholder report must be preceded or accompanied by the Fund’s prospectus for individuals who are not current shareholders of the Fund.
You may obtain a description of the Fund’s proxy voting policies and procedures, and information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, without charge. Simply visit AB’s website at www.abglobal.com, or go to the Securities and Exchange Commission’s (the “Commission”) website at www.sec.gov, or call AB at (800) 227-4618.
The Fund files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website at www.sec.gov. The Fund’s Forms N-Q may also be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. AB publishes full portfolio holdings for the Fund monthly at www.abglobal.com.
AllianceBernstein Investments, Inc. (ABI) is the distributor of the AB family of mutual funds. ABI is a member of FINRA and is an affiliate of AllianceBernstein L.P., the Adviser of the funds.
The [A/B] logo is a registered service mark of AllianceBernstein and AllianceBernstein® is a registered service mark used by permission of the owner, AllianceBernstein L.P.
December 11, 2015
Semi-Annual Report
This report provides management’s discussion of fund performance for AB Taxable Multi-Sector Income Shares (the “Fund”) for the semi-annual reporting period ended October 31, 2015. Please note, shares of this Fund are offered exclusively through registered investment advisers approved by AllianceBernstein L.P. (the “Adviser”). Effective January 20, 2015, the Fund’s name changed from AllianceBernstein Taxable Multi-Sector Income Shares to AB Taxable Multi-Sector Income Shares.
Investment Objectives and Policies
The Fund’s investment objective is to generate income and price appreciation. The Fund invests, under normal circumstances, at least 80% of its net assets in fixed-income securities. The Fund may invest in a broad range of securities in both developed and emerging markets. The Fund may invest across all fixed-income sectors, including corporate and US and non-US Government securities. The Fund may invest up to 50% of its assets in below investment grade bonds (“junk bonds”). The Fund expects to invest in readily marketable fixed-income securities with a range of maturities from short- to long-term.
The Fund may invest without limit in US dollar-denominated foreign fixed-income securities and may invest up to 50% of its assets in non-US dollar-denominated foreign fixed-income securities. These investments may include, in each case, developed and emerging market debt securities.
The Fund may also invest in mortgage-related and other asset-backed securities,
loan participations, inflation-indexed securities, structured securities, variable, floating, and inverse floating-rate instruments and preferred stock, and may use other investment techniques. The Fund may use leverage for investment purposes. The Fund intends, among other things, to enter into transactions such as reverse repurchase agreements, forward contracts, and dollar rolls. The Fund may invest, without limit, in derivatives, such as options, futures contracts, forwards or swap agreements.
Currencies can have a dramatic effect on returns of non-US dollar-denominated fixed-income securities, significantly adding to returns in some years and greatly diminishing them in others. The Adviser evaluates currency and fixed-income positions separately and may seek to hedge the currency exposure resulting from the Fund’s fixed-income securities positions when it finds the currency exposure unattractive. To hedge a portion of its currency risk, the Fund may from time to time invest in currency-related derivatives, including forward currency exchange contracts, futures, options on futures, swaps and options. The Adviser may also seek investment opportunities by taking long or short positions in currencies through the use of currency-related derivatives.
The Adviser selects securities for purchase or sale based on its assessment of the securities’ risk and return characteristics as well as the securities’ impact on the overall risk and return characteristics of the Fund. In making this assessment, the Adviser takes into account various factors including the credit quality and
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 1 |
sensitivity to interest rates of the securities under consideration and of the Fund’s other holdings.
Investment Results
The table on page 5 shows the Fund’s performance compared to its benchmark, the Barclays US Aggregate ex-Government Bond Index, for the six- and 12-month periods ended October 31, 2015.
The Fund outperformed its benchmark for the six-month period, yet underperformed for the 12-month period. Sector positioning detracted for both periods, specifically the Fund’s overweight to basic materials, relative to the benchmark. For the six-month period an underweight to agencies detracted; for the 12-month period, an overweight to inflation-linked securities and Treasuries detracted. Security selection was relatively flat for the six-month period, and contributed for the 12-month period, specifically selection within commercial mortgage-backed securities, consumer non-cyclicals and insurance. Yield-curve positioning detracted for both periods, mainly from positioning on the two-year part of the curve.
Derivatives in the form of credit default swaps and inflation swaps for investment purposes and interest rate swaps for hedging purposes had an immaterial impact on absolute performance during both periods.
Market Review and Investment Strategy
Bond markets were volatile for the 12-month period ended October 31, 2015, as growth trends and monetary
policies in the world’s biggest economies headed in different directions. Inflation continued to fall throughout the developed world, driven primarily by decreasing commodity prices. While oil prices began to rebound in April, they again fell in August, remaining well below their price range in late 2014. These dynamics caused volatility within government bond yields, with the yield on the 10-year US Treasury ranging from 1.7% to 2.5%, ultimately ending the period at 2.2%. Adding to the volatility, the US Federal Reserve postponed its long expected interest-rate hike, alluding to emerging market turmoil as one of the reasons.
In other markets, including many in Europe where the European Central Bank implemented its quantitative easing program, some yields ended the period in negative territory. In emerging markets, political and economic instability across regions negatively affected the investment environment. Slower growth in China, Brazil and other emerging market economies caused further pressure on credit markets at the end of the 12-month period. Against this backdrop, fixed-income returns diverged between regions and sectors. Credit securities generally underperformed developed market Treasuries; developed market Treasuries generally outperformed emerging market local currency Treasuries; and investment-grade securities generally outperformed high-yield, which posted some of the worst returns across the fixed-income market, specifically within the energy and commodities sectors.
| 2 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
DISCLOSURES AND RISKS
Benchmark Disclosure
The unmanaged Barclays US Aggregate ex-Government Bond Index does not reflect fees and expenses associated with the active management of a fund. The Barclays US Aggregate ex-Government Bond Index represents the performance of securities within the US investment-grade fixed-rate bond market, with index components for corporate securities, mortgage pass-through securities, asset-backed securities, and commercial mortgage backed securities. An investor cannot invest directly in an index, and its results are not indicative of the performance for any specific investment, including the Fund.
A Word About Risk
Market Risk: The value of the Fund’s assets will fluctuate as the stock or bond market fluctuates. The value of the Fund’s investments may decline, sometimes rapidly and unpredictably, simply because of economic changes or other events that affect large portions of the market.
Interest Rate Risk: Changes in interest rates will affect the value of investments in fixed-income securities. When interest rates rise, the value of existing investments in fixed-income securities tends to fall and this decrease in value may not be offset by higher income from new investments. Interest rate risk is generally greater for fixed-income securities with longer maturities or durations.
Credit Risk: An issuer or guarantor of a fixed-income security, or the counterparty to a derivatives or other contract, may be unable or unwilling to make timely payments of interest or principal, or to otherwise honor its obligations. The issuer or guarantor may default, causing a loss of the full principal amount of a security. The degree of risk for a particular security may be reflected in its credit rating. There is the possibility that the credit rating of a fixed-income security may be downgraded after purchase, which may adversely affect the value of the security.
Below Investment Grade Securities Risk: Investments in fixed-income securities with lower ratings (commonly known as “junk bonds”) tend to have a higher probability that an issuer will default or fail to meet its payment obligations. These securities may be subject to greater price volatility due to such factors as specific corporate developments, interest rate sensitivity, negative perceptions of the junk bond market generally and less secondary market liquidity.
Inflation Risk: This is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the value of the Fund’s assets can decline as can the value of the Fund’s distributions. This risk is significantly greater for fixed-income securities with longer maturities.
Foreign (Non-US) Risk: Investments in securities of non-US issuers may involve more risk than those of US issuers. These securities may fluctuate more widely in price and may be less liquid due to adverse market, economic, political, regulatory or other factors.
Emerging Market Risk: Investments in emerging market countries may have more risk because the markets are less developed and less liquid as well as being subject to increased economic, political, regulatory or other uncertainties.
Currency Risk: Fluctuations in currency exchange risk may negatively affect the value of the Fund’s investments or reduce its returns.
Prepayment Risk: The value of mortgage-related or asset-backed securities may be particularly sensitive to changes in prevailing interest rates. Early payments of principal on some mortgage-related securities may occur during periods of falling mortgage interest rates and expose the Fund to a lower rate of return upon reinvestment of
(Disclosures, Risks and Note about Historical Performance continued on next page)
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 3 |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
principal. Early payments associated with mortgage-related securities cause these securities to experience significantly greater price and yield volatility than is experienced by traditional fixed-income securities. During periods of rising interest rates, a reduction in prepayments may increase the effective life of mortgage related securities, subjecting them to greater risk of decline in market value in response to rising interest rates. If the life of a mortgage-related security is inaccurately predicted, the Fund may not be able to realize the rate of return it expected.
Derivatives Risk: Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Fund, and may be subject to counterparty risk to a greater degree than more traditional investments.
Leverage Risk: To the extent the Fund uses leveraging techniques, its net asset value (“NAV”) may be more volatile because leverage tends to exaggerate the effect of changes in interest rates and any increase or decrease in the value of the Fund’s investments.
Management Risk: The Fund is subject to management risk because it is an actively-managed investment fund. The Adviser will apply its investment techniques and risk analyses in making investment decisions, but there is no guarantee that its techniques will produce the intended results.
These risks are fully discussed in the Fund’s prospectus. As with all investments, you may lose money by investing in the Fund.
An Important Note About Historical Performance
The performance shown on the following pages represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 227-4618. The investment return and principal value of an investment in the Fund will fluctuate, so that your shares, when redeemed, may be worth more or less than their original cost. Performance assumes reinvestment of distributions and does not account for taxes.
Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For copies of our prospectus and/or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AllianceBernstein Investments representative. Please read the prospectus and/or summary prospectus carefully before investing.
| 4 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Disclosures and Risks
HISTORICAL PERFORMANCE
| THE FUND VS. ITS BENCHMARK PERIODS ENDED OCTOBER 31, 2015 (unaudited) | NAV Returns | |||||||||
| 6 Months | 12 Months | |||||||||
| AB Taxable Multi-Sector Income Shares | 0.19% | 0.93% | ||||||||
| ||||||||||
| Barclays US Aggregate ex-Government Bond Index | -0.38% | 1.70% | ||||||||
| AVERAGE ANNUAL RETURNS AS OF OCTOBER 31, 2015 (unaudited) | ||||
| NAV Returns | ||||
| 1 Year | 0.93 | % | ||
| 5 Years | 2.33 | % | ||
| Since Inception* | 2.41 | % | ||
SEC AVERAGE ANNUAL RETURNS | ||||
| SEC Returns | ||||
| 1 Year | 1.05 | % | ||
| 5 Years | 2.47 | % | ||
| Since Inception* | 2.43 | % | ||
The prospectus fee table shows the fees and the total fund operating expenses of the Fund as 0.00% because the Adviser does not charge any fees or expenses and reimburses Fund operating expenses. Participants in a wrap fee program or other investment program eligible to invest in the Fund pay fees to the program sponsor and should review the program brochure or other literature provided by the sponsor for a discussion of fees and expenses charged.
| * | Inception date: 9/15/2010. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 5 |
Historical Performance
EXPENSE EXAMPLE
(unaudited)
As a shareholder of the Fund, you may incur various ongoing non-operating and extraordinary costs. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period as indicated below.
Actual Expenses
The table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed annual rate of return of 5% before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds by comparing this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), or contingent deferred sales charges on redemptions. Therefore, the hypothetical example is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning Account Value May 1, 2015 | Ending Account Value October 31, 2015 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Actual | $ | 1,000 | $ | 1,001.90 | $ | – 0 – | 0.00 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,025.14 | $ | – 0 – | 0.00 | % | ||||||||
| * | Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). The Fund’s operating expenses are borne by the Adviser or its affiliates. |
| ** | Assumes 5% annual return before expenses. |
| 6 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Expense Example
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $72.4
| * | All data are as of October 31, 2015. The Fund’s security type breakdown is expressed as a percentage of total investments and may vary over time. The Fund also enters into derivative transactions, which may be used for hedging or investment purposes (see “Portfolio of Investments” section of the report for additional details). |
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 7 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
October 31, 2015 (unaudited)
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
CORPORATES – INVESTMENT | ||||||||
Industrial – 32.3% | ||||||||
Basic – 3.1% | ||||||||
BHP Billiton Finance USA Ltd. | $ | 425 | $ | 428,591 | ||||
Ecolab, Inc. | 420 | 428,656 | ||||||
Freeport-McMoRan, Inc. | 430 | 404,200 | ||||||
Glencore Funding LLC | 435 | 379,537 | ||||||
Monsanto Co. | 130 | 129,504 | ||||||
PPG Industries, Inc. | 59 | 65,438 | ||||||
Rio Tinto Finance USA PLC | 425 | 425,702 | ||||||
|
| |||||||
| 2,261,628 | ||||||||
|
| |||||||
Capital Goods – 2.5% | ||||||||
Boeing Co. (The) | 500 | 490,951 | ||||||
Caterpillar Financial Services Corp. | 425 | 429,275 | ||||||
John Deere Capital Corp. | 455 | 456,854 | ||||||
Republic Services, Inc. | 410 | 428,635 | ||||||
|
| |||||||
| 1,805,715 | ||||||||
|
| |||||||
Communications - Media – 2.3% | ||||||||
CBS Corp. | 425 | 427,512 | ||||||
McGraw Hill Financial, Inc. | 565 | 569,713 | ||||||
NBCUniversal Enterprise, Inc. | 270 | 270,304 | ||||||
Time Warner Cable, Inc. | 400 | 421,806 | ||||||
|
| |||||||
| 1,689,335 | ||||||||
|
| |||||||
Communications - Telecommunications – 3.6% | ||||||||
American Tower Corp. | 440 | 436,724 | ||||||
AT&T, Inc. | 435 | 434,170 | ||||||
British Telecommunications PLC | 425 | 426,678 | ||||||
| 8 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Deutsche Telekom International Finance BV | $ | 425 | $ | 428,935 | ||||
DIRECTV Holdings LLC/DIRECTV Financing Co., Inc. | 425 | 430,552 | ||||||
Verizon Communications, Inc. | 425 | 428,998 | ||||||
|
| |||||||
| 2,586,057 | ||||||||
|
| |||||||
Consumer Cyclical - Automotive – 3.8% | ||||||||
Daimler Finance North America LLC | 430 | 427,416 | ||||||
Ford Motor Credit Co. LLC | 500 | 500,059 | ||||||
2.551%, 10/05/18 | 200 | 200,444 | ||||||
General Motors Financial Co., Inc. | 600 | 607,293 | ||||||
Harley-Davidson Financial Services, Inc. | 435 | 430,445 | ||||||
Volkswagen International Finance NV | 600 | 590,708 | ||||||
|
| |||||||
| 2,756,365 | ||||||||
|
| |||||||
Consumer Cyclical - Retailers – 1.2% | ||||||||
CVS Health Corp. | 455 | 458,463 | ||||||
Walgreens Boots Alliance, Inc. | 430 | 429,684 | ||||||
|
| |||||||
| 888,147 | ||||||||
|
| |||||||
Consumer Non-Cyclical – 8.3% | ||||||||
AbbVie, Inc. | 265 | 267,514 | ||||||
1.80%, 5/14/18 | 165 | 165,132 | ||||||
Actavis Funding SCS | 200 | 200,957 | ||||||
Allergan, Inc./United States | 401 | 394,732 | ||||||
Amgen, Inc. | 425 | 430,519 | ||||||
Baxalta, Inc. | 448 | 446,755 | ||||||
Bayer US Finance LLC | 430 | 431,527 | ||||||
Becton Dickinson and Co. | 425 | 429,825 | ||||||
Bunge Ltd. Finance Corp. | 420 | 424,178 | ||||||
Coca-Cola Co. (The) | 530 | 528,921 | ||||||
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 9 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Express Scripts Holding Co. | $ | 420 | $ | 425,880 | ||||
Kraft Heinz Foods Co. | 485 | 486,437 | ||||||
Laboratory Corp. of America Holdings | 430 | 429,166 | ||||||
Medco Health Solutions, Inc. | 135 | 150,784 | ||||||
PepsiCo, Inc. | 435 | 434,823 | ||||||
Series 1 | 222 | 221,566 | ||||||
Whirlpool Corp. | 138 | 137,963 | ||||||
|
| |||||||
| 6,006,679 | ||||||||
|
| |||||||
Energy – 3.6% | ||||||||
Anadarko Petroleum Corp. | 405 | 419,899 | ||||||
ConocoPhillips Co. | 431 | 430,658 | ||||||
Energy Transfer Partners LP | 450 | 444,836 | ||||||
Enterprise Products Operating LLC | 435 | 431,640 | ||||||
Kinder Morgan, Inc./DE | 435 | 421,664 | ||||||
Marathon Petroleum Corp. | 419 | 422,521 | ||||||
|
| |||||||
| 2,571,218 | ||||||||
|
| |||||||
Technology – 3.9% | ||||||||
Apple, Inc. | 435 | 433,760 | ||||||
Cisco Systems, Inc. | 430 | 430,194 | ||||||
Hewlett Packard Enterprise Co. | 610 | 611,283 | ||||||
KLA-Tencor Corp. | 425 | 427,749 | ||||||
QUALCOMM, Inc. | 435 | 433,035 | ||||||
Xerox Corp. | 510 | 515,231 | ||||||
|
| |||||||
| 2,851,252 | ||||||||
|
| |||||||
| 23,416,396 | ||||||||
|
| |||||||
| 10 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Financial Institutions – 20.5% | ||||||||
Banking – 18.6% | ||||||||
ABN AMRO Bank NV | $ | 470 | $ | 476,129 | ||||
American Express Credit Corp. | 432 | 432,725 | ||||||
1.875%, 11/05/18 | 105 | 105,055 | ||||||
Bank of America Corp. | 430 | 431,274 | ||||||
5.65%, 5/01/18 | 140 | 152,305 | ||||||
Bank of Tokyo-Mitsubishi UFJ Ltd. (The) | 430 | 427,577 | ||||||
BB&T Corp. | 425 | 428,406 | ||||||
Capital One Bank USA NA | 430 | 428,653 | ||||||
Capital One Financial Corp. | 430 | 430,398 | ||||||
Capital One NA/Mclean VA | 250 | 251,185 | ||||||
Citigroup, Inc. | 85 | 84,937 | ||||||
1.85%, 11/24/17 | 185 | 185,561 | ||||||
2.15%, 7/30/18 | 140 | 140,528 | ||||||
2.50%, 7/29/19 | 175 | 175,956 | ||||||
2.65%, 10/26/20 | 115 | 114,777 | ||||||
Discover Bank/Greenwood DE | 570 | 573,125 | ||||||
Fifth Third Bancorp | 515 | 518,436 | ||||||
Fifth Third Bank/Cincinnati OH | 560 | 563,989 | ||||||
Goldman Sachs Group, Inc. (The) | 650 | 715,528 | ||||||
HSBC USA, Inc. | 430 | 426,891 | ||||||
Huntington National Bank (The) | 475 | 475,158 | ||||||
JPMorgan Chase & Co. | 430 | 429,821 | ||||||
KeyBank NA/Cleveland OH | 575 | 574,222 | ||||||
Manufacturers & Traders Trust Co. | 565 | 560,524 | ||||||
Mizuho Bank Ltd. | 430 | 428,290 | ||||||
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 11 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Morgan Stanley | $ | 125 | $ | 125,444 | ||||
1.875%, 1/05/18 | 300 | 301,530 | ||||||
Series G | 280 | 311,042 | ||||||
PNC Bank NA | 425 | 424,596 | ||||||
Regions Bank/Birmingham AL | 475 | 476,612 | ||||||
Royal Bank of Canada | 430 | 429,917 | ||||||
SunTrust Banks, Inc. | 420 | 424,325 | ||||||
UBS AG/Stamford CT | 475 | 474,057 | ||||||
US Bancorp | 130 | 130,035 | ||||||
US Bank NA/Cincinnati OH | 430 | 431,084 | ||||||
Wells Fargo & Co. | 430 | 430,314 | ||||||
|
| |||||||
| 13,490,406 | ||||||||
|
| |||||||
Insurance – 0.5% | ||||||||
Humana, Inc. | 300 | 339,049 | ||||||
|
| |||||||
REITS – 1.4% | ||||||||
Simon Property Group LP | 560 | 564,098 | ||||||
Welltower, Inc. | 197 | 199,007 | ||||||
4.70%, 9/15/17 | 215 | 225,912 | ||||||
|
| |||||||
| 989,017 | ||||||||
|
| |||||||
| 14,818,472 | ||||||||
|
| |||||||
Utility – 0.8% | ||||||||
Electric – 0.8% | ||||||||
Dominion Resources, Inc./VA | 425 | 427,493 | ||||||
Exelon Generation Co. LLC | 130 | 130,504 | ||||||
|
| |||||||
| 557,997 | ||||||||
|
| |||||||
Total Corporates – Investment Grade | 38,792,865 | |||||||
|
| |||||||
| 12 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
ASSET-BACKED SECURITIES – 20.4% | ||||||||
Autos - Fixed Rate – 11.5% | ||||||||
CarMax Auto Owner Trust | $ | 1,000 | $ | 999,951 | ||||
Fifth Third Auto Trust | 839 | 836,445 | ||||||
GM Financial Automobile Leasing Trust | 650 | 648,624 | ||||||
GMF Floorplan Owner Revolving Trust | 486 | 484,342 | ||||||
Harley-Davidson Motorcycle Trust | 812 | 813,487 | ||||||
Honda Auto Receivables Owner Trust | 1,000 | 1,000,394 | ||||||
Series 2015-4, Class A3 | 727 | 726,902 | ||||||
Hyundai Auto Lease Securitization Trust | 660 | 660,258 | ||||||
Hyundai Auto Receivables Trust | 503 | 503,000 | ||||||
Santander Drive Auto Receivables Trust | 487 | 486,601 | ||||||
Toyota Auto Receivables Owner Trust | 1,000 | 1,000,769 | ||||||
Westlake Automobile Receivables Trust | 147 | 146,952 | ||||||
|
| |||||||
| 8,307,725 | ||||||||
|
| |||||||
Credit Cards - Fixed Rate – 2.8% | ||||||||
Barclays Dryrock Issuance Trust | 1,000 | 999,777 | ||||||
Synchrony Credit Card Master Note Trust | 1,000 | 999,258 | ||||||
|
| |||||||
| 1,999,035 | ||||||||
|
| |||||||
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 13 |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Autos - Floating Rate – 2.5% | ||||||||
Ford Credit Floorplan Master Owner Trust A | $ | 903 | $ | 894,344 | ||||
GE Dealer Floorplan Master Note Trust | 900 | 893,460 | ||||||
|
| |||||||
| 1,787,804 | ||||||||
|
| |||||||
Other ABS - Fixed Rate – 2.0% | ||||||||
CIT Equipment Collateral | 924 | 924,127 | ||||||
CNH Equipment Trust | 553 | 553,647 | ||||||
|
| |||||||
| 1,477,774 | ||||||||
|
| |||||||
Credit Cards - Floating Rate – 1.6% | ||||||||
American Express Issuance Trust II | 1,200 | 1,199,230 | ||||||
|
| |||||||
Total Asset-Backed Securities | 14,771,568 | |||||||
|
| |||||||
GOVERNMENTS – TREASURIES – 11.7% | ||||||||
United States – 11.7% | ||||||||
U.S. Treasury Notes | 8,500 | 8,493,251 | ||||||
|
| |||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES – 11.0% | ||||||||
Non-Agency Fixed Rate CMBS – 9.0% | ||||||||
Citigroup Commercial Mortgage Trust | 435 | 446,877 | ||||||
Commercial Mortgage Trust | 440 | 450,941 | ||||||
GS Mortgage Securities Trust | 767 | 752,374 | ||||||
Series 2014-GC20, Class A2 | 1,000 | 1,034,147 | ||||||
JP Morgan Chase Commercial Mortgage Securities Trust | 440 | 450,172 | ||||||
| 14 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Portfolio of Investments
| Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Series 2013-C16, Class A2 | $ | 435 | $ | 449,483 | ||||
Merrill Lynch Mortgage Trust | 1,000 | 1,024,916 | ||||||
Morgan Stanley Bank of America Merrill Lynch Trust | 1,000 | 1,034,045 | ||||||
Wachovia Bank Commercial Mortgage Trust | 445 | 446,039 | ||||||
WFRBS Commercial Mortgage Trust | 430 | 446,104 | ||||||
|
| |||||||
| 6,535,098 | ||||||||
|
| |||||||
Non-Agency Floating Rate CMBS – 2.0% | ||||||||
JP Morgan Chase Commercial Mortgage Securities Trust | 1,000 | 993,434 | ||||||
Resource Capital Corp., Ltd. | 422 | 420,319 | ||||||
|
| |||||||
| 1,413,753 | ||||||||
|
| |||||||
Total Commercial Mortgage-Backed Securities | 7,948,851 | |||||||
|
| |||||||
COLLATERALIZED MORTGAGE OBLIGATIONS – 3.4% | ||||||||
Agency Fixed Rate – 2.0% | ||||||||
Federal Home Loan Mortgage Corp. REMICS | 705 | 706,697 | ||||||
Series 4459, Class CA | 674 | 710,799 | ||||||
|
| |||||||
| 1,417,496 | ||||||||
|
| |||||||
Non-Agency Floating Rate – 1.4% | ||||||||
JP Morgan Chase Commercial Mortgage Securities Trust | 1,000 | 999,132 | ||||||
|
| |||||||
Total Collateralized Mortgage Obligations | 2,416,628 | |||||||
|
| |||||||
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 15 |
Portfolio of Investments
| Company | Shares | U.S. $ Value | ||||||
| ||||||||
SHORT-TERM INVESTMENTS – 0.1% | ||||||||
Investment Companies – 0.1% | ||||||||
AB Fixed Income Shares, Inc. – Government STIF | 76,652 | $ | 76,652 | |||||
|
| |||||||
Total Investments – 100.2% | 72,499,815 | |||||||
Other assets less liabilities – (0.2)% | (127,645 | ) | ||||||
|
| |||||||
Net Assets – 100.0% | $ | 72,372,170 | ||||||
|
| |||||||
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note C)
| Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at October 31, 2015 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Sale Contracts | ||||||||||||||||||||
Citigroup Global Markets, Inc./(INTRCONX): | ||||||||||||||||||||
CDX-NAIG Series 24, | 1.00 | % | 0.79 | % | $ | 1,850 | $ | 23,008 | $ | 1,585 | ||||||||||
CDX-NAIG Series 25, | 1.00 | 0.79 | 1,300 | 15,005 | 7,380 | |||||||||||||||
CDX-NAIG Series 25, | 1.00 | 0.79 | 650 | 7,502 | 1,667 | |||||||||||||||
|
|
|
| |||||||||||||||||
| $ | 45,515 | $ | 10,632 | |||||||||||||||||
|
|
|
| |||||||||||||||||
| * | Termination date |
CENTRALLY CLEARED INTEREST RATE SWAPS (see Note C)
| Rate Type | ||||||||||||||||
| Clearing Broker/ (Exchange) | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
Citigroup Global Markets, Inc./(CME) | $ | 7,300 | 7/23/17 | 3 Month LIBOR | 0.943% | $ | 39,871 | |||||||||
Citigroup Global Markets, Inc./(CME) | 3,000 | 7/23/20 | 1.800% | 3 Month LIBOR | (62,683 | ) | ||||||||||
|
| |||||||||||||||
| $ | (22,812 | ) | ||||||||||||||
|
| |||||||||||||||
| 16 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Portfolio of Investments
| (a) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities are considered liquid and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At October 31, 2015, the aggregate market value of these securities amounted to $11,785,994 or 16.3% of net assets. |
| (b) | Floating Rate Security. Stated interest rate was in effect at October 31, 2015. |
| (c) | To obtain a copy of the fund’s financial statements, please go to the Securities and Exchange Commission’s website at www.sec.gov, or call AB at (800) 227-4618. |
| (d) | Investment in affiliated money market mutual fund. The rate shown represents the 7-day yield as of period end. |
Glossary:
ABS – Asset-Backed Securities
CDX-NAIG – North American Investment Grade Credit Default Swap Index
CMBS – Commercial Mortgage-Backed Securities
CME – Chicago Mercantile Exchange
INTRCONX – Inter-Continental Exchange
LIBOR – London Interbank Offered Rates
REIT – Real Estate Investment Trust
See notes to financial statements.
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 17 |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
October 31, 2015 (unaudited)
| Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $72,590,865) | $ | 72,423,163 | ||
Affiliated issuers (cost $76,652) | 76,652 | |||
Cash collateral due from broker | 110,666 | |||
Receivable for shares of beneficial interest sold | 828,858 | |||
Interest receivable | 273,090 | |||
|
| |||
Total assets | 73,712,429 | |||
|
| |||
| Liabilities | ||||
Due to custodian | 17,763 | |||
Payable for investment securities purchased | 1,104,767 | |||
Payable for shares of beneficial interest redeemed | 117,493 | |||
Dividends payable | 96,195 | |||
Payable for variation margin on exchange-traded derivatives | 4,041 | |||
|
| |||
Total liabilities | 1,340,259 | |||
|
| |||
Net Assets | $ | 72,372,170 | ||
|
| |||
| Composition of Net Assets | ||||
Shares of beneficial interest, at par | $ | 73 | ||
Additional paid-in capital | 73,619,671 | |||
Distributions in excess of net investment income | (16,981 | ) | ||
Accumulated net realized loss on investment transactions | (1,050,711 | ) | ||
Net unrealized depreciation on investments | (179,882 | ) | ||
|
| |||
| $ | 72,372,170 | |||
|
| |||
Net Asset Value Per Share—unlimited shares of beneficial interest authorized, $.00001 par value (based on 7,303,935 common shares outstanding) | $ | 9.91 | ||
|
|
See notes to financial statements.
| 18 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Six Months Ended October 31, 2015 (unaudited)
| Investment Income | ||||||||
Interest | $ | 553,533 | ||||||
Dividends—Affiliated issuers | 659 | |||||||
|
| |||||||
Total investment income | $ | 554,192 | ||||||
|
| |||||||
| Realized and Unrealized Gain (Loss) on Investment Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (150,832 | ) | ||||||
Swaps | 30,256 | |||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | (385,673 | ) | ||||||
Swaps | (69,100 | ) | ||||||
|
| |||||||
Net loss on investment transactions | (575,349 | ) | ||||||
|
| |||||||
Net Decrease in Net Assets from Operations | $ | (21,157 | ) | |||||
|
|
See notes to financial statements.
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 19 |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
| Six Months Ended October 31, 2015 (unaudited) | Year Ended April 30, 2015 | |||||||
| Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 554,192 | $ | 1,241,717 | ||||
Net realized gain (loss) on investment transactions | (120,576 | ) | 86,159 | |||||
Net change in unrealized appreciation/depreciation of investments | (454,773 | ) | 153,536 | |||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | (21,157 | ) | 1,481,412 | |||||
| Dividends to Shareholders from | ||||||||
Net investment income | (568,774 | ) | (1,603,900 | ) | ||||
| Transactions in Shares of Beneficial Interest | ||||||||
Net increase (decrease) | (44,625,776 | ) | 12,552,557 | |||||
|
|
|
| |||||
Total increase (decrease) | (45,215,707 | ) | 12,430,069 | |||||
| Net Assets | ||||||||
Beginning of period | 117,587,877 | 105,157,808 | ||||||
|
|
|
| |||||
End of period (including distributions in excess of net investment income of ($16,981) and ($2,399), respectively) | $ | 72,372,170 | $ | 117,587,877 | ||||
|
|
|
| |||||
See notes to financial statements.
| 20 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
October 31, 2015 (unaudited)
NOTE A
Significant Accounting Policies
AB Corporate Shares (the “Trust”) was organized as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated January 26, 2004. Prior to January 20, 2015, the Trust was known as AllianceBernstein Corporate Shares. The Trust is registered under the Investment Company Act of 1940, as an open-end, diversified management investment company. The Trust operates as a “series” company currently offering three separate portfolios: AB Corporate Income Shares, AB Municipal Income Shares and AB Taxable Multi-Sector Income Shares (the “Portfolio”). Each Portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to AB Taxable Multi-Sector Income Shares. Prior to January 20, 2015, the Portfolio was known as AllianceBernstein Taxable Multi-Sector Income Shares.
Shares of the Portfolio are offered exclusively to holders of accounts established under wrap-fee programs sponsored and maintained by certain registered investment advisers approved by AllianceBernstein L.P. (the “Adviser”). The Portfolio’s shares may be purchased at the relevant net asset value without a sales charge or other fee. The financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) which require management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Trust is an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies. The following is a summary of significant accounting policies followed by the Portfolio.
1. Security Valuation
Portfolio securities are valued at their current market value determined on the basis of market quotations or, if market quotations are not readily available or are deemed unreliable, at “fair value” as determined in accordance with procedures established by and under the general supervision of the Trust’s Board of Trustees (the “Board”).
In general, the market values of securities which are readily available and deemed reliable are determined as follows: securities listed on a national securities exchange (other than securities listed on the NASDAQ Stock Market, Inc. (“NASDAQ”)) or on a foreign securities exchange are valued at the last sale price at the close of the exchange or foreign securities exchange. If there has been no sale on such day, the securities are valued at the last traded price from the previous day. Securities listed on more than one exchange are valued by reference to the principal exchange on which the securities are traded; securities listed only on NASDAQ are valued in accordance with the NASDAQ Official Closing Price; listed or over the counter (“OTC”) market put or call options are
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 21 |
Notes to Financial Statements
��
valued at the mid level between the current bid and ask prices. If either a current bid or current ask price is unavailable, the Adviser will have discretion to determine the best valuation (e.g. last trade price in the case of listed options); open futures are valued using the closing settlement price or, in the absence of such a price, the most recent quoted bid price. If there are no quotations available for the day of valuation, the last available closing settlement price is used; U.S. Government securities and any other debt instruments having 60 days or less remaining until maturity are generally valued at market by an independent pricing vendor, if a market price is available. If a market price is not available, the securities are valued at amortized cost. This methodology is commonly used for short term securities that have an original maturity of 60 days or less, as well as short term securities that had an original term to maturity that exceeded 60 days. In instances when amortized cost is utilized, the Valuation Committee (the “Committee”) must reasonably conclude that the utilization of amortized cost is approximately the same as the fair value of the security. Such factors the Committee will consider include, but are not limited to, an impairment of the creditworthiness of the issuer or material changes in interest rates. Fixed-income securities, including mortgage-backed and asset-backed securities, may be valued on the basis of prices provided by a pricing service or at a price obtained from one or more of the major broker-dealers. In cases where broker-dealer quotes are obtained, the Adviser may establish procedures whereby changes in market yields or spreads are used to adjust, on a daily basis, a recently obtained quoted price on a security. Swaps and other derivatives are valued daily, primarily using independent pricing services, independent pricing models using market inputs, as well as third party broker-dealers or counterparties. Investment companies are valued at their net asset value each day.
Securities for which market quotations are not readily available (including restricted securities) or are deemed unreliable are valued at fair value. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, analysis of the issuer’s financial statements or other available documents. In addition, the Portfolio may use fair value pricing for securities primarily traded in non-U.S. markets because most foreign markets close well before the Portfolio values its securities at 4:00 p.m., Eastern Time. The earlier close of these foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim and may materially affect the value of those securities.
2. Fair Value Measurements
In accordance with U.S. GAAP regarding fair value measurements, fair value is defined as the price that the Portfolio would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a framework for measuring fair value, and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability (including those valued
| 22 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Notes to Financial Statements
based on their market values as described in Note A.1 above). Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Portfolio. Unobservable inputs reflect the Portfolio’s own assumptions about the assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances. Each investment is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below.
| • | Level 1—quoted prices in active markets for identical investments |
| • | Level 2—other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| • | Level 3—significant unobservable inputs (including the Portfolio’s own assumptions in determining the fair value of investments) |
The fair value of debt instruments, such as bonds, and over-the-counter derivatives is generally based on market price quotations, recently executed market transactions (where observable) or industry recognized modeling techniques and are generally classified as Level 2. Pricing vendor inputs to Level 2 valuations may include quoted prices for similar investments in active markets, interest rate curves, coupon rates, currency rates, yield curves, option adjusted spreads, default rates, credit spreads and other unique security features in order to estimate the relevant cash flows which are then discounted to calculate fair values. If these inputs are unobservable and significant to the fair value, these investments will be classified as Level 3. In addition, non-agency rated investments are classified as Level 3.
Valuations of mortgage-backed or other asset-backed securities, by pricing vendors, are based on both proprietary and industry recognized models and discounted cash flow techniques. Significant inputs to the valuation of these instruments are value of the collateral, the rates and timing of delinquencies, the rates and timing of prepayments, and default and loss expectations, which are driven in part by housing prices for residential mortgages. Significant inputs are determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles, including relevant indices. Mortgage and asset-backed securities for which management has collected current observable data through pricing services are generally categorized within Level 2. Those investments for which current observable data has not been provided are classified as Level 3.
Other fixed income investments, including non-U.S. government and corporate debt, are generally valued using quoted market prices, if available, which are typically impacted by current interest rates, maturity dates and any perceived credit risk of the issuer. Additionally, in the absence of quoted market prices,
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 23 |
Notes to Financial Statements
these inputs are used by pricing vendors to derive a valuation based upon industry or proprietary models which incorporate issuer specific data with relevant yield/spread comparisons with more widely quoted bonds with similar key characteristics. Those investments for which there are observable inputs are classified as Level 2. Where the inputs are not observable, the investments are classified as Level 3.
The following table summarizes the valuation of the Portfolio’s investments by the above fair value hierarchy levels as of October 31, 2015:
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Corporates – Investment Grade | $ | – 0 | – | $ | 38,792,865 | $ | – 0 | – | $ | 38,792,865 | ||||||
Asset-Backed Securities | – 0 | – | 13,293,794 | 1,477,774 | 14,771,568 | |||||||||||
Governments – Treasuries | – 0 | – | 8,493,251 | – 0 | – | 8,493,251 | ||||||||||
Commercial Mortgage-Backed Securities | – 0 | – | 6,923,935 | 1,024,916 | 7,948,851 | |||||||||||
Collateralized Mortgage Obligations | – 0 | – | 2,416,628 | – 0 | – | 2,416,628 | ||||||||||
Short-Term Investments | 76,652 | – 0 | – | – 0 | – | 76,652 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 76,652 | 69,920,473 | 2,502,690 | 72,499,815 | ||||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets: | ||||||||||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | 10,632 | – 0 | – | 10,632 | # | |||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | 39,871 | – 0 | – | 39,871 | # | |||||||||
Liabilities: | ||||||||||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | (62,683 | ) | – 0 | – | (62,683 | )# | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total^ | $ | 76,652 | $ | 69,908,293 | $ | 2,502,690 | $ | 72,487,635 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| * | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
| # | Only variation margin receivable/payable at period end is reported within the statement of assets and liabilities. This amount reflects cumulative appreciation/(depreciation) of exchange-traded derivatives as reported in the portfolio of investments. |
| ^ | There were no transfers between any levels during the reporting period. |
The Portfolio recognizes all transfers between levels of the fair value hierarchy assuming the financial instruments were transferred at the beginning of the reporting period.
| 24 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Notes to Financial Statements
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value.
| Asset-Backed Securities | Commercial Mortgage-Backed Securities | Total | ||||||||||
Balance as of 4/30/15 | $ | 1,554,193 | $ | – 0 | – | $ | 1,554,193 | |||||
Accrued discounts/(premiums) | 22 | (573 | ) | (551 | ) | |||||||
Realized gain (loss) | 4 | (2,883 | ) | (2,879 | ) | |||||||
Change in unrealized appreciation/depreciation | (112 | ) | (15,546 | ) | (15,658 | ) | ||||||
Purchases/Payups | – 0 | – | 1,638,655 | 1,638,655 | ||||||||
Sales/Paydowns | (76,333 | ) | (594,737 | ) | (671,070 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
|
|
|
|
|
| |||||||
Balance as of 10/31/15 | $ | 1,477,774 | $ | 1,024,916 | $ | 2,502,690 | ||||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from Investments held as of 10/31/15* | $ | (112 | ) | $ | (15,546 | ) | $ | (15,658 | ) | |||
|
|
|
|
|
| |||||||
| * | The unrealized appreciation/depreciation is included in net change in unrealized appreciation/depreciation on investments and other financial instruments in the accompanying statement of operations. |
As of October 31, 2015, all Level 3 securities were priced by third party vendors.
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the Portfolio. The Committee operates under pricing and valuation policies and procedures established by the Adviser and approved by the Board, including pricing policies which set forth the mechanisms and processes to be employed on a daily basis to implement these policies and procedures. In particular, the pricing policies describe how to determine market quotations for securities and other instruments. The Committee’s responsibilities include: 1) fair value and liquidity determinations (and oversight of any third parties to whom any responsibility for fair value and liquidity determinations is delegated), and 2) regular monitoring of the Adviser’s pricing and valuation policies and procedures and modification or enhancement of these policies and procedures (or recommendation of the modification of these policies and procedures) as the Committee believes appropriate.
The Committee is also responsible for monitoring the implementation of the pricing policies by the Adviser’s Pricing Group (the “Pricing Group”) and a third party which performs certain pricing functions in accordance with the pricing policies. The Pricing Group is responsible for the oversight of the third party on a day-to-day basis. The Committee and the Pricing Group perform a series of activities to provide reasonable assurance of the accuracy of prices including: 1) periodic vendor due diligence meetings, review of methodologies, new developments and processes at vendors, 2) daily comparison of security valuation versus prior day for all securities that exceeded established thresholds, and
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 25 |
Notes to Financial Statements
3) daily review of unpriced, stale, and variance reports with exceptions reviewed by senior management and the Committee.
In addition, several processes outside of the pricing process are used to monitor valuation issues including: 1) performance and performance attribution reports are monitored for anomalous impacts based upon benchmark performance, and 2) portfolio managers review all portfolios for performance and analytics (which are generated using the Adviser’s prices).
3. Taxes
It is the Portfolio’s policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its investment company taxable income and net realized gains, if any, to shareholders. Therefore, no provisions for federal income or excise taxes are required.
In accordance with U.S. GAAP requirements regarding accounting for uncertainties in income taxes, management has analyzed the Portfolio’s tax positions taken or expected to be taken on federal and state income tax returns for all open tax years (the current and the prior three tax years) and has concluded that no provision for income tax is required in the Portfolio’s financial statements.
4. Investment Income and Investment Transactions
Dividend income is recorded on the ex-dividend date or as soon as the Portfolio is informed of the dividend. Interest income is accrued daily. Investment transactions are accounted for on the date the securities are purchased or sold. Investment gains or losses are determined on the identified cost basis. The Portfolio amortizes premiums and accretes discounts as adjustments to interest income.
5. Dividends and Distributions
Dividends and distributions to shareholders, if any, are recorded on the ex-dividend date. Income dividends and capital gains distributions are determined in accordance with federal tax regulations and may differ from those determined in accordance with U.S. GAAP. To the extent these differences are permanent, such amounts are reclassified within the capital accounts based on their federal tax basis treatment; temporary differences do not require such reclassification.
NOTE B
Advisory Fee and Other Transactions with Affiliates
Under the terms of the Advisory Agreement, the Portfolio pays no advisory fee to the Adviser and the Adviser reimburses or pays for the Portfolio’s operating expenses. The Portfolio is an integral part of separately managed accounts in wrap-fee programs and other investment programs. Typically, participants in these programs pay a fee to their investment adviser for all costs and expenses of the separately managed account, including costs and expenses associated with the Portfolio, and a fee is paid by their investment adviser to the Adviser. The
| 26 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Notes to Financial Statements
Adviser serves as investment manager and adviser of the Portfolio and continuously furnishes an investment program for the Portfolio and manages, supervises and conducts the affairs of the Portfolio, subject to the supervisions of the Portfolio’s Board. The Advisory Agreement provides that the Adviser or an affiliate will furnish, or pay the expenses of the Portfolio for, office space, facilities and equipment, services of executive and other personnel of the Portfolio and certain administrative services.
The Portfolio has entered into a Distribution Agreement with AllianceBernstein Investments, Inc., the Portfolio’s principal underwriter (the “Underwriter”), to permit the Underwriter to distribute the Portfolio’s shares, which are sold at their net asset value without any sales charge. The Portfolio does not pay a fee for this service. The Underwriter is a wholly owned subsidiary of the Adviser.
AllianceBernstein Investor Services, Inc. (“ABIS”), a wholly-owned subsidiary of the Adviser, acts as the Portfolio’s registrar, transfer agent and dividend-disbursing agent. ABIS registers the transfer, issuance and redemption of Portfolio shares and disburses dividends and other distributions to Portfolio shareholders. The Portfolio does not pay a fee for this service.
The Portfolio may invest in the AB Fixed-Income Shares, Inc. – Government STIF Portfolio (“Government STIF Portfolio”), an open-end management investment company managed by the Adviser. The Government STIF Portfolio is offered as a cash management option to mutual funds and other institutional accounts of the Adviser, and is not available for direct purchase by members of the public. The Government STIF Portfolio pays no investment management fees but does bear its own expenses. A summary of the Portfolio’s transactions in shares of the Government STIF Portfolio for the six months ended October 31, 2015 is as follows:
Market Value April 30, 2015 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value October 31, 2015 (000) | Dividend Income (000) | ||||||||||||
| $ 438 | $ | 36,470 | $ | 36,831 | $ | 77 | $ | 1 | ||||||||
Brokerage commissions paid on investment transactions for the six months ended October 31, 2015 amounted to $0, of which $0 and $0, respectively, was paid to Sanford C. Bernstein & Co. LLC and Sanford C. Bernstein Limited, affiliates of the Adviser.
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 27 |
Notes to Financial Statements
NOTE C
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the six months ended October 31, 2015, were as follows:
| Purchases | Sales | |||||||
Investment securities (excluding | $ | 32,988,727 | $ | 67,317,212 | ||||
U.S. government securities | 25,648,656 | 33,837,551 | ||||||
The cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation are as follows:
Gross unrealized appreciation | $ | 82,922 | ||
Gross unrealized depreciation | (250,624 | ) | ||
|
| |||
Net unrealized depreciation | $ | (167,702 | ) | |
|
|
1. Derivative Financial Instruments
The Portfolio may use derivatives in an effort to earn income and enhance returns, to replace more traditional direct investments, to obtain exposure to otherwise inaccessible markets (collectively, “investment purposes”), or to hedge or adjust the risk profile of its portfolio.
The principal type of derivative utilized by the Portfolio, as well as the methods in which they may be used are:
| • | Swaps |
The Portfolio may enter into swaps to hedge its exposure to interest rates, credit risk, or currencies. The Portfolio may also enter into swaps for non-hedging purposes as a means of gaining market exposures, including by making direct investments in foreign currencies, as described below under “Currency Transactions”. A swap is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to changes in specified prices or rates for a specified amount of an underlying asset. The payment flows are usually netted against each other, with the difference being paid by one party to the other. In addition, collateral may be pledged or received by the Portfolio in accordance with the terms of the respective swaps to provide value and recourse to the Portfolio or its counterparties in the event of default, bankruptcy or insolvency by one of the parties to the swap.
Risks may arise as a result of the failure of the counterparty to the swap to comply with the terms of the swap. The loss incurred by the failure of a counterparty is generally limited to the net interim payment to be received by the Portfolio, and/or the termination value at the end of the contract. Therefore, the Portfolio considers the creditworthiness of each counterparty
| 28 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Notes to Financial Statements
to a swap in evaluating potential counterparty risk. This risk is mitigated by having a netting arrangement between the Portfolio and the counterparty and by the posting of collateral by the counterparty to the Portfolio to cover the Portfolio’s exposure to the counterparty. Additionally, risks may arise from unanticipated movements in interest rates or in the value of the underlying securities. The Portfolio accrues for the interim payments on swaps on a daily basis, with the net amount recorded within unrealized appreciation/depreciation of swaps on the statement of assets and liabilities, where applicable. Once the interim payments are settled in cash, the net amount is recorded as realized gain/(loss) on swaps on the statement of operations, in addition to any realized gain/(loss) recorded upon the termination of swaps. Upfront premiums paid or received are recognized as cost or proceeds on the statement of assets and liabilities and are amortized on a straight line basis over the life of the contract. Amortized upfront premiums are included in net realized gain/(loss) from swaps on the statement of operations. Fluctuations in the value of swaps are recorded as a component of net change in unrealized appreciation/depreciation of swaps on the statement of operations.
Certain standardized swaps, including certain interest rate swaps and credit default swaps, are (or soon will be) subject to mandatory central clearing. Cleared swaps are transacted through futures commission merchants (“FCMs”) that are members of central clearinghouses, with the clearinghouse serving as central counterparty, similar to transactions in futures contracts. Centralized clearing will be required for additional categories of swaps on a phased-in basis based on requirements published by the Securities and Exchange Commission and Commodity Futures Trading Commission.
At the time the Portfolio enters into a centrally cleared swap, the Portfolio deposits and maintains as collateral an initial margin with the broker, as required by the clearinghouse on which the transaction is effected. Such amount is shown as cash collateral due from broker on the statement of assets and liabilities. Pursuant to the contract, the Portfolio agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as variation margin and are recorded by the Portfolio as unrealized gains or losses. Risks may arise from the potential of a counterparty to meet the terms of the contract. The credit/counterparty risk for centrally cleared swaps is generally less than non-centrally cleared swaps, since the clearinghouse, which is the issuer or counterparty to each centrally cleared swap, has robust risk mitigation standards, including the requirement to provide initial and variation margin. When the contract is closed, the Portfolio records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the time it was closed.
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 29 |
Notes to Financial Statements
Interest Rate Swaps:
The Portfolio is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. Because the Portfolio holds fixed rate bonds, the value of these bonds may decrease if interest rates rise. To help hedge against this risk and to maintain its ability to generate income at prevailing market rates, the Portfolio may enter into interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional amount. The Portfolio may elect to pay a fixed rate and receive a floating rate, or, receive a fixed rate and pay a floating rate on a notional amount.
In addition, the Portfolio may also enter into interest rate swap transactions to preserve a return or spread on a particular investment or portion of its portfolio, or protecting against an increase in the price of securities the Portfolio anticipates purchasing at a later date. Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed rate payments) computed based on a contractually-based principal (or “notional”) amount. Interest rate swaps are entered into on a net basis (i.e., the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments).
During the six months ended October 31, 2015, the Portfolio held interest rate swaps for hedging purposes.
Inflation (CPI) Swaps:
Inflation swaps are contracts in which one party agrees to pay the cumulative percentage increase in a price index (the Consumer Price Index with respect to CPI swaps) over the term of the swap (with some lag on the inflation index), and the other pays a compounded fixed rate. Inflation swaps may be used to protect the net asset value, or NAV, of a Portfolio against an unexpected change in the rate of inflation measured by an inflation index since the value of these agreements is expected to increase if unexpected inflation increases.
During the six months ended October 31, 2015, the Portfolio held inflation (CPI) swaps for non-hedging purposes.
Credit Default Swaps:
The Portfolio may enter into credit default swaps, including to manage its exposure to the market or certain sectors of the market, to reduce its risk exposure to defaults by corporate and sovereign issuers held by the Portfolio, or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. The Portfolio may purchase credit protection (“Buy Contract”) or provide credit protection (“Sale Contract”) on the referenced obligation of the credit default swap. During the term of the swap, the Portfolio receives/(pays) fixed payments from/(to) the respective counterparty, calculated at the agreed
| 30 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Notes to Financial Statements
upon rate applied to the notional amount. If the Portfolio is a buyer/(seller) of protection and a credit event occurs, as defined under the terms of the swap, the Portfolio will either (i) receive from the seller/(pay to the buyer) of protection an amount equal to the notional amount of the swap (the “Maximum Payout Amount”) and deliver/(take delivery of) the referenced obligation or (ii) receive/(pay) a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation.
In certain circumstances Maximum Payout Amounts may be partially offset by recovery values of the respective referenced obligations, upfront premium received upon entering into the agreement, or net amounts received from settlement of buy protection credit default swaps entered into by the Portfolio for the same reference obligation with the same counterparty. As of October 31, 2015, the Portfolio did not have Buy Contracts outstanding with respect to the same referenced obligation and same counterparty for its Sale Contracts outstanding.
Credit default swaps may involve greater risks than if a Portfolio had invested in the referenced obligation directly. Credit default swaps are subject to general market risk, liquidity risk, counterparty risk and credit risk. If the Portfolio is a buyer of protection and no credit event occurs, it will lose the payments it made to its counterparty. If the Portfolio is a seller of protection and a credit event occurs, the value of the referenced obligation received by the Portfolio coupled with the periodic payments previously received, may be less than the Maximum Payout Amount it pays to the buyer, resulting in a net loss to the Portfolio.
During the six months ended October 31, 2015, the Portfolio held credit default swaps for non-hedging purposes.
Implied credit spreads over U.S. Treasuries of comparable maturity utilized in determining the market value of credit default swaps on issuers as of period end are disclosed in the portfolio of investments. The implied spreads serve as an indicator of the current status of the payment/performance risk and typically reflect the likelihood of default by the issuer of the referenced obligation. The implied credit spread of a particular reference obligation also reflects the cost of buying/selling protection and may reflect upfront payments required to be made to enter into the agreement. Widening credit spreads typically represent a deterioration of the referenced obligation’s credit soundness and greater likelihood of default or other credit event occurring as defined under the terms of the agreement. A credit spread identified as “Defaulted” indicates a credit event has occurred for the referenced obligation.
The Portfolio typically enters into International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreement”) or similar master
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 31 |
Notes to Financial Statements
agreements (collectively, “Master Agreements”) with its derivative contract counterparties in order to, among other things, reduce its credit risk to counterparties. ISDA Master Agreements include provisions for general obligations, representations, collateral and events of default or termination. Under an ISDA Master Agreement, the Portfolio typically may offset with the counterparty certain derivative financial instrument’s payables and/or receivables with collateral held and/or posted and create one single net payment (close-out netting) in the event of default or termination.
Various Master Agreements govern the terms of certain transactions with counterparties, including transactions such as derivative transactions, repurchase and reverse repurchase agreements. These Master Agreements typically attempt to reduce the counterparty risk associated with such transactions by specifying credit protection mechanisms and providing standardization that improves legal certainty. Cross-termination provisions under Master Agreements typically provide that a default in connection with one transaction between the Portfolio and a counterparty gives the non-defaulting party the right to terminate any other transactions in place with the defaulting party to create one single net payment due to/due from the defaulting party. In the event of a default by a Master Agreements counterparty, the return of collateral with market value in excess of the Portfolio’s net liability, held by the defaulting party, may be delayed or denied.
The Portfolio’s Master Agreements may contain provisions for early termination of OTC derivative transactions in the event the net assets of the Portfolio decline below specific levels (“net asset contingent features”). If these levels are triggered, the Portfolio’s counterparty has the right to terminate such transaction and require the Portfolio to pay or receive a settlement amount in connection with the terminated transaction. For additional details, please refer to netting arrangements by counterparty tables below.
At October 31, 2015, the Portfolio had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of | Fair Value | Statement of | Fair Value | ||||||||
Interest rate contracts | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 39,871 | * | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 62,683 | * | ||||
Credit contracts | Receivable/Payable for variation margin on exchange-traded derivatives | 10,632 | * | |||||||||
|
|
|
| |||||||||
Total | $ | 50,503 | $ | 62,683 | ||||||||
|
|
|
| |||||||||
| * | Only variation margin receivable/payable at period end is reported within the statement of assets and liabilities. This amount reflects cumulative appreciation/(depreciation) of exchange-traded derivatives as reported in the portfolio of investments. |
| 32 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Notes to Financial Statements
The effect of derivative instruments on the statement of operations for the six months ended October 31, 2015:
Derivative Type | Location of Gain | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | $ | (6,430 | ) | $ | (25,488 | ) | |||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 36,686 | (43,612 | ) | ||||||
|
|
|
| |||||||
Total | $ | 30,256 | $ | (69,100 | ) | |||||
|
|
|
| |||||||
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the six months ended October 31, 2015:
Inflation Swaps: | ||||
Average notional amount | $ | 2,616,667 | (a) | |
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 10,300,000 | (b) | |
Credit Default Swaps: | ||||
Average notional amount of sale contracts | $ | 3,630,000 | (c) | |
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of sale contracts | $ | 5,750,000 | (d) |
| (a) | Positions were open for three months during the period. |
| (b) | Positions were open for four months during the period. |
| (c) | Positions were open for five months during the period. |
| (d) | Positions were open for two months during the period. |
For financial reporting purposes, the Portfolio does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the statement of assets and liabilities.
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 33 |
Notes to Financial Statements
All derivatives held at period end were subject to netting arrangements. The following table presents the Portfolio’s derivative assets and liabilities by counterparty net of amounts available for offset under Master Agreements (“MA”) and net of the related collateral received/ pledged by the Portfolio as of October 31, 2015:
| Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged* | Security Collateral Pledged | Net Amount of Derivatives Liabilities | |||||||||||||||
Exchange-Traded Derivatives: | ||||||||||||||||||||
Citigroup Global Markets, Inc.** | $ | 4,041 | $ | – 0 | – | $ | (4,041 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 4,041 | $ | – 0 | – | $ | (4,041 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| * | The actual collateral received/pledged may be more than the amount reported due to overcollateralization. |
| ** | Cash has been posted for initial margin requirements for exchange traded derivatives outstanding at October 31, 2015. |
2. Currency Transactions
The Fund may invest in non-U.S. dollar securities on a currency hedged or unhedged basis. The Fund may seek investment opportunities by taking long or short positions in currencies through the use of currency-related derivatives, including forward currency exchange contracts, futures and options on futures, swaps, and other options. The Fund may enter into transactions for investment opportunities when it anticipates that a foreign currency will appreciate or depreciate in value but securities denominated in that currency are not held by the Fund and do not present attractive investment opportunities. Such transactions may also be used when the Adviser believes that it may be more efficient than a direct investment in a foreign currency-denominated security. The Fund may also conduct currency exchange contracts on a spot basis (i.e., for cash at the spot rate prevailing in the currency exchange market for buying or selling currencies).
NOTE D
Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
| Shares | Amount | |||||||||||||||||||
| Six Months Ended October 31, 2015 (unaudited) | Year Ended April 30, 2015 | Six Months Ended October 31, 2015 (unaudited) | Year Ended April 30, 2015 | |||||||||||||||||
|
| |||||||||||||||||||
| Class A | ||||||||||||||||||||
Shares sold | 5,700,947 | 11,850,429 | $ | 56,597,671 | $ | 118,033,526 | ||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (10,193,046 | ) | (10,606,563 | ) | (101,223,447 | ) | (105,480,969 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (4,492,099 | ) | 1,243,866 | $ | (44,625,776 | ) | $ | 12,552,557 | ||||||||||||
| ||||||||||||||||||||
| 34 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Notes to Financial Statements
NOTE E
Risks Involved in Investing in the Portfolio
Interest Rate Risk and Credit Risk—Interest rate risk is the risk that changes in interest rates will affect the value of the Portfolio’s investments in fixed-income debt securities such as bonds or notes. Increases in interest rates may cause the value of the Portfolio’s investments to decline. Credit risk is the risk that the issuer or guarantor of a debt security, or the counterparty to a derivative contract, will be unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. The degree of risk for a particular security may be reflected in its credit rating. Credit risk is greater for medium quality and lower-rated securities. Lower-rated debt securities and similar unrated securities (commonly known as “junk bonds”) have speculative elements or are predominantly speculative risks.
Below Investment Grade Securities—These securities may be subject to greater price volatility due to such factors as specific corporate developments, interest rate sensitivity, negative perceptions of the junk bond market generally and less secondary market liquidity.
Inflation Risk—This is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the value of the Portfolio’s assets can decline as can the value of the Portfolio’s distributions. This risk is significantly greater for fixed-income securities with longer maturities.
Foreign (Non-U.S.) Risk—Investment in securities of non-U.S. issuers may involve more risk than those of U.S. issuers. These securities may fluctuate more widely in price and may be less liquid due to adverse market, economic, political, regulatory or other factors.
Emerging Market Risk—Investments in emerging market countries may have more risk because the markets are less developed and less liquid, as well as being subject to increased economic, political, regulatory, or other uncertainties.
Currency Risk—Fluctuations in currency exchange rates may negatively affect the value of the Portfolio’s investments or reduce its returns.
Prepayment Risk—The value of mortgage-related or asset-backed securities may be particularly sensitive to changes in prevailing interest rates. Early payments of principal on some mortgage-related securities may occur during periods of falling mortgage interest rates and expose the Portfolio to a lower rate of return upon reinvestment of principal. Early payments associated with mortgage-related securities cause these securities to experience significantly greater price and yield volatility than is experienced by traditional fixed-income securities. During periods of rising interest rates, a reduction in prepayments may increase the effective life of mortgage-related securities, subjecting them to greater risk of decline in
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 35 |
Notes to Financial Statements
market value in response to rising interest rates. If the life of a mortgage-related security is inaccurately predicted, the Portfolio may not be able to realize the rate of return it expected.
Derivatives Risk—The Portfolio may enter into derivative transactions such as forwards, options, futures and swaps. Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Portfolio, and subject to counterparty risk to a greater degree than more traditional investments. Derivatives may result in significant losses, including losses that are far greater than the value of the derivatives reflected on the statement of assets and liabilities.
Leverage Risk—When the Portfolio borrows money or otherwise leverages its investments, its performance may be volatile because leverage tends to exaggerate the effect of any increase or decrease in the value of the Portfolio’s investments. The Portfolio may create leverage through the use of reverse repurchase arrangements, forward currency exchange contracts, forward commitments, dollar rolls or futures or by borrowing money. The use of derivative instruments by the Portfolio, such as forwards, futures, options and swaps, may also result in a form of leverage. Leverage may result in higher returns to the Portfolio than if the Portfolio were not leveraged, but may also adversely affect returns, particularly if the market is declining.
Indemnification Risk—In the ordinary course of business, the Portfolio enters into contracts that contain a variety of indemnifications. The Portfolio’s maximum exposure under these arrangements is unknown. However, the Portfolio has not had prior claims or losses pursuant to these indemnification provisions and expects the risk of loss thereunder to be remote. Therefore, the Portfolio has not accrued any liability in connection with these indemnification provisions.
NOTE F
Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended April 30, 2015 and April 30, 2014 were as follows:
| 2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 1,603,900 | $ | 634,567 | ||||
|
|
|
| |||||
Total taxable distributions paid | $ | 1,603,900 | $ | 634,567 | ||||
|
|
|
| |||||
| 36 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Notes to Financial Statements
As of April 30, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 181,820 | ||
Accumulated capital and other losses | (908,571 | )(a) | ||
Unrealized appreciation/(depreciation) | 199,083 | (b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | (527,668 | )(c) | |
|
|
| (a) | As of April 30, 2015, the Portfolio had a net capital loss carryforward of $906,536. As of that date, the cumulative deferred loss on straddles was $2,035. |
| (b) | The differences between book-basis and tax-basis unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses on wash sales and the tax treatment of swaps. |
| (c) | The difference between book-basis and tax-basis components of accumulated earnings/(deficit) is attributable primarily to dividends payable. |
For tax purposes, net capital losses may be carried over to offset future capital gains, if any. Funds are permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an indefinite period, and such losses will retain their character as either short-term or long-term capital losses. As of April 30, 2015, the Portfolio had a net short-term capital loss carryforward of $905,818 and a net long-term capital loss carryforward of $718 which may be carried forward for an indefinite period.
NOTE G
New Accounting Pronouncement
In May 2015, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”), ASU 2015-07, which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The ASU also removes the disclosure requirement for investments not valued at net asset value. The ASU is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. At this time, management is evaluating the implications of these changes on the financial statements.
NOTE H
Subsequent Events
Management has evaluated subsequent events for possible recognition or disclosure in the financial statements through the date the financial statements are issued. Management has determined that there are no material events that would require disclosure in the Portfolio’s financial statements through this date.
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 37 |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Beneficial Interest Outstanding Throughout Each Period
Six Months (unaudited) | Year Ended April 30, | September 15, 2011 | ||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 9.97 | $ 9.97 | $ 9.97 | $ 10.17 | $ 10.09 | $ 10.00 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(b) | .08 | .09 | .10 | .10 | .32 | .24 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | (.06 | ) | .03 | .02† | .15† | .08 | .09 | |||||||||||||||||
|
| |||||||||||||||||||||||
Net increase in net asset value from operations | .02 | .12 | .12 | .25 | .40 | .33 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.08 | ) | (.12 | ) | (.12 | ) | (.14 | ) | (.32 | ) | (.24 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | – 0 | – | (.31 | ) | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.08 | ) | (.12 | ) | (.12 | ) | (.45 | ) | (.32 | ) | (.24 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 9.91 | $ 9.97 | $ 9.97 | $ 9.97 | $ 10.17 | $ 10.09 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(c) | .19 | % | 1.16 | % | 1.22 | % | 2.47 | % | 4.05 | % | 3.31 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period | $72,372 | $117,588 | $105,158 | $67,791 | $10,174 | $10,124 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Net investment income | 1.50 | %^ | .89 | % | 1.04 | % | 1.05 | % | 3.17 | % | 3.79 | %^ | ||||||||||||
Portfolio turnover rate | 79 | % | 109 | % | 150 | % | 66 | % | 156 | % | 10 | % | ||||||||||||
See footnote summary on page 39.
| 38 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Financial Highlights
| (a) | Commencement of operations. |
| (b) | Based on average shares outstanding. |
| (c) | Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and redemption on the last day of the period. Total return does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Total investment return calculated for a period of less than one year is not annualized. |
| † | Due to timing of sales and repurchase of capital shares, the net realized and unrealized gain (loss) per share is not in accord with the Portfolio’s change in net realized and unrealized gain (loss) on investment transactions for the period. |
| ^ | Annualized. |
See notes to financial statements.
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 39 |
Financial Highlights
BOARD OF TRUSTEES
Marshall C. Turner, Jr.(1) , Chairman John H. Dobkin(1) Michael J. Downey(1) William H. Foulk, Jr.(1) D. James Guzy(1) | Nancy P. Jacklin(1) Robert M. Keith, President and Chief Executive Officer Garry L. Moody(1) Earl D. Weiner(1) |
OFFICERS
Philip L. Kirstein, Douglas J. Peebles(2), Paul J. DeNoon(2), Vice President Scott A. DiMaggio(2), Vice President Shawn E. Keegan(2), Vice President | Greg J. Wilensky(2), Vice President Emilie D. Wrapp, Secretary Joseph J. Mantineo, Treasurer and Chief Financial Officer Phyllis J. Clarke, Controller Vincent S. Noto, Chief Compliance Officer |
Custodian and Accounting Agent State Street Bank and Trust Company
Principal Underwriter AllianceBernstein Investments, Inc.
Transfer Agent AllianceBernstein Investor Services, Inc. | Legal Counsel Seward & Kissel LLP One Battery Park Plaza New York, NY 10004
Independent Registered Public Accounting Firm Ernst & Young LLP 5 Times Square New York, NY 10036 |
| (1) | Member of the Audit Committee, the Governance and Nominating Committee and the Independent Directors Committee. |
| (2) | The day-to-day management of, and investment decisions for, the Trust’s portfolio are made by the Adviser’s Core Fixed-Income Team. Messrs. Paul J. DeNoon, Scott A. DiMaggio, Shawn E. Keegan, Douglas J. Peebles and Greg J. Wilensky are the investment professionals primarily responsible for the day-to-day management of the Trust’s portfolio. |
| 40 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
Board of Trustees
THE FOLLOWING IS NOT PART OF THE SHAREHOLDER REPORT OR THE FINANCIAL STATEMENTS
SUMMARY OF SENIOR OFFICER’S EVALUATION OF INVESTMENT ADVISORY AGREEMENT1
The following is a summary of the evaluation of the Investment Advisory Agreement between AllianceBernstein L.P. (the “Adviser”) and AB Corporate Shares (the “Trust”) with respect to AB Taxable Multi-Sector Income Shares (the “Portfolio”).2 The evaluation of the Investment Advisory Agreement was prepared by Philip L. Kirstein, the Senior Officer of the Trust, for the Trustees of the Trust, as required by the September 1, 2004 Assurance of Discontinuance (“AoD”) between the Adviser and the New York State Attorney General (the “NYAG”). The Senior Officer’s evaluation of the Investment Advisory Agreement is not meant to diminish the responsibility or authority of the Board of Trustees to perform its duties pursuant to Section 15 of the Investment Company Act of 1940 Act (the “40 Act”) and applicable state law. The purpose of this summary is to provide shareholders with a synopsis of the independent evaluation of the reasonableness of the advisory fees proposed to be paid by the Portfolio which was provided to the Trustees in connection with their review of the proposed approval of the continuance of the Investment Advisory Agreement.
The Senior Officer’s evaluation considered the following factors:
| 1. | Advisory fees charged to institutional and other clients of the Adviser for like services; |
| 2. | Advisory fees charged by other mutual fund companies for like services; |
| 3. | Costs to the Adviser and its affiliates of supplying services pursuant to the advisory agreement, excluding any intra-corporate profit; |
| 4. | Profit margins of the Adviser and its affiliates from supplying such services; |
| 5. | Possible economies of scale as the Portfolio grows larger; and |
| 6. | Nature and quality of the Adviser’s services including the performance of the Portfolio. |
These factors, with the exception of the first factor, are generally referred to as the “Gartenberg factors,” which were articulated by the United States Court of Appeals for the Second Circuit in 1982. Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F. 2d 923 (2d Cir. 1982). On March 30, 2010, the Supreme Court held the Gartenberg decision was correct in its basic formulation of what Section 36(b) requires: to face liability under Section 36(b), “an investment adviser must charge a
| 1 | The Senior Officer’s fee evaluation was completed on October 22, 2015 and discussed with the Board of Trustees on November 3-5, 2015. |
| 2 | Future references to the Portfolio do not include “AB.” |
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 41 |
fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining”Jones v. Harris Associates L.P., 130 S. Ct. 1418 (2010). In Jones, the Court stated the Gartenberg approach fully incorporates the correct understanding of fiduciary duty within the context of Section 36(b) and noted with approval that “Gartenberg insists that all relevant circumstances be taken into account” and “uses the range of fees that might result from arm’s-length bargaining as the benchmark for reviewing challenged fees.”3
PORTFOLIO’S EXEMPTION FROM ADVISORY FEES OR EXPENSES
The Portfolio pays no advisory fee to the Adviser for receiving the services to be provided pursuant to the Investment Advisory Agreement. The Portfolio is designed to serve the needs of providers of separately managed accounts (“SMAs”).4 Since SMA clients pay their wrap program provider a unitary fee for managing all investments of their portfolio, the Portfolio will not pay an advisory fee. The Adviser will also reimburse the Portfolio for all of its other operating expenses, except certain extraordinary expenses, taxes, brokerage costs and the interest on borrowed money.
The Portfolio is designed as a component of an institutional fixed-income mandate, Core Plus (“Core Plus SMA”), for SMA clients. Core Plus SMA is modeled on the Adviser’s U.S. Strategic Core Plus investment mandate. Core Plus SMA uses a 60% allocation to direct investments in individual U.S. Government/U.S. agency securities, including pass-thru agency mortgage-backed securities, or cash investments, complemented by a 40% allocation to the Portfolio in order to achieve the approximate exposures of the U.S. Strategic Core Plus investment mandate. The Portfolio’s role as a component of Core Plus SMA calls for the Portfolio to utilize leverage in certain circumstances.
The Portfolio’s net assets on September 30, 2015 are set forth below:
| Portfolio | 9/30/15 Net Assets ($MM) | |||
Taxable Multi-Sector Income Shares | $ | 61.2 | ||
The Portfolio, which offers only one no-load class of shares, is distributed through its principal underwriter, AllianceBernstein Investments, Inc. (“ABI”). Since the Portfolio is reimbursed by the Adviser for its operating expenses, the Portfolio does not have a distribution plan pursuant to Rule 12b-1 under the 40 Act.
| 3 | Jones v. Harris at 1427. |
| 4 | The wrap program providers that offer SMAs currently employ the Adviser as one of several investment managers, and compensate the Adviser on the basis of all SMA assets managed by it, which would include assets of Taxable Multi-Sector Income Shares. |
| 42 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
| I. | ADVISORY FEES CHARGED TO INSTITUTIONAL AND OTHER CLIENTS |
The advisory fees charged to investment companies which the Adviser manages and sponsors are normally higher than those charged to similar sized institutional accounts, including pension plans and sub-advised investment companies. The fee differential reflects, among other things, different services provided to such clients, and different liabilities assumed. Services provided by the Adviser to the Portfolio that are not provided to non-investment company clients include providing office space and personnel to serve as Fund Officers, who among other responsibilities make the certifications required under the Sarbanes-Oxley Act of 2002, and coordinating with and monitoring the Portfolio’s third party service providers such as Fund counsel, auditors, custodians, transfer agents and pricing services. The accounting, administrative, legal and compliance requirements for the Portfolio are more costly than those for institutional client assets due to the greater complexities and time required for investment companies. The Adviser also believes that it incurs substantial entrepreneurial risk when offering a new mutual fund since establishing a new mutual fund requires a large upfront investment and it may take a long time for the fund to achieve profitability since the fund must be priced to scale from inception in order to be competitive and assets are acquired one account at a time. In addition, managing the cash flow of an investment company may be more difficult than that of a stable pool of assets, such as an institutional account with little cash movement in either direction, particularly if the Portfolio is in net redemption and the Adviser is frequently forced to sell securities to raise cash for redemptions. However, managing a fund with positive cash flow may be easier at times than managing a stable pool of assets. Finally, in recent years, investment advisers have been sued by institutional clients and have suffered reputational damage both by the attendant publicity and outcomes other than complete victories. Accordingly, the legal and reputational risks associated with institutional accounts are greater than previously thought, although arguably still not equal to those related to the mutual fund industry.
Notwithstanding the Adviser’s view that managing an investment company is not comparable to managing other institutional accounts because the services provided are different, the Supreme Court has indicated consideration should be given to the advisory fees charged to institutional accounts with a similar investment style as the Portfolio5. In addition to the AB Institutional fee schedule, set forth below are what would have been the effective advisory fee for the Portfolio had the AB Institutional fee schedule been applicable to the Portfolio and the Portfolio’s advisory fee based on September 30, 2015 net assets.6
| 5 | The Supreme Court stated that “courts may give such comparisons the weight that they merit in light of the similarities and differences between the services that the clients in question require, but the courts must be wary of inapt comparisons.” Among the significant differences the Supreme Court noted that may exist between services provided to mutual funds and institutional accounts are “higher marketing costs.” Jones v. Harris at 1428. |
| 6 | The Adviser has indicated that with respect to institutional accounts with assets greater than $300 million, it will negotiate a fee schedule. Discounts that are negotiated vary based upon each client relationship. |
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 43 |
| Portfolio | Net Assets 9/30/15 ($MM) | AB Institutional Fee Schedule | Effective AB Inst. Adv. Fee | Portfolio Advisory Fee | ||||||
| Taxable Multi-Sector Income Shares | $61.2 | U.S. Strategic Core Plus 50 bp on 1st $30 million 20 bp on the balance Minimum account size: $25m | 0.347% | 0.000% | ||||||
The Adviser manages AB Intermediate Bond Fund, Inc. (“Intermediate Bond Fund, Inc.”), a retail mutual fund that has a somewhat similar investment style as the Portfolio.7 Set forth in the table below are the advisory fee schedule of the Intermediate Bond Fund, Inc. and what would have been the effective advisory fee of the Portfolio had the advisory fee schedule of the retail mutual fund been applicable to the Portfolio based on September 30, 2015 net assets:
| Portfolio | AB Mutual Funds (“ABMF”) | Fee Schedule | ABMF Effective Fee | |||||
| Taxable Multi-Sector Income Shares | Intermediate Bond Fund, Inc. | 0.45% on first $2.5 billion 0.40% on next $2.5 billion 0.35% on the balance | 0.450% | |||||
The Adviser also manages Sanford C. Bernstein Fund II – Intermediate Duration Institutional Portfolio (“SCB II”), which has a somewhat similar investment style as the Portfolio. Set forth in the table below are SCB II’s advisory fee schedule and what would have been the effective fee of the Portfolio had SCB II’s advisory fee schedule been applicable to the Portfolio based on September 30, 2015 net assets:8
| Portfolio | ABMF Fund | Fee Schedule | SCB Fund Effective Fee | |||||
| Taxable Multi-Sector Income Shares | Sanford C. Bernstein Fund II – Intermediate Duration Institutional Portfolio9 | 0.50% on 1st $1 billion 0.45% on the balance | 0.500% | |||||
| 7 | The advisory fee schedule of AB Intermediate Bond Fund, Inc. was affected by the December 2003 settlement between the Adviser and the NYAG. The NYAG related master fee schedule, implemented in January 2004, contemplates eight categories with almost all of the AB funds in each category having the same advisory fee schedule. |
| 8 | Although a part of the AB Mutual Funds, SCB II’s advisory fee schedule was not affected by the Adviser’s settlement with the NYAG since its fee schedule had a lower breakpoint level ($1 billion) than the breakpoint level ($2.5 billion) of the High Income category of the NYAG related master schedule. The advisory fee schedule of the High Income category is as follows: 0.50% on the first $2.5 billion, 0.45% on the next $2.5 billion and 0.40% thereafter. |
| 9 | Sanford C. Bernstein Fund II – Intermediate Duration Institutional Portfolio has an expense cap of 0.45%, which effectively reduces the advisory fee. |
| 44 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
The Adviser manages Sanford C. Bernstein Fund, Inc. (“SCB Fund”), an open-end management investment company. The Intermediate Duration Portfolio of SCB Fund has a somewhat similar investment style as the Portfolio. Set forth below are Intermediate Duration Portfolio’s advisory fee schedule and what would have been the effective advisory fee of the Portfolio had the fee schedule of Intermediate Duration Portfolio been applicable to the Portfolio based on September 30, 2015 net assets:
| Portfolio | SCB Fund Portfolio | Fee Schedule | SCB Fund Effective Fee | |||||
| Taxable Multi-Sector Income Shares | Intermediate Duration Portfolio10 | 0.50% on 1st $1 billion 0.45% on next $2 billion 0.40% on next $2 billion 0.35% on next $2 billion 0.30% thereafter | 0.500% | |||||
The adviser also manages the AB Variable Products Series Fund, Inc. (“AVPS”), which is available through variable annuity and variable life contracts offered by other financial institutions and offers policyholders the option to utilize certain AVPS portfolios as the investment option underlying their insurance contracts. Set forth below is the fee schedule of the AVPS portfolio that has a somewhat similar investment style as the Portfolio.11 Also shown is what would have been the effective advisory fee of the Portfolio had the AVPS fee schedule been applicable to the Portfolio based on September 30, 2015 net assets:
| Portfolio | AVPS Portfolio | Fee Schedule | AVPS Effective Fee | |||
| Taxable Multi-Sector Income Shares | Intermediate Bond Portfolio | 0.45% on first $2.5 billion 0.40% on next $2.5 billion 0.35% on the balance | 0.450% |
The AB Investment Trust Management mutual funds (“ITM”), which are offered to investors in Japan, have an “all-in” fee to compensate the Adviser for investment advisory as well as fund accounting and administrative related services. The fee schedule of the ITM mutual fund that has a somewhat similar investment style as the Fund is as follows:
| Fund | ITM Mutual Fund | Fee | ||
| Taxable Multi-Sector Income Shares | AB Multi-Sector Bond Open (Hedged/Unhedged) | 0.40% |
| 10 | Sanford C. Bernstein Fund – Intermediate Duration Portfolio has an expense cap of 0.45%, which effectively reduces the advisory fees by at least five basis points. |
| 11 | The AVPS portfolio was also affected by the settlement between the Adviser and the NYAG. |
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 45 |
The Adviser provides sub-advisory investment services to certain other investment companies managed by other fund families. The Adviser charges the following fee for the sub-advisory relationship that has a somewhat similar investment style as the Portfolio. Also shown is what would have been the effective advisory fee of the Portfolio had the fee schedule of the sub-advisory relationship been applicable to the Portfolio based on September 30, 2015 net assets:
| Portfolio | Sub-advised Fund | Sub-advised Fund Fee Schedule | Sub-Advised Management Fund Effective Fee | |||||
| Taxable Multi-Sector Income Shares | Client #112 | 0.29% on first $100 million 0.20% thereafter | 0.290% | |||||
It is fair to note that the services the Adviser provides pursuant to sub-advisory agreements are generally confined to the services related to the investment process; in other words, they are not as comprehensive as the services provided to the Portfolio by the Adviser. In addition, to the extent that this sub-advisory relationship is with an affiliate of the Adviser, the fee schedule may not reflect arm’s-length bargaining or negotiations.
While it appears that the sub-advisory relationship is paying a lower fee than the investment companies managed by the Adviser, it is difficult to evaluate the relevance of such a fee due to the differences in the services provided, risks involved and other competitive factors between the investment companies and the sub-advisory relationship. There could be various business reasons why an investment adviser would be willing to provide a sub-advised relationship investment related services at a different fee level than an investment company it is sponsoring where the investment adviser is provided all the services, not just investment management service generally required by a registered investment company.
| II. | MANAGEMENT FEES CHARGED BY OTHER MUTUAL FUND COMPANIES FOR LIKE SERVICES. |
Broadridge Financial Solutions, Inc. (“Broadridge”), an analytical service that is not affiliated with the Adviser, compared the fees charged to the Portfolio to the fees charged to other investment companies for similar services by other investment advisers.13,14 Each peer selected by Broadridge had a similar fee arrangement
| 12 | The sub-advisory relationship is with an affiliate of the Adviser. |
| 13 | On June 5, 2015, Broadridge acquired the Fiduciary Services and Competitive Intelligence unit, i.e., the group responsible for providing the Portfolio’s 15(c) reports, from Thomson Reuters’ Lipper division. The group that maintains Lipper’s expense and performance databases and investment classification/objective remains a part of Thomson Reuters’ Lipper division. Accordingly, the Portfolio’s investment classification/objective continued to be determined by Lipper. |
| 14 | The Supreme Court cautioned against accepting mutual fund fee comparisons without careful scrutiny since “these comparisons are problematic because these fees, like those challenged, may not be the product of negotiations conducted at arm’s length.” Jones v. Harris at 1429. |
| 46 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
as the Portfolio, which is to say that with respect to the Portfolio’s peers, all of their fund expenses, including management fees, were reimbursed by their respective investment advisers.15,16
The Portfolio does not pay an advisory fee to the Adviser since the SMA clients pay their wrap program provider a unitary fee for managing all investments of their portfolios. In addition, the Adviser reimburses the Portfolio for all of its operating expenses, except certain extraordinary expenses, taxes, brokerage costs and interest on borrowed money.
| III. | COSTS TO THE ADVISER AND ITS AFFILIATES OF SUPPLYING SERVICES PURSUANT TO THE ADVISORY FEE ARRANGEMENT, EXCLUDING ANY INTRA-CORPORATE PROFIT. |
The Adviser utilizes two profitability reporting systems, which operate independently but are aligned with each other, to estimate the Adviser’s profitability in connection with investment advisory services provided to the Portfolio. The Senior Officer has retained a consultant to provide independent advice regarding the alignment of the two profitability systems as well as the methodologies and allocations utilized by both profitability systems. See Section IV for additional discussion.
| IV. | PROFIT MARGINS OF THE ADVISER AND ITS AFFILIATES FOR SUPPLYING SUCH SERVICES. |
The profitability information for the Portfolio, prepared by the Adviser for the Board of Trustees, was reviewed by the Senior Officer and the consultant. The Portfolio does not pay an advisory fee to the Adviser. However, the Adviser does profit indirectly through the advisory fees that it receives from the wrap program providers whose SMA clients invest in the Portfolio. The Adviser’s profitability with respect to the Portfolio, which was negative in 2014, was calculated using a weighted average of the profitability of the relevant SMA assets, in addition to any fund specific revenue or expense items.
| 15 | Only zero fee no-load funds that participate in a wrap fee program were considered for inclusion in the Fund’s EG, regardless of the Lipper investment classification/objective of the Funds’ peers. The Portfolio’s EG peers includes two BBB-rated Corporate Debt (“BBB”) funds, three Multi-Sector Income (“MSI”) fund, one Short-Intermediate Investment Grade Debt (“SII”) fund, four General Bond (“GB”) funds, two Core Bond (“IID”) funds, one General & Insured Municipal Debt (“GM”) fund, one Inflation-Protected Bond (“IUT”) fund, two Global Income (“GLI”) funds and one Intermediate Municipal Debt (“IMD”) fund. The Fund is classified by Lipper as IID. |
| 16 | “Management Fee” is the fee attributable to the management and bearing of expenses of the funds (not the management of the wrap fee program). In each case, the advisory contract provides for an advisory or management fee of zero. |
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 47 |
ABI and AllianceBernstein Investor Services, Inc. (“ABIS”), affiliates of the Adviser, serve as the Portfolio’s underwriter and transfer agent, respectively. The courts have referred to this type of business relationships as “fall-out benefits” to the Adviser and indicated that such benefits should be factored into the evaluation of the total relationship between the Portfolio and the Adviser. Neither case law nor common business practice precludes the Adviser’s affiliates from earning a reasonable profit on this type of relationship provided the affiliates’ charges and services are competitive. However, neither ABI nor ABIS receive a fee for serving as the Portfolio’s underwriter and transfer agent.
| V. | POSSIBLE ECONOMIES OF SCALE |
The Adviser has indicated that economies of scale are being shared with shareholders through pricing to scale, breakpoints, fee reductions/waivers and enhancement to services.
In May 2012, an independent consultant, retained by the Senior Officer, provided the Board of Trustees information on the Adviser’s firm-wide average costs from 2005 through 2011 and the potential economies of scale. The independent consultant noted that from 2005 through 2007 the Adviser experienced significant growth in assets under management (“AUM”). During this period, operating expenses increased, in part to keep up with growth, and in part reflecting market returns. However, from 2008 through the first quarter of 2009, AUM rapidly and significantly decreased due to declines in market value and client withdrawals. When AUM rapidly decreased, some operating expenses categories, including base compensation and office space, adjusted more slowly during this period, resulting in an increase in average costs. Since 2009, AUM has experienced less significant changes. The independent consultant noted that changes in operating expenses reflect changes in business composition and business practices in response to changes in financial markets. Finally, the independent consultant concluded that the increase in average cost and the decline in net operating margin across the Adviser since late 2008 are inconsistent with the view that there are currently reductions in average costs due to economies of scale that can be shared with the AB Mutual Funds managed by the Adviser through lower fees.
Previously, in February 2008, the independent consultant provided the Board of Trustees an update of the Deli17 study on advisory fees and various fund characteristics.18 The independent consultant first reiterated the results of his previous
| 17 | The Deli study, originally published in 2002 based on 1997 data and updated for the February 2008 Presentation, may be of diminished value due to the age of the data used in the presentation and the changes experienced in the industry since 2008. |
| 18 | As mentioned previously, the Supreme Court cautioned against accepting mutual fund fee comparisons without careful scrutiny since the fees may not be the product of negotiations conducted at arm’s length. See Jones v. Harris at 1429. |
| 48 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
two dimensional comparison analysis (fund size and family size) with the Board of Trustees.19 The independent consultant then discussed the results of the regression model that was utilized to study the effects of various factors on advisory fees. The regression model output indicated that the bulk of the variation in fees predicted were explained by various factors, but substantially by fund AUM, family AUM, index fund indicator and investment style. The independent consultant also compared the advisory fees of the AB Mutual Funds to similar funds managed by 19 other large asset managers, regardless of the fund size and each Adviser’s proportion of mutual fund assets to non-mutual fund assets.
| VI. | NATURE AND QUALITY OF THE ADVISER’S SERVICES INCLUDING THE PERFORMANCE OF THE PORTFOLIO. |
With assets under management of approximately $463 billion as of September 30, 2015, the Adviser has the investment experience to manage and provide non-investment services (described in Section I) to the Portfolio.
The information below, prepared by Broadridge, shows the 1 and 3 year gross performance return and ranking of the Portfolio relative to its Lipper Performance Universe (“PU”)20 for the period ended July 31, 2015:21
| Taxable Multi-Sector Income Shares | Portfolio Return (%) | PU Median (%) | PU Rank | |||||||||
1 Year | 0.96 | 1.72 | 54/85 | |||||||||
3 Year | 0.93 | 4.29 | 46/47 | |||||||||
Set forth below are the 1, 3 year and since inception net performance returns of the Portfolio (in bold) versus its benchmark.22 Portfolio and benchmark volatility and reward-to-variability ratio (“Sharpe Ratio”) information is also shown.23
| 19 | The two dimensional analysis showed patterns of lower advisory fees for funds with larger asset sizes and funds from larger family sizes compared to funds with smaller asset sizes and funds from smaller family sizes, which according to the independent consultant is indicative of a sharing of economies of scale and scope. However, in less liquid and active markets, such is not the case, as the empirical analysis showed potential for diseconomies of scale in those markets. The empirical analysis also showed diminishing economies of scale and scope as funds surpassed a certain high level of assets. |
| 20 | The Portfolio’s PU includes peers with the same Lipper investment classification/objective and load type as the Portfolio. |
| 21 | The performance returns of the Portfolio were provided Broadridge. |
| 22 | The Adviser provided Portfolio and benchmark performance return information for the periods through July 31, 2015. |
| 23 | Portfolio and benchmark volatility and Sharpe Ratio information was obtained through Lipper LANA, a database maintained by Lipper. Volatility is a statistical measure of the tendency of a market price or yield to vary over time. A Sharpe Ratio is a risk adjusted measure of return that divides a fund’s return in excess of the riskless return by the fund’s standard deviation. A fund with a greater volatility would be viewed as more risky than a fund with equivalent performance but lower volatility; for that reason, a greater return would be demanded for the more risky fund. A fund with a higher Sharpe Ratio would be viewed as better performing than a fund with a lower Sharpe Ratio. |
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 49 |
Period Ending July 31, 2015 Annualized Net Performance (%) | ||||||||||||||||||||||||
| 1 Year (%) | 3 Year (%) | Since Inception (%) | Volatility (%) | Sharpe (%) | Risk Period (Year) | |||||||||||||||||||
| Taxable Multi-Sector | 0.96 | 0.93 | 2.50 | 0.83 | 1.04 | 3 | ||||||||||||||||||
| Income Shares | ||||||||||||||||||||||||
| Barclays U.S. Aggregate ex Govt. Index | 2.54 | 2.09 | 3.66 | 2.98 | 0.69 | 3 | ||||||||||||||||||
| Inception Date: September 15, 2010 | ||||||||||||||||||||||||
CONCLUSION:
Based on the factors discussed above the Senior Officer’s conclusion is that the Investment Advisory Agreement for the Portfolio is reasonable and within the range of what would have been negotiated at arm’s-length in light of all the surrounding circumstances. This conclusion with respect to the Portfolio is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: November 25, 2015
| 50 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
THIS PAGE IS NOT PART OF THE SHAREHOLDER REPORT OR THE FINANCIAL STATEMENTS
AB FAMILY OF FUNDS
US EQUITY
US Core
Core Opportunities Fund
Select US Equity Portfolio
US Growth
Concentrated Growth Fund
Discovery Growth Fund
Growth Fund
Large Cap Growth Fund
Small Cap Growth Portfolio
US Value
Discovery Value Fund
Equity Income Fund
Growth & Income Fund
Small Cap Value Portfolio
Value Fund
INTERNATIONAL/ GLOBAL EQUITY
International/Global Core
Global Core Equity Portfolio
Global Equity & Covered Call Strategy Fund
Global Thematic Growth Fund
International Portfolio
Tax-Managed International Portfolio
International/Global Growth
International Growth Fund
International/Global Value
Asia ex-Japan Equity Portfolio
International Value Fund
FIXED INCOME
Municipal
High Income Municipal Portfolio
Intermediate California Municipal Portfolio
Intermediate Diversified Municipal Portfolio
Intermediate New York Municipal Portfolio
Municipal Bond Inflation Strategy
FIXED INCOME (continued)
Tax-Aware Fixed Income Portfolio
National Portfolio
Arizona Portfolio
California Portfolio
Massachusetts Portfolio
Michigan Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
Taxable
Bond Inflation Strategy
Global Bond Fund
High Income Fund
High Yield Portfolio
Intermediate Bond Portfolio
Limited Duration High Income Portfolio
Short Duration Portfolio
ALTERNATIVES
All Market Real Return Portfolio*
Credit Long/Short Portfolio
Global Real Estate Investment Fund
Long/Short Multi-Manager Fund
Multi-Manager Alternative Strategies Fund
Select US Long/Short Portfolio
Unconstrained Bond Fund
MULTI-ASSET
All Market Growth Portfolio*
All Market Income Portfolio
Emerging Markets Multi-Asset Portfolio
Global Risk Allocation Fund
MULTI-ASSET (continued)
Target-Date
Multi-Manager Select Retirement Allocation Fund
Multi-Manager Select 2010 Fund
Multi-Manager Select 2015 Fund
Multi-Manager Select 2020 Fund
Multi-Manager Select 2025 Fund
Multi-Manager Select 2030 Fund
Multi-Manager Select 2035 Fund
Multi-Manager Select 2040 Fund
Multi-Manager Select 2045 Fund
Multi-Manager Select 2050 Fund
Multi-Manager Select 2055 Fund
Wealth Strategies
Balanced Wealth Strategy
Conservative Wealth Strategy
Wealth Appreciation Strategy
Tax-Managed Balanced Wealth Strategy
Tax-Managed Conservative Wealth Strategy
Tax-Managed Wealth Appreciation Strategy
CLOSED-END FUNDS
AB Multi-Manager Alternative Fund
Alliance California Municipal Income Fund
AllianceBernstein Global High Income Fund
AllianceBernstein Income Fund
AllianceBernstein National Municipal Income Fund
We also offer Exchange Reserves, which serves as the money market fund exchange vehicle for the AB mutual funds. An investment in Exchange Reserves is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
* Prior to December 15, 2014, All Market Growth Portfolio was named Dynamic All Market Fund; All Market Real Return Portfolio was named Real Asset Strategy.
| AB TAXABLE MULTI-SECTOR INCOME SHARES • | 51 |
AB Family of Funds
NOTES
| 52 | • AB TAXABLE MULTI-SECTOR INCOME SHARES |
AB TAXABLE MULTI-SECTOR INCOME SHARES
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
TMSIS-0152-1015 
| ITEM 2. | CODE OF ETHICS. |
Not applicable when filing a semi-annual report to shareholders.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Not applicable when filing a semi-annual report to shareholders.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Not applicable when filing a semi-annual report to shareholders.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable to the registrant.
| ITEM 6. | SCHEDULE OF INVESTMENTS. |
Please see Schedule of Investments contained in the Report to Shareholders included under Item 1 of this Form N-CSR.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable to the registrant.
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable to the registrant.
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not applicable to the registrant.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
There have been no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board of Directors since the Fund last provided disclosure in response to this item.
| ITEM 11. | CONTROLS AND PROCEDURES. |
(a) The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940, as amended) are effective at the reasonable assurance level based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this document.
(b) There were no changes in the registrant’s internal controls over financial reporting that occurred during the second fiscal quarter of the period that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
| ITEM 12. | EXHIBITS. |
The following exhibits are attached to this Form N-CSR:
EXHIBIT NO. | DESCRIPTION OF EXHIBIT | |
12 (b) (1) | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
12 (b) (2) | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
12 (c) | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| (Registrant): AB Corporate Shares | ||
| By: | /s/ Robert M. Keith | |
Robert M. Keith President | ||
Date: December 21, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Robert M. Keith | |
Robert M. Keith President |
Date: December 21, 2015
| By: | /s/ Joseph J. Mantineo | |
Joseph J. Mantineo Treasurer and Chief Financial Officer |
Date: December 21, 2015