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: 811-02383
AB BOND FUND, INC.
(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: October 31, 2015
Date of reporting period: October 31, 2015
ITEM 1. | REPORTS TO STOCKHOLDERS. |
OCT 10.31.15
ANNUAL REPORT
AB ALL MARKET REAL RETURN PORTFOLIO
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 17, 2015
Annual Report
This report provides management’s discussion of fund performance for AB All Market Real Return Portfolio (the “Fund”) for the annual reporting period ended October 31, 2015. Prior to December 15, 2014, the Fund was named AllianceBernstein Real Asset Strategy and from December 16, 2014 until January 20, 2015 was named AllianceBernstein All Market Real Return Portfolio.
Investment Objective and Policies
The Fund’s investment objective is to maximize real return. Real return is the rate of return after adjusting for inflation. The Fund pursues an aggressive investment strategy involving a variety of asset classes. The Fund invests primarily in instruments that AllianceBernstein L.P. (the “Adviser”) expects to outperform broad equity indices during periods of rising inflation. Under normal circumstances, the Fund expects to invest its assets principally in the following instruments that, in the judgment of the Adviser, are affected directly or indirectly by the level and change in rate of inflation: inflation-indexed fixed-income securities, such as Treasury inflation-protected securities (“TIPS”) and similar bonds issued by governments outside of the United States, commodities, equity securities, such as commodity-related stocks, real estate securities, utility securities, infrastructure-related securities, securities and derivatives linked to the price of other assets (such as commodities, stock indices and real estate) and currencies. The Fund expects its investments in fixed-income securities to have a broad range of maturities and quality levels.
The Fund will seek inflation protection from investments around the globe, both in developed and emerging market countries. In selecting securities for purchase and sale, the Adviser will utilize its qualitative and quantitative resources to determine overall inflation sensitivity, asset allocation, and security selection. The Adviser assesses the securities’ risks and inflation sensitivity as well as the securities’ impact on the overall risks and inflation sensitivity of the Fund. When its analysis indicates that changes are necessary, the Adviser intends to implement them through a combination of changes to underlying positions and the use of inflation swaps and other types of derivatives, such as interest rate swaps.
The Fund anticipates that its investments, other than its investments in inflation-indexed securities, will focus roughly equally on commodity-related equity securities, commodities and commodity derivatives, and real estate equity securities to provide a balance between expected return and inflation protection. Its commodities investments will include significant exposure to energy commodities, but will also include agricultural products, and industrial and precious metals, such as gold. The Fund’s investments in real estate equity securities will include Real Estate Investment Trusts (“REITs”), other real estate-related securities, and infrastructure-related securities.
The Fund will invest in both US and non-US dollar-denominated equity or fixed-income securities. The Fund may invest in currencies for hedging or for investment purposes, both in the spot
AB ALL MARKET REAL RETURN PORTFOLIO • | 1 |
market and through long or short positions in currency-related derivatives. The Fund does not ordinarily expect to hedge its foreign currency exposure because it will be balanced by investments in US dollar-denominated securities, although it may hedge the exposure under certain circumstances. The Fund may invest significantly to the extent permitted by applicable law in derivatives, such as options, futures, forwards, swaps or structured notes. The Fund intends to use leverage for investment purposes through the use of cash made available by derivatives transactions to make other investments in accordance with its investment policies. In determining when and to what extent to employ leverage or enter into derivatives transactions, the Adviser will consider factors such as the relative risks and returns expected of potential investments and the cost of such transactions. The Adviser will consider the impact of derivatives in making its assessments of the Fund’s risks. The resulting exposures to markets, sectors, issuers or specific securities will be continuously monitored by the Adviser.
The Fund may seek to gain exposure to physical commodities traded in the commodities markets through investments in a variety of derivative instruments, including investments in commodity index-linked notes. The Adviser expects that the Fund will seek to gain exposure to commodities and commodity-related instruments and derivatives primarily through investments in AllianceBernstein Cayman Inflation Strategy, Ltd., a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands (the “Subsidiary”). The Subsidiary is advised by the
Adviser and has the same investment objective and substantially similar investment policies and restrictions as the Fund except that the Subsidiary, unlike the Fund, may invest, without limitation, in commodities and commodity-related instruments. The Fund will be subject to the risks associated with the commodities, derivatives and other instruments in which the Subsidiary invests, to the extent of its investment in the Subsidiary. The Fund limits its investment in the Subsidiary to no more than 25% of its net assets. Investment in the Subsidiary is expected to provide the Fund with commodity exposure within the limitations of federal tax requirements that apply to the Fund.
The Fund is “non-diversified”, which means that it may concentrate its assets in a smaller number of issuers than a diversified fund.
Investment Results
The table on page 7 shows the Fund’s performance compared to its primary benchmark, the Morgan Stanley Capital International All Country (“MSCI AC”) World Commodity Producers Index (net) and the All Market Real Return Portfolio Benchmark, composed of equal weightings of the MSCI AC World Commodity Producers Index, the Financial Times Stock Exchange European Public Real Estate Association/National Association of Real Estate Investment Trusts (“FTSE EPRA/NAREIT”) Global Index and the Dow Jones-UBS Commodity Index, for the six- and 12-month periods ended October 31, 2015.
All share classes of the Fund outperformed the primary benchmark
2 | • AB ALL MARKET REAL RETURN PORTFOLIO |
during both periods, yet underperformed the All Market Real Return Portfolio Benchmark, before sales charges. For the six-month period, strategic allocations to commodity futures, real estate stocks and consumer price index (“CPI”) swaps added to relative performance. An allocation to crude oil futures detracted from performance, but to a smaller extent. For the 12-month period, strategic allocations to real estate stocks and CPI swaps contributed; strategic allocation to commodity futures detracted from performance, but to a smaller degree. During both periods, long-dated WTI crude futures, security selection and asset class allocation to real estate stocks detracted from performance. Asset allocation, security selection in commodity stocks, commodity futures alpha strategy and currency positioning added to performance.
The Fund utilized derivatives for hedging and investment purposes, including Treasury futures, total return swaps and written options, which detracted from returns during both periods in absolute terms; currency forwards and inflation swaps detracted during the six-month period and added during the 12-month period; interest rate swaps added during the six-month period and detracted during the 12-month period; and purchased options added during both periods.
Market Review and Investment Strategy
The 12-month period ended October 31, 2015 was one of the most volatile periods for global financial markets since 2011. Risk aversion spiked during the third quarter of 2015 as a surprise
devaluation of the Chinese yuan and potential spillover of weakness in China and emerging markets, along with the imminent US Federal Reserve (the “Fed”) rate hikes, created an environment of very high uncertainty.
Given that the epicenter of the volatility was the weakness from China and emerging markets, commodity-related investments were the hardest hit, as these events arose in the backdrop of oversupplied markets and tepid demand, thus creating the perfect storm for these markets. Also, more broadly, inflation expectations and all inflation-sensitive assets fell during the period on commodity weakness, fears of slowing global growth and the perception of a Fed hike in this context as being a policy error. Specifically, commodities most leveraged to China demand, such as base metals and bulks (iron ore, coal), performed worst.
The Fund has retained exposure to long-horizon inflation expectations and long-dated crude futures (2017, 2018 and 2019 WTI futures) which the All Market Real Return Portfolio Team (the “Team”) believes should benefit most from signs of reflation. The Fund also retains the underweight to North American REITs, although the Team has reduced the size of the underweight as the threat to the multiple from rising rates is a lot more benign now than was expected at the beginning of 2015. Finally, the Fund has reduced the size of the overweight to the US dollar given the renormalization of the negative correlations between the US dollar and commodities, and also given the strong run up in the US dollar in anticipation of a Fed rate hike.
AB ALL MARKET REAL RETURN PORTFOLIO • | 3 |
DISCLOSURES AND RISKS
Benchmark Disclosure
The MSCI AC World Commodity Producers Index (net), the FTSE® EPRA/NAREIT Global Index and the Dow Jones-UBS Commodity Index are unmanaged and do not reflect fees and expenses associated with the active management of a mutual fund portfolio. The All Market Real Return Portfolio Benchmark is an equally-weighted blend of the MSCI AC World Commodity Producers Index, the FTSE EPRA/NAREIT Global Index and the Dow Jones-UBS Commodity Index. The MSCI AC World Commodity Producers Index is a free float-adjusted, market capitalization index designed to track the performance of global listed commodity producers, including emerging markets. Net returns include the reinvestment of dividends after deduction of non-US withholding tax. The FTSE EPRA/NAREIT Global Index (market-value-weighted index based upon the last closing price of the month) represents the performance of tax-qualified REITs listed on the NYSE, AMEX and the NASDAQ. The Dow Jones-UBS Commodity Index measures price movements of the commodities included in the appropriate sub index. It does not account for effects of rolling futures contracts or costs associated with holding the physical commodity. Commodities sectors include: energy, grains, industrial metals, petroleum, precious metals and softs. MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices, any securities or financial products. This report is not approved, reviewed or produced by MSCI. 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, commodity and bond markets fluctuate. 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 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.
Commodity Risk: Investing in commodities and commodity-linked derivative instruments, either directly or through the Subsidiary, may subject the Fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments.
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.
(Disclosures, Risks and Note about Historical Performance continued on next page)
4 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
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.
Liquidity Risk: Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Fund. Causes of liquidity risk may include low trading volumes and large positions. Foreign fixed-income securities may have more liquidity risk because secondary trading markets for these securities may be smaller and less well-developed and the securities may trade less frequently. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
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.
Currency Risk: Fluctuations in currency exchange rates may negatively affect the value of the Fund’s investments or reduce its returns.
Subsidiary Risk: By investing in the Subsidiary, the Fund is indirectly exposed to the risks associated with the Subsidiary’s investments. The derivatives and other investments held by the Subsidiary are generally similar to those that are permitted to be held by the Fund and are subject to the same risks that apply to similar investments if held directly by the Fund. The Subsidiary is not registered under the Investment Company Act of 1940, as amended (the “1940 Act”), and, unless otherwise noted in this Prospectus, is not subject to all of the investor protections of the 1940 Act. However, the Fund wholly owns and controls the Subsidiary, and the Fund and the Subsidiary are managed by the Adviser, making it unlikely the Subsidiary will take actions contrary to the interests of the Fund or its shareholders.
Real Estate Risk: The Fund’s investments in real estate securities have many of the same risks as direct ownership of real estate, including the risk that the value of real estate could decline due to a variety of factors that affect the real estate market generally. Investments in REITs may have additional risks. REITs are dependent on the capability of their managers, may have limited diversification, and could be significantly affected by changes in taxes.
Diversification Risk: The Fund may have more risk because it is “non-diversified”, meaning that it can invest more of its assets in a smaller number of issuers and that adverse changes in the value of one security could have a more significant effect on the Fund’s NAV.
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 investment return and principal value of an investment in the Fund will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Performance shown on the following pages represents past performance and does not guarantee future results. Current performance may be
(Disclosures, Risks and Note about Historical Performance continued on next page)
AB ALL MARKET REAL RETURN PORTFOLIO • | 5 |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by visiting www.abglobal.com.
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. For Class 1 shares, Click on “Private Clients”, then “Investments”, then “Stocks” or “Bonds”, then “Prospectuses, SAIs, and Shareholder Reports”. Please read the prospectus and/or summary prospectus carefully before investing.
All fees and expenses related to the operation of the Fund have been deducted. NAV returns do not reflect sales charges; if sales charges were reflected, the Fund’s quoted performance would be lower. SEC returns reflect the applicable sales charges for each share class: a 4.25% maximum front-end sales charge for Class A shares; a 1% 1-year contingent deferred sales charge for Class C shares. Returns for the different share classes will vary due to different expenses associated with each class. Performance assumes reinvestment of distributions and does not account for taxes.
6 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE FUND VS. ITS BENCHMARK PERIODS | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB All Market Real Return Portfolio | ||||||||||
Class 1* | -15.01% | -21.12% | ||||||||
| ||||||||||
Class 2* | -14.82% | -20.85% | ||||||||
| ||||||||||
Class A | -15.05% | -21.16% | ||||||||
| ||||||||||
Class C | -15.38% | -21.75% | ||||||||
| ||||||||||
Advisor Class† | -14.96% | -20.95% | ||||||||
| ||||||||||
Class R† | -15.17% | -21.37% | ||||||||
| ||||||||||
Class K† | -15.05% | -21.19% | ||||||||
| ||||||||||
Class I† | -14.92% | -20.97% | ||||||||
| ||||||||||
Class Z† | -14.90% | -20.94% | ||||||||
| ||||||||||
Primary Benchmark: MSCI AC World Commodity Producers Index (net) | -20.79% | -25.10% | ||||||||
| ||||||||||
All Market Real Return Portfolio Benchmark | -13.31% | -16.95% | ||||||||
| ||||||||||
* Class 1 shares are only available to Bernstein Global Wealth Management private client accounts. Class 2 shares are only available to the Adviser’s institutional clients or through other limited arrangements.
† Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. | ||||||||||
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
(Historical Performance continued on next page)
AB ALL MARKET REAL RETURN PORTFOLIO • | 7 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
GROWTH OF A $10,000 INVESTMENT IN THE FUND
3/8/10* TO 10/31/15 (unaudited)
This chart illustrates the total value of an assumed $10,000 investment in AB All Market Real Return Portfolio Class A shares (from 3/8/10* to 10/31/15) as compared to the performance of its benchmark. The chart reflects the deduction of the maximum 4.25% sales charge from the initial $10,000 investment in the Fund and assumes the reinvestment of dividends and capital gains distributions.
* | Inception date: 3/8/2010. |
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
(Historical Performance continued on next page)
8 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF OCTOBER 31, 2015 (unaudited) | ||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | |||||||
Class 1 Shares* | ||||||||
1 Year | -21.12 | % | -21.12 | % | ||||
5 Years | -4.43 | % | -4.43 | % | ||||
Since Inception† | -1.91 | % | -1.91 | % | ||||
Class 2 Shares* | ||||||||
1 Year | -20.85 | % | -20.85 | % | ||||
5 Years | -4.19 | % | -4.19 | % | ||||
Since Inception† | -1.66 | % | -1.66 | % | ||||
Class A Shares | ||||||||
1 Year | -21.16 | % | -24.53 | % | ||||
5 Years | -4.49 | % | -5.31 | % | ||||
Since Inception† | -1.96 | % | -2.70 | % | ||||
Class C Shares | ||||||||
1 Year | -21.75 | % | -22.52 | % | ||||
5 Years | -5.16 | % | -5.16 | % | ||||
Since Inception† | -2.67 | % | -2.67 | % | ||||
Advisor Class Shares‡ | ||||||||
1 Year | -20.95 | % | -20.95 | % | ||||
5 Years | -4.21 | % | -4.21 | % | ||||
Since Inception† | -1.69 | % | -1.69 | % | ||||
Class R Shares‡ | ||||||||
1 Year | -21.37 | % | -21.37 | % | ||||
5 Years | -4.70 | % | -4.70 | % | ||||
Since Inception† | -2.18 | % | -2.18 | % | ||||
Class K Shares‡ | ||||||||
1 Year | -21.19 | % | -21.19 | % | ||||
5 Years | -4.45 | % | -4.45 | % | ||||
Since Inception† | -1.93 | % | -1.93 | % | ||||
Class I Shares‡ | ||||||||
1 Year | -20.97 | % | -20.97 | % | ||||
5 Years | -4.21 | % | -4.21 | % | ||||
Since Inception† | -1.67 | % | -1.67 | % | ||||
Class Z Shares‡ | ||||||||
1 Year | -20.94 | % | -20.94 | % | ||||
Since Inception† | -12.48 | % | -12.48 | % |
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
(Historical Performance and footnotes continued on next page)
AB ALL MARKET REAL RETURN PORTFOLIO • | 9 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
The Fund’s prospectus fee table shows the Fund’s total annual operating expense ratios as 1.14%, 0.89%, 1.30%, 2.02%, 1.02%, 1.55%, 1.24%, 0.91% and 0.88% for Class 1, Class 2, Class A, Class C, Advisor Class, Class R, Class K, Class I and Class Z shares, respectively, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements limit the Fund’s annual operating expense ratios (exclusive of interest expense) to 1.25%, 1.00% , 1.30%, 2.00%, 1.00%, 1.50%, 1.25%, 1.00% and 1.00% for Class 1, Class 2, Class A, Class C, Advisor Class, Class R, Class K, Class I and Class Z shares, respectively. These waivers/reimbursements may not be terminated before January 29, 2016 and may be extended by the Adviser for additional one-year terms. Absent reimbursements or waivers, performance would have been lower, with the exception of Class 1, Class 2, Class K, Class I and Class Z shares, as these share classes are currently operating below their respective contractual expense caps. The Financial Highlights section of this report sets forth expense ratio data for the current reporting period; the expense ratios shown above may differ from the expense ratios in the Financial Highlights sections since they are based on different time periods.
* | Class 1 shares are only available to Bernstein Global Wealth Management private client accounts. Class 2 shares are only available to the Adviser’s institutional clients or through other limited arrangements. |
† | Inception dates: 3/8/2010 for all share classes excluding Class Z shares; 1/31/2014 for Class Z shares. |
‡ | These share classes are offered at NAV to eligible investors and their SEC returns are the same as their NAV returns. Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. The inception dates for these share classes are listed above. |
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
(Historical Performance continued on next page)
10 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END | ||||
SEC Returns (reflects applicable sales charges) | ||||
Class 1 Shares* | ||||
1 Year | -26.71 | % | ||
5 Years | -4.43 | % | ||
Since Inception† | -2.88 | % | ||
Class 2 Shares* | ||||
1 Year | -26.44 | % | ||
5 Years | -4.19 | % | ||
Since Inception† | -2.63 | % | ||
Class A Shares | ||||
1 Year | -29.93 | % | ||
5 Years | -5.33 | % | ||
Since Inception† | -3.69 | % | ||
Class C Shares | ||||
1 Year | -28.00 | % | ||
5 Years | -5.17 | % | ||
Since Inception† | -3.62 | % | ||
Advisor Class Shares‡ | ||||
1 Year | -26.59 | % | ||
5 Years | -4.23 | % | ||
Since Inception† | -2.67 | % | ||
Class R Shares‡ | ||||
1 Year | -27.00 | % | ||
5 Years | -4.71 | % | ||
Since Inception† | -3.15 | % | ||
Class K Shares‡ | ||||
1 Year | -26.76 | % | ||
5 Years | -4.44 | % | ||
Since Inception† | -2.89 | % | ||
Class I Shares‡ | ||||
1 Year | -26.46 | % | ||
5 Years | -4.20 | % | ||
Since Inception† | -2.64 | % | ||
Class Z Shares‡ | ||||
1 Year | -26.52 | % | ||
Since Inception† | -15.88 | % |
* | Class 1 shares are only available to Bernstein Global Wealth Management private client accounts. Class 2 shares are only available to the Adviser’s institutional clients or through other limited arrangements. |
† | Inception dates: 3/8/2010 for all share classes excluding Class Z shares; 1/31/2014 for Class Z shares. |
‡ | Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. The inception dates for these share classes are listed above. |
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
AB ALL MARKET REAL RETURN PORTFOLIO • | 11 |
Historical Performance
EXPENSE EXAMPLE
(unaudited)
As a shareholder of a mutual fund, you may incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions and (2) ongoing costs, including management fees; distribution (12b-1) fees; and other fund expenses. 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* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 849.50 | $ | 6.06 | 1.30 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,018.65 | $ | 6.61 | 1.30 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 846.20 | $ | 9.31 | 2.00 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,015.12 | $ | 10.16 | 2.00 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 850.40 | $ | 4.66 | 1.00 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.16 | $ | 5.09 | 1.00 | % | ||||||||
Class R | ||||||||||||||||
Actual | $ | 1,000 | $ | 848.30 | $ | 6.99 | 1.50 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,017.64 | $ | 7.63 | 1.50 | % | ||||||||
Class K | ||||||||||||||||
Actual | $ | 1,000 | $ | 849.50 | $ | 5.83 | 1.25 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,018.90 | $ | 6.36 | 1.25 | % |
12 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Expense Example
EXPENSE EXAMPLE
(unaudited)
(continued from previous page)
Beginning Account Value May 1, 2015 | Ending Account Value October 31, 2015 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class I | ||||||||||||||||
Actual | $ | 1,000 | $ | 850.80 | $ | 4.43 | 0.95 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.42 | $ | 4.84 | 0.95 | % | ||||||||
Class 1 | ||||||||||||||||
Actual | $ | 1,000 | $ | 849.90 | $ | 5.46 | 1.17 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.31 | $ | 5.96 | 1.17 | % | ||||||||
Class 2 | ||||||||||||||||
Actual | $ | 1,000 | $ | 851.80 | $ | 4.34 | 0.93 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.52 | $ | 4.74 | 0.93 | % | ||||||||
Class Z | ||||||||||||||||
Actual | $ | 1,000 | $ | 851.00 | $ | 4.53 | 0.97 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.32 | $ | 4.94 | 0.97 | % |
* | Expenses are equal to the Portfolio’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 13 |
Expense Example
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $545.5
PORTFOLIO BREAKDOWN* | ||||||
Commodity Related Derivatives | 41.9 | % | ||||
Commodity Related Stocks | 33.2 | % | ||||
Real Estate Stocks | 22.8 | % | ||||
Other | 2.1 | % |
* | All data are as of October 31, 2015. The portfolio breakdown is expressed as an approximate percentage of the Fund’s net assets inclusive of derivative exposure, based on the Advisor’s internal classification guidelines. |
† | 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). |
14 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Portfolio Summary
TEN LARGEST EQUITY HOLDINGS*
October 31, 2015 (unaudited)
Company | U.S. $ Value | Percent of Net Assets | ||||||
Exxon Mobil Corp. | $ | 26,680,920 | 4.9 | % | ||||
Royal Dutch Shell PLC | 17,254,569 | 3.2 | ||||||
SPDR S&P Dividend ETF | 16,906,738 | 3.1 | ||||||
TOTAL SA | 13,494,286 | 2.5 | ||||||
Chevron Corp. | 13,106,986 | 2.4 | ||||||
Vanguard Dividend Appreciation ETF | 11,005,232 | 2.0 | ||||||
BP PLC | 9,979,610 | 1.8 | ||||||
BG Group PLC | 8,931,043 | 1.6 | ||||||
EOG Resources, Inc. | 6,191,845 | 1.2 | ||||||
ConocoPhillips | 4,986,144 | 0.9 | ||||||
$ | 128,537,373 | 23.6 | % |
* | Long-term investments. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 15 |
Ten Largest Equity Holdings
CONSOLIDATED PORTFOLIO OF INVESTMENTS
October 31, 2015
Company | Shares | U.S. $ Value | ||||||
| ||||||||
COMMON STOCKS – 55.7% | ||||||||
Energy – 23.8% | ||||||||
Coal & Consumable Fuels – 0.1% | ||||||||
Cameco Corp. | 16,995 | $ | 240,706 | |||||
China Shenhua Energy Co., Ltd. – Class H | 167,800 | 282,328 | ||||||
CONSOL Energy, Inc. | 9,714 | 64,695 | ||||||
|
| |||||||
587,729 | ||||||||
|
| |||||||
Integrated Oil & Gas – 15.7% | ||||||||
BG Group PLC | 565,309 | 8,931,043 | ||||||
Chevron Corp. | 144,223 | 13,106,986 | ||||||
China Petroleum & Chemical Corp. – Class H | 1,548,000 | 1,115,867 | ||||||
Exxon Mobil Corp. | 322,467 | 26,680,919 | ||||||
Galp Energia SGPS SA | 72,670 | 784,470 | ||||||
LUKOIL PJSC (Sponsored ADR) | 52,530 | 1,904,213 | ||||||
Petroleo Brasileiro SA (ADR)(a) | 24,520 | 119,658 | ||||||
Petroleo Brasileiro SA (Sponsored ADR)(a) | 637,950 | 2,545,421 | ||||||
Royal Dutch Shell PLC (Euronext Amsterdam) – Class A | 233,826 | 6,125,170 | ||||||
Royal Dutch Shell PLC – Class A | 187,621 | 4,898,287 | ||||||
Royal Dutch Shell PLC – Class B | 237,966 | 6,231,112 | ||||||
TOTAL SA | 279,045 | 13,494,286 | ||||||
|
| |||||||
85,937,432 | ||||||||
|
| |||||||
Oil & Gas Equipment & Services – 0.6% | ||||||||
Aker Solutions ASA(b) | 150,950 | 606,299 | ||||||
Deep Sea Supply PLC | 547,947 | 115,876 | ||||||
Helix Energy Solutions Group, Inc.(a) | 56,570 | 326,975 | ||||||
Petrofac Ltd. | 89,160 | 1,156,873 | ||||||
RPC, Inc. | 39,140 | 431,714 | ||||||
Schlumberger Ltd. | 7,870 | 615,119 | ||||||
|
| |||||||
3,252,856 | ||||||||
|
| |||||||
Oil & Gas Exploration & Production – 7.0% | ||||||||
Anadarko Petroleum Corp. | 59,917 | 4,007,249 | ||||||
Apache Corp. | 18,183 | 856,965 | ||||||
Cabot Oil & Gas Corp. | 19,937 | 432,832 | ||||||
Canadian Natural Resources Ltd. | 152,156 | 3,528,120 | ||||||
CNOOC Ltd. | 2,481,200 | 2,796,094 | ||||||
Concho Resources, Inc.(a) | 5,747 | 666,135 | ||||||
ConocoPhillips | 93,461 | 4,986,144 | ||||||
Det Norske Oljeselskap ASA(a) | 167,277 | 1,035,452 | ||||||
Devon Energy Corp. | 18,749 | 786,146 | ||||||
EOG Resources, Inc. | 72,124 | 6,191,845 | ||||||
EQT Corp. | 7,330 | 484,293 | ||||||
Hess Corp. | 49,323 | 2,772,446 | ||||||
Inpex Corp. | 98,100 | 935,089 | ||||||
Marathon Oil Corp. | 32,568 | 598,600 | ||||||
Murphy Oil Corp. | 48,310 | 1,373,453 | ||||||
Noble Energy, Inc. | 20,686 | 741,386 | ||||||
Occidental Petroleum Corp. | 42,760 | 3,187,331 | ||||||
Pioneer Natural Resources Co. | 7,188 | 985,762 |
16 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
SM Energy Co. | 28,770 | $ | 959,480 | |||||
Woodside Petroleum Ltd. | 37,008 | 776,167 | ||||||
|
| |||||||
38,100,989 | ||||||||
|
| |||||||
Oil & Gas Refining & Marketing – 0.4% | ||||||||
JX Holdings, Inc. | 207,900 | 816,352 | ||||||
Marathon Petroleum Corp. | 12,820 | 664,076 | ||||||
Valero Energy Corp. | 8,950 | 589,984 | ||||||
|
| |||||||
2,070,412 | ||||||||
|
| |||||||
129,949,418 | ||||||||
|
| |||||||
Equity: Other – 8.3% | ||||||||
Diversified/Specialty – 7.1% | ||||||||
Alexandria Real Estate Equities, Inc. | 1,098 | 98,534 | ||||||
Ayala Land, Inc. | 723,760 | 552,736 | ||||||
Azrieli Group | 2,513 | 98,486 | ||||||
Beni Stabili SpA SIIQ | 73,653 | 60,513 | ||||||
British Land Co. PLC (The) | 156,733 | 2,099,390 | ||||||
Bumi Serpong Damai Tbk PT | 520,600 | 61,255 | ||||||
CA Immobilien Anlagen AG(a) | 43,001 | 843,347 | ||||||
Canadian Real Estate Investment Trust | 1,108 | 36,089 | ||||||
CapitaLand Ltd. | 175,300 | 386,696 | ||||||
CBRE Group, Inc. – Class A(a) | 16,430 | 612,510 | ||||||
Central Pattana PCL | 95,551 | 123,578 | ||||||
Cheung Kong Property Holdings Ltd. | 102,500 | 718,523 | ||||||
China Overseas Property Holdings Ltd.(a) | 90,713 | 15,449 | ||||||
Ciputra Development Tbk PT | 760,173 | 59,985 | ||||||
Cofinimmo SA | 1,393 | 155,234 | ||||||
Country Garden Holdings Co., Ltd. | 512,000 | 194,475 | ||||||
CSR Ltd. | 90,520 | 177,210 | ||||||
Dalian Wanda Commercial Properties Co., Ltd. – Class H(b) | 25,700 | 171,526 | ||||||
Digital Realty Trust, Inc. | 2,080 | 153,837 | ||||||
Duke Realty Corp. | 63,064 | 1,305,425 | ||||||
East Japan Railway Co. | 4,400 | 418,332 | ||||||
Emira Property Fund Ltd. | 243,820 | 324,177 | ||||||
Evergrande Real Estate Group Ltd. | 387,250 | 293,659 | ||||||
Fastighets AB Balder – Class B(a) | 6,370 | 128,321 | ||||||
Fibra Uno Administracion SA de CV | 171,281 | 375,583 | ||||||
Folkestone Education Trust | 134,700 | 212,524 | ||||||
Fonciere Des Regions | 9,022 | 849,200 | ||||||
Forest City Enterprises, Inc. – Class A(a) | 3,516 | 77,704 | ||||||
Fukuoka REIT Corp. | 30 | 48,920 | ||||||
Gecina SA | 2,365 | 301,643 | ||||||
Globe Trade Centre SA(a) | 18,162 | 31,583 | ||||||
GPT Group (The) | 353,512 | 1,197,284 | ||||||
Gramercy Property Trust, Inc. | 57,546 | 1,305,143 | ||||||
Great Portland Estates PLC | 23,760 | 325,400 | ||||||
Growthpoint Properties Ltd. | 176,642 | 323,606 | ||||||
H&R Real Estate Investment Trust | 4,209 | 67,532 | ||||||
Hemfosa Fastigheter AB | 53,550 | 580,682 | ||||||
Henderson Land Development Co., Ltd. | 70,457 | 449,085 |
AB ALL MARKET REAL RETURN PORTFOLIO • | 17 |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Hufvudstaden AB – Class A | 7,660 | $ | 108,232 | |||||
Hulic Co., Ltd. | 24,350 | 227,427 | ||||||
IMMOFINANZ AG(a) | 377,200 | 965,579 | ||||||
IOI Properties Group Bhd | 139,200 | 65,305 | ||||||
Kaisa Group Holdings Ltd.(a)(c)(d) | 805,000 | 147,589 | ||||||
Kennedy Wilson Europe Real Estate PLC | 44,413 | 818,866 | ||||||
Kiwi Property Group Ltd. | 87,426 | 80,392 | ||||||
KLCCP Stapled Group | 32,000 | 52,243 | ||||||
Land & Houses PCL | 249,200 | 59,554 | ||||||
Land Securities Group PLC | 54,350 | 1,119,702 | ||||||
Lend Lease Group | 84,730 | 779,303 | ||||||
Leopalace21 Corp.(a) | 43,500 | 231,765 | ||||||
Lippo Karawaci Tbk PT | 1,356,600 | 117,739 | ||||||
Longfor Properties Co., Ltd. | 103,200 | 138,538 | ||||||
Mah Sing Group Bhd | 110,350 | 33,860 | ||||||
Mapletree Greater China Commercial Trust(b) | 131,000 | 92,868 | ||||||
Merlin Properties Socimi SA | 142,407 | 1,824,905 | ||||||
Mitsubishi Estate Co., Ltd. | 136,600 | 2,929,588 | ||||||
Mitsui Fudosan Co., Ltd. | 111,400 | 3,031,601 | ||||||
New World China Land Ltd. | 184,000 | 122,066 | ||||||
New World Development Co., Ltd. | 889,000 | 947,072 | ||||||
Orix JREIT, Inc. | 326 | 438,852 | ||||||
Pakuwon Jati Tbk PT | 1,637,000 | 50,677 | ||||||
Premier Investment Corp. | 255 | 250,163 | ||||||
Pruksa Real Estate PCL | 47,200 | 37,157 | ||||||
Quality Houses PCL | 306,483 | 22,059 | ||||||
Redefine Properties Ltd. | 294,360 | 245,604 | ||||||
Resilient Property Income Fund Ltd. | 17,250 | 151,988 | ||||||
SA Corporate Real Estate Fund Nominees Pty Ltd. | 424,640 | 159,944 | ||||||
SM Prime Holdings, Inc. | 552,200 | 254,006 | ||||||
SP Setia Bhd Group | 61,200 | 47,011 | ||||||
Sponda Oyj | 16,623 | 70,614 | ||||||
Sumitomo Realty & Development Co., Ltd. | 63,700 | 2,097,536 | ||||||
Summarecon Agung Tbk PT | 766,300 | 77,561 | ||||||
Sun Hung Kai Properties Ltd. | 181,923 | 2,432,430 | ||||||
Sunac China Holdings Ltd. | 127,600 | 78,419 | ||||||
Suntec Real Estate Investment Trust | 165,100 | 193,925 | ||||||
Supalai PCL | 43,400 | 23,062 | ||||||
Swiss Prime Site AG (REG)(a) | 4,378 | 334,492 | ||||||
United Urban Investment Corp. | 333 | 462,005 | ||||||
UOL Group Ltd. | 229,764 | 1,072,253 | ||||||
VEREIT, Inc. | 13,915 | 114,938 | ||||||
Wallenstam AB – Class B | 13,656 | 120,948 | ||||||
West China Cement Ltd. | 1,596,000 | 272,345 | ||||||
WHA Corp. PCL(a) | 242,000 | 21,909 | ||||||
Wharf Holdings Ltd. (The) | 94,000 | 560,548 | ||||||
WP Carey, Inc. | 1,351 | 85,613 | ||||||
|
| |||||||
38,805,429 | ||||||||
|
|
18 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Health Care – 0.7% | ||||||||
HCP, Inc. | 7,041 | $ | 261,925 | |||||
LTC Properties, Inc. | 20,370 | 872,855 | ||||||
Omega Healthcare Investors, Inc. | 2,477 | 85,506 | ||||||
Ventas, Inc. | 31,505 | 1,692,448 | ||||||
Welltower, Inc. | 15,290 | 991,862 | ||||||
|
| |||||||
3,904,596 | ||||||||
|
| |||||||
Triple Net – 0.5% | ||||||||
National Retail Properties, Inc. | 30,770 | 1,169,260 | ||||||
Realty Income Corp. | 32,554 | 1,610,121 | ||||||
|
| |||||||
2,779,381 | ||||||||
|
| |||||||
45,489,406 | ||||||||
|
| |||||||
Retail – 4.9% | ||||||||
Regional Mall – 1.4% | ||||||||
BR Malls Participacoes SA | 30,640 | 88,903 | ||||||
CapitaLand Mall Trust | 179,100 | 252,515 | ||||||
General Growth Properties, Inc. | 7,743 | 224,160 | ||||||
Macerich Co. (The) | 2,428 | 205,749 | ||||||
Multiplan Empreendimentos Imobiliarios SA | 24,680 | 269,087 | ||||||
Pennsylvania Real Estate Investment Trust | 49,130 | 1,104,443 | ||||||
Simon Property Group, Inc. | 21,869 | 4,405,729 | ||||||
Taubman Centers, Inc. | 950 | 73,131 | ||||||
Westfield Corp. | 155,744 | 1,129,941 | ||||||
|
| |||||||
7,753,658 | ||||||||
|
| |||||||
Shopping Center/Other Retail – 3.5% | ||||||||
Aeon Mall Co., Ltd. | 7,500 | 125,458 | ||||||
Brixmor Property Group, Inc. | 31,100 | 796,782 | ||||||
Capital & Counties Properties PLC | 50,198 | 343,539 | ||||||
Capitaland Malaysia Mall Trust | 77,200 | 24,799 | ||||||
Citycon Oyj(a) | 27,054 | 71,189 | ||||||
DDR Corp. | 45,814 | 769,675 | ||||||
Federal Realty Investment Trust | 1,055 | 151,382 | ||||||
Federation Centres | 532,905 | 1,100,855 | ||||||
Fibra Shop Portafolios Inmobiliarios SAPI de CV | 452,304 | 463,591 | ||||||
Hammerson PLC | 97,153 | 951,877 | ||||||
Hyprop Investments Ltd. | 43,817 | 397,358 | ||||||
IGB Real Estate Investment Trust | 117,600 | 36,955 | ||||||
Iguatemi Empresa de Shopping Centers SA | 4,200 | 23,212 | ||||||
Intu Properties PLC | 63,418 | 337,595 | ||||||
Japan Retail Fund Investment Corp. | 267 | 517,118 | ||||||
JB Hi-Fi Ltd. | 31,210 | 397,105 | ||||||
Kimco Realty Corp. | 6,319 | 169,160 | ||||||
Kite Realty Group Trust | 35,760 | 944,422 | ||||||
Klepierre | 31,406 | 1,487,381 | ||||||
Link REIT | 354,923 | 2,120,551 | ||||||
Mercialys SA | 29,660 | 681,348 | ||||||
Ramco-Gershenson Properties Trust | 52,143 | 876,002 | ||||||
Regency Centers Corp. | 1,433 | 97,387 | ||||||
Renhe Commercial Holdings Co., Ltd.(a) | 1,124,000 | 58,565 |
AB ALL MARKET REAL RETURN PORTFOLIO • | 19 |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Retail Opportunity Investments Corp. | 48,980 | $ | 888,007 | |||||
RioCan Real Estate Investment Trust (Toronto) | 4,875 | 95,069 | ||||||
Scentre Group | 762,207 | 2,235,652 | ||||||
Smart Real Estate Investment Trust | 1,703 | 40,452 | ||||||
Unibail-Rodamco SE | 6,803 | 1,893,485 | ||||||
Vastned Retail NV | 14,625 | 709,290 | ||||||
|
| |||||||
18,805,261 | ||||||||
|
| |||||||
26,558,919 | ||||||||
|
| |||||||
Materials – 4.8% | ||||||||
Aluminum – 0.0% | ||||||||
Alcoa, Inc. | 8,039 | 71,789 | ||||||
Norsk Hydro ASA | 8,263 | 29,596 | ||||||
|
| |||||||
101,385 | ||||||||
|
| |||||||
Commodity Chemicals – 0.4% | ||||||||
LyondellBasell Industries NV – Class A | 14,450 | 1,342,549 | ||||||
Westlake Chemical Corp. | 12,910 | 778,086 | ||||||
|
| |||||||
2,120,635 | ||||||||
|
| |||||||
Diversified Chemicals – 0.2% | ||||||||
Arkema SA | 15,332 | 1,120,442 | ||||||
|
| |||||||
Diversified Metals & Mining – 1.6% | ||||||||
Anglo American PLC | 8,560 | 71,816 | ||||||
Aurubis AG | 12,360 | 825,647 | ||||||
BHP Billiton Ltd. | 19,815 | 324,981 | ||||||
BHP Billiton PLC | 12,945 | 206,913 | ||||||
Boliden AB | 58,600 | 1,121,977 | ||||||
First Quantum Minerals Ltd. | 93,030 | 496,596 | ||||||
Freeport-McMoRan, Inc. | 65,550 | 771,523 | ||||||
Glencore PLC(a) | 1,602,281 | 2,766,260 | ||||||
Korea Zinc Co., Ltd. | 2,450 | 1,018,144 | ||||||
Lundin Mining Corp.(a) | 164,300 | 554,117 | ||||||
Rio Tinto Ltd. | 2,712 | 96,976 | ||||||
South32 Ltd.(a) | 240,320 | 248,854 | ||||||
|
| |||||||
8,503,804 | ||||||||
|
| |||||||
Fertilizers & Agricultural Chemicals – 0.3% | ||||||||
Mosaic Co. (The) | 10,277 | 347,260 | ||||||
Potash Corp. of Saskatchewan, Inc. | 25,758 | 521,621 | ||||||
Syngenta AG (REG) | 2,885 | 969,274 | ||||||
|
| |||||||
1,838,155 | ||||||||
|
| |||||||
Forest Products – 0.0% | ||||||||
West Fraser Timber Co., Ltd. | 2,139 | 75,689 | ||||||
|
| |||||||
Gold – 0.9% | ||||||||
Agnico Eagle Mines Ltd. | 36,985 | 1,045,400 | ||||||
Barrick Gold Corp. | 36,777 | 282,662 | ||||||
Franco-Nevada Corp. | 4,927 | 249,892 | ||||||
Goldcorp, Inc. | 97,736 | 1,250,477 | ||||||
Koza Altin Isletmeleri AS | 58,010 | 325,641 | ||||||
Newcrest Mining Ltd.(a) | 25,207 | 219,585 |
20 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Newmont Mining Corp. | 16,723 | $ | 325,429 | |||||
Randgold Resources Ltd. | 13,550 | 908,756 | ||||||
Real Gold Mining Ltd.(a)(c)(d) | 124,500 | – 0 | – | |||||
|
| |||||||
4,607,842 | ||||||||
|
| |||||||
Paper Packaging – 0.2% | ||||||||
Smurfit Kappa Group PLC | 31,450 | 897,031 | ||||||
|
| |||||||
Paper Products – 0.3% | ||||||||
International Paper Co. | 12,463 | 532,045 | ||||||
Mondi PLC | 36,406 | 841,857 | ||||||
Stora Enso Oyj – Class R | 17,103 | 158,651 | ||||||
UPM-Kymmene Oyj | 16,584 | 310,469 | ||||||
|
| |||||||
1,843,022 | ||||||||
|
| |||||||
Precious Metals & Minerals – 0.0% | ||||||||
Fresnillo PLC | 6,977 | 78,257 | ||||||
Industrias Penoles SAB de CV | 4,412 | 58,445 | ||||||
|
| |||||||
136,702 | ||||||||
|
| |||||||
Silver – 0.1% | ||||||||
Silver Wheaton Corp. | 55,735 | 757,427 | ||||||
|
| |||||||
Specialty Chemicals – 0.1% | ||||||||
Johnson Matthey PLC | 13,420 | 533,770 | ||||||
|
| |||||||
Steel – 0.7% | ||||||||
ArcelorMittal (Euronext Amsterdam) | 6,143 | 34,304 | ||||||
JFE Holdings, Inc. | 3,072 | 48,293 | ||||||
Nippon Steel & Sumitomo Metal Corp. | 4,700 | 95,281 | ||||||
Novolipetsk Steel OJSC (GDR)(b) | 67,720 | 830,430 | ||||||
Nucor Corp. | 1,959 | 82,866 | ||||||
POSCO | 429 | 68,988 | ||||||
Severstal PAO (GDR)(b) | 53,830 | 631,584 | ||||||
ThyssenKrupp AG | 2,253 | 45,398 | ||||||
Vale SA (Preference Shares) | 11,633 | 42,318 | ||||||
Vale SA (Sponsored ADR) (Local Preference Shares) | 365,030 | 1,314,108 | ||||||
voestalpine AG | 16,120 | 582,837 | ||||||
|
| |||||||
3,776,407 | ||||||||
|
| |||||||
26,312,311 | ||||||||
|
| |||||||
Residential – 4.3% | ||||||||
Multi-Family – 3.4% | ||||||||
Advance Residence Investment Corp. | 88 | 187,770 | ||||||
Apartment Investment & Management Co. – Class A | 2,402 | 94,134 | ||||||
AvalonBay Communities, Inc. | 13,146 | 2,298,315 | ||||||
Boardwalk Real Estate Investment Trust | 610 | 25,061 | ||||||
BUWOG AG(a) | 3,509 | 74,606 | ||||||
Camden Property Trust | 1,328 | 97,993 | ||||||
Canadian Apartment Properties REIT | 1,814 | 37,345 | ||||||
China Overseas Land & Investment Ltd. | 272,140 | 878,976 |
AB ALL MARKET REAL RETURN PORTFOLIO • | 21 |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
China Resources Land Ltd. | 639,908 | $ | 1,662,857 | |||||
China Vanke Co., Ltd. – Class H | 632,874 | 1,480,152 | ||||||
CIFI Holdings Group Co., Ltd. | 1,414,000 | 301,751 | ||||||
Comforia Residential REIT, Inc. | 95 | 182,003 | ||||||
Corp. GEO SAB de CV Series B(a)(c)(d) | 23,600 | – 0 | –^ | |||||
Cyrela Brazil Realty SA Empreendimentos e Participacoes | 18,900 | 43,896 | ||||||
Desarrolladora Homex SAB de CV(a) | 1,460 | 703 | ||||||
Deutsche Wohnen AG | 23,396 | 659,513 | ||||||
Emlak Konut Gayrimenkul Yatirim Ortakligi AS | 562,503 | 544,912 | ||||||
Equity LifeStyle Properties, Inc. | 1,173 | 70,943 | ||||||
Equity Residential | 14,239 | 1,100,959 | ||||||
Essex Property Trust, Inc. | 6,288 | 1,386,127 | ||||||
Ichigo Office REIT Investment | 450 | 311,089 | ||||||
Independence Realty Trust, Inc. | 51,740 | 405,642 | ||||||
Japan Rental Housing Investments, Inc. | 319 | 213,400 | ||||||
KWG Property Holding Ltd. | 758,000 | 544,627 | ||||||
LEG Immobilien AG(a) | 3,949 | 314,835 | ||||||
LPN Development PCL | 40,800 | 20,496 | ||||||
Mid-America Apartment Communities, Inc. | 14,676 | 1,250,249 | ||||||
MRV Engenharia e Participacoes SA | 20,250 | 38,948 | ||||||
Shenzhen Investment Ltd. | 210,000 | 84,956 | ||||||
Shimao Property Holdings Ltd. | 88,500 | 154,314 | ||||||
Sino-Ocean Land Holdings Ltd. | 261,080 | 150,739 | ||||||
Stockland | 163,164 | 468,289 | ||||||
Sun Communities, Inc. | 11,036 | 739,633 | ||||||
UDR, Inc. | 3,981 | 137,185 | ||||||
UNITE Group PLC (The) | 38,980 | 398,915 | ||||||
Urbi Desarrollos Urbanos SAB de CV(a)(c)(d) | 120,400 | – 0 | –^ | |||||
Vonovia SE | 41,451 | 1,381,725 | ||||||
Wing Tai Holdings Ltd. | 671,300 | 835,381 | ||||||
Yuexiu Property Co., Ltd. | 444,000 | 76,497 | ||||||
|
| |||||||
18,654,936 | ||||||||
|
| |||||||
Self Storage – 0.9% | ||||||||
Big Yellow Group PLC | 51,520 | 594,739 | ||||||
CubeSmart | 36,490 | 1,015,152 | ||||||
Extra Space Storage, Inc. | 14,533 | 1,151,595 | ||||||
National Storage Affiliates Trust | 39,951 | 600,863 | ||||||
Public Storage | 5,319 | 1,220,497 | ||||||
Safestore Holdings PLC | 86,780 | 435,454 | ||||||
|
| |||||||
5,018,300 | ||||||||
|
| |||||||
23,673,236 | ||||||||
|
| |||||||
Office – 2.4% | ||||||||
Office – 2.4% | ||||||||
Allied Properties Real Estate Investment Trust | 21,418 | 587,701 | ||||||
alstria office REIT-AG(a) | 80,173 | 1,118,626 | ||||||
Ascendas India Trust | 48,900 | 30,543 | ||||||
Befimmo SA | 1,162 | 77,753 | ||||||
Boston Properties, Inc. | 16,128 | 2,029,708 | ||||||
Castellum AB | 11,330 | 169,582 |
22 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Cominar Real Estate Investment Trust | 2,545 | $ | 29,934 | |||||
Derwent London PLC | 6,880 | 410,894 | ||||||
Dream Office Real Estate Investment Trust | 30,451 | 488,809 | ||||||
Entra ASA(b) | 4,315 | 36,680 | ||||||
Fabege AB | 9,141 | 145,221 | ||||||
Highwoods Properties, Inc. | 14,590 | 633,935 | ||||||
Hongkong Land Holdings Ltd. | 204,200 | 1,531,130 | ||||||
Hudson Pacific Properties, Inc. | 17,410 | 497,404 | ||||||
ICADE | 8,940 | 660,644 | ||||||
Inmobiliaria Colonial SA(a) | 115,812 | 85,649 | ||||||
Investa Office Fund | 117,040 | 334,978 | ||||||
Japan Prime Realty Investment Corp. | 114 | 371,090 | ||||||
Japan Real Estate Investment Corp. | 86 | 397,533 | ||||||
Kenedix Office Investment Corp. – Class A | 138 | 632,604 | ||||||
Kilroy Realty Corp. | 1,353 | 89,082 | ||||||
Liberty Property Trust | 13,017 | 442,838 | ||||||
Mori Hills REIT Investment Corp. | 166 | 205,387 | ||||||
Nippon Building Fund, Inc. | 93 | 441,683 | ||||||
Norwegian Property ASA(a) | 17,050 | 18,459 | ||||||
PSP Swiss Property AG (REG)(a) | 2,749 | 239,136 | ||||||
SL Green Realty Corp. | 1,530 | 181,489 | ||||||
Tokyo Tatemono Co., Ltd. | 14,200 | 176,440 | ||||||
Vornado Realty Trust | 2,605 | 261,933 | ||||||
Workspace Group PLC | 32,290 | 475,579 | ||||||
|
| |||||||
12,802,444 | ||||||||
|
| |||||||
Oil, Gas & Consumable Fuels – 1.8% | ||||||||
Integrated Oil & Gas – 1.8% | ||||||||
BP PLC | 1,679,225 | 9,979,610 | ||||||
|
| |||||||
Industrials – 1.5% | ||||||||
Industrial Warehouse Distribution – 1.1% | ||||||||
Ascendas Real Estate Investment Trust | 135,900 | 231,374 | ||||||
DCT Industrial Trust, Inc. | 26,750 | 992,960 | ||||||
Global Logistic Properties Ltd. | 210,700 | 336,994 | ||||||
GLP J-Reit | 398 | 396,034 | ||||||
Granite Real Estate Investment Trust | 27,908 | 807,099 | ||||||
Japan Logistics Fund, Inc. | 136 | 254,338 | ||||||
Mapletree Logistics Trust | 432,309 | 314,426 | ||||||
Mexico Real Estate Management SA de CV(a) | 381,186 | 527,547 | ||||||
PLA Administradora Industrial S de RL de CV(a) | 170,060 | 313,088 | ||||||
Prologis, Inc. | 27,806 | 1,188,150 | ||||||
Segro PLC | 51,239 | 354,939 | ||||||
Warehouses De Pauw CVA | 6,013 | 492,248 | ||||||
|
| |||||||
6,209,197 | ||||||||
|
| |||||||
Mixed Office Industrial – 0.4% | ||||||||
BR Properties SA | 13,240 | 40,500 | ||||||
Goodman Group | 325,312 | 1,395,708 | ||||||
Green REIT PLC | 45,618 | 78,815 | ||||||
Kungsleden AB | 76,834 | 575,449 | ||||||
|
| |||||||
2,090,472 | ||||||||
|
| |||||||
8,299,669 | ||||||||
|
|
AB ALL MARKET REAL RETURN PORTFOLIO • | 23 |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Lodging – 1.0% | ||||||||
Lodging – 1.0% | ||||||||
Ashford Hospitality Trust, Inc. | 119,896 | $ | 824,884 | |||||
Chesapeake Lodging Trust | 31,910 | 878,801 | ||||||
Host Hotels & Resorts, Inc. | 11,624 | 201,444 | ||||||
Japan Hotel REIT Investment Corp. | 335 | 232,676 | ||||||
Pebblebrook Hotel Trust | 24,550 | 839,119 | ||||||
RLJ Lodging Trust | 44,840 | 1,125,036 | ||||||
Summit Hotel Properties, Inc. | 67,010 | 876,491 | ||||||
Wyndham Worldwide Corp. | 5,070 | 412,445 | ||||||
|
| |||||||
5,390,896 | ||||||||
|
| |||||||
Metals & Mining – 0.9% | ||||||||
Diversified Metals & Mining – 0.9% | ||||||||
Rio Tinto PLC | 129,249 | 4,710,509 | ||||||
|
| |||||||
Chemicals – 0.8% | ||||||||
Fertilizers & Agricultural Chemicals – 0.8% | ||||||||
CF Industries Holdings, Inc. | 33,572 | 1,704,450 | ||||||
Monsanto Co. | 30,444 | 2,837,990 | ||||||
|
| |||||||
4,542,440 | ||||||||
|
| |||||||
Food Products – 0.4% | ||||||||
Agricultural Products – 0.4% | ||||||||
Archer-Daniels-Midland Co. | 43,569 | 1,989,361 | ||||||
|
| |||||||
Real Estate – 0.3% | ||||||||
Developers – 0.1% | ||||||||
Daelim Industrial Co., Ltd. | 4,240 | 276,812 | ||||||
|
| |||||||
Diversified Real Estate Activities – 0.2% | ||||||||
MMC Norilsk Nickel PJSC (ADR) | 99,470 | 1,482,103 | ||||||
|
| |||||||
1,758,915 | ||||||||
|
| |||||||
Mortgage – 0.2% | ||||||||
Mortgage – 0.2% | ||||||||
Blackstone Mortgage Trust, Inc. – Class A | 14,360 | 395,187 | ||||||
Concentradora Hipotecaria SAPI de CV | 251,130 | 393,013 | ||||||
First American Financial Corp. | 10,240 | 390,451 | ||||||
|
| |||||||
1,178,651 | ||||||||
|
| |||||||
Food Beverage & Tobacco – 0.2% | ||||||||
Agricultural Products – 0.1% | ||||||||
Bunge Ltd. | 4,514 | 329,342 | ||||||
|
| |||||||
Packaged Foods & Meats – 0.1% | ||||||||
Tyson Foods, Inc. – Class A | 12,240 | 542,966 | ||||||
|
| |||||||
872,308 | ||||||||
|
| |||||||
Financial:Other – 0.1% | ||||||||
Financial:Other – 0.1% | ||||||||
HFF, Inc. – Class A | 11,240 | 388,005 | ||||||
|
| |||||||
Total Common Stocks | 303,896,098 | |||||||
|
|
24 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
Company | Principal Amount (000) | U.S. $ Value | ||||||||||
| ||||||||||||
INFLATION-LINKED SECURITIES – 25.2% | ||||||||||||
United States – 25.2% | ||||||||||||
U.S. Treasury Inflation Index | U.S.$ | 134,482 | $ | 133,632,788 | ||||||||
0.625%, 7/15/21 (TIPS) | 3,714 | 3,769,544 | ||||||||||
|
| |||||||||||
Total Inflation-Linked Securities | 137,402,332 | |||||||||||
|
| |||||||||||
Shares | ||||||||||||
INVESTMENT COMPANIES – 5.5% | ||||||||||||
Funds and Investment Trusts – 5.5% | ||||||||||||
iShares US Real Estate ETF | 27,630 | 2,082,197 | ||||||||||
SPDR S&P Dividend ETF | 217,450 | 16,906,737 | ||||||||||
Vanguard Dividend Appreciation ETF | 139,820 | 11,005,232 | ||||||||||
|
| |||||||||||
Total Investment Companies | 29,994,166 | |||||||||||
|
| |||||||||||
WARRANTS – 0.2% | ||||||||||||
Materials – 0.2% | ||||||||||||
Fertilizers & Agricultural Chemicals – 0.2% | ||||||||||||
UPL Ltd., Deutsche Bank, expiring 1/30/17(a) | 158,480 | 1,113,122 | ||||||||||
|
| |||||||||||
Equity: Other – 0.0% | ||||||||||||
Diversified/Specialty – 0.0% | ||||||||||||
Eastern & Oriental Bhd, expiring 7/21/19(a) | 12,100 | 605 | ||||||||||
|
| |||||||||||
Health Care – 0.0% | ||||||||||||
Emaar Properties PJSC, Merrill Lynch Intl & Co., | 75,327 | 132,286 | ||||||||||
|
| |||||||||||
132,891 | ||||||||||||
|
| |||||||||||
Financial:Other – 0.0% | ||||||||||||
Financial:Other – 0.0% | ||||||||||||
DLF Ltd., Merrill Lynch Intl & Co., | 29,860 | 53,026 | ||||||||||
|
| |||||||||||
Industrials – 0.0% | ||||||||||||
Industrial Warehouse Distribution – 0.0% | ||||||||||||
WHA Corp. PCL, | 24,200 | 340 | ||||||||||
|
| |||||||||||
Total Warrants | 1,299,379 | |||||||||||
|
|
AB ALL MARKET REAL RETURN PORTFOLIO • | 25 |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
SHORT-TERM INVESTMENTS – 9.1% | ||||||||||
Investment Companies – 9.1% | ||||||||||
AB Fixed Income Shares, Inc. – | 49,719,017 | $ | 49,719,017 | |||||||
|
| |||||||||
Total Investments – 95.7% | 522,310,992 | |||||||||
Other assets less liabilities – 4.3% | 23,185,510 | |||||||||
|
| |||||||||
Net Assets – 100.0% | $ | 545,496,502 | ||||||||
|
|
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at October 31, 2015 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Purchased Contracts |
| |||||||||||||||||||
Cattle Feeder Futures | 9 | January 2016 | $ | 830,258 | $ | 824,400 | $ | (5,858 | ) | |||||||||||
Coffee C Futures | 10 | December 2015 | 499,510 | 453,563 | (45,947 | ) | ||||||||||||||
Coffee Robusta Futures | 30 | January 2016 | 487,256 | 492,900 | 5,644 | |||||||||||||||
Gold 100 OZ Futures | 104 | December 2015 | 11,525,301 | 11,870,560 | 345,259 | |||||||||||||||
Lean Hogs Futures | 75 | December 2015 | 1,943,228 | 1,776,000 | (167,228 | ) | ||||||||||||||
LME Nickel Futures | 28 | December 2015 | 1,703,930 | 1,688,148 | (15,782 | ) | ||||||||||||||
LME PRI Aluminum Futures | 39 | December 2015 | 1,576,207 | 1,428,619 | (147,588 | ) | ||||||||||||||
LME Zinc Futures | 4 | December 2015 | 168,812 | 170,075 | 1,263 | |||||||||||||||
Platinum Futures | 29 | January 2016 | 1,419,870 | 1,434,195 | 14,325 | |||||||||||||||
Silver Futures | 10 | December 2015 | 775,008 | 778,350 | 3,342 | |||||||||||||||
Soybean Futures | 61 | January 2016 | 2,800,081 | 2,701,538 | (98,543 | ) | ||||||||||||||
Sugar 11 (World) Futures | 111 | February 2016 | 1,535,690 | 1,805,126 | 269,436 | |||||||||||||||
WTI Crude Futures | 191 | November 2017 | 15,443,783 | 10,470,620 | (4,973,163 | ) | ||||||||||||||
WTI Crude Futures | 355 | November 2018 | 28,647,847 | 20,220,800 | (8,427,047 | ) | ||||||||||||||
WTI Crude Futures | 178 | November 2019 | 12,406,385 | 10,412,999 | (1,993,386 | ) | ||||||||||||||
Sold Contracts |
| |||||||||||||||||||
KC HRW Wheat Futures | 109 | December 2015 | 2,710,556 | 2,690,938 | 19,618 | |||||||||||||||
Live Cattle Futures | 47 | December 2015 | 2,619,853 | 2,664,430 | (44,577 | ) | ||||||||||||||
LME Nickel Futures | 16 | December 2015 | 971,471 | 964,656 | 6,815 | |||||||||||||||
LME PRI Aluminum Futures | 79 | December 2015 | 3,083,227 | 2,893,869 | 189,358 | |||||||||||||||
|
| |||||||||||||||||||
$ | (15,064,059 | ) | ||||||||||||||||||
|
|
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note D)
Counterparty | Contracts to | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
BNP Paribas SA | AUD | 5,344 | USD | 3,752 | 12/15/15 | $ | (50,966 | ) | ||||||||||||||||
Citibank | SGD | 1,769 | USD | 1,242 | 12/15/15 | (18,507 | ) | |||||||||||||||||
Citibank | USD | 5,658 | GBP | 3,713 | 12/15/15 | 65,270 | ||||||||||||||||||
Citibank | USD | 7,623 | NOK | 62,169 | 12/15/15 | (311,407 | ) | |||||||||||||||||
Deutsche Bank AG | AUD | 3,963 | USD | 2,907 | 12/15/15 | 86,620 |
26 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
Counterparty | Contracts to | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
Deutsche Bank AG | EUR | 4,150 | USD | 4,551 | 12/15/15 | $ | (15,538 | ) | ||||||||||||||||
Deutsche Bank AG | GBP | 2,009 | USD | 3,047 | 12/15/15 | (49,156 | ) | |||||||||||||||||
Goldman Sachs Bank USA | USD | 12,014 | RUB | 757,555 | 11/25/15 | (228,109 | ) | |||||||||||||||||
Goldman Sachs Bank USA | KRW | 776,074 | USD | 651 | 12/15/15 | (27,760 | ) | |||||||||||||||||
HSBC Bank USA | BRL | 5,216 | USD | 1,331 | 12/15/15 | (3,487 | ) | |||||||||||||||||
HSBC Bank USA | HKD | 10,644 | USD | 1,373 | 12/15/15 | (431 | ) | |||||||||||||||||
JPMorgan Chase Bank | AUD | 3,577 | USD | 2,504 | 12/15/15 | (41,199 | ) | |||||||||||||||||
JPMorgan Chase Bank | JPY | 309,133 | USD | 2,583 | 12/15/15 | 19,258 | ||||||||||||||||||
JPMorgan Chase Bank | JPY | 842,890 | USD | 6,970 | 12/15/15 | (19,246 | ) | |||||||||||||||||
JPMorgan Chase Bank | USD | 2,649 | AUD | 3,649 | 12/15/15 | (52,835 | ) | |||||||||||||||||
Morgan Stanley & Co., Inc. | GBP | 2,343 | USD | 3,601 | 12/15/15 | (10,674 | ) | |||||||||||||||||
Morgan Stanley & Co., Inc. | INR | 55,489 | USD | 820 | 12/15/15 | (22,532 | ) | |||||||||||||||||
Morgan Stanley & Co., Inc. | JPY | 156,932 | USD | 1,305 | 12/15/15 | 3,894 | ||||||||||||||||||
Morgan Stanley & Co., Inc. | USD | 11,417 | NZD | 17,153 | 12/15/15 | 162,561 | ||||||||||||||||||
Northern Trust Company | EUR | 1,975 | USD | 2,221 | 12/15/15 | 47,473 | ||||||||||||||||||
Northern Trust Company | NOK | 7,754 | USD | 941 | 12/15/15 | 29,419 | ||||||||||||||||||
Royal Bank of Scotland PLC | CAD | 16,071 | USD | 12,145 | 12/15/15 | (142,122 | ) | |||||||||||||||||
Royal Bank of Scotland PLC | CNY | 66,842 | USD | 10,185 | 12/15/15 | (327,938 | ) | |||||||||||||||||
Royal Bank of Scotland PLC | EUR | 20,024 | USD | 22,438 | 12/15/15 | 404,189 | ||||||||||||||||||
Royal Bank of Scotland PLC | NOK | 18,885 | USD | 2,289 | 12/15/15 | 67,795 | ||||||||||||||||||
Royal Bank of Scotland PLC | NZD | 17,211 | USD | 11,274 | 12/15/15 | (344,531 | ) | |||||||||||||||||
Royal Bank of Scotland PLC | RUB | 320,474 | USD | 4,707 | 12/15/15 | (249,787 | ) | |||||||||||||||||
Royal Bank of Scotland PLC | USD | 5,382 | EUR | 4,752 | 12/15/15 | (152,719 | ) | |||||||||||||||||
Royal Bank of Scotland PLC | USD | 10,636 | JPY | 1,274,123 | 12/15/15 | (70,273 | ) | |||||||||||||||||
Standard Chartered Bank | GBP | 1,264 | USD | 1,983 | 12/15/15 | 34,852 | ||||||||||||||||||
Standard Chartered Bank | USD | 683 | IDR | 10,096,953 | 12/15/15 | 43,024 | ||||||||||||||||||
State Street Bank & Trust Co. | EUR | 2,995 | USD | 3,356 | 12/15/15 | 60,229 | ||||||||||||||||||
State Street Bank & Trust Co. | SEK | 10,036 | USD | 1,197 | 12/15/15 | 21,178 | ||||||||||||||||||
State Street Bank & Trust Co. | SGD | 48 | USD | 34 | 12/15/15 | (114 | ) | |||||||||||||||||
State Street Bank & Trust Co. | USD | 1,753 | CHF | 1,709 | 12/15/15 | (21,295 | ) | |||||||||||||||||
State Street Bank & Trust Co. | USD | 5,440 | EUR | 4,896 | 12/15/15 | (52,123 | ) | |||||||||||||||||
State Street Bank & Trust Co. | USD | 1,686 | GBP | 1,096 | 12/15/15 | 3,363 | ||||||||||||||||||
State Street Bank & Trust Co. | USD | 1,899 | HKD | 14,716 | 12/15/15 | 161 | ||||||||||||||||||
State Street Bank & Trust Co. | USD | 512 | JPY | 61,246 | 12/15/15 | (3,899 | ) | |||||||||||||||||
State Street Bank & Trust Co. | USD | 603 | MYR | 2,611 | 12/15/15 | 3,082 | ||||||||||||||||||
State Street Bank & Trust Co. | USD | 2,620 | ZAR | 36,491 | 12/15/15 | (3,084 | ) | |||||||||||||||||
UBS AG | GBP | 5,551 | USD | 8,531 | 12/15/15 | (24,307 | ) | |||||||||||||||||
UBS AG | USD | 7,431 | EUR | 6,523 | 12/15/15 | (253,374 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
$ | (1,445,045 | ) | ||||||||||||||||||||||
|
|
INFLATION (CPI) SWAPS (see Note D)
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 | $ | 8,719 | 3/25/25 | 2.205 | % | CPI | # | $ | (67,796 | ) | ||||||||||
Deutsche Bank AG | 38,982 | 3/25/25 | 2.205 | % | CPI | # | (303,108 | ) | ||||||||||||
Deutsche Bank AG | 46,779 | 3/25/25 | 2.205 | % | CPI | # | (363,735 | ) | ||||||||||||
Deutsche Bank AG | 18,987 | 3/26/25 | 2.195 | % | CPI | # | (138,598 | ) | ||||||||||||
Deutsche Bank AG | 37,975 | 3/26/25 | 2.170 | % | CPI | # | (233,604 | ) |
AB ALL MARKET REAL RETURN PORTFOLIO • | 27 |
Consolidated Portfolio of Investments
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 | $ | 54,500 | 7/30/25 | 2.278 | % | CPI | # | $ | (516,259 | ) | ||||||||||
JPMorgan Chase Bank, NA | 76,719 | 3/30/25 | 2.170 | % | CPI | # | (464,177 | ) | ||||||||||||
JPMorgan Chase Bank, NA | 76,719 | 4/01/25 | 2.170 | % | CPI | # | (464,443 | ) | ||||||||||||
�� |
|
| ||||||||||||||||||
$ | (2,551,720 | ) | ||||||||||||||||||
|
|
# | Variable interest rate based on the rate of inflation as determined by the Consumer Price Index (CPI). |
TOTAL RETURN SWAPS (see Note D)
Counterparty & Referenced Obligation | # of Shares or Units | Rate Paid/ Received | Notional Amount (000) | Maturity Date | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Receive Total Return on Reference Obligation |
| |||||||||||||||||||
Credit Suisse International Bloomberg Commodity Index 2 Months Forwards | 227,233 | 0.11 | % | $ | 44,487 | 12/15/15 | $ | (1,128,647 | ) | |||||||||||
Goldman Sachs International Bloomberg Commodity Index 2 Months Forwards | 250,000 | 0.11 | % | 48,944 | 12/15/15 | (1,241,729 | ) | |||||||||||||
JPMorgan Chase Bank, NA Bloomberg Commodity Index 2 Months Forwards | 26,693 | 0.11 | % | 5,130 | 12/15/15 | (36,051 | ) | |||||||||||||
Bloomberg Commodity Index 2 Months Forwards | 18,121 | 0.11 | % | 3,548 | 12/15/15 | (89,680 | ) | |||||||||||||
Bloomberg Commodity Index 2 Months Forwards | 432,632 | 0.11 | % | 84,700 | 12/15/15 | (2,148,847 | ) | |||||||||||||
Pay Total Return on Reference Obligation |
| |||||||||||||||||||
JPMorgan Chase Bank, NA BBG WTI Crude Oil Index | 102,626 | 0.05 | % | 10,950 | 1/15/16 | 50,254 | ||||||||||||||
|
| |||||||||||||||||||
$ | (4,594,700 | ) | ||||||||||||||||||
|
|
28 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
^ | Amount less than $0.50. |
(a) | Non-income producing security. |
(b) | 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 $2,369,387 or 0.4% of net assets. |
(c) | Fair valued by the Adviser. |
(d) | Illiquid security. |
(e) | Position, or a portion thereof, has been segregated to collateralize margin requirements for open futures contracts. |
(f) | Position, or a portion thereof, has been segregated to collateralize OTC derivatives outstanding. |
(g) | 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. |
(h) | Investment in affiliated money market mutual fund. The rate shown represents the 7-day yield as of period end. |
Currency Abbreviations:
AUD – Australian Dollar BRL – Brazilian Real CAD – Canadian Dollar CHF – Swiss Franc CNY – Chinese Yuan Renminbi EUR – Euro GBP – Great British Pound HKD – Hong Kong Dollar IDR – Indonesian Rupiah INR – Indian Rupee JPY – Japanese Yen KRW – South Korean Won MYR – Malaysian Ringgit NOK – Norwegian Krone NZD – New Zealand Dollar RUB – Russian Ruble SEK – Swedish Krona SGD – Singapore Dollar USD – United States Dollar ZAR – South African Rand
Glossary:
ADR – American Depositary Receipt ETF – Exchange Traded Fund GDR – Global Depositary Receipt KC HRW – Kansas City Hard Red Winter LME – London Metal Exchange OJSC – Open Joint Stock Company PJSC – Public Joint Stock Company REG – Registered Shares REIT – Real Estate Investment Trust SPDR – Standard & Poor’s Depository Receipt TIPS – Treasury Inflation Protected Security WTI – West Texas Intermediate |
See notes to consolidated financial statements.
AB ALL MARKET REAL RETURN PORTFOLIO • | 29 |
Consolidated Portfolio of Investments
CONSOLIDATED STATEMENT OF ASSETS & LIABILITIES
October 31, 2015
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $505,922,898) | $ | 472,591,975 | ||
Affiliated issuers (cost $49,719,017) | 49,719,017 | |||
Cash | 457,794 | |||
Cash collateral due from broker | 4,739,428 | |||
Foreign currencies, at value (cost $22,806,326) | 22,479,143 | |||
Receivable for investment securities sold and foreign | 3,684,810 | |||
Receivable for capital stock sold | 1,196,852 | |||
Unrealized appreciation on forward currency exchange contracts | 1,052,368 | |||
Dividends and interest receivable | 495,175 | |||
Receivable for variation margin on exchange-traded derivatives | 113,358 | |||
Unrealized appreciation on total return swaps | 50,254 | |||
Receivable for terminated total return swaps | 16,105 | |||
|
| |||
Total assets | 556,596,279 | |||
|
| |||
Liabilities | ||||
Unrealized depreciation on inflation swaps | 2,551,720 | |||
Unrealized depreciation on total return swaps | 4,644,954 | |||
Unrealized depreciation on forward currency exchange contracts | 2,497,413 | |||
Payable for investment securities purchased | 449,111 | |||
Payable for capital stock redeemed | 224,952 | |||
Management fee payable | 309,300 | |||
Distribution fee payable | 109,534 | |||
Transfer Agent fee payable | 43,587 | |||
Administrative fee payable | 15,124 | |||
Accrued expenses and other liabilities | 254,082 | |||
|
| |||
Total liabilities | 11,099,777 | |||
|
| |||
Net Assets | $ | 545,496,502 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 67,725 | ||
Additional paid-in capital | 652,019,426 | |||
Undistributed net investment income | 7,271,555 | |||
Accumulated net realized loss on investment | (56,532,567 | ) | ||
Net unrealized depreciation on investments | (57,329,637 | ) | ||
|
| |||
$ | 545,496,502 | |||
|
|
See notes to consolidated financial statements.
30 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Statement of Assets & Liabilities
Net Asset Value Per Share—30 billion shares of capital stock authorized, $.001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 16,610,699 | 2,043,157 | $ | 8.13 | * | ||||||
| ||||||||||||
C | $ | 4,202,139 | 522,994 | $ | 8.03 | |||||||
| ||||||||||||
Advisor | $ | 30,541,177 | 3,755,310 | $ | 8.13 | |||||||
| ||||||||||||
R | $ | 162,267 | 20,144 | $ | 8.06 | |||||||
| ||||||||||||
K | $ | 1,667,321 | 206,501 | $ | 8.07 | |||||||
| ||||||||||||
I | $ | 14,508,096 | 1,789,941 | $ | 8.11 | |||||||
| ||||||||||||
1 | $ | 474,631,103 | 58,995,365 | $ | 8.05 | |||||||
| ||||||||||||
2 | $ | 8,221 | 1,000 | $ | 8.22 | |||||||
| ||||||||||||
Z | $ | 3,165,479 | 390,303 | $ | 8.11 | |||||||
|
* | The maximum offering price per share for Class A shares was $8.49 which reflects a sales charge of 4.25%. |
See notes to consolidated financial statements.
AB ALL MARKET REAL RETURN PORTFOLIO • | 31 |
Consolidated Statement of Assets & Liabilities
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended October 31, 2015
Investment Income | ||||||||
Dividends | ||||||||
Unaffiliated issuers (net of foreign taxes withheld of $784,283) | $ | 12,041,343 | ||||||
Affiliated issuers | 73,768 | |||||||
Interest* | (862,776 | ) | $ | 11,252,335 | ||||
|
| |||||||
Expenses | ||||||||
Management fee (see Note B) | 4,332,368 | |||||||
Distribution fee—Class A | 62,789 | |||||||
Distribution fee—Class C | 61,367 | |||||||
Distribution fee—Class R | 820 | |||||||
Distribution fee—Class K | 4,777 | |||||||
Distribution fee—Class 1 | 1,232,120 | |||||||
Transfer agency—Class A | 57,905 | |||||||
Transfer agency—Class C | 16,259 | |||||||
Transfer agency—Advisor Class | 107,185 | |||||||
Transfer agency—Class R | 400 | |||||||
Transfer agency—Class K | 3,592 | |||||||
Transfer agency—Class I | 10,527 | |||||||
Transfer agency—Class 1 | 44,179 | |||||||
Transfer agency—Class Z | 181 | |||||||
Custodian | 291,251 | |||||||
Registration fees | 168,700 | |||||||
Audit and tax | 112,486 | |||||||
Printing | 76,804 | |||||||
Administrative | 49,900 | |||||||
Legal | 46,596 | |||||||
Directors’ fees | 18,777 | |||||||
Miscellaneous | 97,193 | |||||||
|
| |||||||
Total expenses | 6,796,176 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (114,288 | ) | ||||||
|
| |||||||
Net expenses | 6,681,888 | |||||||
|
| |||||||
Net investment income | 4,570,447 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (28,790,814 | )(a) | ||||||
Futures | (7,671,107 | ) | ||||||
Options written | (2,983,656 | ) | ||||||
Swaps | (61,307,078 | ) | ||||||
Foreign currency transactions | 8,142,059 | |||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | (29,553,767 | )(b) | ||||||
Futures | (11,071,414 | ) | ||||||
Swaps | (3,715,068 | ) | ||||||
Foreign currency denominated assets and liabilities | (4,506,371 | ) | ||||||
|
| |||||||
Net loss on investment and foreign currency transactions | (141,457,216 | ) | ||||||
|
| |||||||
Contributions from Affiliates (see Note B) | 306 | |||||||
|
| |||||||
Net Decrease in Net Assets from Operations | $ | (136,886,463 | ) | |||||
|
|
(a) | Net of foreign capital gains taxes of $68,911. |
(b) | Net of decrease in accrued foreign capital gains taxes of $36,480. |
* | The negative interest income reflects interest income adjusted for fluctuation in the inflation index related to TIPS and amortization of premiums. |
See notes to consolidated financial statements.
32 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Statement of Operations
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 4,570,447 | $ | 7,307,282 | ||||
Net realized loss on investment transactions and foreign currency transactions | (92,610,596 | ) | (1,755,935 | ) | ||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | (48,846,620 | ) | (28,674,070 | ) | ||||
Contributions from Affiliates (see Note B) | 306 | 119,942 | ||||||
|
|
|
| |||||
Net decrease in net assets from operations | (136,886,463 | ) | (23,002,781 | ) | ||||
Dividends to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (483,613 | ) | (792,091 | ) | ||||
Class C | (100,388 | ) | (58,007 | ) | ||||
Advisor Class | (1,240,758 | ) | (985,378 | ) | ||||
Class R | (4,403 | ) | (423 | ) | ||||
Class K | (50,051 | ) | (26,710 | ) | ||||
Class I | (452,178 | ) | (354,919 | ) | ||||
Class 1 | (12,070,530 | ) | (6,782,380 | ) | ||||
Class 2 | (270 | ) | (161 | ) | ||||
Class Z | (254 | ) | – 0 | – | ||||
Capital Stock Transactions | ||||||||
Net increase | 64,070,635 | 80,314,554 | ||||||
|
|
|
| |||||
Total increase (decrease) | (87,218,273 | ) | 48,311,704 | |||||
Net Assets | ||||||||
Beginning of period | 632,714,775 | 584,403,071 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $7,271,555 and $7,153,574, respectively) | $ | 545,496,502 | $ | 632,714,775 | ||||
|
|
|
|
See notes to consolidated financial statements.
AB ALL MARKET REAL RETURN PORTFOLIO • | 33 |
Consolidated Statement of Changes in Net Assets
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2015
NOTE A
Significant Accounting Policies
AB Bond Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940 as an open-end management investment company. Prior to January 20, 2015, the Fund was known as AllianceBernstein Bond Fund, Inc. The Fund, which is a Maryland corporation, operates as a series company comprised of nine portfolios currently in operation: the AB Intermediate Bond Portfolio, the AB Bond Inflation Strategy Portfolio, the AB Municipal Bond Inflation Strategy Portfolio, the AB All Market Real Return Portfolio (formerly AllianceBernstein Real Asset Strategy), the AB Limited Duration High Income Portfolio, the AB Government Reserves Portfolio, the AB Tax-Aware Fixed Income Portfolio, the AB Credit Long/Short Portfolio and the AB High Yield Portfolio. They are each diversified Portfolios, with the exception of the AB Credit Long/Short Portfolio and the AB High Yield Portfolio, which are non-diversified. Each Portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to the AB All Market Real Return Portfolio (the “Portfolio”). Prior to January 20, 2015, the Portfolio was known as AllianceBernstein Real Asset Strategy. As part of the Portfolio’s investment strategy, the Portfolio seeks to gain exposure to commodities and commodities-related instruments and derivatives primarily through investments in AllianceBernstein Cayman Inflation Strategy, Ltd., a wholly-owned subsidiary of the Portfolio organized under the laws of the Cayman Islands (the “Subsidiary”). The Portfolio and the Subsidiary commenced operations on March 8, 2010. The Subsidiary was incorporated on February 1, 2010. The Portfolio is the sole shareholder of the Subsidiary and it is intended that the Portfolio will remain the sole shareholder and will continue to control the Subsidiary. Under the Articles of Association of the Subsidiary, shares issued by the Subsidiary confer upon a shareholder the right to receive notice of, to attend and to vote at general meetings of the Subsidiary and shall confer upon the shareholder rights in a winding-up or repayment of capital and the right to participate in the profits or assets of the Subsidiary. As of October 31, 2015, net assets of the Portfolio were $545,496,502, of which $100,984,733, or 19%, represented the Portfolio’s ownership of all issued shares and voting rights of the Subsidiary. This report presents the consolidated financial statements of AB All Market Real Return Portfolio and the Subsidiary. All intercompany transactions and balances have been eliminated in consolidation. The Portfolio has authorized the issuance of Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I, Class 1, Class 2 and Class Z shares. Class B shares are not publically offered. Class 1 shares are sold only to the private clients of Sanford C. Bernstein & Co. LLC by its registered representatives. As of October 31, 2015, AllianceBernstein L.P. (the “Adviser”), was the sole shareholder of Class 2 shares. Class A shares are sold with a front-end sales charge of up to 4.25% for purchases not exceeding $1,000,000. With respect to purchases of $1,000,000 or more, Class A shares redeemed within one year of purchase may be subject to a contingent deferred sales charge of 1%. Class C shares are subject to a contingent deferred sales
34 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
charge of 1% on redemptions made within the first year after purchase. Class R, Class K, Class 1, and Class Z shares are sold without an initial or contingent deferred sales charge. Advisor Class, Class I, and Class 2 shares are sold without an initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. All ten classes of shares have identical voting, dividend, liquidation and other rights, except that the classes bear different distribution and transfer agency expenses. Each class has exclusive voting rights with respect to its distribution plan. The consolidated 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 consolidated financial statements and amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Portfolio 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 Fund’s Board of Directors (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 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
AB ALL MARKET REAL RETURN PORTFOLIO • | 35 |
Notes to Consolidated Financial Statements
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 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 |
36 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
• | 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 rates, coupon rates, yield curves, option adjusted spreads, default rates, credit spreads and other unique security features in order to estimate the relevant cash flows which is 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.
Where readily available market prices or relevant bid prices are not available for certain equity investments, such investments may be valued based on similar publicly traded investments, movements in relevant indices since last available prices or based upon underlying company fundamentals and comparable company data (such as multiples to earnings or other multiples to equity). Where an investment is valued using an observable input, by pricing vendors, such as another publicly traded security, the investment will be classified as Level 2. If management determines that an adjustment is appropriate based on restrictions on resale, illiquidity or uncertainty, and such adjustment is a significant component of the valuation, the investment will be classified as Level 3. An investment will also be classified as Level 3 where management uses company fundamentals and other significant inputs to determine the valuation.
AB ALL MARKET REAL RETURN PORTFOLIO • | 37 |
Notes to Consolidated 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: | ||||||||||||||||
Common Stocks: | ||||||||||||||||
Energy | $ | 79,848,653 | $ | 50,100,765 | $ | – 0 | – | $ | 129,949,418 | |||||||
Equity: Other | 12,997,318 | 32,344,499 | 147,589 | 45,489,406 | ||||||||||||
Retail | 11,764,253 | 14,794,666 | – 0 | – | 26,558,919 | |||||||||||
Materials | 10,857,981 | 15,454,330 | – 0 | –^ | 26,312,311 | |||||||||||
Residential | 12,067,850 | 11,605,386 | – 0 | –^^ | 23,673,236 | |||||||||||
Office | 5,273,376 | 7,529,068 | – 0 | – | 12,802,444 | |||||||||||
Oil, Gas & Consumable Fuels | – 0 | – | 9,979,610 | – 0 | – | 9,979,610 | ||||||||||
Industrials | 3,828,844 | 4,470,825 | – 0 | – | 8,299,669 | |||||||||||
Lodging | 5,158,220 | 232,676 | – 0 | – | 5,390,896 | |||||||||||
Metals & Mining | – 0 | – | 4,710,509 | – 0 | – | 4,710,509 | ||||||||||
Chemicals | 4,542,440 | – 0 | – | – 0 | – | 4,542,440 | ||||||||||
Food Products | 1,989,361 | – 0 | – | – 0 | – | 1,989,361 | ||||||||||
Real Estate | 1,482,103 | 276,812 | – 0 | – | 1,758,915 | |||||||||||
Mortgage | 1,178,651 | – 0 | – | – 0 | – | 1,178,651 | ||||||||||
Food Beverage & Tobacco | 872,308 | – 0 | – | – 0 | – | 872,308 | ||||||||||
Financial:Other | 388,005 | – 0 | – | – 0 | – | 388,005 | ||||||||||
Inflation-Linked Securities | – 0 | – | 137,402,332 | – 0 | – | 137,402,332 | ||||||||||
Investment Companies | 29,994,166 | – 0 | – | – 0 | – | 29,994,166 | ||||||||||
Warrants | 945 | 1,298,434 | – 0 | – | 1,299,379 | |||||||||||
Short-Term Investments | 49,719,017 | – 0 | – | – 0 | – | 49,719,017 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 231,963,491 | 290,199,912 | 147,589 | 522,310,992 | ||||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets: | ||||||||||||||||
Futures | 855,060 | – 0 | – | – 0 | – | 855,060 | # | |||||||||
Forward Currency Exchange Contracts | – 0 | – | 1,052,368 | – 0 | – | 1,052,368 | ||||||||||
Total Return Swaps | – 0 | – | 50,254 | – 0 | – | 50,254 | ||||||||||
Liabilities: | ||||||||||||||||
Futures | (15,919,119 | ) | – 0 | – | – 0 | – | (15,919,119 | )# | ||||||||
Forward Currency Exchange Contracts | – 0 | – | (2,497,413 | ) | – 0 | – | (2,497,413 | ) | ||||||||
Inflation (CPI) Swaps | – 0 | – | (2,551,720 | ) | – 0 | – | (2,551,720 | ) | ||||||||
Total Return Swaps | – 0 | – | (4,644,954 | ) | – 0 | – | (4,644,954 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total+ | $ | 216,899,432 | $ | 281,608,447 | $ | 147,589 | $ | 498,655,468 | ||||||||
|
|
|
|
|
|
|
|
^ | The Portfolio held securities with zero market value at period end. |
^^ | Amount less than $0.50. |
* | 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 consolidated statement of assets and liabilities. This amount reflects cumulative appreciation/(depreciation) of exchange-traded derivatives as reported in the consolidated portfolio of investments. |
+ | There were de minimus transfers under 1% of net assets between Level 1 and Level 2 during the reporting period. |
38 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated 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.
Common Stocks - Equity: Other | Common Stocks - Materials^ | Common Stocks - Residential | ||||||||||
Balance as of 10/31/14 | $ | – 0 | – | $ | 2 | $ | 2,586 | |||||
Accrued discounts/(premiums) | – 0 | – | – 0 | – | – 0 | – | ||||||
Realized gain (loss) | – 0 | – | – 0 | – | – 0 | – | ||||||
Change in unrealized appreciation/depreciation | (150,535 | ) | (2 | ) | (181 | ) | ||||||
Purchases | – 0 | – | – 0 | – | – 0 | – | ||||||
Sales | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers in to Level 3 | 298,124 | – 0 | – | – 0 | – | |||||||
Transfers out of Level 3 | – 0 | – | – 0 | – | (2,405 | ) | ||||||
|
|
|
|
|
| |||||||
Balance as of 10/31/15 | $ | 147,589 | $ | – 0 | – | $ | – 0 | –^^ | ||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 10/31/15* | $ | (150,535 | ) | $ | – 0 | – | $ | – 0 | –^^ | |||
|
|
|
|
|
| |||||||
Total | ||||||||||||
Balance as of 10/31/14 | $ | 2,588 | ||||||||||
Accrued discounts/(premiums) | – 0 | – | ||||||||||
Realized gain (loss) | – 0 | – | ||||||||||
Change in unrealized appreciation/depreciation | (150,718 | ) | ||||||||||
Purchases | – 0 | – | ||||||||||
Sales | – 0 | – | ||||||||||
Transfers in to Level 3 | 298,124 | |||||||||||
Transfers out of Level 3 | (2,405 | ) | ||||||||||
|
| |||||||||||
Balance as of 10/31/15 | $ | 147,589 | + | |||||||||
|
| |||||||||||
Net change in unrealized appreciation/depreciation from investments held as of 10/31/15* | $ | (150,535 | ) | |||||||||
|
|
^ | The Portfolio held securities with zero market value at period end. |
^^ | Amount less than $0.50. |
+ | 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 on investments and other financial instruments in the accompanying statement of operations. |
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the Portfolio. The Committee operates under pricing and
AB ALL MARKET REAL RETURN PORTFOLIO • | 39 |
Notes to Consolidated Financial Statements
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 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. Currency Translation
Assets and liabilities denominated in foreign currencies and commitments under forward currency exchange contracts are translated into U.S. dollars at the mean of the quoted bid and ask prices of such currencies against the U.S. dollar. Purchases and sales of portfolio securities are translated into U.S. dollars at the rates of exchange prevailing when such securities were acquired or sold. Income and expenses are translated into U.S. dollars at rates of exchange prevailing when accrued.
Net realized gain or loss on foreign currency transactions represents foreign exchange gains and losses from sales and maturities of foreign fixed income investments, foreign currency exchange contracts, holding of foreign currencies, currency gains or losses realized between the trade and settlement dates on foreign investment transactions, and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Portfolio’s books
40 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains and losses from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of net unrealized appreciation or depreciation of foreign currency denominated assets and liabilities.
4. 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. The Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued and applied to net investment income, net realized gains and net unrealized appreciation/depreciation as such income and/or gains are earned.
If, during a taxable year, the Subsidiary’s taxable losses (and other deductible items) exceed its income and gains, the net loss will not pass through to the Portfolio as a deductible amount for Federal income tax purposes. Note that the loss from the Subsidiary’s contemplated activities also cannot be carried forward to reduce future Subsidiary’s income in subsequent years. However, if the Subsidiary’s taxable gains exceed its losses and other deductible items during a taxable year, the net gain will pass through to the Portfolio as income for Federal income tax purposes.
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 consolidated financial statements.
5. 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.
6. Class Allocations
All income earned and expenses incurred by the Portfolio are borne on a pro-rata basis by each outstanding class of shares, based on the proportionate interest in the Portfolio represented by the net assets of such class, except for class specific expenses which are allocated to the respective class. Expenses of the
AB ALL MARKET REAL RETURN PORTFOLIO • | 41 |
Notes to Consolidated Financial Statements
Fund are charged proportionately to each Portfolio or based on other appropriate methods. Realized and unrealized gains and losses are allocated among the various share classes based on respective net assets.
7. 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
Management Fee and Other Transactions with Affiliates
Under the terms of the investment advisory agreement, the Portfolio pays the Adviser a management fee at an annual rate of .75% of the Portfolio’s average daily net assets. Effective February 1, 2014, the Adviser agreed to waive its fees and bear certain expenses to the extent necessary to limit total operating expenses on an annual basis to 1.30%, 2.00%, 1.00%, 1.50%, 1.25%, 1.00%, 1.25%, 1.00% and 1.00% of daily average net assets for Class A, Class C, Advisor Class, Class R, Class K, Class I, Class 1, Class 2 and Class Z shares, respectively. This fee waiver and/or expense reimbursement agreement will remain in effect until January 29, 2016. For the year ended October 31, 2015, such reimbursement amounted to $114,288. Prior to February 1, 2014, the Adviser had agreed to waive its fees and bear certain expenses to the extent necessary to limit total operating expenses on an annual basis to 1.05%, 1.75%, 0.75%, 1.25%, 1.00%, 0.75%, 1.00% and 0.75% of daily average net assets for Class A, Class C, Advisor Class, Class R, Class K, Class I, Class 1 and Class 2 shares, respectively.
The Subsidiary has entered into a separate agreement with the Adviser for the management of the Subsidiary’s portfolio. The Adviser receives no compensation from the Subsidiary for its services under the agreement.
During the years ended October 31, 2015 and October 31, 2014 the Adviser reimbursed the Strategy $306 and $119,942, respectively, for trading losses incurred due to a trade entry error.
Pursuant to the investment advisory agreement, the Portfolio may reimburse the Adviser for certain legal and accounting services provided to the Portfolio by the Adviser. For the year ended October 31, 2015, the reimbursement for such services amounted to $49,900.
The Portfolio compensates AllianceBernstein Investor Services, Inc. (“ABIS”), a wholly-owned subsidiary of the Adviser, under a Transfer Agency Agreement for providing personnel and facilities to perform transfer agency services for the Portfolio. ABIS may make payments to intermediaries that provide omnibus
42 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
account services, sub-accounting services and/or networking services. Such compensation retained by ABIS amounted to $110,359 for the year ended October 31, 2015.
AllianceBernstein Investments, Inc. (the “Distributor”), a wholly-owned subsidiary of the Adviser, serves as the distributor of the Portfolio’s shares. The Distributor has advised the Portfolio that it has retained front-end sales charges of $1,109 from the sale of Class A shares and received $8 and $818 in contingent deferred sales charges imposed upon redemptions by shareholders of Class A and Class C shares, respectively, for the year ended October 31, 2015.
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 year ended October 31, 2015 is as follows:
Market Value October 31, 2014 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value October 31, 2015 (000) | Dividend Income (000) | ||||||||||||||
$ | 111,862 | $ | 346,108 | $ | 408,251 | $ | 49,719 | $ | 74 |
Brokerage commissions paid on investment transactions for the year ended October 31, 2015 amounted to $465,209, of which $0 and $0, respectively, was paid to Sanford C. Bernstein & Co. LLC and Sanford C. Bernstein Limited, affiliates of the Adviser.
NOTE C
Distribution Services Agreement
The Portfolio has adopted a Distribution Services Agreement (the “Agreement”) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Agreement, the Portfolio pays distribution and servicing fees to AllianceBernstein Investments, Inc. (the “Distributor”) at an annual rate of up to .30% of the Portfolio’s average daily net assets attributable to Class A shares, 1% of the Portfolio’s average daily net assets attributable to Class C shares, .50% of the Portfolio’s average daily net assets attributable to Class R shares, .25% of the Portfolio’s average daily net assets attributable to Class K shares and .25% of the Portfolio’s average daily net assets attributable to Class 1 shares. There are no distribution and servicing fees on the Advisor Class, Class I, Class 2 and Class Z shares. The fees are accrued daily and paid monthly. The Agreement provides that the Distributor will use such payments in their entirety for distribution assistance and promotional activities. Since the commencement of the
AB ALL MARKET REAL RETURN PORTFOLIO • | 43 |
Notes to Consolidated Financial Statements
Portfolio’s operations, the Distributor has incurred expenses in excess of the distribution costs reimbursed by the Portfolio in the amounts of $145,679, $14,160, $20,431 and $2,305,314 for Class C, Class R, Class K and Class 1 shares, respectively. While such costs may be recovered from the Portfolio in future periods so long as the Agreement is in effect, the rate of the distribution and servicing fees payable under the Agreement may not be increased without a shareholder vote. In accordance with the Agreement, there is no provision for recovery of unreimbursed distribution costs incurred by the Distributor beyond the current fiscal year for Class A shares. The Agreement also provides that the Adviser may use its own resources to finance the distribution of the Portfolio’s shares.
NOTE D
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the year ended October 31, 2015 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 313,935,468 | $ | 258,511,030 | ||||
U.S. government securities | 20,848,883 | – 0 | – |
The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation (excluding futures, foreign currency, written options and swap transactions) are as follows:
Cost | $ | 691,242,574 | ||
|
| |||
Gross unrealized appreciation | $ | 376,090 | ||
Gross unrealized depreciation | (168,549,153 | ) | ||
|
| |||
Net unrealized depreciation | $ | (168,173,063 | ) | |
|
|
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:
• | Futures |
The Portfolio may buy or sell futures for investment purposes or for the purpose of hedging its portfolio against adverse effects of potential movements in the market. The Portfolio bears the market risk that arises from changes in the value of these instruments and the imperfect correlation between movements in the price of the futures and movements
44 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
in the price of the assets, reference rates or indices which they are designed to track. Among other things, the Portfolio may purchase or sell futures for foreign currencies or options thereon for non-hedging purposes as a means of making direct investment in foreign currencies, as described below under “Currency Transactions”.
At the time the Portfolio enters into futures, the Portfolio deposits and maintains as collateral an initial margin with the broker, as required by the exchange on which the transaction is effected. Such amount is shown as cash collateral due from broker on the consolidated 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 exchange-traded futures is generally less than privately negotiated futures, since the clearinghouse, which is the issuer or counterparty to each exchange-traded future, 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.
Use of long futures subjects the Portfolio to risk of loss in excess of the amounts shown on the consolidated statement of assets and liabilities, up to the notional value of the futures. Use of short futures subjects the Portfolio to unlimited risk of loss. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of futures can vary from the previous day’s settlement price, which could effectively prevent liquidation of unfavorable positions.
During the year ended October 31, 2015, the Portfolio held futures for hedging and non-hedging purposes.
• | Forward Currency Exchange Contracts |
The Portfolio may enter into forward currency exchange contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings, to hedge certain firm purchase and sale commitments denominated in foreign currencies and for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions”.
A forward currency exchange contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. The gain or loss arising from the difference between the original contract and the closing of such contract would be included in net realized gain or loss on foreign currency transactions. Fluctuations in the value of open forward
AB ALL MARKET REAL RETURN PORTFOLIO • | 45 |
Notes to Consolidated Financial Statements
currency exchange contracts are recorded for financial reporting purposes as unrealized appreciation and/or depreciation by the Portfolio. Risks may arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar.
During the year ended October 31, 2015, the Portfolio held forward currency exchange contracts for hedging and non-hedging purposes.
• | Option Transactions |
For hedging and investment purposes, the Portfolio may purchase and write (sell) put and call options on U.S. and foreign securities, including government securities, and foreign currencies that are traded on U.S. and foreign securities exchanges and over-the-counter markets. Among other things, the Portfolio may use options transactions for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions” and may use options strategies involving the purchase and/or writing of various combinations of call and/or put options, for hedging and investment purposes.
The risk associated with purchasing an option is that the Portfolio pays a premium whether or not the option is exercised. Additionally, the Portfolio bears the risk of loss of the premium and change in market value should the counterparty not perform under the contract. Put and call options purchased are accounted for in the same manner as portfolio securities. The cost of securities acquired through the exercise of call options is increased by premiums paid. The proceeds from securities sold through the exercise of put options are decreased by the premiums paid.
When the Portfolio writes an option, the premium received by the Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from written options which expire unexercised are recorded by the Portfolio on the expiration date as realized gains from options written. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium received is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium received is added to the proceeds from the sale of the underlying security or currency in determining whether the Portfolio has realized a gain or loss. If a put option is exercised, the premium received reduces the cost basis of the security or currency purchased by the Portfolio. In writing an option, the Portfolio bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Portfolio could result in the Portfolio selling or buying a security or currency at a price different from the current market value.
46 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
During the year ended October 31, 2015, the Portfolio held purchased options for hedging and non-hedging purposes.
During the year ended October 31, 2015, the Portfolio held written options for hedging and non-hedging purposes.
For the year ended October 31, 2015, the Portfolio had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 10/31/14 | – 0 | – | $ | – 0 | – | |||
Options written | 18,977,914 | 5,863,774 | ||||||
Options expired | (6,502,284 | ) | (2,129,588 | ) | ||||
Options bought back | (12,475,630 | ) | (3,734,186 | ) | ||||
Options exercised | – 0 | – | – 0 | – | ||||
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| |||||
Options written outstanding as of 10/31/15 | – 0 | – | $ | – 0 | – | |||
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|
|
• | Swaps |
The Portfolio may enter into swaps to hedge its exposure to interest rates, credit risk, equity markets and currencies. The Portfolio may also enter into swaps for non-hedging purposes as a means of gaining market exposures, making direct investments in foreign currencies, as described below under “Currency Transactions” or in order to take a “long” or “short” position with respect to an underlying referenced asset described below under “Total Return Swaps”. 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 consolidated statement of assets
AB ALL MARKET REAL RETURN PORTFOLIO • | 47 |
Notes to Consolidated Financial Statements
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 consolidated 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 consolidated 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 consolidated 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 consolidated statement of operations.
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, a 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 year ended October 31, 2015, the Portfolio held interest rate swaps for hedging and non-hedging purposes.
Inflation (CPI) Swaps:
Inflation swap agreements 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 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.
48 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
During the year ended October 31, 2015, the Portfolio held inflation (CPI) swaps for hedging and non-hedging purposes.
Total Return Swaps:
The Portfolio may enter into total return swaps in order to take a “long” or “short” position with respect to an underlying referenced asset. The Portfolio is subject to market price volatility of the underlying referenced asset. A total return swap involves commitments to pay interest in exchange for a market linked return based on a notional amount. To the extent that the total return of the security, group of securities or index underlying the transaction exceeds or falls short of the offsetting interest obligation, the Portfolio will receive a payment from or make a payment to the counterparty.
During the year ended October 31, 2015, the Portfolio held total return swaps for hedging and non-hedging purposes.
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.
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.
AB ALL MARKET REAL RETURN PORTFOLIO • | 49 |
Notes to Consolidated Financial Statements
At October 31, 2015, the Portfolio had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Consolidated Statement of Assets and Liabilities Location | Fair Value | Consolidated Statement of Assets and Liabilities Location | Fair Value | ||||||||
Commodity contracts | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 855,060 | * | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 15,919,119 | * | ||||
Foreign exchange contracts | Unrealized appreciation on forward currency exchange contracts |
| 1,052,368 |
| Unrealized depreciation on forward currency exchange contracts | | 2,497,413 | | ||||
Interest rate contracts | Unrealized depreciation on inflation swaps | | 2,551,720 | | ||||||||
Equity contracts | Unrealized appreciation on total return swaps | 50,254 | Unrealized depreciation on total return swaps | 4,644,954 | ||||||||
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| |||||||||
Total | $ | 1,957,682 | $ | 25,613,206 | ||||||||
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* | Only variation margin receivable/payable at period end is reported within the consolidated statement of assets and liabilities. This amount reflects cumulative appreciation/(depreciation) of exchange-traded derivatives as reported in the consolidated portfolio of investments. |
The effect of derivative instruments on the consolidated statement of operations for the year ended October 31, 2015:
Derivative Type | Location of Gain | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Equity contracts | Net realized gain (loss) on futures; Net change in unrealized appreciation/depreciation of futures | $ | (2,410,382 | ) | $ | 711,386 | ||||
Commodity contracts | Net realized gain (loss) on futures; Net change in unrealized appreciation/depreciation of futures | (5,260,725 | ) | (11,782,800 | ) | |||||
Foreign exchange contracts | Net realized gain (loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation of foreign currency denominated assets and liabilities | 7,670,898 | (4,206,089 | ) |
50 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
Derivative Type | Location of Gain | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Equity contracts | Net realized gain (loss) on investment transactions; Net change in unrealized appreciation/depreciation of investments | $ | 2,639,663 | $ | 836,383 | |||||
Equity contracts | Net realized gain (loss) on options written; Net change in unrealized appreciation/depreciation of options written | (2,757,379 | ) | – 0 | – | |||||
Commodity contracts | Net realized gain (loss) on options written; Net change in unrealized appreciation/depreciation of options written | (226,277 | ) | – 0 | – | |||||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (13,075,847 | ) | 2,155,641 | ||||||
Equity contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (48,231,231 | ) | (5,870,709 | ) | |||||
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Total | $ | (61,651,280 | ) | $ | (18,156,188 | ) | ||||
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The following table represents the average monthly volume of the Portfolio’s derivative transactions during the year ended October 31, 2015:
Futures: | ||||
Average original value of buy contracts | $ | 85,040,117 | ||
Average original value of sale contracts | $ | 38,808,477 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 53,184,015 | ||
Average principal amount of sale contracts | $ | 121,059,674 | ||
Purchased Options: | ||||
Average monthly cost | $ | 1,920,887 | (a) | |
Interest Rate Swaps: | ||||
Average notional amount | $ | 3,830,000 | (b) | |
Inflation Swaps: | ||||
Average notional amount | $ | 336,073,077 | ||
Total Return Swaps: | ||||
Average notional amount | $ | 198,447,297 |
(a) | Positions were open for three months during the year. |
(b) | Positions were open for nine months during the year. |
For financial reporting purposes, the Portfolio does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the consolidated statement of assets and liabilities.
AB ALL MARKET REAL RETURN PORTFOLIO • | 51 |
Notes to Consolidated 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:
AB All Market Real Return
Counterparty | Derivative Assets Subject to a MA | Derivative Available for Offset | Cash Collateral Received | Security Collateral Received | Net Amount of Derivatives Assets | |||||||||||||||
OTC Derivatives: | ||||||||||||||||||||
Citibank | $ | 65,270 | $ | (65,270 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
Deutsche Bank AG | 86,620 | (86,620 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
JPMorgan Chase Bank/ JPMorgan Chase Bank, NA | 19,258 | (19,258 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Morgan Stanley & Co., Inc. | 166,455 | (33,206 | ) | – 0 | – | – 0 | – | 133,249 | ||||||||||||
Northern Trust Company | 76,892 | – 0 | – | – 0 | – | – 0 | – | 76,892 | ||||||||||||
Royal Bank of Scotland PLC | 312,901 | (312,901 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Standard Chartered Bank | 77,876 | – 0 | – | – 0 | – | – 0 | – | 77,876 | ||||||||||||
State Street Bank & Trust Co. | 72,467 | (25,948 | ) | – 0 | – | – 0 | – | 46,519 | ||||||||||||
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| |||||||||||
Total | $ | 877,739 | $ | (543,203 | ) | $ | – 0 | – | $ | – 0 | – | $ | 334,536 | ^ | ||||||
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|
Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged | Security Collateral Pledged* | Net Amount of Derivatives Liabilities | |||||||||||||||
OTC Derivatives: | ||||||||||||||||||||
BNP Paribas SA | $ | 50,966 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 50,966 | |||||||
Citibank | 329,914 | (65,270 | ) | – 0 | – | – 0 | – | 264,644 | ||||||||||||
Deutsche Bank AG | 1,672,256 | (86,620 | ) | – 0 | – | (1,585,636 | ) | – 0 | – | |||||||||||
Goldman Sachs Bank USA | 255,869 | – 0 | – | – 0 | – | – 0 | – | 255,869 | ||||||||||||
HSBC Bank USA | 3,918 | – 0 | – | – 0 | – | – 0 | – | 3,918 | ||||||||||||
JPMorgan Chase Bank/ JPMorgan Chase Bank, NA | 1,041,105 | (19,258 | ) | – 0 | – | (1,021,847 | ) | – 0 | – | |||||||||||
Morgan Stanley & Co., Inc. | 33,206 | (33,206 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Royal Bank of Scotland PLC | 1,287,370 | (312,901 | ) | – 0 | – | – 0 | – | 974,469 | ||||||||||||
State Street Bank & Trust Co. | 25,948 | (25,948 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
UBS AG | 277,681 | – 0 | – | – 0 | – | – 0 | – | 277,681 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 4,978,233 | $ | (543,203 | ) | $ | – 0 | – | $ | (2,607,483 | ) | $ | 1,827,547 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | The actual collateral received/pledged may be more than the amount reported due to overcollateralization. |
^ | 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. |
52 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
AllianceBernstein Cayman Inflation Strategy, Ltd.
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: | ||||||||||||||||||||
Morgan Stanley & Co., LLC** | $ | 113,358 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 113,358 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 113,358 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 113,358 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
JPMorgan Chase Bank, NA | $ | 50,254 | $ | (50,254 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
Royal Bank of Scotland PLC | 159,083 | – 0 | – | – 0 | – | – 0 | – | 159,083 | ||||||||||||
State Street Bank & Trust Co. | 15,546 | (15,546 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 224,883 | $ | (65,800 | ) | $ | – 0 | – | $ | – 0 | – | $ | 159,083 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged | Security Collateral Pledged* | Net Amount of Derivatives Liabilities | |||||||||||||||
OTC Derivatives: | ||||||||||||||||||||
Credit Suisse International | $ | 1,128,647 | $ | – 0 | – | $ | – 0 | – | $ | (1,128,647 | ) | $ | – 0 | – | ||||||
Deutsche Bank AG | 15,538 | – 0 | – | – 0 | – | – 0 | – | 15,538 | ||||||||||||
Goldman Sachs International | 1,241,729 | – 0 | – | – 0 | – | (1,241,729 | ) | – 0 | – | |||||||||||
JPMorgan Chase Bank | 795 | – 0 | – | – 0 | – | – 0 | – | 795 | ||||||||||||
JPMorgan Chase Bank, NA | 2,274,578 | (50,254 | ) | – 0 | – | (2,224,324 | ) | – 0 | – | |||||||||||
State Street Bank & Trust Co. | 54,567 | (15,546 | ) | – 0 | – | – 0 | – | 39,021 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 4,715,854 | $ | (65,800 | ) | $ | – 0 | – | $ | (4,594,700 | ) | $ | 55,354 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | 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. |
2. Currency Transactions
The Portfolio may invest in non-U.S. dollar securities on a currency hedged or unhedged basis. The Portfolio 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 Portfolio may enter into transactions for investment
AB ALL MARKET REAL RETURN PORTFOLIO • | 53 |
Notes to Consolidated Financial Statements
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 Portfolio 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 Portfolio 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 E
Capital Stock
Each class consists of 3,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | Year Ended October 31, 2014 | Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 374,648 | 711,126 | $ | 3,531,705 | $ | 7,769,044 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 37,166 | 46,030 | 350,845 | 488,844 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (1,070,575 | ) | (3,924,160 | ) | (10,041,550 | ) | (44,056,119 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (658,761 | ) | (3,167,004 | ) | $ | (6,159,000 | ) | $ | (35,798,231 | ) | ||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 37,945 | 66,006 | $ | 351,368 | $ | 733,585 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 9,857 | 4,929 | 92,557 | 52,050 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (344,737 | ) | (449,168 | ) | (3,093,893 | ) | (4,892,133 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (296,935 | ) | (378,233 | ) | $ | (2,649,968 | ) | $ | (4,106,498 | ) | ||||||||||
| ||||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 1,189,217 | 3,229,636 | $ | 10,830,265 | $ | 36,855,186 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 98,208 | 65,150 | 925,118 | 692,544 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (3,060,481 | ) | (3,621,284 | ) | (28,495,992 | ) | (39,903,399 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (1,773,056 | ) | (326,498 | ) | $ | (16,740,609 | ) | $ | (2,355,669 | ) | ||||||||||
| ||||||||||||||||||||
Class R | ||||||||||||||||||||
Shares sold | 7,416 | 16,124 | $ | 63,929 | $ | 168,739 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 442 | 28 | 4,154 | 296 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (5,045 | ) | (2,285 | ) | (45,082 | ) | (24,289 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 2,813 | 13,867 | $ | 23,001 | $ | 144,746 | ||||||||||||||
|
54 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | Year Ended October 31, 2014 | Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||
Class K | ||||||||||||||||||||
Shares sold | 62,469 | 101,455 | $ | 557,586 | $ | 1,094,794 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 5,336 | 2,522 | 50,051 | 26,710 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (68,385 | ) | (49,545 | ) | (611,048 | ) | (530,428 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (580 | ) | 54,432 | $ | (3,411 | ) | $ | 591,076 | ||||||||||||
| ||||||||||||||||||||
Class I | ||||||||||||||||||||
Shares sold | 150,454 | 453,087 | $ | 1,362,834 | $ | 4,971,354 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 48,155 | 33,483 | 452,178 | 354,918 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (433,520 | ) | (205,125 | ) | (4,392,159 | ) | (2,347,148 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (234,911 | ) | 281,445 | $ | (2,577,147 | ) | $ | 2,979,124 | ||||||||||||
| ||||||||||||||||||||
Class 1 | ||||||||||||||||||||
Shares sold | 18,003,797 | 17,658,838 | $ | 160,040,128 | $ | 192,145,101 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,118,730 | 569,369 | 10,437,747 | 6,001,142 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (9,227,855 | ) | (7,369,828 | ) | (81,519,998 | ) | (79,296,240 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 9,894,672 | 10,858,379 | $ | 88,957,877 | $ | 118,850,003 | ||||||||||||||
| ||||||||||||||||||||
Class Z* | ||||||||||||||||||||
Shares sold | 563,425 | (950 | ) | $ | 4,665,612 | $ | (10,003 | ) | ||||||||||||
| ||||||||||||||||||||
Shares redeemed | (174,072 | ) | – 0 | – | (1,445,720 | ) | – 0 | – | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 389,353 | (950 | ) | $ | 3,219,892 | $ | (10,003 | ) | ||||||||||||
|
* | Commenced distribution on January 31, 2014. |
NOTE F
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.
AB ALL MARKET REAL RETURN PORTFOLIO • | 55 |
Notes to Consolidated Financial Statements
Commodity Risk—Investing in commodities and commodity-linked derivative instruments, either directly or through the Subsidiary, may subject the Portfolio to greater volatility than investments in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments.
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 in the consolidated 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.
Liquidity Risk—Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Portfolio. Causes of liquidity risk may include low trading volumes, large positions and heavy redemptions of fixed-income mutual fund shares. Over recent years, liquidity risk has also increased because the capacity of dealers in the secondary market for fixed-income securities to make markets in these securities has decreased, even as the overall bond market has grown significantly, due to, among other things, structural changes, additional regulatory requirements and capital and risk restraints that have led to reduced inventories. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
Foreign (Non-U.S.) Risk—Investments 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.
56 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
Currency Risk—Fluctuations in currency exchange rates may negatively affect the value of the Portfolio’s investments or reduce its returns.
Subsidiary Risk—By investing in the Subsidiary, the Portfolio is indirectly exposed to the risks associated with the Subsidiary’s investments. The derivatives and other investments held by the Subsidiary are generally similar to those that are permitted to be held by the Fund and are subject to the same risks that apply to similar investments if held directly by the Portfolio. The Subsidiary is not registered under the Investment Company Act of 1940, as amended (the “1940 Act”), and, unless otherwise noted in this Prospectus, is not subject to all of the investor protections of the 1940 Act. However, the Portfolio wholly owns and controls the Subsidiary, and the Portfolio and the Subsidiary are managed by the Adviser, making it unlikely the Subsidiary will take actions contrary to the interests of the Portfolio or its shareholders.
Real Estate Risk—The Portfolio’s investments in the real estate market have many of the same risks as direct ownership of real estate, including the risk that the value of real estate could decline due to a variety of factors that affect the real estate market generally. Investments in real estate investment trusts, or “REITs”, may have additional risks. REITs are dependent on the capability of their managers, may have limited diversification, and could be significantly affected by changes in taxes.
Diversification Risk—The Portfolio may have more risk because it is “non-diversified”, meaning that it can invest more of its assets in a smaller number of issuers and that adverse changes in the value of one security could have a more significant effect on the Portfolio’s NAV.
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.
NOTE G
Joint Credit Facility
A number of open-end mutual funds managed by the Adviser, including the Portfolio, participate in a $280 million revolving credit facility (the “Facility”) intended to provide short-term financing, if necessary, subject to certain restrictions in connection with abnormal redemption activity. Commitment fees related to the Facility are paid by the participating funds and are included in miscellaneous expenses in the consolidated statement of operations. The Portfolio did not utilize the Facility during the year ended October 31, 2015.
AB ALL MARKET REAL RETURN PORTFOLIO • | 57 |
Notes to Consolidated Financial Statements
NOTE H
Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended October 31, 2015 and October 31, 2014 were as follows:
2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 14,402,445 | $ | 9,000,069 | ||||
|
|
|
| |||||
Total distributions paid | $ | 14,402,445 | $ | 9,000,069 | ||||
|
|
|
|
As of October 31, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 8,252,178 | ||
Accumulated capital and other losses | (45,493,925 | )(a) | ||
Unrealized appreciation/(depreciation) | (171,066,938 | )(b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | (208,308,685 | ) | |
|
|
(a) | On October 31, 2015, the Portfolio had a net capital loss carryforward of $45,176,677. As of that date, the cumulative deferred loss on straddles was $317,248. |
(b) | The differences between book-basis and tax-basis unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses on wash sales, the tax treatment of partnerships and passive foreign investment companies (PFICs), the tax treatment of Treasury inflation-protected securities, the realization for tax purposes of gains/losses on certain derivative instruments, the tax treatment of a corporate restructuring, and the tax treatment of earnings from the Subsidiary. |
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-December 22, 2010 capital losses must be utilized prior to the earlier capital losses, which are subject to expiration. Post-December 22, 2010 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 October 31, 2015, the Portfolio had a net capital loss carryforward of $45,176,677 which will expire as follows:
Short-Term | Long-Term | Expiration | ||
$ 6,012,702 | n/a | 2019 | ||
24,477,600 | $14,686,375 | No expiration |
During the current fiscal year, permanent differences primarily due to the tax treatment of swaps and passive foreign investment companies (PFICs), reclassifications of foreign currency and foreign capital gains tax, the book/tax differences associated with the treatment of earnings from the Subsidiary, the tax treatment of a corporate restructuring, return of capital distributions received
58 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
from underlying securities, the tax treatment of partnership investments and contributions from the Adviser resulted in a net decrease in distributions in excess of net investment income, a net decrease in accumulated net realized loss on investment and foreign currency transactions, and a net decrease in additional paid-in capital. These reclassifications had no effect on net assets.
NOTE I
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 J
Subsequent Events
Management has evaluated subsequent events for possible recognition or disclosure in the consolidated financial statements through the date the consolidated financial statements are issued. Management has determined that there are no material events that would require disclosure in the Portfolio’s consolidated financial statements through this date.
AB ALL MARKET REAL RETURN PORTFOLIO • | 59 |
Notes to Consolidated Financial Statements
CONSOLIDATED FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.52 | $ 11.04 | $ 11.33 | $ 11.05 | $ 11.25 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .06 | (c) | .12 | .10 | .11 | .16 | ||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (2.26 | ) | (.50 | ) | (.13 | ) | .25 | (.01 | ) | |||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (2.20 | ) | (.38 | ) | (.03 | ) | .36 | .15 | ||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.19 | ) | (.14 | ) | (.26 | ) | (.08 | ) | (.35 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 8.13 | $ 10.52 | $ 11.04 | $ 11.33 | $ 11.05 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (21.16 | )% | (3.45 | )% | (.27 | )% | 3.36 | % | 1.32 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $16,611 | $28,434 | $64,800 | $67,989 | $70,081 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.30 | % | 1.23 | % | 1.05 | % | 1.05 | % | 1.05 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.47 | % | 1.30 | % | 1.34 | % | 1.28 | % | 1.61 | % | ||||||||||
Net investment income(b) | .62 | % | 1.03 | % | .86 | % | 1.02 | % | 1.44 | % | ||||||||||
Portfolio turnover rate | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 68.
60 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.40 | $ 10.90 | $ 11.18 | $ 10.93 | $ 11.19 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income (loss)(a)(b) | (.01 | ) | .04 | .02 | .03 | .08 | ||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (2.23 | ) | (.49 | ) | (.12 | ) | .25 | (.01 | ) | |||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (2.24 | ) | (.45 | ) | (.10 | ) | .28 | .07 | ||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.13 | ) | (.05 | ) | (.18 | ) | (.03 | ) | (.33 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 8.03 | $ 10.40 | $ 10.90 | $ 11.18 | $ 10.93 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (21.75 | )% | (4.13 | )% | (.92 | )% | 2.58 | % | .61 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $4,202 | $8,531 | $13,063 | $15,974 | $17,414 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | 2.00 | % | 1.93 | % | 1.75 | % | 1.75 | % | 1.75 | % | ||||||||||
Expenses, before waivers/reimbursements | 2.16 | % | 2.02 | % | 2.04 | % | 1.99 | % | 2.31 | % | ||||||||||
Net investment income (loss)(b) | (.07 | )% | .34 | % | .16 | % | .32 | % | .73 | % | ||||||||||
Portfolio turnover rate | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 68.
AB ALL MARKET REAL RETURN PORTFOLIO • | 61 |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.56 | $ 11.09 | $ 11.37 | $ 11.08 | $ 11.26 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .09 | .15 | .13 | .15 | .19 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (2.27 | ) | (.50 | ) | (.12 | ) | .25 | (.01 | ) | |||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (2.18 | ) | (.35 | ) | .01 | .40 | .18 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.25 | ) | (.18 | ) | (.29 | ) | (.11 | ) | (.36 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 8.13 | $ 10.56 | $ 11.09 | $ 11.37 | $ 11.08 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (20.95 | )% | (3.20 | )% | .12 | % | 3.69 | % | 1.55 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $30,541 | $58,399 | $64,911 | $72,529 | $50,795 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.00 | % | .94 | % | .75 | % | .75 | % | .75 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.17 | % | 1.02 | % | 1.04 | % | .99 | % | 1.29 | % | ||||||||||
Net investment income(b) | .95 | % | 1.33 | % | 1.18 | % | 1.33 | % | 1.69 | % | ||||||||||
Portfolio turnover rate | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 68.
62 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class R | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.51 | $ 11.04 | $ 11.32 | $ 11.02 | $ 11.23 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .04 | .15 | .08 | .09 | .16 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (2.24 | ) | (.55 | ) | (.13 | ) | .26 | (.04 | ) | |||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (2.20 | ) | (.40 | ) | (.05 | ) | .35 | .12 | ||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.25 | ) | (.13 | ) | (.23 | ) | (.05 | ) | (.33 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 8.06 | $ 10.51 | $ 11.04 | $ 11.32 | $ 11.02 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (21.37 | )% | (3.66 | )% | (.47 | )% | 3.20 | % | 1.03 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $162 | $182 | $38 | $17 | $11 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.50 | % | 1.44 | % | 1.25 | % | 1.25 | % | 1.25 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.64 | % | 1.55 | % | 1.65 | % | 1.64 | % | 2.87 | % | ||||||||||
Net investment income(b) | .42 | % | 1.36 | % | .76 | % | .82 | % | 1.39 | % | ||||||||||
Portfolio turnover rate | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 68.
AB ALL MARKET REAL RETURN PORTFOLIO • | 63 |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class K | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.50 | $ 11.03 | $ 11.32 | $ 11.05 | $ 11.25 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .06 | .12 | .10 | .10 | .15 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (2.25 | ) | (.49 | ) | (.12 | ) | .27 | – 0 | – | |||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (2.19 | ) | (.37 | ) | (.02 | ) | .37 | .15 | ||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.24 | ) | (.16 | ) | (.27 | ) | (.10 | ) | (.35 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 8.07 | $ 10.50 | $ 11.03 | $ 11.32 | $ 11.05 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (21.19 | )% | (3.39 | )% | (.19 | )% | 3.43 | % | 1.33 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $1,668 | $2,174 | $1,684 | $1,286 | $128 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.25 | % | 1.19 | % | 1.00 | % | 1.00 | % | 1.00 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.34 | % | 1.24 | % | 1.33 | % | 1.35 | % | 1.91 | % | ||||||||||
Net investment income(b) | .67 | % | 1.10 | % | .95 | % | .89 | % | 1.38 | % | ||||||||||
Portfolio turnover rate | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 68.
64 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class I | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.54 | $ 11.07 | $ 11.36 | $ 11.07 | $ 11.27 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a) | .09 | .15 | .13 | (b) | .14 | (b) | .15 | (b) | ||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (2.25 | ) | (.49 | ) | (.13 | ) | .26 | .02 | † | |||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (2.16 | ) | (.34 | ) | – 0 | – | .40 | .17 | ||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.27 | ) | (.19 | ) | (.29 | ) | (.11 | ) | (.37 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 8.11 | $ 10.54 | $ 11.07 | $ 11.36 | $ 11.07 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (20.97 | )% | (3.09 | )% | .04 | % | 3.69 | % | 1.53 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $14,508 | $21,341 | $19,303 | $18,790 | $15,850 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | .96 | % | .91 | % | .75 | % | .75 | % | .75 | % | ||||||||||
Expenses, before waivers/reimbursements | .96 | % | .91 | % | .97 | % | .98 | % | 1.38 | % | ||||||||||
Net investment income | .99 | % | 1.37 | % | 1.17 | %(b) | 1.32 | %(b) | 1.42 | %(b) | ||||||||||
Portfolio turnover rate | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 68.
AB ALL MARKET REAL RETURN PORTFOLIO • | 65 |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class 1 | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net asset value, beginning of period | $ 10.46 | $ 11.00 | $ 11.29 | $ 11.01 | $ 11.25 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a) | .07 | .13 | .10 | (b) | .12 | (b) | .15 | (b) | ||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (2.24 | ) | (.50 | ) | (.12 | ) | .25 | (.01 | ) | |||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (2.17 | ) | (.37 | ) | (.02 | ) | .37 | .14 | ||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.24 | ) | (.17 | ) | (.27 | ) | (.09 | ) | (.38 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 8.05 | $ 10.46 | $ 11.00 | $ 11.29 | $ 11.01 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (21.12 | )% | (3.35 | )% | (.19 | )% | 3.47 | % | 1.25 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $474,631 | $513,633 | $420,593 | $221,971 | $182,720 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.16 | % | 1.14 | % | 1.00 | % | 1.00 | % | 1.00 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.16 | % | 1.14 | % | 1.16 | % | 1.21 | % | 1.47 | % | ||||||||||
Net investment income | .79 | % | 1.16 | % | .95 | %(b) | 1.07 | %(b) | 1.40 | %(b) | ||||||||||
Portfolio turnover rate | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 68.
66 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class 2 | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.68 | $ 11.19 | $ 11.48 | $ 11.07 | $ 11.27 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a) | .09 | .15 | .13 | (b) | .15 | (b) | .14 | (b) | ||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (2.28 | ) | (.50 | ) | (.12 | ) | .26 | .03 | † | |||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (2.19 | ) | (.35 | ) | .01 | .41 | .17 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.27 | ) | (.16 | ) | (.30 | ) | – 0 | – | (.37 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 8.22 | $ 10.68 | $ 11.19 | $ 11.48 | $ 11.07 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (20.85 | )% | (3.12 | )% | .05 | % | 3.70 | % | 1.50 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $8 | $11 | $11 | $11 | $11 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | .92 | % | .89 | % | .75 | % | .75 | % | .75 | % | ||||||||||
Expenses, before waivers/reimbursements | .92 | % | .89 | % | 1.93 | % | .96 | % | 3.72 | % | ||||||||||
Net investment income | .92 | % | 1.36 | % | 1.16 | %(b) | 1.32 | %(b) | 1.19 | %(b) | ||||||||||
Portfolio turnover rate | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 68.
AB ALL MARKET REAL RETURN PORTFOLIO • | 67 |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class Z | ||||||||
Year Ended October 31, | ||||||||
2015 | January 31, (2014)(e) to October 31, 2014 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 10.55 | $ 10.53 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(a) | .07 | .13 | ||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (2.24 | ) | (.11 | ) | ||||
Contributions from Affiliates(c) | .00 | .00 | ||||||
|
| |||||||
Net increase (decrease) in net asset value from operations | (2.17 | ) | .02 | |||||
|
| |||||||
Less: Dividends | ||||||||
Dividends from net investment income | (.27 | ) | – 0 | – | ||||
|
| |||||||
Net asset value, end of period | $ 8.11 | $ 10.55 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | (20.94 | )% | .19 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $3,166 | $10 | ||||||
Ratio to average net assets of: | ||||||||
Expenses | .96 | % | .88 | % | ||||
Net investment income | .92 | % | 1.59 | % | ||||
Portfolio turnover rate | 53 | % | 73 | % |
(a) | Based on average shares outstanding. |
(b) | Net of fees and expenses waived/reimbursed by the Adviser. |
(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. Initial sales charges or contingent deferred sales charges are not reflected in the calculation of total investment return. 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) | Commencement of distribution. |
† | 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. |
See notes to consolidated financial statements.
68 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Financial Highlights
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors of AB Bond Fund, Inc. and Shareholders of the AB All Market Real Return Portfolio
We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated portfolio of investments, of AB All Market Real Return Portfolio (the “Fund”), formerly known as AllianceBernstein Real Asset Strategy Portfolio (one of the portfolios constituting AB Bond Fund, Inc., formerly known as AllianceBernstein Bond Fund, Inc.), as of October 31, 2015, and the related consolidated statement of operations for the year then ended, the consolidated statements of changes in net assets for each of the two years in the period then ended and the consolidated financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2015, by correspondence with the custodian and others or by other appropriate auditing procedures where replies from others were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the consolidated financial position of AB All Market Real Return Portfolio (one of the portfolios constituting the AB Bond Fund, Inc.) at October 31, 2015, the consolidated results of its operations for the year then ended, the consolidated changes in its net assets for each of the two years in the period then ended and the consolidated financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.
New York, New York
December 30, 2015
AB ALL MARKET REAL RETURN PORTFOLIO • | 69 |
Report of Independent Registered Public Accounting Firm
2015 FEDERAL TAX INFORMATION
(unaudited)
For Federal income tax purposes, the following information is furnished with respect to the distributions paid by the Portfolio during the taxable year ended October 31, 2015. For corporate shareholders, 15.24% of dividends paid qualify for the dividends received deduction. For foreign shareholders, 1.18% of ordinary income dividends paid may be considered to be qualifying to be taxed as interest-related dividends.
For the taxable year ended October 31, 2015, the Portfolio designates $9,157,926 as the maximum amount that may be considered qualified dividend income for individual shareholders.
Shareholders should not use the above information to prepare their income tax returns. The information necessary to complete your income tax returns will be included with your Form 1099-DIV which will be sent to you separately in January 2016.
70 | • AB ALL MARKET REAL RETURN PORTFOLIO |
BOARD OF DIRECTORS
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 Daniel J. Loewy(2), Vice President Vinod Chathlani(2), Vice President Vadim Zlotnikov(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 State Street Corporation CCB/5 1 Iron Street Boston, MA 02210
Principal Underwriter AllianceBernstein Investments, Inc. 1345 Avenue of the Americas New York, NY 10105
Transfer Agent AllianceBernstein Investor Services, Inc. P.O. Box 786003 San Antonio, TX 78278-6003 Toll-Free (800) 221-5672 | Independent Registered Public Ernst & Young LLP 5 Times Square New York, NY 10036
Legal Counsel Seward & Kissel LLP One Battery Park Plaza New York, NY 10004 |
(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 Fund’s portfolio are made by the Adviser’s All Market Real Return Portfolio Team. Messrs. Loewy, Chathlani and Zlotnikov are the investment professionals with the most significant responsibility for the day-to-day management of the Fund’s portfolio. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 71 |
Board of Directors
MANAGEMENT OF THE FUND
Board of Directors Information
The business and affairs of the Strategy are managed under the direction of the Board of Directors. Certain information concerning the Strategy’s Directors is set forth below.
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
INTERESTED DIRECTOR | ||||||||
Robert M. Keith, + 1345 Avenue of the Americas New York, NY 10105 55 (2010) | Senior Vice President of AllianceBernstein L.P. (the “Adviser”) and the head of AllianceBernstein Investments, Inc. (“ABI”) since July 2008; Director of ABI and President of the AB Mutual Funds. Previously, he served as Executive Managing Director of ABI from December 2006 to June 2008. Prior to joining ABI in 2006, Executive Managing Director of Bernstein Global Wealth Management, and prior thereto, Senior Managing Director and Global Head of Client Service and Sales of the Adviser’s institutional investment management business since 2004. Prior thereto, he was Managing Director and Head of North American Client Service and Sales in the Adviser’s institutional investment management business, with which he had been associated since prior to 2004. | 110 | None | |||||
72 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS | ||||||||
Marshall C. Turner, Jr., ++ Chairman of the Board 74 (2010) | Private Investor since prior to 2010. Former Chairman and CEO of Dupont Photomasks, Inc. (components of semi-conductor manufacturing). He also has extensive operating leadership and venture capital investment experience, including five interim or full-time CEO roles and prior service as general partner of institutional venture capital partnerships. He also has extensive non-profit board leadership, and currently serves on the boards of two education and science related non-profit organizations. He has served as a director of one AB fund since 1992, and director or trustee of multiple AB funds since 2005. He has been Chairman of the AB Funds since January 2014, and the Chairman of the Independent Directors Committees of such Funds since February 2014. | 110 | Xilinx, Inc. (programmable logic semi-conductors) since 2007 | |||||
John H. Dobkin, ++ 73 (2010) | Independent Consultant since prior to 2010. Formerly, President of Save Venice, Inc. (preservation organization) from 2001–2002; Senior Advisor from June 1999-June 2000 and President of Historic Hudson Valley (historic preservation) from December 1989-May 1999. Previously, Director of the National Academy of Design. He has served as a director or trustee of various AB Funds since 1992, and as Chairman of the Audit Committees of a number of such Funds from 2001-2008. | 110 | None | |||||
AB ALL MARKET REAL RETURN PORTFOLIO • | 73 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Michael J. Downey, ++ 71 | Private Investor since prior to 2010. Formerly, managing partner of Lexington Capital, LLC (investment advisory firm) from December 1997 until December 2003. He served as a Director of The Merger Fund (registered investment company) since prior to 2010 until 2013. He served as a Director of Prospect Acquisition Corp. (financial services) from 2007 until 2009. From 1987 until 1993, Chairman and CEO of Prudential Mutual Fund Management, director of the Prudential mutual funds, and member of the Executive Committee of Prudential Securities Inc. He has served as a director or trustee of the AB Funds since 2005 and is a director and Chairman of one other registered investment company. | 110 | Asia Pacific Fund, Inc. (registered investment company) since prior to 2010 | |||||
William H. Foulk, Jr., ++ 83 (2010) | Investment Adviser and an Independent Consultant since prior to 2010. Previously, he was Senior Manager of Barrett Associates, Inc., a registered investment adviser. He was formerly Deputy Comptroller and Chief Investment Officer of the State of New York and, prior thereto, Chief Investment Officer of the New York Bank for Savings. He has served as a director or trustee of various AB Funds since 1983, and was Chairman of the Independent Directors Committees of the AB Funds from 2003 until early February 2014. He served as Chairman of such Funds from 2003 through December 2013. He is also active in a number of mutual fund related organizations and committees. | 110 | None |
74 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
D. James Guzy, ++ 79 (2010) | Chairman of the Board of SRC Computers, Inc. (semi-conductors), with which he has been associated since prior to 2010. He served as Chairman of the Board of PLX Technology (semi-conductors) since prior to 2010 until November 2013. He was a Director of Cirrus Logic Corporation (semi-conductors) from 1984 until July 2011. He was a director of Intel Corporation (semi-conductors) from 1969 until 2008, and served as Chairman of the Finance Committee of such company for several years until May 2008. He has served as a director or trustee of one or more of the AB Funds since 1982. | 110 | None | |||||
Nancy P. Jacklin, ++ 67 (2010) | Professorial Lecturer at the Johns Hopkins School of Advanced International Studies (2008-2015). U.S. Executive Director of the International Monetary Fund (which is responsible for ensuring the stability of the international monetary system), (December 2002-May 2006); Partner, Clifford Chance (1992-2002); Sector Counsel, International Banking and Finance, and Associate General Counsel, Citicorp (1985-1992); Assistant General Counsel (International), Federal Reserve Board of Governors (1982-1985); and Attorney Advisor, U.S. Department of the Treasury (1973-1982). Member of the Bar of the District of Columbia and of New York; and member of the Council on Foreign Relations. She has served as a director or trustee of the AB Funds since 2006 and has been Chairman of the Governance and Nominating Committees of the Funds since August 2014. | 110 | None |
AB ALL MARKET REAL RETURN PORTFOLIO • | 75 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Garry L. Moody, ++ 63 (2010) | Independent Consultant. Formerly, Partner, Deloitte & Touche LLP (1995-2008) where he held a number of senior positions, including Vice Chairman, and U.S. and Global Investment Management Practice Managing Partner; President, Fidelity Accounting and Custody Services Company (1993-1995); and Partner, Ernst & Young LLP (1975-1993), where he served as the National Director of Mutual Fund Tax Services and Managing Partner of its Chicago Office Tax department. He is a member of the Trustee Advisory Board of BoardIQ, a biweekly publication focused on issues and news affecting directors of mutual funds. He has served as a director or trustee, and as Chairman of the Audit Committees, of the AB Funds since 2008. | 110 | None | |||||
Earl D. Weiner, ++ 76 (2010) | Of Counsel, and Partner prior to January 2007, of the law firm Sullivan & Cromwell LLP and is a former member of the ABA Federal Regulation of Securities Committee Task Force to draft editions of the Fund Director’s Guidebook. He also serves as a director or trustee of various non-profit organizations and has served as Chairman or Vice Chairman of a number of them. He has served as a director or trustee of the AB Funds since 2007 and served as Chairman of the Governance and Nominating Committees of the AB Funds from 2007 until August 2014. | 110 | None |
76 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Management of the Fund
* | The address for each of the Strategy’s disinterested Directors is c/o AllianceBernstein L.P., Attention: Philip L. Kirstein, 1345 Avenue of the Americas, New York, NY 10105. |
** | There is no stated term of office for the Strategy’s Directors. |
*** | The information above includes each Director’s principal occupation during the last five years and other information relating to the experience, attributes and skills relevant to each Director’s qualifications to serve as a Director, which led to the conclusion that each Director should serve as a Director for the Strategy. |
+ | Mr. Keith is an “interested person” of the Strategy as defined in the “40 Act”, due to his position as a Senior Vice President of the Adviser. |
++ | Member of the Audit Committee, the Governance and Nominating Committee and the Independent Directors Committee. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 77 |
Management of the Fund
Officer Information
Certain information concerning the Strategy’s Officers is listed below.
NAME, ADDRESS* AND AGE | PRINCIPAL POSITION(S) HELD WITH FUND | PRINCIPAL OCCUPATION DURING PAST 5 YEARS | ||
Robert M. Keith 55 | President and Chief Executive Officer | See biography above. | ||
Philip L. Kirstein 70 | Senior Vice President and Independent Compliance Officer | Senior Vice President and Independent Compliance Officer of the AB Funds, with which he has been associated since October 2004. Prior thereto, he was Of Counsel to Kirkpatrick & Lockhart, LLP from October 2003 to October 2004, and General Counsel of Merrill Lynch Investment Managers, L.P. since prior to March 2003. | ||
Daniel J. Loewy 41 | Senior Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Vadim Zlotnikov 53 | Senior Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Vinod Chathlani 32 | Vice President | Assistant Vice President of the Adviser,** with which he has been associated since December 2013. Prior thereto, he was a risk analyst at Oppenheimer Funds and a corporate investment strategist at Reliance Communications since prior to 2010. | ||
Emilie D. Wrapp 59 | Secretary | Senior Vice President, Assistant General Counsel and Assistant Secretary of ABI,** with which she has been associated since prior to 2010. | ||
Joseph J. Mantineo 56 | Treasurer and Chief Financial Officer | Senior Vice President of AllianceBernstein Investor Services, Inc, (“ABIS”),** with which he has been associated since prior to 2010. | ||
Phyllis J. Clarke 54 | Controller | Vice President of ABIS,** with which she has been associated since prior to 2010. | ||
Vincent S. Noto 50 | Chief Compliance Officer | Senior Vice President since 2015 and Mutual Fund Chief Compliance Officer of the Adviser** since 2014. Prior thereto, he was Vice President and Director of Mutual Fund Compliance of the Adviser** since prior to 2010. |
* | The address for each of the Fund’s Officers is 1345 Avenue of the Americas, New York, NY 10105. |
** | The Adviser, ABI and ABIS are affiliates of the Strategy. |
The Fund’s Statement of Additional Information (“SAI”) has additional information about the Strategy’s Directors and Officers and is available without charge upon request. Contact your financial representative or AB at 1-800-227-4618, or visit www.abglobal.com, for a free prospectus or SAI. |
78 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Management of the Fund
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 Bond Fund, Inc. (the “Fund”), in respect of AB All Market Real Return Portfolio (the “Portfolio”).2,3 The evaluation of the Investment Advisory Agreement was prepared by Philip L. Kirstein, the Senior Officer of the Fund, for the Directors of the Fund, as required by the August 2004 agreement 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 Directors of the Fund to perform its duties pursuant to Section 15 of the Investment Company Act of 1940 (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 Directors in connection with their review of the proposed 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
1 | The Senior Officer’s fee evaluation was completed on October 22, 2015 and discussed with the Board of Directors on November 3-5, 2015. |
2 | Future references to the Fund or the Portfolio do not include “AB.” |
3 | Effective December 15, 2014, the Portfolio changed its name from Real Asset Strategy to All Market Real Return Portfolio. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 79 |
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.”4
INVESTMENT ADVISORY FEES, NET ASSETS & EXPENSE RATIOS
The Adviser proposed that the Portfolio pay the advisory fee set forth below for receiving the services to be provided pursuant to the Investment Advisory Agreement.
Portfolio | Net Assets 9/30/15 ($MM) | Advisory Fee Schedule Based on the Average Daily Net Assets of the Portfolio | ||
All Market Real Return Portfolio | $522.9 | 0.75% (flat fee) |
The Adviser is reimbursed as specified in the Investment Advisory Agreement for certain clerical, legal, accounting, administrative and other services provided to the Portfolio. During the Portfolio’s fiscal year ended October 31, 2014, the Adviser received $57,849 (0.009% of the Portfolio’s average daily net assets) for such services.
The Adviser agreed to waive that portion of its advisory fees and/or reimburse the Portfolio for that portion of the Portfolio’s total operating expenses to the degree necessary to limit the Portfolio’s expense ratios to the amounts set forth below for the Portfolio’s current fiscal year. The waiver is terminable by the
4 | Jones v. Harris at 1427. |
80 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Adviser upon at least 60 days’ notice prior to the Portfolio’s prospectus update. In addition, set forth below are the Portfolio’s gross expense ratios for the most recent semi-annual period.5
Expense Cap Pursuant to Expense Limitation Undertaking6 | Gross Expense Ratio7 | Fiscal Year End | ||||||||||||||
Portfolio | Current | Effective 02/01/16 | ||||||||||||||
All Market Real Return Portfolio8,9,10 | Advisor | 1.00 | % | 1.05 | % | 1.02 | % | Oct. 31 (ratios as of Apr. 30, 2015) | ||||||||
Class A | 1.30 | % | 1.30 | % | 1.32 | % | ||||||||||
Class C | 2.00 | % | 2.05 | % | 2.03 | % | ||||||||||
Class R | 1.50 | % | 1.55 | % | 1.62 | % | ||||||||||
Class K | 1.25 | % | 1.30 | % | 1.32 | % | ||||||||||
Class I | 1.00 | % | 1.05 | % | 0.98 | % | ||||||||||
Class Z | 1.00 | % | 1.05 | % | 0.92 | % | ||||||||||
Class 1 | 1.25 | % | 1.30 | % | 1.15 | % | ||||||||||
Class 2 | 1.00 | % | 1.05 | % | 0.90 | % |
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, although as
5 | Semi-annual total expense ratios are unaudited. |
6 | The expense cap pursuant to the expense limitation undertaking for the Portfolio excludes interest expense. |
7 | Annualized. |
8 | The Rule 12b-1 fee for Class A shares will bill reduced from 0.30% to 0.25%, effective on February 1, 2016. The expense cap for Class A shares will remain at the same level (1.30%). |
9 | Class I, Class Z, Class 1, and Class 2 shares of the Portfolio were operating below their respective expense caps, and their net expense ratio during the most recent semi-annual period were 0.97%, 0.91%, 1.15% and 0.90, respectively. |
10 | The Portfolio’s fiscal percentage of net assets allocated to ETFs as of July 31, 2015 is 0.36%. The Portfolio’s acquired funds expense ratio related to such ETF holdings is 0.0022%. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 81 |
previously noted, the Adviser is reimbursed for providing such services. Also, retail mutual funds managed by the Adviser are widely held and accordingly, servicing the Portfolio’s investors is more time consuming and labor intensive compared to servicing institutional clients since the Adviser needs to communicate with a more extensive network of financial intermediaries and shareholders. 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.11 In addition to the AB Institutional fee schedule, set forth below is what would have been the effective advisory fee for the Portfolio had the AB Institutional fee schedule been applicable to the Portfolio versus the Portfolio’s advisory fees based on September 30, 2015 net assets:12
Portfolio | Net Assets 09/30/15 ($MM) | AB Institutional Fee Schedule | Effective AB Inst. Adv. Fee | Strategy Advisory Fee | ||||||
All Market Real Return Portfolio | $522.9 | Real Asset Strategy Schedule 0.75% on 1st $150 million 0.60% on next $150 million 0.50% on the balance Minimum acct size: $150 million | 0.600% | 0.750% |
11 | 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. |
12 | 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. |
82 | • AB ALL MARKET REAL RETURN PORTFOLIO |
The Adviser also manages and sponsors retail mutual funds, which are organized in jurisdictions outside the United States, generally Luxembourg, Japan, Taiwan, and South Korea, and sold to non-United States resident investors. The Adviser charges the following fees for Real Asset Portfolio, a Luxembourg fund that has a somewhat similar investment style as the Portfolio:
Portfolio | Luxembourg Fund | Fee13 | ||
All Market Real Return Portfolio | Real Asset Portfolio | |||
Class A | 1.55% | |||
Class I (Institutional) | 0.75% |
The Adviser represented that it does not provide any sub-advisory investment services to other investment 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 investment advisers.14, 15 Broadridge’s analysis included the comparison of the Portfolio’s contractual management fee, estimated at the approximate current asset level of the subject Portfolio, to the median of the Portfolio’s Broadridge Expense Group (“EG”)16 and the Portfolio’s contractual management fee ranking.17
13 | Class A shares of the fund are charged an “all-in” fee, which includes investment advisory services and distribution related services, while Class I shares, whose fee is for investment advisory services only. |
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. |
15 | 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 remains a part of Thomson Reuters’ Lipper division. Accordingly, the Portfolio’s investment classification/objective continues to be determined by Lipper. |
16 | Broadridge does not consider average account size when constructing EGs. Funds with relatively small average account sizes tend to have higher transfer agent expense ratios than comparable sized funds that have relatively large average account sizes. There are limitations to Lipper expense category data because different funds categorize expenses differently. |
17 | The contractual management fee is calculated by Broadridge using the Portfolio’s contractual management fee rate at the hypothetical asset level. The hypothetical asset level is based on the combined net assets of all classes of the Portfolio, rounded up to the next $25 million. Broadridge’s total expense ratio information is based on the most recent annual report except as otherwise noted. A ranking of “1” would mean that Portfolio had the lowest effective fee rate in the Broadridge peer group. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 83 |
Broadridge describes an EG as a representative sample of comparable funds. Broadridge’s standard methodology for screening funds to be included in an EG entails the consideration of several fund criteria, including fund type, Lipper investment classification/objective, load type, similar 12b-1/non-12b-1 service fees, asset (size) comparability, expense components and attributes. An EG will typically consist of seven to twenty funds.
Portfolio | Contractual Management Fee (%) | Broadridge EG Median (%) | Broadridge EG Rank | |||||||||
All Market Real Return Portfolio | 0.750 | 0.804 | 7/16 |
Broadridge also compared the Portfolio’s total expense ratio to the medians of the Portfolio’s EG and Broadridge Expense Universe (“EU”). The EU is a broader group compared to the EG, consisting of all funds that have the same Lipper investment classification/objective and load type as the subject Portfolio.18 Pro-forma total expense ratio (italicized) is shown to reflect the Portfolio’s anticipated 12b-1 fee reduction.
Portfolio | Expense Ratio (%) | Broadridge Median (%) | Broadridge Group Rank | Broadridge Median (%) | Broadridge EU Rank | |||||||||||
All Market Real Return Portfolio | 1.230 | 1.277 | 7/16 | 1.288 | 36/97 | |||||||||||
Pro-forma | 1.230 | 1.277 | 7/16 | 1.288 | 36/97 |
Based on this analysis, considering pro-forma information where available, the Portfolio has an equally favorable ranking on a total expense ratio basis and on a contractual management fee basis.
III. | COSTS TO THE ADVISER AND ITS AFFILIATES OF SUPPLYING SERVICES PURSUANT TO THE MANAGEMENT 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.
18 | Except for asset (size) comparability, Broadridge uses the same criteria for selecting an EG when selecting an EU. Unlike the EG, the EU allows for the same adviser to be represented by more than just one fund. |
84 | • AB ALL MARKET REAL RETURN PORTFOLIO |
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 Directors, was reviewed by the Senior Officer and the independent consultant. The Adviser’s profitability from providing investment advisory services to the Portfolio increased during calendar year 2014, relative to 2013.
In addition to the Adviser’s direct profits from managing the Portfolio, certain of the Portfolio’s affiliates have business relationships with the Portfolio and may earn a profit from providing other services to the Portfolio. The courts have referred to this type of business opportunity 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. These affiliates provide transfer agent, distribution and brokerage related services to the Portfolio and receive transfer agent fees, front-end sales loads, Rule 12b-1 payments, contingent deferred sales charges (“CDSC”) and brokerage commissions. In addition, the Adviser benefits from soft dollar arrangements which offset expenses the Adviser would otherwise incur. During the Portfolio‘s most recently completed fiscal year, ABI received from the Portfolio $996, $1,471,103 and $775 front-end sales charges, Rule 12b-1 and CDSC fees, respectively.19
AllianceBernstein Investments, Inc. (“ABI”), an affiliate of the Adviser, is the Portfolio’s principal underwriter. ABI and the Adviser have disclosed in the Portfolio’s prospectus that they may make revenue sharing payments from their own resources, in addition to revenues derived from sales loads and Rule 12b-1 fees, to firms that sell shares of the Portfolio. In 2014, ABI paid approximately 0.05% of the average monthly assets of the AB Mutual Funds or approximately $19.4 million for distribution services and educational support (revenue sharing payments).
Fees and reimbursements for out of pocket expenses charged by AllianceBernstein Investor Services, Inc. (“ABIS”), the affiliated transfer agent for the Portfolio, are charged on a per account basis, based on the level of service provided and the class of share held by the account. ABIS also receives a fee per shareholder sub-account for each account maintained by an intermediary on an omnibus basis. During the Portfolio’s most recently completed fiscal year, ABIS received $88,332 in fees from the Portfolio.
19 | As a result of discussions between the Board and the Adviser, ABI will reduce the Portfolio’s Class A shares Rule 12b-1 fee payment rate from 0.30% to 0.25% effective on February 1, 2016. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 85 |
The Portfolio effected brokerage transactions through the Adviser’s affiliate, Sanford C. Bernstein & Co., LLC (“SCB & Co.”) and its U.K. affiliate, Sanford C. Bernstein Limited (“SCB Ltd.”), collectively “SCB,” and paid commissions for such transactions during the Portfolio’s most recently completed fiscal year. The Adviser represented that SCB’s profitability from business conducted with the Portfolio is comparable to the profitability of SCB’s dealings with other similar third party clients. In the ordinary course of business, SCB receives and pays liquidity rebates from electronic communications networks (“ECNs”) derived from trading for its clients. These credits and charges are not being passed onto to any SCB client. The Adviser also receives certain soft dollar benefits from brokers that execute agency trades for its clients. These soft dollar benefits reduce the Adviser’s research expense and increase its profitability.
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 Directors 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 Directors an update of the Deli20 study on advisory fees and various fund
20 | 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. |
86 | • AB ALL MARKET REAL RETURN PORTFOLIO |
characteristics.21 The independent consultant first reiterated the results of his previous two dimensional comparison analysis (fund size and family size) with the Board of Directors.22 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 FUND |
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 shows the 1, 3, and 5 year performance returns and rankings of the Portfolio23 relative to its Broadridge Performance Group (“PG”) and Broadridge Performance Universe (“PU”)24 for the period ended July 31, 2015.25
Portfolio | Fund Return (%) | PG Median (%) | PU Median (%) | PG Rank | PU Rank | |||||||||||
All Market Real Return Portfolio | ||||||||||||||||
1 year | -25.18 | 3.13 | -1.74 | 5/5 | 59/59 | |||||||||||
3 year | -6.53 | 7.09 | 2.30 | 5/5 | 39/39 | |||||||||||
5 year | -1.10 | 7.21 | 3.72 | 5/5 | 21/24 |
21 | 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. |
22 | 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. |
23 | The performance returns and rankings are for the Class A shares of the Portfolio. The performance returns of the Portfolio were provided Broadridge. |
24 | The Portfolio’s PG/PU is not identical to the Portfolio’s EG/EU as the criteria for including/excluding a fund in/from a PG/PU is somewhat different from that of an EG/EU. |
25 | The current Lipper investment classification/objective dictates the PG and PU throughout the life of the Portfolio even if the Portfolio may have had a different investment classification/objective at different points in time. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 87 |
Set forth below are the 1, 3, and 5 year and since inception net performance returns of the Portfolio (in bold)26 versus its benchmark.27 Portfolio and benchmark volatility and reward-to-variability ratio (“Sharpe Ratio”) information is also shown.28
Period Ending July 31, 2015 Annualized Net Performance | ||||||||||||||||||||||||||||
1 Year (%) | 3 Year (%) | 5 Year (%) | Since (%) | Volatility (%) | Sharpe (%) | Risk Period (Year) | ||||||||||||||||||||||
All Market Real Return Portfolio | -25.18 | -6.53 | -1.10 | -1.24 | 14.69 | -0.01 | 5 | |||||||||||||||||||||
MSCI AC World Commodity Producers Index | -30.57 | -6.39 | -3.02 | -4.23 | N/A | N/A | N/A | |||||||||||||||||||||
All Market Real Return Index | -19.81 | -4.17 | -0.12 | -0.40 | 14.82 | 0.06 | 5 | |||||||||||||||||||||
Inception Date: March 8, 2010 |
CONCLUSION:
Based on the factors discussed above the Senior Officer’s conclusion is that the proposed advisory fee 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 in respect of the Portfolio is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: November 25, 2015
26 | The performance returns and risk measures shown in the table are for the Class A shares of the Portfolio. |
27 | The Adviser provided Portfolio and benchmark performance return information for the periods through July 31, 2015. |
28 | 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. |
88 | • AB ALL MARKET REAL RETURN PORTFOLIO |
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 ALL MARKET REAL RETURN PORTFOLIO • | 89 |
AB Family of Funds
NOTES
90 | • AB ALL MARKET REAL RETURN PORTFOLIO |
NOTES
AB ALL MARKET REAL RETURN PORTFOLIO • | 91 |
NOTES
92 | • AB ALL MARKET REAL RETURN PORTFOLIO |
AB ALL MARKET REAL RETURN PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
AMRR-0151-1015
OCT 10.31.15
ANNUAL REPORT
AB BOND INFLATION STRATEGY
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 21, 2015
Annual Report
This report provides management’s discussion of fund performance for AB Bond Inflation Strategy (the “Strategy”) for the annual reporting period ended October 31, 2015. Effective January 20, 2015, the Strategy’s name changed from AllianceBernstein Bond Inflation Strategy to AB Bond Inflation Strategy.
Investment Objectives and Policies
The Strategy seeks to maximize real return without assuming what AllianceBernstein L.P. (the “Adviser”) considers to be undue risk. Real return is the rate of return after adjusting for inflation. The Strategy pursues its objective by investing principally in inflation-indexed securities (such as Treasury Inflation-Protected Securities (“TIPS”), or inflation-indexed securities from issuers other than the US Treasury) or by gaining inflation protection through derivatives transactions, such as inflation (“CPI”) swaps or total return swaps linked to TIPS. In deciding whether to purchase inflation-indexed securities or use inflation-linked derivatives transactions, the Adviser will consider the relative costs and efficiency of each method. In addition, in seeking to maximize real return, the Strategy may invest in other fixed-income investments such as US and non-US government securities, corporate fixed-income securities and mortgage-related securities, as well as derivatives linked to such securities.
Under normal circumstances, the Strategy invests at least 80% of its net assets in fixed-income securities. While the Strategy expects to invest principally in investment-grade securities, it may
invest up to 15% of its total assets in fixed-income securities rated BB or B or the equivalent by at least one national rating agency (or deemed by the Adviser to be of comparable credit quality), which are not investment-grade (“junk bonds”).
Inflation-indexed securities are fixed-income securities structured to provide protection against inflation. Their principal value and/or the interest paid on them are adjusted to reflect official inflation measures. The inflation measure for TIPS is the Consumer Price Index for Urban Consumers. The Strategy may also invest in other inflation-indexed securities, issued by both US and non-US issuers, and in derivative instruments linked to these securities.
The Strategy may invest in derivatives, such as options, futures, forwards or swaps. The Strategy intends to use leverage for investment purposes. To do this, the Strategy expects to enter into (i) reverse repurchase agreement transactions and use the cash made available from these transactions to make additional investments in fixed-income securities in accordance with the Strategy’s investment policies and (ii) total return swaps. In determining when and to what extent to employ leverage or enter into derivatives transactions, the Adviser will consider factors such as the relative risks and returns expected of potential investments and the costs of such transactions. The Adviser will consider the impact of reverse repurchase agreements, swaps and other derivatives in making its assessments of the Strategy’s risks. The
AB BOND INFLATION STRATEGY • | 1 |
resulting exposures to markets, sectors, issuers or specific securities will be continuously monitored by the Adviser.
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 Strategy. 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 Strategy’s other holdings.
The Strategy may also invest in loan participations, structured securities, asset-backed securities, variable, floating, and inverse floating-rate instruments, and preferred stock, and may use other investment techniques. The Strategy may invest in fixed-income securities of any maturity and duration. If the rating of a fixed-income security falls below investment-grade, the Strategy will not be obligated to sell the security and may continue to hold it if, in the Adviser’s opinion, the investment is appropriate under the circumstances.
Investment Results
The table on page 6 shows the Strategy’s performance compared to its benchmark, the Barclays 1-10 Year TIPS Index, and to the Lipper TIPS Fund Average (the “Lipper Average”) for the six- and 12-month periods ended October 31, 2015. Funds in the Lipper Average have generally similar investment objectives to the Strategy, although some of the funds may have different investment policies
and sales and management fees and fund expenses. The inception date for Class Z shares was December 11, 2014; due to limited performance history, there is no discussion of comparison to the benchmark and Lipper Average for this share class.
For the six-month period, all share classes underperformed the benchmark, before sales charges; all share classes outperformed the Lipper Average except Class C and Class R shares. For the 12-month period, all share classes underperformed the benchmark, before sales charges; all share classes outperformed the Lipper Average except Class C, Class K and Class R shares. During both periods, TIPS performed poorly on an absolute basis and relative to comparable maturity Treasuries, as a significant drop in commodity prices including oil and metals dampened inflation expectations. Currency positioning contributed to returns, specifically the Strategy’s long US dollar position against short euro, Canadian dollar and Australian dollar positions. Sector allocation detracted for both periods mainly from an overweight to investment-grade corporates, relative to the benchmark. Yield-curve positioning had an immaterial impact on performance for both periods.
During both periods, the Strategy utilized derivatives including currency forwards to manage active currency positions. Credit default swaps were utilized for hedging and investment purposes, and written options were used for hedging purposes, which had an immaterial impact on performance during both periods, in absolute terms. Treasury futures, and interest rate and CPI swaps, were utilized to manage
2 | • AB BOND INFLATION STRATEGY |
the duration, inflation protection, country exposure and yield curve positioning of the Strategy.
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.
AB BOND INFLATION STRATEGY • | 3 |
DISCLOSURES AND RISKS
Benchmark Disclosure
The unmanaged Barclays 1-10 Year TIPS Index does not reflect fees and expenses associated with the active management of a mutual fund portfolio. The Barclays 1-10 Year TIPS Index represents the performance of inflation-protected securities issued by the US Treasury. An investor cannot invest directly in an index, and its results are not indicative of the performance for any specific investment, including the Strategy.
A Word About Risk
Market Risk: The value of the Strategy’s assets will fluctuate as the bond market fluctuates. The value of the Strategy’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 investments in fixed-income securities tends to fall and this decrease in value may not be offset by higher income from new investments. The Strategy may be subject to a heightened risk of rising interest rates due to the current period of historically low rates and the effect of government fiscal policy initiatives, including Federal Reserve actions, and market reaction to these initiatives. The current period of historically low rates is expected to end and rates are expected to begin rising in the near future. Interest rate risk is generally greater for fixed-income securities with longer maturities or durations.
Duration Risk: Duration is a measure that relates the expected price volatility of a fixed-income security to changes in interest rates. The duration of a fixed-income security may be shorter than or equal to full maturity of a fixed-income security. Fixed-income securities with longer durations have more risk and will decrease in price as interest rates rise. For example, a fixed-income security with a duration of three years will decrease in value by approximately 3% if interest rates increase by 1%.
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 Strategy’s assets can decline as can the value of the Strategy’s distributions. This risk is significantly greater for fixed-income securities with longer maturities. Although the Strategy invests principally in inflation-indexed securities, the value of its securities may be vulnerable to changes in expectations of inflation or interest rates.
Derivatives Risk: Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Strategy, and may be subject to counterparty risk to a greater degree than more traditional investments.
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.
Currency Risk: Fluctuations in currency exchange rates may negatively affect the value of the Strategy’s investments or reduce its returns.
(Disclosures, Risks and Note about Historical Performance continued on next page)
4 | • AB BOND INFLATION STRATEGY |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
Leverage Risk: To the extent the Strategy 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 Strategy’s investments.
Liquidity Risk: Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Strategy. Causes of liquidity risk may include low trading volumes, large positions and heavy redemptions of Strategy shares. Over recent years liquidity risk has also increased because the capacity of dealers in the secondary market for fixed-income securities to make markets in these securities has decreased, even as the overall bond market has grown significantly, due to, among other things, structural changes, additional regulatory requirements and capital and risk restraints that have led to reduced inventories. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
Management Risk: The Strategy 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 Strategy’s prospectus. As with all investments, you may lose money by investing in the Strategy.
An Important Note About Historical Performance
The investment return and principal value of an investment in the Strategy will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. 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 visiting www.abglobal.com. For Class 1 shares, click on “Private Clients”, then “Investments”, then “Stocks” or “Bonds”, then “Mutual Fund Performance at a Glance”.
All fees and expenses related to the operation of the Strategy have been deducted. NAV returns do not reflect sales charges; if sales charges were reflected, the Strategy’s quoted performance would be lower. SEC returns reflect the applicable sales charges for each share class: a 4.25% maximum front-end sales charge for Class A shares; a 1% 1-year contingent deferred sales charge for Class C shares. Class 1 and Class 2 shares do not carry sales charges. Returns for the different share classes will vary due to different expenses associated with each class. Performance assumes reinvestment of distributions and does not account for taxes.
AB BOND INFLATION STRATEGY • | 5 |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE STRATEGY VS. ITS BENCHMARK PERIODS ENDED OCTOBER 31, 2015 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB Bond Inflation Strategy | ||||||||||
Class 1* | -2.51% | -2.04% | ||||||||
| ||||||||||
Class 2* | -2.45% | -1.95% | ||||||||
| ||||||||||
Class A | -2.59% | -2.18% | ||||||||
| ||||||||||
Class C | -2.95% | -2.93% | ||||||||
| ||||||||||
Advisor Class† | -2.45% | -1.90% | ||||||||
| ||||||||||
Class R† | -2.68% | -2.49% | ||||||||
| ||||||||||
Class K† | -2.57% | -2.24% | ||||||||
| ||||||||||
Class I† | -2.46% | -1.88% | ||||||||
| ||||||||||
Class Z† | -2.34% | -0.86% | ‡ | |||||||
| ||||||||||
Barclays 1-10 Year TIPS Index | -1.83% | -1.24% | ||||||||
| ||||||||||
Lipper TIPS Fund Average | -2.60% | -2.21% | ||||||||
| ||||||||||
* Class 1 shares are only available to Bernstein Global Wealth Management private client accounts. Class 2 shares are only available to large Bernstein Global Wealth Management private client accounts and the Adviser’s institutional clients or through other limited arrangements.
† Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Strategy.
‡ Since inception on December 11, 2014. | ||||||||||
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
(Historical Performance continued on next page)
6 | • AB BOND INFLATION STRATEGY |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
GROWTH OF A $10,000 INVESTMENT IN THE STRATEGY
1/26/10* TO 10/31/15 (unaudited)
This chart illustrates the total value of an assumed $10,000 investment in AB Bond Inflation Strategy Class A shares (from 1/26/10* to 10/31/15) as compared to the performance of the Strategy’s benchmark. The chart reflects the deduction of the maximum 4.25% sales charge from the initial $10,000 investment in the Strategy and assumes the reinvestment of dividends and capital gains distributions.
* | Inception date: 1/26/2010. |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
(Historical Performance continued on next page)
AB BOND INFLATION STRATEGY • | 7 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF OCTOBER 31, 2015 (unaudited) | ||||||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | SEC Yields* | ||||||||||
Class 1 Shares† | 0.78 | % | ||||||||||
1 Year | -2.04 | % | -2.04 | % | ||||||||
5 Years | 1.49 | % | 1.49 | % | ||||||||
Since Inception‡ | 2.39 | % | 2.39 | % | ||||||||
Class 2 Shares† | 0.87 | % | ||||||||||
1 Year | -1.95 | % | -1.95 | % | ||||||||
5 Years | 1.58 | % | 1.58 | % | ||||||||
Since Inception‡ | 2.47 | % | 2.47 | % | ||||||||
Class A Shares | 0.47 | % | ||||||||||
1 Year | -2.18 | % | -6.36 | % | ||||||||
5 Years | 1.29 | % | 0.41 | % | ||||||||
Since Inception‡ | 2.17 | % | 1.41 | % | ||||||||
Class C Shares | -0.22 | % | ||||||||||
1 Year | -2.93 | % | -3.89 | % | ||||||||
5 Years | 0.56 | % | 0.56 | % | ||||||||
Since Inception‡ | 1.44 | % | 1.44 | % | ||||||||
Advisor Class Shares^ | 0.79 | % | ||||||||||
1 Year | -1.90 | % | -1.90 | % | ||||||||
5 Years | 1.57 | % | 1.57 | % | ||||||||
Since Inception‡ | 2.47 | % | 2.47 | % | ||||||||
Class R Shares^ | 0.13 | % | ||||||||||
1 Year | -2.49 | % | -2.49 | % | ||||||||
5 Years | 1.08 | % | 1.08 | % | ||||||||
Since Inception‡ | 1.97 | % | 1.97 | % | ||||||||
Class K Shares^ | 0.44 | % | ||||||||||
1 Year | -2.24 | % | -2.24 | % | ||||||||
5 Years | 1.32 | % | 1.32 | % | ||||||||
Since Inception‡ | 2.21 | % | 2.21 | % | ||||||||
Class I Shares^ | 0.78 | % | ||||||||||
1 Year | -1.88 | % | -1.88 | % | ||||||||
5 Years | 1.59 | % | 1.59 | % | ||||||||
Since Inception‡ | 2.49 | % | 2.49 | % | ||||||||
Class Z Shares^ | 0.87 | % | ||||||||||
Since Inception‡ | -0.86 | % | -0.86 | % |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
(Historical Performance continued on next page)
8 | • AB BOND INFLATION STRATEGY |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
The Strategy’s prospectus fee table shows the Strategy’s total annual operating expense ratios as 0.77%, 0.67%, 1.15%, 1.86%, 0.86%, 1.40%, 1.07%, 0.69% and 0.68% for Class 1, Class 2, Class A, Class C, Advisor Class, Class R, Class K, Class I and Class Z shares, respectively, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements limit the Strategy’s annual operating expenses (exclusive of interest expense) to 0.60%, 0.50%, 0.80%, 1.50%, 0.50%, 1.00%, 0.75%, 0.50% and 0.50% for Class 1, Class 2, Class A, Class C, Advisor Class, Class R, Class K, Class I and Class Z shares, respectively. These waivers/reimbursements may not be terminated before January 29, 2016 and may be extended by the Adviser for additional one-year terms. Absent reimbursements or waivers, performance would have been lower. The Financial Highlights section of this report sets forth expense ratio data for the current reporting period; the expense ratios shown above may differ from the expense ratios in the Financial Highlights sections since they are based on different time periods.
* | SEC yields are calculated based on SEC guidelines for the 30-day period ended October 31, 2015. |
† | Class 1 shares are only available to Bernstein Global Wealth Management private client accounts. Class 2 shares are only available to large Bernstein Global Wealth Management private client accounts and the Adviser’s institutional clients or through other limited arrangements. These share classes do not carry front-end sales charges, therefore their respective NAV and SEC returns are the same. |
‡ | Inception date for all share classes excluding Class Z: 1/26/2010; 12/11/2014 for Class Z shares. |
^ | These share classes are offered at NAV to eligible investors and their SEC returns are the same as their NAV returns. Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Strategy. The inception date for these share classes is listed above. |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
(Historical Performance continued on next page)
AB BOND INFLATION STRATEGY • | 9 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END SEPTEMBER 30, 2015 (unaudited) | ||||
SEC Return (reflects applicable | ||||
Class 1 Shares† | ||||
1 Year | -1.95 | % | ||
5 Years | 1.80 | % | ||
Since Inception‡ | 2.39 | % | ||
Class 2 Shares† | ||||
1 Year | -1.87 | % | ||
5 Years | 1.89 | % | ||
Since Inception‡ | 2.48 | % | ||
Class A Shares | ||||
1 Year | -6.38 | % | ||
5 Years | 0.68 | % | ||
Since Inception‡ | 1.38 | % | ||
Class C Shares | ||||
1 Year | -3.81 | % | ||
5 Years | 0.87 | % | ||
Since Inception‡ | 1.45 | % | ||
Advisor Class Shares^ | ||||
1 Year | -1.91 | % | ||
5 Years | 1.86 | % | ||
Since Inception‡ | 2.46 | % | ||
Class R Shares^ | ||||
1 Year | -2.41 | % | ||
5 Years | 1.37 | % | ||
Since Inception‡ | 1.97 | % | ||
Class K Shares^ | ||||
1 Year | -2.06 | % | ||
5 Years | 1.62 | % | ||
Since Inception‡ | 2.21 | % | ||
Class I Shares^ | ||||
1 Year | -1.79 | % | ||
5 Years | 1.90 | % | ||
Since Inception‡ | 2.49 | % | ||
Class Z Shares^ | ||||
Since Inception‡ | -1.15 | % |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
(Historical Performance continued on next page)
10 | • AB BOND INFLATION STRATEGY |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
† | Class 1 shares are only available to Bernstein Global Wealth Management private client accounts. Class 2 shares are only available to large Bernstein Global Wealth Management private client accounts and the Adviser’s institutional clients or through other limited arrangements. |
‡ | Inception date for all share classes excluding Class Z: 1/26/2010; 12/11/2014 for Class Z shares. |
^ | These share classes are offered at NAV to eligible investors and their SEC returns are the same as their NAV returns. Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Strategy. The inception date for these share classes is listed above. |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
AB BOND INFLATION STRATEGY • | 11 |
Historical Performance
EXPENSE EXAMPLE
(unaudited)
As a shareholder of a mutual fund, you may incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions and (2) ongoing costs, including management fees; distribution (12b-1) fees; and other fund expenses. 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* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 974.10 | $ | 4.53 | 0.91 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.62 | $ | 4.63 | 0.91 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 970.50 | $ | 8.00 | 1.61 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,017.09 | $ | 8.19 | 1.61 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 975.50 | $ | 3.04 | 0.61 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.13 | $ | 3.11 | 0.61 | % | ||||||||
Class R | ||||||||||||||||
Actual | $ | 1,000 | $ | 973.20 | $ | 5.42 | 1.09 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.71 | $ | 5.55 | 1.09 | % | ||||||||
Class K | ||||||||||||||||
Actual | $ | 1,000 | $ | 974.30 | $ | 4.28 | 0.86 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.87 | $ | 4.38 | 0.86 | % | ||||||||
Class I | ||||||||||||||||
Actual | $ | 1,000 | $ | 975.40 | $ | 2.94 | 0.59 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.23 | $ | 3.01 | 0.59 | % |
12 | • AB BOND INFLATION STRATEGY |
Expense Example
Beginning Account Value May 1, 2015 | Ending Account Value October 31, 2015 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class 1 | ||||||||||||||||
Actual | $ | 1,000 | $ | 974.90 | $ | 3.53 | 0.71 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.63 | $ | 3.62 | 0.71 | % | ||||||||
Class 2 | ||||||||||||||||
Actual | $ | 1,000 | $ | 975.50 | $ | 3.04 | 0.61 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.13 | $ | 3.11 | 0.61 | % | ||||||||
Class Z | ||||||||||||||||
Actual | $ | 1,000 | $ | 976.60 | $ | 3.09 | 0.62 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.08 | $ | 3.16 | 0.62 | % |
* | Expenses are equal to each classes’ annualized expense ratios, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
AB BOND INFLATION STRATEGY • | 13 |
Expense Example
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $334.7
Total Investments ($mil): $436.9
INFLATION PROTECTION BREAKDOWN* | ||||
U.S. Inflation-Protected Exposure | 98.4 | % | ||
Non-U.S. | — | |||
Non-Inflation Exposure | 1.6 | % | ||
|
| |||
100 | % |
SECTOR BREAKDOWN OF NET PORTFOLIO ASSETS, EXCLUDING TREASURY SECURITIES, TIPS, INTEREST RATE DERIVATIVES AND NET CASH EQUIVALENTS* | ||||
Corporates – Investment Grade | 14.5 | % | ||
Asset-Backed Securities | 11.4 | % | ||
Commercial Mortgage-Backed Securities | 10.2 | % | ||
Collateralized Mortgage Obligations | 3.1 | % | ||
Quasi-Sovereigns | 0.6 | % | ||
Corporates – Non-Investment Grade | 0.6 | % | ||
Governments – Sovereign Agencies | 0.5 | % | ||
Governments – Sovereign Bonds | 0.2 | % | ||
Common Stocks | 0.2 | % | ||
Emerging Markets – Corporate Bonds | 0.1 | % |
SECTOR BREAKDOWN OF TOTAL PORTFOLIO INVESTMENTS, EXCLUDING DERIVATIVES† | ||||
Inflation-Linked Securities | 60.1 | % | ||
Corporates – Investment Grade | 14.5 | % | ||
Asset-Backed Securities | 8.8 | % | ||
Commercial Mortgage-Backed Securities | 7.8 | % | ||
Corporates – Non-Investment Grade | 2.5 | % | ||
Collateralized Mortgage Obligations | 2.4 | % | ||
Quasi-Sovereigns | 0.5 | % | ||
Governments – Sovereign Agencies | 0.4 | % | ||
Governments – Treasuries | 0.3 | % | ||
Governments – Sovereign Bonds | 0.1 | % | ||
Common Stocks | 0.1 | % | ||
Emerging Markets – Corporate Bonds | 0.0 | % | ||
Short-Term | 2.5 | % |
14 | • AB BOND INFLATION STRATEGY |
Portfolio Summary
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
* | All data are as of October 31, 2015. The Strategy’s sector and inflation protection exposure breakdowns are expressed as an approximate percentage of the Strategy’s total net assets (and may vary over time) inclusive of derivative exposure except as noted, based on the Adviser’s internal classification. |
† | The Strategy’s sector breakdown is expressed, based on the Adviser’s internal classification, as a percentage of total investments and may vary over time. The Strategy also enters into derivative transactions (not reflected in the table), which may be used for hedging or investment purposes or to adjust the risk profile or exposures of the Strategy (see “Portfolio of Investments” section of the report for additional details). Derivative transactions may result in a form of leverage for the Strategy. The Strategy uses leverage for investment purposes by entering into reverse repurchase agreements. As a result, the Strategy’s total investments will generally exceed its net assets. |
AB BOND INFLATION STRATEGY • | 15 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
October 31, 2015
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
INFLATION-LINKED SECURITIES – 78.5% | ||||||||||
United States – 78.5% | ||||||||||
U.S. Treasury Inflation Index | U.S.$ | 173,215 | $ | 170,868,726 | ||||||
0.125%, 1/15/22 (TIPS)(b) | 11,510 | 11,237,208 | ||||||||
0.25%, 1/15/25 (TIPS)(a) | 31,576 | 30,338,624 | ||||||||
0.375%, 7/15/23 (TIPS)(a) | 19,910 | 19,610,885 | ||||||||
0.375%, 7/15/25 (TIPS) | 12,446 | 12,139,194 | ||||||||
0.625%, 1/15/24 (TIPS) | 14,179 | 14,148,941 | ||||||||
1.625%, 1/15/18 (TIPS) | 4,263 | 4,416,851 | ||||||||
|
| |||||||||
Total Inflation-Linked Securities | 262,760,429 | |||||||||
|
| |||||||||
CORPORATES – INVESTMENT | ||||||||||
Industrial – 12.5% | ||||||||||
Basic – 1.2% | ||||||||||
Barrick Gold Corp. | 147 | 136,540 | ||||||||
Dow Chemical Co. (The) | 67 | 80,578 | ||||||||
Eastman Chemical Co. | 300 | 298,385 | ||||||||
Freeport-McMoran Oil & Gas LLC/FCX Oil & Gas, Inc. | 124 | 112,375 | ||||||||
Glencore Funding LLC | 1,720 | 1,474,900 | ||||||||
International Paper Co. | 660 | 708,560 | ||||||||
LyondellBasell Industries NV | 405 | 458,691 | ||||||||
Minsur SA | 314 | 329,832 | ||||||||
Sociedad Quimica y Minera de Chile SA | 393 | 334,050 | ||||||||
|
| |||||||||
3,933,911 | ||||||||||
|
| |||||||||
Capital Goods – 0.3% | ||||||||||
Odebrecht Finance Ltd. | 426 | 246,547 | ||||||||
Yamana Gold, Inc. | 853 | 782,638 | ||||||||
|
| |||||||||
1,029,185 | ||||||||||
|
| |||||||||
Communications - Media – 1.6% | ||||||||||
21st Century Fox America, Inc. | 1,095 | 1,086,825 | ||||||||
6.15%, 3/01/37-2/15/41 | 331 | 382,987 |
16 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||||
| ||||||||||||
CBS Corp. | U.S.$ | 300 | $ | 292,342 | ||||||||
5.75%, 4/15/20 | 325 | 364,234 | ||||||||||
Cox Communications, Inc. | 163 | 146,745 | ||||||||||
Discovery Communications LLC | 323 | 301,520 | ||||||||||
McGraw Hill Financial, Inc. | 611 | 625,371 | ||||||||||
NBCUniversal Enterprise, Inc. | 409 | 435,585 | ||||||||||
RELX Capital, Inc. | 460 | 544,661 | ||||||||||
Time Warner Cable, Inc. | 235 | 190,343 | ||||||||||
5.00%, 2/01/20 | 35 | 37,447 | ||||||||||
8.75%, 2/14/19 | 25 | 29,305 | ||||||||||
Time Warner, Inc. | 537 | 534,726 | ||||||||||
Viacom, Inc. | 339 | 321,484 | ||||||||||
|
| |||||||||||
5,293,575 | ||||||||||||
|
| |||||||||||
Communications - Telecommunications – 1.6% | ||||||||||||
American Tower Corp. | 300 | 290,669 | ||||||||||
4.70%, 3/15/22 | 395 | 414,760 | ||||||||||
5.05%, 9/01/20 | 35 | 38,047 | ||||||||||
AT&T, Inc. | 1,255 | 1,238,745 | ||||||||||
DIRECTV Holdings LLC/DIRECTV Financing Co., Inc. | 274 | 280,553 | ||||||||||
4.45%, 4/01/24 | 372 | 383,589 | ||||||||||
5.00%, 3/01/21 | 825 | 901,882 | ||||||||||
Rogers Communications, Inc. | CAD | 55 | 44,232 | |||||||||
Telefonica Emisiones SAU | U.S.$ | 400 | 446,392 | |||||||||
Verizon Communications, Inc. | 1,157 | 1,060,477 | ||||||||||
7.35%, 4/01/39 | 300 | 383,343 | ||||||||||
|
| |||||||||||
5,482,689 | ||||||||||||
|
| |||||||||||
Consumer Cyclical - Automotive – 0.5% | ||||||||||||
Ford Motor Credit Co. LLC | 400 | 396,010 | ||||||||||
5.875%, 8/02/21 | 640 | 729,522 | ||||||||||
General Motors Co. | 425 | 432,059 | ||||||||||
|
| |||||||||||
1,557,591 | ||||||||||||
|
|
AB BOND INFLATION STRATEGY • | 17 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Cyclical - Retailers – 0.8% | ||||||||||
CVS Health Corp. | U.S.$ | 695 | $ | 714,840 | ||||||
Kohl’s Corp. | 876 | 869,303 | ||||||||
Walgreens Boots Alliance, Inc. | 935 | 927,992 | ||||||||
|
| |||||||||
2,512,135 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 3.5% | ||||||||||
AbbVie, Inc. | 455 | 447,278 | ||||||||
Actavis Funding SCS | 803 | 795,723 | ||||||||
3.85%, 6/15/24 | 278 | 276,635 | ||||||||
Agilent Technologies, Inc. | 7 | 7,523 | ||||||||
Altria Group, Inc. | 930 | 938,756 | ||||||||
4.75%, 5/05/21 | 195 | 214,704 | ||||||||
Baxalta, Inc. | 700 | 708,505 | ||||||||
Bayer US Finance LLC | 374 | 376,575 | ||||||||
Becton Dickinson and Co. | 388 | 396,984 | ||||||||
Biogen, Inc. | 436 | 443,293 | ||||||||
Bunge Ltd. Finance Corp. | 81 | 95,792 | ||||||||
Celgene Corp. | 520 | 521,370 | ||||||||
Gilead Sciences, Inc. | 675 | 682,430 | ||||||||
Grupo Bimbo SAB de CV | 648 | 638,779 | ||||||||
Kraft Heinz Foods Co. | 350 | 351,361 | ||||||||
3.50%, 7/15/22(c) | 447 | 455,553 | ||||||||
Kroger Co. (The) | 624 | 636,366 | ||||||||
Laboratory Corp. of America Holdings | 275 | 267,662 | ||||||||
Medtronic, Inc. | 895 | 916,476 | ||||||||
Perrigo Finance PLC | 217 | 212,322 | ||||||||
3.90%, 12/15/24 | 310 | 298,333 |
18 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Reynolds American, Inc. | U.S.$ | 284 | $ | 282,567 | ||||||
4.00%, 6/12/22 | 611 | 640,472 | ||||||||
Thermo Fisher Scientific, Inc. | 363 | 379,457 | ||||||||
Tyson Foods, Inc. | 199 | 200,557 | ||||||||
3.95%, 8/15/24 | 650 | 663,595 | ||||||||
|
| |||||||||
11,849,068 | ||||||||||
|
| |||||||||
Energy – 2.2% | ||||||||||
Diamond Offshore Drilling, Inc. | 350 | 246,512 | ||||||||
Energy Transfer Partners LP | 510 | 507,430 | ||||||||
6.125%, 2/15/17 | 145 | 151,529 | ||||||||
EnLink Midstream Partners LP | 352 | 283,873 | ||||||||
Enterprise Products Operating LLC | 771 | 732,831 | ||||||||
5.20%, 9/01/20 | 335 | 368,291 | ||||||||
Kinder Morgan Energy Partners LP | 846 | 787,436 | ||||||||
4.15%, 3/01/22 | 104 | 99,135 | ||||||||
Marathon Petroleum Corp. | 280 | 305,465 | ||||||||
Noble Energy, Inc. | 491 | 467,372 | ||||||||
4.15%, 12/15/21 | 127 | 128,450 | ||||||||
8.25%, 3/01/19 | 387 | 450,812 | ||||||||
Plains All American Pipeline LP/PAA Finance Corp. | 621 | 579,983 | ||||||||
Regency Energy Partners LP/Regency Energy Finance Corp. | 115 | 105,548 | ||||||||
Reliance Holding USA, Inc. | 1,060 | 1,161,861 | ||||||||
Spectra Energy Capital LLC | 8 | 9,195 | ||||||||
Valero Energy Corp. | 476 | 538,684 | ||||||||
Williams Partners LP | 350 | 297,481 | ||||||||
4.125%, 11/15/20 | 300 | 299,437 | ||||||||
|
| |||||||||
7,521,325 | ||||||||||
|
| |||||||||
Other Industrial – 0.1% | ||||||||||
Hutchison Whampoa International 14 Ltd. | 356 | 355,037 | ||||||||
|
|
AB BOND INFLATION STRATEGY • | 19 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Technology – 0.7% | ||||||||||
KLA-Tencor Corp. | U.S.$ | 639 | $ | 643,444 | ||||||
Motorola Solutions, Inc. | 505 | 572,260 | ||||||||
Seagate HDD Cayman | 398 | 357,456 | ||||||||
Tencent Holdings Ltd. | 426 | 435,109 | ||||||||
Total System Services, Inc. | 259 | 258,837 | ||||||||
|
| |||||||||
2,267,106 | ||||||||||
|
| |||||||||
41,801,622 | ||||||||||
|
| |||||||||
Financial Institutions – 5.5% | ||||||||||
Banking – 3.2% | ||||||||||
ABN AMRO Bank NV | 150 | 151,258 | ||||||||
Bank of America Corp. | EUR | 900 | 980,729 | |||||||
Barclays Bank PLC | 101 | 140,359 | ||||||||
Barclays PLC | U.S.$ | 294 | 284,334 | |||||||
BPCE SA | 213 | 228,037 | ||||||||
Capital One Financial Corp. | 150 | 156,937 | ||||||||
Citigroup, Inc. | 655 | 637,051 | ||||||||
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA/Netherlands | 396 | 404,022 | ||||||||
Credit Suisse Group Funding Guernsey Ltd. | 895 | 875,023 | ||||||||
Goldman Sachs Group, Inc. (The) | 810 | 811,847 | ||||||||
JPMorgan Chase & Co. | 55 | 58,907 | ||||||||
Mizuho Financial Group Cayman 3 Ltd. | 816 | 836,947 | ||||||||
Morgan Stanley | 171 | 175,848 | ||||||||
5.50%, 7/28/21 | 456 | 516,153 | ||||||||
Murray Street Investment Trust I | 52 | 54,068 |
20 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
PNC Bank NA | U.S.$ | 940 | $ | 972,937 | ||||||
Rabobank Capital Funding Trust III | 375 | 381,975 | ||||||||
Santander Bank NA | 890 | 884,896 | ||||||||
Santander UK PLC | 505 | 526,674 | ||||||||
Standard Chartered PLC | 725 | 735,309 | ||||||||
UBS AG/Stamford CT | 465 | 537,810 | ||||||||
UBS Group Funding Jersey Ltd. | 453 | 454,589 | ||||||||
|
| |||||||||
10,805,710 | ||||||||||
|
| |||||||||
Brokerage – 0.3% | ||||||||||
Nomura Holdings, Inc. | 809 | 813,827 | ||||||||
|
| |||||||||
Insurance – 1.4% | ||||||||||
American International Group, Inc. | 625 | 695,056 | ||||||||
6.40%, 12/15/20 | 205 | 242,060 | ||||||||
Coventry Health Care, Inc. | 415 | 462,235 | ||||||||
Dai-ichi Life Insurance Co., Ltd. (The) | 415 | 430,562 | ||||||||
Hartford Financial Services Group, Inc. (The) | 535 | 592,048 | ||||||||
5.50%, 3/30/20 | 24 | 26,821 | ||||||||
6.10%, 10/01/41 | 165 | 197,727 | ||||||||
Lincoln National Corp. | 175 | 213,917 | ||||||||
MetLife, Inc. | 90 | 106,223 | ||||||||
7.717%, 2/15/19 | 180 | 211,758 | ||||||||
Series C | 673 | 679,309 | ||||||||
Nationwide Financial Services, Inc. | 360 | 400,172 | ||||||||
Nationwide Mutual Insurance Co. | 125 | 188,965 | ||||||||
Prudential Financial, Inc. | 340 | 355,810 | ||||||||
|
| |||||||||
4,802,663 | ||||||||||
|
|
AB BOND INFLATION STRATEGY • | 21 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
REITS – 0.6% | ||||||||||
Host Hotels & Resorts LP | U.S.$ | 175 | $ | 187,916 | ||||||
Trust F/1401 | 825 | 853,875 | ||||||||
Welltower, Inc. | 890 | 968,337 | ||||||||
|
| |||||||||
2,010,128 | ||||||||||
|
| |||||||||
18,432,328 | ||||||||||
|
| |||||||||
Utility – 0.8% | ||||||||||
Electric – 0.7% | ||||||||||
Berkshire Hathaway Energy Co. | 340 | 408,171 | ||||||||
CMS Energy Corp. | 144 | 159,775 | ||||||||
Constellation Energy Group, Inc. | 91 | 99,472 | ||||||||
Entergy Corp. | 607 | 623,829 | ||||||||
Exelon Corp. | 570 | 570,454 | ||||||||
Exelon Generation Co. LLC | 416 | 423,901 | ||||||||
|
| |||||||||
2,285,602 | ||||||||||
|
| |||||||||
Natural Gas – 0.1% | ||||||||||
NiSource Finance Corp. | 75 | 85,274 | ||||||||
Talent Yield Investments Ltd. | 480 | 500,485 | ||||||||
|
| |||||||||
585,759 | ||||||||||
|
| |||||||||
2,871,361 | ||||||||||
|
| |||||||||
Total Corporates – Investment Grade | 63,105,311 | |||||||||
|
| |||||||||
ASSET-BACKED SECURITIES – 11.4% | ||||||||||
Autos - Fixed Rate – 6.5% | ||||||||||
Ally Auto Receivables Trust | 341 | 341,290 | ||||||||
Ally Master Owner Trust | 707 | 705,871 | ||||||||
AmeriCredit Automobile Receivables Trust | 558 | 558,354 | ||||||||
Series 2013-4, Class A3 | 283 | 283,018 | ||||||||
ARI Fleet Lease Trust | 248 | 248,256 |
22 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Avis Budget Rental Car Funding AESOP LLC | U.S.$ | 420 | $ | 422,210 | ||||||
Series 2013-2A, Class A | 289 | 290,311 | ||||||||
Series 2014-1A, Class A | 1,689 | 1,711,966 | ||||||||
Bank of The West Auto Trust | 706 | 706,815 | ||||||||
California Republic Auto Receivables Trust | 850 | 849,363 | ||||||||
Series 2015-2, Class A3 | 530 | 526,669 | ||||||||
Capital Auto Receivables Asset Trust | 200 | 201,422 | ||||||||
CPS Auto Receivables Trust | 376 | 376,079 | ||||||||
Series 2014-B, Class A | 332 | 331,456 | ||||||||
Drive Auto Receivables Trust | 275 | 274,479 | ||||||||
Series 2015-CA, Class A2A | 398 | 397,939 | ||||||||
Series 2015-DA, Class A2A | 510 | 509,973 | ||||||||
Enterprise Fleet Financing LLC | 252 | 252,046 | ||||||||
Series 2015-1, Class A2 | 720 | 719,010 | ||||||||
Exeter Automobile Receivables Trust | – 0 | –** | 373 | |||||||
Series 2014-1A, Class A | 97 | 97,469 | ||||||||
Series 2014-2A, Class A | 125 | 124,782 | ||||||||
Flagship Credit Auto Trust | 46 | 45,861 | ||||||||
Ford Credit Auto Owner Trust | 225 | 224,318 | ||||||||
Series 2014-2, Class A | 728 | 732,631 |
AB BOND INFLATION STRATEGY • | 23 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
GM Financial Automobile Leasing Trust | U.S.$ | 673 | $ | 674,666 | ||||||
Series 2015-2, Class A3 | 798 | 797,869 | ||||||||
GMF Floorplan Owner Revolving Trust | 599 | 596,667 | ||||||||
Harley-Davidson Motorcycle Trust | 415 | 414,210 | ||||||||
Hertz Vehicle Financing II LP | 508 | 506,564 | ||||||||
Hertz Vehicle Financing LLC | 2,185 | 2,181,164 | ||||||||
Series 2013-1A, Class B2 | 368 | 354,725 | ||||||||
Hyundai Auto Lease Securitization Trust | 495 | 495,193 | ||||||||
Series 2015-B, Class A3 | 557 | 558,292 | ||||||||
Hyundai Auto Receivables Trust | 165 | 165,492 | ||||||||
Mercedes Benz Auto Lease Trust | 318 | 317,988 | ||||||||
Mercedes-Benz Master Owner Trust | 1,193 | 1,193,060 | ||||||||
Nissan Auto Lease Trust | 587 | 589,540 | ||||||||
Santander Drive Auto Receivables Trust | 65 | 65,012 | ||||||||
Series 2015-3, Class A2A | 601 | 601,107 | ||||||||
Series 2015-4,Class A2A | 335 | 334,725 | ||||||||
TCF Auto Receivables Owner Trust | 804 | 803,266 | ||||||||
Westlake Automobile Receivables Trust | 286 | 285,906 | ||||||||
|
| |||||||||
21,867,407 | ||||||||||
|
|
24 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Credit Cards - Fixed Rate – 1.9% | ||||||||||
American Express Credit Account Master Trust | U.S.$ | 474 | $ | 475,674 | ||||||
Barclays Dryrock Issuance Trust | 523 | 536,927 | ||||||||
Series 2015-2, Class A | 728 | 732,778 | ||||||||
Capital One Multi-Asset Execution Trust | 692 | 694,063 | ||||||||
Chase Issuance Trust | 825 | 827,525 | ||||||||
Discover Card Execution Note Trust | 718 | 717,268 | ||||||||
Synchrony Credit Card Master Note Trust | 1,084 | 1,098,377 | ||||||||
World Financial Network Credit Card Master Trust | 370 | 372,200 | ||||||||
Series 2013-A, Class A | 373 | 373,713 | ||||||||
Series 2015-B,Class A | 551 | 557,133 | ||||||||
|
| |||||||||
6,385,658 | ||||||||||
|
| |||||||||
Autos - Floating Rate – 1.2% | ||||||||||
BMW Floorplan Master Owner Trust | 1,037 | 1,031,860 | ||||||||
Ford Credit Floorplan Master Owner Trust A | 692 | 685,366 | ||||||||
GE Dealer Floorplan Master Note Trust | 534 | 531,047 | ||||||||
Series 2015-1, Class A | 620 | 615,495 | ||||||||
Hertz Fleet Lease Funding LP | 760 | 760,523 | ||||||||
Volkswagen Credit Auto Master Trust | 330 | 325,931 | ||||||||
|
| |||||||||
3,950,222 | ||||||||||
|
|
AB BOND INFLATION STRATEGY • | 25 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Credit Cards - Floating Rate – 0.9% | ||||||||||
Cabela’s Credit Card Master Note Trust | U.S.$ | 600 | $ | 599,112 | ||||||
Discover Card Execution Note Trust | 501 | 499,379 | ||||||||
First National Master Note Trust | 794 | 794,230 | ||||||||
World Financial Network Credit Card Master Trust | 910 | 910,307 | ||||||||
Series 2015-A, Class A | 403 | 401,551 | ||||||||
|
| |||||||||
3,204,579 | ||||||||||
|
| |||||||||
Other ABS - Fixed Rate – 0.9% | ||||||||||
CIT Equipment Collateral | 845 | 845,576 | ||||||||
CNH Equipment Trust | 493 | 493,712 | ||||||||
Dell Equipment Finance Trust | 247 | 245,760 | ||||||||
Series 2015-2, Class A2A | 286 | 285,987 | ||||||||
GE Equipment Small Ticket LLC | 177 | 176,527 | ||||||||
SBA Tower Trust | 851 | 850,660 | ||||||||
|
| |||||||||
2,898,222 | ||||||||||
|
| |||||||||
Total Asset-Backed Securities | 38,306,088 | |||||||||
|
| |||||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES – 10.2% | ||||||||||
Non-Agency Fixed Rate CMBS – 8.6% | ||||||||||
Banc of America Commercial Mortgage Trust | 1,705 | 1,797,358 | ||||||||
Series 2007-5, Class AM | 258 | 270,040 |
26 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Bear Stearns Commercial Mortgage Securities Trust | U.S.$ | 571 | $ | 575,207 | ||||||
BHMS Mortgage Trust | 1,070 | 1,091,484 | ||||||||
CGRBS Commercial Mortgage Trust | 885 | 904,654 | ||||||||
Citigroup Commercial Mortgage Trust | 209 | 211,885 | ||||||||
Series 2013-GC11, Class D | 420 | 391,410 | ||||||||
Series 2015-GC27, Class A5 | 707 | 702,432 | ||||||||
COBALT CMBS Commercial Mortgage Trust | 454 | 479,655 | ||||||||
Commercial Mortgage Trust | 659 | 680,294 | ||||||||
Series 2007-GG9, Class A4 | 561 | 581,114 | ||||||||
Series 2007-GG9, Class AM | 598 | 619,123 | ||||||||
Series 2013-SFS, Class A1 | 361 | 354,227 | ||||||||
Credit Suisse Commercial Mortgage Trust | 463 | 473,492 | ||||||||
CSAIL Commercial Mortgage Trust | 631 | 656,146 | ||||||||
DBUBS Mortgage Trust | 368 | 391,803 | ||||||||
Extended Stay America Trust | 515 | 513,636 | ||||||||
GS Mortgage Securities Corp. II | 784 | 797,294 | ||||||||
GS Mortgage Securities Trust | 550 | 575,267 | ||||||||
Series 2013-G1, Class A1 | 644 | 631,994 |
AB BOND INFLATION STRATEGY • | 27 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
JP Morgan Chase Commercial Mortgage Securities Trust | U.S.$ | 252 | $ | 251,484 | ||||||
Series 2006-CB15, Class A4 | 424 | 428,932 | ||||||||
Series 2006-LDP9, Class AM | 370 | 378,139 | ||||||||
Series 2007-CB19, Class AM | 295 | 309,555 | ||||||||
Series 2007-LD12, Class AM | 245 | 260,353 | ||||||||
Series 2007-LDPX, Class A1A | 1,890 | 1,965,895 | ||||||||
Series 2007-LDPX, Class A3 | 405 | 418,268 | ||||||||
Series 2008-C2, Class A1A | 840 | 899,445 | ||||||||
Series 2010-C2, Class A1 | 84 | 84,386 | ||||||||
Series 2011-C5, Class D | 266 | 276,739 | ||||||||
Series 2015-C32, Class C | 545 | 503,156 | ||||||||
JPMBB Commercial Mortgage Securities Trust | 670 | 700,692 | ||||||||
LB-UBS Commercial Mortgage Trust | 494 | 493,969 | ||||||||
Series 2007-C1, Class A4 | 1,045 | 1,075,922 | ||||||||
Series 2007-C1, Class AM | 290 | 301,171 | ||||||||
LSTAR Commercial Mortgage Trust | 625 | 635,716 | ||||||||
Series 2015-3, Class A2 | 698 | 701,456 | ||||||||
Merrill Lynch Mortgage Trust | 568 | 581,227 | ||||||||
Merrill Lynch/Countrywide Commercial Mortgage Trust | 998 | 1,028,584 | ||||||||
Series 2007-9, Class A4 | 125 | 130,394 |
28 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
UBS-Barclays Commercial Mortgage Trust | U.S.$ | 277 | $ | 282,655 | ||||||
Series 2012-C4, Class A5 | 2,309 | 2,297,412 | ||||||||
Wachovia Bank Commercial Mortgage Trust | 401 | 408,420 | ||||||||
WF-RBS Commercial Mortgage Trust | 344 | 167,613 | ||||||||
Series 2013-C14, Class A5 | 862 | 885,252 | ||||||||
Series 2014-C20, Class A2 | 648 | 669,905 | ||||||||
|
| |||||||||
28,835,255 | ||||||||||
|
| |||||||||
Non-Agency Floating Rate CMBS – 1.6% | ||||||||||
Carefree Portfolio Trust | 489 | 489,009 | ||||||||
Commercial Mortgage Trust | 775 | 770,076 | ||||||||
Series 2014-SAVA, Class A | 540 | 537,876 | ||||||||
H/2 Asset Funding NRE | 662 | 660,474 | ||||||||
JP Morgan Chase Commercial Mortgage Securities Trust | 1,068 | 1,060,987 | ||||||||
PFP III Ltd. | 247 | 245,960 | ||||||||
Resource Capital Corp., Ltd. | 449 | 447,053 | ||||||||
Starwood Retail Property Trust | 614 | 609,238 | ||||||||
Wells Fargo Commercial Mortgage Trust | 537 | 512,339 | ||||||||
|
| |||||||||
5,333,012 | ||||||||||
|
| |||||||||
Total Commercial Mortgage-Backed Securities | 34,168,267 | |||||||||
|
| |||||||||
AB BOND INFLATION STRATEGY • | 29 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
COLLATERALIZED MORTGAGE OBLIGATIONS – 3.1% | ||||||||||
GSE Risk Share Floating Rate – 2.8% | ||||||||||
Bellemeade Re Ltd. | U.S.$ | 495 | $ | 494,665 | ||||||
Federal Home Loan Mortgage Corp. Structured Agency Credit Risk Debt Notes | 1,030 | 1,024,818 | ||||||||
Series 2014-DN3, Class M3 | 1,055 | 1,017,270 | ||||||||
Series 2015-DNA1, Class M3 | 260 | 245,327 | ||||||||
Series 2015-DNA2, Class M2 | 1,046 | 1,043,886 | ||||||||
Series 2015-HQ1, Class M2 | 410 | 406,588 | ||||||||
Series 2015-HQA1, Class M2 | 770 | 766,958 | ||||||||
Federal National Mortgage Association Connecticut Avenue Securities | 278 | 277,318 | ||||||||
Series 2014-C04, Class 1M2 | 528 | 529,482 | ||||||||
Series 2014-C04, Class 2M2 | 195 | 195,966 | ||||||||
Series 2015-C01, Class 1M2 | 450 | 436,078 | ||||||||
Series 2015-C02, Class 2M2 | 445 | 422,992 | ||||||||
Series 2015-C03, Class 1M2 | 691 | 687,911 | ||||||||
Series 2015-C03, Class 2M2 | 679 | 678,478 | ||||||||
Series 2015-C04, Class 1M2 | 204 | 207,548 | ||||||||
Series 2015-C04, Class 2M2 | 314 | 318,238 | ||||||||
Wells Fargo Credit Risk Transfer Securities Trust | 250 | 249,791 | ||||||||
Series 2015-WF1, Class 2M1 | 303 | 303,545 | ||||||||
|
| |||||||||
9,306,859 | ||||||||||
|
|
30 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Non-Agency Floating Rate – 0.2% | ||||||||||
JP Morgan Chase Commercial Mortgage Securities Trust | U.S.$ | 853 | $ | 852,260 | ||||||
|
| |||||||||
Agency Fixed Rate – 0.1% | ||||||||||
Federal National Mortgage Association REMICS | 2,358 | 251,379 | ||||||||
|
| |||||||||
Total Collateralized Mortgage Obligations | 10,410,498 | |||||||||
|
| |||||||||
CORPORATES – NON-INVESTMENT GRADE – 3.1% | ||||||||||
Industrial – 1.5% | ||||||||||
Basic – 0.2% | ||||||||||
Novelis, Inc. | 90 | 90,675 | ||||||||
Teck Resources Ltd. | 785 | 533,800 | ||||||||
|
| |||||||||
624,475 | ||||||||||
|
| |||||||||
Capital Goods – 0.1% | ||||||||||
Sealed Air Corp. | 331 | 345,895 | ||||||||
|
| |||||||||
Communications - Media – 0.0% | ||||||||||
CSC Holdings LLC | 146 | 155,125 | ||||||||
|
| |||||||||
Communications - Telecommunications – 0.4% | ||||||||||
Numericable-SFR SAS | EUR | 231 | 262,910 | |||||||
Sprint Capital Corp. | U.S.$ | 1,000 | 960,000 | |||||||
|
| |||||||||
1,222,910 | ||||||||||
|
| |||||||||
Consumer Cyclical - Automotive – 0.1% | ||||||||||
Dana Holding Corp. | 147 | 152,145 | ||||||||
Goodyear Tire & Rubber Co. (The) | 190 | 198,740 | ||||||||
|
| |||||||||
350,885 | ||||||||||
|
| |||||||||
Consumer Cyclical - Other – 0.2% | ||||||||||
KB Home | 345 | 339,271 | ||||||||
MCE Finance Ltd. | 405 | 379,688 | ||||||||
|
| |||||||||
718,959 | ||||||||||
|
|
AB BOND INFLATION STRATEGY • | 31 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Non-Cyclical – 0.1% | ||||||||||
Valeant Pharmaceuticals International, Inc. | U.S.$ | 385 | $ | 323,881 | ||||||
|
| |||||||||
Energy – 0.3% | ||||||||||
DCP Midstream LLC | 405 | 358,420 | ||||||||
ONEOK, Inc. | 463 | 397,023 | ||||||||
SM Energy Co. | 41 | 40,401 | ||||||||
Transocean, Inc. | 370 | 296,311 | ||||||||
|
| |||||||||
1,092,155 | ||||||||||
|
| |||||||||
Technology – 0.1% | ||||||||||
Advanced Micro Devices, Inc. | 280 | 215,600 | ||||||||
|
| |||||||||
5,049,885 | ||||||||||
|
| |||||||||
Financial Institutions – 1.4% | ||||||||||
Banking – 1.2% | ||||||||||
Bank of America Corp. | 233 | 243,487 | ||||||||
Barclays Bank PLC | 137 | 156,865 | ||||||||
7.75%, 4/10/23 | 372 | 404,085 | ||||||||
BNP Paribas SA | 345 | 357,075 | ||||||||
Credit Agricole SA | 248 | 254,200 | ||||||||
HBOS Capital Funding LP | EUR | 951 | 1,056,225 | |||||||
Intesa Sanpaolo SpA | U.S.$ | 689 | 690,111 | |||||||
Royal Bank of Scotland PLC (The) | 102 | 111,279 | ||||||||
Societe Generale SA | 115 | 117,229 | ||||||||
8.00%, 9/29/25(c)(d) | 340 | 344,799 | ||||||||
UniCredit Luxembourg Finance SA | 325 | 342,047 | ||||||||
|
| |||||||||
4,077,402 | ||||||||||
|
| |||||||||
Finance – 0.2% | ||||||||||
AerCap Aviation Solutions BV | 200 | 208,500 | ||||||||
International Lease Finance Corp. | 294 | 315,441 |
32 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Navient Corp. | U.S.$ | 54 | $ | 53,190 | ||||||
|
| |||||||||
577,131 | ||||||||||
|
| |||||||||
4,654,533 | ||||||||||
|
| |||||||||
Utility – 0.2% | ||||||||||
Electric – 0.2% | ||||||||||
AES Corp./VA | 377 | 401,505 | ||||||||
NRG Energy, Inc. | 287 | 256,865 | ||||||||
|
| |||||||||
658,370 | ||||||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | 10,362,788 | |||||||||
|
| |||||||||
GOVERNMENTS – SOVEREIGN AGENCIES – 0.7% | ||||||||||
Brazil – 0.2% | ||||||||||
Petrobras Global Finance BV | 693 | 591,441 | ||||||||
|
| |||||||||
Canada – 0.1% | ||||||||||
NOVA Chemicals Corp. | 391 | 400,071 | ||||||||
|
| |||||||||
Colombia – 0.1% | ||||||||||
Ecopetrol SA | 292 | 237,980 | ||||||||
|
| |||||||||
Israel – 0.2% | ||||||||||
Israel Electric Corp. Ltd. | 620 | 643,622 | ||||||||
|
| |||||||||
United Kingdom – 0.1% | ||||||||||
Royal Bank of Scotland Group PLC | 345 | 357,075 | ||||||||
|
| |||||||||
Total Governments – Sovereign Agencies | 2,230,189 | |||||||||
|
| |||||||||
QUASI-SOVEREIGNS – 0.6% | ||||||||||
Quasi-Sovereign Bonds – 0.6% | ||||||||||
Chile – 0.3% | ||||||||||
Corp. Nacional del Cobre de Chile | 575 | 570,330 | ||||||||
Empresa de Transporte de Pasajeros Metro SA | 358 | 372,827 | ||||||||
|
| |||||||||
943,157 | ||||||||||
|
|
AB BOND INFLATION STRATEGY • | 33 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Malaysia – 0.1% | ||||||||||
Petronas Capital Ltd. | U.S.$ | 310 | $ | 338,153 | ||||||
|
| |||||||||
Mexico – 0.1% | ||||||||||
Petroleos Mexicanos | 256 | 260,352 | ||||||||
|
| |||||||||
South Korea – 0.1% | ||||||||||
Korea National Oil Corp. | 450 | 460,283 | ||||||||
|
| |||||||||
Total Quasi-Sovereigns | 2,001,945 | |||||||||
|
| |||||||||
GOVERNMENTS – TREASURIES – 0.4% | ||||||||||
Brazil – 0.4% | ||||||||||
Brazil Notas do Tesouro Nacional | BRL | 4,905 | 1,203,727 | |||||||
|
| |||||||||
GOVERNMENTS – SOVEREIGN BONDS – 0.2% | ||||||||||
Mexico – 0.1% | ||||||||||
Mexico Government International Bond | U.S.$ | 168 | 188,916 | |||||||
|
| |||||||||
Qatar – 0.1% | ||||||||||
Qatar Government International Bond | 360 | 400,140 | ||||||||
|
| |||||||||
Total Governments – Sovereign Bonds | 589,056 | |||||||||
|
| |||||||||
Shares | ||||||||||
COMMON STOCKS – 0.2% | ||||||||||
Mt Logan Re Ltd. (Preference Shares)(h)(i) | 500 | 530,735 | ||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
EMERGING MARKETS – CORPORATE BONDS – 0.1% | ||||||||||
Industrial – 0.1% | ||||||||||
Communications - Telecommunications – 0.1% | ||||||||||
Comcel Trust via Comunicaciones Celulares SA | U.S.$ | 208 | 165,880 | |||||||
|
|
34 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Non-Cyclical – 0.0% | ||||||||||
Virgolino de Oliveira Finance SA | U.S.$ | 655 | $ | 8,515 | ||||||
|
| |||||||||
Total Emerging Markets – Corporate Bonds | 174,395 | |||||||||
|
| |||||||||
Shares | ||||||||||
PREFERRED STOCKS – 0.0% | ||||||||||
Financial Institutions – 0.0% | ||||||||||
Insurance – 0.0% | ||||||||||
Allstate Corp. (The) | 2,100 | 54,033 | ||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
SHORT-TERM INVESTMENTS – 3.2% | ||||||||||
Governments – Treasuries – 2.5% | ||||||||||
Japan – 2.5% | ||||||||||
Japan Treasury Discount Bill | JPY | 1,020,000 | 8,452,915 | |||||||
|
| |||||||||
Shares | ||||||||||
Investment Companies – 0.7% | ||||||||||
AB Fixed Income Shares, Inc. – | 2,523,731 | 2,523,731 | ||||||||
|
| |||||||||
Total Short-Term Investments | 10,976,646 | |||||||||
|
| |||||||||
Total Investments – 130.5% | 436,874,107 | |||||||||
Other assets less liabilities – (30.5)% | (102,171,318 | ) | ||||||||
|
| |||||||||
Net Assets – 100.0% | $ | 334,702,789 | ||||||||
|
|
AB BOND INFLATION STRATEGY • | 35 |
Portfolio of Investments
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at October 31, 2015 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Purchased Contracts |
| |||||||||||||||||||
10 Year Canadian Bond Futures | 31 | December 2015 | $ | 3,401,138 | $ | 3,330,912 | $ | (70,226 | ) | |||||||||||
U.S. T-Note 5 Yr (CBT) Futures | 152 | December 2015 | 18,185,941 | 18,205,564 | 19,623 | |||||||||||||||
U.S. Ultra Bond (CBT) Futures | 3 | December 2015 | 492,450 | 479,250 | (13,200 | ) | ||||||||||||||
Sold Contracts | ||||||||||||||||||||
Euro-BOBL Futures | 93 | December 2015 | 13,103,452 | 13,235,457 | (132,005 | ) | ||||||||||||||
U.S. Long Bond (CBT) Futures | 10 | December 2015 | 1,561,634 | 1,564,375 | (2,741 | ) | ||||||||||||||
U.S. T-Note 10 Yr (CBT) Futures | 73 | December 2015 | 9,333,351 | 9,321,188 | 12,163 | |||||||||||||||
|
| |||||||||||||||||||
$ | (186,386 | ) | ||||||||||||||||||
|
|
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note D)
Counterparty | Contracts to Deliver (000) | In Exchange (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||
BNP Paribas SA | USD 1,637 | GBP 1,080 | 11/10/15 | $ | 27,531 | |||||||||||
Goldman Sachs Bank USA | USD 1,179 | BRL 4,767 | 11/04/15 | 56,712 | ||||||||||||
Goldman Sachs Bank USA | BRL 4,767 | USD 1,235 | 11/04/15 | (753 | ) | |||||||||||
Goldman Sachs Bank USA | TWD 83,246 | USD 2,609 | 12/04/15 | 45,770 | ||||||||||||
Goldman Sachs Bank USA | BRL 5,150 | USD 1,120 | 1/04/17 | (45,167 | ) | |||||||||||
HSBC Bank USA | GBP 1,126 | USD 1,730 | 11/10/15 | (5,052 | ) | |||||||||||
HSBC Bank USA | JPY 1,450,000 | USD 12,098 | 11/16/15 | 81,007 | ||||||||||||
JPMorgan Chase Bank | JPY 620,000 | USD 5,199 | 3/25/16 | 45,924 | ||||||||||||
Morgan Stanley Capital Services LLC | USD 851 | INR 55,483 | 12/04/15 | (7,257 | ) | |||||||||||
Standard Chartered Bank | BRL 4,767 | USD 1,175 | 11/04/15 | (60,841 | ) | |||||||||||
Standard Chartered Bank | USD 1,235 | BRL 4,767 | 11/04/15 | 753 | ||||||||||||
State Street Bank & Trust Co. | SGD 7,262 | USD 5,185 | 11/06/15 | 1,887 | ||||||||||||
State Street Bank & Trust Co. | USD 150 | CAD 201 | 11/19/15 | 3,479 | ||||||||||||
State Street Bank & Trust Co. | EUR 6,876 | USD 7,590 | 12/03/15 | 26,311 | ||||||||||||
State Street Bank & Trust Co. | USD 4,219 | JPY 511,237 | 12/11/15 | 19,927 | ||||||||||||
|
| |||||||||||||||
$ | 190,231 | |||||||||||||||
|
|
CURRENCY OPTIONS WRITTEN (see Note D)
Description | Exercise Price | Expiration Date | Contracts (000) | Premiums Received | U.S. $ Value | |||||||||||||||
Call – USD/JPY | 119.300 | 11/04/15 | 4,260 | $ | 10,075 | $ | (3,331 | ) |
36 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note D)
Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at October 31, 2015 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Buy Contracts |
| |||||||||||||||||||
Citigroup Global Markets, Inc./(INTRCONX): | ||||||||||||||||||||
CDX-NAHY Series 21, | (5.00 | )% | 2.57 | % | $ | 3,955 | $ | (306,654 | ) | $ | (130,548 | ) | ||||||||
Morgan Stanley & Co., LLC/(INTRCONX): | ||||||||||||||||||||
CDX-NAHY Series 21, | (5.00 | ) | 2.57 | 3,168 | (245,621 | ) | (165,592 | ) | ||||||||||||
CDX-NAIG Series 23, | (1.00 | ) | 0.72 | 18,250 | (224,078 | ) | 17,211 | |||||||||||||
|
|
|
| |||||||||||||||||
$ | (776,353 | ) | $ | (278,929 | ) | |||||||||||||||
|
|
|
|
* | Termination date |
CENTRALLY CLEARED INTEREST RATE SWAPS (see Note D)
Rate Type | ||||||||||||||||
Clearing Broker/ (Exchange) | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | CAD | 17,120 | 3/10/17 | 0.973% | 3 Month CDOR | $ | (32,621 | ) | ||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 22,680 | 3/11/17 | 2.140% | 3 Month BBSW | (49,930 | ) | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 23,060 | 5/18/17 | 0.811% | 3 Month LIBOR | (101,095 | ) | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | CAD | 15,500 | 6/05/17 | 1.054% | 3 Month CDOR | (50,637 | ) | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 19,500 | 6/09/17 | 2.218% | 3 Month BBSW | (69,341 | ) | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | 14,040 | 10/30/17 | 1.915% | 3 Month BBSW | (878 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 6,980 | 10/31/19 | 3 Month LIBOR | 1.747% | 118,763 | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | GBP | 5,640 | 6/05/20 | 6 Month LIBOR | 1.651% | 118,628 | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 6,420 | 8/11/20 | 3 Month LIBOR | 1.712% | 94,152 |
AB BOND INFLATION STRATEGY • | 37 |
Portfolio of Investments
Rate Type | ||||||||||||||||
Clearing Broker/ (Exchange) | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 2,610 | 1/14/24 | 2.980% | 3 Month LIBOR | $ | (236,850 | ) | ||||||||
Morgan Stanley & Co., LLC/(CME Group) | 2,300 | 2/14/24 | 2.889% | 3 Month LIBOR | (185,159 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 3,280 | 4/28/24 | 2.817% | 3 Month LIBOR | (229,054 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 4,670 | 5/06/24 | 2.736% | 3 Month LIBOR | (353,416 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 1,890 | 5/29/24 | 3 Month LIBOR | 2.628% | 122,662 | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 3,330 | 7/02/24 | 2.632% | 3 Month LIBOR | (209,629 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 2,370 | 7/10/24 | 2.674% | 3 Month LIBOR | (156,470 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 1,900 | 7/18/24 | 3 Month LIBOR | 2.668% | 123,241 | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 2,810 | 9/24/24 | 3 Month LIBOR | 2.691% | 172,504 | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 3,450 | 3/11/25 | 6 Month BBSW | 2.973% | 23,754 | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | NZD | 3,560 | 6/09/25 | 3 Month BKBM | 4.068% | 141,429 | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 2,110 | 6/09/25 | 6 Month BBSW | 3.384% | 71,429 | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 1,160 | 6/09/25 | 2.488% | 3 Month LIBOR | (56,950 | ) | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | 3,830 | 8/04/25 | 2.293% | 3 Month LIBOR | (101,273 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | GBP | 520 | 6/05/45 | 2.396% | 6 Month LIBOR | (52,172 | ) | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 490 | 8/06/45 | 2.692% | 3 Month LIBOR | (19,283 | ) | |||||||||
Morgan Stanley & Co., LLC/(LCH Group) | NZD | 30,550 | 6/09/17 | 3.368% | 3 Month BKBM | (389,578 | ) | |||||||||
|
| |||||||||||||||
$ | (1,307,774 | ) | ||||||||||||||
|
|
38 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
CREDIT DEFAULT SWAPS (see Note D)
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) | ||||||||||||||||||
Buy Contracts | ||||||||||||||||||||||||
Citibank, NA: | ||||||||||||||||||||||||
Advanced Micro Devices, Inc., 7.75%, 8/01/20, 3/20/19* | (5.00 | )% | 9.62 | % | $ | 280 | $ | 34,441 | $ | 16,951 | $ | 17,490 | ||||||||||||
Sprint Communications, Inc., | (5.00 | ) | 5.90 | 534 | 12,354 | (24,740 | ) | 37,094 | ||||||||||||||||
Sprint Communications, Inc., | (5.00 | ) | 5.90 | 466 | 10,782 | (20,821 | ) | 31,603 | ||||||||||||||||
Sale Contracts | ||||||||||||||||||||||||
Bank of America, NA: |
| |||||||||||||||||||||||
CDX-NAIG | 1.00 | 0.34 | 3,200 | 48,869 | 1,307 | 47,562 | ||||||||||||||||||
Credit Suisse International: |
| |||||||||||||||||||||||
Kohl’s Corp., | 1.00 | 0.96 | 123 | 69 | (1,212 | ) | 1,281 | |||||||||||||||||
Kohl’s Corp., | 1.00 | 0.96 | 72 | 40 | (633 | ) | 673 | |||||||||||||||||
Kohl’s Corp., | 1.00 | 0.96 | 50 | 28 | (489 | ) | 517 | |||||||||||||||||
Kohl’s Corp., | 1.00 | 0.96 | 49 | 28 | (485 | ) | 513 | |||||||||||||||||
Deutsche Bank AG: | ||||||||||||||||||||||||
Anadarko Petroleum Corp., | 1.00 | 0.57 | 440 | 3,823 | (5,843 | ) | 9,666 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 110,434 | $ | (35,965 | ) | $ | 146,399 | ||||||||||||||||||
|
|
|
|
|
|
* | Termination date |
AB BOND INFLATION STRATEGY • | 39 |
Portfolio of Investments
INFLATION (CPI) SWAPS (see Note D)
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 | $ | 7,300 | 1/15/16 | CPI# | 0.970% | $ | 95,381 | |||||||||
Barclays Bank PLC | 2,570 | 7/15/19 | 1.370% | CPI# | (4,172 | ) | ||||||||||
Barclays Bank PLC | 20,750 | 7/15/20 | 1.527% | CPI# | (89,273 | ) | ||||||||||
Barclays Bank PLC | 6,950 | 1/15/21 | 1.490% | CPI# | (33,709 | ) | ||||||||||
Citibank, NA | 7,300 | 1/15/16 | 0.945% | CPI# | (93,312 | ) | ||||||||||
Deutsche Bank AG | 3,460 | 7/15/18 | 1.440% | CPI# | (16,624 | ) | ||||||||||
Deutsche Bank AG | 24,000 | 7/15/21 | 1.574% | CPI# | (127,407 | ) | ||||||||||
JPMorgan Chase Bank, NA | 8,710 | 1/15/20 | 1.795% | CPI# | (138,235 | ) | ||||||||||
|
| |||||||||||||||
$ | (407,351 | ) | ||||||||||||||
|
|
# | Variable interest rate based on the rate of inflation as determined by the Consumer Price Index (CPI). |
INTEREST RATE SWAPS (see Note D)
Rate Type | ||||||||||||||||||
Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||||
Morgan Stanley Capital Services LLC | $ | 1,100 | 2/21/42 | 2.813 | % | 3 Month LIBOR | $ | (70,508 | ) | |||||||||
Morgan Stanley Capital Services LLC | 830 | 3/06/42 | 2.804 | % | 3 Month LIBOR | (50,857 | ) | |||||||||||
|
| |||||||||||||||||
$ | (121,365 | ) | ||||||||||||||||
|
|
REVERSE REPURCHASE AGREEMENTS (see Note D)
Broker | Interest Rate | Maturity | U.S. $ Value at October 31, 2015 | |||||||||
Bank of America | 0.15 | % | 1/25/16 | $ | 19,236,767 | |||||||
Bank of America† | 0.15 | % | — | 5,265,234 | ||||||||
Barclays Capital, Inc.† | 0.21 | % | — | 2,401,540 | ||||||||
HSBC Bank USA | 0.40 | % | 1/14/16 | 20,978,962 | ||||||||
HSBC Bank USA | 0.45 | % | 1/25/16 | 25,846,980 | ||||||||
HSBC Bank USA | 0.45 | % | 1/26/16 | 10,035,440 | ||||||||
JPMorgan Chase Bank | 0.37 | % | 1/13/16 | 14,027,970 | ||||||||
JPMorgan Chase Bank | 0.38 | % | 1/14/16 | 15,582,796 | ||||||||
|
| |||||||||||
$ | 113,375,689 | |||||||||||
|
|
† | The reverse repurchase agreement matures on demand. Interest rate resets daily and the rate shown is the rate in effect on October 31, 2015 |
40 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
The type of underlying collateral and the remaining maturity of open reverse repurchase agreements in relation to the reverse repurchase agreements on the Statements of Assets and Liabilities is as follows:
Reverse Repurchase Agreements
Overnight and | Up to 30 Days | 31-90 Days | Greater than 90 Days | Total | ||||||||||||||||
Inflation-Linked Securities | $ | 7,666,774 | $ | – 0 | – | $ | 105,708,915 | $ | – 0 | – | $ | 113,375,689 | ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 7,666,774 | $ | – 0 | – | $ | 105,708,915 | $ | – 0 | – | $ | 113,375,689 | ||||||||
|
|
|
|
|
|
|
|
|
|
** | Principal amount less than 500. |
(a) | Position, or a portion thereof, has been segregated to collateralize reverse repurchase agreements. |
(b) | Position, or a portion thereof, has been segregated to collateralize OTC derivatives outstanding. |
(c) | 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 $54,829,892 or 16.4% of net assets. |
(d) | Securities are perpetual and, thus, do not have a predetermined maturity date. The date shown, if applicable, reflects the next call date. |
(e) | Floating Rate Security. Stated interest rate was in effect at October 31, 2015. |
(f) | Variable rate coupon, rate shown as of October 31, 2015. |
(g) | IO – Interest Only |
(h) | The security is subject to a 12 month lock-up period, after which semi-annual redemptions are permitted. |
(i) | Restricted and illiquid security. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Mt Logan Re Ltd. (Preference Shares) | 12/30/14 | $ | 500,000 | $ | 530,735 | 0.16 | % |
(j) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities, which represent 0.00% of net assets as of October 31, 2015, are considered illiquid and restricted. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Virgolino de Oliveira Finance SA | 1/27/14 | $ | 363,153 | $ | 8,515 | 0.00 | % |
(k) | Security is in default and is non-income producing. |
(l) | 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. |
(m) | Investment in affiliated money market mutual fund. The rate shown represents the 7-day yield as of period end. |
Currency Abbreviations:
AUD – Australian Dollar
BRL – Brazilian Real
CAD – Canadian Dollar
EUR – Euro
AB BOND INFLATION STRATEGY • | 41 |
Portfolio of Investments
GBP – Great British Pound
INR – Indian Rupee
JPY – Japanese Yen
NZD – New Zealand Dollar
SGD – Singapore Dollar
TWD – New Taiwan Dollar
USD – United States Dollar
Glossary:
ABS – Asset-Backed Securities
BBSW – Bank Bill Swap Reference Rate (Australia)
BKBM – Bank Bill Benchmark (New Zealand)
CBT – Chicago Board of Trade
CDOR – Canadian Dealer Offered Rate
CDX-NAHY – North American High Yield Credit Default Swap Index
CDX-NAIG – North American Investment Grade Credit Default Swap Index
CMBS – Commercial Mortgage-Backed Securities
CME – Chicago Mercantile Exchange
GSE – Government-Sponsored Enterprise
INTRCONX – Inter-Continental Exchange
LCH – London Clearing House
LIBOR – London Interbank Offered Rates
REIT – Real Estate Investment Trust
TIPS – Treasury Inflation Protected Security
See notes to financial statements.
42 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
October 31, 2015
Assets | ||||
Investments in securities, at value | ||||
Investments in securities, at value (cost $443,027,688) | $ | 434,350,376 | ||
Affiliated issuers (cost $2,523,731) | 2,523,731 | |||
Cash collateral due from broker | 1,220,455 | |||
Foreign currencies, at value (cost $8,804,310) | 8,705,837 | |||
Interest receivable | 1,269,999 | |||
Receivable for capital stock sold | 1,180,751 | |||
Unrealized appreciation on forward currency exchange contracts | 309,301 | |||
Receivable for investment securities sold | 219,870 | |||
Unrealized appreciation on credit default swaps | 146,399 | |||
Unrealized appreciation on inflation swaps | 95,381 | |||
Upfront premium paid on credit default swaps | 18,258 | |||
|
| |||
Total assets | 450,040,358 | |||
|
| |||
Liabilities | ||||
Due to custodian | 94,834 | |||
Options written, at value (premiums received $10,075) | 3,331 | |||
Payable for reverse repurchase agreements | 113,375,689 | |||
Payable for capital stock redeemed | 507,190 | |||
Unrealized depreciation on inflation swaps | 502,732 | |||
Payable for investment securities purchased | 168,405 | |||
Unrealized depreciation on interest rate swaps | 121,365 | |||
Unrealized depreciation on forward currency exchange contracts | 119,070 | |||
Payable for variation margin on exchange-traded derivatives | 95,686 | |||
Advisory fee payable | 75,880 | |||
Upfront premium received on credit default swaps | 54,223 | |||
Distribution fee payable | 28,380 | |||
Administrative fee payable | 16,304 | |||
Transfer Agent fee payable | 7,301 | |||
Accrued expenses | 167,179 | |||
|
| |||
Total liabilities | 115,337,569 | |||
|
| |||
Net Assets | $ | 334,702,789 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 32,296 | ||
Additional paid-in capital | 353,608,703 | |||
Undistributed net investment income | 2,604,789 | |||
Accumulated net realized loss on investment and foreign currency transactions | (10,815,346 | ) | ||
Net unrealized depreciation on investments and foreign currency denominated assets and liabilities | (10,727,653 | ) | ||
|
| |||
$ | 334,702,789 | |||
|
|
See notes to financial statements.
AB BOND INFLATION STRATEGY • | 43 |
Statement of Assets & Liabilities
Net Asset Value Per Share—30 billion shares of capital stock authorized, $.001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 13,660,392 | 1,308,567 | $ | 10.44 | * | ||||||
| ||||||||||||
C | $ | 2,678,781 | 260,735 | $ | 10.27 | |||||||
| ||||||||||||
Advisor | $ | 18,343,353 | 1,753,894 | $ | 10.46 | |||||||
| ||||||||||||
R | $ | 20,229 | 1,937 | $ | 10.44 | |||||||
| ||||||||||||
K | $ | 1,616,053 | 155,023 | $ | 10.42 | |||||||
| ||||||||||||
I | $ | 265,136 | 25,535 | $ | 10.38 | |||||||
| ||||||||||||
1 | $ | 253,401,391 | 24,471,985 | $ | 10.35 | |||||||
| ||||||||||||
2 | $ | 40,896,500 | 3,950,151 | $ | 10.35 | |||||||
| ||||||||||||
Z | $ | 3,820,954 | 368,230 | $ | 10.38 | |||||||
|
* | The maximum offering price per share for Class A shares was $10.90 which reflects a sales charge of 4.25%. |
See notes to financial statements.
44 | • AB BOND INFLATION STRATEGY |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Year Ended October 31, 2015
Investment Income | ||||||||
Interest | $ | 5,853,593 | ||||||
Dividends | ||||||||
Affiliated issuers | 7,459 | |||||||
Unaffiliated issuers | 2,678 | |||||||
Other income | 2,731 | $ | 5,866,461 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 1,761,015 | |||||||
Distribution fee—Class A | 45,200 | |||||||
Distribution fee—Class C | 31,279 | |||||||
Distribution fee—Class R | 696 | |||||||
Distribution fee—Class K | 4,922 | |||||||
Distribution fee—Class 1 | 272,232 | |||||||
Transfer agency—Class A | 44,604 | |||||||
Transfer agency—Class C | 9,615 | |||||||
Transfer agency—Advisor Class | 51,473 | |||||||
Transfer agency—Class R | 357 | |||||||
Transfer agency—Class K | 3,216 | |||||||
Transfer agency—Class I | 138 | |||||||
Transfer agency—Class 1 | 21,643 | |||||||
Transfer agency—Class 2 | 3,224 | |||||||
Transfer agency—Class Z | 230 | |||||||
Custodian | 203,539 | |||||||
Registration fees | 134,991 | |||||||
Audit and tax | 89,493 | |||||||
Printing | 67,204 | |||||||
Legal | 52,004 | |||||||
Administrative | 49,296 | |||||||
Directors’ fees | 18,330 | |||||||
Miscellaneous | 18,513 | |||||||
|
| |||||||
Total expenses before interest expense | 2,883,214 | |||||||
Interest expense | 290,324 | |||||||
|
| |||||||
Total expenses | 3,173,538 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (767,870 | ) | ||||||
|
| |||||||
Net expenses | 2,405,668 | |||||||
|
| |||||||
Net investment income | 3,460,793 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (1,051,151 | ) | ||||||
Securities sold short | 7,590 | |||||||
Futures | (922,689 | ) | ||||||
Swaps | (2,440,447 | ) | ||||||
Foreign currency transactions | 2,075,091 | |||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | (7,869,724 | ) | ||||||
Futures | 19,619 | |||||||
Options written | 6,744 | |||||||
Swaps | (312,531 | ) | ||||||
Foreign currency denominated assets and liabilities | (32,574 | ) | ||||||
|
| |||||||
Net loss on investment and foreign currency transactions | (10,520,072 | ) | ||||||
|
| |||||||
Net Decrease in Net Assets from Operations | $ | (7,059,279 | ) | |||||
|
|
See notes to financial statements.
AB BOND INFLATION STRATEGY • | 45 |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 3,460,793 | $ | 7,257,676 | ||||
Net realized loss on investment transactions and foreign currency transactions | (2,331,606 | ) | (3,331,693 | ) | ||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | (8,188,466 | ) | 2,402,522 | |||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | (7,059,279 | ) | 6,328,505 | |||||
Dividends to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (135,111 | ) | (324,609 | ) | ||||
Class C | (18,189 | ) | (47,997 | ) | ||||
Advisor Class | (203,846 | ) | (187,729 | ) | ||||
Class R | (1,105 | ) | (2,783 | ) | ||||
Class K | (20,282 | ) | (29,968 | ) | ||||
Class I | (7,362 | ) | (52,380 | ) | ||||
Class 1 | (3,672,680 | ) | (6,051,926 | ) | ||||
Class 2 | (556,237 | ) | (949,413 | ) | ||||
Class Z(a) | (14,356 | ) | – 0 | – | ||||
Capital Stock Transactions | ||||||||
Net decrease | (28,377,535 | ) | (27,646,661 | ) | ||||
|
|
|
| |||||
Total decrease | (40,065,982 | ) | (28,964,961 | ) | ||||
Net Assets | ||||||||
Beginning of period | 374,768,771 | 403,733,732 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $2,604,789 and $1,795,374, respectively) | $ | 334,702,789 | $ | 374,768,771 | ||||
|
|
|
|
(a) | Commenced distributions on December 11, 2014. |
See notes to financial statements.
46 | • AB BOND INFLATION STRATEGY |
Statement of Changes in Net Assets
STATEMENT OF CASH FLOWS
For the Year Ended October 31, 2015
Cash flows from operating activities | ||||||||
Net decrease in net assets from operations | $ | (7,059,279 | ) | |||||
Reconciliation of Net Decrease in Net Assets from Operations to Net Increase in Cash from Operating Activities: | ||||||||
Decrease in interest and dividends receivable | $ | 154,333 | ||||||
Decrease in receivable for investments sold | 8,665,967 | |||||||
Net accretion of bond discount and amortization of bond premium | 1,814,638 | |||||||
Inflation index adjustment | (1,043,164 | ) | ||||||
Decrease in payable for investments purchased | (9,563,903 | ) | ||||||
Decrease in accrued expenses | (33,952 | ) | ||||||
Increase in cash collateral due from broker | (325,124 | ) | ||||||
Purchases of long-term investments | (237,515,361 | ) | ||||||
Purchases of short-term investments | (285,367,477 | ) | ||||||
Proceeds from disposition of long-term investments | 256,891,052 | |||||||
Proceeds from disposition of short-term investments | 278,110,379 | |||||||
Proceeds from short sales transactions, net | 7,590 | |||||||
Proceeds from options written, net | 10,075 | |||||||
Payments on swaps, net | (2,392,236 | ) | ||||||
Payments for exchange-traded derivatives settlements | (1,390,215 | ) | ||||||
Net realized loss on investment transactions and foreign currency transactions | 2,331,606 | |||||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | 8,188,466 | |||||||
|
| |||||||
Total adjustments | 18,542,674 | |||||||
|
| |||||||
Net increase in cash from operating activities | $ | 11,483,395 | ||||||
|
| |||||||
Financing Activities: | ||||||||
Redemptions of capital stock, net | (31,933,752 | ) | ||||||
Increase in due to custodian | 94,834 | |||||||
Cash dividends paid (net of dividend reinvestments)* | (921,894 | ) | ||||||
Increase in reverse repurchase agreements | 27,992,602 | |||||||
|
| |||||||
Net decrease in cash from financing activities | (4,768,210 | ) | ||||||
Effect of exchange rate on cash | 1,986,252 | |||||||
|
| |||||||
Net increase in cash | 8,701,437 | |||||||
Net change in cash | ||||||||
Cash at beginning of year | 4,400 | |||||||
|
| |||||||
Cash at end of year | $ | 8,705,837 | ||||||
|
| |||||||
* Reinvestment of dividends | $ | 3,707,274 | ||||||
Supplemental disclosure of cash flow information: | ||||||||
Interest expense paid during the year | $ | 286,229 |
In accordance with U.S. GAAP, the Strategy has included a Statement of Cash Flows as a result of its significant investments in reverse repurchase agreements throughout the year.
See notes to financial statements.
AB BOND INFLATION STRATEGY • | 47 |
Statement of Cash Flows
NOTES TO FINANCIAL STATEMENTS
October 31, 2015
NOTE A
Significant Accounting Policies
AB Bond Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940 as an open-end management investment company. Prior to January 20, 2015, the Fund was known as AllianceBernstein Bond Fund, Inc. The Fund, which is a Maryland corporation, operates as a series company comprised of nine portfolios currently in operation: the AB Intermediate Bond Portfolio, the AB Bond Inflation Strategy Portfolio, the AB Municipal Bond Inflation Strategy Portfolio, the AB All Market Real Return Portfolio (formerly AllianceBernstein Real Asset Strategy), the AB Limited Duration High Income Portfolio, the AB Government Reserves Portfolio, the AB Tax-Aware Fixed Income Portfolio, the AB Credit Long/Short Portfolio and the AB High Yield Portfolio. They are each diversified Portfolios, with the exception of the AB Credit Long/Short Portfolio and the AB High Yield Portfolio, which are non-diversified. Each Portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to the AB Bond Inflation Strategy Portfolio (the “Strategy”). Prior to January 20, 2015, the Portfolio was known as AllianceBernstein Bond Inflation Strategy Portfolio. The Strategy has authorized the issuance of Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I, Class 1, Class 2 and Class Z shares. Effective December 11, 2014, the Strategy commenced offering of Class Z shares. Class B shares are not currently offered. Class 1 shares are sold only to the private clients of Sanford C. Bernstein & Co. LLC by its registered representatives. Class A shares are sold with a front-end sales charge of up to 4.25% for purchases not exceeding $1,000,000. With respect to purchases of $1,000,000 or more, Class A shares redeemed within one year of purchase may be subject to a contingent deferred sales charge of 1%. Class C shares are subject to a contingent deferred sales charge of 1% on redemptions made within the first year after purchase. Class R, Class K, and Class 1 shares are sold without an initial or contingent deferred sales charge. Advisor Class, Class I, Class 2 and Class Z shares are sold without an initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. All ten classes of shares have identical voting, dividend, liquidation and other rights, except that the classes bear different distribution and transfer agency expenses. Each class has exclusive voting rights with respect to its distribution plan. 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 Strategy 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 Strategy.
48 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
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 Fund’s Board of Directors (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 valued at the mid level between the current bid and ask prices. If either a current bid or current ask price is unavailable, AllianceBernstein L.P. (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.
AB BOND INFLATION STRATEGY • | 49 |
Notes to Financial Statements
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 Strategy may use fair value pricing for securities primarily traded in non-U.S. markets because most foreign markets close well before the Strategy 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 Strategy 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 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 Strategy. Unobservable inputs reflect the Strategy’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 Strategy’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.
50 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
Where readily available market prices or relevant bid prices are not available for certain equity investments, such investments may be valued based on similar publicly traded investments, movements in relevant indices since last available prices or based upon underlying company fundamentals and comparable company data (such as multiples to earnings or other multiples to equity). Where an investment is valued using an observable input, such as another publicly traded security, the investment will be classified as Level 2. If management determines that an adjustment is appropriate based on restrictions on resale, illiquidity or uncertainty, and such adjustment is a significant component of the valuation, the investment will be classified as Level 3. An investment will also be classified as Level 3 where management uses company fundamentals and other significant inputs to determine the valuation.
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, 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 Strategy’s investments by the above fair value hierarchy levels as of October 31, 2015:
Investments in | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
| |||||||||||||||
Inflation-Linked Securities | $ | – 0 | – | $ | 262,760,429 | $ | – 0 | – | $ | 262,760,429 | ||||||
Corporates – Investment Grade | – 0 | – | 63,105,311 | – 0 | – | 63,105,311 | ||||||||||
Asset-Backed Securities | – 0 | – | 34,580,341 | 3,725,747 | 38,306,088 | |||||||||||
Commercial Mortgage-Backed Securities | – 0 | – | 26,834,483 | 7,333,784 | 34,168,267 |
AB BOND INFLATION STRATEGY • | 51 |
Notes to Financial Statements
Investments in | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Corporates – Non-Investment Grade | $ | – 0 | – | $ | 10,762,859 | $ | – 0 | – | $ | 10,762,859 | ||||||
Collateralized Mortgage Obligations | – 0 | – | 1,103,639 | 9,306,859 | 10,410,498 | |||||||||||
Quasi-Sovereigns | – 0 | – | 2,001,945 | – 0 | – | 2,001,945 | ||||||||||
Governments – Sovereign Agencies | – 0 | – | 1,830,118 | – 0 | – | 1,830,118 | ||||||||||
Governments – Treasuries | – 0 | – | 1,203,727 | – 0 | – | 1,203,727 | ||||||||||
Governments – Sovereign Bonds | – 0 | – | 589,056 | – 0 | – | 589,056 | ||||||||||
Common Stocks | – 0 | – | – 0 | – | 530,735 | 530,735 | ||||||||||
Emerging Markets – Corporate Bonds | – 0 | – | 174,395 | – 0 | – | 174,395 | ||||||||||
Preferred Stocks | 54,033 | – 0 | – | – 0 | – | 54,033 | ||||||||||
Short-Term Investments: | ||||||||||||||||
Governments – Treasuries | – 0 | – | 8,452,915 | – 0 | – | 8,452,915 | ||||||||||
Investment Companies | 2,523,731 | – 0 | – | – 0 | – | 2,523,731 | ||||||||||
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Total Investments in Securities | 2,577,764 | 413,399,218 | 20,897,125 | 436,874,107 | ||||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets: | ||||||||||||||||
Futures | 31,786 | – 0 | – | – 0 | – | 31,786 | # | |||||||||
Forward Currency Exchange Contracts | – 0 | – | 309,301 | – 0 | – | 309,301 | ||||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | 17,211 | – 0 | – | 17,211 | # | |||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | 986,562 | – 0 | – | 986,562 | # | |||||||||
Credit Default Swaps | – 0 | – | 146,399 | – 0 | – | 146,399 | ||||||||||
Inflation (CPI) Swaps | – 0 | – | 95,381 | – 0 | – | 95,381 | ||||||||||
Liabilities: | ||||||||||||||||
Futures | (218,172 | ) | – 0 | – | – 0 | – | (218,172 | )# | ||||||||
Forward Currency Exchange Contracts | – 0 | – | (119,070 | ) | – 0 | – | (119,070 | ) | ||||||||
Currency Options Written | – 0 | – | (3,331 | ) | – 0 | – | (3,331 | ) | ||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | (296,140 | ) | – 0 | – | (296,140 | )# | ||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | (2,294,336 | ) | – 0 | – | (2,294,336 | )# | ||||||||
Inflation (CPI) Swaps | – 0 | – | (502,732 | ) | – 0 | – | (502,732 | ) | ||||||||
Interest Rate Swaps | – 0 | – | (121,365 | ) | – 0 | – | (121,365 | ) | ||||||||
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|
| |||||||||
Total^ | $ | 2,391,378 | $ | 411,617,098 | $ | 20,897,125 | $ | 434,905,601 | ||||||||
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* | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. Other financial instruments may also include options written which are valued at market value. |
# | 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. |
52 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
The Strategy 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.
Asset-Backed Securities | Commercial Mortgage-Backed Securities | Collateralized Mortgage Obligations | ||||||||||
Balance as of 10/31/14 | $ | 2,818,092 | $ | 3,965,975 | $ | 3,714,288 | ||||||
Accrued discounts/(premiums) | 77 | (19,882 | ) | (144 | ) | |||||||
Realized gain (loss) | 18 | (1,465 | ) | 20,059 | ||||||||
Change in unrealized appreciation/depreciation | 420 | (154,007 | ) | (95,901 | ) | |||||||
Purchases/Payups | 2,791,627 | 3,563,083 | 7,594,028 | |||||||||
Sales/Paydowns | (817,655 | ) | (19,920 | ) | (1,925,471 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | (1,066,832 | ) | – 0 | – | – 0 | – | ||||||
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Balance as of 10/31/15 | $ | 3,725,747 | $ | 7,333,784 | $ | 9,306,859 | ||||||
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| |||||||
Net change in unrealized appreciation/depreciation from Investments held as of 10/31/15* | $ | 420 | $ | (154,007 | ) | $ | (98,367 | ) | ||||
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Common Stocks | Total | |||||||||||
Balance as of 10/31/14 | $ | – 0 | – | $ | 10,498,355 | |||||||
Accrued discounts/(premiums) | – 0 | – | (19,949 | ) | ||||||||
Realized gain (loss) | – 0 | – | 18,612 | |||||||||
Change in unrealized appreciation/depreciation | 30,735 | (218,753 | ) | |||||||||
Purchases/Payups | 500,000 | 14,448,738 | ||||||||||
Sales/Paydowns | – 0 | – | (2,763,046 | ) | ||||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | ||||||||
Transfers out of Level 3 | – 0 | – | (1,066,832 | ) | ||||||||
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| |||||||||
Balance as of 10/31/15 | $ | 530,735 | $ | 20,897,125 | + | |||||||
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Net change in unrealized appreciation/depreciation from Investments held as of 10/31/15* | $ | 30,735 | $ | (221,219 | ) | |||||||
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+ | 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 on investments and other financial instruments in the accompanying statement of operations. |
As of October 31, 2015, all Level 3 securities were priced i) at net asset value, ii) by third party vendors, or iii) using prior transaction prices, which approximates fair value.
AB BOND INFLATION STRATEGY • | 53 |
Notes to Financial Statements
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the Strategy. 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 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. Currency Translation
Assets and liabilities denominated in foreign currencies and commitments under forward currency exchange contracts are translated into U.S. dollars at the mean of the quoted bid and ask prices of such currencies against the U.S. dollar. Purchases and sales of portfolio securities are translated into U.S. dollars at the rates of exchange prevailing when such securities were acquired or sold. Income and expenses are translated into U.S. dollars at rates of exchange prevailing when accrued.
Net realized gain or loss on foreign currency transactions represents foreign exchange gains and losses from sales and maturities of foreign fixed income investments, foreign currency exchange contracts, holding of foreign currencies, currency gains or losses realized between the trade and settlement dates on foreign
54 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
investment transactions, and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Strategy’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains and losses from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of net unrealized appreciation or depreciation of foreign currency denominated assets and liabilities.
4. Taxes
It is the Strategy’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. The Strategy may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued and applied to net investment income, net realized gains and net unrealized appreciation/depreciation as such income and/or gains are earned.
In accordance with U.S. GAAP requirements regarding accounting for uncertainties in income taxes, management has analyzed the Strategy’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 Strategy’s financial statements.
5. Investment Income and Investment Transactions
Dividend income is recorded on the ex-dividend date or as soon as the Strategy 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 Strategy amortizes premiums and accretes discounts as adjustments to interest income.
6. Class Allocations
All income earned and expenses incurred by the Strategy are borne on a pro-rata basis by each outstanding class of shares, based on the proportionate interest in the Strategy represented by the net assets of such class, except for class specific expenses which are allocated to the respective class. Expenses of the Fund are charged proportionately to each Strategy or based on other appropriate methods. Realized and unrealized gains and losses are allocated among the various share classes based on respective net assets.
7. 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
AB BOND INFLATION STRATEGY • | 55 |
Notes to Financial Statements
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 investment advisory agreement, the Strategy pays the Adviser an advisory fee at an annual rate of .50% of the first $2.5 billion, .45% of the next $2.5 billion and .40% in excess of $5 billion, of the Strategy’s average daily net assets. The Adviser has agreed to waive its fees and bear certain expenses to the extent necessary to limit total operating expenses on an annual basis (“Expense Caps”) to .80%, 1.50%, .50%, 1.00%, .75%, .50%, .60%, .50% and .50% of the daily average net assets for the Class A, Class C, Advisor Class, Class R, Class K, Class I, Class 1, Class 2, and Class Z shares, respectively. Prior to February 1, 2014, the Expense Caps were .75%, 1.45%, .45%, .95%, .70%, .45%, .55% and .45% of the daily average net assets for the Class A, Class C, Advisor Class, Class R, Class K, Class I, Class 1, and Class 2 shares, respectively. Under the agreement, fees waived and expenses borne by the Adviser were subject to repayment by the Strategy until January 26, 2013. No repayment was made that would cause the Strategy’s total annualized operating expenses to exceed the net fee percentage set forth above, or would have exceeded the amount of offering expenses as recorded by the Strategy before January 26, 2011. This fee waiver and/or expense reimbursement agreement will remain in effect until January 31, 2016 and then may be extended for additional one-year terms. For the year ended October 31, 2015, such reimbursement amounted to $767,870.
Pursuant to the investment advisory agreement, the Strategy may reimburse the Adviser for certain legal and accounting services provided to the Strategy by the Adviser. For the year ended October 31, 2015, the reimbursement for such services amounted to $49,296.
The Strategy compensates AllianceBernstein Investor Services, Inc. (“ABIS”), a wholly-owned subsidiary of the Adviser, under a Transfer Agency Agreement for providing personnel and facilities to perform transfer agency services for the Strategy. ABIS may make payments to intermediaries that provide omnibus account services, sub-accounting services and/or networking services. Such compensation retained by ABIS amounted to $96,225 for the year ended October 31, 2015.
AllianceBernstein Investments, Inc. (the “Distributor”), a wholly-owned subsidiary of the Adviser, serves as the distributor of the Strategy’s shares. The Distributor has advised the Strategy that it has retained front-end sales charges of $233 from the sale of Class A shares and received $47 and $214 in contingent deferred sales charges imposed upon redemptions by shareholders of Class A and Class C shares, respectively, for the year ended October 31, 2015.
56 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
The Strategy 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 Strategy’s transactions in shares of the Government STIF Portfolio for the year ended October 31, 2015 is as follows:
Market Value October 31, 2014 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value October 31, 2015 (000) | Dividend Income (000) | ||||||||||||||
$ | 3,846 | $ | 276,788 | $ | 278,110 | $ | 2,524 | $ | 7 |
Brokerage commissions paid on investment transactions for the year ended October 31, 2015 amounted to $5,075, of which $0 and $0, respectively, was paid to Sanford C. Bernstein & Co. LLC and Sanford C. Bernstein Limited, affiliates of the Adviser.
NOTE C
Distribution Services Agreement
The Strategy has adopted a Distribution Services Agreement (the “Agreement”) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Agreement, the Strategy pays distribution and servicing fees to the Distributor at an annual rate of up to .30% of the Strategy’s average daily net assets attributable to Class A shares, 1% of the Strategy’s average daily net assets attributable to Class C shares, .50% of the Strategy’s average daily net assets attributable to Class R shares .25% of the Strategy’s average daily net assets attributable to Class K shares and .10% of the Strategy’s average daily net assets attributable to Class 1 shares. There are no distribution and servicing fees on the Advisor Class, Class I, Class 2 and Class Z shares. The fees are accrued daily and paid monthly. The Agreement provides that the Distributor will use such payments in their entirety for distribution assistance and promotional activities. Since the commencement of the Strategy’s operations, the Distributor has incurred expenses in excess of the distribution costs reimbursed by the Strategy in the amounts of $232,090, $15,914, $18,962 and $1,742,684 for Class C, Class R, Class K and Class 1 shares, respectively. While such costs may be recovered from the Strategy in future periods so long as the Agreement is in effect, the rate of the distribution and servicing fees payable under the Agreement may not be increased without a shareholder vote. In accordance with the Agreement, there is no provision for recovery of unreimbursed distribution costs incurred by the Distributor beyond the current fiscal year for Class A shares. The Agreement also provides that the Adviser may use its own resources to finance the distribution of the Strategy’s shares.
AB BOND INFLATION STRATEGY • | 57 |
Notes to Financial Statements
NOTE D
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the year ended October 31, 2015 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 77,396,476 | $ | 38,666,344 | ||||
U.S. government securities | 160,118,885 | 203,138,937 |
The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation (excluding futures, foreign currency and swap transactions) are as follows:
Cost | $ | 446,087,829 | ||
|
| |||
Gross unrealized appreciation | $ | 1,810,665 | ||
Gross unrealized depreciation | (11,024,387 | ) | ||
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| |||
Net unrealized depreciation | $ | (9,213,722 | ) | |
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1. Derivative Financial Instruments
The Strategy 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 Strategy, as well as the methods in which they may be used are:
• | Futures |
The Strategy may buy or sell futures for investment purposes or for the purpose of hedging its portfolio against adverse effects of potential movements in the market. The Strategy bears the market risk that arises from changes in the value of these instruments and the imperfect correlation between movements in the price of the futures and movements in the price of the assets, reference rates or indices which they are designed to track. Among other things, the Strategy may purchase or sell futures for foreign currencies or options thereon for non-hedging purposes as a means of making direct investment in foreign currencies, as described below under “Currency Transactions”.
At the time the Strategy enters into futures, the Strategy deposits and maintains as collateral an initial margin with the broker, as required by the exchange 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 Strategy 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
58 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
recorded by the Strategy 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 exchange-traded futures is generally less than privately negotiated futures, since the clearinghouse, which is the issuer or counterparty to each exchange-traded future, has robust risk mitigation standards, including the requirement to provide initial and variation margin. When the contract is closed, the Strategy 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.
Use of long futures subjects the Strategy to risk of loss in excess of the amounts shown on the statement of assets and liabilities, up to the notional value of the futures. Use of short futures subjects the Strategy to unlimited risk of loss. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of futures can vary from the previous day’s settlement price, which could effectively prevent liquidation of unfavorable positions.
During the year ended October 31, 2015, the Strategy held futures for hedging and non-hedging purposes.
• | Forward Currency Exchange Contracts |
The Strategy may enter into forward currency exchange contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings, to hedge certain firm purchase and sale commitments denominated in foreign currencies and for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions”.
A forward currency exchange contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. The gain or loss arising from the difference between the original contract and the closing of such contract would be included in net realized gain or loss on foreign currency transactions. Fluctuations in the value of open forward currency exchange contracts are recorded for financial reporting purposes as unrealized appreciation and/or depreciation by the Strategy. Risks may arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar.
During the year ended October 31, 2015, the Strategy held forward currency exchange contracts for hedging and non-hedging purposes.
• | Option Transactions |
For hedging and investment purposes, the Strategy may purchase and write (sell) put and call options on U.S. and foreign securities, including government securities, and foreign currencies that are traded on U.S. and foreign securities exchanges and over-the-counter markets. Among other
AB BOND INFLATION STRATEGY • | 59 |
Notes to Financial Statements
things, the Strategy may use options transactions for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions” and may use options strategies involving the purchase and/or writing of various combinations of call and/or put options, for hedging and investment purposes.
The risk associated with purchasing an option is that the Strategy pays a premium whether or not the option is exercised. Additionally, the Strategy bears the risk of loss of the premium and change in market value should the counterparty not perform under the contract. Put and call options purchased are accounted for in the same manner as portfolio securities. The cost of securities acquired through the exercise of call options is increased by premiums paid. The proceeds from securities sold through the exercise of put options are decreased by the premiums paid.
When the Strategy writes an option, the premium received by the Strategy is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from written options which expire unexercised are recorded by the Strategy on the expiration date as realized gains from options written. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium received is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium received is added to the proceeds from the sale of the underlying security or currency in determining whether the Strategy has realized a gain or loss. If a put option is exercised, the premium received reduces the cost basis of the security or currency purchased by the Strategy. In writing an option, the Strategy bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Strategy could result in the Strategy selling or buying a security or currency at a price different from the current market value.
During the year ended October 31, 2015, the Strategy held written options for hedging purposes.
For the year ended October 31, 2015, the Strategy had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 10/31/14 | – 0 | – | $ | – 0 | – | |||
Options written | 4,260,000 | 10,075 | ||||||
Options expired | – 0 | – | – 0 | – | ||||
Options bought back | – 0 | – | – 0 | – | ||||
Options exercised | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Options written outstanding as of 10/31/15 | 4,260,000 | $ | 10,075 | |||||
|
|
|
|
60 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
• | Swaps |
The Strategy may enter into swaps to hedge its exposure to interest rates, credit risk, or currencies. The Strategy 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 Strategy in accordance with the terms of the respective swaps to provide value and recourse to the Strategy 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 Strategy, and/or the termination value at the end of the contract. Therefore, the Strategy 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 Strategy and the counterparty and by the posting of collateral by the counterparty to the Strategy to cover the Strategy’s exposure to the counterparty. Additionally, risks may arise from unanticipated movements in interest rates or in the value of the underlying securities. The Strategy 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.
AB BOND INFLATION STRATEGY • | 61 |
Notes to Financial Statements
At the time the Strategy enters into a centrally cleared swap, the Strategy 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 Strategy 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 Strategy 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 Strategy 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 Strategy is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. Because the Strategy 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 Strategy may enter into interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional amount. The Strategy 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 Strategy 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 Strategy anticipates purchasing at a later date. Interest rate swaps involve the exchange by a Strategy 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 Strategy receiving or paying, as the case may be, only the net amount of the two payments).
During the year ended October 31, 2015, the Strategy held interest rate swaps for hedging and non-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
62 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
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 Strategy 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 year ended October 31, 2015, the Strategy held inflation (CPI) swaps for hedging and non-hedging purposes.
Credit Default Swaps:
The Strategy 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 Strategy, or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. The Strategy 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 Strategy receives/(pays) fixed payments from/(to) the respective counterparty, calculated at the agreed upon rate applied to the notional amount. If the Strategy is a buyer/(seller) of protection and a credit event occurs, as defined under the terms of the swap, the Strategy 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 Strategy for the same reference obligation with the same counterparty. As of October 31, 2015, the Strategy did not have Buy Contracts outstanding with respect to the same referenced obligations and same counterparty for its Sale Contracts outstanding.
Credit default swaps may involve greater risks than if a Strategy 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 Strategy is a buyer of protection and no credit event occurs, it will lose the payments it made to its counterparty. If the Strategy is a seller of protection and a credit event occurs, the value of the referenced obligation received by the Strategy 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 Strategy.
AB BOND INFLATION STRATEGY • | 63 |
Notes to Financial Statements
During the year ended October 31, 2015, the Strategy held credit default swaps for hedging and 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 Strategy 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 Strategy 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 Strategy 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 Strategy’s net liability, held by the defaulting party, may be delayed or denied.
The Strategy’s Master Agreements may contain provisions for early termination of OTC derivative transactions in the event the net assets of the Strategy decline below specific levels (“net asset contingent features”). If these levels are triggered, the Strategy’s counterparty has the right to terminate such transaction
64 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
and require the Strategy 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 Strategy 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 | $ | 1,018,348 | * | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 2,512,508 | * | ||||
Credit contracts | Receivable/Payable for variation margin on exchange-traded derivatives | 17,211 | * | Receivable/Payable for variation margin on exchange-traded derivatives | 296,140 | * | ||||||
Foreign exchange contracts | Unrealized appreciation on forward currency exchange contracts | | 309,301 | | Unrealized depreciation on forward currency exchange contracts | | 119,070 | | ||||
Foreign exchange contracts | Options written, at value | | 3,331 | | ||||||||
Interest rate contracts | Unrealized depreciation on interest rate swaps | | 121,365 | | ||||||||
Interest rate contracts | Unrealized appreciation on inflation swaps | | 95,381 | | Unrealized depreciation on inflation swaps | | 502,732 | | ||||
Credit contracts | Unrealized appreciation on credit default swaps | 146,399 | ||||||||||
|
|
|
| |||||||||
Total | $ | 1,586,640 | $ | 3,555,146 | ||||||||
|
|
|
|
* | 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. |
AB BOND INFLATION STRATEGY • | 65 |
Notes to Financial Statements
The effect of derivative instruments on the statement of operations for the year 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 futures; Net change in unrealized appreciation/depreciation of futures | $ | (922,689 | ) | $ | 19,619 | ||||
Foreign exchange contracts | Net realized gain (loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation of foreign currency denominated assets and liabilities | | 768,987 | | | 56,265 | | |||
Foreign exchange contracts | Net realized gain (loss) on options written; Net change in unrealized appreciation/depreciation of options written |
| – 0 | – |
| 6,744 |
| |||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (2,326,608 | ) | (354,221 | ) | |||||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (113,839 | ) | 41,690 | ||||||
|
|
|
| |||||||
Total | $ | (2,594,149 | ) | $ | (229,903 | ) | ||||
|
|
|
|
The following table represents the average monthly volume of the Strategy’s derivative transactions during the year ended October 31, 2015:
Futures: | ||||
Average original value of buy contracts | $ | 8,766,469 | ||
Average original value of sale contracts | $ | 33,890,178 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 5,689,306 | ||
Average principal amount of sale contracts | $ | 24,809,121 | ||
Interest Rate Swaps: | ||||
Average notional amount | $ | 6,113,637 |
66 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
Inflation Swaps: | ||||
Average notional amount | $ | 60,507,692 | ||
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 104,985,291 | ||
Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 1,280,000 | ||
Average notional amount of sale contracts | $ | 4,471,231 | ||
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 22,662,538 |
For financial reporting purposes, the Strategy 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 Strategy’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 Strategy 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 | |||||||||||||||
OTC Derivatives: | ||||||||||||||||||||
Bank of America, NA | $ | 48,869 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 48,869 | |||||||
Barclays Bank PLC | 95,381 | (95,381 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
BNP Paribas SA | 27,531 | – 0 | – | – 0 | – | – 0 | – | 27,531 | ||||||||||||
Citibank, NA | 57,577 | (57,577 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Credit Suisse International | 165 | – 0 | – | – 0 | – | – 0 | – | 165 | ||||||||||||
Deutsche Bank AG | 3,823 | (3,823 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Goldman Sachs Bank USA | 102,482 | (45,920 | ) | – 0 | – | – 0 | – | 56,562 | ||||||||||||
HSBC Bank USA | 81,007 | (5,052 | ) | – 0 | – | – 0 | – | 75,955 | ||||||||||||
JPMorgan Chase Bank/ JPMorgan Chase Bank, NA | 45,924 | (45,924 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Standard Chartered Bank | 753 | (753 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
State Street Bank & Trust Co. | 51,604 | – 0 | – | – 0 | – | – 0 | – | 51,604 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 515,116 | $ | (254,430 | ) | $ | – 0 | – | $ | – 0 | – | $ | 260,686 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
AB BOND INFLATION STRATEGY • | 67 |
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 | |||||||||||||||
Exchange-Traded Derivatives: | ||||||||||||||||||||
Citigroup Global Markets, Inc.** | $ | 1,327 | $ | – 0 | – | $ | (1,327 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
Goldman Sachs & Co.** | 10,139 | – 0 | – | (10,139 | ) | – 0 | – | – 0 | – | |||||||||||
Morgan Stanley & Co., LLC** | 84,220 | – 0 | – | (84,220 | ) | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 95,686 | $ | – 0 | – | $ | (95,686 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Barclays Bank PLC | $ | 127,154 | $ | (95,381 | ) | $ | – 0 | – | $ | – 0 | – | $ | 31,773 | |||||||
Citibank, NA | 93,312 | (57,577 | ) | – 0 | – | – 0 | – | 35,735 | ||||||||||||
Deutsche Bank AG | 144,031 | (3,823 | ) | – 0 | – | (131,944 | ) | 8,264 | ||||||||||||
Goldman Sachs Bank USA | 45,920 | (45,920 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
HSBC Bank USA | 5,052 | (5,052 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
JPMorgan Chase Bank/ JPMorgan Chase Bank, NA | 141,566 | (45,924 | ) | – 0 | – | – 0 | – | 95,642 | ||||||||||||
Morgan Stanley Capital Services LLC | 128,622 | – 0 | – | – 0 | – | – 0 | – | 128,622 | ||||||||||||
Standard Chartered Bank | 60,841 | (753 | ) | – 0 | – | – 0 | – | 60,088 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 746,498 | $ | (254,430 | ) | $ | – 0 | – | $ | (131,944 | ) | $ | 360,124 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | 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. |
See Note D.4 for additional disclosure of netting arrangements regarding reverse repurchase agreements.
2. Currency Transactions
The Strategy may invest in non-U.S. dollar securities on a currency hedged or unhedged basis. The Strategy 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 Strategy may enter into transactions for investment opportunities when it anticipates that a foreign currency will appreciate or
68 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
depreciate in value but securities denominated in that currency are not held by the Strategy 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 Strategy 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).
3. TBA and Dollar Rolls
The Strategy may invest in TBA mortgage-backed securities. A TBA, or “To Be Announced”, trade represents a contract for the purchase or sale of mortgage-backed securities to be delivered at a future agree-upon date; however, the specific mortgage pool numbers or the number of pools that will be delivered to fulfill the trade obligation or terms of the contract are unknown at the time of the trade. Mortgage pools (including fixed-rate or variable-rate mortgages) guaranteed by the Government National Mortgage Association, or GNMA, the Federal National Mortgage Association, or FNMA, or the Federal Home Loan Mortgage Corporation, or FHLMC, are subsequently allocated to the TBA transactions.
The Strategy may enter into dollar rolls. Dollar rolls involve sales by the Strategy of securities for delivery in the current month and the Strategy’s simultaneously contracting to repurchase substantially similar (same type and coupon) securities on a specified future date. During the roll period, the Strategy forgoes principal and interest paid on the securities. The Strategy is compensated by the difference between the current sales price and the lower forward price for the future purchase (often referred to as the “drop”) as well as by the interest earned on the cash proceeds of the initial sale. Dollar rolls involve the risk that the market value of the securities the Strategy is obligated to repurchase under the agreement may decline below the repurchase price. Dollar rolls are speculative techniques. During the year ended October 31, 2015, the Strategy had no transactions in dollar rolls.
4. Reverse Repurchase Agreements
The Strategy may enter into reverse repurchase transactions (“RVP”) in accordance with the terms of a Master Repurchase Agreement (“MRA”), under which the Strategy sells securities and agrees to repurchase them at a mutually agreed upon date and price. At the time the Strategy enters into a reverse repurchase agreement, it will establish a segregated account with the custodian containing liquid assets having a value comparable to the repurchase price. Under the MRA and other Master Agreements, the Strategy is permitted to offset payables and/or receivables with collateral held and/or posted to the counterparty and create one single net payment due to or from the Strategy in the event of a default. In the event of a default by a MRA counterparty, the Strategy may be considered an unsecured creditor with respect to any excess collateral (collateral with a market value in excess of the repurchase price) held by and/or posted to the counterparty,
AB BOND INFLATION STRATEGY • | 69 |
Notes to Financial Statements
and as such the return of such excess collateral may be delayed or denied. For the year ended October 31, 2015, the average amount of reverse repurchase agreements outstanding was $115,431,269 and the daily weighted average interest rate was 0.24%. At October 31, 2015, the Strategy had reverse repurchase agreements outstanding in the amount of $113,375,689 as reported on the statement of assets and liabilities. During the period, the Strategy received net interest payment from counterparties.
The following table presents the Strategy’s RVP liabilities by counterparty net of the related collateral pledged by the Strategy as of October 31, 2015:
Counterparty | RVP Liabilities Subject to a MRA | Securities Collateral Pledged†* | Net Amount of RVP Liabilities | |||||||||
Bank of America | $ | 24,502,001 | $ | (24,502,001 | ) | $ | – 0 | – | ||||
Barclays Capital, Inc. | 2,401,540 | (2,401,540 | ) | – 0 | – | |||||||
HSBC Bank USA | 56,861,382 | (56,773,117 | ) | 88,265 | ||||||||
JPMorgan Chase Bank | 29,610,766 | (29,572,143 | ) | 38,623 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 113,375,689 | $ | (113,248,801 | ) | $ | 126,888 | |||||
|
|
|
|
|
|
† | Including accrued interest. |
* | The actual collateral pledged may be more than the amount reported due to overcollateralization. |
NOTE E
Capital Stock
Each class consists of 3,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | Year Ended October 31, 2014 | Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||||||||||||
| ||||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 169,441 | 365,636 | $ | 1,801,811 | $ | 3,958,275 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 11,466 | 26,770 | 120,842 | 291,538 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (344,463 | ) | (1,081,920 | ) | (3,652,268 | ) | (11,685,187 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (163,556 | ) | (689,514 | ) | $ | (1,729,615 | ) | $ | (7,435,374 | ) | ||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 44,035 | 18,830 | $ | 461,102 | $ | 201,233 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,497 | 3,806 | 15,586 | 41,032 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (122,764 | ) | (230,439 | ) | (1,282,056 | ) | (2,459,540 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (77,232 | ) | (207,803 | ) | $ | (805,368 | ) | $ | (2,217,275 | ) | ||||||||||
|
70 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | Year Ended October 31, 2014 | Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||||||||||||
| ||||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 513,914 | 1,013,910 | $ | 5,473,679 | $ | 10,977,539 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 17,717 | 15,279 | 186,880 | 166,616 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (273,750 | ) | (269,728 | ) | (2,917,777 | ) | (2,933,678 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 257,881 | 759,461 | $ | 2,742,782 | $ | 8,210,477 | ||||||||||||||
| ||||||||||||||||||||
Class R | ||||||||||||||||||||
Shares sold | 2,736 | 3,557 | $ | 29,226 | $ | 38,616 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 104 | 255 | 1,105 | 2,783 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (22,219 | ) | (1,811 | ) | (237,039 | ) | (19,578 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (19,379 | ) | 2,001 | $ | (206,708 | ) | $ | 21,821 | ||||||||||||
| ||||||||||||||||||||
Class K | ||||||||||||||||||||
Shares sold | 42,242 | 90,056 | $ | 449,842 | $ | 974,305 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,925 | 2,755 | 20,281 | 29,968 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (95,208 | ) | (70,120 | ) | (1,009,773 | ) | (753,094 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (51,041 | ) | 22,691 | $ | (539,650 | ) | $ | 251,179 | ||||||||||||
| ||||||||||||||||||||
Class I | ||||||||||||||||||||
Shares sold | 28,559 | 60,929 | $ | 302,454 | $ | 660,107 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 688 | 4,646 | 7,241 | 50,358 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (82,025 | ) | (231,495 | ) | (865,824 | ) | (2,489,428 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (52,778 | ) | (165,920 | ) | $ | (556,129 | ) | $ | (1,778,963 | ) | ||||||||||
| ||||||||||||||||||||
Class 1 | ||||||||||||||||||||
Shares sold | 3,177,028 | 8,046,926 | $ | 33,474,332 | $ | 86,492,452 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 276,081 | 421,004 | 2,888,583 | 4,555,895 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (5,915,647 | ) | (10,830,473 | ) | (62,348,456 | ) | (116,610,335 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (2,462,538 | ) | (2,362,543 | ) | $ | (25,985,541 | ) | $ | (25,561,988 | ) | ||||||||||
|
AB BOND INFLATION STRATEGY • | 71 |
Notes to Financial Statements
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | Year Ended October 31, 2014 | Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||||||||||||
| ||||||||||||||||||||
Class 2 | ||||||||||||||||||||
Shares sold | 1,143,181 | 1,144,093 | $ | 12,002,916 | $ | 12,184,729 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 43,283 | 70,568 | 452,514 | 763,421 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (1,654,114 | ) | (1,126,681 | ) | (17,603,900 | ) | (12,084,688 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (467,650 | ) | 87,980 | $ | (5,148,470 | ) | $ | 863,462 | ||||||||||||
| ||||||||||||||||||||
Class Z(a) | ||||||||||||||||||||
Shares sold | 407,576 | – 0 | – | $ | 4,264,298 | $ | – 0 | – | ||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,367 | – 0 | – | 14,242 | – 0 | – | ||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (40,713 | ) | – 0 | – | (427,376 | ) | – 0 | – | ||||||||||||
| ||||||||||||||||||||
Net increase | 368,230 | – 0 | – | $ | 3,851,164 | $ | – 0 | – | ||||||||||||
|
(a) | Commenced distributions on December 11, 2014. |
NOTE F
Risks Involved in Investing in the Strategy
Interest Rate Risk and Credit Risk—Interest rate risk is the risk that changes in interest rates will affect the value of the Strategy’s investments in fixed-income debt securities such as bonds or notes. Increases in interest rates may cause the value of the Strategy’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.
Duration Risk—Duration is the measure that relates the expected price volatility of a fixed-income security to changes in interest rates. The duration of a fixed-income security may be shorter than or equal to full maturity of a fixed-income security. Fixed-income securities with longer durations have more risk and will decrease in price as interest rates rise. For example, a fixed-income security with a duration of three years will decrease in value by approximately 3% if interest rates increase by 1%.
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 real value of the Strategy’s assets can decline as can the real value of the Strategy’s distributions.
72 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
Derivatives Risk—The Fund 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 Fund, 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.
Foreign (Non-U.S.) Risk—Investments 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.
Currency Risk—Fluctuations in currency exchange rates may negatively affect the value of the Strategy’s investments or reduce its returns.
Leverage Risk—When the Fund 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 Fund’s investments. The Fund 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 Fund, such as forwards, futures, options and swaps, may also result in a form of leverage. Leverage may result in higher returns to the Fund than if the Fund were not leveraged, but may also adversely affect returns, particularly if the market is declining.
Liquidity Risk—Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Strategy. Causes of liquidity risk may include low trading volumes, large positions and heavy redemptions of fixed-income mutual fund shares. Over recent years, liquidity risk has also increased because the capacity of dealers in the secondary market for fixed-income securities to make markets in these securities has decreased, even as the overall bond market has grown significantly, due to, among other things, structural changes, additional regulatory requirements and capital and risk restraints that have led to reduced inventories. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
Indemnification Risk—In the ordinary course of business, the Strategy enters into contracts that contain a variety of indemnifications. The Strategy’s maximum exposure under these arrangements is unknown. However, the Strategy has not had prior claims or losses pursuant to these indemnification provisions and expects the risk of loss thereunder to be remote. Therefore, the Strategy has not accrued any liability in connection with these indemnification provisions.
AB BOND INFLATION STRATEGY • | 73 |
Notes to Financial Statements
NOTE G
Joint Credit Facility
A number of open-end mutual funds managed by the Adviser, including the Strategy, participate in a $280 million revolving credit facility (the “Facility”) intended to provide short-term financing, if necessary, subject to certain restrictions in connection with abnormal redemption activity. Commitment fees related to the Facility are paid by the participating funds and are included in miscellaneous expenses in the statement of operations. The Strategy did not utilize the Facility during the year ended October 31, 2015.
NOTE H
Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended October 31, 2015 and October 31, 2014 were as follows:
2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 4,629,168 | $ | 7,646,805 | ||||
|
|
|
| |||||
Total taxable distributions paid | $ | 4,629,168 | $ | 7,646,805 | ||||
|
|
|
|
As of October 31, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 2,563,654 | ||
Accumulated capital and other losses | (10,535,991 | )(a) | ||
Unrealized appreciation/(depreciation) | (10,834,598 | )(b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | (18,806,935 | )(c) | |
|
|
(a) | At October 31, 2015, the Strategy had a net capital loss carryforward of $10,535,991. |
(b) | The differences between book-basis and tax-basis unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses on wash sales, the tax treatment of swaps and passive foreign investment companies (PFICs), the realization for tax purposes of gains/losses on certain derivative instruments, and the tax treatment of Treasury inflation-protected securities. |
(c) | The difference between book-basis and tax-basis components of accumulated earnings/ (deficit) is attributable primarily to the tax treatment of defaulted securities. |
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 October 31, 2015, the Strategy had a net short-term capital loss carryforward of $2,747,614 and a net long-term capital loss carryforward of $7,788,377, which may be carried forward for an indefinite period.
During the current fiscal year, permanent differences primarily due to the tax treatment of swaps and swap clearing fees, reclassifications of foreign currency
74 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
and paydown gains/losses, and the tax treatment of Treasury inflation-protected securities resulted in a net increase in undistributed net investment income and a net increase in accumulated net realized loss on investment and foreign currency transactions. These reclassifications had no effect on net assets.
NOTE I
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 J
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 Strategy’s financial statements through this date.
AB BOND INFLATION STRATEGY • | 75 |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.77 | $ 10.81 | $ 11.36 | $ 10.81 | $ 10.53 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .08 | .17 | .09 | .13 | .38 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.31 | ) | (.04 | ) | (.57 | ) | .56 | .21 | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.23 | ) | .13 | (.48 | ) | .69 | .59 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.10 | ) | (.17 | ) | (.07 | ) | (.14 | ) | (.31 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.10 | ) | (.17 | ) | (.07 | ) | (.14 | ) | (.31 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.44 | $ 10.77 | $ 10.81 | $ 11.36 | $ 10.81 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (2.18 | )% | 1.16 | % | (4.23 | )% | 6.41 | % | 5.75 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $13,660 | $15,860 | $23,358 | $17,627 | $9,732 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .88 | % | .81 | % | .80 | % | .81 | % | .78 | % | ||||||||||
Expenses, before waivers/reimbursements(e) | 1.36 | % | 1.15 | % | 1.18 | % | 1.25 | % | 1.87 | % | ||||||||||
Net investment income(b) | .75 | % | 1.57 | % | .80 | % | 1.20 | % | 3.59 | % | ||||||||||
Portfolio turnover rate** | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on page 84.
76 | • AB BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.64 | $ 10.71 | $ 11.28 | $ 10.78 | $ 10.50 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .00 | (c) | .07 | .00 | (c) | .04 | .30 | |||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.31 | ) | (.01 | ) | (.56 | ) | .56 | .22 | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.31 | ) | .06 | (.56 | ) | .60 | .52 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.06 | ) | (.13 | ) | (.01 | ) | (.10 | ) | (.24 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.06 | ) | (.13 | ) | (.01 | ) | (.10 | ) | (.24 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.27 | $ 10.64 | $ 10.71 | $ 11.28 | $ 10.78 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (2.93 | )% | .50 | % | (4.98 | )% | 5.61 | % | 5.03 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $2,679 | $3,596 | $5,845 | $7,991 | $6,782 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | 1.58 | % | 1.51 | % | 1.51 | % | 1.51 | % | 1.49 | % | ||||||||||
Expenses, before waivers/reimbursements(e) | 2.07 | % | 1.86 | % | 1.86 | % | 1.96 | % | 2.84 | % | ||||||||||
Net investment income(b) | .06 | % | .70 | % | .01 | % | .39 | % | 2.82 | % | ||||||||||
Portfolio turnover rate** | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on page 84.
AB BOND INFLATION STRATEGY • | 77 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.79 | $ 10.82 | $ 11.39 | $ 10.83 | $ 10.55 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .13 | .19 | .06 | .16 | .39 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.33 | ) | (.03 | ) | (.52 | ) | .56 | .24 | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.20 | ) | .16 | (.46 | ) | .72 | .63 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.13 | ) | (.19 | ) | (.11 | ) | (.16 | ) | (.35 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.13 | ) | (.19 | ) | (.11 | ) | (.16 | ) | (.35 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.46 | $ 10.79 | $ 10.82 | $ 11.39 | $ 10.83 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (1.90 | )% | 1.50 | % | (4.06 | )% | 6.69 | % | 6.07 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $18,343 | $16,144 | $7,969 | $5,499 | $2,325 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .58 | % | .52 | % | .51 | % | .51 | % | .49 | % | ||||||||||
Expenses, before waivers/reimbursements(e) | 1.06 | % | .86 | % | .87 | % | .95 | % | 1.80 | % | ||||||||||
Net investment income(b) | 1.23 | % | 1.77 | % | .54 | % | 1.52 | % | 3.70 | % | ||||||||||
Portfolio turnover rate** | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on page 84.
78 | • AB BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class R | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.78 | $ 10.81 | $ 11.34 | $ 10.79 | $ 10.50 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income (loss)(a)(b) | (.08 | ) | .14 | .06 | .11 | .43 | ||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.19 | ) | (.02 | ) | (.57 | ) | .55 | .15 | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.27 | ) | .12 | (.51 | ) | .66 | .58 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.07 | ) | (.15 | ) | (.02 | ) | (.11 | ) | (.29 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.07 | ) | (.15 | ) | (.02 | ) | (.11 | ) | (.29 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.44 | $ 10.78 | $ 10.81 | $ 11.34 | $ 10.79 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (2.49 | )% | 1.10 | % | (4.51 | )% | 6.18 | % | 5.59 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $20 | $230 | $209 | $539 | $488 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | 1.06 | % | 1.01 | % | 1.01 | % | 1.01 | % | .98 | % | ||||||||||
Expenses, before waivers/reimbursements(e) | 1.50 | % | 1.40 | % | 1.44 | % | 1.60 | % | 2.16 | % | ||||||||||
Net investment income (loss)(b) | (.68 | )% | 1.26 | % | .49 | % | .98 | % | 4.16 | % | ||||||||||
Portfolio turnover rate** | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on page 84.
AB BOND INFLATION STRATEGY • | 79 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class K | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.77 | $ 10.80 | $ 11.35 | $ 10.79 | $ 10.50 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .07 | .17 | .09 | .13 | .28 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.31 | ) | (.03 | ) | (.57 | ) | .57 | .31 | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.24 | ) | .14 | (.48 | ) | .70 | .59 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.11 | ) | (.17 | ) | (.07 | ) | (.14 | ) | (.30 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.11 | ) | (.17 | ) | (.07 | ) | (.14 | ) | (.30 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.42 | $ 10.77 | $ 10.80 | $ 11.35 | $ 10.79 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (2.24 | )% | 1.31 | % | (4.26 | )% | 6.51 | % | 5.75 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $1,616 | $2,219 | $1,981 | $2,007 | $566 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .83 | % | .76 | % | .76 | % | .77 | % | .75 | % | ||||||||||
Expenses, before waivers/reimbursements(e) | 1.17 | % | 1.07 | % | 1.12 | % | 1.27 | % | 2.39 | % | ||||||||||
Net investment income(b) | .70 | % | 1.57 | % | .80 | % | 1.19 | % | 2.76 | % | ||||||||||
Portfolio turnover rate** | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on page 84.
80 | • AB BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class I | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.73 | $ 10.77 | $ 11.33 | $ 10.78 | $ 10.51 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income (loss)(a)(b) | (.06 | ) | .22 | .10 | .18 | .27 | ||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.14 | ) | (.06 | ) | (.55 | ) | .53 | .36 | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.20 | ) | .16 | (.45 | ) | .71 | .63 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.15 | ) | (.20 | ) | (.11 | ) | (.16 | ) | (.36 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.15 | ) | (.20 | ) | (.11 | ) | (.16 | ) | (.36 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.38 | $ 10.73 | $ 10.77 | $ 11.33 | $ 10.78 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (1.88 | )% | 1.52 | % | (4.00 | )% | 6.65 | % | 6.11 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $265 | $841 | $2,631 | $267 | $76 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .57 | % | .51 | % | .50 | % | .52 | % | .50 | % | ||||||||||
Expenses, before waivers/reimbursements(e) | .76 | % | .69 | % | .83 | % | .95 | % | 1.91 | % | ||||||||||
Net investment income (loss)(b) | (.50 | )% | 2.06 | % | 1.10 | % | 1.54 | % | 3.67 | % | ||||||||||
Portfolio turnover rate** | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on page 84.
AB BOND INFLATION STRATEGY • | 81 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class 1 | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.71 | $ 10.76 | $ 11.33 | $ 10.78 | $ 10.51 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .10 | .19 | .12 | .16 | .34 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.32 | ) | (.04 | ) | (.58 | ) | .55 | .28 | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.22 | ) | .15 | (.46 | ) | .71 | .62 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.14 | ) | (.20 | ) | (.11 | ) | (.16 | ) | (.35 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.14 | ) | (.20 | ) | (.11 | ) | (.16 | ) | (.35 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.35 | $ 10.71 | $ 10.76 | $ 11.33 | $ 10.78 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (2.04 | )% | 1.38 | % | (4.08 | )% | 6.63 | % | 6.01 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $253,402 | $288,565 | $315,187 | $193,864 | $105,201 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .68 | % | .61 | % | .60 | % | .61 | % | .58 | % | ||||||||||
Expenses, before waivers/reimbursements(e) | .87 | % | .77 | % | .81 | % | .96 | % | 1.20 | % | ||||||||||
Net investment income(b) | .98 | % | 1.75 | % | 1.05 | % | 1.41 | % | 3.24 | % | ||||||||||
Portfolio turnover rate** | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on page 84.
82 | • AB BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class 2 | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.71 | $ 10.75 | $ 11.33 | $ 10.77 | $ 10.51 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .11 | .20 | .12 | .14 | .39 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.32 | ) | (.03 | ) | (.58 | ) | .59 | .23 | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.21 | ) | .17 | (.46 | ) | .73 | .62 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.15 | ) | (.21 | ) | (.12 | ) | (.17 | ) | (.36 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.15 | ) | (.21 | ) | (.12 | ) | (.17 | ) | (.36 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.35 | $ 10.71 | $ 10.75 | $ 11.33 | $ 10.77 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (1.95 | )% | 1.55 | % | (4.06 | )% | 6.80 | % | 6.01 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $40,897 | $47,314 | $46,554 | $47,200 | $16,550 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .58 | % | .51 | % | .51 | % | .51 | % | .49 | % | ||||||||||
Expenses, before waivers/reimbursements(e) | .77 | % | .67 | % | .71 | % | .86 | % | 1.84 | % | ||||||||||
Net investment income(b) | 1.09 | % | 1.87 | % | 1.05 | % | 1.36 | % | 3.73 | % | ||||||||||
Portfolio turnover rate**. | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on page 84.
AB BOND INFLATION STRATEGY • | 83 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class Z | ||||
December 11, 2014(f) to October 31, | ||||
|
| |||
Net asset value, beginning of period | $ 10.62 | |||
|
| |||
Income From Investment Operations | ||||
Net investment income(a)(b) | .19 | |||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.28 | ) | ||
|
| |||
Net increase (decrease) in net asset value from operations | (.09 | ) | ||
|
| |||
Less: Dividends | ||||
Dividends from net investment income | (.15 | ) | ||
|
| |||
Net asset value, end of period | $ 10.38 | |||
|
| |||
Total Return | ||||
Total investment return based on net asset value(d) | (.86 | )% | ||
Ratios/Supplemental Data | ||||
Net assets, end of period (000’s omitted) | $3,821 | |||
Ratio to average net assets of: | ||||
Expenses, net of waivers/reimbursements(e) | .61 | %^ | ||
Expenses, before waivers/reimbursements(e) | .84 | %^ | ||
Net investment income(b) | 2.09 | %^ | ||
Portfolio turnover rate** | 51 | % |
(a) | Based on average shares outstanding. |
(b) | Net of fees and expenses waived/reimbursed by the Adviser. |
(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. Initial sales charges or contingent deferred sales charges are not reflected in the calculation of total investment return. 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 presented below exclude interest expense |
84 | • AB BOND INFLATION STRATEGY |
Financial Highlights
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Net of waivers/reimbursements | .80 | % | .79 | % | .75 | % | .75 | % | .75 | % | ||||||||||
Before waivers/reimbursements | 1.28 | % | 1.13 | % | 1.12 | % | 1.18 | % | 1.83 | % | ||||||||||
Class C | ||||||||||||||||||||
Net of waivers/reimbursements | 1.50 | % | 1.48 | % | 1.45 | % | 1.45 | % | 1.45 | % | ||||||||||
Before waivers/reimbursements | 1.99 | % | 1.84 | % | 1.81 | % | 1.90 | % | 2.80 | % | ||||||||||
Advisor Class | ||||||||||||||||||||
Net of waivers/reimbursements | .50 | % | .49 | % | .45 | % | .45 | % | .45 | % | ||||||||||
Before waivers/reimbursements | .98 | % | .84 | % | .82 | % | .89 | % | 1.76 | % | ||||||||||
Class R | ||||||||||||||||||||
Net of waivers/reimbursements | 1.00 | % | .99 | % | .95 | % | .95 | % | .95 | % | ||||||||||
Before waivers/reimbursements | 1.44 | % | 1.38 | % | 1.39 | % | 1.54 | % | 2.13 | % | ||||||||||
Class K | ||||||||||||||||||||
Net of waivers/reimbursements | .75 | % | .74 | % | .70 | % | .70 | % | .70 | % | ||||||||||
Before waivers/reimbursements | 1.09 | % | 1.05 | % | 1.06 | % | 1.21 | % | 2.34 | % | ||||||||||
Class I | ||||||||||||||||||||
Net of waivers/reimbursements | .50 | % | .49 | % | .45 | % | .45 | % | .45 | % | ||||||||||
Before waivers/reimbursements | .69 | % | .67 | % | .78 | % | .89 | % | 1.86 | % | ||||||||||
Class 1 | ||||||||||||||||||||
Net of waivers/reimbursements | .60 | % | .59 | % | .55 | % | .55 | % | .55 | % | ||||||||||
Before waivers/reimbursements | .79 | % | .74 | % | .76 | % | .89 | % | 1.18 | % | ||||||||||
Class 2 | ||||||||||||||||||||
Net of waivers/reimbursements | .50 | % | .49 | % | .45 | % | .45 | % | .45 | % | ||||||||||
Before waivers/reimbursements | .69 | % | .64 | % | .66 | % | .80 | % | 1.80 | % | ||||||||||
Class Z(g) | ||||||||||||||||||||
Net of waivers/reimbursements | .50 | %^ | ||||||||||||||||||
Before waivers/reimbursements | .73 | %^ |
(f) | Commencement of distributions. |
(g) | Commenced distribution on December 11, 2014. |
^ | Annualized. |
** | The Strategy accounts for dollar roll transactions as purchases and sales. |
See notes to financial statements.
AB BOND INFLATION STRATEGY • | 85 |
Financial Highlights
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of AB Bond Inflation Strategy Portfolio
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of AB Bond Inflation Strategy Portfolio (the “Fund”) (formerly AllianceBernstein Bond Inflation Strategy Portfolio), one of the portfolios constituting the AB Bond Fund, Inc. (formerly AllianceBernstein Bond Fund, Inc.) as of October 31, 2015, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended (including the period December 11, 2014 (commencement of distribution) to October 31, 2015 for Class Z shares). These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2015, by correspondence with the custodian and others, or by other appropriate auditing procedures where replies from others were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AB Bond Inflation Strategy Portfolio, one of the portfolios constituting the AB Bond Fund, Inc., at October 31, 2015, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended (including the period December 11, 2014 (commencement of distribution) to October 31, 2015 for Class Z shares), in conformity with U.S. generally accepted accounting principles.
New York, New York
December 30, 2015
86 | • AB BOND INFLATION STRATEGY |
Report of Independent Registered Public Accounting Firm
2015 FEDERAL TAX INFORMATION
(unaudited)
For Federal income tax purposes, the following information is furnished with respect to the distributions paid by the Strategy during the taxable year ended October 31, 2015.
For foreign shareholders, 64.25% of ordinary income dividends paid may be considered to be qualifying to be taxed as interest-related dividends.
Shareholders should not use the above information to prepare their income tax returns. The information necessary to complete your income tax returns will be included with your Form 1099-DIV which will be sent to you separately in January 2016.
AB BOND INFLATION STRATEGY • | 87 |
BOARD OF DIRECTORS
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 Paul J. DeNoon(2) , Vice President Rajen B. Jadav(2), Vice President Shawn E. Keegan(2), Vice President Douglas J. Peebles(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 State Street Corporation CCB/5 1 Iron Street Boston, MA 02210
Principal Underwriter AllianceBernstein Investments, Inc. 1345 Avenue of the Americas New York, NY 10105
Transfer Agent AllianceBernstein Investor Services, Inc. P.O. Box 786003 San Antonio, TX 78278-6003 Toll-Free (800) 221-5672 | Independent Registered Public Ernst & Young LLP 5 Times Square New York, NY 10036
Legal Counsel Seward & Kissel LLP One Battery Park Plaza New York, NY 10004 |
(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 Strategy’s portfolio are made by the Adviser’s U.S. Core Fixed-Income Team. Mr. Paul J. DeNoon, Mr. Rajen B. Jadav, Mr. Shawn E. Keegan, Mr. Douglas J. Peebles and Mr. Greg J. Wilensky are the investment professionals with the most significant responsibility for the day-to-day management of the Strategy’s portfolio. |
88 | • AB BOND INFLATION STRATEGY |
Board of Directors
MANAGEMENT OF THE FUND
Board of Directors Information
The business and affairs of the Strategy are managed under the direction of the Board of Directors. Certain information concerning the Strategy’s Directors is set forth below.
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD BY DIRECTOR | |||||
INTERESTED DIRECTOR | ||||||||
Robert M. Keith, + 1345 Avenue of the Americas New York, NY 10105 55 (2010) | Senior Vice President of AllianceBernstein L.P. (the “Adviser”) and the head of AllianceBernstein Investments, Inc. (“ABI”) since July 2008; Director of ABI and President of the AB Mutual Funds. Previously, he served as Executive Managing Director of ABI from December 2006 to June 2008. Prior to joining ABI in 2006, Executive Managing Director of Bernstein Global Wealth Management, and prior thereto, Senior Managing Director and Global Head of Client Service and Sales of the Adviser’s institutional investment management business since 2004. Prior thereto, he was Managing Director and Head of North American Client Service and Sales in the Adviser’s institutional investment management business, with which he had been associated since prior to 2004. | 110 | None | |||||
AB BOND INFLATION STRATEGY • | 89 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD BY DIRECTOR | |||||
DISINTERESTED DIRECTORS | ||||||||
Marshall C. Turner, Jr., ++ Chairman of the Board 74 (2005) | Private Investor since prior to 2010. Former Chairman and CEO of Dupont Photomasks, Inc. (components of semi-conductor manufacturing). He has extensive operating leadership and venture capital investment experience, including five interim or full-time CEO roles and prior service as general partner of institutional venture capital partnerships. He also has extensive non-profit board leadership, and currently serves on the boards of two education and science-related non-profit organizations. He has served as a director of one AB fund since 1992, and director or trustee of multiple AB funds since 2005. He has been Chairman of the AB Funds since January 2014, and the Chairman of the Independent Directors Committees of such Funds since February 2014. | 110 | Xilinx, Inc. (programmable logic semi-conductors) since 2007 | |||||
John H. Dobkin, ++ 73 (1998) | Independent Consultant since prior to 2010. Formerly, President of Save Venice, Inc. (preservation organization) from 2001-2002; Senior Advisor from June 1999-June 2000 and President of Historic Hudson Valley (historic preservation) from December 1989-May 1999. Previously, Director of the National Academy of Design. He has served as a director or trustee of various AB Funds since 1992, and as Chairman of the Audit Committees of a number of such Funds from 2001-2008. | 110 | None |
90 | • AB BOND INFLATION STRATEGY |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD BY DIRECTOR | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Michael J. Downey, ++ 71 (2005) | Private Investor since prior to 2010. Formerly, managing partner of Lexington Capital, LLC (investment advisory firm) from December 1997 until December 2003. He served as a Director of The Merger Fund (registered investment company) since prior to 2010 until 2013. He served as a Director of Prospect Acquisition Corp. (financial services) from 2007 until 2009. From 1987 until 1993, Chairman and CEO of Prudential Mutual Fund Management, director of the Prudential mutual funds, and member of the Executive Committee of Prudential Securities Inc. He has served as a director or trustee of the AB Funds since 2005 and is a director and Chairman of one other registered investment company. | 110 | Asia Pacific Fund, Inc. (registered investment company) since prior to 2010 | |||||
William H. Foulk, Jr., ++ 83 (1998) | Investment Adviser and an Independent Consultant since prior to 2010. Previously, he was Senior Manager of Barrett Associates, Inc., a registered investment adviser. He was formerly Deputy Comptroller and Chief Investment Officer of the State of New York and, prior thereto, Chief Investment Officer of the New York Bank for Savings. He has served as a director or trustee of various AB Funds since 1983, and was Chairman of the Independent Directors Committees of the AB Funds from 2003 until early February 2014. He served as Chairman of such Funds from 2003 through December 2013. He is also active in a number of mutual fund related organizations and committees. | 110 | None |
AB BOND INFLATION STRATEGY • | 91 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD BY DIRECTOR | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
D. James Guzy, ++ 79 (2005) | Chairman of the Board of SRC Computers, Inc. (semi-conductors), with which he has been associated since prior to 2010. He served as Chairman of the Board of PLX Technology (semi-conductors) since prior to 2010 until November 2013. He was a Director of Cirrus Logic Corporation (semi-conductors) from 1984 until July 2011. He was a director of Intel Corporation (semi-conductors) from 1969 until 2008, and served as Chairman of the Finance Committee of such company for several years until May 2008. He has served as a director or trustee of one or more of the AB Funds since 1982. | 110 | None | |||||
Nancy P. Jacklin, ++ 67 (2006) | Professorial Lecturer at the Johns Hopkins School of Advanced International Studies (2008-2015). U.S. Executive Director of the International Monetary Fund (which is responsible for ensuring the stability of the international monetary system), (December 2002-May 2006); Partner, Clifford Chance (1992-2002); Sector Counsel, International Banking and Finance, and Associate General Counsel, Citicorp (1985-1992); Assistant General Counsel (International), Federal Reserve Board of Governors (1982-1985); and Attorney Advisor, U.S. Department of the Treasury (1973-1982). Member of the Bar of the District of Columbia and of New York; and member of the Council on Foreign Relations. She has served as a director or trustee of the AB Funds since 2006 and has been Chairman of the Governance and Nominating Committees of the Funds since August 2014. | 110 | None |
92 | • AB BOND INFLATION STRATEGY |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD BY DIRECTOR | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Garry L. Moody, ++ 63 (2008) | Independent Consultant. Formerly, Partner, Deloitte & Touche LLP (1995-2008) where he held a number of senior positions, including Vice Chairman, and U.S. and Global Investment Management Practice Managing Partner; President, Fidelity Accounting and Custody Services Company (1993-1995); and Partner, Ernst & Young LLP (1975-1993), where he served as the National Director of Mutual Fund Tax Services and Managing Partner of its Chicago Office Tax department. He is a member of the Trustee Advisory Board of BoardIQ, a biweekly publication focused on issues and news affecting directors of mutual funds. He has served as a director or trustee, and as Chairman of the Audit Committees, of the AB Funds since 2008. | 110 | None | |||||
Earl D. Weiner, ++ 76 (2007) | Of Counsel, and Partner prior to January 2007, of the law firm Sullivan & Cromwell LLP and is a former member of the ABA Federal Regulation of Securities Committee Task Force to draft editions of the Fund Director’s Guidebook. He also serves as a director or trustee of various non-profit organizations and has served as Chairman or Vice Chairman of a number of them. He has served as a director or trustee of the AB Funds since 2007 and served as Chairman of the Governance and Nominating Committees of the AB Funds from 2007 until August 2014. | 110 | None |
AB BOND INFLATION STRATEGY • | 93 |
Management of the Fund
* | The address for each of the Strategy’s disinterested Directors is c/o AllianceBernstein L.P., Attention: Philip L. Kirstein, 1345 Avenue of the Americas, New York, NY 10105. |
** | There is no stated term of office for the Strategy’s Directors. |
*** | The information above includes each Director’s principal occupation during the last five years and other information relating to the experience, attributes and skills relevant to each Director’s qualifications to serve as a Director, which led to the conclusion that each Director should serve as a Director for the Strategy. |
+ | Mr. Keith is an “interested person” of the Strategy as defined in the “40 Act”, due to his position as a Senior Vice President of the Adviser. |
++ | Member of the Audit Committee, the Governance and Nominating Committee and the Independent Directors Committee. |
94 | • AB BOND INFLATION STRATEGY |
Management of the Fund
Officer Information
Certain information concerning the Strategy’s Officers is listed below.
NAME, ADDRESS* AND AGE | PRINCIPAL HELD WITH FUND | PRINCIPAL OCCUPATION DURING PAST 5 YEARS | ||
Robert M. Keith 55 | President and Chief Executive Officer | See biography above. | ||
Philip L. Kirstein 70 | Senior Vice President and Independent Compliance Officer | Senior Vice President and Independent Compliance Officer of the AB Funds, with which he has been associated since October 2004. Prior thereto, he was Of Counsel to Kirkpatrick & Lockhart, LLP from October 2003 to October 2004, and General Counsel of Merrill Lynch Investment Managers, L.P. since prior to March 2003. | ||
Paul J. DeNoon 53 | Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Rajen B. Jadav 40 | Vice President | Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Shawn E. Keegan 44 | Vice President | Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Douglas J. Peebles 50 | Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Greg J. Wilensky 48 | Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Emilie D. Wrapp 59 | Secretary | Senior Vice President, Assistant General Counsel and Assistant Secretary of ABI,** with which she has been associated since prior to 2010. | ||
Joseph J. Mantineo 56 | Treasurer and Chief Financial Officer | Senior Vice President of AllianceBernstein Investor Services, Inc. (“ABIS”),** with which he has been associated since prior to 2010. | ||
Phyllis J. Clarke 54 | Controller | Vice President of ABIS,** with which she has been associated since prior to 2010. | ||
Vincent S. Noto 50 | Chief Compliance Officer | Senior Vice President since 2015 and Mutual Fund Chief Compliance Officer of the Adviser** since 2014. Prior thereto, he was Vice President and Director of Mutual Fund Compliance of the Adviser** since prior to 2010. |
* | The address for each of the Fund’s Officers is 1345 Avenue of the Americas, New York, NY 10105. |
** | The Adviser, ABI and ABIS are affiliates of the Strategy. |
The Fund’s Statement of Additional Information (“SAI”) has additional information about the Strategy’s Directors and Officers and is available without charge upon request. Contact your financial representative or AB at 1-800-227-4618, or visit www.ABglobal.com, for a free prospectus or SAI. |
AB BOND INFLATION STRATEGY • | 95 |
Management of the Fund
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 Bond Fund, Inc. (the “Fund”) in respect of AB Bond Inflation Strategy (the “Strategy”).2 The evaluation of the Investment Advisory Agreement was prepared by Philip L. Kirstein, the Senior Officer of the Fund, for the Directors of the Fund, 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 Directors of the Fund to perform its duties pursuant to Section 15 of the Investment Company Act of 1940 (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 Strategy which was provided to the Directors 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 Strategy grows larger; and |
6. | Nature and quality of the Adviser’s services including the performance of the Strategy. |
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 fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the
1 | The Senior Officer’s fee evaluation was completed on October 22, 2015 and discussed with the Board of Directors on November 3-5, 2015. |
2 | Future references to the Fund or the Strategy do not include “AB.” |
96 | • AB BOND INFLATION STRATEGY |
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
INVESTMENT ADVISORY FEES, NET ASSETS, EXPENSE CAPS & RATIOS
The Adviser proposed that the Strategy pay the advisory fee set forth in the table below for receiving the services to be provided pursuant to the Investment Advisory Agreement. The fee schedule below, implemented in January 2004 in connection with the Adviser’s settlement with the NYAG in December 2003, is based on a master schedule that contemplates eight categories of funds with almost all funds in each category having the same advisory fee schedule.4
Strategy | Category | Net Assets 9/30/15 ($MM) | Advisory Fee Based on % of Average Daily Net Assets | |||||
Bond Inflation Strategy | High Income | $ | 339.5 | 0.50% on 1st $2.5 billion 0.45% on next $2.5 billion 0.40% on the balance |
The Adviser is reimbursed as specified in the Investment Advisory Agreement for certain clerical, legal, accounting, administrative and other services provided to the Strategy. During the Strategy’s fiscal year ended October 31, 2014, the Adviser received $51,054 (0.012% of the Strategy’s average daily net assets) for providing such services.
The Adviser agreed to waive that portion of its advisory fees and/or reimburse the Strategy for that portion of the Strategy’s total operating expenses to the degree necessary to limit the Strategy’s expense ratios to the amounts set forth below for the Strategy’s current fiscal year. The waiver is terminable by the Adviser upon at least 60 days’ notice prior to the Strategy’s prospectus update. In addition, set forth below are the Strategy’s gross expense ratios for the most recent semi-annual period:5
3 | Jones v. Harris at 1427. |
4 | Most of the AB Mutual Funds, which the Adviser manages, were affected by the Adviser’s settlement with the NYAG. |
5 | Semi-annual total expense ratios are unaudited. |
AB BOND INFLATION STRATEGY • | 97 |
Expense Cap Pursuant to Expense Limitation Undertaking6 | Gross Expense Ratio7 | Fiscal Year End | ||||||||||||||
Strategy | Current | Effective 02/01/16 | ||||||||||||||
Bond Inflation Strategy8,9 | Advisor Class A Class C Class R Class K Class I Class Z10 Class 1 Class 2 |
| 0.50 0.80 1.50 1.00 0.75 0.50 0.50 0.60 0.50 | % % % % % % % % % |
| 0.50 0.75 1.50 1.00 0.75 0.50 0.50 0.60 0.50 | % % % % % % % % % |
| 0.96 1.26 1.97 1.45 1.08 0.68 0.80 0.80 0.70 | % % % % % % % % % | Oct. 31 (ratios as of Apr. 30, 2015) |
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 Strategy 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 Strategy’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 Strategy are more costly than those for institutional client assets due to the greater complexities and time required for investment companies, although as previously noted, the Adviser is reimbursed for providing such services. Also, retail mutual funds managed by the Adviser are widely held and accordingly, servicing the Strategy’s investors is more time consuming and labor intensive compared to servicing institutional clients since the Adviser needs to communicate with a more extensive network of financial intermediaries and shareholders. 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
6 | The expense cap pursuant to the expense limitation undertaking for the Strategy excludes interest expense. |
7 | Annualized. |
8 | The Rule 12b-1 fee for Class A shares will bill reduced from 0.30% to 0.25%, effective on February 1, 2016. The expense cap for Class A shares will be reduced from 0.80% to 0.75%. |
9 | The Strategy’s expense ratios exclude interest expense of 0.06% for Advisor Class, Class A, Class C, Class R, Class K, Class I, Class 1, and Class 2 shares, and 0.07% for Class Z shares. |
10 | Class Z shares commenced on December 11, 2014. |
98 | • AB BOND INFLATION STRATEGY |
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 Strategy 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 Strategy.11 In addition to the AB Institutional fee schedule, set forth below is what would have been the effective advisory fee for the Strategy had the AB Institutional fee schedule been applicable to the Strategy versus the Strategy’s advisory fees based on September 30, 2015 net assets.12
Strategy | Net Assets 09/30/15 ($MM) | AB Institutional Fee Schedule | Effective AB Inst. Adv. Fee | Strategy Advisory Fee | ||||||||||
Bond Inflation Strategy | $339.5 | TIPS Plus 0.50% on 1st $30 million 0.20% on the balance Minimum account size: $25m | 0.227% | 0.500% |
The Adviser provides sub-advisory investment services to certain other investment companies managed by another fund family that have a somewhat similar investment style as the Strategy. Set forth below are the advisory fee schedules of such sub-advisory relationships, their effective fees and the Strategy’s advisory fees based on the Strategy’s assets as of September 30, 2015:13
11 | 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. |
12 | 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. |
13 | 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. |
AB BOND INFLATION STRATEGY • | 99 |
Strategy | Sub-advised Fund | Sub-advised Fund Fee Schedule | Sub-Advised Management Fund Effective Fee (%) | Fund Advisory Fee(%) | ||||||
Bond Inflation Strategy14 | Client #1 | AB Sub-Advisory Fee Schedule: 0.15% of average daily net assets | 0.150% (Fee to AB) | 0.500% |
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 Strategy by the Adviser.
While it appears that the sub-advisory relationship is paying a lower fee than the Strategy, it is difficult to evaluate the relevance of such fees due to the differences in the services provided, risks involved, and other competitive factors between the Strategy 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 Strategy with fees charged to other investment companies for similar services offered by other investment advisers.15, 16 Broadridge’s analysis included the comparison of the Strategy’s contractual management fee, estimated at the approximate current
14 | It should be noted that the advisory fee paid by the shareholders of the sub-advisory relationship is higher than the fee charged to the Strategy. |
15 | On June 5, 2015, Broadridge acquired the Fiduciary Services and Competitive Intelligence unit, i.e., the group responsible for providing the Strategy’s 15(c) reports, from Thomson Reuters’ Lipper division. The group that maintains Lipper’s expense and performance databases and investment classifications/objectives remains a part of Thomson Reuters’ Lipper division. Accordingly, the Strategy’s investment classification/objective continued to be determined by Lipper. |
16 | Broadridge does not consider average account size when constructing EGs. Funds with relatively small average account sizes tend to have higher transfer agent expense rations than comparable sized funds that have relatively large average account sizes. There are limitations to Lipper expense category data because different funds categorize expenses differently. |
100 | • AB BOND INFLATION STRATEGY |
asset level of the Strategy, to the median of the Strategy’s Broadridge Expense Group (“EG”) and the Strategy’s contractual management fee ranking.17
Broadridge describes an EG as a representative sample of comparable funds. Broadridge’s standard methodology for screening funds to be included in an EG entails the consideration of several fund criteria, including fund type, Lipper investment classification/objective, load type, similar 12b-1/non-12b-1 service fees, asset (size) comparability, expense components and attributes. An EG will typically consist of seven to twenty funds.
Strategy | Contractual Management Fee (%) | Broadridge EG Median (%) | Broadridge EG Rank | |||||||||
Bond Inflation Strategy | 0.500 | 0.416 | 9/12 |
Broadridge also compared the Strategy’s total expense ratio to the medians of the Strategy’s EG and Broadridge Expense Universe (“EU”). The EU is a broader group compared to the EG, consisting of all funds that have the same Lipper investment classification/objective and load type as the subject Strategy.18 Pro-forma total expense ratio (italicized) is shown to reflect the Strategy’s anticipated 12b-1 fee reduction.
Strategy | Total Expense Ratio (%)19 | Broadridge Median (%) | Broadridge Rank | Broadridge Median (%) | Broadridge Rank | |||||||||||||||
Bond Inflation Strategy | 0.790 | 0.813 | 6/12 | 0.813 | 9/22 | |||||||||||||||
Pro-forma | 0.740 | 0.813 | 4/12 | 0.813 | 4/22 |
Based on this analysis, considering pro-forma information where available, the Strategy has a more favorable ranking on a total expense ratio basis than on a management fee basis.
17 | The contractual management fee is calculated by Broadridge using the Strategy’s contractual management fee rate at the hypothetical asset level. The hypothetical asset level is based on the combined net assets of all classes of the Strategy, rounded up to the next $25 million. Broadridge’s total expense ratio information is based on the most recent annual report except as otherwise noted. A ranking of “1” would mean that Strategy had the lowest fee rate in the Broadridge peer group. |
18 | Except for asset (size) comparability, Broadridge uses the same criteria for selecting an EG when selecting an EU. Unlike the EG, the EU allows for the same adviser to be represented by more than just one fund. |
19 | Most recently completed fiscal year Class A share total expense ratio. The total expense ratio information provided by Broadridge was estimated by Lipper, and there may be a slight difference compared to the Adviser’s total expense ratio due to rounding. |
AB BOND INFLATION STRATEGY • | 101 |
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 Strategy. The Senior Officer has retained an independent 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 Strategy, prepared by the Adviser for the Board of Directors, was reviewed by the Senior Officer and the independent consultant. The Adviser’s profitability from providing investment advisory services to the Strategy increased during calendar year 2014, relative to 2013.
In addition to the Adviser’s direct profits from managing the Strategy, certain of the Adviser’s affiliates have business relationships with the Strategy and may earn a profit from providing other services to the Strategy. The courts have referred to this type of business opportunity as “fall-out benefits” to the Adviser and indicated that such benefits should be factored into the evaluation of the total relationship between the Strategy 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. These affiliates provide transfer agent and distribution related services to the Strategy and receive transfer agent fees, front-end sales loads, Rule 12b-1 payments and contingent deferred sales charges (“CDSC”). During the Strategy’s most recently completed fiscal year, ABI received from the Strategy $601, $438,801 and $319 in front-end sales charges, Rule 12b-1 and CDSC fees, respectively.20
AllianceBernstein Investments, Inc. (“ABI”), an affiliate of the Adviser, is the Strategy’s principal underwriter. ABI and the Adviser have disclosed in the Strategy’s prospectus that they may make revenue sharing payments from their own resources, in addition to revenues derived from sales loads and Rule 12b-1 fees, to firms that sell shares of the Strategy. In 2014, ABI paid approximately 0.05% of the average monthly assets of the AB Mutual Funds or approximately $20.4 million for distribution services and educational support (revenue sharing payments).
20 | As a result of discussions between the Board and the Adviser, ABI will reduce the Strategy’s Class A distribution service fee payment rate from 0.30% to 0.25% effective on February 1, 2016. |
102 | • AB BOND INFLATION STRATEGY |
Fees and reimbursements for out of pocket expenses charged by AllianceBernstein Investor Services, Inc. (“ABIS”), the affiliated transfer agent for the Strategy, are charged on a per account basis, based on the level of service provided and the class of share held by the account. ABIS also receives a fee per shareholder sub-account for each account maintained by an intermediary on an omnibus basis. During the Strategy’s most recently completed fiscal year, ABIS received $74,080 in fees from the Strategy.
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 Directors 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.
Previously, in February 2008, the independent consultant provided the Board of Directors an update of the Deli21 study on advisory fees and various fund characteristics.22 The independent consultant first reiterated the results of his previous two dimensional comparison analysis (fund size and family size) with the Board
21 | 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. |
22 | 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. |
AB BOND INFLATION STRATEGY • | 103 |
of Directors.23 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 Strategy.
The information below shows the 1 and 3 year performance return and rankings of the Strategy24 relative to its Broadridge Performance Group (“PG”) and Broadridge Performance Universe (“PU”)25 for the periods ended July 31, 2015.26
Strategy | Strategy Return (%) | PG Median (%) | PU Median (%) | PG Rank | PU Rank | |||||||||||
Bond Inflation Strategy | ||||||||||||||||
1 year | -2.65 | -2.60 | -2.55 | 7/12 | 19/31 | |||||||||||
3 year | -0.88 | -1.80 | -1.80 | 2/10 | 5/26 | |||||||||||
5 year | 2.24 | 2.55 | 2.49 | 6/9 | 15/23 |
23 | 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. |
24 | The performance returns and rankings are for the Class A shares of the Strategy. The performance returns of the Strategy were provided Broadridge. |
25 | The Strategy’s PG is identical to the Strategy’s EG. The Strategy’s PU is not identical to the Strategy’s EU as the criteria for including/excluding a strategy in/from a PU are somewhat different from that of an EU. |
26 | The current Lipper investment classification/objective dictates the PG and PU throughout the life of the Strategy even if the Strategy may have had a different investment classification/objective at different points in time. |
104 | • AB BOND INFLATION STRATEGY |
Set forth below are the 1, 3, and 5 year and since inception net performance returns of the Strategy (in bold)27 versus its benchmark.28 Strategy and benchmark volatility and reward-to-variability ratio (“Sharpe Ratio”) information is also shown.29
Period Ending July 31, 2015 Annualized Net Performance | ||||||||||||||||||||||||||||
1 Year (%) | 3 Year (%) | 5 Year (%) | Since Inception (%) | Volatility (%) | Sharpe (%) | Risk Period (Year) | ||||||||||||||||||||||
Bond Inflation Strategy | -2.65 | -0.88 | 2.24 | 2.47 | 4.03 | 0.55 | 5 | |||||||||||||||||||||
Barclays 1-10yr TIPS Index | -1.80 | -0.92 | 2.25 | 2.43 | 3.68 | 0.60 | 5 | |||||||||||||||||||||
Inception Date: January 6, 2010 |
CONCLUSION:
Based on the factors discussed above the Senior Officer’s conclusion is that the proposed advisory fee for the Strategy 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 in respect of the Strategy is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: November 25, 2015
27 | The performance returns and risk measures shown in the table are for the Class A shares of the Strategy. |
28 | The Adviser provided Strategy and benchmark performance return information for the periods through July 31, 2015. |
29 | Strategy 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 strategy with a greater volatility would be viewed as more risky than a strategy with equivalent performance but lower volatility; for that reason, a greater return would be demanded for the more risky fund. A strategy with a higher Sharpe Ratio would be viewed as better performing than a strategy with a lower Sharpe Ratio. |
AB BOND INFLATION STRATEGY • | 105 |
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
106 | • AB BOND INFLATION STRATEGY |
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.
NOTES
AB BOND INLFATION STRATEGY • | 107 |
NOTES
108 | • AB BOND INFLATION STRATEGY |
AB BOND INFLATION STRATEGY
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
BIS-0151-1015
OCT 10.31.15
ANNUAL REPORT
AB CREDIT LONG/SHORT PORTFOLIO
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 16, 2015
Annual Report
This report provides management’s discussion of fund performance for AB Credit Long/Short Portfolio (the “Fund”) for the annual reporting period ended October 31, 2015. Effective January 20, 2015, the Fund’s name changed from AllianceBernstein Credit Long/Short Portfolio to AB Credit Long/Short Portfolio.
Investment Objectives and Policies
The Fund’s investment objective is to seek absolute return over a full market cycle. At least 80% of the Fund’s net assets will under normal circumstances be invested in long and short positions in credit-related instruments. For purposes of this 80% requirement, credit-related instruments will include any type of fixed-income security, such as corporate bonds, convertible fixed-income securities, preferred stocks, US government and agency securities, securities of foreign governments and supranational entities, mortgage-related and asset-backed securities, and loan participations. It is expected that a substantial portion of the Fund’s long and short positions will relate to fixed-income securities rated below investment grade (commonly known as “junk bonds”).
In selecting securities for purchase or sale by the Fund and securities for the Fund to take short positions in, AllianceBernstein L.P. (the “Adviser”) will attempt to take advantage of inefficiencies that it believes exist in the global debt markets. These inefficiencies arise from investor behavior, market complexity, and the investment limitations to which investors are subject. The Adviser will combine quantitative
analysis with fundamental credit and economic research in seeking to exploit these inefficiencies.
Under normal market conditions, the net exposure of the Fund (long exposure minus short exposure) will range between 150% and -150%. For example, the Fund may hold long positions in fixed-income securities with a value equal to 95% of its net assets and hold short positions equal to 75% of its net assets, resulting in 20% net long exposure. The Fund may also take long and short positions in equity securities.
Short positions may be effectuated through derivative instruments or through conventional short sales. When the Fund sells securities short, it sells a security that it does not own (but has borrowed) at its current market price in anticipation that the price of the security will decline. To complete, or close out, the short sale transaction, the Fund buys the same security in the market at a later date and returns it to the lender. The Adviser expects that the Fund’s long positions will be effectuated both through derivatives and actual purchases of fixed-income securities. The Fund may invest in fixed-income securities with a range of maturities from short- to long-term, and expects to maintain a weighted average duration of between -3 and 6 years. The Fund would have a negative duration when the Adviser expects the value of the Fund’s assets to increase as interest rates rise.
While the Fund’s investments will be focused on US dollar-denominated securities, the Fund may invest to a
AB CREDIT LONG/SHORT PORTFOLIO • | 1 |
lesser extent in securities denominated in foreign currencies. Fluctuations in currency exchange rates can have a dramatic impact on the returns of fixed-income securities. While the Adviser may hedge the foreign currency exposure resulting from the Fund’s security positions through the use of currency-related derivatives, it is not required to do so. The Fund may take long and short positions in currencies (or related derivatives) independent of any such security positions, including taking a position in a currency when it does not hold any securities denominated in that currency.
The Fund expects to use derivatives, such as options, futures, forwards and swaps, to a significant extent. Derivatives may provide a more efficient and economical exposure to market segments than direct investments, and may also be a more efficient way to alter the Fund’s exposure. The Fund may, for example, use credit default, interest rate and total return swaps to establish exposure to the fixed-income markets or particular fixed-income securities and, as noted above, may use currency derivatives to hedge foreign currency exposure.
The Fund may borrow money and enter into transactions such as reverse repurchase agreements that are similar to borrowings (in addition to the borrowing of securities inherent in short sale transactions) for investment purposes. As a result of these borrowing transactions and the use of derivatives, the Fund will at times be highly leveraged, with aggregate exposure (long and short) substantially in excess of its net assets.
The Fund is “non-diversified”, which means that it may concentrate its assets in a smaller number of issuers than a diversified fund.
Investment Results
The table on page 7 shows the Fund’s performance compared to its benchmark, the Bank of America Merrill Lynch (“BofA ML”) 3-Month US Treasury Bill Index, for the six- and 12-month periods ended October 31, 2015.
All share classes of the Fund underperformed the benchmark for both periods before sales charges, primarily driven by the underperformance of single-name long positions, relative to the benchmark. In particular, long positions in the securities of US sub investment-grade issuers detracted, with particular underperformance from the securities of energy, metals and mining issuers. These losses were partially offset by gains from single name shorts in the US sub investment-grade energy, metals and mining, and chemicals, as well as gains from single-name shorts in European investment-grade credits across a variety of sectors. Further, capital structure relative value trades, which involve going long one security in a company’s capital structure while at the same time going short another security in the same company’s capital structure, contributed to performance during both periods.
The Fund utilized derivatives including interest rate swaps for hedging purposes, and purchased options, Treasury futures and currency forwards for hedging and investment purposes, which detracted from performance during both periods, in absolute terms; written options and
2 | • AB CREDIT LONG/SHORT PORTFOLIO |
swaptions, credit default swaps and total return swaps for hedging and investment purposes added to performance during both periods.
Market Review and Investment Strategy
Global credit markets were under pressure during the 12-month period ended October 31, 2015, with particular pressure on emerging markets and US high yield credit. Questions regarding global growth, the outlook for energy and industrial commodities, and global central bank policy all weighed on global financial markets. With the heightened volatility in the overall capital markets, the Fund’s Investment Policy Team (the “Team”) has generally maintained a
broadly neutral risk allocation; its focus remains on identifying idiosyncratic relative value opportunities.
The Team has kept the Fund’s overall positioning in Europe relatively conservative, with a modest net short exposure in select securities it believes are overvalued. With ongoing weakness in commodity prices, the Team still believes that a cautious, fundamentally-driven approach to the energy and mining sectors remains warranted, given the potential downside risks. Lastly, the Team continues to invest premium in downside hedging strategies, with a focus on limiting the Fund’s market-related downside.
AB CREDIT LONG/SHORT PORTFOLIO • | 3 |
DISCLOSURES AND RISKS
Benchmark Disclosure
The unmanaged Bank of America Merrill Lynch® 3-Month US Treasury Bill Index does not reflect fees and expenses associated with the active management of a mutual fund portfolio. The BofA ML 3-Month US Treasury Bill Index measures the performance of Treasury securities maturing in 90 days. 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 bond or stock market fluctuates. The value of its 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.
Interest Rate Risk: Changes in interest rates will affect the value of investments in fixed-income securities. When interest rates rise, the value of 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 greater risk of rising interest rates due to the current period of historically low rates and the effect of government fiscal policy initiatives, including Federal Reserve actions, and market reaction to these initiatives. The current period of historically low rates is expected to end and rates are expected to begin rising in the near future. Interest rate risk is generally greater for fixed-income securities with longer maturities or durations. Duration is a measure that relates the expected price volatility of a fixed-income security to changes in interest rates. The duration of a fixed-income security may be shorter than or equal to full maturity of a fixed-income security. A fixed-income security with a duration of three years will decrease in value by approximately 3% if interest rates increase by 1%.
Below Investment Grade Securities Risk: Investments in fixed-income securities with lower ratings are subject to 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, negative perceptions of the junk bond market generally and less secondary market liquidity. These securities are often able to be “called” or repurchased by the issuer prior to their maturity date, forcing the Fund to reinvest the proceeds, possibly at a lower rate of return.
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 if the Fund invests a significant portion of its assets in fixed-income securities with longer maturities.
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.
(Disclosures, Risks and Note about Historical Performance continued on next page)
4 | • AB CREDIT LONG/SHORT PORTFOLIO |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
Short Sale Risk: Short sales involve the risk that the Fund will incur a loss by subsequently buying a security at a higher price than the price at which it sold the security. The amount of such loss is theoretically unlimited, as it will be based on the increase in value of the security sold short. In contrast, the risk of loss from a long position is limited to the Fund’s investment in the security, because the price of the security cannot fall below zero. The Fund may not always be able to close out a short position on favorable terms.
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 rates may negatively affect the value of the Fund’s investments or reduce its returns.
Diversification Risk: The Fund may have more risk because it is “non-diversified”, meaning that it can invest more of its assets in a smaller number of issuers. Accordingly, changes in the value of a single security may have a more significant effect, either negative or positive, on the Fund’s NAV.
Liquidity Risk: Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Fund. Causes of liquidity risk may include low trading volumes, large positions and heavy redemptions of Fund shares. Over recent years liquidity risk has also increased because the capacity of dealers in the secondary market for fixed-income securities to make markets in these securities has decreased, even as the overall bond market has grown significantly, due to, among other things, structural changes, additional regulatory requirements and capital and risk restraints that have led to reduced inventories. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
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 investment return and principal value of an investment in the Fund will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. 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 visiting www.abglobal.com. The Fund has been in operation only for a short period of time, and therefore has a very limited historical performance period. This limited performance period is unlikely to be representative of the performance the Fund will achieve over a longer period.
(Disclosures, Risks and Note about Historical Performance continued on next page)
AB CREDIT LONG/SHORT PORTFOLIO • | 5 |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
All fees and expenses related to the operation of the Fund have been deducted. NAV returns do not reflect sales charges; if sales charges were reflected, the Fund’s quoted performance would be lower. SEC returns reflect the applicable sales charges for each share class: a 4.25% maximum front-end sales charge for Class A shares and a 1% 1-year contingent deferred sales charge for Class C shares. Returns for the different share classes will vary due to different expenses associated with each class. Performance assumes reinvestment of distributions and does not account for taxes.
6 | • AB CREDIT LONG/SHORT PORTFOLIO |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE FUND VS. ITS BENCHMARK PERIODS ENDED OCTOBER 31, 2015 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB Credit Long/Short Portfolio* | ||||||||||
Class A | -0.30% | -0.75% | ||||||||
| ||||||||||
Class C | -0.71% | -1.55% | ||||||||
| ||||||||||
Advisor Class† | -0.20% | -0.55% | ||||||||
| ||||||||||
BofA ML 3-Month US Treasury Bill Index | 0.01% | 0.02% | ||||||||
| ||||||||||
* The returns shown are based on net asset values calculated for shareholder transactions and may differ from the returns shown in the Financial Highlights, which reflects adjustments made to the net asset values in accordance with accounting principles generally accepted in the United States of America.
† Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. | ||||||||||
GROWTH OF A $10,000 INVESTMENT IN THE FUND
5/7/14* TO 10/31/15 (unaudited)
This chart illustrates the total value of an assumed $10,000 investment in AB Credit Long/Short Portfolio Class A shares (from 5/7/14* to 10/31/15) as compared to the performance of the Fund’s benchmark. The chart reflects the deduction of the maximum 4.25% sales charge from the initial $10,000 investment in the Fund and assumes the reinvestment of dividends and capital gains distributions.
* | Inception date: 5/7/2014. |
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
(Historical Performance continued on next page)
AB CREDIT LONG/SHORT PORTFOLIO • | 7 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF OCTOBER 31, 2015 (unaudited) | ||||||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | SEC Yields* | ||||||||||
Class A Shares | -4.19 | % | ||||||||||
1 Year | -0.75 | % | -4.93 | % | ||||||||
Since Inception† | -0.12 | % | -2.98 | % | ||||||||
Class C Shares | -5.13 | % | ||||||||||
1 Year | -1.55 | % | -2.53 | % | ||||||||
Since Inception† | -0.90 | % | -0.90 | % | ||||||||
Advisor Class Shares‡ | -4.14 | % | ||||||||||
1 Year | -0.55 | % | -0.55 | % | ||||||||
Since Inception† | 0.10 | % | 0.10 | % |
The Fund’s prospectus fee table shows the Fund’s total annual operating expense ratios as 4.29%, 6.31% and 5.37% for Class A, Class C and Advisor Class shares, respectively, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements limit the Fund’s annual operating expense ratios exclusive of interest expense, dividend expense, borrowing costs and brokerage expense on securities sold short to 1.35%, 2.10% and 1.10% for Class A, Class C and Advisor Class shares, respectively. These waivers/reimbursements may not be terminated before January 29, 2016 and may be extended by the Adviser for additional one-year terms. Absent reimbursements or waivers, performance would have been lower. The Financial Highlights section of this report sets forth expense ratio data for the current reporting period; the expense ratios shown above may differ from the expense ratios in the Financial Highlights sections since they are based on different time periods.
* | SEC yields are calculated based on SEC guidelines for the 30-day period ended October 31, 2015. |
† | Inception date: 5/7/2014. |
‡ | Advisor Class shares are offered at NAV to eligible investors and their SEC returns are the same as their NAV returns. Please note that Advisor Class shares are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. The inception date is listed above. |
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
(Historical Performance continued on next page)
8 | • AB CREDIT LONG/SHORT PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END SEPTEMBER 30, 2015 (unaudited) | ||||
SEC Returns (reflects applicable | ||||
Class A Shares | ||||
1 Year | -4.49 | % | ||
Since Inception† | -3.44 | % | ||
Class C Shares | ||||
1 Year | -1.84 | % | ||
Since Inception† | -1.10 | % | ||
Advisor Class Shares‡ | ||||
1 Year | 0.14 | % | ||
Since Inception† | -0.11 | % |
† | Inception date: 5/7/2014. |
‡ | Advisor Class shares are offered at NAV to eligible investors and their SEC returns are the same as their NAV returns. Please note that Advisor Class shares are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. The inception date is listed above. |
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
AB CREDIT LONG/SHORT PORTFOLIO • | 9 |
Historical Performance
EXPENSE EXAMPLE
(unaudited)
As a shareholder of a mutual fund, you may incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions and (2) ongoing costs, including management fees; distribution (12b-1) fees; and other fund expenses. 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* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 997.00 | $ | 27.18 | 5.40 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 997.98 | $ | 27.19 | 5.40 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 992.90 | $ | 30.79 | 6.13 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 994.30 | $ | 30.81 | 6.13 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 998.00 | $ | 25.73 | 5.11 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 999.45 | $ | 25.75 | 5.11 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
10 | • AB CREDIT LONG/SHORT PORTFOLIO |
Expense Example
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $21.3
SECTOR BREAKDOWN*
Long | Short | |||||||
Bank Loans | 0.6 | % | — | % | ||||
Collateralized Mortgage Obligations | 1.7 | — | ||||||
Common Stocks | 2.3 | — | ||||||
Corporates – Investment Grade | 24.7 | -21.9 | ||||||
Corporates – Non-Investment Grade | 39.1 | -31.8 | ||||||
Emerging Markets – Corporate Bonds | 1.0 | — | ||||||
Emerging Markets – Sovereigns | 0.9 | -0.8 | ||||||
Governments – Sovereign Agencies | 2.1 | — | ||||||
Governments – Treasuries | 0.7 | — | ||||||
Investment Companies | 4.9 | — | ||||||
Options Purchased – Puts | 0.1 | — | ||||||
Preferred Stocks | 0.8 | — | ||||||
Quasi-Sovereigns | 1.2 | -1.0 | ||||||
Warrants | 0.1 | — |
NET COUNTRY EXPOSURE (TOP THREE)*
Long | ||||
United States | 22.3 | % | ||
Germany | 2.8 | |||
Brazil | 1.9 |
Short | ||||
Spain | -3.3 | % | ||
Denmark | -2.0 | |||
Italy | -1.4 |
TEN LARGEST HOLDINGS*
Long | ||||
Company | ||||
Volkswagen Group of America Finance LLC | 2.8 | % | ||
CCO Safari II LLC | 2.5 | |||
Odebrecht Finance Ltd. | 2.2 | |||
BlackRock Debt Strategies Fund, Inc. | 2.0 | |||
Windstream Services LLC | 2.0 | |||
Teck Resources Ltd. | 1.9 | |||
Lloyds Bank PLC | 1.9 | |||
ArcelorMittal | 1.8 | |||
Hewlett Packard Enterprise Co. | 1.8 | |||
MarkWest Energy Partners LP/MarkWest Energy Finance Corp. | 1.8 |
Short | ||||
Company | ||||
TDC A/S | -2.4 | % | ||
Odebrecht Finance Ltd. | -2.2 | |||
NXP BV/NXP Funding LLC | -2.0 | |||
United Rentals North America, Inc. | -2.0 | |||
Chubb Corp. (The) | -1.8 | |||
Rent-A-Center Inc./TX | -1.8 | |||
MPLX LP | -1.7 | |||
Kinder Morgan, Inc./DE | -1.7 | |||
CNH Industrial Finance Europe SA | -1.5 | |||
Hexion, Inc. | -1.5 |
* | Holdings are expressed as a percentage of total net assets 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 CREDIT LONG/SHORT PORTFOLIO • | 11 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
October 31, 2015
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
CORPORATES – NON-INVESTMENT | ||||||||||
Industrial – 32.8% | ||||||||||
Basic – 4.0% | ||||||||||
ArcelorMittal | U.S.$ | 400 | $ | 380,750 | ||||||
Magnetation LLC/Mag Finance Corp. | 35 | 7,700 | ||||||||
Peabody Energy Corp. | 55 | 9,625 | ||||||||
10.00%, 3/15/22(c) | 25 | 6,750 | ||||||||
Teck Resources Ltd. | 745 | 398,575 | ||||||||
6.25%, 7/15/41 | 24 | 13,560 | ||||||||
Thompson Creek Metals Co., Inc. | 57 | 23,940 | ||||||||
|
| |||||||||
840,900 | ||||||||||
|
| |||||||||
Capital Goods – 1.0% | ||||||||||
Berry Plastics Corp. | 83 | 86,735 | ||||||||
Bombardier, Inc. | 15 | 11,625 | ||||||||
7.50%, 3/15/25(c) | 138 | 107,295 | ||||||||
|
| |||||||||
205,655 | ||||||||||
|
| |||||||||
Communications - Media – 5.0% | ||||||||||
Cequel Communications Holdings I LLC/Cequel Capital Corp. | 62 | 59,566 | ||||||||
CSC Holdings LLC | 60 | 52,769 | ||||||||
DISH DBS Corp. | 66 | 63,129 | ||||||||
iHeartCommunications, Inc. | 104 | 89,440 | ||||||||
9.00%, 9/15/22 | 95 | 77,663 | ||||||||
10.00%, 1/15/18 | 35 | 18,550 | ||||||||
Neptune Finco Corp. | 200 | 211,250 | ||||||||
Univision Communications, Inc. | 88 | 86,460 | ||||||||
Virgin Media Finance PLC | 200 | 196,500 | ||||||||
Ziggo Bond Finance BV | 205 | 195,262 | ||||||||
|
| |||||||||
1,050,589 | ||||||||||
|
|
12 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Communications - | ||||||||||
Communications Sales & Leasing, Inc./CSL Capital LLC | U.S.$ | 157 | $ | 152,290 | ||||||
8.25%, 10/15/23 | 160 | 147,920 | ||||||||
Frontier Communications Corp. | 146 | 153,026 | ||||||||
Sprint Capital Corp. | 80 | 72,000 | ||||||||
Sprint Corp. | 135 | 118,547 | ||||||||
T-Mobile USA, Inc. | 100 | 100,250 | ||||||||
Wind Acquisition Finance SA | 200 | 201,500 | ||||||||
Windstream Services LLC | 523 | 414,477 | ||||||||
|
| |||||||||
1,360,010 | ||||||||||
|
| |||||||||
Consumer Cyclical - Automotive – 0.2% | ||||||||||
Gates Global LLC/Gates Global Co. | 60 | 48,150 | ||||||||
|
| |||||||||
Consumer Cyclical - Other – 1.2% | ||||||||||
MDC Holdings, Inc. | 8 | 8,160 | ||||||||
6.00%, 1/15/43 | 42 | 34,020 | ||||||||
PulteGroup, Inc. | 140 | 138,950 | ||||||||
6.375%, 5/15/33 | 51 | 52,581 | ||||||||
7.875%, 6/15/32 | 19 | 21,993 | ||||||||
|
| |||||||||
255,704 | ||||||||||
|
| |||||||||
Consumer Cyclical - Retailers – 2.8% | ||||||||||
American Tire Distributors, Inc. | 100 | 101,000 | ||||||||
Argos Merger Sub, Inc. | 149 | 156,822 | ||||||||
Cash America International, Inc. | 120 | 120,900 | ||||||||
Neiman Marcus Group Ltd. LLC | 33 | 34,277 | ||||||||
Party City Holdings, Inc. | 124 | 127,720 | ||||||||
Rite Aid Corp. | 55 | 59,263 | ||||||||
|
| |||||||||
599,982 | ||||||||||
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 13 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Non-Cyclical – 3.5% | ||||||||||
BI-LO LLC/BI-LO Finance Corp. | U.S.$ | 110 | $ | 100,650 | ||||||
HCA, Inc. | 126 | 129,774 | ||||||||
Post Holdings, Inc. | 73 | 77,745 | ||||||||
8.00%, 7/15/25(c) | 77 | 83,545 | ||||||||
PRA Holdings, Inc. | 54 | 60,885 | ||||||||
Sun Products Corp. (The) | 48 | 45,000 | ||||||||
Tenet Healthcare Corp. | 110 | 99,000 | ||||||||
Valeant Pharmaceuticals International, Inc. | 66 | 55,522 | ||||||||
6.75%, 8/15/18(c) | 100 | 96,510 | ||||||||
|
| |||||||||
748,631 | ||||||||||
|
| |||||||||
Energy – 6.4% | ||||||||||
Antero Resources Corp. | 18 | 16,155 | ||||||||
6.00%, 12/01/20 | 89 | 85,440 | ||||||||
Chesapeake Energy Corp. | 200 | 129,000 | ||||||||
Cobalt International Energy, Inc. | 64 | 46,080 | ||||||||
Denbury Resources, Inc. | 135 | 90,112 | ||||||||
Global Partners LP/GLP Finance Corp. | 200 | 184,000 | ||||||||
MarkWest Energy Partners LP/MarkWest Energy Finance Corp. | 400 | 374,000 | ||||||||
Sabine Pass Liquefaction LLC | 268 | 256,945 | ||||||||
Transocean, Inc. | 200 | 127,000 | ||||||||
Whiting Petroleum Corp. | 48 | 42,270 | ||||||||
|
| |||||||||
1,351,002 | ||||||||||
|
| |||||||||
Other Industrial – 1.5% | ||||||||||
General Cable Corp. | 85 | 58,066 | ||||||||
Laureate Education, Inc. | 331 | 263,145 | ||||||||
|
| |||||||||
321,211 | ||||||||||
|
|
14 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Technology – 0.6% | ||||||||||
Avaya, Inc. | U.S.$ | 25 | $ | 20,313 | ||||||
10.50%, 3/01/21(c) | 112 | 43,400 | ||||||||
Energizer Holdings, Inc. | 67 | 68,340 | ||||||||
|
| |||||||||
132,053 | ||||||||||
|
| |||||||||
Transportation - Services – 0.2% | ||||||||||
Con-way, Inc. | 75 | 49,821 | ||||||||
|
| |||||||||
6,963,708 | ||||||||||
|
| |||||||||
Financial Institutions – 5.2% | ||||||||||
Banking – 4.0% | ||||||||||
ABN AMRO Bank NV | EUR | 71 | 78,270 | |||||||
Barclays Bank PLC | U.S.$ | 73 | 83,585 | |||||||
Credit Agricole SA | 210 | 206,850 | ||||||||
Danske Bank A/S | GBP | 56 | 87,625 | |||||||
Royal Bank of Scotland PLC (The) | U.S.$ | 85 | 92,732 | |||||||
Societe Generale SA | 200 | 202,823 | ||||||||
UBS Preferred Funding Trust V | 94 | 95,175 | ||||||||
|
| |||||||||
847,060 | ||||||||||
|
| |||||||||
Finance – 0.9% | ||||||||||
Enova International, Inc. | 96 | 81,360 | ||||||||
TMX Finance LLC/TitleMax Finance Corp. | 129 | 101,265 | ||||||||
|
| |||||||||
182,625 | ||||||||||
|
| |||||||||
Other Finance – 0.3% | ||||||||||
CNG Holdings, Inc. | 33 | 16,706 | ||||||||
iPayment, Inc. | 1 | 1,151 | ||||||||
Series AI | 11 | 11,771 | ||||||||
Speedy Group Holdings Corp. | 55 | 39,600 | ||||||||
|
| |||||||||
69,228 | ||||||||||
|
| |||||||||
1,098,913 | ||||||||||
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 15 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Utility – 1.1% | ||||||||||
Electric – 1.1% | ||||||||||
Calpine Corp. | U.S.$ | 61 | $ | 65,499 | ||||||
NRG Energy, Inc. | 23 | 21,160 | ||||||||
6.625%, 3/15/23 | 42 | 39,060 | ||||||||
Series WI | 21 | 18,795 | ||||||||
Talen Energy Supply LLC | 118 | 101,276 | ||||||||
|
| |||||||||
245,790 | ||||||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | 8,308,411 | |||||||||
|
| |||||||||
CORPORATES – | ||||||||||
Industrial – 18.7% | ||||||||||
Basic – 0.4% | ||||||||||
Newmont Mining Corp. | 100 | 79,674 | ||||||||
|
| |||||||||
Capital Goods – 3.6% | ||||||||||
Odebrecht Finance Ltd. | 800 | 474,000 | ||||||||
Yamana Gold, Inc. | 324 | 297,274 | ||||||||
|
| |||||||||
771,274 | ||||||||||
|
| |||||||||
Communications - Media – 2.5% | ||||||||||
CCO Safari II LLC | 205 | 208,379 | ||||||||
6.484%, 10/23/45(c) | 307 | 318,357 | ||||||||
|
| |||||||||
526,736 | ||||||||||
|
| |||||||||
Consumer Cyclical - Automotive – 2.8% | ||||||||||
Volkswagen Group of America Finance LLC | 615 | 588,143 | ||||||||
|
| |||||||||
Consumer Cyclical - Retailers – 1.6% | ||||||||||
CVS Health Corp. | 309 | 331,274 | ||||||||
|
| |||||||||
Consumer Non-Cyclical – 1.2% | ||||||||||
Gilead Sciences, Inc. | 255 | 257,952 | ||||||||
|
| |||||||||
Energy – 3.7% | ||||||||||
Cenovus Energy, Inc. | 135 | 108,619 | ||||||||
Encana Corp. | 100 | 78,574 |
16 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Kinder Morgan, Inc./DE | U.S.$ | 335 | $ | 339,409 | ||||||
Weatherford International Ltd./Bermuda | 400 | 271,000 | ||||||||
|
| |||||||||
797,602 | ||||||||||
|
| |||||||||
Services – 0.7% | ||||||||||
Amazon.com, Inc. | 135 | 140,718 | ||||||||
|
| |||||||||
Technology – 2.2% | ||||||||||
Hewlett Packard Enterprise Co. | 390 | 377,799 | ||||||||
Hewlett-Packard Co. | 100 | 96,163 | ||||||||
|
| |||||||||
473,962 | ||||||||||
|
| |||||||||
3,967,335 | ||||||||||
|
| |||||||||
Financial Institutions – 6.0% | ||||||||||
Banking – 4.8% | ||||||||||
Bank of America Corp. | 200 | 200,605 | ||||||||
BPCE SA | 200 | 214,119 | ||||||||
Citigroup, Inc. | 200 | 200,774 | ||||||||
Lloyds Bank PLC | 350 | 403,885 | ||||||||
|
| |||||||||
1,019,383 | ||||||||||
|
| |||||||||
Brokerage – 0.8% | ||||||||||
GFI Group, Inc. | 155 | 168,175 | ||||||||
|
| |||||||||
Finance – 0.4% | ||||||||||
HSBC Finance Capital Trust IX | 100 | 100,100 | ||||||||
|
| |||||||||
1,287,658 | ||||||||||
|
| |||||||||
Total Corporates – Investment Grade | 5,254,993 | |||||||||
|
| |||||||||
Shares | ||||||||||
INVESTMENT COMPANIES – 4.9% | ||||||||||
Funds and Investment Trusts – 4.9% | ||||||||||
BlackRock Corporate High Yield Fund, Inc. | 30,199 | 313,767 | ||||||||
BlackRock Debt Strategies Fund, Inc. | 122,300 | 423,158 | ||||||||
Wells Fargo Advantage Income Opportunities Fund | 39,092 | 308,045 | ||||||||
|
| |||||||||
Total Investment Companies | 1,044,970 | |||||||||
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 17 |
Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
COMMON STOCKS – 2.3% | ||||||||||
Clear Channel Outdoor Holdings, | 4,650 | $ | 34,782 | |||||||
DISH Network Corp. – Class A(i) | 400 | 25,188 | ||||||||
Dynegy, Inc.(i) | 1,496 | 29,067 | ||||||||
eDreams ODIGEO SA(i) | 5,380 | 14,376 | ||||||||
Eldorado Resorts, Inc.(i) | 2,665 | 26,384 | ||||||||
EMC Corp./MA | 1,459 | 38,255 | ||||||||
Emeco Holdings Ltd.(i) | 92,500 | 3,609 | ||||||||
Enova International, Inc.(i) | 1,000 | 13,000 | ||||||||
EP Energy Corp. – Class A(i) | 1,479 | 8,149 | ||||||||
General Motors Co. | 1,700 | 59,347 | ||||||||
Hovnanian Enterprises, Inc. – Class A(i) | 2,224 | 4,582 | ||||||||
International Game Technology PLC | 1,678 | 27,217 | ||||||||
iPayment, Inc.(i) | 714 | 3,675 | ||||||||
Koninklijke KPN NV | 6,700 | 24,550 | ||||||||
LyondellBasell Industries NV – Class A | 230 | 21,369 | ||||||||
MDC Holdings, Inc. | 1,466 | 38,101 | ||||||||
Navistar International Corp.(i) | 3,120 | 38,376 | ||||||||
Nortek, Inc.(i) | 590 | 36,197 | ||||||||
Townsquare Media, Inc. – Class A(i) | 2,620 | 28,715 | ||||||||
Triangle Petroleum Corp.(i) | 3,670 | 4,404 | ||||||||
Whiting Petroleum Corp.(i) | 660 | 11,372 | ||||||||
|
| |||||||||
Total Common Stocks | 490,715 | |||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
GOVERNMENTS – SOVEREIGN AGENCIES – 2.1% | ||||||||||
Brazil – 1.1% | ||||||||||
Petrobras Global Finance BV | U.S.$ | 350 | 229,530 | |||||||
United Kingdom – 1.0% | ||||||||||
Royal Bank of Scotland Group PLC | 205 | 212,175 | ||||||||
|
| |||||||||
Total Governments – Sovereign Agencies | 441,705 | |||||||||
|
| |||||||||
COLLATERALIZED MORTGAGE OBLIGATIONS – 1.7% | ||||||||||
Non-Agency Fixed Rate – 1.7% | ||||||||||
Alternative Loan Trust | 86 | 79,938 |
18 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
CHL Mortgage Pass-Through Trust | U.S.$ | 84 | $ | 77,837 | ||||||
GSR Mortgage Loan Trust | 41 | 35,415 | ||||||||
Morgan Stanley Mortgage Loan Trust | 89 | 64,506 | ||||||||
Wells Fargo Mortgage Backed Securities Trust | 33 | 32,919 | ||||||||
Series 2007-2, Class 1A18 | 70 | 67,769 | ||||||||
|
| |||||||||
Total Collateralized Mortgage Obligations | 358,384 | |||||||||
|
| |||||||||
QUASI-SOVEREIGNS – 1.2% | ||||||||||
Quasi-Sovereign Bonds – 1.2% | ||||||||||
Venezuela – 1.2% | ||||||||||
Petroleos de Venezuela SA | 700 | 247,800 | ||||||||
|
| |||||||||
EMERGING MARKETS – CORPORATE BONDS – 1.0% | ||||||||||
Industrial – 1.0% | ||||||||||
Basic – 1.0% | ||||||||||
Sappi Papier Holding GmbH | 200 | 208,000 | ||||||||
|
| |||||||||
EMERGING MARKETS – | ||||||||||
Venezuela – 0.9% | ||||||||||
Venezuela Government International Bond | 450 | 196,875 | ||||||||
|
| |||||||||
Shares | ||||||||||
PREFERRED STOCKS – 0.8% | ||||||||||
Financial Institutions – 0.5% | ||||||||||
REITS – 0.5% | ||||||||||
Public Storage | 4,550 | 112,431 | ||||||||
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 19 |
Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
Industrial – 0.3% | ||||||||||
Energy – 0.3% | ||||||||||
Energy XXI Ltd. | 500 | $ | 12,000 | |||||||
Halcon Resources Corp. | 150 | 24,900 | ||||||||
Magnum Hunter Resources Corp. | 1,400 | 1,918 | ||||||||
Sanchez Energy Corp. | 1,550 | 24,606 | ||||||||
|
| |||||||||
63,424 | ||||||||||
|
| |||||||||
Total Preferred Stocks | 175,855 | |||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
GOVERNMENTS – TREASURIES – 0.7% | ||||||||||
Brazil – 0.7% | ||||||||||
Brazil Notas do Tesouro Nacional | BRL | 240 | 154,107 | |||||||
|
| |||||||||
BANK LOANS – 0.6% | ||||||||||
Industrial – 0.6% | ||||||||||
Basic – 0.1% | ||||||||||
Magnetation LLC | U.S.$ | 38 | 33,544 | |||||||
|
| |||||||||
Communications - Media – 0.5% | ||||||||||
TWCC Holding Corp. | 100 | 99,781 | ||||||||
|
| |||||||||
Total Bank Loans | 133,325 | |||||||||
|
| |||||||||
Contracts | ||||||||||
OPTIONS PURCHASED – PUTS – 0.1% | ||||||||||
Options on Equities – 0.1% | ||||||||||
Tesla Motors, Inc. | 11 | 1,155 | ||||||||
Tesla Motors, Inc. | 11 | 11,138 | ||||||||
|
| |||||||||
12,293 | ||||||||||
|
| |||||||||
Options on Funds and Investment Trusts – 0.0% | ||||||||||
Boardwalk Real Estate Investment Trust | 1,669 | 484 |
20 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Company | Contracts | U.S. $ Value | ||||||||
| ||||||||||
SPDR S&P 500 ETF Trust | 13 | $ | 1,014 | |||||||
SPDR S&P 500 ETF Trust | 21 | 724 | ||||||||
SPDR S&P 500 ETF Trust | 20 | 300 | ||||||||
|
| |||||||||
2,522 | ||||||||||
|
| |||||||||
Notional Amount (000) | ||||||||||
Swaptions – 0.0% | ||||||||||
CDX-NAHY.25 RTP, Barclays Bank PLC (Buy Protection) | 670 | 1,296 | ||||||||
|
| |||||||||
Total Options Purchased – Puts | 16,111 | |||||||||
|
| |||||||||
Shares | ||||||||||
WARRANTS – 0.1% | ||||||||||
iPayment Holdings, Inc., | 13,856 | 13,856 | ||||||||
|
| |||||||||
Contracts | ||||||||||
OPTIONS PURCHASED – CALLS – 0.1% | ||||||||||
Options on Equities – 0.1% | ||||||||||
Beazer Homes USA, Inc. | 21 | 315 | ||||||||
Diageo PLC | 7,696 | 1,897 | ||||||||
iShares iBoxx High Yield Corp. | 119 | 1,190 | ||||||||
|
| |||||||||
3,402 | ||||||||||
|
| |||||||||
Options on Indices – 0.0% | ||||||||||
EURO STOXX 50 Index | 126 | 2,597 | ||||||||
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 21 |
Portfolio of Investments
Company | Contracts | U.S. $ Value | ||||||||
| ||||||||||
Options on Funds and Investment Trusts – 0.0% | ||||||||||
SPDR S&P 500 ETF Trust | 11 | $ | 1,721 | |||||||
SPDR S&P 500 ETF Trust | 86 | 430 | ||||||||
|
| |||||||||
2,151 | ||||||||||
|
| |||||||||
Notional Amount (000) | ||||||||||
Swaptions – 0.0% | ||||||||||
CDX-NAHY.24 RTR, Deutsche Bank AG (Sell Protection) | 1,000 | 1,190 | ||||||||
|
| |||||||||
Total Options Purchased – Calls | 9,340 | |||||||||
|
| |||||||||
Shares | ||||||||||
SHORT-TERM INVESTMENTS – 13.0% | ||||||||||
Investment Companies – 12.5% | ||||||||||
AB Fixed Income Shares, Inc. – Government STIF Portfolio, 0.13%(n)(o) | 2,653,060 | 2,653,060 | ||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
U.S. Treasury Bills – 0.5% | ||||||||||
U.S. Treasury Bill | U.S.$ | 100 | 99,995 | |||||||
|
| |||||||||
Total Short-Term Investments | 2,753,055 | |||||||||
|
| |||||||||
Total Investments Before Securities | 19,807,502 | |||||||||
|
| |||||||||
SECURITIES SOLD SHORT – (55.5)% | ||||||||||
CORPORATES – NON-INVESTMENT | ||||||||||
Financial Institutions – (3.9)% | ||||||||||
Banking – (2.0)% | ||||||||||
Bankia SA | EUR | (200 | ) | (232,201 | ) |
22 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
UniCredit SpA | U.S.$ | (200 | ) | $ | (196,750 | ) | ||||
|
| |||||||||
(428,951 | ) | |||||||||
|
| |||||||||
Finance – (0.9)% | ||||||||||
iStar, Inc. | (200 | ) | (195,750 | ) | ||||||
|
| |||||||||
Other Finance – (1.0)% | ||||||||||
International Personal Finance PLC | EUR | (200 | ) | (206,734 | ) | |||||
|
| |||||||||
(831,435 | ) | |||||||||
|
| |||||||||
Industrial – (26.4)% | ||||||||||
Basic – (4.6)% | ||||||||||
ArcelorMittal | (300 | ) | (295,916 | ) | ||||||
Chemtura Corp. | U.S.$ | (200 | ) | (203,000 | ) | |||||
Hexion, Inc. | (200 | ) | (169,500 | ) | ||||||
8.875%, 2/01/18 | (200 | ) | (153,000 | ) | ||||||
TPC Group, Inc. | (200 | ) | (163,520 | ) | ||||||
|
| |||||||||
(984,936 | ) | |||||||||
|
| |||||||||
Capital Goods – (6.4)% | ||||||||||
Ball Corp. | (200 | ) | (203,250 | ) | ||||||
BlueLine Rental Finance Corp. | (200 | ) | (201,750 | ) | ||||||
Clean Harbors, Inc. | (198 | ) | (203,247 | ) | ||||||
CNH Industrial Finance Europe SA | EUR | (300 | ) | (324,782 | ) | |||||
United Rentals North America, Inc. | U.S.$ | (400 | ) | (417,400 | ) | |||||
|
| |||||||||
(1,350,429 | ) | |||||||||
|
| |||||||||
Communications - Media – (1.8)% | ||||||||||
Intelsat Jackson Holdings SA | (200 | ) | (180,500 | ) | ||||||
Lamar Media Corp. | (200 | ) | (212,000 | ) | ||||||
|
| |||||||||
(392,500 | ) | |||||||||
|
| |||||||||
Consumer Cyclical - Automotive – (3.9)% | ||||||||||
American Axle & Manufacturing, Inc. | (200 | ) | (212,500 | ) | ||||||
Dana Holding Corp. | (200 | ) | (207,000 | ) |
AB CREDIT LONG/SHORT PORTFOLIO • | 23 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Jaguar Land Rover Automotive PLC | U.S.$ | (192 | ) | $ | (197,760 | ) | ||||
Lear Corp. | (195 | ) | (202,312 | ) | ||||||
|
| |||||||||
(819,572 | ) | |||||||||
|
| |||||||||
Consumer Cyclical - Retailers – (1.8)% | ||||||||||
Rent-A-Center Inc./TX | (400 | ) | (376,000 | ) | ||||||
|
| |||||||||
Consumer Non-Cyclical – (2.5)% | ||||||||||
ACCO Brands Corp. | (200 | ) | (213,000 | ) | ||||||
HCA, Inc. | (197 | ) | (208,820 | ) | ||||||
Unilabs Subholding AB | EUR | (100 | ) | (114,674 | ) | |||||
|
| |||||||||
(536,494 | ) | |||||||||
|
| |||||||||
Energy – (1.5)% | ||||||||||
California Resources Corp. | U.S.$ | (100 | ) | (68,000 | ) | |||||
Chesapeake Energy Corp. | (200 | ) | (126,000 | ) | ||||||
Sanchez Energy Corp. | (100 | ) | (79,500 | ) | ||||||
Ultra Petroleum Corp. | (100 | ) | (56,000 | ) | ||||||
|
| |||||||||
(329,500 | ) | |||||||||
|
| |||||||||
Other Industrial – (0.9)% | ||||||||||
Unifrax I LLC/Unifrax Holding Co. | (200 | ) | (193,000 | ) | ||||||
|
| |||||||||
Services – (1.0)% | ||||||||||
Realogy Group LLC/Realogy Co-Issuer Corp. | (200 | ) | (206,000 | ) | ||||||
|
| |||||||||
Technology – (2.0)% | ||||||||||
NXP BV/NXP Funding LLC | (400 | ) | (418,000 | ) | ||||||
|
| |||||||||
(5,606,431 | ) | |||||||||
|
| |||||||||
Utility – (1.5)% | ||||||||||
Electric – (1.5)% | ||||||||||
Calpine Corp. | (189 | ) | (198,639 | ) | ||||||
Enel SpA | EUR | (100 | ) | (118,888 | ) | |||||
|
| |||||||||
(317,527 | ) | |||||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | (6,755,393 | ) | ||||||||
|
|
24 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
CORPORATES – INVESTMENT | ||||||||||
Financial Institutions – (3.5)% | ||||||||||
Banking – (1.7)% | ||||||||||
BNP Paribas SA | EUR | (150 | ) | $ | (168,602 | ) | ||||
Intesa Sanpaolo SpA | (150 | ) | (192,530 | ) | ||||||
|
| |||||||||
(361,132 | ) | |||||||||
|
| |||||||||
Insurance – (1.8)% | ||||||||||
Chubb Corp. (The) | U.S.$ | (400 | ) | (384,000 | ) | |||||
|
| |||||||||
(745,132 | ) | |||||||||
|
| |||||||||
Industrial – (18.4)% | ||||||||||
Basic – (2.2)% | ||||||||||
Barrick Gold Corp. | (300 | ) | (278,654 | ) | ||||||
Newmont Mining Corp. | (200 | ) | (184,621 | ) | ||||||
|
| |||||||||
(463,275 | ) | |||||||||
|
| |||||||||
Capital Goods – (2.2)% | ||||||||||
Odebrecht Finance Ltd. | (800 | ) | (463,000 | ) | ||||||
|
| |||||||||
Communications - | ||||||||||
TDC A/S | GBP | (300 | ) | (503,050 | ) | |||||
Telefonica Emisiones SAU | EUR | (200 | ) | (249,889 | ) | |||||
|
| |||||||||
(752,939 | ) | |||||||||
|
| |||||||||
Consumer Non-Cyclical – (2.2)% | ||||||||||
Carrefour SA | (200 | ) | (227,914 | ) | ||||||
Casino Guichard Perrachon SA | (200 | ) | (233,367 | ) | ||||||
|
| |||||||||
(461,281 | ) | |||||||||
|
| |||||||||
Energy – (6.3)% | ||||||||||
Cenovus Energy, Inc. | U.S.$ | (200 | ) | (190,371 | ) | |||||
Encana Corp. | (200 | ) | (185,996 | ) | ||||||
Kinder Morgan, Inc./DE | (400 | ) | (361,814 | ) | ||||||
MPLX LP | (400 | ) | (364,985 | ) |
AB CREDIT LONG/SHORT PORTFOLIO • | 25 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Repsol International Finance BV | EUR | (200 | ) | $ | (241,372 | ) | ||||
|
| |||||||||
(1,344,538 | ) | |||||||||
|
| |||||||||
Services – (1.0)% | ||||||||||
Amazon.com, Inc. | U.S.$ | (200 | ) | (208,699 | ) | |||||
|
| |||||||||
Technology – (1.0)% | ||||||||||
Hewlett-Packard Co. | (200 | ) | (207,832 | ) | ||||||
|
| |||||||||
(3,901,564 | ) | |||||||||
|
| |||||||||
Total Corporates – Investment Grade | (4,646,696 | ) | ||||||||
|
| |||||||||
QUASI-SOVEREIGNS – (1.0)% | ||||||||||
Quasi-Sovereign Bonds – (1.0)% | ||||||||||
Venezuela – (1.0)% | ||||||||||
Petroleos de Venezuela SA | (600 | ) | (207,000 | ) | ||||||
|
| |||||||||
EMERGING MARKETS – | ||||||||||
Venezuela – (0.8)% | ||||||||||
Venezuela Government International Bond | (400 | ) | (161,000 | ) | ||||||
|
| |||||||||
Total Securities Sold Short | (11,770,089 | ) | ||||||||
|
| |||||||||
Total Investments – 37.8% | 8,037,413 | |||||||||
Other assets less liabilities – 62.2% | 13,215,617 | |||||||||
|
| |||||||||
Net Assets – 100.0% | $ | 21,253,030 | ||||||||
|
|
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at October 31, 2015 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Purchased Contracts |
| |||||||||||||||||||
EURO STOXX 50 Index Futures | 3 | December 2015 | $ | 104,933 | $ | 112,263 | $ | 7,330 | ||||||||||||
EURO-BUND Futures | 4 | December 2015 | 673,168 | 691,505 | 18,337 | |||||||||||||||
Russell 2000 Mini Futures | 1 | December 2015 | 115,412 | 115,830 | 418 |
26 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Type | Number of Contracts | Expiration Month | Original Value | Value at October 31, 2015 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Sold Contracts | ||||||||||||||||||||
S&P 500 E Mini Futures | 2 | December 2015 | $ | 200,284 | $ | 207,370 | $ | (7,086 | ) | |||||||||||
U.S. Long Bond (CBT) Futures | 8 | December 2015 | 1,250,887 | 1,251,500 | (613 | ) | ||||||||||||||
U.S. T-Note 10 Yr (CBT) Futures | 4 | December 2015 | 512,377 | 510,750 | 1,627 | |||||||||||||||
|
| |||||||||||||||||||
$ | 20,013 | |||||||||||||||||||
|
|
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note D)
Counterparty | Contracts to Deliver (000) | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||
Credit Suisse International | EUR | 6 | USD | 7 | 12/03/15 | $ | 49 | |||||||||
Deutsche Bank AG | BRL | 146 | USD | 36 | 11/04/15 | (1,451 | ) | |||||||||
Deutsche Bank AG | USD | 38 | BRL | 146 | 11/04/15 | 23 | ||||||||||
Royal Bank of Scotland PLC | USD | 376 | GBP | 245 | 11/10/15 | 1,588 | ||||||||||
Standard Chartered Bank | BRL | 340 | USD | 87 | 11/04/15 | (1,275 | ) | |||||||||
Standard Chartered Bank | USD | 87 | BRL | 340 | 11/04/15 | 717 | ||||||||||
Standard Chartered Bank | BRL | 243 | USD | 62 | 12/02/15 | (734 | ) | |||||||||
State Street Bank & Trust Co. | DKK | 365 | USD | 55 | 11/05/15 | 1,576 | ||||||||||
State Street Bank & Trust Co. | USD | 37 | DKK | 242 | 11/05/15 | (1,275 | ) | |||||||||
State Street Bank & Trust Co. | GBP | 3 | USD | 4 | 11/10/15 | 23 | ||||||||||
State Street Bank & Trust Co. | USD | 51 | GBP | 33 | 11/10/15 | (212 | ) | |||||||||
State Street Bank & Trust Co. | CAD | 139 | USD | 104 | 11/19/15 | (2,410 | ) | |||||||||
State Street Bank & Trust Co. | BRL | 185 | USD | 47 | 12/02/15 | (315 | ) | |||||||||
State Street Bank & Trust Co. | EUR | 82 | USD | 91 | 12/03/15 | 517 | ||||||||||
State Street Bank & Trust Co. | USD | 2,514 | EUR | 2,277 | 12/03/15 | (8,715 | ) | |||||||||
State Street Bank & Trust Co. | AUD | 5 | USD | 3 | 12/18/15 | – 0 | –^ | |||||||||
|
| |||||||||||||||
$ | (11,894 | ) | ||||||||||||||
|
|
PUT OPTIONS WRITTEN (see Note D)
Description | Contracts | Exercise Price | Expiration Month | Premiums Received | U.S. $ Value | |||||||||||||||
iShares iBoxx High Yield Corp.(l) | 119 | $ | 76.00 | December 2015 | $ | 4,636 | $ | (1,547 | ) | |||||||||||
SPDR S&P 500 ETF Trust(l) | 20 | 177.00 | November 2015 | 1,339 | (120 | ) | ||||||||||||||
SPDR S&P 500 ETF Trust(l) | 21 | 184.00 | November 2015 | 944 | (231 | ) | ||||||||||||||
SPDR S&P 500 ETF Trust(l) | 13 | 190.00 | November 2015 | 402 | (279 | ) | ||||||||||||||
Taylor Morrison Home Corp.(l) | 17 | 22.50 | January 2016 | 4,557 | (7,225 | ) | ||||||||||||||
Tesla Motors, Inc.(l) | 22 | 160.00 | January 2016 | 31,943 | (7,425 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||
$ | 43,821 | $ | (16,827 | ) | ||||||||||||||||
|
|
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 27 |
Portfolio of Investments
CREDIT DEFAULT SWAPTIONS WRITTEN (see Note D)
Description | Counterparty | Buy/Sell Protection | Strike Rate | Expiration Date | Notional Amount (000) | Premiums Received | Market Value | |||||||||||||||||||
Put – CDX-NAHY Series 24, | Deutsche Bank AG | Sell | 101.00 | % | 11/18/15 | $ | 1,000 | $ | 594 | $ | (115 | ) | ||||||||||||||
Put – CDX-NAHY Series 24, | Barclays Bank PLC | Sell | 98.00 | 11/18/15 | 670 | 603 | (280 | ) | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||
$ | 1,197 | $ | (395 | ) | ||||||||||||||||||||||
|
|
|
|
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note D)
Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at October 31, 2015 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Buy Contracts | ||||||||||||||||||||
Morgan Stanley & Co. LLC/(INTRCONX): | ||||||||||||||||||||
CDX-NAHY Series 23, | (5.00 | )% | 3.09 | % | $ | 660 | $ | (51,098 | ) | $ | (3,511 | ) | ||||||||
CDX-NAHY Series 24, | (5.00 | ) | 3.59 | 277 | (17,537 | ) | (212 | ) | ||||||||||||
CDX-NAHY Series 24, | (5.00 | ) | 3.59 | 495 | (31,316 | ) | (16,004 | ) | ||||||||||||
CDX-NAHY Series 25, | (5.00 | ) | 4.27 | 400 | (14,863 | ) | (4,551 | ) | ||||||||||||
CDX-NAIG Series 23, | (1.00 | ) | 0.72 | 2,500 | (30,696 | ) | 8,551 | |||||||||||||
iTraxx-XOVER Series 23, | (5.00 | ) | 3.13 | EUR | 180 | (16,544 | ) | (3,221 | ) | |||||||||||
iTraxx-XOVER Series 23, | (5.00 | ) | 3.13 | 720 | (66,177 | ) | (7,765 | ) | ||||||||||||
Sale Contracts | ||||||||||||||||||||
Morgan Stanley & Co. LLC/(CME): | ||||||||||||||||||||
CDX-NAHY Series 23, | 5.00 | 3.09 | $ | 495 | 38,323 | 5,345 | ||||||||||||||
Morgan Stanley & Co. LLC/(INTRCONX): | ||||||||||||||||||||
CDX-NAHY Series 23, | 5.00 | 3.09 | 165 | 12,775 | 4,534 | |||||||||||||||
CDX-NAHY Series 24, | 5.00 | 3.59 | 396 | 25,053 | 14,061 | |||||||||||||||
iTraxx-XOVER Series 23, | 5.00 | 3.13 | EUR | 180 | 16,544 | 1,096 | ||||||||||||||
iTraxx-XOVER Series 23, | 5.00 | 3.13 | 840 | 76,694 | (3,703 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||
$ | (58,842 | ) | $ | (5,380 | ) | |||||||||||||||
|
|
|
|
* | Termination date |
28 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
CENTRALLY CLEARED INTEREST RATE SWAPS (see Note D)
Rate Type | ||||||||||||||||||||
Clearing Broker/ (Exchange) | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Morgan Stanley & Co. LLC/(CME) | $ | 250 | 5/09/19 | 1.732 | % | 3 Month LIBOR | $ | (6,345 | ) |
CREDIT DEFAULT SWAPS (see Note D)
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) | ||||||||||||||||||
Buy Contracts |
| |||||||||||||||||||||||
Barclays Bank PLC: | ||||||||||||||||||||||||
Australia and New Zealand Banking Group Ltd., | (1.00 | )% | 0.78 | % | $ | 200 | $ | (2,218 | ) | $ | (3,059 | ) | $ | 841 | ||||||||||
Boyd Gaming Corp., | (5.00 | ) | 2.42 | 200 | (25,837 | ) | (20,757 | ) | (5,080 | ) | ||||||||||||||
Commonwealth Bank of Australia, | (1.00 | ) | 0.78 | 200 | (2,227 | ) | (3,059 | ) | 832 | |||||||||||||||
Federative Republic of Brazil, | (1.00 | ) | 4.34 | 400 | 58,893 | 57,362 | 1,531 | |||||||||||||||||
National Australia Bank Ltd., | (1.00 | ) | 0.72 | 200 | (2,783 | ) | (3,059 | ) | 276 | |||||||||||||||
Stena Aktiebolag, | (5.00 | ) | 5.00 | EUR | 170 | (1,111 | ) | 1,572 | (2,683 | ) | ||||||||||||||
Teck Resources Limited, | (5.00 | ) | 10.57 | $ | 400 | 76,495 | 97,442 | (20,947 | ) | |||||||||||||||
Weatherford International Ltd., | (1.00 | ) | 5.71 | 400 | 78,552 | 66,772 | 11,780 | |||||||||||||||||
Westpac banking Corp., | (1.00 | ) | 0.78 | 200 | (2,219 | ) | (3,059 | ) | 840 |
AB CREDIT LONG/SHORT PORTFOLIO • | 29 |
Portfolio of Investments
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) | ||||||||||||||||||
Windstream Services, LLC, | (5.00 | )% | 7.54 | % | $ | 400 | $ | 38,334 | $ | 56,849 | $ | (18,515 | ) | |||||||||||
Citibank, NA: | ||||||||||||||||||||||||
Alcoa, Inc., | (1.00 | ) | 2.99 | 200 | 18,252 | 32,436 | (14,184 | ) | ||||||||||||||||
ArcelorMittal, | (1.00 | ) | 6.04 | EUR | 160 | 37,060 | 24,469 | 12,591 | ||||||||||||||||
Dell, Inc., | (1.00 | ) | 2.64 | 200 | 12,453 | 9,021 | 3,432 | |||||||||||||||||
J. C. Penney Co., Inc., | (5.00 | ) | 0.06 | 100 | (2,875 | ) | 1,372 | (4,247 | ) | |||||||||||||||
Quest Diagnostics, Inc., | (1.00 | ) | 0.79 | 500 | (5,715 | ) | (1,937 | ) | (3,778 | ) | ||||||||||||||
Renault, | (1.00 | ) | 1.00 | EUR | 160 | (233 | ) | – 0 | – | (233 | ) | |||||||||||||
Republic of Colombia, | (1.00 | ) | 2.07 | 400 | 20,055 | 21,460 | (1,405 | ) | ||||||||||||||||
Republic of Indonesia, | (1.00 | ) | 2.18 | 400 | 21,897 | 22,135 | (238 | ) | ||||||||||||||||
Republic of South Africa, | (1.00 | ) | 2.50 | 400 | 27,920 | 30,187 | (2,267 | ) | ||||||||||||||||
Republic of Turkey, | (1.00 | ) | 2.50 | 400 | 27,875 | 28,605 | (730 | ) | ||||||||||||||||
Russian Federation, | (1.00 | ) | 2.77 | 400 | 32,502 | 37,439 | (4,937 | ) | ||||||||||||||||
Transocean, Inc., | (5.00 | ) | 8.90 | 1,000 | 132,035 | 99,458 | 32,577 | |||||||||||||||||
Credit Suisse International: | ||||||||||||||||||||||||
BellSouth Corp., | (1.00 | ) | 0.60 | 1,000 | (15,880 | ) | (19,060 | ) | 3,180 | |||||||||||||||
ConAgra Foods, Inc., | (1.00 | ) | 1.05 | 600 | 2,695 | (5,321 | ) | 8,016 |
30 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
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) | ||||||||||||||||||
Western Union Co. (The), | (1.00 | )% | 0.32 | % | $ | 600 | $ | (8,116 | ) | $ | (5,028 | ) | $ | (3,088 | ) | |||||||||
Deutsche Bank AG: | ||||||||||||||||||||||||
Lloyds Bank PLC, | (1.00 | ) | 0.40 | EUR | 470 | (13,441 | ) | (10,207 | ) | (3,234 | ) | |||||||||||||
Goldman Sachs International: | ||||||||||||||||||||||||
Amkor Technology, Inc., | (5.00 | ) | 3.23 | $ | 100 | (8,777 | ) | (4,927 | ) | (3,850 | ) | |||||||||||||
Teck Resources Ltd., | (1.00 | ) | 7.87 | 250 | 40,499 | 5,333 | 35,166 | |||||||||||||||||
Teck Resources Ltd., | (5.00 | ) | 10.57 | 200 | 38,247 | 31,135 | 7,112 | |||||||||||||||||
Transocean, Inc., | (5.00 | ) | 8.75 | 320 | 39,133 | 23,410 | 15,723 | |||||||||||||||||
JPMorgan Chase Bank, NA: | ||||||||||||||||||||||||
Kohl’s Corp., | (1.00 | ) | 0.30 | 400 | (4,675 | ) | (2,847 | ) | (1,828 | ) | ||||||||||||||
Repsol, S.A., | (1.00 | ) | 1.81 | EUR | 200 | 8,516 | 11,073 | (2,557 | ) | |||||||||||||||
Morgan Stanley Capital Services LLC: | ||||||||||||||||||||||||
ArcelorMittal, | (1.00 | ) | 6.04 | 210 | 48,646 | 45,444 | 3,202 | |||||||||||||||||
British Telecommunications PLC, | (1.00 | ) | 0.78 | 960 | (12,799 | ) | (10,685 | ) | (2,114 | ) | ||||||||||||||
Chesapeake Energy Corp., | (5.00 | ) | 16.40 | $ | 200 | 63,868 | 28,621 | 35,247 | ||||||||||||||||
Koninklijke KPN N.V., | (1.00 | ) | 0.86 | EUR | 350 | (3,158 | ) | (580 | ) | (2,578 | ) | |||||||||||||
Noble Corp., | (1.00 | ) | 5.92 | $ | 150 | 29,631 | 22,148 | 7,483 |
AB CREDIT LONG/SHORT PORTFOLIO • | 31 |
Portfolio of Investments
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) | ||||||||||||||||||
United States Steel Corp., | (5.00 | )% | 14.87 | % | $ | 200 | $ | 58,109 | $ | 14,250 | $ | 43,859 | ||||||||||||
Sale Contracts | ||||||||||||||||||||||||
Bank of America, NA: | ||||||||||||||||||||||||
Genworth Holdings, Inc., | 5.00 | 5.69 | 20 | (446 | ) | 820 | (1,266 | ) | ||||||||||||||||
Barclays Bank PLC: | ||||||||||||||||||||||||
Assured Guaranty Municipal Corp., | 5.00 | 2.85 | 20 | 1,895 | 1,464 | 431 | ||||||||||||||||||
United Rentals (North America), Inc., | 5.00 | 2.58 | 400 | 45,198 | 28,347 | 16,851 | ||||||||||||||||||
Citibank, NA: | ||||||||||||||||||||||||
Nabors Industries, Inc., | 1.00 | 3.89 | 20 | (2,419 | ) | (2,224 | ) | (195 | ) | |||||||||||||||
NRG Energy, Inc., | 5.00 | 4.52 | 100 | 1,660 | 8,437 | (6,777 | ) | |||||||||||||||||
Safeway, Inc., | 1.00 | 2.17 | 20 | (1,048 | ) | (1,621 | ) | 573 | ||||||||||||||||
Staples, Inc., | 1.00 | 1.52 | 20 | (482 | ) | (791 | ) | 309 | ||||||||||||||||
Transocean, Inc., | 1.00 | 8.90 | 1,200 | (332,014 | ) | (279,301 | ) | (52,713 | ) | |||||||||||||||
Unitymedia GmbH, | 5.00 | 1.78 | EUR | 90 | 14,764 | 15,335 | (571 | ) | ||||||||||||||||
Weatherford International LLC, | 1.00 | 4.63 | $ | 20 | (2,932 | ) | (1,723 | ) | (1,209 | ) | ||||||||||||||
Credit Suisse International: | ||||||||||||||||||||||||
AT&T, Inc., | 1.00 | 0.52 | 1,000 | 18,736 | 22,124 | (3,388 | ) | |||||||||||||||||
Avon Products, Inc., | 1.00 | 9.14 | 20 | (5,758 | ) | (3,436 | ) | (2,322 | ) |
32 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
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) | ||||||||||||||||||
Freeport-McMoran Inc., | 1.00 | % | 5.49 | % | $ | 20 | $ | (3,491 | ) | $ | (1,408 | ) | $ | (2,083 | ) | |||||||||
Teck Resources Ltd., | 1.00 | 10.19 | 20 | (6,186 | ) | (1,497 | ) | (4,689 | ) | |||||||||||||||
Transocean Inc., | 1.00 | 8.90 | 20 | (5,534 | ) | (4,194 | ) | (1,340 | ) | |||||||||||||||
Western Union Co. (The), | 1.00 | 0.89 | 400 | 1,586 | (4,330 | ) | 5,916 | |||||||||||||||||
Goldman Sachs International: | ||||||||||||||||||||||||
Teck Resources Ltd., | 1.00 | 10.19 | 200 | (61,856 | ) | (18,934 | ) | (42,922 | ) | |||||||||||||||
JPMorgan Chase Bank, NA: | ||||||||||||||||||||||||
Kohl’s Corp., | 1.00 | 0.96 | 400 | 225 | (4,202 | ) | 4,427 | |||||||||||||||||
Morgan Stanley Capital Services LLC: | ||||||||||||||||||||||||
AK Steel Corp., | 5.00 | 23.32 | 200 | (88,952 | ) | (51,299 | ) | (37,653 | ) | |||||||||||||||
Chesapeake Energy Corp., | 5.00 | 13.58 | 200 | (38,285 | ) | (17,567 | ) | (20,718 | ) | |||||||||||||||
Chesapeake Energy Corp., | 5.00 | 14.27 | 100 | (21,162 | ) | (11,774 | ) | (9,388 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 313,102 | $ | 346,634 | $ | (33,532 | ) | ||||||||||||||||||
|
|
|
|
|
|
* | Termination date |
AB CREDIT LONG/SHORT PORTFOLIO • | 33 |
Portfolio of Investments
TOTAL RETURN SWAPS (see Note D)
Counterparty & Referenced Obligation | # of Shares or Units | Rate Paid/ Received | Notional Amount (000) | Maturity Date | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Receive Total Return on Reference Obligation |
| |||||||||||||||||||
Morgan Stanley Capital Services LLC iBoxx $ Liquid High Yield Index | 980,000 | LIBOR | $ | 980 | 12/21/15 | $ | 41,876 | |||||||||||||
Pay Total Return on Reference Obligation |
| |||||||||||||||||||
Bank of America, NA iBoxx $ Liquid High Yield Index | 225,000 | LIBOR | 225 | 12/21/15 | (2,851 | ) | ||||||||||||||
iBoxx $ Liquid High Yield Index | 610,000 | LIBOR | 610 | 12/21/15 | (3,811 | ) | ||||||||||||||
JPMorgan Chase Bank, NA iBoxx $ Liquid High Yield Index | 700,000 | LIBOR | 700 | 12/21/15 | (20,842 | ) | ||||||||||||||
Morgan Stanley Capital Services LLC iBoxx $ Liquid High Yield Index | 765,000 | LIBOR | 765 | 12/21/15 | (9,862 | ) | ||||||||||||||
|
| |||||||||||||||||||
$ | 4,510 | |||||||||||||||||||
|
|
^ | Less than $0.50. |
(a) | Security is in default and is non-income producing. |
(b) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security, which represents 0.04% of net assets as of October 31, 2015, is considered illiquid and restricted. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Magnetation LLC/Mag Finance Corp. | 2/19/15 | $ | 21,437 | $ | 7,700 | 0.04 | % |
(c) | 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 $1,449,116 or 6.8% of net assets. |
(d) | Pay-In-Kind Payments (PIK). The issuer may pay cash interest and/or interest in additional debt securities. Rates shown are the rates in effect at October 31, 2015. |
(e) | Floating Rate Security. Stated interest rate was in effect at October 31, 2015. |
(f) | Convertible security. |
(g) | Coupon rate adjusts periodically based upon a predetermined schedule. Stated interest rate in effect at October 31, 2015. |
(h) | Securities are perpetual and, thus, do not have a predetermined maturity date. The date shown, if applicable, reflects the next call date. |
(i) | Non-income producing security. |
(j) | Fair valued by the Adviser. |
(k) | Illiquid security. |
(l) | One contract relates to 100 shares. |
(m) | One contract relates to 1 share. |
(n) | 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. |
34 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
(o) | Investment in affiliated money market mutual fund. The rate shown represents the 7-day yield as of period end. |
(p) | Position, or a portion thereof, has been segregated to collateralize OTC derivatives outstanding. |
Currency Abbreviations:
AUD – Australian Dollar
BRL – Brazilian Real
CAD – Canadian Dollar
DKK – Danish Krone
EUR – Euro
GBP – Great British Pound
USD – United States Dollar
Glossary:
CBT – Chicago Board of Trade
CDX-NAHY – North American High Yield Credit Default Swap Index
CDX-NAIG – North American Investment Grade Credit Default Swap Index
CME – Chicago Mercantile Exchange
ETF – Exchange Traded Fund
INTRCONX – Inter-Continental Exchange
LIBOR – London Interbank Offered Rates
REIT – Real Estate Investment Trust
RTP – Right to Pay
RTR – Right To Receive
SPDR – Standard & Poor’s Depository Receipt
See notes to financial statements.
AB CREDIT LONG/SHORT PORTFOLIO • | 35 |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
October 31, 2015
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $18,335,395) | $ | 17,154,442 | ||
Affiliated issuers (cost $2,653,060) | 2,653,060 | |||
Cash collateral due from broker | 377,295 | |||
Foreign currencies, at value (cost $35,162) | 34,957 | |||
Deposit at broker for securities sold short | 12,946,051 | |||
Upfront premium paid on credit default swaps | 844,520 | |||
Receivable for investment securities sold | 490,546 | |||
Interest and dividends receivable | 260,569 | |||
Unrealized appreciation on credit default swaps | 252,195 | |||
Unrealized appreciation on total return swaps | 41,876 | |||
Receivable due from Adviser | 3,217 | |||
Receivable for terminated credit default swaps | 10,578 | |||
Unrealized appreciation on forward currency exchange contracts | 4,493 | |||
|
| |||
Total assets | 35,073,799 | |||
|
| |||
Liabilities | ||||
Due to custodian | 381,765 | |||
Options written, at value (premiums received $43,821) | 16,827 | |||
Swaptions written, at value (premiums received $1,197) | 395 | |||
Payable for securities sold short, at value (proceeds received $12,703,546) | 11,770,089 | |||
Upfront premium received on credit default swaps | 497,886 | |||
Collateral due to broker | 360,000 | |||
Unrealized depreciation on credit default swaps | 285,727 | |||
Interest expense payable | 216,841 | |||
Payable for investment securities purchased | 66,217 | |||
Unrealized depreciation on total return swaps | 37,366 | |||
Unrealized depreciation on forward currency exchange contracts | 16,387 | |||
Payable for variation margin on exchange-traded derivatives | 4,916 | |||
Transfer Agent fee payable | 2,919 | |||
Distribution fee payable | 124 | |||
Accrued expenses | 163,310 | |||
|
| |||
Total liabilities | 13,820,769 | |||
|
| |||
Net Assets | $ | 21,253,030 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 2,153 | ||
Additional paid-in capital | 21,470,421 | |||
Undistributed net investment income | 48,954 | |||
Accumulated net realized loss on investment | (16,217 | ) | ||
Net unrealized depreciation on investments | (252,281 | ) | ||
|
| |||
$ | 21,253,030 | |||
|
|
See notes to financial statements.
36 | • AB CREDIT LONG/SHORT PORTFOLIO |
Statement of Assets & Liabilities
Net Asset Value Per Share—30 billion shares of capital stock authorized, $.001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 186,419 | 18,932 | $ | 9.85 | * | ||||||
| ||||||||||||
C | $ | 99,612 | 10,191 | $ | 9.77 | |||||||
| ||||||||||||
Advisor | $ | 20,966,999 | 2,124,028 | $ | 9.87 | |||||||
|
* | The maximum offering price per share for Class A shares was $10.29 which reflects a sales charge of 4.25%. |
See notes to financial statements.
AB CREDIT LONG/SHORT PORTFOLIO • | 37 |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Year Ended October 31, 2015
Investment Income | ||||||||
Interest | $ | 1,147,131 | ||||||
Dividends | ||||||||
Unaffiliated issuers (net of foreign taxes withheld of $286) | 92,874 | |||||||
Affiliated issuers | 2,670 | |||||||
Other income | 225 | $ | 1,242,900 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 190,435 | |||||||
Distribution fee—Class A | 339 | |||||||
Distribution fee—Class C | 868 | |||||||
Transfer agency—Class A | 117 | |||||||
Transfer agency—Class C | 94 | |||||||
Transfer agency—Advisor Class | 17,903 | |||||||
Custodian | 135,519 | |||||||
Audit and tax | 112,412 | |||||||
Administrative | 53,056 | |||||||
Amortization of offering expenses | 49,076 | |||||||
Registration fees | 48,400 | |||||||
Legal | 39,972 | |||||||
Directors’ fees | 18,036 | |||||||
Printing | 11,626 | |||||||
Miscellaneous | 30,216 | |||||||
|
| |||||||
Total operating expenses (see Note B) | 708,069 | |||||||
Interest expense | 661,155 | |||||||
Dividend expense on securities sold short | 494 | |||||||
Broker fee on securities sold short | 94,856 | |||||||
|
| |||||||
Total expenses | 1,464,574 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (474,108 | ) | ||||||
|
| |||||||
Net expenses | 990,466 | |||||||
|
| |||||||
Net investment income | 252,434 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (1,266,871 | ) | ||||||
Securities sold short | 1,194,862 | |||||||
Futures | (57,524 | ) | ||||||
Options written | 52,786 | |||||||
Swaptions written | 96,272 | |||||||
Swaps | (6,797 | ) | ||||||
Foreign currency transactions | (226,953 | ) | ||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | (802,990 | ) | ||||||
Securities sold short | 652,365 | |||||||
Futures | 33,840 | |||||||
Options written | 29,825 | |||||||
Swaptions written | (3,001 | ) | ||||||
Swaps | (17,393 | ) | ||||||
Foreign currency denominated assets and liabilities | (19,391 | ) | ||||||
|
| |||||||
Net loss on investment and foreign currency transactions | (340,970 | ) | ||||||
|
| |||||||
Contributions from Affiliates (see Note B) | 1,338 | |||||||
|
| |||||||
Net Decrease in Net Assets from Operations | $ | (87,198 | ) | |||||
|
|
See notes to financial statements.
38 | • AB CREDIT LONG/SHORT PORTFOLIO |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Year Ended October 31, 2015 | May 7, 2014(a) to October 31, 2014 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 252,434 | $ | 197,119 | ||||
Net realized gain (loss) on investment transactions and foreign currency transactions | (214,225 | ) | 46,256 | |||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | (126,745 | ) | (125,536 | ) | ||||
Contributions from Affiliates (see Note B) | 1,338 | – 0 | – | |||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | (87,198 | ) | 117,839 | |||||
Dividends to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (1,069 | ) | (87 | ) | ||||
Class C | (363 | ) | (182 | ) | ||||
Advisor Class | (201,440 | ) | (101,727 | ) | ||||
Capital Stock Transactions | ||||||||
Net increase | 522,726 | 21,004,531 | ||||||
|
|
|
| |||||
Total increase | 232,656 | 21,020,374 | ||||||
Net Assets | ||||||||
Beginning of period | 21,020,374 | – 0 | – | |||||
|
|
|
| |||||
End of period (including undistributed net investment income of $48,954 and $130,266, respectively) | $ | 21,253,030 | $ | 21,020,374 | ||||
|
|
|
|
(a) | Commencement of operations. |
See notes to financial statements.
AB CREDIT LONG/SHORT PORTFOLIO • | 39 |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
October 31, 2015
NOTE A
Significant Accounting Policies
AB Bond Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940 as an open-end management investment company. Prior to January 20, 2015, the Fund was known as AllianceBernstein Bond Fund, Inc. The Fund, which is a Maryland corporation, operates as a series company comprised of nine portfolios currently in operation: the AB Intermediate Bond Portfolio, the AB Bond Inflation Strategy Portfolio, the AB Municipal Bond Inflation Strategy Portfolio, the AB All Market Real Return Portfolio (formerly AllianceBernstein Real Asset Strategy), the AB Limited Duration High Income Portfolio, the AB Government Reserves Portfolio, the AB Tax-Aware Fixed Income Portfolio, the AB Credit Long/Short Portfolio and the AB High Yield Portfolio. They are each diversified Portfolios, with the exception of the AB Credit Long/Short Portfolio and the AB High Yield Portfolio, which are non-diversified. The AB Credit Long/Short Portfolio commenced operations on May 7, 2014. The AB High Yield Portfolio commenced operations July 15, 2014. Each Portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to the AB Credit Long/Short Portfolio (the “Portfolio”). Prior to January 20, 2015, the Portfolio was known as AllianceBernstein Credit Long/Short Portfolio. The Fund have authorized the issuance of Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I, Class Z, Class 1 and Class 2 shares. Class B, Class R, Class K, Class I, Class Z, Class 1 and Class 2 shares are not currently offered. Class A shares are sold with a front-end sales charge of up to 4.25% for purchases not exceeding $1,000,000. With respect to purchases of $1,000,000 or more, Class A shares redeemed within one year of purchase may be subject to a contingent deferred sales charge of 1%. Class C shares are subject to a contingent deferred sales charge of 1% on redemptions made within the first year after purchase. Advisor Class shares are sold without any initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. All ten classes of shares have identical voting, dividend, liquidation and other rights, except that the classes bear different distribution and transfer agency expenses. Each class has exclusive voting rights with respect to its distribution plan. 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 Fund 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 Fund’s Board of Directors (the “Board”).
40 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
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 valued at the mid level between the current bid and ask prices. If either a current bid or current ask price is unavailable, AllianceBernstein L.P. (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 value it’s securities at 4:00 p.m., Eastern Time. The earlier close of these foreign markets gives rise to the
AB CREDIT LONG/SHORT PORTFOLIO • | 41 |
Notes to Financial Statements
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 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.
Where readily available market prices or relevant bid prices are not available for certain equity investments, such investments may be valued based on similar publicly traded investments, movements in relevant indices since last available prices or based upon underlying company fundamentals and comparable company data (such as multiples to earnings or other multiples to equity). Where an investment is valued using an observable input, such as another publicly traded security, the investment will be classified as Level 2. If management determines that an adjustment is appropriate based on restrictions on resale, illiquidity or
42 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
uncertainty, and such adjustment is a significant component of the valuation, the investment will be classified as Level 3. An investment will also be classified as Level 3 where management uses company fundamentals and other significant inputs to determine the valuation.
Options are valued using market-based inputs to models, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency, where such inputs and models are available. Alternatively the values may be obtained through unobservable management determined inputs and/or management’s proprietary models. Where models are used, the selection of a particular model to value an option depends upon the contractual terms of, and specific risks inherent in, the option as well as the availability of pricing information in the market. Valuation models require a variety of inputs, including contractual terms, market prices, measures of volatility and correlations of such inputs. Exchange traded options generally will be classified as Level 2. For options that do not trade on exchange but trade in liquid markets, inputs can generally be verified and model selection does not involve significant management judgment. Options are classified within Level 2 on the fair value hierarchy when all of the significant inputs can be corroborated to market evidence. Otherwise such instruments 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 – Non-Investment Grade | $ | – 0 | – | $ | 8,187,511 | $ | 120,900 | $ | 8,308,411 | |||||||
Corporates – Investment Grade | – 0 | – | 5,254,993 | – 0 | – | 5,254,993 | ||||||||||
Investment Companies | 1,044,970 | – 0 | – | – 0 | – | 1,044,970 | ||||||||||
Common Stocks | 458,881 | 28,159 | 3,675 | 490,715 | ||||||||||||
Governments – Sovereign Agencies | – 0 | – | 441,705 | – 0 | – | 441,705 | ||||||||||
Collateralized Mortgage Obligations | – 0 | – | – 0 | – | 358,384 | 358,384 | ||||||||||
Quasi-Sovereigns | – 0 | – | 247,800 | – 0 | – | 247,800 | ||||||||||
Emerging Markets – Corporate Bonds | – 0 | – | 208,000 | – 0 | – | 208,000 | ||||||||||
Emerging Markets – Sovereigns | – 0 | – | 196,875 | – 0 | – | 196,875 | ||||||||||
Preferred Stocks | 114,349 | 61,506 | – 0 | – | 175,855 | |||||||||||
Governments – Treasuries | – 0 | – | 154,107 | – 0 | – | 154,107 | ||||||||||
Bank Loans | – 0 | – | – 0 | – | 133,325 | 133,325 | ||||||||||
Options Purchased – Puts | – 0 | – | 16,111 | – 0 | – | 16,111 | ||||||||||
Warrants | – 0 | – | – 0 | – | 13,856 | 13,856 | ||||||||||
Options Purchased – Calls | – 0 | – | 9,340 | – 0 | – | 9,340 | ||||||||||
Short-Term Investments: | ||||||||||||||||
Investment Companies | 2,653,060 | – 0 | – | – 0 | – | 2,653,060 | ||||||||||
U.S. Treasury Bills | – 0 | – | 99,995 | – 0 | – | 99,995 | ||||||||||
Liabilities: | ||||||||||||||||
Corporates – Non-Investment Grade | – 0 | – | (6,755,393 | ) | – 0 | – | (6,755,393 | ) | ||||||||
Corporates – Investment Grade | – 0 | – | (4,646,696 | ) | – 0 | – | (4,646,696 | ) | ||||||||
Quasi-Sovereigns | – 0 | – | (207,000 | ) | – 0 | – | (207,000 | ) | ||||||||
Emerging Markets – Sovereigns | – 0 | – | (161,000 | ) | – 0 | – | (161,000 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 4,271,260 | 3,136,013 | 630,140 | 8,037,413 |
AB CREDIT LONG/SHORT PORTFOLIO • | 43 |
Notes to Financial Statements
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets: | ||||||||||||||||
Futures | $ | 20,382 | $ | 7,330 | $ | – 0 | – | $ | 27,712 | # | ||||||
Forward Currency Exchange Contracts | – 0 | – | 4,493 | – 0 | – | 4,493 | ||||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | 33,587 | – 0 | – | 33,587 | # | |||||||||
Credit Default Swaps | – 0 | – | 252,195 | – 0 | – | 252,195 | ||||||||||
Total Return Swaps | – 0 | – | 41,876 | – 0 | – | 41,876 | ||||||||||
Liabilities: | ||||||||||||||||
Futures | (7,699 | ) | – 0 | – | – 0 | – | (7,699 | )# | ||||||||
Forward Currency Exchange Contracts | – 0 | – | (16,387 | ) | – 0 | – | (16,387 | ) | ||||||||
Put Options Written | – 0 | – | (16,827 | ) | – 0 | – | (16,827 | ) | ||||||||
Credit Default Swaptions Written | – 0 | – | (395 | ) | – 0 | – | (395 | ) | ||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | (38,967 | ) | – 0 | – | (38,967 | )# | ||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | (6,345 | ) | – 0 | – | (6,345 | )# | ||||||||
Credit Default Swaps | – 0 | – | (285,727 | ) | – 0 | – | (285,727 | ) | ||||||||
Total Return Swaps | – 0 | – | (37,366 | ) | – 0 | – | (37,366 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total^ | $ | 4,283,943 | $ | 3,073,480 | $ | 630,140 | $ | 7,987,563 | ||||||||
|
|
|
|
|
|
|
|
* | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. Other financial instruments may also include options written and swaptions written which are valued at market value. |
# | 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 following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value.
Corporates - Non- Investment Grade | Common Stocks | Collateralized Mortgage Obligations | ||||||||||
Balance as of 10/31/14 | $ | 124,800 | $ | – 0 | – | $ | 699,902 | |||||
Accrued discounts/(premiums) | (438 | ) | – 0 | – | 672 | |||||||
Realized gain (loss) | – 0 | – | – 0 | – | (11,947 | ) | ||||||
Change in unrealized appreciation/depreciation | (3,462 | ) | 1,891 | 9,275 | ||||||||
Purchases/Payups | – 0 | – | 1,784 | – 0 | – | |||||||
Sales/Paydowns | – 0 | – | – 0 | – | (339,518 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
|
|
|
|
|
| |||||||
Balance as of 10/31/15 | $ | 120,900 | $ | 3,675 | $ | 358,384 | ||||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 10/31/15* | $ | (3,462 | ) | $ | 1,891 | $ | (6,165 | ) | ||||
|
|
|
|
|
|
44 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
Bank Loans | Warrants | Total | ||||||||||
Balance as of 10/31/14 | $ | 466,414 | $ | – 0 | – | $ | 1,291,116 | |||||
Accrued discounts/(premiums) | 585 | – 0 | – | 819 | ||||||||
Realized gain (loss) | (7,890 | ) | – 0 | – | (19,837 | ) | ||||||
Change in unrealized appreciation/depreciation | 4,054 | 8,868 | 20,626 | |||||||||
Purchases/Payups | 36,375 | 4,988 | 43,147 | |||||||||
Sales/Paydowns | (366,213 | ) | – 0 | – | (705,731 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
|
|
|
|
|
| |||||||
Balance as of 10/31/15 | $ | 133,325 | $ | 13,856 | $ | 630,140 | ||||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 10/31/15* | $ | (1,697 | ) | $ | 8,868 | $ | (565 | ) | ||||
|
|
|
|
|
|
* | 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. |
The following presents information about significant unobservable inputs related to the Portfolio’s Level 3 investments at October 31, 2015. Securities priced by third party vendors are excluded from the following table.
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||
Fair Value at 10/31/15 | Valuation Technique | Unobservable | Range/ Weighted Average | |||||||||
Bank Loans | $ | 33,544 | Market Approach | EBITDA* EBITDA Multiple Scrap Value | $ $ | 28 mil – $ 70 mil / NA 6X 154 mil / NA |
|
* | Earnings before Interest, Taxes, Depreciation and Amortization. |
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.
AB CREDIT LONG/SHORT PORTFOLIO • | 45 |
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. Currency Translation
Assets and liabilities denominated in foreign currencies and commitments under forward currency exchange contracts are translated into U.S. dollars at the mean of the quoted bid and ask prices of such currencies against the U.S. dollar. Purchases and sales of portfolio securities are translated into U.S. dollars at the rates of exchange prevailing when such securities were acquired or sold. Income and expenses are translated into U.S. dollars at rates of exchange prevailing when accrued.
Net realized gain or loss on foreign currency transactions represents foreign exchange gains and losses from sales and maturities of foreign fixed income investments, foreign currency exchange contracts, holding of foreign currencies, currency gains or losses realized between the trade and settlement dates on foreign investment transactions, and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Portfolio’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains and losses from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of net unrealized appreciation or depreciation of foreign currency denominated assets and liabilities.
4. 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. The Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued and
46 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
applied to net investment income, net realized gains and net unrealized appreciation/depreciation as such income and/or gains are earned.
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 tax year) and has concluded that no provision for income tax is required in the Portfolio’s financial statements.
5. Investment Income and Investment Transactions
Dividend income (or dividend expense) is recorded on the ex-dividend date or as soon as the Portfolio is informed of the dividend. Interest income (or interest expense) 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.
6. Class Allocations
All income earned and expenses incurred by the Portfolio are borne on a pro-rata basis by each outstanding class of shares, based on the proportionate interest in the Portfolio represented by the net assets of such class, except for class specific expenses which are allocated to the respective class. Realized and unrealized gains and losses are allocated among the various share classes based on respective net assets.
7. 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.
8. Offering Expenses
Offering expenses of $90,444 were deferred and amortized on a straight line basis over a one year period starting from May 7, 2014 (commencement of operations).
NOTE B
Advisory Fee and Other Transactions with Affiliates
Under the terms of the investment advisory agreement, the Portfolio pays the Adviser an advisory fee at an annual rate of .90% of the Portfolio’s average daily net assets. The fee is accrued daily and paid monthly. The Adviser has agreed to waive its fees and bear certain expenses to the extent necessary to limit total operating expenses on an annual basis (the “Expense Caps”) to 1.35%, 2.10%, and 1.10% of daily average net assets for Class A, Class C, and Advisor Class
AB CREDIT LONG/SHORT PORTFOLIO • | 47 |
Notes to Financial Statements
shares, respectively. Any fees waived and expenses borne by the Adviser through October 31, 2014 are subject to repayment by the Portfolio until October 31, 2017. Any fees waived and expense borne by the Adviser from November 1, 2014 through May 6, 2015 are subject to repayment by the Portfolio until October 31, 2018, provided that no reimbursement payment will be made that would cause the Portfolio’s total annual operating expenses to exceed the net fee percentage set forth in the preceding sentence. The Expense Caps may not be terminated by the Adviser before January 29, 2016. For the year ended October 31, 2015, such reimbursements/waivers amounted to $421,052.
During the year ended October 31, 2015, the Adviser reimbursed the Portfolio $1,338 for trading losses incurred due to a trade entry error.
Pursuant to the investment advisory agreement, the Portfolio may reimburse the Adviser for certain legal and accounting services provided to the Portfolio by the Adviser. For the year ended October 31, 2015, the Adviser voluntarily agreed to waive such fees amounting to $53,056.
The Portfolio compensates AllianceBernstein Investor Services, Inc. (“ABIS”), a wholly-owned subsidiary of the Adviser, under a Transfer Agency Agreement for providing personnel and facilities to perform transfer agency services for the Portfolio. ABIS may make payments to intermediaries that provide omnibus account services, sub-accounting services and/or networking services. Such compensation retained by ABIS amounted to $ 16,569 for the year ended October 31, 2015.
AllianceBernstein Investments, Inc. (the “Distributor”), a wholly-owned subsidiary of the Adviser, serves as the distributor of the Portfolio’s shares. The Distributor has advised the Portfolio that it has retained front-end sales charges of $106 from the sale of Class A shares and received $0 and $0 in contingent deferred sales charges imposed upon redemptions by shareholders of Class A and Class C shares, respectively, for the year ended October 31, 2015.
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 year ended October 31, 2015 is as follows:
Market Value October 31, 2014 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value October 31, 2015 (000) | Dividend Income (000) | ||||||||||||||
$ | 2,038 | $ | 27,318 | $ | 26,703 | $ | 2,653 | $ | 3 |
48 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
Brokerage commissions paid on investment transactions for the year ended October 31, 2015 amounted to $19,040, of which $0 and $0, respectively, was paid to Sanford C. Bernstein & Co. LLC and Sanford C. Bernstein Limited, affiliates of the Adviser.
NOTE C
Distribution Services Agreement
The Portfolio has adopted a Distribution Services Agreement (the “Agreement”) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Agreement, the Portfolio pays distribution and servicing fees to the Distributor at an annual rate of up to .25% of the Portfolio’s average daily net assets attributable to Class A shares, 1% of the Portfolio’s average daily net assets attributable to Class C shares. There are no distribution and servicing fees on the Advisor Class shares. The fees are accrued daily and paid monthly. The Agreement provides that the Distributor will use such payments in their entirety for distribution assistance and promotional activities. Since the commencement of the Portfolio’s operations, the Distributor has incurred expenses in excess of the distribution costs reimbursed by the Portfolio in the amount of $103 for Class C shares. While such costs may be recovered from the Portfolio in future periods so long as the Agreement is in effect, the rate of the distribution and servicing fees payable under the Agreement may not be increased without a shareholder vote. In accordance with the Agreement, there is no provision for recovery of unreimbursed distribution costs incurred by the Distributor beyond the current fiscal year for Class A shares. The Agreement also provides that the Adviser may use its own resources to finance the distribution of the Portfolio’s shares.
NOTE D
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the year ended October 31, 2015, were as follows:
Purchases | Sales | Securities Sold Short | Covers on Securities Sold Short | |||||||||
$ 29,852,619 | $ | 28,595,242 | $ | 18,357,751 | $ | 12,296,933 |
During the year ended October 31, 2015, there were no purchases or sales of U.S. Government Securities.
The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation are as follows:
Gross Unrealized | Net Unrealized Appreciation/ (Depreciation) on Investments | Net Unrealized Appreciation/ (Depreciation) on Securities Sold Short | Net Unrealized Appreciation/ (Depreciation) | |||||||||||||||||
Cost of | Appreciation on Investments | Depreciation on Investments | ||||||||||||||||||
$ 21,073,223 | $ | 216,036 | $ | (1,481,757 | ) | $ | (1,265,721 | ) | $ | 933,457 | (a) | $ | (332,264 | ) |
(a) | Gross unrealized appreciation was $970,664 and gross unrealized depreciation was $(37,207), resulting in net unrealized appreciation of $933,457. |
AB CREDIT LONG/SHORT PORTFOLIO • | 49 |
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:
• | Futures |
The Portfolio may buy or sell futures for investment purposes or for the purpose of hedging its portfolio against adverse effects of potential movements in the market. The Portfolio bears the market risk that arises from changes in the value of these instruments and the imperfect correlation between movements in the price of the futures and movements in the price of the assets, reference rates or indices which they are designed to track. Among other things, the Portfolio may purchase or sell futures for foreign currencies or options thereon for non-hedging purposes as a means of making direct investment in foreign currencies, as described below under “Currency Transactions”.
At the time the Portfolio enters into futures, the Portfolio deposits and maintains as collateral an initial margin with the broker, as required by the exchange 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 exchange-traded futures is generally less than privately negotiated futures, since the clearinghouse, which is the issuer or counterparty to each exchange-traded future, 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.
Use of long futures subjects the Portfolio to risk of loss in excess of the amounts shown on the statement of assets and liabilities, up to the notional value of the futures. Use of short futures subjects the Portfolio to unlimited risk of loss. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of futures can vary from the previous day’s settlement price, which could effectively prevent liquidation of unfavorable positions.
During the year ended October 31, 2015, the Portfolio held futures for hedging and non-hedging purposes.
50 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
• | Forward Currency Exchange Contracts |
The Portfolio may enter into forward currency exchange contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings, to hedge certain firm purchase and sale commitments denominated in foreign currencies and for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions”.
A forward currency exchange contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. The gain or loss arising from the difference between the original contract and the closing of such contract would be included in net realized gain or loss on foreign currency transactions. Fluctuations in the value of open forward currency exchange contracts are recorded for financial reporting purposes as unrealized appreciation and/or depreciation by the Portfolio. Risks may arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar.
During the year ended October 31, 2015, the Portfolio held forward currency exchange contracts for hedging and non-hedging purposes.
• | Option Transactions |
For hedging and investment purposes, the Portfolio may purchase and write (sell) put and call options on U.S. and foreign securities and foreign currencies that are traded on U.S. and foreign securities exchanges and over-the-counter markets. Among other things, the Portfolio may also use options transactions for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions” and may use options strategies involving the purchase and/or writing of various combinations of call and/or put options, for hedging and investment purposes.
The risk associated with purchasing an option is that the Portfolio pays a premium whether or not the option is exercised. Additionally, the Portfolio bears the risk of loss of the premium and change in market value should the counterparty not perform under the contract. Put and call options purchased are accounted for in the same manner as portfolio securities. The cost of securities acquired through the exercise of call options is increased by premiums paid. The proceeds from securities sold through the exercise of put options are decreased by the premiums paid.
When the Portfolio writes an option, the premium received by the Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from written options which expire unexercised are recorded by the Portfolio on the expiration date as realized gains from options written. The difference between the premium received and the amount paid on effecting a closing
AB CREDIT LONG/SHORT PORTFOLIO • | 51 |
Notes to Financial Statements
purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium received is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium received is added to the proceeds from the sale of the underlying security or currency in determining whether the Portfolio has realized a gain or loss. If a put option is exercised, the premium received reduces the cost basis of the security or currency purchased by the Portfolio. In writing an option, the Portfolio bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Portfolio could result in the Portfolio selling or buying a security or currency at a price different from the current market value.
At October 31, 2015, the maximum payments for written put options amounted to $2,282,050. In certain circumstances maximum payout amounts may be partially offset by recovery values of the respective referenced assets and upfront premium received upon entering into the contract.
The Portfolio may also invest in options on swap agreements, also called “swaptions”. A swaption is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based “premium”. A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the total return on a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties.
During the year ended October 31, 2015, the Portfolio held purchased options for hedging and non-hedging purposes. During the year ended October 31, 2015, the Portfolio held written options for hedging and non-hedging purposes.
For the year ended October 31, 2015, the Portfolio had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 10/31/14 | 308 | $ | 33,464 | |||||
Options written | 633,814 | 143,280 | ||||||
Options expired | (1,100 | ) | (79,325 | ) | ||||
Options bought back | (632,810 | ) | (53,598 | ) | ||||
Options exercised | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Options written outstanding as of 10/31/15 | 212 | $ | 43,821 | |||||
|
|
|
|
52 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
Notional Amount | Premiums Received | |||||||
Swaptions written outstanding as of 10/31/14 | 5,180,000 | $ | 13,411 | |||||
Swaptions written | 28,675,000 | 89,813 | ||||||
Swaptions expired | (29,035,000 | ) | (90,707 | ) | ||||
Swaptions bought back | (3,150,000 | ) | (11,320 | ) | ||||
Swaptions exercised | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Swaptions written outstanding as of 10/31/15 | 1,670,000 | $ | 1,197 | |||||
|
|
|
|
• | 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” or in order to take a “long” or “short” position with respect to an underlying referenced asset described below under “Total Return Swaps”. 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
AB CREDIT LONG/SHORT PORTFOLIO • | 53 |
Notes to Financial Statements
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 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
54 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
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 year 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 had Buy Contracts outstanding with respect to the same referenced obligation and same counterparty for its Sales Contracts which may partially offset the Maximum Payout Amount in the amount of $901,000.
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.
AB CREDIT LONG/SHORT PORTFOLIO • | 55 |
Notes to Financial Statements
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.
During the year ended October 31, 2015, the Portfolio held credit default swaps for hedging and non-hedging purposes.
Total Return Swaps:
The Portfolio may enter into total return swaps in order take a “long” or “short” position with respect to an underlying referenced asset. The Portfolio is subject to market price volatility of the underlying referenced asset. A total return swap involves commitments to pay interest in exchange for a market linked return based on a notional amount. To the extent that the total return of the security, group of securities or index underlying the transaction exceeds or falls short of the offsetting interest obligation, the Portfolio will receive a payment from or make a payment to the counterparty.
During the year ended October 31, 2015, the Portfolio held total return swaps for hedging and non-hedging purposes.
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.
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
56 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
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 Assets and Liabilities Location | Fair Value | Statement of Assets and Liabilities Location | Fair Value | ||||||||
Interest rate | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 19,964 | * | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 6,958 | * | ||||
Credit contracts | Receivable/Payable for variation margin on exchange-traded derivatives | 33,587 | * | Receivable/Payable for variation margin on exchange-traded derivatives | 38,967 | * | ||||||
Equity contracts | Receivable/Payable for variation margin on exchange-traded derivatives | 7,748 | * | Receivable/Payable for variation margin on exchange-traded derivatives | 7,086 | * | ||||||
Foreign exchange contracts | Unrealized appreciation on forward currency exchange contracts |
| 4,493 |
| Unrealized depreciation on forward currency exchange contracts |
| 16,387 |
| ||||
Credit contracts | Investments in securities, at value | 2,486 | ||||||||||
Equity contracts | Investments in securities, at value | 22,965 | ||||||||||
Credit contracts | Swaptions written, at value | 395 | ||||||||||
Equity contracts | Options written, at value | 16,827 | ||||||||||
Credit contracts | Unrealized appreciation on credit default swaps | 252,195 | Unrealized depreciation on credit default swaps | 285,727 |
AB CREDIT LONG/SHORT PORTFOLIO • | 57 |
Notes to Financial Statements
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of Assets and Liabilities Location | Fair Value | Statement of Assets and Liabilities Location | Fair Value | ||||||||
Equity contracts | Unrealized appreciation on total return swaps | $ | 41,876 | Unrealized depreciation on total return swaps | $ | 37,366 | ||||||
|
|
|
| |||||||||
Total | $ | 385,314 | $ | 409,713 | ||||||||
|
|
|
|
* | 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 year ended October 31, 2015:
Derivative Type | Location of Gain or (Loss) on Derivatives | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Interest rate contracts | Net realized gain (loss) on futures; Net change in unrealized appreciation/depreciation of futures | $ | (73,781 | ) | $ | 29,289 | ||||
Equity contracts | Net realized gain (loss) on futures; Net change in unrealized appreciation/depreciation of futures | 16,257 | 4,551 | |||||||
Foreign exchange contracts | Net realized gain (loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation of foreign currency denominated assets and liabilities | 8,279 | (20,164 | ) | ||||||
Interest rate contracts | Net realized gain (loss) on investment transactions; Net change in unrealized appreciation/depreciation of investments | (8,053 | ) | 5,266 | ||||||
Foreign exchange contracts | Net realized gain (loss) on investment transactions; Net change in unrealized appreciation/depreciation of investments | (2,909 | ) | – 0 | – |
58 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
Derivative Type | Location of Gain or (Loss) on Derivatives | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Credit contracts | Net realized gain (loss) on investment transactions; Net change in unrealized appreciation/depreciation of investments | $ | (138,465 | ) | $ | 5,601 | ||||
Equity contracts | Net realized gain (loss) on investment transactions; Net change in unrealized appreciation/depreciation of investments | (197,403 | ) | (15,924 | ) | |||||
Credit contracts | Net realized gain (loss) on swaptions written; Net change in unrealized appreciation/depreciation of swaptions written | 96,272 | (3,001 | ) | ||||||
Equity contracts | Net realized gain (loss) on options written; Net change in unrealized appreciation/depreciation of options written | 52,786 | 29,825 | |||||||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (66,069 | ) | 18,447 | ||||||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 32,339 | (20,757 | ) | ||||||
Equity contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 26,933 | (15,083 | ) | ||||||
|
|
|
| |||||||
Total | $ | (253,814 | ) | $ | 18,050 | |||||
|
|
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 59 |
Notes to Financial Statements
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the year ended October 31, 2015:
Futures: | ||||
Average original value of buy contracts | $ | 1,934,968 | ||
Average original value of sale contracts | $ | 1,346,430 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 2,995,966 | ||
Average principal amount of sale contracts | $ | 687,561 | ||
Purchased Options: | ||||
Average monthly cost | $ | 109,249 | ||
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 1,596,154 | ||
Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 9,074,646 | ||
Average notional amount of sale contracts | $ | 3,556,959 | ||
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 5,482,601 | ||
Average notional amount of sale contracts | $ | 2,163,195 | ||
Total Return Swaps: | ||||
Average notional amount | $ | 2,009,583 | (a) |
(a) | Positions were open for eleven months during the year. |
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: | ||||||||||||||||||||
Morgan Stanley & Co. LLC** | $ | 17,987 | $ | (17,987 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 17,987 | $ | (17,987 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
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|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Barclays Bank PLC | $ | 300,663 | $ | (36,675 | ) | $ | (263,988 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
Citibank, NA | 346,473 | (346,473 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Credit Suisse International | 23,066 | (23,066 | ) | – 0 | – | – 0 | – | – 0 | – |
60 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
Counterparty | Derivative Assets Subject to a MA | Derivative Available for Offset | Cash Collateral Received* | Security Collateral Received | Net Amount of Derivatives Assets | |||||||||||||||
Deutsche Bank AG | 6,191 | (6,191 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Goldman Sachs International | 117,879 | (70,633 | ) | – 0 | – | – 0 | – | 47,246 | ||||||||||||
JPMorgan Chase Bank, NA | 8,741 | (8,741 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Morgan Stanley Capital Services LLC | 242,130 | (174,218 | ) | – 0 | – | – 0 | – | 67,912 | ||||||||||||
Royal Bank of Scotland PLC | 1,588 | – 0 | – | – 0 | – | – 0 | – | 1,588 | ||||||||||||
Standard Chartered Bank | 717 | (717 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
State Street Bank & Trust Co. | 2,116 | (2,116 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 1,049,564 | $ | (668,830 | ) | $ | (263,988 | ) | $ | – 0 | – | $ | 116,746 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
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** | $ | 21,743 | $ | (17,987 | ) | $ | (3,756 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 21,743 | $ | (17,987 | ) | $ | (3,756 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Bank of America, NA | $ | 7,108 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 7,108 | |||||||
Barclays Bank PLC | 36,675 | (36,675 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Citibank, NA | 347,718 | (346,473 | ) | – 0 | – | (1,245 | ) | – 0 | – | |||||||||||
Credit Suisse International | 44,965 | (23,066 | ) | – 0 | – | – 0 | – | 21,899 | ||||||||||||
Deutsche Bank AG | 15,007 | (6,191 | ) | – 0 | – | – 0 | – | 8,816 | ||||||||||||
Goldman Sachs International: | 70,633 | (70,633 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
JPMorgan Chase Bank, NA | 25,517 | (8,741 | ) | – 0 | – | – 0 | – | 16,776 | ||||||||||||
Morgan Stanley Capital Services LLC | 174,218 | (174,218 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Standard Chartered Bank | 2,009 | (717 | ) | – 0 | – | – 0 | – | 1,292 | ||||||||||||
State Street Bank & Trust Co. | 12,927 | (2,116 | ) | – 0 | – | – 0 | – | 10,811 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 736,777 | $ | (668,830 | ) | $ | – 0 | – | $ | (1,245 | ) | $ | 66,702 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | 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. |
AB CREDIT LONG/SHORT PORTFOLIO • | 61 |
Notes to Financial Statements
2. Currency Transactions
The Portfolio may invest in non-U.S. dollar securities on a currency hedged or unhedged basis. The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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).
3. Short Sales
The Portfolio may sell securities short. A short sale is a transaction in which the Portfolio sells securities it does not own, but has borrowed, in anticipation of a decline in the market price of the securities. The Portfolio is obligated to replace the borrowed securities at their market price at the time of settlement. The Portfolio’s obligation to replace the securities borrowed in connection with a short sale will be fully secured by collateral deposited with the broker. The Portfolio is liable to the buyer for any dividends/interest payable on securities while those securities are in a short position. These dividends/interest are recorded as an expense of the Portfolio. Short sales by the Portfolio involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from a purchase of a security because losses from short sales may be unlimited, whereas losses from purchases cannot exceed the total amount invested.
NOTE E
Capital Stock
Each class consists of 3,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | May 7 2014(a) to October 31, 2014 | Year Ended October 31, 2015 | May 7 2014(a) to October 31, 2014 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 11,548 | 8,408 | $ | 113,733 | $ | 83,942 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 100 | 4 | 984 | 41 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (1,128 | ) | – 0 | – | (11,052 | ) | – 0 | – | ||||||||||||
| ||||||||||||||||||||
Net increase | 10,520 | 8,412 | $ | 103,665 | $ | 83,983 | ||||||||||||||
|
62 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | May 7 2014(a) to October 31, 2014 | Year Ended October 31, 2015 | May 7 2014(a) to October 31, 2014 | |||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 5,701 | 4,445 | $ | 56,054 | $ | 44,511 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 31 | 14 | 308 | 141 | ||||||||||||||||
| ||||||||||||||||||||
Net increase | 5,732 | 4,459 | $ | 56,362 | $ | 44,652 | ||||||||||||||
| ||||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 120,616 | 2,095,777 | $ | 1,189,631 | $ | 20,956,109 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,369 | 162 | 13,427 | 1,617 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (85,608 | ) | (8,288 | ) | (840,359 | ) | (81,830 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 36,377 | 2,087,651 | $ | 362,699 | $ | 20,875,896 | ||||||||||||||
|
(a) | Commencement of operations. |
NOTE F
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 Risk—Investments in fixed-income securities with lower ratings (commonly known as “junk bonds”) are subject to 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, negative perceptions of the junk bond market generally and less secondary market liquidity. These securities are often able to be “called” or repurchased by the issuer prior to their maturity date, forcing the Fund to reinvest the proceeds, possibly at a lower rate of return.
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 each Portfolio’s assets can decline as can the value of the Portfolio’s distributions. This risk is significantly greater if the Fund invests a significant portion of its assets in fixed-income securities with longer maturities.
AB CREDIT LONG/SHORT PORTFOLIO • | 63 |
Notes to Financial Statements
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 in 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.
Short Sales Risk— Short sales involve the risk that the Portfolio will incur a loss by subsequently buying a security at a higher price than the price at which it sold the security. The amount of such loss is theoretically unlimited, as it will be based on the increase in value of the security sold short. In contrast, the risk of loss from a long position is limited to the Portfolio’s investment in the security, because the price of the security cannot fall below zero. The Portfolio may not always be able to close out a short position on favorable terms.
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.
Non-Diversification Risk—The Portfolio may have more risk because it is “non-diversified”, meaning that it can invest more of its assets in a smaller number of issuers and that adverse changes in the value of one security could have a more significant effect on the Portfolio’s NAV.
Liquidity Risk—Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Portfolio. Causes of liquidity risk may include low trading volumes, large positions and
64 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
heavy redemptions of fixed-income mutual fund shares. Over recent years, liquidity risk has also increased because the capacity of dealers in the secondary market for fixed-income securities to make markets in these securities has decreased, even as the overall bond market has grown significantly, due to, among other things, structural changes, additional regulatory requirements and capital and risk restraints that have led to reduced inventories. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
Indemnification Risk—In the ordinary course of business, the Portfolio enter 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 expect the risk of loss thereunder to be remote. Therefore, the Portfolio has not accrued any liability in connection with these indemnification provisions.
NOTE G
Joint Credit Facility
A number of open-end mutual funds managed by the Adviser, including the Portfolio, participate in a $280 million revolving credit facility (the “Facility”) intended to provide short-term financing, if necessary, subject to certain restrictions in connection with abnormal redemption activity. Commitment fees related to the Facility are paid by the participating funds and are included in miscellaneous expenses in the statement of operations. The Portfolio did not utilize the Facility during the year ended October 31, 2015.
NOTE H
Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended October 31, 2015 and October 31, 2014 were as follows:
2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 202,872 | $ | 101,996 | ||||
|
|
|
| |||||
Total distributions paid | $ | 202,872 | $ | 101,996 | ||||
|
|
|
|
As of October 31, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 88,564 | ||
Unrealized appreciation/(depreciation) | (304,391 | )(a) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | (215,827 | )(b) | |
|
|
(a) | The differences between book-basis and tax-basis unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses on wash sales, the tax treatment of swaps and the realization for tax purposes of gains/losses on certain derivative instruments. |
(b) | The difference between book-basis and tax-basis components of accumulated earnings/(deficit) is attributable primarily to the tax treatment of defaulted securities. |
AB CREDIT LONG/SHORT PORTFOLIO • | 65 |
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, and such losses will retain their character as either short-term or long-term capital losses. As of October 31, 2015, the Portfolio did not have any capital loss carryforwards.
During the current fiscal year, permanent differences primarily due to the tax treatment of offering costs and clearing fees, reclassifications of foreign currency, the tax treatment of proceeds from the sale of defaulted securities, contributions from Affiliates, the redesignation of dividends, return of capital distributions received from underlying securities, the offset of a net operating loss against capital gain, and the tax treatment of swaps and options resulted in a net decrease in undistributed net investment income, a net decrease in accumulated net realized loss on investment and foreign currency transactions, and a net decrease in additional paid-in capital. These reclassifications had no effect on net assets.
NOTE I
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 J
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.
66 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||
Year Ended 2015 | May 7, 2014(a) to October 31, 2014 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 10.00 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .09 | .08 | ||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.16 | ) | (.03 | ) | ||||
Contributions from Affiliates | .00 | (d) | – 0 | – | ||||
|
| |||||||
Net increase (decrease) in net asset value from operations | (.07 | ) | .05 | |||||
|
| |||||||
Less: Dividends | ||||||||
Dividends from net investment income | (.08 | ) | (.05 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 9.85 | $ 10.00 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(e)* | (.65 | )% | .57 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $186 | $84 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements(f) | 5.02 | % | 3.56 | %^ | ||||
Expenses, before waivers/reimbursements(f) | 7.28 | % | 4.29 | %^ | ||||
Net investment income(c) | .88 | % | 1.79 | %^ | ||||
Portfolio turnover rate | 163 | % | 69 | % | ||||
Portfolio turnover rate (including securities sold short) | 147 | % | 102 | % |
See footnote summary on page 70.
AB CREDIT LONG/SHORT PORTFOLIO • | 67 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||
Year Ended 2015 | May 7, 2014(a) to October 31, 2014 | |||||||
|
|
|
| |||||
Net asset value, beginning of period | $ 9.97 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .01 | .06 | ||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.15 | ) | (.05 | ) | ||||
Contributions from Affiliates | .00 | (d) | – 0 | – | ||||
|
| |||||||
Net increase (decrease) in net asset value from operations | (.14 | ) | .01 | |||||
|
| |||||||
Less: Dividends | ||||||||
Dividends from net investment income | (.06 | ) | (.04 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 9.77 | $ 9.97 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(e)* | (1.45 | )% | .21 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $100 | $44 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements(f) | 5.78 | % | 4.18 | %^ | ||||
Expenses, before waivers/reimbursements(f) | 8.08 | % | 6.31 | %^ | ||||
Net investment income(c) | .10 | % | 1.21 | %^ | ||||
Portfolio turnover rate | 163 | % | 69 | % | ||||
Portfolio turnover rate (including securities sold short) | 147 | % | 102 | % |
See footnote summary on page 70.
68 | • AB CREDIT LONG/SHORT PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||
Year Ended 2015 | May 7, 2014(a) to October 31, 2014 | |||||||
|
|
|
| |||||
Net asset value, beginning of period | $ 10.01 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .12 | .10 | ||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.17 | ) | (.04 | ) | ||||
Contributions from Affiliates | .00 | (d) | – 0 | – | ||||
|
| |||||||
Net increase (decrease) in net asset value from operations | (.05 | ) | .06 | |||||
|
| |||||||
Less: Dividends | ||||||||
Dividends from net investment income | (.09 | ) | (.05 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 9.87 | $ 10.01 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(e)* | (.45 | )% | .70 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $20,967 | $20,892 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements(f) | 4.67 | % | 2.79 | %^ | ||||
Expenses, before waivers/reimbursements(f) | 6.91 | % | 5.37 | %^ | ||||
Net investment income(c) | 1.20 | % | 2.01 | %^ | ||||
Portfolio turnover rate | 163 | % | 69 | % | ||||
Portfolio turnover rate (including securities sold short) | 147 | % | 102 | % |
See footnote summary on page 70.
AB CREDIT LONG/SHORT PORTFOLIO • | 69 |
Financial Highlights
(a) | Commencement of operations. |
(b) | Based on average shares outstanding. |
(c) | Net of fees and expenses waived/reimbursed by the Adviser. |
(d) | Amount is less than $.005. |
(e) | 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. Initial sales charges or contingent deferred sales charges are not reflected in the calculation of total investment return. 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. |
* | The net asset value and total return include adjustments in accordance with accounting principles generally accepted in the United States of America for financial reporting purposes. As such, the net asset value and total return for shareholder transactions may differ from financial statements. |
(f) | The expense ratios presented below exclude expenses on securities sold short: |
Year Ended October 31, 2015 | May 7, 2014(a) to October 31, 2014 | |||||||
Class A | ||||||||
Net of waivers/reimbursements | 1.35 | % | 1.35 | %^ | ||||
Before waivers/reimbursements | 3.61 | % | 2.08 | %^ | ||||
Class C | ||||||||
Net of waivers/reimbursements | 2.10 | % | 2.10 | %^ | ||||
Before waivers/reimbursements | 4.40 | % | 4.24 | %^ | ||||
Advisor Class | ||||||||
Net of waivers/reimbursements | 1.10 | % | 1.10 | %^ | ||||
Before waivers/reimbursements | 3.34 | % | 3.68 | %^ |
^ | Annualized. |
See notes to financial statements.
70 | • AB CREDIT LONG/SHORT PORTFOLIO |
Financial Highlights
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors of AB Bond Fund, Inc. and
Shareholders of AB Credit Long/Short Portfolio
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of AB Credit Long/Short Portfolio (the “Fund”), formerly known as AllianceBernstein Credit Long/Short Portfolio (one of the portfolios constituting the AB Bond Fund, Inc., formerly known as AllianceBernstein Bond Fund, Inc.), as of October 31, 2015, the related statement of operations for the year then ended, and the statements of changes in net assets and financial highlights for the year then ended and the period May 7, 2014 (commencement of operations) to October 31, 2014. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2015, by correspondence with the custodian and others or by other appropriate auditing procedures where replies from others were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AB Credit Long/Short Portfolio (one of the portfolios constituting the AB Bond Fund, Inc.) at October 31, 2015, the results of its operations for the year then ended, and the statements of changes in net assets and financial highlights for the year then ended and the period May 7, 2014 (commencement of operations) to October 31, 2014, in conformity with U.S. generally accepted accounting principles.
New York, New York
December 30, 2015
AB CREDIT LONG/SHORT PORTFOLIO • | 71 |
Report of Independent Registered Public Accounting Firm
2015 FEDERAL TAX INFORMATION
(unaudited)
For Federal income tax purposes, the following information is furnished with respect to the distributions paid by the Portfolio during the taxable year ended October 31, 2015. For corporate shareholders, 12.97% of dividends paid qualify for the dividends received deduction. For foreign shareholders, 23.34% of ordinary dividends paid may be considered to be qualifying to be taxed as interest-related dividends.
For the taxable year ended October 31, 2015, the Portfolio designates $33,162 as the maximum amount that may be considered qualified dividend income for individual shareholders.
Shareholders should not use the above information to prepare their income tax returns. The information necessary to complete your income tax returns will be included with your form 1099-DIV which will be sent to you separately in January 2016.
72 | • AB CREDIT LONG/SHORT PORTFOLIO |
BOARD OF DIRECTORS
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 Gershon M. Distenfeld(2), Vice President Sherif M. Hamid(2), Vice President Ivan Rudolph-Shabinsky(2), Vice President Robert Schwartz(2), Vice President | Ashish C. Shah(2), Vice President Joseph J. Mantineo, Treasurer and Chief Financial Officer Emilie D. Wrapp, Secretary Phyllis J. Clarke, Controller Vincent S. Noto, Chief Compliance Officer |
Custodian and Accounting Agent State Street Bank and Trust Company State Street Corporation CCB/5 1 Iron Street Boston, MA 02210
Principal Underwriter AllianceBernstein Investments, Inc. 1345 Avenue of the Americas New York, NY 10105
Transfer Agent AllianceBernstein Investor Services, Inc. P.O. Box 786003 San Antonio, TX 78278-6003 Toll-Free (800) 221-5672 | Independent Registered Public Accounting Firm Ernst & Young LLP 5 Times Square New York, NY 10036
Legal Counsel Seward & Kissel LLP One Battery Park Plaza New York, NY 10004 |
(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 Fund are made by the Credit Long/Short Investment Team. Messrs. Distenfeld, Hamid, Rudolph-Shabinksy, Schwartz and Shah are the investment professionals with the most significant responsibility for the day-to-day management of the Fund’s portfolio. |
AB CREDIT LONG/SHORT PORTFOLIO • | 73 |
Board of Directors
MANAGEMENT OF THE FUND
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC COMPANY DIRECTORSHIPS CURRENTLY HELD | |||||
INTERESTED DIRECTOR | ||||||||
Robert M. Keith, + 1345 Avenue of the Americas New York, NY 10105 55 (2014) | Senior Vice President of AllianceBernstein L.P. (the “Adviser”) and the head of AllianceBernstein Investments, Inc. (“ABI”) since July 2008; Director of ABI and President of the AB Mutual Funds. Previously, he served as Executive Managing Director of ABI from December 2006 to June 2008. Prior to joining ABI in 2006, Executive Managing Director of Bernstein Global Wealth Management, and prior thereto, Senior Managing Director and Global Head of Client Service and Sales of the Adviser’s institutional investment management business since 2004. Prior thereto, he was Managing Director and Head of North American Client Service and Sales in the Adviser’s institutional investment management business, with which he had been associated since prior to 2004. | 110 | None | |||||
74 | • AB CREDIT LONG/SHORT PORTFOLIO |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS | ||||||||
Marshall C. Turner, Jr., # Chairman of the Board 74 (2014) | Private Investor since prior to 2010. Former Chairman and CEO of Dupont Photomasks, Inc. (components of semi-conductor manufacturing). He has extensive operating leadership and venture capital investing experience, including five interim or full-time CEO roles, and prior service as general partner of institutional venture capital partnerships. He also has extensive non-profit board leadership experience, and currently serves on the boards of two education and science-related non-profit organizations. He has served as a director of one AB fund since 1992, and director or trustee of multiple AB Funds since 2005. He has been Chairman of the AB Funds since January 2014, and the Chairman of the Independent Directors Committees of such Funds since February 2014. | 110 | Xilinx, Inc. (programmable logic semi-conductors) since 2007 | |||||
John H. Dobkin, # 73 (2014) | Independent Consultant since prior to 2010. Formerly, President of Save Venice, Inc. (preservation organization) from 2001–2002; Senior Advisor from June 1999-June 2000 and President of Historic Hudson Valley (historic preservation) from December 1989-May 1999. Previously, Director of the National Academy of Design. He has served as a director or trustee of various AB Funds since 1992, and as Chairman of the Audit Committees of a number of such Funds from 2001-2008. | 110 | None | |||||
AB CREDIT LONG/SHORT PORTFOLIO • | 75 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Michael J. Downey, # 71 (2014) | Private Investor since prior to 2010. Formerly, managing partner of Lexington Capital, LLC (investment advisory firm) from December 1997 until December 2003. He served as Director of The Merger Fund (registered investment company) since prior to 2010 until 2013. He served as a Director of Prospect Acquisition Corp. (financial services) from 2007 until 2009. From 1987 until 1993, Chairman and CEO of Prudential Mutual Fund Management, director of the Prudential mutual funds, and member of the Executive Committee of Prudential Securities Inc. He has served as a director or trustee of the AB Funds since 2005 and is a director and Chairman of one other registered investment company. | 110 | Asia Pacific Fund, Inc. (registered investment company) since prior to 2010 | |||||
William H. Foulk, Jr., # 83 (2014) | Investment Adviser and an Independent Consultant since prior to 2010. Previously, he was Senior Manager of Barrett Associates, Inc., a registered investment adviser. He was formerly Deputy Comptroller and Chief Investment Officer of the State of New York and, prior thereto, Chief Investment Officer of the New York Bank for Savings. He has served as a director or trustee of various AB Funds since 1983, and was Chairman of the Independent Directors Committees of the AB Funds from 2003 until early February 2014. He served as Chairman of such Funds from 2003 through December 2013. He is also active in a number of mutual fund related organizations and committees. | 110 | None |
76 | • AB CREDIT LONG/SHORT PORTFOLIO |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
D. James Guzy, # 79 (2014) | Chairman of the Board of SRC Computers, Inc. (semi-conductors), with which he has been associated since prior to 2010. He served as Chairman of the Board of PLX Technology (semi-conductors) since prior to 2010 until November 2013. He was a Director of Cirrus Logic Corporation (semi-conductors) from 1984 until July 2011. He was a director of Intel Corporation (semi-conductors) from 1969 until 2008, and served as Chairman of the Finance Committee of such company for several years until May 2008. He has served as a director or trustee of one or more of the AB Funds since 1982. | 110 | None | |||||
Nancy P. Jacklin, # 67 (2014) | Professorial Lecturer at the Johns Hopkins School of Advanced International Studies (2008-2015) U.S. Executive Director of the International Monetary Fund (which is responsible for ensuring the stability of the international monetary system), (December 2002-May 2006); Partner, Clifford Chance (1992-2002); Sector Counsel, International Banking and Finance, and Associate General Counsel, Citicorp (1985-1992); Assistant General Counsel (International), Federal Reserve Board of Governors (1982-1985); and Attorney Advisor, U.S. Department of the Treasury (1973-1982). Member of the Bar of the District of Columbia and of New York; and member of the Council on Foreign Relations. She has served as a director or trustee of the AB Funds since 2006 and has been Chairman of the Governance and Nominating Committees of the Funds since August 2014. | 110 | None |
AB CREDIT LONG/SHORT PORTFOLIO • | 77 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Garry L. Moody, # 63 (2014) | Independent Consultant. Formerly, Partner, Deloitte & Touche LLP (1995-2008) where he held a number of senior positions, including Vice Chairman, and U.S. and Global Investment Management Practice Managing Partner; President, Fidelity Accounting and Custody Services Company (1993-1995); and Partner, Ernst & Young LLP (1975-1993), where he served as the National Director of Mutual Fund Tax Services and Managing Partner of its Chicago Office Tax department. He is a member of the Trustee Advisory Board of BoardIQ, a biweekly publication focused on issues and news affecting directors of mutual funds. He has served as a director or trustee, and as Chairman of the Audit Committees, of the AB Funds since 2008. | 110 | None | |||||
Earl D. Weiner, # 76 (2014) | Of Counsel, and Partner prior to January 2007, of the law firm Sullivan & Cromwell LLP and is a former member of the ABA Federal Regulation of Securities Committee Task Force to draft editions of the Fund Director’s Guidebook. He also serves as a director or trustee of various non-profit organizations and has served as Chairman or Vice Chairman of a number of them. He has served as a director or trustee of the AB Funds since 2007 and served as Chairman of the Governance and Nominating Committees of the AB Funds from 2007 until August 2014. | 110 | None |
78 | • AB CREDIT LONG/SHORT PORTFOLIO |
Management of the Fund
* | The address for each of the Fund’s disinterested Directors is c/o AllianceBernstein L.P., Attention: Philip L. Kirstein, 1345 Avenue of the Americas, New York, NY 10105. |
** | There is no stated term of office for the Fund’s Directors. |
*** | The information above includes each Director’s principal occupation during the last five years and other information relating to the experience, attributes and skills relevant to each Director’s qualifications to serve as a Director, which led to the conclusion that each Director should serve as a Director for the Fund. |
+ | Mr. Keith is an “interested person” of the Portfolio as defined in the Investment Company Act of 1940, due to his position as a Senior Vice President of the Adviser. |
# | Member of the Audit Committee, the Governance and Nominating Committee and the Independent Directors Committee. |
AB CREDIT LONG/SHORT PORTFOLIO • | 79 |
Management of the Fund
Officer Information
Certain information concerning the Fund’s Officers is listed below.
NAME, ADDRESS*, AND AGE | POSITION(S) HELD WITH FUND | PRINCIPAL OCCUPATION DURING PAST 5 YEARS | ||
Robert M. Keith 55 | President and Chief Executive Officer | See biography above. | ||
Philip L. Kirstein 70 | Senior Vice President and Independent Compliance Officer | Senior Vice President and Independent Compliance Officer of the AB Funds, with which he has been associated since October 2004. Prior thereto, he was Of Counsel to Kirkpatrick & Lockhart, LLP from October 2003 to October 2004, and General Counsel of Merrill Lynch Investment Managers, L.P. since prior to March 2003. | ||
Gershon M. Distenfeld 40 | Vice President | Senior Vice President of the Adviser**, with which he has been associated since prior to 2010. | ||
Sherif M. Hamid 39 | Vice President | Senior Vice President of the Adviser**, with which he has been associated since 2013 and Portfolio Manager for High Yield. Prior to joining the Adviser, he was at Barclays Capital where he was head of European Credit Strategy from 2011 to 2013, and a U.S. investment-grade credit strategist and U.S. high yield analyst from prior to 2010. | ||
Robert Schwartz 43 | Vice President | Senior Vice President of the Adviser**, with which he has been associated since 2012 and Corporate Credit Research Analyst. Prior thereto, he was a senior credit analyst at Bell Point Capital Management from 2010 until 2012, a senior credit analyst at Litespeed Partners since prior to 2010. | ||
Ivan Rudolph-Shabinsky 51 | Vice President | Senior Vice President of the Adviser**, with which he has been associated since prior to 2010. | ||
Ashish C. Shah 45 | Vice President | Senior Vice President and Head of Global Credit of the Adviser** with which he has been associated since May 2010 and Chief Diversity Officer since 2014. Previously he was a Managing Director and Head of Global Credit Strategy at Barclays Capital since prior to 2010. | ||
Emilie D. Wrapp 59 | Secretary | Senior Vice President, Assistant General Counsel and Assistant Secretary of ABI**, with which she has been associated since prior to 2010. | ||
80 | • AB CREDIT LONG/SHORT PORTFOLIO |
Management of the Fund
NAME, ADDRESS*, AND AGE | POSITION(S) HELD WITH FUND | PRINCIPAL OCCUPATION DURING PAST 5 YEARS | ||
Joseph J. Mantineo 56 | Treasurer and Chief Financial Officer | Senior Vice President of ABIS**, with which he has been associated since prior to 2010. | ||
Vincent S. Noto 50 | Chief Compliance Officer | Senior Vice President since 2015 and Mutual Fund Chief Compliance Officer of the Adviser** since 2014. Prior thereto, he was Vice President and Director of Mutual Fund Compliance of the Adviser** since prior to 2010. | ||
Phyllis J. Clarke 54 | Controller | Vice President of ABIS**, with which she has been associated since prior to 2010. |
* | The address for each of the Fund’s Officers is 1345 Avenue of the Americas, New York, NY 10105. |
** | The Adviser, ABI and ABIS are affiliates of the Fund. |
The Fund’s Statement of Additional Information (“SAI”) has additional information about the Fund’s Directors and Officers and is available without charge upon request. Contact your financial representative or AB at 1-(800) 227-4618, or visit www.ABglobal.com, for a free prospectus or SAI. |
AB CREDIT LONG/SHORT PORTFOLIO • | 81 |
Management of the Fund
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 Bond Fund, Inc. (the “Fund”), in respect of AB Credit Long/Short Portfolio (the “Portfolio”),2 prepared by Philip L. Kirstein, the Senior Officer of the Fund for the Directors of the Fund, as required by the August 2004 agreement 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 Directors of the Fund to perform its duties pursuant to Section 15 of the Investment Company Act of 1940 (the “40 Act”) and applicable state law. The purpose of the 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 Directors 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 fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the
1 | The information in the fee evaluation was completed on October 22, 2015 and discussed with the Board of Directors on November 3-5, 2015. |
2 | Future references to the Portfolio do not include “AB.” |
82 | • AB CREDIT LONG/SHORT PORTFOLIO |
product of arm’s length bargaining.” Jones v. Harris Associates L.P., 130 S. Ct. 1418 (2010). In the Jones decision, 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
ADVISORY FEES, NET ASSETS, & EXPENSE RATIOS
The Adviser proposed that the Portfolio pays the advisory fee set forth below for receiving the services to be provided pursuant to the Investment Advisory Agreement. Also shown are the Fund’s net assets on September 30, 2015.
Portfolio | Net Assets 9/30/15 ($MM) | Advisory Fee Schedule Based on the Net Assets of the Portfolio | ||
Credit Long/Short Portfolio | $21.2 | 0.90% (as breakpoints) |
The Portfolio’s Investment Advisory Agreement provides for the Adviser to be reimbursed for certain clerical, legal, accounting, administrative and other services provided to the Fund. During the Portfolio’s fiscal year ended October 31, 2014, the Adviser received $38,604 (0.190% of the Portfolio’s average daily net assets) for providing such services.
The Adviser has agreed to waive that portion of its management fees and/or reimburse the Portfolio for that portion of the Portfolio’s total operating expenses to the degree necessary to limit the Portfolio’s expense ratio to the amounts set forth below for the Portfolio’s current fiscal year. The waiver is terminable by the Adviser at the end of the Portfolio’s fiscal year upon at least 60 days’ notice prior to the Portfolio’s prospectus update. In addition, set forth below are the Portfolio’s gross expense ratios for the most recent semi-annual period:4
Portfolio | Expense Cap Pursuant to Undertaking | Gross Expense Ratio5 | Fiscal Year End | |||||||||
Credit Long/Short Portfolio6, 7, 8 | Advisor Class A Class C | | 1.10% 1.35% 2.10% | | | 3.33% 3.62% 4.41% | | October 31 (ratios as of April 30, 2015) |
3 | Jones v. Harris at 1427. |
4 | Semi-annual total expense ratios are unaudited. |
5 | Annualized. |
6 | The Rule 12b-1 fee for Class A shares of the Portfolio is 0.25%. |
7 | The Portfolio’s expense ratios exclude expenses on securities sold short of 3.13%, 3.19%, and 3.21% for Advisor Class, Class A, and Class C shares, respectively. |
8 | The Portfolio’s fiscal percentage of net assets allocated to ETFs as of July 31, 2015 is 0.24%. The Portfolio’s acquired funds expense ratio related to such ETF holdings is 0.0002%. |
AB CREDIT LONG/SHORT PORTFOLIO • | 83 |
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 and sub-advised investment companies 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 assets due to the greater complexities and time required for investment companies, although the Adviser is reimbursed for providing such services. Managing the cash flow of an investment company is more difficult than that of a stable pool of assets, such as an institutional account with little cash movement in either direction, particularly if a fund 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. 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 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.9 In addition to the AB Institutional fee schedule, set forth below is what would have been the effective advisory fee for the Portfolio had the AB Institutional fee schedule been applicable to the Portfolio versus the Portfolio’s advisory fees based on September 30, 2015 net assets.10
9 | 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. |
10 | The Adviser has indicated that with respect to institutional accounts with assets greater than $300 million, it will negotiate a fee schedule. Discounts that are negotiated vary based upon each client relationship. |
84 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio | Net Assets 09/30/15 ($MM) | AB Institutional Fee Schedule | Effective AB Inst. Adv. Fee (%) | Portfolio Advisory Fee (%) | ||||||
Credit Long/Short Portfolio | $21.2 | Credit Long/Short Portfolio 0.90% on 1st $200 million 0.80% on next $100 million 0.70% on the balance Minimum account size: $100m | 0.900% | 0.900% |
The Adviser has represented that it does not provide sub-advisory investment services to other investment 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 offered by other investment advisers.11, 12 Broadridge’s analysis included the comparison of the Portfolio’s contractual management fee, estimated at the approximate current asset level of the Portfolio, to the median of the Fund’s Broadridge Expense Group (“EG”)13 and the Portfolio’s contractual management fee ranking.14
11 | 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. |
12 | 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 remains a part of Thomson Reuters’ Lipper division. Accordingly, the Portfolio’s investment classification/objective continued to be determined by Lipper. |
13 | Broadridge does not consider average account size when constructing EGs. Funds with relatively small average account sizes tend to have higher transfer agent expense ratios than comparable sized funds that have relatively large average account sizes. There are limitations to Lipper expense category data because different funds categorize expenses differently. |
14 | The contractual management fee is calculated by Broadridge using the Portfolio’s contractual management fee rate at the hypothetical asset level. The hypothetical asset level is based on the combined net assets of all classes of the Portfolio, rounded up to the next $25 million. Broadridge’s total expense ratio information is based on the most recent annual report except as otherwise noted. A ranking of “1” would mean that Portfolio had the lowest effective fee rate in the Broadridge peer group. |
AB CREDIT LONG/SHORT PORTFOLIO • | 85 |
Broadridge describes an EG as a representative sample of comparable funds. Broadridge’s standard methodology for screening funds to be included in an EG entails the consideration of several fund criteria, including fund type, Lipper investment classification/objective, load type and similar 12b-1/non-12b-1 service fees, asset (size) comparability, expense components and attributes. An EG will typically consist of seven to twenty funds.
Portfolio | Contractual Management Fee (%)15 | Broadridge EG Median (%) | Broadridge EG Rank | |||||||
Credit Long/Short Portfolio | 0.900 | 1.000 | 4/13 |
Broadridge also compared the Portfolio’s total expense ratio to the medians of the Portfolio’s EG and Broadridge Expense Universe (“EU”). The EU is a broader group compared to the EG, consisting of all funds that have the same investment classifications/objective and load type as the subject Portfolio.16 Set forth below is Broadridge’s comparison of the Portfolio’s total expense ratio and the medians of the Portfolio’s EG and EU.
Portfolio | Expense Ratio (%)17 | Broadridge Median (%) | Broadridge Group Rank | Broadridge EU Median (%) | Broadridge Rank | |||||||||
Credit Long/Short Portfolio | 1.350 | 1.409 | 4/13 | 1.200 | 26/41 |
Based on this analysis, considering pro-forma information where available, the Portfolio has equally favorable rankings on a total expense ratio basis and on a contractual management fee basis.
III. | COSTS TO THE ADVISER AND ITS AFFILIATES OF SUPPLYING SERVICES PURSUANT TO THE MANAGEMENT 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.
15 | The contractual management fee does not reflect any expense reimbursements made by the Portfolio to the Adviser for certain clerical, legal, accounting, administrative, and other services. In addition, the contractual management fee does not reflect any advisory fee waivers for expense caps. |
16 | Except for asset (size) comparability, Broadridge uses the same criteria for selecting an EG when selecting an EU. Unlike the EG, the EU allows for the same adviser to be represented by more than just one fund. |
17 | Most recently completed fiscal year Class A share total expense ratio. |
86 | • AB CREDIT LONG/SHORT PORTFOLIO |
IV. | PROFIT MARGINS OF THE ADVISER AND ITS AFFILIATES FOR SUPPLYING SUCH SERVICES. |
The Portfolio’s profitability information, prepared by the Adviser for the Board of Directors, was reviewed by the Senior Officer and the consultant. The Adviser’s profitability from providing investment advisory services to the Portfolio was negative during calendar year 2014.
In addition to the Adviser’s direct profits from managing the Portfolio, certain of the Adviser’s affiliates have business relationships with the Portfolio and may earn a profit from providing other services to the Portfolio. The courts have referred to this type of business opportunity 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 and the relationship otherwise complies with the 40 Act restrictions. These affiliates provide transfer agent and distribution related services to the Portfolio and receive transfer agent fees, Rule 12b-1 payments, front-end sales loads and contingent deferred sales charges (“CDSC”). During the Portfolio’s most recently completed fiscal year, ABI received from the Portfolio $62 and $123 in front-end sales charges and Rule 12b-1 fees, respectively.
AllianceBernstein Investments, Inc. (“ABI”), an affiliate of the Adviser, is the Fund’s principal underwriter. ABI and the Adviser have disclosed in the Portfolio’s prospectus that they may make revenue sharing payments from their own resources, in addition to resources derived from sales loads and Rule 12b-1 fees, to firms that sell shares of the Portfolio. In 2014, ABI paid approximately 0.05% of the average monthly assets of the AB Mutual Funds or approximately $20.4 million for distribution services and educational support (revenue sharing payments).
Fees and reimbursements for out of pocket expenses charged by AllianceBernstein Investor Services, Inc. (“ABIS”), the affiliated transfer agent for the Portfolio, are based on the level of the network account and the class of shares held by the account. ABIS also receives a fee per shareholder sub-account for each account maintained by an intermediary on an omnibus basis. ABIS received $7,509 in fees from the Portfolio during the Portfolio’s most recently completed fiscal year.
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 Directors information on the Adviser’s firm-wide average
AB CREDIT LONG/SHORT PORTFOLIO • | 87 |
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 Directors an update of the Deli18 study on advisory fees and various fund characteristics.19 The independent consultant first reiterated the results of his previous two dimensional comparison analysis (fund size and family size) with the Board of Directors.20 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.
18 | 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. |
19 | 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. |
20 | 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. |
88 | • AB CREDIT LONG/SHORT PORTFOLIO |
VI. | NATURE AND QUALITY OF THE ADVISER’S SERVICES, INCLUDING THE PERFORMANCE OF THE FUND |
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 prepared by Broadridge shows the 1 year performance return and rankings21 of the Portfolio relative to its Broadridge Performance Group (“PG”) and Broadridge Performance Universe (“PU”)22 for the period ended July 31, 2015.23
Fund Return | PG Median | PU Median (%) | PG Rank | PU Rank | ||||||||||||||||
Credit Long/Short Portfolio | ||||||||||||||||||||
1 year | -0.42 | -0.42 | -0.50 | 7/13 | 25/50 |
Set forth below are the 1 year and since inception performance returns of the Portfolio (in bold)24 versus its benchmark.25 Portfolio and benchmark volatility and reward-to-variability ratio (“Sharpe Ratio”) information is also shown.26
Period Ending July 31, 2015 Annualized Net Performance (%) | ||||||||||||||||||||
1 Year (%) | Since (%) | Volatility (%) | Sharpe (%) | Risk Period (Year) | ||||||||||||||||
Credit Long/Short Portfolio | -0.42 | -0.07 | 2.12 | -0.19 | 1 | |||||||||||||||
Bank of America/Merrill Lynch 3 Month U.S. Treasury Bill | 0.01 | 0.02 | 0.02 | N/A | 1 | |||||||||||||||
Inception Date: May 7, 2014 |
21 | The performance return and rankings are for the Portfolio’s Class A shares. The performance return of the Portfolio was provided by Broadridge. |
22 | The Portfolio’s PG is identical to the Portfolio’s EG. The Portfolio’s PU is not identical to the Portfolio’s EU as the criteria for including/excluding a fund from a PU is somewhat different from that of an EU. |
23 | The current Lipper investment classification/objective dictates the PG and PU throughout the life of the Portfolio even if the Portfolio had a different investment classification/objective at a different point in time. |
24 | The performance returns and risk measures shown in the table are for the Class A shares of the Portfolio. |
25 | The Adviser provided Portfolio and benchmark performance return information for periods through July 31, 2015. |
26 | 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 CREDIT LONG/SHORT PORTFOLIO • | 89 |
CONCLUSION:
Based on the factors discussed above the Senior Officer’s conclusion is that the proposed advisory fee 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 in respect of the Portfolio is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: November 25, 2015
90 | • AB CREDIT LONG/SHORT PORTFOLIO |
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 CREDIT LONG/SHORT PORTFOLIO • | 91 |
AB Family of Funds
NOTES
92 | • AB CREDIT LONG/SHORT PORTFOLIO |
AB CREDIT LONG/SHORT PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
CLS-0151-1015
OCT 10.31.15
ANNUAL REPORT
AB HIGH YIELD PORTFOLIO
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
Annual Report
This report provides management’s discussion of fund performance for AB High Yield Portfolio (the “Fund”) for the annual reporting period ended October 31, 2015. Effective January 20, 2015, the Fund’s name changed from AllianceBernstein High Yield Portfolio to AB High Yield Portfolio.
Investment Objectives and Policies
The Fund’s investment objective is to seek to maximize total return consistent with prudent investment management. At least 80% of the Fund’s net assets will under normal circumstances be invested in fixed-income securities rated Ba1 or lower by Moody’s Investors Service (“Moody’s”) or BB+ or lower by Standard & Poor’s Ratings Services (“S&P”) or Fitch Ratings (commonly known as “junk bonds”), unrated securities considered by AllianceBernstein L.P. (the “Adviser”) to be of comparable quality, and related derivatives. The Fund may invest in fixed-income securities with a range of maturities from short- to long-term. The Fund may also invest in equity securities.
In selecting securities for purchase or sale by the Fund, the Adviser attempts to take advantage of inefficiencies that it believes exist in the global debt markets. These inefficiencies arise from investor behavior, market complexity, and the investment limitations to which investors are subject. The Adviser combines quantitative analysis with fundamental credit and economic research in seeking to exploit these inefficiencies.
The Fund will most often invest in securities of US issuers, but may also purchase
fixed-income securities of foreign issuers, including securities denominated in foreign currencies. Fluctuations in currency exchange rates can have a dramatic impact on the returns of fixed-income securities denominated in foreign currencies. The Adviser may or may not hedge any foreign currency exposure through the use of currency-related derivatives.
The Fund expects to use derivatives, such as options, futures, forwards and swaps, to a significant extent. Derivatives may provide a more efficient and economical exposure to market segments than direct investments, and may also be a more efficient way to alter the Fund’s exposure. The Fund may, for example, use credit default and interest rate swaps to gain exposure to the fixed-income markets or particular fixed-income securities and, as noted above, may use currency derivatives. The Adviser may use derivatives to effectively leverage the Fund by creating aggregate market exposure substantially in excess of the Fund’s net assets.
Investment Results
The table on page 5 shows the Fund’s performance compared to its benchmark, the Barclays US Corporate High Yield (“HY”) 2% Issuer Capped Index, for the six- and 12-month periods ended October 31, 2015.
All share classes of the Fund underperformed the benchmark for the 12-month period; for the six-month period all shares classes underperformed with the exception of Class I and Class Z shares, before sales charges. Sector positioning contributed for both periods, specifically an overweight to
AB HIGH YIELD PORTFOLIO • | 1 |
collateralized mortgage obligations and bank loans, relative to the benchmark. An underweight to basic materials and energy, as well as an overweight to banking, contributed for both periods. Security selection within energy and telecommunications holdings detracted for both periods. Yield-curve positioning detracted for both periods, mainly from an underweight to the five-year part of the curve. Currency and country positioning did not have a material impact on returns for either period.
The Fund utilized derivatives in the form of Treasury futures and written options for hedging purposes, interest rate swaps and total return swaps for investment purposes, and currency forwards and credit default swaps for hedging and investment purposes, which had an immaterial impact on performance during both periods, in absolute terms. Purchased options for hedging purposes had an immaterial impact for the six-month period and detracted from returns for the 12-month period.
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. There was significant divergence of returns in the corporate high-yield market. The metals/mining and energy sectors were the worst performers as commodity prices continued to fall. However, consumer related sectors including food/beverages, gaming/lodging/leisure and retail posted positive returns.
2 | • AB HIGH YIELD PORTFOLIO |
DISCLOSURES AND RISKS
Benchmark Disclosure
The unmanaged Barclays US Corporate High Yield 2% Issuer Capped Index does not reflect fees and expenses associated with the active management of a mutual fund portfolio. The Barclays US Corporate HY 2% Issuer Capped Index is the 2% Issuer Capped component of the US Corporate High Yield Index. The Barclays US Corporate HY Index represents the performance of fixed-income securities having a maximum quality rating of Ba1, a minimum amount outstanding of $150 million and at least one year to maturity. An investor cannot invest directly in an index or average, and their 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 bond or stock market fluctuates. The value of its 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 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 greater risk of rising interest rates due to the current period of historically low rates and the effect of government fiscal policy initiatives, including Federal Reserve actions, and market reaction to these initiatives. The current period of historically low rates is expected to end and rates are expected to begin rising in the near future. 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 are subject to 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, negative perception of the junk bond market generally and less secondary market liquidity. These securities are often able to be “called” or repurchased by the issuer prior to their maturity date, forcing the Fund to reinvest the proceeds, possibly at a lower rate of return.
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 if the Fund invests a significant portion of its assets in fixed-income securities with longer maturities.
Derivatives Risk: Investments in 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.
(Disclosures, Risks and Note about Historical Performance continued on next page)
AB HIGH YIELD PORTFOLIO • | 3 |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
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. These risks may be heightened with respect to investments in emerging-market countries, where there may be an increased amount of economic, political and social instability.
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 Fund’s investments or reduce its returns.
Diversification Risk: The Fund may have more risk because it is “non-diversified”, meaning that it can invest more of its assets in a smaller number of issuers. Accordingly, changes in the value of a single security may have a more significant effect, either negative or positive, on the Fund’s NAV.
Liquidity Risk: Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Fund. Causes of liquidity risk may include low trading volumes, large positions and heavy redemptions of Fund shares. Over recent years liquidity risk has also increased because the capacity of dealers in the secondary market for fixed-income securities to make markets in these securities has decreased, even as the overall bond market has grown significantly, due to, among other things, structural changes, additional regulatory requirements and capital and risk restraints that have led to reduced inventories. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
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 investment return and principal value of an investment in the Fund will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. 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 visiting www.abglobal.com. The Fund has been in operation only for a short period of time, and therefore has a very limited historical performance period. This limited performance period is unlikely to be representative of the performance the Fund will achieve over a longer period.
All fees and expenses related to the operation of the Fund have been deducted. NAV returns do not reflect sales charges; if sales charges were reflected, the Fund’s quoted performance would be lower. SEC returns reflect the applicable sales charges for each share class: a 4.25% maximum front-end sales charge for Class A shares and a 1% 1-year contingent deferred sales charge for Class C shares. Returns for the different share classes will vary due to different expenses associated with each class. Performance assumes reinvestment of distributions and does not account for taxes.
4 | • AB HIGH YIELD PORTFOLIO |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE FUND VS. ITS BENCHMARK PERIODS ENDED OCTOBER 31, 2015 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB High Yield Portfolio | ||||||||||
Class A | -3.46% | -2.19% | ||||||||
| ||||||||||
Class C | -3.82% | -2.95% | ||||||||
| ||||||||||
Advisor Class* | -3.44% | -1.94% | ||||||||
| ||||||||||
Class R* | -3.58% | -2.42% | ||||||||
| ||||||||||
Class K* | -3.45% | -2.17% | ||||||||
| ||||||||||
Class I* | -3.34% | -1.94% | ||||||||
| ||||||||||
Class Z* | -3.33% | -1.93% | ||||||||
| ||||||||||
Barclays US Corporate HY 2% Issuer Capped Index | -3.38% | -1.91% | ||||||||
| ||||||||||
* Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. | ||||||||||
GROWTH OF A $10,000 INVESTMENT IN THE FUND 7/15/14* TO 10/31/15 (unaudited)
This chart illustrates the total value of an assumed $10,000 investment in AB High Yield Portfolio Class A shares (from 7/15/14* to 10/31/15) as compared to the performance of the Fund’s benchmark. The chart reflects the deduction of the maximum 4.25% sales charge from the initial $10,000 investment in the Fund and assumes the reinvestment of dividends and capital gains distributions.
* | Inception date: 7/15/2014. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance continued on next page)
AB HIGH YIELD PORTFOLIO • | 5 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF OCTOBER 31, 2015 (unaudited) | ||||||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | SEC Yields* | ||||||||||
Class A Shares | 0.39 | % | ||||||||||
1 Year | -2.19 | % | -6.35 | % | ||||||||
Since Inception† | -1.66 | % | -4.87 | % | ||||||||
Class C Shares | -0.32 | % | ||||||||||
1 Year | -2.95 | % | -3.88 | % | ||||||||
Since Inception† | -2.41 | % | -2.41 | % | ||||||||
Advisor Class Shares‡ | 0.52 | % | ||||||||||
1 Year | -1.94 | % | -1.94 | % | ||||||||
Since Inception† | -1.39 | % | -1.39 | % | ||||||||
Class R Shares‡ | 0.79 | % | ||||||||||
1 Year | -2.42 | % | -2.42 | % | ||||||||
Since Inception† | -1.89 | % | -1.89 | % | ||||||||
Class K Shares‡ | 0.75 | % | ||||||||||
1 Year | -2.17 | % | -2.17 | % | ||||||||
Since Inception† | -1.65 | % | -1.65 | % | ||||||||
Class I Shares‡ | 1.16 | % | ||||||||||
1 Year | -1.94 | % | -1.94 | % | ||||||||
Since Inception† | -1.41 | % | -1.41 | % | ||||||||
Class Z Shares‡ | 1.29 | % | ||||||||||
1 Year | -1.93 | % | -1.93 | % | ||||||||
Since Inception† | -1.40 | % | -1.40 | % |
The Fund’s prospectus fee table shows the Fund’s total annual operating expense ratios as 49.84%, 56.89%, 33.51%, 4.84%, 4.56%, 4.27% and 4.30% for Class A, Class C, Advisor Class, Class R, Class K, Class I and Class Z shares, respectively, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements limit the Fund’s annual operating expenses to 1.05%, 1.80%, 0.80%, 1.30%, 1.05%, 0.80% and 0.80% for Class A, Class C, Advisor Class, Class R, Class K, Class I and Class Z shares, respectively. These waivers/reimbursements may not be terminated before January 29, 2016 and may be extended by the Adviser for additional one-year terms. Absent reimbursements or waivers, performance would have been lower. The Financial Highlights section of this report sets forth expense ratio data for the current reporting period; the expense ratios shown above may differ from the expense ratios in the Financial Highlights sections since they are based on different time periods.
* | SEC yields are calculated based on SEC guidelines for the 30-day period ended October 31, 2015. |
† | Inception date: 7/15/2014. |
‡ | These share classes are offered at NAV to eligible investors and their SEC returns are the same as their NAV returns. Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. The inception date for these share classes is listed above. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance continued on next page)
6 | • AB HIGH YIELD PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END SEPTEMBER 30, 2015 (unaudited) | ||||
SEC Returns (reflects applicable | ||||
Class A Shares | ||||
1 Year | -8.04 | % | ||
Since Inception† | -7.53 | % | ||
Class C Shares | ||||
1 Year | -5.58 | % | ||
Since Inception† | -4.92 | % | ||
Advisor Class Shares‡ | ||||
1 Year | -3.66 | % | ||
Since Inception† | -3.92 | % | ||
Class R Shares‡ | ||||
1 Year | -4.14 | % | ||
Since Inception† | -4.41 | % | ||
Class K Shares‡ | ||||
1 Year | -3.91 | % | ||
Since Inception† | -4.17 | % | ||
Class I Shares‡ | ||||
1 Year | -3.68 | % | ||
Since Inception† | -3.93 | % | ||
Class Z Shares‡ | ||||
1 Year | -3.67 | % | ||
Since Inception† | -3.93 | % |
† | Inception date: 7/15/2014. |
‡ | These share classes are offered at NAV to eligible investors and their SEC returns are the same as their NAV returns. Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. The inception date for these share classes is listed above. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
AB HIGH YIELD PORTFOLIO • | 7 |
Historical Performance
EXPENSE EXAMPLE
(unaudited)
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions and (2) ongoing costs, including management fees; distribution (12b-1) fees; and other Fund expenses. 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 first line of 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 second line of 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.
Beginning Account Value May 1, 2015 | Ending Account Value October 31, 2015 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 965.40 | $ | 5.20 | 1.05 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.91 | $ | 5.35 | 1.05 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 961.80 | $ | 8.90 | 1.80 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,016.13 | $ | 9.15 | 1.80 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 965.60 | $ | 3.96 | 0.80 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.17 | $ | 4.08 | 0.80 | % | ||||||||
Class R | ||||||||||||||||
Actual | $ | 1,000 | $ | 964.20 | $ | 6.44 | 1.30 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,018.65 | $ | 6.61 | 1.30 | % | ||||||||
Class K | ||||||||||||||||
Actual | $ | 1,000 | $ | 965.50 | $ | 5.20 | 1.05 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.91 | $ | 5.35 | 1.05 | % | ||||||||
Class I | ||||||||||||||||
Actual | $ | 1,000 | $ | 966.60 | $ | 3.97 | 0.80 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.17 | $ | 4.08 | 0.80 | % | ||||||||
Class Z | ||||||||||||||||
Actual | $ | 1,000 | $ | 966.70 | $ | 3.97 | 0.80 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.17 | $ | 4.08 | 0.80 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
8 | • AB HIGH YIELD PORTFOLIO |
Expense Example
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $19.7
* | 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). “Other” securities type weightings represent 0.1% or less in the following security types: Emerging Markets – Sovereigns, Options Purchased – Calls and Options Purchased – Puts. |
AB HIGH YIELD PORTFOLIO • | 9 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
October 31, 2015
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
CORPORATES – NON-INVESTMENT GRADE – 72.1% | ||||||||||
Industrial – 59.3% | ||||||||||
Basic – 3.2% | ||||||||||
AK Steel Corp. | U.S.$ | 65 | $ | 31,675 | ||||||
Aleris International, Inc. | 13 | 12,155 | ||||||||
7.875%, 11/01/20 | 9 | 8,460 | ||||||||
ArcelorMittal | 10 | 9,609 | ||||||||
6.125%, 6/01/18-6/01/25 | 100 | 96,461 | ||||||||
6.25%, 3/01/21 | 10 | 9,444 | ||||||||
7.00%, 2/25/22 | 15 | 14,213 | ||||||||
7.75%, 10/15/39 | 42 | 35,805 | ||||||||
Ashland, Inc. | 19 | 19,641 | ||||||||
Chemours Co. (The) | 4 | 2,980 | ||||||||
Cliffs Natural Resources, Inc. | 12 | 4,860 | ||||||||
8.25%, 3/31/20(a) | 17 | 15,215 | ||||||||
Commercial Metals Co. | 25 | 25,937 | ||||||||
FMG Resources August 2006 Pty Ltd. | 25 | 17,875 | ||||||||
9.75%, 3/01/22(a) | 14 | 13,930 | ||||||||
Huntsman International LLC | 10 | 9,407 | ||||||||
JMC Steel Group, Inc. | 10 | 6,800 | ||||||||
Joseph T. Ryerson & Son, Inc. | 18 | 15,705 | ||||||||
Lundin Mining Corp. | 13 | 13,030 | ||||||||
Magnetation LLC/Mag Finance Corp. | 35 | 7,700 | ||||||||
Momentive Performance Materials, Inc. | 40 | 32,000 | ||||||||
8.875%, 10/15/20(d)(e)(f) | 40 | – 0 | – | |||||||
Novelis, Inc. | 10 | 10,075 | ||||||||
8.75%, 12/15/20 | 30 | 30,075 | ||||||||
Peabody Energy Corp. | 62 | 10,850 | ||||||||
10.00%, 3/15/22(a) | 30 | 8,100 | ||||||||
Smurfit Kappa Treasury Funding Ltd. | 40 | 48,800 |
10 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Steel Dynamics, Inc. | U.S.$ | 15 | $ | 14,888 | ||||||
6.125%, 8/15/19 | 35 | 36,225 | ||||||||
Teck Resources Ltd. | 18 | 12,240 | ||||||||
5.40%, 2/01/43 | 5 | 2,675 | ||||||||
6.25%, 7/15/41 | 8 | 4,520 | ||||||||
Thompson Creek Metals Co., Inc. | 8 | 3,360 | ||||||||
9.75%, 12/01/17 | 25 | 23,625 | ||||||||
Univar USA, Inc. | 14 | 13,860 | ||||||||
WR Grace & Co.-Conn | 12 | 12,480 | ||||||||
|
| |||||||||
634,675 | ||||||||||
|
| |||||||||
Capital Goods – 6.5% | ||||||||||
Apex Tool Group LLC | 20 | 16,100 | ||||||||
Ardagh Packaging Finance PLC/Ardagh Holdings USA, Inc. | 200 | 196,000 | ||||||||
Berry Plastics Corp. | 7 | 6,930 | ||||||||
5.50%, 5/15/22 | 20 | 20,600 | ||||||||
6.00%, 10/15/22(a) | 4 | 4,180 | ||||||||
Beverage Packaging Holdings Luxembourg II SA/Beverage Packaging Holdings II Issuer | 10 | 10,050 | ||||||||
Bombardier, Inc. | 35 | 26,950 | ||||||||
6.125%, 1/15/23(a) | 74 | 57,350 | ||||||||
7.50%, 3/15/25(a) | 27 | 20,992 | ||||||||
Building Materials Corp. of America | 19 | 20,235 | ||||||||
Clean Harbors, Inc. | 18 | 18,720 | ||||||||
CNH Industrial Capital LLC | 60 | 60,150 | ||||||||
EnerSys | 10 | 10,150 | ||||||||
EnPro Industries, Inc. | 16 | 16,120 | ||||||||
Gardner Denver, Inc. | 28 | 24,220 | ||||||||
HD Supply, Inc. | 39 | 41,535 | ||||||||
11.50%, 7/15/20 | 15 | 16,969 | ||||||||
KLX, Inc. | 40 | 40,825 |
AB HIGH YIELD PORTFOLIO • | 11 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||||
| ||||||||||||
Manitowoc Co., Inc. (The) | U.S.$ | 3 | $ | 3,098 | ||||||||
8.50%, 11/01/20 | 30 | 31,238 | ||||||||||
Masco Corp. | 30 | 34,875 | ||||||||||
Owens-Brockway Glass Container, Inc. | 3 | 3,184 | ||||||||||
Owens-Illinois, Inc. | 25 | 27,797 | ||||||||||
Pactiv LLC | 31 | 29,992 | ||||||||||
Reynolds Group Issuer, Inc./Reynolds Group Issuer LLC/Reynolds Group Issuer Lu | 100 | 103,875 | ||||||||||
9.00%, 4/15/19 | 100 | 102,250 | ||||||||||
Sealed Air Corp. | 13 | 13,585 | ||||||||||
6.875%, 7/15/33(a) | 75 | 76,500 | ||||||||||
SPX FLOW, Inc. | 75 | 79,500 | ||||||||||
Summit Materials LLC/Summit Materials Finance Corp. | 8 | 8,480 | ||||||||||
TransDigm, Inc. | 30 | 30,300 | ||||||||||
6.50%, 7/15/24 | 20 | 20,350 | ||||||||||
United Rentals North America, Inc. | 64 | 63,840 | ||||||||||
5.75%, 11/15/24 | 39 | 39,585 | ||||||||||
|
| |||||||||||
1,276,525 | ||||||||||||
|
| |||||||||||
Communications - Media – 8.3% | ||||||||||||
CCO Holdings LLC/CCO Holdings Capital Corp. 5.125%, 2/15/23 | 60 | 60,150 | ||||||||||
5.375%, 5/01/25(a) | 42 | 41,580 | ||||||||||
5.75%, 1/15/24 | 8 | 8,120 | ||||||||||
5.875%, 5/01/27(a) | 44 | 44,000 | ||||||||||
Cequel Communications Holdings I LLC/Cequel Capital Corp. | 74 | 71,095 | ||||||||||
Clear Channel Worldwide Holdings, Inc. | 35 | 36,487 | ||||||||||
7.625%, 3/15/20 | 6 | 6,225 | ||||||||||
CSC Holdings LLC | 140 | 123,129 | ||||||||||
7.625%, 7/15/18 | 24 | 25,470 | ||||||||||
8.625%, 2/15/19 | 35 | 37,187 |
12 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||||
| ||||||||||||
DISH DBS Corp. | U.S.$ | 30 | $ | 29,888 | ||||||||
5.875%, 11/15/24 | 60 | 57,390 | ||||||||||
6.75%, 6/01/21 | 105 | 108,412 | ||||||||||
Hughes Satellite Systems Corp. | 50 | 54,500 | ||||||||||
iHeartCommunications, Inc. | 70 | 60,200 | ||||||||||
9.00%, 12/15/19-9/15/22 | 60 | 50,200 | ||||||||||
Intelsat Jackson Holdings SA | 95 | 78,316 | ||||||||||
Mediacom Broadband LLC/Mediacom Broadband Corp. | 30 | 28,950 | ||||||||||
Nexstar Broadcasting, Inc. | 17 | 17,574 | ||||||||||
Nielsen Co. Luxembourg SARL (The) | 29 | 30,051 | ||||||||||
Nielsen Finance LLC/Nielsen Finance Co. | 35 | 35,569 | ||||||||||
Outfront Media Capital LLC/Outfront Media Capital Corp. | 10 | 10,406 | ||||||||||
Radio One, Inc. | 20 | 18,700 | ||||||||||
9.25%, 2/15/20(a) | 26 | 21,450 | ||||||||||
RR Donnelley & Sons Co. | 30 | 32,138 | ||||||||||
8.25%, 3/15/19 | 20 | 22,400 | ||||||||||
Sinclair Television Group, Inc. | 20 | 20,050 | ||||||||||
5.625%, 8/01/24(a) | 50 | 49,000 | ||||||||||
6.125%, 10/01/22 | 26 | 26,715 | ||||||||||
Sirius XM Radio, Inc. | 18 | 18,428 | ||||||||||
6.00%, 7/15/24(a) | 47 | 49,623 | ||||||||||
Starz LLC/Starz Finance Corp. | 55 | 56,244 | ||||||||||
TEGNA, Inc. | 35 | 34,650 | ||||||||||
5.125%, 7/15/20 | 5 | 5,213 | ||||||||||
5.50%, 9/15/24(a) | 7 | 7,105 | ||||||||||
6.375%, 10/15/23 | 7 | 7,560 | ||||||||||
Time, Inc. | 50 | 50,000 | ||||||||||
Townsquare Media, Inc. | 19 | 18,240 | ||||||||||
Univision Communications, Inc. | 98 | 96,697 | ||||||||||
6.75%, 9/15/22(a) | 22 | 23,238 |
AB HIGH YIELD PORTFOLIO • | 13 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||||
| ||||||||||||
Videotron Ltd. | U.S.$ | 55 | $ | 57,406 | ||||||||
|
| |||||||||||
1,629,756 | ||||||||||||
|
| |||||||||||
Communications - Telecommunications – 6.9% | ||||||||||||
CenturyLink, Inc. | 10 | 9,725 | ||||||||||
Series U | 55 | 47,025 | ||||||||||
Series W | 27 | 26,795 | ||||||||||
CommScope Technologies Finance LLC | 23 | 23,345 | ||||||||||
CommScope, Inc. | 14 | 13,860 | ||||||||||
Communications Sales & Leasing, Inc./CSL Capital LLC | 40 | 38,800 | ||||||||||
8.25%, 10/15/23 | 31 | 28,659 | ||||||||||
Frontier Communications Corp. | 34 | 30,362 | ||||||||||
7.125%, 3/15/19-1/15/23 | 43 | 40,822 | ||||||||||
7.625%, 4/15/24 | 35 | 31,325 | ||||||||||
7.875%, 1/15/27 | 10 | 8,500 | ||||||||||
8.125%, 10/01/18 | 15 | 15,825 | ||||||||||
9.00%, 8/15/31 | 10 | 9,045 | ||||||||||
10.50%, 9/15/22(a) | 7 | 7,263 | ||||||||||
11.00%, 9/15/25(a) | 79 | 82,801 | ||||||||||
Level 3 Financing, Inc. | 24 | 24,300 | ||||||||||
7.00%, 6/01/20 | 40 | 42,400 | ||||||||||
SBA Communications Corp. | 20 | 20,900 | ||||||||||
Sprint Capital Corp. | 5 | 4,150 | ||||||||||
8.75%, 3/15/32 | 45 | 40,500 | ||||||||||
Sprint Communications, Inc. | 40 | 34,180 | ||||||||||
9.00%, 11/15/18(a) | 85 | 93,446 | ||||||||||
Sprint Corp. | 10 | 8,781 | ||||||||||
7.25%, 9/15/21 | 30 | 27,562 | ||||||||||
7.625%, 2/15/25 | 122 | 108,275 | ||||||||||
7.875%, 9/15/23 | 85 | 78,625 | ||||||||||
T-Mobile USA, Inc. | 50 | 51,620 | ||||||||||
6.375%, 3/01/25 | 85 | 85,212 | ||||||||||
6.542%, 4/28/20 | 102 | 104,550 |
14 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Telecom Italia Capital SA | U.S.$ | 110 | $ | 106,344 | ||||||
7.20%, 7/18/36 | 8 | 8,240 | ||||||||
WaveDivision Escrow LLC/WaveDivision Escrow Corp. | 10 | 9,725 | ||||||||
Windstream Services LLC | 21 | 16,643 | ||||||||
7.50%, 4/01/23 | 30 | 25,050 | ||||||||
Zayo Group LLC/Zayo Capital, Inc. | 42 | 42,819 | ||||||||
6.375%, 5/15/25(a) | 15 | 15,188 | ||||||||
|
| |||||||||
1,362,662 | ||||||||||
|
| |||||||||
Consumer Cyclical - Automotive – 1.3% | ||||||||||
Affinia Group, Inc. | 30 | 31,125 | ||||||||
Banque PSA Finance SA | 30 | 30,320 | ||||||||
Commercial Vehicle Group, Inc. | 50 | 50,750 | ||||||||
Dana Holding Corp. | 29 | 29,580 | ||||||||
Gates Global LLC/Gates Global Co. | 58 | 46,545 | ||||||||
LKQ Corp. | 55 | 54,038 | ||||||||
Titan International, Inc. | 20 | 16,900 | ||||||||
|
| |||||||||
259,258 | ||||||||||
|
| |||||||||
Consumer Cyclical - Entertainment – 0.4% | ||||||||||
AMC Entertainment, Inc. | 17 | 17,127 | ||||||||
Regal Entertainment Group | 35 | 35,650 | ||||||||
Royal Caribbean Cruises Ltd. | 15 | 16,425 | ||||||||
|
| |||||||||
69,202 | ||||||||||
|
| |||||||||
Consumer Cyclical - Other – 4.2% | ||||||||||
Beazer Homes USA, Inc. | 20 | 19,250 | ||||||||
Boyd Gaming Corp. | 50 | 53,875 | ||||||||
Caesars Entertainment Operating Co., Inc. | 5 | 4,025 | ||||||||
Caesars Entertainment Resort Properties LLC/Caesars Entertainment Resort Prope | 20 | 19,850 |
AB HIGH YIELD PORTFOLIO • | 15 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||||
| ||||||||||||
Caesars Growth Properties Holdings LLC/Caesars Growth Properties Finance, Inc. | U.S.$ | 20 | $ | 16,550 | ||||||||
CalAtlantic Group, Inc. | 20 | 22,150 | ||||||||||
8.375%, 5/15/18 | 15 | 17,250 | ||||||||||
DR Horton, Inc. | 60 | 61,050 | ||||||||||
Eldorado Resorts, Inc. | 16 | 16,200 | ||||||||||
GLP Capital LP / GLP Financing II, Inc. | 25 | 25,241 | ||||||||||
International Game Technology | 80 | 85,800 | ||||||||||
Isle of Capri Casinos, Inc. | 9 | 9,473 | ||||||||||
K. Hovnanian Enterprises, Inc. | 28 | 19,600 | ||||||||||
KB Home | 15 | 14,751 | ||||||||||
7.00%, 12/15/21 | 10 | 10,125 | ||||||||||
8.00%, 3/15/20 | 20 | 21,750 | ||||||||||
Lennar Corp. | 50 | 50,875 | ||||||||||
M/I Homes, Inc. | 40 | 40,850 | ||||||||||
MDC Holdings, Inc. | 8 | 8,160 | ||||||||||
6.00%, 1/15/43 | 7 | 8,910 | ||||||||||
Meritage Homes Corp. | 63 | 64,575 | ||||||||||
7.00%, 4/01/22 | 4 | 4,380 | ||||||||||
NAI Entertainment Holdings/NAI Entertainment Holdings Finance Corp. | 25 | 25,812 | ||||||||||
PulteGroup, Inc. | 30 | 29,775 | ||||||||||
6.375%, 5/15/33 | 10 | 10,310 | ||||||||||
7.875%, 6/15/32 | 4 | 4,630 | ||||||||||
Scientific Games International, Inc. | 18 | 18,090 | ||||||||||
Shea Homes LP/Shea Homes Funding Corp. | 4 | 4,185 | ||||||||||
6.125%, 4/01/25(a) | 42 | 43,995 | ||||||||||
Taylor Morrison Communities, Inc./Monarch Communities, Inc. | 50 | 49,250 | ||||||||||
5.875%, 4/15/23(a) | 14 | 14,140 |
16 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||||
| ||||||||||||
Toll Brothers Finance Corp. | U.S.$ | 10 | $ | 10,400 | ||||||||
Wynn Las Vegas LLC/Wynn Las Vegas Capital Corp. | 5 | 4,950 | ||||||||||
5.50%, 3/01/25(a) | 13 | 12,201 | ||||||||||
|
| |||||||||||
822,428 | ||||||||||||
|
| |||||||||||
Consumer Cyclical - Restaurants – 0.2% | ||||||||||||
1011778 BC ULC/New Red Finance, Inc. | 16 | 16,240 | ||||||||||
6.00%, 4/01/22(a) | 22 | 23,017 | ||||||||||
|
| |||||||||||
39,257 | ||||||||||||
|
| |||||||||||
Consumer Cyclical - Retailers – 3.2% | ||||||||||||
American Tire Distributors, Inc. | 50 | 50,500 | ||||||||||
Argos Merger Sub, Inc. | 65 | 68,412 | ||||||||||
Asbury Automotive Group, Inc. | 13 | 13,748 | ||||||||||
Cash America International, Inc. | 67 | 67,502 | ||||||||||
CST Brands, Inc. | 28 | 28,280 | ||||||||||
Dollar Tree, Inc. | 48 | 50,580 | ||||||||||
Group 1 Automotive, Inc. | 30 | 30,300 | ||||||||||
L Brands, Inc. | 30 | 31,163 | ||||||||||
8.50%, 6/15/19 | 50 | 59,000 | ||||||||||
Levi Strauss & Co. | 19 | 19,238 | ||||||||||
6.875%, 5/01/22 | 15 | 16,444 | ||||||||||
Neiman Marcus Group Ltd. LLC | 23 | 23,890 | ||||||||||
Party City Holdings, Inc. | 17 | 17,510 | ||||||||||
Rite Aid Corp. | 77 | 82,967 | ||||||||||
Serta Simmons Bedding LLC | 15 | 15,844 | ||||||||||
Sonic Automotive, Inc. | 45 | 43,762 | ||||||||||
Wolverine World Wide, Inc. | 10 | 10,500 | ||||||||||
|
| |||||||||||
629,640 | ||||||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 17 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||||
| ||||||||||||
Consumer Non-Cyclical – 10.4% | ||||||||||||
Air Medical Merger Sub Corp. | U.S.$ | 30 | $ | 27,300 | ||||||||
Alere, Inc. | 7 | 7,280 | ||||||||||
AMAG Pharmaceuticals, Inc. | 8 | 7,460 | ||||||||||
Amsurg Corp. | 20 | 19,650 | ||||||||||
BI-LO LLC/BI-LO Finance Corp. | 39 | 35,685 | ||||||||||
9.25%, 2/15/19(a) | 20 | 20,550 | ||||||||||
Capsugel SA | 36 | 36,270 | ||||||||||
CHS/Community Health Systems, Inc. | 129 | 129,967 | ||||||||||
Concordia Healthcare Corp. | 2 | 1,740 | ||||||||||
9.50%, 10/21/22(a) | 13 | 12,740 | ||||||||||
Constellation Brands, Inc. | 20 | 20,475 | ||||||||||
7.25%, 5/15/17 | 40 | 43,300 | ||||||||||
DaVita HealthCare Partners, Inc. | 48 | 47,650 | ||||||||||
Endo Finance LLC | 120 | 117,300 | ||||||||||
Envision Healthcare Corp. | 42 | 40,740 | ||||||||||
First Quality Finance Co., Inc. | 30 | 27,825 | ||||||||||
HCA, Inc. | 153 | 157,582 | ||||||||||
5.375%, 2/01/25 | 49 | 50,286 | ||||||||||
6.50%, 2/15/20 | 80 | 89,500 | ||||||||||
Hill-Rom Holdings, Inc. | 6 | 6,120 | ||||||||||
HRG Group, Inc. | 13 | 13,780 | ||||||||||
7.875%, 7/15/19 | 48 | 50,940 | ||||||||||
Immucor, Inc. | 20 | 20,500 | ||||||||||
Jaguar Holding Co. II/Pharmaceutical Product Development LLC | 13 | 13,016 | ||||||||||
Kindred Healthcare, Inc. | 55 | 57,062 |
18 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Kinetic Concepts, Inc./KCI USA, Inc. | U.S.$ | 50 | $ | 52,795 | ||||||
Mallinckrodt International Finance SA | 11 | 10,656 | ||||||||
Mallinckrodt International Finance SA/Mallinckrodt CB LLC | 10 | 9,588 | ||||||||
5.50%, 4/15/25(a) | 18 | 16,374 | ||||||||
5.625%, 10/15/23(a) | 23 | 21,706 | ||||||||
5.75%, 8/01/22(a) | 18 | 17,111 | ||||||||
MPH Acquisition Holdings LLC | 10 | 10,200 | ||||||||
Post Holdings, Inc. | 60 | 63,216 | ||||||||
7.75%, 3/15/24(a) | 18 | 19,170 | ||||||||
8.00%, 7/15/25(a) | 29 | 31,465 | ||||||||
PRA Holdings, Inc. | 30 | 33,825 | ||||||||
Quintiles Transnational Corp. | 18 | 18,506 | ||||||||
RSI Home Products, Inc. | 34 | 35,105 | ||||||||
Smithfield Foods, Inc. | 25 | 25,375 | ||||||||
5.875%, 8/01/21(a) | 30 | 31,500 | ||||||||
6.625%, 8/15/22 | 20 | 21,400 | ||||||||
Spectrum Brands, Inc. | 15 | 15,994 | ||||||||
6.125%, 12/15/24(a) | 7 | 7,543 | ||||||||
6.375%, 11/15/20 | 30 | 32,025 | ||||||||
6.625%, 11/15/22 | 20 | 21,850 | ||||||||
Sterigenics-Nordion Holdings LLC | 5 | 5,031 | ||||||||
Sun Products Corp. (The) | 26 | 30,938 | ||||||||
Tenet Healthcare Corp. | 25 | 25,000 | ||||||||
6.75%, 6/15/23 | 14 | 13,895 | ||||||||
6.875%, 11/15/31 | 72 | 64,800 | ||||||||
8.00%, 8/01/20 | 60 | 62,100 | ||||||||
8.125%, 4/01/22 | 23 | 24,323 | ||||||||
Valeant Pharmaceuticals International, Inc. | 30 | 25,200 | ||||||||
5.875%, 5/15/23(a) | 57 | 48,165 | ||||||||
6.125%, 4/15/25(a) | 202 | 170,690 | ||||||||
6.75%, 8/15/18(a) | 25 | 24,128 | ||||||||
|
| |||||||||
2,044,392 | ||||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 19 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Energy – 7.8% | ||||||||||
American Energy-Permian Basin LLC/AEPB Finance Corp. | U.S.$ | 10 | $ | 5,375 | ||||||
Antero Resources Corp. | 55 | 49,362 | ||||||||
5.375%, 11/01/21 | 10 | 9,200 | ||||||||
5.625%, 6/01/23(a) | 10 | 9,200 | ||||||||
Approach Resources, Inc. | 10 | 5,600 | ||||||||
Baytex Energy Corp. | 20 | 16,500 | ||||||||
Berry Petroleum Co. LLC | 34 | 12,240 | ||||||||
Bonanza Creek Energy, Inc. | 3 | 2,010 | ||||||||
6.75%, 4/15/21 | 3 | 2,160 | ||||||||
BreitBurn Energy Partners LP/BreitBurn Finance Corp. | 19 | 7,125 | ||||||||
California Resources Corp. | 19 | 13,823 | ||||||||
6.00%, 11/15/24 | 24 | 16,320 | ||||||||
Carrizo Oil & Gas, Inc. | 25 | 24,937 | ||||||||
Chaparral Energy, Inc. | 21 | 6,930 | ||||||||
CHC Helicopter SA | 41 | 23,085 | ||||||||
Chesapeake Energy Corp. | 19 | 16,245 | ||||||||
3.571%, 4/15/19(i) | 15 | 9,675 | ||||||||
4.875%, 4/15/22 | 20 | 12,400 | ||||||||
6.875%, 11/15/20 | 35 | 23,712 | ||||||||
7.25%, 12/15/18 | 6 | 4,830 | ||||||||
Cobalt International Energy, Inc. | 24 | 17,280 | ||||||||
Concho Resources, Inc. | 30 | 30,150 | ||||||||
Crestwood Midstream Partners LP/Crestwood Midstream Finance Corp. | 16 | 13,600 | ||||||||
DCP Midstream Operating LP | 13 | 11,009 | ||||||||
5.60%, 4/01/44 | 16 | 12,420 | ||||||||
Denbury Resources, Inc. | 77 | 51,397 | ||||||||
5.50%, 5/01/22 | 18 | 12,600 |
20 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Diamondback Energy, Inc. | U.S.$ | 8 | $ | 8,520 | ||||||
Energy Transfer Equity LP | 41 | 39,720 | ||||||||
7.50%, 10/15/20 | 16 | 17,203 | ||||||||
Energy XXI Gulf Coast, Inc. | 35 | 6,825 | ||||||||
7.75%, 6/15/19 | 10 | 2,050 | ||||||||
11.00%, 3/15/20(a) | 13 | 6,825 | ||||||||
EP Energy LLC/Everest Acquisition Finance, Inc. | 20 | 15,400 | ||||||||
9.375%, 5/01/20 | 7 | 6,090 | ||||||||
EXCO Resources, Inc. | 5 | 1,375 | ||||||||
8.50%, 4/15/22 | 7 | 1,610 | ||||||||
Global Partners LP/GLP Finance Corp. | 50 | 46,000 | ||||||||
7.00%, 6/15/23 | 7 | 6,580 | ||||||||
Gulfport Energy Corp. | 18 | 16,470 | ||||||||
Halcon Resources Corp. | 17 | 5,706 | ||||||||
9.75%, 7/15/20 | 8 | 2,720 | ||||||||
Hornbeck Offshore Services, Inc. | 30 | 24,150 | ||||||||
Jones Energy Holdings LLC/Jones Energy Finance Corp. | 19 | 15,247 | ||||||||
Jupiter Resources, Inc. | 24 | 12,480 | ||||||||
Laredo Petroleum, Inc. | 19 | 18,762 | ||||||||
Legacy Reserves LP/Legacy Reserves Finance Corp. | 30 | 19,800 | ||||||||
8.00%, 12/01/20 | 10 | 7,100 | ||||||||
Linn Energy LLC/Linn Energy Finance Corp. | 52 | 12,220 | ||||||||
MarkWest Energy Partners LP/MarkWest Energy Finance Corp. | 65 | 60,950 | ||||||||
Memorial Resource Development Corp. | 20 | 18,850 | ||||||||
Midstates Petroleum Co., Inc./Midstates Petroleum Co. LLC | 20 | 3,600 | ||||||||
Newfield Exploration Co. | 20 | 19,000 | ||||||||
5.625%, 7/01/24 | 16 | 15,840 |
AB HIGH YIELD PORTFOLIO • | 21 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Northern Blizzard Resources, Inc. | U.S.$ | 38 | $ | 31,160 | ||||||
Oasis Petroleum, Inc. | 20 | 17,050 | ||||||||
Offshore Group Investment Ltd. | 30 | 8,813 | ||||||||
Paragon Offshore PLC | 60 | 9,150 | ||||||||
PHI, Inc. | 45 | 39,825 | ||||||||
Precision Drilling Corp. | 20 | 17,400 | ||||||||
QEP Resources, Inc. | 60 | 54,000 | ||||||||
Range Resources Corp. | 27 | 24,165 | ||||||||
Sabine Oil & Gas Corp. | 20 | 2,800 | ||||||||
Sabine Pass Liquefaction LLC | 92 | 88,205 | ||||||||
5.75%, 5/15/24 | 100 | 96,500 | ||||||||
SandRidge Energy, Inc. | 15 | 3,488 | ||||||||
Seven Generations Energy Ltd. | 7 | 6,370 | ||||||||
8.25%, 5/15/20(a) | 30 | 29,100 | ||||||||
SM Energy Co. | 20 | 17,950 | ||||||||
5.625%, 6/01/25 | 25 | 22,750 | ||||||||
Southern Star Central Corp. | 20 | 19,400 | ||||||||
Swift Energy Co. | 15 | 3,863 | ||||||||
Targa Resources Partners LP/Targa Resources Partners Finance Corp. | 55 | 48,125 | ||||||||
6.75%, 3/15/24(a) | 10 | 9,838 | ||||||||
Tervita Corp. | 15 | 11,025 | ||||||||
10.875%, 2/15/18(a) | 20 | 10,000 | ||||||||
Transocean, Inc. | 45 | 28,575 | ||||||||
Triangle USA Petroleum Corp. | 20 | 9,400 | ||||||||
Vanguard Natural Resources LLC/VNR Finance Corp. | 10 | 5,988 | ||||||||
W&T Offshore, Inc. | 15 | 6,750 |
22 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Whiting Petroleum Corp. | U.S.$ | 17 | $ | 14,971 | ||||||
5.75%, 3/15/21 | 17 | 15,789 | ||||||||
6.25%, 4/01/23 | 36 | 33,480 | ||||||||
WPX Energy, Inc. | 15 | 13,200 | ||||||||
8.25%, 8/01/23 | 10 | 9,400 | ||||||||
|
| |||||||||
1,538,808 | ||||||||||
|
| |||||||||
Other Industrial – 0.8% | ||||||||||
General Cable Corp. | 17 | 11,613 | ||||||||
5.75%, 10/01/22 | 20 | 17,250 | ||||||||
Laureate Education, Inc. | 55 | 43,725 | ||||||||
Modular Space Corp. | 23 | 13,743 | ||||||||
New Enterprise Stone & Lime Co., Inc. | 30 | 25,500 | ||||||||
13.00% (7.00% Cash and 6.00% PIK), 3/15/18(g) | 22 | 22,949 | ||||||||
Safway Group Holding LLC/Safway Finance Corp. | 17 | 17,467 | ||||||||
|
| |||||||||
152,247 | ||||||||||
|
| |||||||||
Services – 0.5% | ||||||||||
ADT Corp. (The) | 15 | 14,925 | ||||||||
4.125%, 4/15/19 | 20 | 20,450 | ||||||||
6.25%, 10/15/21 | 20 | 21,600 | ||||||||
IHS, Inc. | 30 | 30,300 | ||||||||
Mobile Mini, Inc. | 20 | 20,800 | ||||||||
|
| |||||||||
108,075 | ||||||||||
|
| |||||||||
Technology – 4.7% | ||||||||||
Avaya, Inc. | 41 | 33,313 | ||||||||
10.50%, 3/01/21(a) | 30 | 11,625 | ||||||||
Blackboard, Inc. | 10 | 8,600 | ||||||||
BMC Software Finance, Inc. | 35 | 27,081 | ||||||||
Brightstar Corp. | 60 | 60,312 | ||||||||
CDW LLC/CDW Finance Corp. | 13 | 13,488 | ||||||||
5.50%, 12/01/24 | 49 | 51,327 | ||||||||
Ceridian HCM Holding, Inc. | 15 | 13,200 |
AB HIGH YIELD PORTFOLIO • | 23 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
CommScope Holding Co., Inc. | U.S.$ | 10 | $ | 10,400 | ||||||
Dell, Inc. | 35 | 36,220 | ||||||||
6.50%, 4/15/38 | 36 | 30,510 | ||||||||
Energizer Holdings, Inc. | 12 | 12,240 | ||||||||
Ensemble S Merger Sub, Inc. | 14 | 14,035 | ||||||||
First Data Corp. | 160 | 162,800 | ||||||||
11.75%, 8/15/21 | 30 | 34,200 | ||||||||
12.625%, 1/15/21 | 45 | 51,581 | ||||||||
Infor Software Parent LLC/Infor Software Parent, Inc. | 20 | 17,312 | ||||||||
Infor US, Inc. | 27 | 27,540 | ||||||||
6.50%, 5/15/22(a) | 50 | 47,375 | ||||||||
Micron Technology, Inc. | 71 | 67,627 | ||||||||
MSCI, Inc. | 32 | 33,680 | ||||||||
5.75%, 8/15/25(a) | 8 | 8,436 | ||||||||
Nokia Oyj | 15 | 16,031 | ||||||||
Open Text Corp. | 7 | 7,070 | ||||||||
Sabre GLBL, Inc. | 9 | 9,135 | ||||||||
Sanmina Corp. | 32 | 32,640 | ||||||||
Sensata Technologies BV | 50 | 48,938 | ||||||||
SunGard Data Systems, Inc. | 40 | 41,704 | ||||||||
|
| |||||||||
928,420 | ||||||||||
|
| |||||||||
Transportation - Airlines – 0.2% | ||||||||||
Air Canada | 15 | 15,900 | ||||||||
8.75%, 4/01/20(a) | 20 | 21,850 | ||||||||
|
| |||||||||
37,750 | ||||||||||
|
| |||||||||
Transportation - Services – 0.7% | ||||||||||
Avis Budget Car Rental LLC/Avis Budget Finance, Inc. | 40 | 39,850 |
24 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Con-way, Inc. | U.S.$ | 21 | $ | 15,279 | ||||||
Hertz Corp. (The) | 65 | 67,275 | ||||||||
XPO Logistics, Inc. | 16 | 11,602 | ||||||||
|
| |||||||||
134,006 | ||||||||||
|
| |||||||||
11,667,101 | ||||||||||
|
| |||||||||
Financial Institutions – 9.7% | ||||||||||
Banking – 4.9% | ||||||||||
ABN AMRO Bank NV | EUR | 50 | 55,120 | |||||||
Ally Financial, Inc. | U.S.$ | 85 | 87,762 | |||||||
8.00%, 12/31/18-11/01/31 | 86 | 102,885 | ||||||||
Bank of America Corp. | 9 | 9,081 | ||||||||
Series X | 50 | 50,703 | ||||||||
Series Z | 11 | 11,495 | ||||||||
Bank of Ireland | EUR | 100 | 115,475 | |||||||
Barclays Bank PLC | U.S.$ | 30 | 34,350 | |||||||
BBVA International Preferred SAU | EUR | 50 | 54,900 | |||||||
Citigroup, Inc. | U.S.$ | 46 | 45,655 | |||||||
Credit Agricole SA | GBP | 50 | 83,632 | |||||||
HT1 Funding GmbH | EUR | 40 | 43,986 | |||||||
Lloyds Bank PLC | 50 | 56,632 | ||||||||
Lloyds Banking Group PLC | U.S.$ | 35 | 39,200 | |||||||
RBS Capital Trust C | EUR | 35 | 38,285 | |||||||
Royal Bank of Scotland Group PLC | U.S.$ | 100 | 104,450 | |||||||
Zions Bancorporation | 10 | 10,363 | ||||||||
5.80%, 6/15/23(k) | 20 | 19,800 | ||||||||
|
| |||||||||
963,774 | ||||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 25 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Brokerage – 0.1% | ||||||||||
E*TRADE Financial Corp. | U.S.$ | 15 | $ | 16,038 | ||||||
|
| |||||||||
Finance – 3.6% | ||||||||||
Artsonig Pty Ltd. | 24 | 1,789 | ||||||||
CIT Group, Inc. | 20 | 20,300 | ||||||||
5.25%, 3/15/18 | 95 | 99,631 | ||||||||
5.50%, 2/15/19(a) | 30 | 31,837 | ||||||||
Creditcorp | 20 | 14,700 | ||||||||
Enova International, Inc. | 40 | 33,900 | ||||||||
International Lease Finance Corp. | 70 | 75,105 | ||||||||
8.25%, 12/15/20 | 90 | 107,550 | ||||||||
8.75%, 3/15/17 | 20 | 21,575 | ||||||||
8.875%, 9/01/17 | 40 | 44,400 | ||||||||
Navient Corp. | 20 | 20,224 | ||||||||
4.875%, 6/17/19 | 50 | 48,375 | ||||||||
5.00%, 10/26/20 | 30 | 28,088 | ||||||||
7.25%, 1/25/22 | 35 | 34,475 | ||||||||
8.00%, 3/25/20 | 80 | 84,800 | ||||||||
TMX Finance LLC/TitleMax Finance Corp. | 60 | 47,100 | ||||||||
|
| |||||||||
713,849 | ||||||||||
|
| |||||||||
Insurance – 0.8% | ||||||||||
American Equity Investment Life Holding Co. | 30 | 31,800 | ||||||||
Genworth Holdings, Inc. | 30 | 21,900 | ||||||||
HUB International Ltd. | 30 | 29,925 | ||||||||
Liberty Mutual Group, Inc. | 40 | 46,900 | ||||||||
Wayne Merger Sub LLC | 20 | 27,825 | ||||||||
|
| |||||||||
158,350 | ||||||||||
|
| |||||||||
Other Finance – 0.2% | ||||||||||
ACE Cash Express, Inc. | 10 | 3,300 | ||||||||
CNG Holdings, Inc. | 13 | 6,581 |
26 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
iPayment, Inc. | U.S.$ | 6 | $ | 6,331 | ||||||
Series AI | 9 | 9,563 | ||||||||
Speedy Group Holdings Corp. | 30 | 21,600 | ||||||||
|
| |||||||||
47,375 | ||||||||||
|
| |||||||||
REITS – 0.1% | ||||||||||
FelCor Lodging LP | 15 | 15,525 | ||||||||
|
| |||||||||
1,914,911 | ||||||||||
|
| |||||||||
Utility – 3.1% | ||||||||||
Electric – 3.1% | ||||||||||
AES Corp./VA | 20 | 18,550 | ||||||||
7.375%, 7/01/21 | 74 | 78,810 | ||||||||
Calpine Corp. | 15 | 14,250 | ||||||||
5.75%, 1/15/25 | 60 | 56,850 | ||||||||
7.875%, 1/15/23(a) | 41 | 44,024 | ||||||||
DPL, Inc. | 20 | 20,500 | ||||||||
Dynegy, Inc. | 26 | 24,310 | ||||||||
6.75%, 11/01/19 | 45 | 44,887 | ||||||||
7.375%, 11/01/22 | 35 | 35,087 | ||||||||
FirstEnergy Corp. | 20 | 20,042 | ||||||||
Series B | 29 | 29,312 | ||||||||
Series C | 20 | 23,867 | ||||||||
GenOn Energy, Inc. | 29 | 26,898 | ||||||||
NRG Energy, Inc. | 6 | 5,520 | ||||||||
7.625%, 1/15/18 | 25 | 26,188 | ||||||||
7.875%, 5/15/21 | 40 | 39,800 | ||||||||
Series WI | 44 | 39,380 | ||||||||
Talen Energy Supply LLC | 37 | 31,756 | ||||||||
6.50%, 5/01/18 | 10 | 10,175 | ||||||||
TerraForm Power Operating LLC | 20 | 18,000 | ||||||||
|
| |||||||||
608,206 | ||||||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | 14,190,218 | |||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 27 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
CORPORATES – INVESTMENT GRADE – 5.1% | ||||||||||
Financial Institutions – 3.7% | ||||||||||
Banking – 1.7% | ||||||||||
HSBC Capital Funding LP/Jersey | U.S.$ | 35 | $ | 52,850 | ||||||
JPMorgan Chase & Co. | 35 | 33,687 | ||||||||
Series R | 20 | 20,290 | ||||||||
Series S | 7 | 7,543 | ||||||||
Nationwide Building Society | GBP | 40 | 62,281 | |||||||
Standard Chartered PLC | U.S.$ | 100 | 101,000 | |||||||
Wells Fargo & Co. | 55 | 56,237 | ||||||||
|
| |||||||||
333,888 | ||||||||||
|
| |||||||||
Brokerage – 0.1% | ||||||||||
GFI Group, Inc. | 19 | 20,615 | ||||||||
|
| |||||||||
Insurance – 1.1% | ||||||||||
MetLife, Inc. | 49 | 49,459 | ||||||||
Mitsui Sumitomo Insurance Co., Ltd. | 50 | 58,107 | ||||||||
Nationwide Mutual Insurance Co. | 20 | 30,235 | ||||||||
Progressive Corp. (The) | 25 | 25,125 | ||||||||
Prudential Financial, Inc. | 40 | 41,860 | ||||||||
XLIT Ltd. | 12 | 11,511 | ||||||||
|
| |||||||||
216,297 | ||||||||||
|
| |||||||||
REITS – 0.8% | ||||||||||
DDR Corp. | 40 | 48,486 | ||||||||
EPR Properties | 55 | 64,603 | ||||||||
Senior Housing Properties Trust | 30 | 33,270 | ||||||||
|
| |||||||||
146,359 | ||||||||||
|
| |||||||||
717,159 | ||||||||||
|
|
28 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Industrial – 1.3% | ||||||||||
Basic – 0.1% | ||||||||||
Freeport-McMoRan, Inc. | U.S.$ | 25 | $ | 22,875 | ||||||
5.45%, 3/15/43 | 3 | 2,141 | ||||||||
Glencore Funding LLC | 3 | 2,618 | ||||||||
|
| |||||||||
27,634 | ||||||||||
|
| |||||||||
Communications - Media – 0.2% | ||||||||||
CCO Safari II LLC | 20 | 20,329 | ||||||||
6.484%, 10/23/45(a) | 25 | 25,925 | ||||||||
|
| |||||||||
46,254 | ||||||||||
|
| |||||||||
Communications - | ||||||||||
Embarq Corp. | 30 | 31,556 | ||||||||
Qwest Corp. | 15 | 16,118 | ||||||||
|
| |||||||||
47,674 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 0.1% | ||||||||||
Forest Laboratories LLC | 10 | 10,808 | ||||||||
|
| |||||||||
Energy – 0.7% | ||||||||||
Cimarex Energy Co. | 5 | 4,973 | ||||||||
Enterprise Products Operating LLC | 14 | 13,755 | ||||||||
Kinder Morgan Finance Co. LLC | 29 | 29,216 | ||||||||
Kinder Morgan, Inc./DE | 10 | 10,132 | ||||||||
Noble Energy, Inc. | 30 | 30,124 | ||||||||
Regency Energy Partners LP/Regency Energy Finance Corp. | 5 | 4,589 | ||||||||
5.00%, 10/01/22 | 27 | 26,240 | ||||||||
5.50%, 4/15/23 | 12 | 11,638 | ||||||||
|
| |||||||||
130,667 | ||||||||||
|
| |||||||||
263,037 | ||||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 29 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
Utility – 0.1% | ||||||||||
Electric – 0.1% | ||||||||||
PPL Capital Funding, Inc. | U.S.$ | 20 | $ | 16,900 | ||||||
|
| |||||||||
Total Corporates – Investment Grade | 997,096 | |||||||||
|
| |||||||||
GOVERNMENTS – TREASURIES – 3.1% | ||||||||||
Brazil – 0.1% | ||||||||||
Brazil Notas do Tesouro Nacional | BRL | 30 | 18,099 | |||||||
|
| |||||||||
United States – 3.0% | ||||||||||
U.S. Treasury Notes | U.S.$ | 600 | 599,813 | |||||||
|
| |||||||||
Total Governments – Treasuries | 617,912 | |||||||||
|
| |||||||||
BANK LOANS – 2.0% | ||||||||||
Industrial – 1.2% | ||||||||||
Basic – 0.4% | ||||||||||
FMG Resources (August 2006) Pty LTD | 20 | 16,836 | ||||||||
Ineos US Finance LLC | 25 | 24,489 | ||||||||
Magnetation LLC | 38 | 33,544 | ||||||||
|
| |||||||||
74,869 | ||||||||||
|
| |||||||||
Consumer Cyclical - Entertainment – 0.0% | ||||||||||
NCL Corporation Ltd. | 4 | 3,850 | ||||||||
|
| |||||||||
Consumer Cyclical - Retailers – 0.1% | ||||||||||
J. Crew Group, Inc. | 16 | 11,641 | ||||||||
Men’s Wearhouse, Inc., (The) | 7 | 7,264 | ||||||||
|
| |||||||||
18,905 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 0.4% | ||||||||||
Air Medical Group Holdings, Inc. | 13 | 13,056 | ||||||||
Concordia Healthcare Corp. | 14 | 13,428 |
30 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Company |
Principal | U.S. $ Value | ||||||||
| ||||||||||
Grifols Worldwide Operations Limited | U.S.$ | 10 | $ | 9,852 | ||||||
Ortho-Clinical Diagnostics Holdings Luxembourg S.A.r.l. | 9 | 9,279 | ||||||||
Pharmedium Healthcare Corporation | 40 | 40,083 | ||||||||
|
| |||||||||
85,698 | ||||||||||
|
| |||||||||
Other Industrial – 0.2% | ||||||||||
Atkore International, Inc. | 25 | 21,812 | ||||||||
Travelport Finance (Luxembourg) S.A.r.l. | 23 | 23,052 | ||||||||
|
| |||||||||
44,864 | ||||||||||
|
| |||||||||
Technology – 0.1% | ||||||||||
BMC Software Finance Inc. | 20 | 17,934 | ||||||||
|
| |||||||||
246,120 | ||||||||||
|
| |||||||||
Utility – 0.8% | ||||||||||
Electric – 0.8% | ||||||||||
Energy Future Intermediate Holding Company LLC | 150 | 149,907 | ||||||||
|
| |||||||||
Total Bank Loans | 396,027 | |||||||||
|
| |||||||||
Shares | ||||||||||
COMMON STOCKS – 1.8% | ||||||||||
Clear Channel Outdoor Holdings, Inc. – Class A(f) | 2,000 | 14,960 | ||||||||
Crown Castle International Corp. | 480 | 41,021 | ||||||||
DISH Network Corp. – Class A(f) | 150 | 9,445 | ||||||||
Dynegy, Inc.(f) | 768 | 14,922 | ||||||||
eDreams ODIGEO SA(f) | 5,140 | 13,735 | ||||||||
Eldorado Resorts, Inc.(f) | 1,332 | 13,187 | ||||||||
EMC Corp./MA | 710 | 18,616 | ||||||||
Emeco Holdings Ltd.(f) | 55,000 | 2,146 | ||||||||
EP Energy Corp. – Class A(f) | 1,456 | 8,022 | ||||||||
General Motors Co. | 760 | 26,532 | ||||||||
Hovnanian Enterprises, Inc. – Class A(f) | 1,894 | 3,902 | ||||||||
International Game Technology PLC | 1,000 | 16,220 | ||||||||
iPayment, Inc.(f) | 579 | 2,982 | ||||||||
Las Vegas Sands Corp. | 450 | 22,279 | ||||||||
LifePoint Health, Inc.(f) | 260 | 17,909 | ||||||||
LyondellBasell Industries NV – Class A | 110 | 10,220 | ||||||||
MDC Holdings, Inc. | 637 | 16,556 | ||||||||
Navistar International Corp.(f) | 1,533 | 18,856 | ||||||||
Nortek, Inc.(f) | 280 | 17,178 |
AB HIGH YIELD PORTFOLIO • | 31 |
Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
SBA Communications Corp. – Class A(f) | 290 | $ | 34,516 | |||||||
Townsquare Media, Inc. – Class A(f) | 1,300 | 14,248 | ||||||||
Travelport Worldwide Ltd. | 1,430 | 19,376 | ||||||||
Whiting Petroleum Corp.(f) | 299 | 5,152 | ||||||||
|
| |||||||||
Total Common Stocks | 361,980 | |||||||||
|
| |||||||||
PREFERRED STOCKS – 1.4% | ||||||||||
Financial Institutions – 1.3% | ||||||||||
Banking – 1.1% | ||||||||||
GMAC Capital Trust I | 2,375 | 61,346 | ||||||||
Goldman Sachs Group, Inc. (The) | 1,550 | 38,580 | ||||||||
Morgan Stanley | 2,000 | 54,100 | ||||||||
US Bancorp | 2,000 | 57,960 | ||||||||
|
| |||||||||
211,986 | ||||||||||
|
| |||||||||
REITS – 0.2% | ||||||||||
Public Storage | 1,000 | 24,710 | ||||||||
Welltower, Inc. | 500 | 13,275 | ||||||||
|
| |||||||||
37,985 | ||||||||||
|
| |||||||||
249,971 | ||||||||||
|
| |||||||||
Industrial – 0.1% | ||||||||||
Consumer Cyclical - Other – 0.0% | ||||||||||
Hovnanian Enterprises, Inc. | 325 | 2,128 | ||||||||
|
| |||||||||
Energy – 0.1% | ||||||||||
Energy XXI Ltd. | 250 | 6,000 | ||||||||
Halcon Resources Corp. | 35 | 5,810 | ||||||||
Sanchez Energy Corp. | 550 | 7,863 | ||||||||
SandRidge Energy, Inc. | 200 | 1,510 | ||||||||
|
| |||||||||
21,183 | ||||||||||
|
| |||||||||
23,311 | ||||||||||
|
| |||||||||
Total Preferred Stocks | 273,282 | |||||||||
|
|
32 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Company | Principal | U.S. $ Value | ||||||||
| ||||||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES – 1.2% | ||||||||||
Non-Agency Fixed Rate CMBS – 1.2% | ||||||||||
Citigroup Commercial Mortgage Trust | U.S.$ | 50 | $ | 44,064 | ||||||
GS Mortgage Securities Trust | 100 | 90,204 | ||||||||
JPMBB Commercial Mortgage Securities Trust | 100 | 91,596 | ||||||||
|
| |||||||||
Total Commercial Mortgage-Backed Securities | 225,864 | |||||||||
|
| |||||||||
COLLATERALIZED MORTGAGE OBLIGATIONS – 0.9% | ||||||||||
GSE Risk Share Floating Rate – 0.8% | ||||||||||
Federal Home Loan Mortgage Corp. Structured Agency Credit Risk Debt Notes | 50 | 57,679 | ||||||||
Series 2013-DN2, Class M2 | 50 | 49,871 | ||||||||
Federal National Mortgage Association Connecticut Avenue Securities | 50 | 52,271 | ||||||||
|
| |||||||||
159,821 | ||||||||||
|
| |||||||||
Non-Agency Fixed Rate – 0.1% | ||||||||||
Alternative Loan Trust | 30 | 25,207 | ||||||||
|
| |||||||||
Total Collateralized Mortgage Obligations | 185,028 | |||||||||
|
| |||||||||
Shares | ||||||||||
INVESTMENT COMPANIES – 0.3% | ||||||||||
Funds and Investment Trusts – 0.3% | ||||||||||
iShares Russell 2000 ETF | 434 | 50,058 | ||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 33 |
Portfolio of Investments
Company | Principal | U.S. $ Value | ||||||||
| ||||||||||
GOVERNMENTS – SOVEREIGN | ||||||||||
Brazil – 0.2% | ||||||||||
Petrobras Global Finance BV | U.S.$ | 45 | $ | 29,511 | ||||||
|
| |||||||||
Colombia – 0.0% | ||||||||||
Ecopetrol SA | 10 | 8,150 | ||||||||
|
| |||||||||
Total Governments – Sovereign Agencies | 37,661 | |||||||||
|
| |||||||||
AGENCIES – 0.1% | ||||||||||
United States – 0.1% | ||||||||||
CITGO Petroleum Corp. | 29 | 28,420 | ||||||||
|
| |||||||||
Shares | ||||||||||
WARRANTS – 0.1% | ||||||||||
iPayment Holdings, Inc., | 11,721 | 11,721 | ||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
EMERGING MARKETS – | ||||||||||
Venezuela – 0.1% | ||||||||||
Venezuela Government International Bond | U.S.$ | 20 | 8,750 | |||||||
|
| |||||||||
Contracts | ||||||||||
OPTIONS PURCHASED – CALLS – 0.0% | ||||||||||
Options on Indices – 0.0% | ||||||||||
EURO STOXX 50 Volatility Index | 123 | 2,535 | ||||||||
iShares iBoxx High Yield | 102 | 204 | ||||||||
|
| |||||||||
2,739 | ||||||||||
|
| |||||||||
Options on Funds and Investment Trusts – 0.0% | �� | |||||||||
SPDR S&P 500 ETF Trust | 11 | 1,721 | ||||||||
SPDR S&P 500 ETF Trust | 36 | 180 | ||||||||
|
| |||||||||
1,901 | ||||||||||
|
|
34 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Company | Contracts | U.S. $ Value | ||||||||
| ||||||||||
Options on Equities – 0.0% | ||||||||||
Diageo PLC | 3,344 | $ | 824 | |||||||
Beazer Homes USA | 9 | 23 | ||||||||
|
| |||||||||
847 | ||||||||||
|
| |||||||||
Total Options Purchased – Calls | 5,487 | |||||||||
|
| |||||||||
OPTIONS PURCHASED – PUTS – 0.0% | ||||||||||
Options on Funds and Investment | ||||||||||
Boardwalk Real Estate Investment Trust | 1,630 | 472 | ||||||||
SPDR S&P 500 ETF Trust | 13 | 1,014 | ||||||||
SPDR S&P 500 ETF Trust | 20 | 300 | ||||||||
SPDR S&P 500 ETF Trust | 21 | 725 | ||||||||
|
| |||||||||
2,511 | ||||||||||
|
| |||||||||
Notional Amount (000) | ||||||||||
Swaptions – 0.0% | ||||||||||
CDX-NAHY Series 25, 5 Year Index RTP, | U.S.$ | 660,000 | 1,277 | |||||||
|
| |||||||||
Total Options Purchased – Puts | 3,788 | |||||||||
|
| |||||||||
Shares | ||||||||||
SHORT-TERM INVESTMENTS – 10.6% | ||||||||||
Investment Companies – 10.1% | ||||||||||
AB Fixed-Income Shares, Inc. – | 1,992,398 | 1,992,398 | ||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 35 |
Portfolio of Investments
Principal | U.S. $ Value | |||||||||
| ||||||||||
TIME DEPOSITS – 0.5% | ||||||||||
BBH, Grand Cayman | ||||||||||
(0.237)%, 11/02/15 | EUR | – 0 | –^ | $ | 5 | |||||
0.03%, 11/02/15 | U.S.$ | 5 | 5,341 | |||||||
0.05%, 11/02/15 | CAD | – 0 | –^ | 1 | ||||||
0.854%, 11/02/15 | AUD | – 0 | –^ | – 0 | –† | |||||
5.25%, 11/02/15 | ZAR | 2 | 113 | |||||||
BTMU, Grand Cayman | JPY | 5,359 | 44,410 | |||||||
DNB, Oslo | GBP | 29 | 43,948 | |||||||
|
| |||||||||
Total Time Deposits | 93,818 | |||||||||
|
| |||||||||
Total Short-Term Investments | 2,086,216 | |||||||||
|
| |||||||||
Total Investments – 99.0% | 19,479,508 | |||||||||
Other assets less liabilities – 1.0% | 203,864 | |||||||||
|
| |||||||||
Net Assets – 100.0% | $ | 19,683,372 | ||||||||
|
|
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at October 31, 2015 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Purchased Contracts |
| |||||||||||||||||||
U.S. T-Note 10 Yr Futures (CBT) | 3 | December 2015 | $ | 384,930 | $ | 383,063 | $ | (1,867 | ) | |||||||||||
Sold Contracts |
| |||||||||||||||||||
S&P 500 E-Mini Futures | 2 | December 2015 | 200,287 | 207,370 | (7,083 | ) | ||||||||||||||
|
| |||||||||||||||||||
$ | (8,950 | ) | ||||||||||||||||||
|
|
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note D)
Counterparty | Contracts to Deliver (000) | In Exchange (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
Brown Brothers Harriman & Co. | USD | 41 | SEK | 341 | 11/05/15 | $ | (1,392 | ) | ||||||||||||||||
Brown Brothers Harriman & Co. | USD | 44 | GBP | 29 | 11/10/15 | (91 | ) | |||||||||||||||||
Brown Brothers Harriman & Co. | NZD | 81 | USD | 54 | 11/20/15 | (1,214 | ) | |||||||||||||||||
Brown Brothers Harriman & Co. | USD | 24 | MXN | 402 | 11/20/15 | 771 | ||||||||||||||||||
Brown Brothers Harriman & Co. | EUR | 444 | USD | 490 | 12/03/15 | 1,697 | ||||||||||||||||||
Brown Brothers Harriman & Co. | USD | 44 | JPY | 5,359 | 12/11/15 | 9 | ||||||||||||||||||
Brown Brothers Harriman & Co. | AUD | 40 | USD | 28 | 12/18/15 | 7 | ||||||||||||||||||
Deutsche Bank AG | BRL | 93 | USD | 23 | 11/04/15 | (911 | ) | |||||||||||||||||
Deutsche Bank AG | USD | 24 | BRL | 93 | 11/04/15 | 7 |
36 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Counterparty | Contracts to Deliver (000) | In Exchange (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
Goldman Sachs Bank USA | USD | 27 | BRL | 108 | 12/02/15 | $ | 473 | |||||||||||||||||
Royal Bank of Scotland PLC | GBP | 185 | USD | 284 | 11/10/15 | (1,201 | ) | |||||||||||||||||
Royal Bank of Scotland PLC | USD | 44 | PEN | 142 | 11/17/15 | (586 | ) | |||||||||||||||||
Standard Chartered Bank | BRL | 92 | USD | 24 | 11/04/15 | (7 | ) | |||||||||||||||||
Standard Chartered Bank | USD | 24 | BRL | 92 | 11/04/15 | 410 | ||||||||||||||||||
Standard Chartered Bank | KRW | 50,312 | USD | 42 | 11/13/15 | (1,773 | ) | |||||||||||||||||
Standard Chartered Bank | BRL | 77 | USD | 20 | 12/02/15 | (226 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
$ | (4,027 | ) | ||||||||||||||||||||||
|
|
PUT OPTIONS WRITTEN (see Note D)
Description | Contracts | Exercise Price | Expiration Month | Premiums Received | U.S. $ Value | |||||||||||||||
iShares IBoxx High Yield(o) | 102 | $ | 76.00 | December 2015 | $ | 3,973 | $ | (1,326 | ) | |||||||||||
SPDR S&P 500 ETF Trust(o) | 20 | 177.00 | November 2015 | 1,339 | (120 | ) | ||||||||||||||
SPDR S&P 500 ETF Trust(o) | 21 | 184.00 | November 2015 | 944 | (231 | ) | ||||||||||||||
SPDR S&P 500 ETF Trust(o) | 13 | 190.00 | November 2015 | 402 | (279 | ) | ||||||||||||||
Taylor Morrison Home Corp.(o) | 8 | 22.50 | January 2016 | 2,145 | (3,400 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||
$ | 8,803 | $ | (5,356 | ) | ||||||||||||||||
|
|
|
|
CREDIT DEFAULT SWAPTIONS WRITTEN (see Note D)
Description | Counterparty | Buy/Sell Protection | Strike Rate | Expiration Date | Notional Amount (000) | Premiums Received | Market Value | |||||||||||||||||||||
Put – CDX-NAHY | | Barclays Bank PLC | | Sell | 98.00 | % | 11/18/15 | $ | 660 | $ | 594 | $ | (276 | ) |
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note D)
Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at October 31, 2015 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Buy Contracts | ||||||||||||||||||||
Citigroup Global Markets, Inc./(INTRCONX): | ||||||||||||||||||||
iTraxx Europe Crossover Series 23, | (5.00 | )% | 3.13 | % | EUR | 160 | $ | (14,661 | ) | $ | 2,127 | |||||||||
Sale Contracts | ||||||||||||||||||||
Citigroup Global Markets, Inc./(INTRCONX): | ||||||||||||||||||||
CDX-NAHY Series 24, | 5.00 | 3.59 | $ | 344 | 21,734 | 5,917 | ||||||||||||||
CDX-NAHY Series 24, | 5.00 | 3.59 | 143 | 9,019 | 2,441 | |||||||||||||||
CDX-NAHY Series 25, | 5.00 | 4.27 | 162 | 6,019 | 6,322 |
AB HIGH YIELD PORTFOLIO • | 37 |
Portfolio of Investments
Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at October 31, 2015 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
CDX-NAHY Series 25, | 5.00 | % | 4.27 | % | $ | 162 | $ | 6,019 | $ | 5,924 | ||||||||||
CDX-NAHY Series 25, | 5.00 | 4.27 | 162 | 6,019 | 5,876 | |||||||||||||||
CDX-NAHY Series 25, | 5.00 | 4.27 | 162 | 6,019 | 5,701 | |||||||||||||||
CDX-NAHY Series 25, | 5.00 | 4.27 | 112 | 4,162 | 4,635 | |||||||||||||||
CDX-NAHY Series 25, | 5.00 | 4.27 | 112 | 4,162 | 4,437 | |||||||||||||||
CDX-NAHY Series 25, | 5.00 | 4.27 | 112 | 4,162 | 4,327 | |||||||||||||||
CDX-NAHY Series 25, | 5.00 | 4.27 | 112 | 4,162 | 1,228 | |||||||||||||||
|
|
|
| |||||||||||||||||
$ | 56,816 | $ | 48,935 | |||||||||||||||||
|
|
|
|
* | Termination date |
CREDIT DEFAULT SWAPS (see Note D)
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) | ||||||||||||||||||
Buy Contracts | ||||||||||||||||||||||||
Credit Suisse International: | ||||||||||||||||||||||||
Western Union Co., | (1.00 | )% | 0.32 | % | $ | 60 | $ | (812 | ) | $ | (503 | ) | $ | (309 | ) | |||||||||
Goldman Sachs International: | ||||||||||||||||||||||||
British Telecommunications PLC, | (1.00 | ) | 0.71 | EUR 170 | (2,642 | ) | (4,259 | ) | 1,617 | |||||||||||||||
Sale Contracts | ||||||||||||||||||||||||
Bank of America, NA: | ||||||||||||||||||||||||
Abengoa S.A., | 5.00 | 49.43 | 15 | (11,329 | ) | (11,327 | ) | (2 | ) | |||||||||||||||
Barclays Bank PLC: | ||||||||||||||||||||||||
Altice Finco S.A., | 5.00 | 4.12 | 40 | 2,022 | 1,839 | 183 | ||||||||||||||||||
Unitymedia GmbH, | 5.00 | 1.96 | 70 | 11,924 | 11,818 | 106 |
38 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
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) | ||||||||||||||||||
Citibank, NA: | ||||||||||||||||||||||||
Advanced Micro Devices, Inc., | 5.00 | % | 11.19 | % | $ | 20 | $ | (4,107 | ) | $ | (4,767 | ) | $ | 660 | ||||||||||
Credit Suisse International: | ||||||||||||||||||||||||
Altice Finco S.A., | 5.00 | 4.12 | EUR | 100 | 5,212 | 4,566 | 646 | |||||||||||||||||
Numericable-Sfr Sas, | 5.00 | 3.30 | 80 | 7,699 | 7,167 | 532 | ||||||||||||||||||
Western Union Co., | 1.00 | 0.89 | $ | 40 | 157 | (433 | ) | 590 | ||||||||||||||||
Goldman Sachs International: | ||||||||||||||||||||||||
Convatec Healthcare E S.A., | 5.00 | 1.18 | EUR | 25 | 4,154 | 3,873 | 281 | |||||||||||||||||
K. Hovnanian Enterprises, Inc., | 5.00 | 12.23 | $ | 10 | (2,458 | ) | (2,622 | ) | 164 | |||||||||||||||
Wind Acquisition Finance S.A., | 5.00 | 3.05 | EUR | 30 | 3,066 | 3,331 | (265 | ) | ||||||||||||||||
JPMorgan Chase Bank, NA: | ||||||||||||||||||||||||
Virgin Media Finance PLC, | 5.00 | 1.87 | 60 | 8,093 | 5,825 | 2,268 | ||||||||||||||||||
Wind Acquisition Finance S.A., | 5.00 | 2.47 | 70 | 7,580 | 4,904 | 2,676 | ||||||||||||||||||
Morgan Stanley & Co. International PLC: | ||||||||||||||||||||||||
AK Steel Corp., | 5.00 | 22.73 | $ | 30 | (11,960 | ) | 282 | (12,242 | ) | |||||||||||||||
MGM Resorts International, | 5.00 | 1.84 | 70 | 8,493 | 5,871 | 2,622 | ||||||||||||||||||
U.S. Steel Corp., | 5.00 | 13.96 | 20 | (4,729 | ) | 883 | (5,612 | ) | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 20,363 | $ | 26,448 | $ | (6,085 | ) | ||||||||||||||||||
|
|
|
|
|
|
* | Termination date |
AB HIGH YIELD PORTFOLIO • | 39 |
Portfolio of Investments
TOTAL RETURN SWAPS (see Note D)
Counterparty & Referenced Obligation | # of Shares or Units | Rate Paid/ Received | Notional Amount (000) | Maturity Date | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Receive Total Return on Reference Obligation |
| |||||||||||||||||||
Bank of America, NA | ||||||||||||||||||||
Markit iBoxx USD Liquid | 7,246 | LIBOR | $ | 1,670 | 12/28/15 | $ | 6,997 | |||||||||||||
Goldman Sachs International | ||||||||||||||||||||
Markit iBoxx USD Liquid | 415 | LIBOR | 94 | 12/28/15 | 2,121 | |||||||||||||||
Markit iBoxx USD Liquid | 782 | LIBOR | 179 | 12/28/15 | 2,035 | |||||||||||||||
Markit iBoxx USD Liquid | 392 | LIBOR | 90 | 12/28/15 | 651 | |||||||||||||||
JPMorgan Chase Bank, NA | ||||||||||||||||||||
Markit iBoxx USD Liquid | 1,011 | LIBOR | 231 | 12/28/15 | 2,953 | |||||||||||||||
Morgan Stanley & Co. International PLC | ||||||||||||||||||||
Markit iBoxx USD Liquid | 796 | LIBOR | 182 | 12/28/15 | 2,241 | |||||||||||||||
Markit iBoxx USD Liquid | 797 | LIBOR | 183 | 12/28/15 | 1,405 | |||||||||||||||
Markit iBoxx USD Liquid | 4 | LIBOR | 1 | 12/28/15 | 11 | |||||||||||||||
Pay Total Return on Reference Obligation |
| |||||||||||||||||||
Morgan Stanley & Co. International PLC | ||||||||||||||||||||
Markit iBoxx USD Liquid | 866 | LIBOR | 200 | 12/21/15 | (494 | ) | ||||||||||||||
|
| |||||||||||||||||||
$ | 17,920 | |||||||||||||||||||
|
|
^ | Principal amount less than 500. |
† | Less than $0.50. |
(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 $5,451,929 or 27.7% of net assets. |
(b) | Security is in default and is non-income producing. |
(c) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities, which represent 0.04% of net assets as of October 31, 2015, are considered illiquid and restricted. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Magnetation LLC/Mag Finance Corp. 11.00%, 5/15/18 | 7/17/14 | $ | 36,771 | $ | 7,700 | 0.04 | % |
(d) | Fair valued by the Adviser. |
(e) | Restricted and illiquid security. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Momentive Performance Materials, Inc. 8.875%, 10/15/20 | 7/16/14 | $ | – 0 | – | $ | – 0 | – | 0.00 | % |
40 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
(f) | Non-income producing security. |
(g) | Pay-In-Kind Payments (PIK). The issuer may pay cash interest and/or interest in additional debt securities. Rates shown are the rates in effect at October 31, 2015. |
(h) | Convertible security. |
(i) | Floating Rate Security. Stated interest rate was in effect at October 31, 2015. |
(j) | Coupon rate adjusts periodically based upon a predetermined schedule. Stated interest rate in effect at October 31, 2015. |
(k) | Securities are perpetual and, thus, do not have a predetermined maturity date. The date shown, if applicable, reflects the next call date. |
(l) | Illiquid security. |
(m) | This position or a portion of this position represents an unsettled loan purchase. The coupon rate will be determined at the time of settlement and will be based upon the London-Interbank Offered Rate (“LIBOR”) plus a premium which was determined at the time of purchase. |
(n) | One contract relates to 1 share. |
(o) | One contract relates to 100 shares. |
(p) | Investment in affiliated money market mutual fund. The rate shown represents the 7-day yield as of period end. |
(q) | 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. |
Currency Abbreviations:
AUD – Australian Dollar
BRL – Brazilian Real
CAD – Canadian Dollar
EUR – Euro
GBP – Great British Pound
JPY – Japanese Yen
KRW – South Korean Won
MXN – Mexican Peso
NZD – New Zealand Dollar
PEN – Peruvian Nuevo Sol
SEK – Swedish Krona
USD – United States Dollar
ZAR – South African Rand
Glossary:
CBT – Chicago Board of Trade
CDX-NAHY – North American High Yield Credit Default Swap Index
CMBS – Commercial Mortgage-Backed Securities
ETF – Exchange Traded Fund
GSE – Government-Sponsored Enterprise
INTRCONX – Inter-Continental Exchange
LIBOR – London Interbank Offered Rates
REIT – Real Estate Investment Trust
RTP – Right to Pay
SPDR – Standard & Poor’s Depository Receipt
See notes to financial statements.
AB HIGH YIELD PORTFOLIO • | 41 |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
October 31, 2015
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $18,621,809) | $ | 17,487,110 | ||
Affiliated issuers (cost $1,992,398) | 1,992,398 | |||
Foreign currencies, at value (cost $194) | 198 | |||
Dividends and interest receivable | 294,915 | |||
Cash collateral due from broker | 263,306 | |||
Receivable from Adviser | 114,967 | |||
Receivable for capital stock sold | 70,123 | |||
Receivable for investment securities sold and foreign currency transactions | 53,852 | |||
Upfront premiums paid on credit default swaps | 50,359 | |||
Unrealized appreciation on total return swaps | 18,414 | |||
Unrealized appreciation on credit default swaps | 12,345 | |||
Unrealized appreciation on forward currency exchange contracts | 3,374 | |||
Receivable for variation margin on exchange-traded derivatives | 2,922 | |||
|
| |||
Total assets | 20,364,283 | |||
|
| |||
Liabilities | ||||
Payable for investment securities purchased and foreign currency transactions | 321,050 | |||
Audit and tax fee payable | 112,329 | |||
Dividends payable | 65,242 | |||
Upfront premiums received on credit default swaps | 23,911 | |||
Unrealized depreciation on credit default swaps | 18,430 | |||
Payable for newly entered credit default swaps | 12,856 | |||
Unrealized depreciation on forward currency exchange contracts | 7,401 | |||
Options written, at value (premiums received $8,803) | 5,356 | |||
Transfer Agent fee payable | 1,504 | |||
Offering expenses payable | 975 | |||
Distribution fee payable | 646 | |||
Unrealized depreciation on total return swaps | 494 | |||
Payable for capital stock redeemed | 386 | |||
Swaptions written, at value (premiums received $594) | 276 | |||
Accrued expenses and other liabilities | 110,055 | |||
|
| |||
Total liabilities | 680,911 | |||
|
| |||
Net Assets | $ | 19,683,372 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 2,130 | ||
Additional paid-in capital | 21,109,059 | |||
Undistributed net investment income | 122,320 | |||
Accumulated net realized loss on investment and foreign currency transactions | (466,855 | ) | ||
Net unrealized depreciation on investments and foreign currency denominated assets and liabilities | (1,083,282 | ) | ||
|
| |||
$ | 19,683,372 | |||
|
|
See notes to financial statements.
42 | • AB HIGH YIELD PORTFOLIO |
Statement of Assets & Liabilities
Net Asset Value Per Share—30 billion shares of capital stock authorized, $.001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 2,741,974 | 296,847 | $ | 9.24 | * | ||||||
| ||||||||||||
C | $ | 119,137 | 12,895 | $ | 9.24 | |||||||
| ||||||||||||
Advisor | $ | 250,840 | 27,145 | $ | 9.24 | |||||||
| ||||||||||||
R | $ | 9,242 | 1,000 | $ | 9.24 | |||||||
| ||||||||||||
K | $ | 9,242 | 1,000 | $ | 9.24 | |||||||
| ||||||||||||
I | $ | 16,543,695 | 1,790,331 | $ | 9.24 | |||||||
| ||||||||||||
Z | $ | 9,242 | 1,000 | $ | 9.24 | |||||||
|
* | The maximum offering price per share for Class A shares was $9.65 which reflects a sales charge of 4.25%. |
See notes to financial statements.
AB HIGH YIELD PORTFOLIO • | 43 |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Year Ended October 31, 2015
Investment Income | ||||||||
Interest | $ | 905,606 | ||||||
Dividends | ||||||||
Unaffiliated issuers (net of foreign taxes withheld of $60) | 28,383 | |||||||
Affiliated issuers | 1,484 | |||||||
Other Income | 250 | $ | 935,723 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 108,212 | |||||||
Distribution fee—Class A | 1,225 | |||||||
Distribution fee—Class C | 1,026 | |||||||
Distribution fee—Class R | 48 | |||||||
Distribution fee—Class K | 24 | |||||||
Transfer agency—Class A | 6,988 | |||||||
Transfer agency—Class C | 3,459 | |||||||
Transfer agency—Advisor Class | 5,266 | |||||||
Transfer agency—Class R | 6 | |||||||
Transfer agency—Class K | 5 | |||||||
Transfer agency—Class I | 3,453 | |||||||
Transfer agency—Class Z | 2 | |||||||
Audit and tax | 117,822 | |||||||
Amortization of offering expenses | 101,109 | |||||||
Registration fees | 91,362 | |||||||
Custodian | 90,802 | |||||||
Administrative | 52,405 | |||||||
Legal | 41,306 | |||||||
Directors’ fees | 18,764 | |||||||
Printing | 16,361 | |||||||
Miscellaneous | 59,185 | |||||||
|
| |||||||
Total expenses | 718,830 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (572,066 | ) | ||||||
|
| |||||||
Net expenses | 146,764 | |||||||
|
| |||||||
Net investment income | 788,959 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (471,531 | ) | ||||||
Swaps | (52,656 | ) | ||||||
Futures | 39,734 | |||||||
Options written | 45,351 | |||||||
Swaptions written | 35,475 | |||||||
Foreign currency transactions | 61,832 | |||||||
Net change in unrealized appreciation/depreciation on: | ||||||||
Investments | (840,759 | ) | ||||||
Swaps | 44,527 | |||||||
Futures | (6,443 | ) | ||||||
Options written | 4,239 | |||||||
Swaptions written | (1,678 | ) | ||||||
Foreign currency denominated assets and liabilities | (15,489 | ) | ||||||
|
| |||||||
Net loss on investment and foreign currency transactions | (1,157,398 | ) | ||||||
|
| |||||||
Net Decrease in Net Assets from Operations | $ | (368,439 | ) | |||||
|
|
See notes to financial statements.
44 | • AB HIGH YIELD PORTFOLIO |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Year Ended October 31, 2015 | July 15, 2014* to October 31, 2014 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 788,959 | $ | 193,271 | ||||
Net realized gain (loss) on investment and foreign currency transactions | (341,795 | ) | 95,040 | |||||
Net change in unrealized appreciation/depreciation on investments and foreign currency denominated assets and liabilities | (815,603 | ) | (267,679 | ) | ||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | (368,439 | ) | 20,632 | |||||
Dividends and Distributions to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (21,264 | ) | (192 | ) | ||||
Class C | (3,905 | ) | (72 | ) | ||||
Advisor Class | (7,335 | ) | (202 | ) | ||||
Class R | (422 | ) | (87 | ) | ||||
Class K | (446 | ) | (94 | ) | ||||
Class I | (844,746 | ) | (203,083 | ) | ||||
Class Z | (470 | ) | (102 | ) | ||||
Net realized gain on investment and foreign currency transactions | ||||||||
Class A | (52 | ) | – 0 | – | ||||
Class C | (122 | ) | – 0 | – | ||||
Advisor Class | (191 | ) | – 0 | – | ||||
Class R | (14 | ) | – 0 | – | ||||
Class K | (14 | ) | – 0 | – | ||||
Class I | (24,706 | ) | – 0 | – | ||||
Class Z | (14 | ) | – 0 | – | ||||
Capital Stock Transactions | ||||||||
Net increase | 992,821 | 20,145,891 | ||||||
|
|
|
| |||||
Total increase (decrease) | (279,319 | ) | 19,962,691 | |||||
Net Assets | ||||||||
Beginning of period | 19,962,691 | – 0 | – | |||||
|
|
|
| |||||
End of period (including undistributed net investment income of $122,320 and $64,724, respectively) | $ | 19,683,372 | $ | 19,962,691 | ||||
|
|
|
|
* | Commencement of operations. |
See notes to financial statements.
AB HIGH YIELD PORTFOLIO • | 45 |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
October 31, 2015
NOTE A
Significant Accounting Policies
AB Bond Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940 as an open-end management investment company. Prior to January 20, 2015, the Fund was known as AllianceBernstein Bond Fund, Inc. The Fund, which is a Maryland corporation, operates as a series company comprised of nine portfolios currently in operation: AB Intermediate Bond Portfolio, AB Bond Inflation Strategy Portfolio, AB Municipal Bond Inflation Strategy Portfolio, AB All Market Real Return Portfolio, AB Limited Duration High Income Portfolio, AB Government Reserves Portfolio, AB Tax-Aware Fixed Income Portfolio, AB Credit Long/Short Portfolio and AB High Yield Portfolio. They are each diversified Portfolios, with the exception of AB Credit Long/Short Portfolio and AB High Yield Portfolio, which are non-diversified. AB Credit Long/Short Portfolio commenced operations on May 7, 2014. AB High Yield Portfolio commenced operations on July 15, 2014. Each Portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to AB High Yield Portfolio (the “Portfolio”). Prior to January 20, 2015, the Portfolio was known as AllianceBernstein High Yield Portfolio. The Portfolio has authorized the issuance of Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I, Class Z, Class 1 and Class 2 shares. Class B, Class 1 and Class 2 shares are not currently publicly offered. As of October 31, 2015, AllianceBernstein L.P. (the “Adviser”) was the sole shareholder of Class R, Class K, Class I and Class Z shares. Class A shares are sold with a front-end sales charge of up to 4.25% for purchases not exceeding $1,000,000. With respect to purchases of $1,000,000 or more, Class A shares redeemed within one year of purchase may be subject to a contingent deferred sales charge of 1%. Class C shares are subject to a contingent deferred sales charge of 1% on redemptions made within the first year after purchase. Class R and Class K shares are sold without an initial or contingent deferred sales charge. Advisor Class, Class I and Class Z shares are sold without an initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. All ten classes of shares have identical voting, dividend, liquidation and other rights, except that the classes bear different distribution and transfer agency expenses. Each class has exclusive voting rights with respect to its distribution plan. 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 Fund 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
46 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
are deemed unreliable, at “fair value” as determined in accordance with procedures established by and under the general supervision of the Portfolio’s Board of Directors (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 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 contracts 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.
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
AB HIGH YIELD PORTFOLIO • | 47 |
Notes to Financial Statements
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. To account for this, the Portfolio may frequently value many of its foreign equity securities using fair value prices based on third party vendor modeling tools to the extent available.
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 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 is 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.
48 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
Where readily available market prices or relevant bid prices are not available for certain equity investments, such investments may be valued based on similar publicly traded investments, movements in relevant indices since last available prices or based upon underlying company fundamentals and comparable company data (such as multiples to earnings or other multiples to equity). Where an investment is valued using an observable input, such as another publicly traded security, the investment will be classified as Level 2. If management determines that an adjustment is appropriate based on restrictions on resale, illiquidity or uncertainty, and such adjustment is a significant component of the valuation, the investment will be classified as Level 3. An investment will also be classified as Level 3 where management uses company fundamentals and other significant inputs to determine the valuation.
Options are valued using market-based inputs to models, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency, where such inputs and models are available. Alternatively the values may be obtained through unobservable management determined inputs and/or management’s proprietary models. Where models are used, the selection of a particular model to value an option depends upon the contractual terms of, and specific risks inherent in, the option as well as the availability of pricing information in the market. Valuation models require a variety of inputs, including contractual terms, market prices, measures of volatility and correlations of such inputs. Exchange traded options generally will be classified as Level 2. For options that do not trade on exchange but trade in liquid markets, inputs can generally be verified and model selection does not involve significant management judgment. Options are classified within Level 2 on the fair value hierarchy when all of the significant inputs can be corroborated to market evidence. Otherwise such instruments 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 HIGH YIELD PORTFOLIO • | 49 |
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.
Bank loan prices are provided by third party pricing services and consist of a composite of the quotes received by the vendor into a consensus price. Bank loans are classified as Level 3, as significant input used in the fair value measurement of these instruments is the market quotes that are received by the vendor and these inputs are not observable.
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 – Non-Investment Grade | $ | – 0 | – | $ | 14,007,240 | $ | 182,978 | ^ | $ | 14,190,218 | ||||||
Corporates – Investment Grade | – 0 | – | 997,096 | – 0 | – | 997,096 | ||||||||||
Governments – Treasuries | – 0 | – | 617,912 | – 0 | – | 617,912 | ||||||||||
Bank Loans | – 0 | – | – 0 | – | 396,027 | 396,027 | ||||||||||
Common Stocks | 356,852 | 2,146 | 2,982 | 361,980 | ||||||||||||
Preferred Stocks | 252,099 | 21,183 | – 0 | – | 273,282 | |||||||||||
Commercial Mortgage-Backed Securities | – 0 | – | – 0 | – | 225,864 | 225,864 | ||||||||||
Collateralized Mortgage Obligations | – 0 | – | – 0 | – | 185,028 | 185,028 | ||||||||||
Investment Companies | 50,058 | – 0 | – | – 0 | – | 50,058 | ||||||||||
Governments – Sovereign Agencies | – 0 | – | 37,661 | – 0 | – | 37,661 | ||||||||||
Agencies | – 0 | – | 28,420 | – 0 | – | 28,420 | ||||||||||
Warrants | – 0 | – | – 0 | – | 11,721 | 11,721 | ||||||||||
Emerging Markets – Sovereigns | – 0 | – | 8,750 | – 0 | – | 8,750 | ||||||||||
Options Purchased – Calls | – 0 | – | 5,487 | – 0 | – | 5,487 | ||||||||||
Options Purchased – Puts | – 0 | – | 3,788 | – 0 | – | 3,788 | ||||||||||
Short-Term Investments: | ||||||||||||||||
Investment Companies | 1,992,398 | – 0 | – | – 0 | – | 1,992,398 | ||||||||||
Time Deposits | – 0 | – | 93,818 | – 0 | – | 93,818 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 2,651,407 | 15,823,501 | 1,004,600 | 19,479,508 | ||||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets | ||||||||||||||||
Credit Default Swaps | – 0 | – | 12,345 | – 0 | – | 12,345 | ||||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | 48,935 | – 0 | – | 48,935 | † | |||||||||
Forward Currency Exchange Contracts | – 0 | – | 3,374 | – 0 | – | 3,374 | ||||||||||
Total Return Swaps | – 0 | – | 18,414 | – 0 | – | 18,414 |
50 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
Investments in Securities | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities | ||||||||||||||||
Credit Default Swaps | $ | – 0 | – | $ | (18,430 | ) | $ | – 0 | – | $ | (18,430 | ) | ||||
Futures | (8,950 | ) | – 0 | – | – 0 | – | (8,950 | )† | ||||||||
Forward Currency Exchange Contracts | – 0 | – | (7,401 | ) | – 0 | – | (7,401 | ) | ||||||||
Total Return Swaps | – 0 | – | (494 | ) | – 0 | – | (494 | ) | ||||||||
Put Options Written | – 0 | – | (5,356 | ) | – 0 | – | (5,356 | ) | ||||||||
Credit Default Swaptions Written | – 0 | – | (276 | ) | – 0 | – | (276 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total** | $ | 2,642,457 | $ | 15,874,612 | $ | 1,004,600 | $ | 19,521,669 | ||||||||
|
|
|
|
|
|
|
|
^ | The Portfolio held securities with zero market value at period end. |
* | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. Other financial instruments may also include written options and swaptions which are valued at market value. |
† | Only variation margin receivable/payable at period end is reported within the statement of assets and liabilities. This amount reflects cumulative appreciation/depreciation on exchange-traded derivatives as reported in the portfolio of investments. |
** | There were no transfers between level 1 and level 2 during the reporting period. |
The Portfolio recognizes all transfers between levels of the fair value hierarchy assuming the financial instrument was 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.
Corporates - Non-Investment Grade# | Corporates - Investment Grade | Bank Loans | Common Stocks | |||||||||||||
Balance as of 10/31/14 | $ | 207,734 | $ | 34,600 | $ | 326,756 | $ | – 0 | – | |||||||
Accrued discounts/ (premiums) | (4,561 | ) | – 0 | – | 1,465 | – 0 | – | |||||||||
Realized gain (loss) | (99 | ) | – 0 | – | (1,384 | ) | – 0 | – | ||||||||
Change in unrealized appreciation/depreciation | (17,979 | ) | – 0 | – | (6,744 | ) | 1,535 | |||||||||
Purchases | 37,392 | – 0 | – | 164,973 | 1,447 | |||||||||||
Sales/Paydowns | (39,509 | ) | – 0 | – | (89,039 | ) | – 0 | – | ||||||||
Transfers into level 3 | – 0 | – | – 0 | – | – 0 | – | – 0 | – | ||||||||
Transfers out of level 3 | – 0 | – | (34,600 | ) | – 0 | – | – 0 | – | ||||||||
|
|
|
|
|
|
|
| |||||||||
Balance as of 10/31/15 | $ | 182,978 | $ | – 0 | – | $ | 396,027 | $ | 2,982 | |||||||
|
|
|
|
|
|
|
| |||||||||
Net change in unrealized appreciation/depreciation from investments held as of 10/31/15** | $ | (16,780 | ) | $ | – 0 | – | $ | (8,203 | ) | $ | 1,535 | |||||
|
|
|
|
|
|
|
|
AB HIGH YIELD PORTFOLIO • | 51 |
Notes to Financial Statements
Commercial Mortgage-Backed Securities | Collateralized Mortgage Obligations | Warrants | Total | |||||||||||||
Balance as of 10/31/14 | $ | 238,158 | $ | 262,347 | $ | – 0 | – | $ | 1,069,595 | |||||||
Accrued discounts/ (premiums) | 225 | (5,744 | ) | – 0 | – | (8,615 | ) | |||||||||
Realized gain (loss) | – 0 | – | (5,771 | ) | – 0 | – | (7,254 | ) | ||||||||
Change in unrealized appreciation/ | (12,519 | ) | 2,930 | 7,501 | (25,276 | ) | ||||||||||
Purchases | – 0 | – | – 0 | – | 4,220 | 208,032 | ||||||||||
Sales/Paydowns | – 0 | – | (68,734 | ) | – 0 | – | (197,282 | ) | ||||||||
Transfers into level 3 | – 0 | – | – 0 | – | – 0 | – | – 0 | – | ||||||||
Transfers out of level 3 | – 0 | – | – 0 | – | – 0 | – | (34,600 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Balance as of 10/31/15 | $ | 225,864 | $ | 185,028 | $ | 11,721 | $ | 1,004,600 | + | |||||||
|
|
|
|
|
|
|
| |||||||||
Net change in unrealized appreciation/depreciation from investments held as of 10/31/15** | $ | (12,519 | ) | $ | (2,333 | ) | $ | 7,501 | $ | (30,799 | ) | |||||
|
|
|
|
|
|
|
|
# | The Portfolio held securities with zero market value at period end. |
** | 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. |
+ | There were de minimis transfers under 1% of net assets during the reporting period. |
The following presents information about significant unobservable inputs related to the Portfolio’s Level 3 investments at October 31, 2015. Securities priced by (i) third party vendors or (ii) using prior transaction prices, which approximates fair value, are excluded from the following table:
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||
Fair Value at | Valuation Technique | Unobservable Input | Range/ | |||||||||
Bank Loans | $33,544 | Market Approach | EBITDA* Projection | $28mm-$70mm/N/A | ||||||||
EBITDA* Multiple | 6x/N/A | |||||||||||
Scrap Value | $154mm/N/A |
* | Earnings Before Interest, Taxes, Depreciation and Amortization. |
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the Portfolios. 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),
52 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
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, process at vendors, 2) daily comparisons of security valuation versus prior day for all securties 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. Currency Translation
Assets and liabilities denominated in foreign currencies and commitments under forward currency exchange contracts are translated into U.S. dollars at the mean of the quoted bid and ask prices of such currencies against the U.S. dollar. Purchases and sales of portfolio securities are translated into U.S. dollars at the rates of exchange prevailing when such securities were acquired or sold. Income and expenses are translated into U.S. dollars at the rates of exchange prevailing when accrued.
Net realized gain or loss on foreign currency transactions represents foreign exchange gains and losses from sales and maturities of foreign fixed income investments, foreign currency exchange contracts, holding of foreign currencies, currency gains or losses realized between the trade and settlement dates on foreign investment transactions, and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Portfolio’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains and losses from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of net unrealized appreciation and depreciation on foreign currency denominated assets and liabilities.
AB HIGH YIELD PORTFOLIO • | 53 |
Notes to Financial Statements
4. 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. The Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued and applied to net investment income, net realized gains and net unrealized appreciation/depreciation as such income and/or gains are earned.
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 (all years since inception of the Portfolio) and has concluded that no provision for income tax is required in the Portfolio’s financial statements.
5. 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 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.
6. Class Allocations
All income earned and expenses incurred by the Portfolio are borne on a prorate basis by each outstanding class of shares, based on the proportionate interest in the Portfolio represented by the net assets of such class, except for class specific expenses which are allocated to the respective class. Expenses of the Fund are charged proportionately to each Portfolio or based on other appropriate methods. Realized and unrealized gains and losses are allocated among the various share classes based on respective net assets.
7. 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.
8. Offering Expenses
Offering expenses of $142,762 were deferred and amortized on a straight line basis over a one year period starting from July 15, 2014 (commencement of operations).
54 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
NOTE B
Advisory Fee and Other Transactions with Affiliates
Under the terms of the investment advisory agreement, the Portfolio pays the Adviser an advisory fee at an annual rate of .60% of the first $2.5 billion, .55% of the next $2.5 billion and .50% in excess of $5 billion, of the Portfolio’s average daily net assets. The fee is accrued daily and paid monthly. The Adviser has agreed to waive its fees and bear certain expenses to the extent necessary to limit total operating expenses on an annual basis (the “Expense Caps”) to 1.05%, 1.80%, .80%, 1.30%, 1.05%, .80%, and .80% of the daily average net assets for the Class A, Class C, Advisor Class, Class R, Class K, Class I, and Class Z shares, respectively. Any fees waived and expenses borne by the Adviser through October 31, 2014 are subject to repayment by the Portfolio until October 31, 2017. Any fees waived and expenses borne by the Adviser from November 1, 2014 to July 14, 2015 are subject to repayment by the Portfolio until October 31, 2018, provided that no repayment will be made that would cause the Portfolio’s total annual operating expenses to exceed the net fee percentage set forth per the Expense Caps. The Expense Caps may not be terminated before January 29, 2016. For the year ended October 31, 2015, such waiver/reimbursement amounted to $519,661.
Pursuant to the investment advisory agreement, the Portfolio may reimburse the Adviser for certain legal and accounting services provided to the Portfolio by the Adviser. For the year ended October 31, 2015, the Adviser voluntarily agreed to waive such fees in the amount of $52,405.
The Portfolio compensates AllianceBernstein Investor Services, Inc. (“ABIS”), a wholly-owned subsidiary of the Adviser, under a Transfer Agency Agreement for providing personnel and facilities to perform transfer agency services for the Portfolio. ABIS may make payments to intermediaries that provide omnibus account services, sub-accounting services and/or networking services. Such compensation retained by ABIS amounted to $18,000 for the year ended October 31, 2015.
AllianceBernstein Investments, Inc. (the “Distributor”), a wholly-owned subsidiary of the Adviser, serves as the distributor of the Portfolio’s shares. The Distributor has advised the Portfolio that it has retained front-end sales charges of $696 from the sale of Class A shares and received $46 in contingent deferred sales charges imposed upon redemptions by shareholders of Class C shares for the year ended October 31, 2015.
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
AB HIGH YIELD PORTFOLIO • | 55 |
Notes to Financial Statements
fees but does bear its own expenses. A summary of the Portfolio’s transactions in shares of the Government STIF Portfolio for the year ended October 31, 2015 is as follows:
Market Value | Purchases at Cost (000) | Sales Proceeds (000) | Market Value October 31, 2015 (000) | Dividend Income (000) | ||||||||||||||
$ | 1,841 | $ | 9,187 | $ | 9,036 | $ | 1,992 | $ | 1 |
Brokerage commissions paid on investment transactions for the year ended October 31, 2015 amounted to $8,524, none of which was paid to Sanford C. Bernstein & Co. LLC or Sanford C. Bernstein Limited, respectively, affiliates of the Adviser.
NOTE C
Distribution Services Agreement
The Portfolio has adopted a Distribution Services Agreement (the “Agreement”) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Agreement, the Portfolio pays distribution and servicing fees to the Distributor at an annual rate of up to .25% of the Portfolio’s average daily net assets attributable to Class A shares, 1% of the Portfolio’s average daily net assets attributable to Class C shares, .50% of the Portfolio’s average daily net assets attributable to Class R shares and .25% of the Portfolio’s average daily net assets attributable to Class K shares. There are no distribution and servicing fees on Advisor Class, Class I and Class Z shares. The fees are accrued daily and paid monthly. The Agreement provides that the Distributor will use such payments in their entirety for distribution assistance and promotional activities. Since the commencement of the Portfolio’s operations, the Distributor has incurred expenses in excess of the distribution costs reimbursed by the Portfolio in the amount of $490 for Class C shares. While such costs may be recovered from the Portfolio in future periods so long as the Agreement is in effect, the rate of the distribution and servicing fees payable under the Agreement may not be increased without a shareholder vote. In accordance with the Agreement, there is no provision for recovery of unreimbursed distribution costs incurred by the Distributor beyond the current fiscal year for Class A shares. The Agreement also provides that the Adviser may use its own resources to finance the distribution of the Portfolio’s shares.
NOTE D
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the year ended October 31, 2015 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding U.S. government securities) | $ | 9,706,807 | $ | 9,267,764 | ||||
U.S. government securities | 599,367 | – 0 | – |
56 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation (excluding foreign currency exchange contracts, written options, swaps and futures) are as follows:
Cost | $ | 20,638,891 | ||
|
| |||
Gross unrealized appreciation | $ | 154,245 | ||
Gross unrealized depreciation | (1,313,628 | ) | ||
|
| |||
Net unrealized depreciation | $ | (1,159,383 | ) | |
|
|
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:
• | Forward Currency Exchange Contracts |
The Portfolio may enter into forward currency exchange contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings, to hedge certain firm purchase and sales commitments denominated in foreign currencies and for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions”.
A forward currency exchange contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. The gain or loss arising from the difference between the original contract and the closing of such contract would be included in net realized gain or loss on foreign currency transactions. Fluctuations in the value of open forward currency exchange contracts are recorded for financial reporting purposes as unrealized appreciation and/or depreciation by the Portfolio. Risks may arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar.
During the year ended October 31, 2015, the Portfolio held forward currency exchange contracts for hedging and non-hedging purposes.
• | Futures |
The Portfolio may buy or sell futures for investment purposes or for the purpose of hedging its portfolio against adverse effects of potential movements in the market. The Portfolio bears the market risk that arises from changes in the value of these instruments and the imperfect correlation between movements in the price of the futures and movements in the price of the assets, reference rates or indices which they are designed
AB HIGH YIELD PORTFOLIO • | 57 |
Notes to Financial Statements
to track. Among other things, the Portfolio may purchase or sell futures for foreign currencies or options thereon for non-hedging purposes as a means of making direct investment in foreign currencies, as described below under “Currency Transactions”.
At the time the Portfolio enters into a future, the Portfolio deposits and maintains as collateral an initial margin with the broker, as required by the exchange 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 exchange-traded futures is generally less than privately negotiated futures, since the clearinghouse, which is the issuer or counterparty to each exchange-traded future, 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.
Use of long futures subjects the Portfolio to risk of loss in excess of the amounts shown on the statement of assets and liabilities, up to the notional value of the future. Use of short futures subjects the Portfolio to unlimited risk of loss. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a future can vary from the previous day’s settlement price, which could effectively prevent liquidation of unfavorable positions.
During the year ended October 31, 2015, the Portfolio held futures for hedging purposes.
• | Option Transactions |
For hedging and investment purposes, the Portfolio may purchase and write (sell) put and call options on U.S. and foreign securities, including government securities, and foreign currencies that are traded on U.S. and foreign securities exchanges and over-the-counter markets. Among other things, the Portfolio may use options transactions for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions” and may use options strategies involving the purchase and/or writing of various combinations of call and/or put options, for hedging and investment purposes.
The risk associated with purchasing an option is that the Portfolio pays a premium whether or not the option is exercised. Additionally, the Portfolio bears the risk of loss of the premium and change in market value should the counterparty not perform under the contract. Put and call
58 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
options purchased are accounted for in the same manner as portfolio securities. The cost of securities acquired through the exercise of call options is increased by premiums paid. The proceeds from securities sold through the exercise of put options are decreased by the premiums paid.
When the Portfolio writes an option, the premium received by the Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from written options which expire unexercised are recorded by the Portfolio on the expiration date as realized gains from options written. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium received is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium received is added to the proceeds from the sale of the underlying security or currency in determining whether the Portfolio has realized a gain or loss. If a put option is exercised, the premium received reduces the cost basis of the security or currency purchased by the Portfolio. In writing an option, the Portfolio bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Portfolio could result in the Portfolio selling or buying a security or currency at a price different from the current market value.
At October 31, 2015, the maximum payments for written put options amounted to $1,780,600. In certain circumstances maximum payout amounts may be partially offset by recovery values of the respective referenced assets and upfront premiums received upon entering into the contract.
The Portfolio may also invest in options on swap agreements, also called “swaptions”. A swaption is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based “premium”. A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the total return on a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties.
During the year ended October 31, 2015, the Portfolio held purchased options for hedging purposes.
During the year ended October 31, 2015, the Portfolio held written options for hedging purposes.
AB HIGH YIELD PORTFOLIO • | 59 |
Notes to Financial Statements
For the year ended October 31, 2015, the Portfolio had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 10/31/14 | 150 | $ | 12,293 | |||||
Options written | 542,861 | 75,330 | ||||||
Options expired | (690 | ) | (56,244 | ) | ||||
Options bought back | (542,157 | ) | (22,576 | ) | ||||
Options exercised | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Options written outstanding as of 10/31/15 | 164 | $ | 8,803 | |||||
|
|
|
|
For the year ended October 31, 2015, the Portfolio had the following transactions in written swaptions:
Notional Amount | Premiums Received | |||||||
Swaptions written outstanding as of 10/31/14 | $ | 3,760,000 | $ | 9,332 | ||||
Swaptions written | 9,840,000 | 26,737 | ||||||
Swaptions expired | (12,940,000 | ) | (35,475 | ) | ||||
Swaptions bought back | – 0 | – | – 0 | – | ||||
Swaptions exercised | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Swaptions written outstanding as of 10/31/15 | $ | 660,000 | $ | 594 | ||||
|
|
|
|
• | 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
60 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
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 on 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 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.
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
AB HIGH YIELD PORTFOLIO • | 61 |
Notes to Financial Statements
swap agreement, the Portfolio receives/(pays) fixed payments from/(to) the respective counterparty, calculated at the agreed upon interest 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 agreement, 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 contract (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 swap agreements entered into by the Portfolio for the same reference obligation with the same counterparty. As of October 31, 2015, the Portfolio had Buy Contracts outstanding with respect to the same referenced obligation and counterparty as certain Sale Contracts which may partially offset the Maximum Payout Amount in the amount of $40,000.
Credit default swaps may involve greater risks than if the 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 its investment. 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.
Implied credit spreads over 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 market’s assessment of the likelihood of default by the issuer of the referenced obligation. The implied credit spread of a particular reference entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Widening credit spreads typically represent a deterioration of the referenced entity’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 entity or obligation.
During the year ended October 31, 2015, the Portfolio held credit default swaps for hedging and non-hedging purposes.
62 | • AB HIGH YIELD PORTFOLIO |
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 anticipate 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 year ended October 31, 2015, the Portfolio held interest rate swaps for hedging and non-hedging purposes.
Total Return Swaps:
The Portfolio may enter into total return swaps in order take a “long” or “short” position with respect to an underlying referenced asset. The Portfolio is subject to market price volatility of the underlying referenced asset. A total return swap involves commitments to pay interest in exchange for a market linked return based on a notional amount. To the extent that the total return of the security, group of securities or index underlying the transaction exceeds or falls short of the offsetting interest obligation, the Portfolio will receive a payment from or make a payment to the counterparty.
During the year ended October 31, 2015, the Portfolio held total return swaps for non-hedging purposes.
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
AB HIGH YIELD PORTFOLIO • | 63 |
Notes to Financial Statements
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 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 Assets and Liabilities Location | Fair Value | Statement of Assets and Liabilities Location | Fair Value | ||||||||
Interest rate | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 1,867 | * | ||||||||
Interest rate contracts | Investments in securities, at value | $ | 204 | | Options written, at value | | 1,326 | | ||||
Interest rate contracts | Unrealized appreciation on total return swaps | | 18,414 | | Unrealized depreciation on total return swaps | | 494 | | ||||
Foreign exchange contracts | Unrealized appreciation on forward currency exchange contracts | | 3,374 | | Unrealized depreciation on forward currency exchange contracts | | 7,401 | |
64 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of Assets and Liabilities Location | Fair Value | Statement of Assets and Liabilities Location | Fair Value | ||||||||
Credit contracts | Unrealized appreciation on credit default swaps | 12,345 | Unrealized depreciation on credit default swaps | 18,430 | ||||||||
Credit contracts | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 48,935 | * | ||||||||
Credit contracts | Investments in securities, at value | 1,277 | Swaptions written, at value | $ | 276 | |||||||
Equity contracts | Receivable/Payable for variation margin on exchange-traded derivatives | 7,083 | * | |||||||||
Equity contracts | Investment in securities, at value | 7,794 | Options written, at value | 4,030 | ||||||||
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|
|
| |||||||||
Total | $ | 92,343 | $ | 40,907 | ||||||||
|
|
|
|
* | Only variation margin receivable/payable at period end is reported within the statement of assets and liabilities. This amount reflects cumulative appreciation/(depreciation) on exchange-traded derivatives as reported in the portfolio of investments. |
The effect of derivative instruments on the statement of operations for the year ended October 31, 2015:
Derivative Type | Location of Gain or (Loss) on Derivatives | 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 on swaps | $ | (43,009 | ) | $ | 9,227 | ||||
Interest rate contracts | Net realized gain/(loss) on futures; Net change in unrealized appreciation/ depreciation on futures | 23,041 | (1,867 | ) | ||||||
Interest rate contracts | Net realized gain/(loss) on investment transactions; Net change in unrealized appreciation/depreciation on investment transactions | (23,773 | ) | (8,015 | ) |
AB HIGH YIELD PORTFOLIO • | 65 |
Notes to Financial Statements
Derivative Type | Location of Gain or (Loss) on Derivatives | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Interest rate contracts | Net realized gain/(loss) on options written; Net change in unrealized appreciation/depreciation on options written | $ | – 0 | – | $ | 2,648 | ||||
Foreign exchange contracts | Net realized gain/(loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation on foreign currency denominated assets and liabilities | 99,623 | (16,235 | ) | ||||||
Foreign exchange contracts | Net realized gain/(loss) on investment transactions; Net change in unrealized appreciation/depreciation on investment transactions | (2,493 | ) | – 0 | – | |||||
Foreign exchange contracts | Net realized gain/(loss) on options written; Net change in unrealized appreciation/depreciation on options written | 2,007 | – 0 | – | ||||||
Credit contracts | Net realized gain/(loss) on investment transactions; Net change in unrealized appreciation/depreciation on investment transactions | (57,356 | ) | 2,126 | ||||||
Credit contracts | Net realized gain/(loss) on swaps; Net change in unrealized appreciation/ depreciation on swaps | (9,647 | ) | 35,300 | ||||||
Credit Contracts | Net realized gain/(loss) on swaptions written; Net change in unrealized appreciation/depreciation on swaptions written | 35,475 | (1,678 | ) |
66 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
Derivative Type | Location of Gain or (Loss) on Derivatives | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Equity contracts | Net realized gain/(loss) on futures; Net change in unrealized appreciation/depreciation on futures | $ | 16,693 | $ | (4,576 | ) | ||||
Equity contracts | Net realized gain/(loss) on investment transactions; Net change in unrealized appreciation/depreciation on investment transactions | (77,432 | ) | 10,727 | ||||||
Equity contracts | Net realized gain/(loss) on options written; Net change in unrealized appreciation/depreciation on options written | 43,344 | 1,591 | |||||||
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|
|
| |||||||
Total | $ | 6,473 | $ | 29,248 | ||||||
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|
|
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the year ended October 31, 2015:
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 723,672 | ||
Average notional amount of sale contracts | $ | 1,067,260 | (a) | |
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 1,913,333 | (b) | |
Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 175,714 | ||
Average notional amount of sale contracts | $ | 593,667 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 274,042 | ||
Average principal amount of sale contracts | $ | 1,138,145 | ||
Futures: | ||||
Average notional amount of buy contracts | $ | 1,508,038 | (c) | |
Average notional amount of sale contracts | $ | 128,467 | (d) | |
Total Return Swaps: | ||||
Average notional amount | $ | 1,115,923 | ||
Purchased Options: | ||||
Average cost | $ | 36,471 |
(a) | Positions were open for eight months during the year. |
(b) | Positions were open for six months during the year. |
(c) | Positions were open for nine months during the year. |
(d) | Positions were open for ten months during the year. |
AB HIGH YIELD PORTFOLIO • | 67 |
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 year end were subject to netting arrangements. The following tables present 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 | Derivatives Available for Offset | Cash Collateral Received | Security Collateral Received | Net Amount of Derivatives Assets | |||||||||||||||
Exchange-Traded Derivatives: | ||||||||||||||||||||
Citigroup Global Markets, Inc.* | $ | 1,758 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 1,758 | |||||||
Morgan Stanley & Co., LLC* | 5,331 | (5,331 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 7,089 | $ | (5,331 | ) | $ | – 0 | – | $ | – 0 | – | $ | 1,758 | |||||||
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OTC Derivatives: | ||||||||||||||||||||
Bank of America, N.A. | $ | 6,997 | $ | (6,997 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
Barclays Bank PLC | 15,223 | (276 | ) | – 0 | – | – 0 | – | 14,947 | ||||||||||||
Brown Brothers Harriman & Co. | 2,484 | (2,484 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Credit Suisse International | 13,068 | (812 | ) | – 0 | – | – 0 | – | 12,256 | ||||||||||||
Deutsche Bank AG | 3,838 | (911 | ) | – 0 | – | – 0 | – | 2,927 | ||||||||||||
Goldman Sachs Bank USA / Goldman Sachs International | 12,500 | (5,100 | ) | – 0 | – | – 0 | – | 7,400 | ||||||||||||
JPMorgan Chase Bank, NA | 18,626 | – 0 | – | – 0 | – | – 0 | – | 18,626 | ||||||||||||
Morgan Stanley & Co. International PLC | 12,150 | (12,150 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Standard Chartered Bank | 410 | (410 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 85,296 | $ | (29,140 | ) | $ | – 0 | – | $ | – 0 | – | $ | 56,156 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
Counterparty | Derivative Liabilities Subject to a MA | Derivatives Available for Offset | Cash Collateral Pledged | Security Collateral Pledged | Net Amount of Derivatives Liabilities | |||||||||||||||
Exchange-Traded Derivatives: | ||||||||||||||||||||
Morgan Stanley & Co., LLC* | $ | 5,356 | $ | (5,331 | ) | $ | (25 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 5,356 | $ | (5,331 | ) | $ | (25 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Bank of America, N.A. | $ | 11,329 | $ | (6,997 | ) | $ | – 0 | – | $ | – 0 | – | $ | 4,332 | |||||||
Barclays Bank PLC | 276 | (276 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Brown Brothers Harriman & Co. | 2,697 | (2,484 | ) | – 0 | – | – 0 | – | 213 | ||||||||||||
Citibank, N.A. | 4,107 | – 0 | – | – 0 | – | – 0 | – | 4,107 | ||||||||||||
Credit Suisse International | 812 | (812 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Deutsche Bank AG | 911 | (911 | ) | – 0 | – | – 0 | – | – 0 | – |
68 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
Counterparty | Derivative Liabilities Subject to a MA | Derivatives Available for Offset | Cash Collateral Pledged | Security Collateral Pledged | Net Amount of Derivatives Liabilities | |||||||||||||||
Goldman Sachs Bank USA / Goldman Sachs International | $ | 5,100 | $ | (5,100 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
Morgan Stanley & Co. International PLC | 17,183 | (12,150 | ) | – 0 | – | – 0 | – | 5,033 | ||||||||||||
Royal Bank of Scotland PLC | 1,787 | – 0 | – | – 0 | – | – 0 | – | 1,787 | ||||||||||||
Standard Chartered Bank | 2,006 | (410 | ) | – 0 | – | – 0 | – | 1,596 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 46,208 | $ | (29,140 | ) | $ | – 0 | – | $ | – 0 | – | $ | 17,068 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | Cash has been posted for initial margin requirements on 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. |
2. Currency Transactions
The Portfolio may invest in non-U.S. dollar securities on a currency hedged or unhedged basis. The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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).
3. Loan Participations and Assignments
The Portfolio may invest in direct debt instruments which are interests in amounts owed to lenders or lending syndicates by corporate, governmental, or other borrowers, either in the form of participations at the time the loan is originated (“Participations”) or by buying an interest in the loan in the secondary market from a financial institution or institutional investor (“Assignments”). A loan is often administered by a bank or other financial institution (the “Lender”) that acts as agent for all holders. The agent administers the terms of the loan as specified in the loan agreement. When investing in Participations, the Portfolio generally has no right to enforce compliance with the terms of the loan agreement with the borrower. In addition, when investing in Participations, the Portfolio has the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender and only upon
AB HIGH YIELD PORTFOLIO • | 69 |
Notes to Financial Statements
receipt of payments by the Lender from the borrower. As a result, the Portfolio may be subject to the credit risk of both the borrower and the Lender. When the Portfolio purchases Assignments from Lenders, it will typically acquire direct rights against the borrower on the loan. These loans may include participations in “bridge loans”, which are loans taken out by borrowers for a short period (typically less than six months) pending arrangement of more permanent financing through, for example, the issuance of bonds, frequently high-yield bonds issued for the purpose of acquisitions. The Portfolio may also participate in unfunded loan commitments, which are contractual obligations for investing in future Participations, and may receive a commitment fee based on the amount of the commitment. Under these arrangements, the Portfolio may receive a fixed rate commitment fee and, if and to the extent the borrower borrows under the facility, the Portfolio may receive an additional funding fee.
Unfunded loan commitments and funded loans are marked to market daily.
As of October 31, 2015, the Portfolio had no unfunded loan commitments or bridge loan commitments outstanding.
During the year ended October 31, 2015, the Portfolio received no commitment fees or additional funding fees.
NOTE E
Capital Stock
Each class consists of 3,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||||||||||
Year Ended 2015 | July 15, 2014* to October 31, 2014 | Year Ended 2015 | July 15, 2014* to October 31, 2014 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 292,676 | 2,929 | $ | 2,741,466 | $ | 29,153 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 2,211 | 10 | 20,519 | 102 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (979 | ) | – 0 | – | (9,038 | ) | – 0 | – | ||||||||||||
| ||||||||||||||||||||
Net increase | 293,908 | 2,939 | $ | 2,752,947 | $ | 29,255 | ||||||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 14,010 | 1,000 | $ | 135,980 | $ | 10,002 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 334 | – 0 | – | 3,193 | – 0 | – | ||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (2,449 | ) | – 0 | – | (23,449 | ) | – 0 | – | ||||||||||||
| ||||||||||||||||||||
Net increase | 11,895 | 1,000 | $ | 115,724 | $ | 10,002 | ||||||||||||||
|
70 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
Shares | Amount | |||||||||||||||||||
Year Ended 2015 | July 15, 2014* to October 31, 2014 | Year Ended 2015 | July 15, 2014* to October 31, 2014 | |||||||||||||||||
|
| |||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 12,660 | 13,778 | $ | 117,525 | $ | 136,502 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 694 | 13 | 6,625 | 124 | ||||||||||||||||
| ||||||||||||||||||||
Net increase | 13,354 | 13,791 | $ | 124,150 | $ | 136,626 | ||||||||||||||
| ||||||||||||||||||||
Class R | ||||||||||||||||||||
Shares sold | – 0 | – | 1,000 | $ | – 0 | – | $ | 10,002 | ||||||||||||
| ||||||||||||||||||||
Net increase | – 0 | – | 1,000 | $ | – 0 | – | $ | 10,002 | ||||||||||||
| ||||||||||||||||||||
Class K | ||||||||||||||||||||
Shares sold | – 0 | – | 1,000 | $ | – 0 | – | $ | 10,002 | ||||||||||||
| ||||||||||||||||||||
Net increase | – 0 | – | 1,000 | $ | – 0 | – | $ | 10,002 | ||||||||||||
| ||||||||||||||||||||
Class I | ||||||||||||||||||||
Shares sold | – 0 | – | 1,994,000 | $ | – 0 | – | $ | 19,940,002 | ||||||||||||
| ||||||||||||||||||||
Shares redeemed | (203,669 | ) | – 0 | – | (2,000,000 | ) | – 0 | – | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (203,669 | ) | 1,994,000 | $ | (2,000,000 | ) | $ | 19,940,002 | ||||||||||||
| ||||||||||||||||||||
Class Z | ||||||||||||||||||||
Shares sold | – 0 | – | 1,000 | $ | – 0 | – | $ | 10,002 | ||||||||||||
| ||||||||||||||||||||
Net increase | – 0 | – | 1,000 | $ | – 0 | – | $ | 10,002 | ||||||||||||
|
* | Commencement of operations. |
At October 31, 2015, the Adviser owns approximately 84% of the Portfolio’s outstanding shares.
NOTE F
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 Risk—Investments in fixed-income securities with lower ratings are subject to a higher probability that an issuer will default or
AB HIGH YIELD PORTFOLIO • | 71 |
Notes to Financial Statements
fail to meet its payment obligations. These securities may be subject to greater price volatility, due to such factors as specific corporate developments, negative perception of the junk bond market generally and less secondary market liquidity. These securities are often able to be “called” or repurchased by the issuer prior to their maturity date, forcing the Portfolio to reinvest the proceeds, possibly at a lower rate of return.
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 if the Portfolio invests a significant portion of its assets in 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.
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 contracts 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.
Foreign (Non-U.S.) Risk—Investments 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. These risks may be heightened with respect to investments in emerging-market countries, where there may be an increased amount of economic, political and social instability.
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.
72 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
Diversification Risk—The Portfolio may have more risk because it is “non-diversified”, meaning that it can invest more of its assets in a smaller number of issuers. Accordingly, changes in the value of a single security may have a more significant effect, either negative or positive, on the Portfolio’s NAV.
Liquidity Risk—Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Portfolio. Causes of liquidity risk may include low trading volumes, large positions and heavy redemptions of fixed-income mutual fund shares. Over recent years, liquidity risk has also increased because the capacity of dealers in the secondary market for fixed-income securities to make markets in these securities has decreased, even as the overall bond market has grown significantly, due to, among other things, structural changes, additional regulatory requirements and capital and risk restraints that have led to reduced inventories. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
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 G
Joint Credit Facility
A number of open-end mutual funds managed by the Adviser, including the Portfolio, participate in a $280 million revolving credit facility (the “Facility”) intended to provide short-term financing if necessary, subject to certain restrictions, in connection with abnormal redemption activity. Commitment fees related to the Facility are paid by the participating funds and are included in miscellaneous expenses in the statement of operations. The Portfolio did not utilize the Facility during the year ended October 31, 2015.
NOTE H
Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended October 31, 2015 and October 31, 2014 were as follows:
2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 903,701 | $ | 203,832 | ||||
Long-term capital gains | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Total taxable distributions paid | $ | 903,701 | $ | 203,832 | ||||
|
|
|
|
AB HIGH YIELD PORTFOLIO • | 73 |
Notes to Financial Statements
As of October 31, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 218,630 | ||
Accumulated capital and other losses | (451,121 | )(a) | ||
Unrealized appreciation/(depreciation) | (1,122,523 | )(b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | (1,355,014 | )(c) | |
|
|
(a) | As of October 31, 2015, the Portfolio had a net capital loss carryforward of $451,121. |
(b) | The differences between book-basis and tax-basis unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses on wash sales, the tax treatment of swaps, and the realization for tax purposes of gains/losses on certain derivative instruments. |
(c) | The differences between book-basis and tax-basis components of accumulated earnings/(deficit) is attributable primarily to the tax treatment of interest on defaulted securities and 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 October 31, 2015, the Portfolio had a net short-term capital loss carryforward of $353,432 and a net long-term capital loss carryforward of $97,689 which may be carried forward for an indefinite period.
During the current year, permanent differences primarily due to foreign currency reclassfications, the tax treatment of swaps, options, and futures, reclassifications of paydown gains/losses, the redesignation of dividends and the tax treatment of offering costs resulted in a net decrease in distributions in excess of net investment income, a net increase in accumulated net realized loss on investment and foreign currency transactions, and a net decrease in additional paid-in capital. These reclassifications had no affect on net assets.
NOTE I
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 J
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.
74 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||
Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 9.91 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .38 | .10 | ||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.59 | ) | (.10 | ) | ||||
|
| |||||||
Net increase (decrease) in net asset value from operations | (.21 | ) | .00 | |||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | (.45 | ) | (.09 | ) | ||||
Distributions from net realized gain on investment and foreign currency transactions | (.01 | ) | – 0 | – | ||||
|
| |||||||
Total dividends and distributions | (.46 | ) | (.09 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 9.24 | $ 9.91 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | (2.19 | )% | 0.04 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $2,742 | $29 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | 1.05 | % | 1.05 | %(e) | ||||
Expenses, before waivers/reimbursements | 6.57 | % | 49.84 | %(e) | ||||
Net investment income(c) | 4.11 | % | 3.41 | %(e) | ||||
Portfolio turnover rate | 56 | % | 5 | % |
See footnote summary on page 81.
AB HIGH YIELD PORTFOLIO • | 75 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||
Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 9.91 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .32 | .07 | ||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.61 | ) | (.09 | ) | ||||
|
| |||||||
Net decrease in net asset value from operations | (.29 | ) | (.02 | ) | ||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | (.37 | ) | (.07 | ) | ||||
Distributions from net realized gain on investment and foreign currency transactions | (.01 | ) | – 0 | – | ||||
|
| |||||||
Total dividends and distributions | (.38 | ) | (.07 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 9.24 | $ 9.91 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | (2.95 | )% | (0.18 | )% | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $119 | $10 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | 1.80 | % | 1.80 | %(e) | ||||
Expenses, before waivers/reimbursements | 7.85 | % | 56.89 | %(e) | ||||
Net investment income(c) | 3.36 | % | 2.28 | %(e) | ||||
Portfolio turnover rate | 56 | % | 5 | % |
See footnote summary on page 81.
76 | • AB HIGH YIELD PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||
Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 9.91 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .42 | .10 | ||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.61 | ) | (.09 | ) | ||||
|
| |||||||
Net increase (decrease) in net asset value from operations | (.19 | ) | .01 | |||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | (.47 | ) | (.10 | ) | ||||
Distributions from net realized gain on investment and foreign currency transactions | (.01 | ) | – 0 | – | ||||
|
| |||||||
Total dividends and distributions | (.48 | ) | (.10 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 9.24 | $ 9.91 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | (1.94 | )% | 0.14 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $251 | $137 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | .80 | % | .80 | %(e) | ||||
Expenses, before waivers/reimbursements | 7.35 | % | 33.51 | %(e) | ||||
Net investment income(c) | 4.38 | % | 3.26 | %(e) | ||||
Portfolio turnover rate | 56 | % | 5 | % |
See footnote summary on page 81.
AB HIGH YIELD PORTFOLIO • | 77 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class R | ||||||||
Year Ended 2015 | July 15, 2014(a) to October 31, 2014 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 9.91 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .37 | .08 | ||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.60 | ) | (.08 | ) | ||||
|
| |||||||
Net increase (decrease) in net asset value from operations | (.23 | ) | .00 | |||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | (.43 | ) | (.09 | ) | ||||
Distributions from net realized gain on investment and foreign currency transactions | (.01 | ) | – 0 | – | ||||
|
| |||||||
Total dividends and distributions | (.44 | ) | (.09 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 9.24 | $ 9.91 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | (2.42 | )% | (0.03 | )% | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $9 | $10 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | 1.30 | % | 1.30 | %(e) | ||||
Expenses, before waivers/reimbursements | 4.39 | % | 4.84 | %(e) | ||||
Net investment income(c) | 3.90 | % | 2.78 | %(e) | ||||
Portfolio turnover rate | 56 | % | 5 | % |
See footnote summary on page 81.
78 | • AB HIGH YIELD PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class K | ||||||||
Year Ended 2015 | July 15, 2014(a) to October 31, 2014 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 9.91 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .40 | .09 | ||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.61 | ) | (.09 | ) | ||||
|
| |||||||
Net increase (decrease) in net asset value from operations | (.21 | ) | .00 | |||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | (.45 | ) | (.09 | ) | ||||
Distributions from net realized gain on investment and foreign currency transactions | (.01 | ) | – 0 | – | ||||
|
| |||||||
Total dividends and distributions | (.46 | ) | (.09 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 9.24 | $ 9.91 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | (2.17 | )% | 0.05 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $9 | $10 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | 1.05 | % | 1.05 | %(e) | ||||
Expenses, before waivers/reimbursements | 4.13 | % | 4.56 | %(e) | ||||
Net investment income(c) | 4.15 | % | 3.03 | %(e) | ||||
Portfolio turnover rate | 56 | % | 5 | % |
See footnote summary on page 81.
AB HIGH YIELD PORTFOLIO • | 79 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class I | ||||||||
Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 9.91 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .42 | .10 | ||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.61 | ) | (.09 | ) | ||||
|
| |||||||
Net increase (decrease) in net asset value from operations | (.19 | ) | .01 | |||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | (.47 | ) | (.10 | ) | ||||
Distributions from net realized gain on investment and foreign currency transactions | (.01 | ) | – 0 | – | ||||
|
| |||||||
Total dividends and distributions | (.48 | ) | (.10 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 9.24 | $ 9.91 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | (1.94 | )% | 0.12 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $16,544 | $19,757 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | .80 | % | .80 | %(e) | ||||
Expenses, before waivers/reimbursements | 3.86 | % | 4.27 | %(e) | ||||
Net investment income(c) | 4.39 | % | 3.29 | %(e) | ||||
Portfolio turnover rate | 56 | % | 5 | % |
See footnote summary on page 81.
80 | • AB HIGH YIELD PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class Z | ||||||||
Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 9.91 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .42 | .10 | ||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.61 | ) | (.09 | ) | ||||
|
| |||||||
Net increase (decrease) in net asset value from operations | (.19 | ) | .01 | |||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | (.47 | ) | (.10 | ) | ||||
Distributions from net realized gain on investment and foreign currency transactions | (.01 | ) | – 0 | – | ||||
|
| |||||||
Total dividends and distributions | (.48 | ) | (.10 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 9.24 | $ 9.91 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | (1.93 | )% | 0.12 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $9 | $10 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | .80 | % | .80 | %(e) | ||||
Expenses, before waivers/reimbursements | 3.86 | % | 4.30 | %(e) | ||||
Net investment income(c) | 4.40 | % | 3.28 | %(e) | ||||
Portfolio turnover rate | 56 | % | 5 | % |
(a) | Commencement of operations. |
(b) | Based on average shares outstanding. |
(c) | Net of expenses waived/reimbursed by the Adviser. |
(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. Initial sales charges or contingent deferred sales charges are not reflected in the calculation of total investment return. 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) | Annualized. |
See notes to financial statements.
AB HIGH YIELD PORTFOLIO • | 81 |
Financial Highlights
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors of AB Bond Fund, Inc. and Shareholders of AB High Yield Portfolio
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of AB High Yield Portfolio (the “Fund”) (formerly known as AllianceBernstein High Yield Portfolio), one of the portfolios constituting AB Bond Fund, Inc. (formerly known as AllianceBernstein Bond Fund, Inc.), as of October 31, 2015, and the related statement of operations for the year then ended, and the statements of changes in net assets and financial highlights for the year then ended and for the period July 15, 2014 (commencement of operations) to October 31, 2014. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2015, by correspondence with the custodian and others or by other appropriate auditing procedures where replies from others were not received. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AB High Yield Portfolio (one of the portfolios constituting AB Bond Fund, Inc.) at October 31, 2015, the results of its operations for the year then ended, and the changes in its net assets and financial highlights for the year then ended and for the period July 15, 2014 (commencement of operations) to October 31, 2014 in conformity with U.S. generally accepted accounting principles.
New York, New York
December 30, 2015
82 | • AB HIGH YIELD PORTFOLIO |
Report of Independent Registered Public Accounting Firm
2015 FEDERAL TAX INFORMATION
(unaudited)
For Federal income tax purposes, the following information is furnished with respect to the distributions paid by the Portfolio during the taxable year ended October 31, 2015. For foreign shareholders, 66.37% of ordinary dividends paid may be considered to be qualifying to be taxed as interest-related dividends.
Shareholders should not use the above information to prepare their income tax returns. The information necessary to complete your income tax returns will be included with your Form 1099-DIV which will be sent to you separately in January 2016.
AB HIGH YIELD PORTFOLIO • | 83 |
BOARD OF DIRECTORS
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 Gershon M. Distenfeld(2), Vice President Sherif M. Hamid(2), Vice President Ivan Rudolph-Shabinsky(2), Vice President Ashish C. Shah(2), Vice President | Joseph J. Mantineo, Treasurer and Chief Financial Officer Emilie D. Wrapp, Secretary Phyllis J. Clarke, Controller Vincent S. Noto, Chief Compliance Officer |
Custodian and Accounting Agent Brown Brothers Harriman & Co. 50 Post Office Square Boston, MA 02110
Principal Underwriter AllianceBernstein Investments, Inc. 1345 Avenue of the Americas New York, NY 10105
Transfer Agent AllianceBernstein Investor Services, Inc. P.O. Box 786003 San Antonio, TX 78278-6003 Toll-Free (800) 221-5672 | Independent Registered Public Accounting Firm Ernst & Young LLP 5 Times Square New York, NY 10036
Legal Counsel Seward & Kissel LLP One Battery Park Plaza New York, NY 10004 |
(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 Fund are made by the High Yield Investment Team. Messrs. Distenfeld, Hamid, Rudolph-Shabinksy and Shah are the investment professionals with the most significant responsibility for the day-to-day management of the Fund’s portfolio. |
84 | • AB HIGH YIELD PORTFOLIO |
Board of Directors
MANAGEMENT OF THE FUND
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIP CURRENTLY HELD BY DIRECTOR | |||||
INTERESTED DIRECTOR | ||||||||
Robert M. Keith, + 1345 Avenue of the Americas New York, NY 10105 55 (2014) | Senior Vice President of AllianceBernstein L.P. (the “Adviser”) and the head of AllianceBernstein Investments, Inc. (“ABI”) since July 2008; Director of ABI and President of the AB Mutual Funds. Previously, he served as Executive Managing Director of ABI from December 2006 to June 2008. Prior to joining ABI in 2006, Executive Managing Director of Bernstein Global Wealth Management, and prior thereto, Senior Managing Director and Global Head of Client Service and Sales of the Adviser’s institutional investment management business since 2004. Prior thereto, he was Managing Director and Head of North American Client Service and Sales in the Adviser’s institutional investment management business, with which he had been associated since prior to 2004. | 110 | None |
AB HIGH YIELD PORTFOLIO • | 85 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIP CURRENTLY HELD BY DIRECTOR | |||||
DISINTERESTED DIRECTORS | ||||||||
Marshall C. Turner, Jr.# Chairman of the Board 74 (2014) | Private Investor since prior to 2010. Former Chairman and CEO of Dupont Photomasks, Inc. (components of semi-conductor manufacturing). He has extensive operating leadership and venture capital investing experience, including five interim or full-time CEO roles, and prior service as general partner of institutional venture capital partnerships. He also has extensive non-profit board leadership experience, and currently serves on the boards of two education and science-related non-profit organizations. He has served as a director of one AB fund since 1992, and director or trustee of multiple AB Funds since 2005. He has been Chairman of the AB Funds since January 2014, and the Chairman of the Independent Directors Committees of such Funds since February 2014. | 110 | Xilinx, Inc. (programmable logic semi- conductors) since 2007 | |||||
John H. Dobkin, # 73 (2014) | Independent Consultant since prior to 2010. Formerly, President of Save Venice, Inc. (preservation organization) from 2001–2002; Senior Advisor from June 1999-June 2000 and President of Historic Hudson Valley (historic preservation) from December 1989-May 1999. Previously, Director of the National Academy of Design. He has served as a director or trustee of various AB Funds since 1992, and as Chairman of the Audit Committees of a number of such Funds from 2001-2008. | 110 | None |
86 | • AB HIGH YIELD PORTFOLIO |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIP CURRENTLY DIRECTOR | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Michael J. Downey, # 71 (2014) | Private Investor since prior to 2009. Formerly, managing partner of Lexington Capital, LLC (investment advisory firm) from December 1997 until December 2003. He was a Director of The Merger Fund (registered investment company) since prior to 2010 until 2013 and Prospect Acquisition Corp. (financial services) from 2007 until 2009. From 1987 until 1993, Chairman and CEO of Prudential Mutual Fund Management, director of the Prudential mutual funds, and member of the Executive Committee of Prudential Securities Inc. He has served as a director or trustee of the AB Funds since 2005 and is a director and Chairman of one other registered investment company. | 110 | Asia Pacific Fund, Inc. (registered investment company) since prior to 2010 | |||||
William H. Foulk, Jr., # 83 (2014) | Investment Adviser and an Independent Consultant since prior to 2010. Previously, he was Senior Manager of Barrett Associates, Inc., a registered investment adviser. He was formerly Deputy Comptroller and Chief Investment Officer of the State of New York and, prior thereto, Chief Investment Officer of the New York Bank for Savings. He has served as a director or trustee of various AB Funds since 1983, and was Chairman of the Independent Directors Committees of the AB Funds from 2003 until early February 2014. He served as Chairman of such Funds from 2003 through December 2013. He is also active in a number of mutual fund related organizations and committees. | 110 | None |
AB HIGH YIELD PORTFOLIO • | 87 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIP CURRENTLY HELD BY DIRECTOR | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
D. James Guzy, # 79 (2014) | Chairman of the Board of SRC Computers, Inc. (semi-conductors), with which he has been associated since prior to 2010. He served as Chairman of the Board of PLX Technology (semi-conductors) since prior to 2010 until November 2013. He was a Director of Cirrus Logic Corporation (semi-conductors) from 1984 until July 2011. He was a director of Intel Corporation (semi-conductors) from 1969 until 2008, and served as Chairman of the Finance Committee of such company for several years until May 2008. He has served as a director or trustee of one or more of the AB Funds since 1982. | 110 | ||||||
Nancy P. Jacklin, # 67 (2014) | Professorial Lecturer at the Johns Hopkins School of Advanced International Studies (2008-2015). U.S. Executive Director of the International Monetary Fund (which is responsible for ensuring the stability of the international monetary system), (December 2002-May 2006); Partner, Clifford Chance (1992-2002); Sector Counsel, International Banking and Finance, and Associate General Counsel, Citicorp (1985-1992); Assistant General Counsel (International), Federal Reserve Board of Governors (1982-1985); and Attorney Advisor, U.S. Department of the Treasury (1973-1982). Member of the Bar of the District of Columbia and of New York; and member of the Council on Foreign Relations. She has served as a director or trustee of the AB Funds since 2006 and has been Chairman of the Governance and Nominating Committees of the Funds since August 2014. | 110 | None |
88 | • AB HIGH YIELD PORTFOLIO |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIP CURRENTLY HELD BY DIRECTOR | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Garry L. Moody, # 63 (2014) | Independent Consultant. Formerly, Partner, Deloitte & Touche LLP (1995-2008) where he held a number of senior positions, including Vice Chairman, and U.S. and Global Investment Management Practice Managing Partner; President, Fidelity Accounting and Custody Services Company (1993-1995); and Partner, Ernst & Young LLP (1975-1993), where he served as the National Director of Mutual Fund Tax Services and Managing Partner of its Chicago Office Tax department. He is a member of the Trustee Advisory Board of BoardIQ, a biweekly publication focused on issues and news affecting directors of mutual funds. He has served as a director or trustee, and as Chairman of the Audit Committees, of the AB Funds since 2008. | 110 | None | |||||
Earl D. Weiner, # 76 (2014) | Of Counsel, and Partner prior to January 2007, of the law firm Sullivan & Cromwell LLP and is a former member of the ABA Federal Regulation of Securities Committee Task Force to draft editions of the Fund Director’s Guidebook. He also serves as a director or trustee of various non-profit organizations and has served as Chairman or Vice Chairman of a number of them. He has served as a director or trustee of the AB Funds since 2007 and served as Chairman of the Governance and Nominating Committees of the AB Funds from 2007 until August 2014. | 110 | None |
AB HIGH YIELD PORTFOLIO • | 89 |
Management of the Fund
* | The address for each of the Fund’s disinterested Directors is c/o AllianceBernstein L.P., Attention: Philip L. Kirstein, 1345 Avenue of the Americas, New York, NY 10105. |
** | There is no stated term of office for the Fund’s Directors. |
*** | The information above includes each Director’s principal occupation during the last five years and other information relating to the experience, attributes and skills relevant to each Director’s qualifications to serve as a Director, which led to the conclusion that each Director should serve as a Director for the Fund. |
+ | Mr. Keith is an “interested person” of the Portfolio as defined in the Investment Company Act of 1940, due to his position as a Senior Vice President of the Adviser. |
# | Member of the Audit Committee, the Governance and Nominating Committee and the Independent Directors Committee. |
90 | • AB HIGH YIELD PORTFOLIO |
Management of the Fund
Officer Information
Certain information concerning the Fund’s Officers is listed below.
NAME, ADDRESS*, AND AGE | POSITION(S) HELD WITH FUND | PRINCIPAL OCCUPATION DURING PAST 5 YEARS | ||
Robert M. Keith 55 | President and Chief Executive Officer | See biography above. | ||
Philip L. Kirstein 70 | Senior Vice President and Independent Compliance Officer | Senior Vice President and Independent Compliance Officer of the AB Funds, with which he has been associated since October 2004. Prior thereto, he was Of Counsel to Kirkpatrick & Lockhart, LLP from October 2003 to October 2004, and General Counsel of Merrill Lynch Investment Managers, L.P. since prior to March 2003. | ||
Gershon M. Distenfeld 39 | Vice President | Senior Vice President of the Adviser**, with which he has been associated since prior to 2010. | ||
Sherif M. Hamid 39 | Vice President | Senior Vice President of the Adviser, with which he has been associated since 2013 and Portfolio Manager for High Yield. Previously, he was head of European Credit Strategy of Barclays Capital 2011 to 2013, and a U.S. investment-grade credit strategist and U.S. high yield analyst since prior to 2010. | ||
Ivan Rudolph-Shabinsky 51 | Vice President | Senior Vice President of the Adviser**, with which he has been associated since prior to 2010. | ||
Ashish C. Shah 45 | Vice President | Senior Vice President, and Head of Global Credit of the Adviser**, with which he has been associated since May 2010 and Chief Diversity Officer since 2014. Previously he was a Managing Director and Head of Global Credit Strategy at Barclays Capital since prior to 2010. | ||
Emilie D. Wrapp 59 | Secretary | Senior Vice President, Assistant General Counsel and Assistant Secretary of ABI**, with which she has been associated since prior to 2010. | ||
Joseph J. Mantineo 56 | Treasurer and Chief Financial Officer | Senior Vice President of ABIS**, with which he has been associated since prior to 2010. | ||
Vincent S. Noto 50 | Chief Compliance Officer | Senior Vice President since 2015 and Mutual Fund Chief Compliance Officer of the Adviser** since 2014. Prior thereto, he was Vice President and Director of Mutual Fund Compliance of the Adviser** since prior to 2010. | ||
Phyllis J. Clarke 54 | Controller | Vice President of ABIS**, with which she has been associated since prior to 2010. |
AB HIGH YIELD PORTFOLIO • | 91 |
Management of the Fund
* | The address for each of the Fund’s Officers is 1345 Avenue of the Americas, New York, NY 10105. |
** | The Adviser, ABI and ABIS are affiliates of the Fund. |
The Fund’s Statement of Additional Information (“SAI”) has additional information about the Fund’s Directors and Officers and is available without charge upon request. Contact your financial representative or AB at 1-(800) 227-4618, or visit www.ABglobal.com, for a free prospectus or SAI. |
92 | • AB HIGH YIELD PORTFOLIO |
Management of the Fund
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 Bond Fund, Inc. (the “Fund”) in respect of AB High Yield Portfolio (the “Portfolio”),2 prepared by Philip L. Kirstein, the Senior Officer of the Fund for the Directors of the Fund, as required by the August 2004 agreement 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 Directors of the Fund to perform its duties pursuant to Section 15 of the Investment Company Act of 1940 (the “40 Act”) and applicable state law. The purpose of the 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 Directors 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 fee that is so disproportionately large that it bears no
1 | The information in the fee evaluation was completed on October 22, 2015 and discussed with the Board of Directors on November 3-5, 2015. |
2 | Future references to the Portfolio do not include “AB.” References in the fee summary pertaining to performance and expense ratios refer to the Class A shares of the Portfolio. |
AB HIGH YIELD PORTFOLIO • | 93 |
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 the Jones decision, 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
INVESTMENT ADVISORY FEES, NET ASSETS, & EXPENSE RATIOS
The Adviser proposed that the Portfolio pays the advisory fee set forth below for receiving the services to be provided pursuant to the Investment Advisory Agreement. Also shown are the Portfolio’s net assets on September 30, 2015.
Portfolio | Net Assets 9/30/15 ($MM) | Advisory Fee | ||
High Yield Portfolio4,5 | $18.9 | 0.60% on 1st $2.5 billion | ||
0.55% on next $2.5 billion | ||||
0.50% on the balance |
The Portfolio’s Investment Advisory Agreement provides for the Adviser to be reimbursed for certain clerical, legal, accounting, administrative and other services provided to the Fund. During the Portfolio’s fiscal year ended October 31, 2014, the Adviser received $19,919 (0.100% of the Portfolio’s average daily net assets) for providing such services but waived the amount in its entirety.
The Adviser has agreed to waive that portion of its management fees and/or reimburse the Portfolio for that portion of the Portfolio’s total operating expenses to the degree necessary to limit the Portfolio’s expense ratio to the amounts set forth below for the Portfolio’s current fiscal year. The waiver is terminable by the Adviser at the end of the Portfolio’s fiscal year upon at least
3 | Jones v. Harris at 1427. |
4 | The advisory fee schedule for the Portfolio has a higher effective fee rate than the advisory fee schedule of the High Income category, in which the Portfolio would have been categorized, had the Adviser proposed to implement the NYAG related fee schedule. The advisory fee schedule of the High Income category is as follows: 50 bp on the first $2.5 billion, 45 bp on the next $2.5 billion, and 40 bp on the balance. |
5 | The Adviser manages AB High Income Fund, Inc. (“High Income Fund, Inc.”). Prior to January 25, 2008, the High Income Fund, Inc. had an emerging market debt investment strategy and was known as AB Emerging Market Debt Fund, Inc. In addition, on or around January 25, 2008, High Income Fund, Inc. merged with other retail fixed income mutual funds managed by the Adviser: AB Corporate Debt Portfolio (“Corporate Debt Portfolio”) and AB High Yield Fund, Inc. (“High Yield Fund, Inc.”). Emerging Market Debt Fund, Inc., Corporate Debt Portfolio and High Yield Fund, Inc. were categorized as High Income and accordingly, their advisory fee schedules were identical to each other under the High Income category. |
94 | • AB HIGH YIELD PORTFOLIO |
60 days’ notice prior to the Portfolio’s prospectus update. In addition, set forth below are the gross expense ratios of the Portfolio for the most recent semi-annual period:6
Portfolio | Expense Cap Pursuant to Expense Limitation | Gross Expense Ratio7 | Fiscal Year End | |||||||
High Yield Portfolio8,9 | Advisor | 0.80% | 9.04 | % | Oct. 31 (ratios as of April 30, 2015) | |||||
Class A | 1.05% | 7.52 | % | |||||||
Class C | 1.80% | 9.12 | % | |||||||
Class R | 1.30% | 4.28 | % | |||||||
Class K | 1.05% | 4.01 | % | |||||||
Class I | 0.80% | 3.74 | % | |||||||
Class Z | 0.80% | 3.75 | % |
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 and sub-advised investment companies 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 assets due to the greater complexities and time required for investment companies, although the Adviser is entitled to be reimbursed for providing some of these services. Also, retail mutual funds managed by the Adviser are widely held. Servicing the Portfolio’s investors is more time consuming and labor intensive compared to institutional clients since the Adviser needs to communicate with a more extensive network of financial intermediaries and shareholders. 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. Managing the cash flow of an investment company is more difficult than managing that of a stable pool of assets, such as an institutional account with little cash movement in
6 | Semi-annual total expense ratios are unaudited. |
7 | Annualized |
8 | The Rule 12b-1 fee for Class A shares of the Fund is 0.25%. |
9 | The Portfolio’s fiscal percentage of net assets allocated to ETFs as of July 31, 2015 is 0.55%. The Portfolio’s acquired funds expense ratio related to such ETF holdings is 0.0008%. |
AB HIGH YIELD PORTFOLIO • | 95 |
either direction, particularly, if a fund 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 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.10 In addition to the AB Institutional fee schedule, set forth below is what would have been the effective advisory fee of the Portfolio had the AB Institutional fee schedule been applicable to the Portfolio based on September 30, 2015 net assets.11
Portfolio | Net Assets ($MM) | AB Institutional Fee Schedule | Effective AB Inst. Adv. Fee (%) | Fund Advisory Fee (%) | ||||||||
High Yield Portfolio | $18.9 | U.S. High Yield 0.55% on 1st $50 million 0.30% on the balance Minimum account size: $50m | 0.550% | 0.600% |
The Adviser also manages and sponsors retail mutual funds, which are organized in jurisdictions outside the United States, generally Luxembourg, Japan, Taiwan, and South Korea and sold to non-United States resident investors. The Adviser charges the following fee for the Luxembourg fund that has a somewhat similar investment style as the Portfolio:
Portfolio | Luxembourg Fund | Fee12 | ||
High Yield Portfolio | U.S. High Yield | |||
Class A2 | 1.20% | |||
Class I2 (Institutional) | 0.65% |
10 | 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. |
11 | 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. |
12 | Class A2 shares of the Luxembourg funds are charged an “all-in” fee, which covers investment advisory and distribution related services, unlike Class I2 shares, whose fee is for investment advisory services only. |
96 | • AB HIGH YIELD PORTFOLIO |
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 table below shows the fee schedule of the ITM mutual fund that has a somewhat similar investment style as the Portfolio:
Portfolio | ITM Mutual Fund | Fee | ||
High Yield Portfolio | High Yield Open Fund | 1.00% |
The Adviser represented that it does not provide sub-advisory investment services to other investment 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 offered by other investment advisers.13,14 Broadridge’s analysis included the comparison of the Portfolio’s contractual management fee, estimated at the approximate current asset level of the Portfolio, to the median of the Fund’s Broadridge Expense Group (“EG”)15 and the Portfolio’s contractual management fee ranking.16
Broadridge describes an EG as a representative sample of comparable funds. Broadridge’s standard methodology for screening funds to be included in an EG
13 | 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. |
14 | 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. |
15 | Broadridge does not consider average account size when constructing EGs. Funds with relatively small average account sizes tend to have higher transfer agent expense ratios than comparable sized funds that have relatively large average account sizes. There are limitations to Lipper expense category data because different funds categorize expenses differently. |
16 | The contractual management fee is calculated by Broadridge using the Portfolio’s contractual management fee rate at the hypothetical asset level. The hypothetical asset level is based on the combined net assets of all classes of the Portfolio, rounded up to the next $25 million. Broadridge’s total expense ratio information is based on the most recent annual report except as otherwise noted. A ranking of “1” would mean that Portfolio had the lowest effective fee rate in the Broadridge peer group. |
AB HIGH YIELD PORTFOLIO • | 97 |
entails the consideration of several fund criteria, including fund type, Lipper investment classification/objective, load type and similar 12b-1/non-12b-1 service fees, asset (size) comparability, expense components and attributes. An EG will typically consist of seven to twenty funds.
Portfolio | Contractual Management Fee (%)17 | Broadridge Median (%) | Broadridge Rank | |||||||||
High Yield Portfolio | 0.600 | 0.680 | 3/17 |
Broadridge also compared the Portfolio’s total expense ratio to the medians of the Portfolio’s EG and Broadridge Expense Universe (“EU”). The EU is a broader group compared to the EG, consisting of all funds that have the same investment classifications/objective and load type as the subject Portfolio.18
Portfolio | Expense Ratio (%)19 | Broadridge Median (%) | Broadridge Group Rank | Broadridge EU Median (%) | Broadridge Rank | |||||||||||||||
High Yield Portfolio | 1.050 | 1.090 | 4/17 | 1.050 | 55/109 |
Based on this analysis, the Portfolio has a more favorable ranking on a contractual management fee basis than on a total expense ratio basis.
III. | COSTS TO THE ADVISER AND ITS AFFILIATES OF SUPPLYING SERVICES PURSUANT TO THE MANAGEMENT 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.
17 | The contractual management fee does not reflect any expense reimbursements made by the Portfolio to the Adviser for certain clerical, legal, accounting, administrative, and other services. In addition, the contractual management fee does not reflect any advisory fee waivers for expense caps. |
18 | Except for asset (size) comparability, Broadridge uses the same criteria for selecting an EG when selecting an EU. Unlike the EG, the EU allows for the same adviser to be represented by more than just one fund. |
19 | Most recently completed fiscal year Class A share total expense ratio. |
98 | • AB HIGH YIELD PORTFOLIO |
IV. | PROFIT MARGINS OF THE ADVISER AND ITS AFFILIATES FOR SUPPLYING SUCH SERVICES. |
The Portfolio’s profitability information, prepared by the Adviser for the Board of Directors, was reviewed by the Senior Officer and the consultant. The Adviser’s profitability from providing investment advisory services to the Portfolio was negative, during calendar year 2014.
In addition to the Adviser’s direct profits from managing the Portfolio, certain of the Adviser’s affiliates have business relationships with the Portfolio and may earn a profit from providing other services to the Portfolio. The courts have referred to this type of business opportunity 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 and the relationship otherwise complies with the 40 Act restrictions. These affiliates will provide transfer agent and distribution related services to the Portfolio and will receive transfer agent fees, Rule 12b-1 payments, front-end sales loads and contingent deferred sales charges (“CDSC”). During the Portfolio’s most recently completed fiscal year, ABI received from the Portfolio $49 and $66 in front-end sales loads and Rule 12b-1 fees, respectively.
AllianceBernstein Investments, Inc. (“ABI”), an affiliate of the Adviser, is the Fund’s principal underwriter. ABI and the Adviser have disclosed in the Portfolio’s prospectus that they may make revenue sharing payments from their own resources, in addition to resources derived from sales loads and Rule 12b-1 fees, to firms that sell shares of the Portfolio. The total amount to be paid to a financial intermediary associated with the sale of shares will generally not exceed the sum of (a) 0.25% of the current year’s fund sales by that firm and (b) 0.10% of the average daily net assets attributable to that firm over the year. In 2014, ABI paid approximately 0.05% of the average monthly assets of the AB Mutual Funds or approximately $20.4 million for distribution services and educational support (revenue sharing payments).
Fees and reimbursements for out of pocket expenses to be charged by AllianceBernstein Investor Services, Inc. (“ABIS”), the affiliated transfer agent for the Portfolio, are based on the level of the network account and the class of shares held by the account. ABIS also receives a fee per shareholder sub-account for each account maintained by an intermediary on an omnibus basis. ABIS received $6,000 in fees from the Portfolio during the Portfolio’s most recently completed fiscal year.
AB HIGH YIELD PORTFOLIO • | 99 |
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 Directors 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 Directors an update of the Deli20 study on advisory fees and various fund characteristics.21 The independent consultant first reiterated the results of his previous two dimensional comparison analysis (fund size and family size) with the Board of Directors.22 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
20 | 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. |
21 | 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. |
22 | 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. |
100 | • AB HIGH YIELD PORTFOLIO |
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 FUND |
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 prepared by Broadridge shows the 1 year performance returns and rankings23 of the Portfolio relative to its Broadridge Performance Group (“PG”) and Broadridge Performance Universe (“PU”)24 for the period ended July 31, 2015.25
Fund Return (%) | PG Median (%) | PU Median (%) | PG Rank | PU Rank | ||||||||||||||||
High Yield Portfolio | ||||||||||||||||||||
1 year | 0.19 | -1.18 | 0.09 | 5/17 | 57/119 |
23 | The performance returns and rankings of the Portfolio are for the Fund’s Class A shares. The performance returns of the Portfolio were provided by Broadridge. |
24 | The Portfolio’s PG is identical to the Portfolio’s EG. The Portfolio’s PU is not identical to the Portfolio’s EU as the criteria for including/excluding a fund from a PU is somewhat different from that of an EU. |
25 | The current Lipper investment classification/objective dictates the PG and PU throughout the life of the Portfolio even if the Portfolio had a different investment classification/objective at a different point in time. |
AB HIGH YIELD PORTFOLIO • | 101 |
Set forth below are the 1 year and since inception performance returns of the Portfolio (in bold)26 versus its benchmark.27 Portfolio and benchmark volatility and reward-to-variability ratio (“Sharpe Ratio”) information is also shown.28
Period Ending July 31, 2015 Annualized Net Performance (%) | ||||||||||||||||||||
1 Year (%) | Since (%) | Volatility (%) | Sharpe (%) | Risk Period (Year) | ||||||||||||||||
High Yield Portfolio | 0.19 | -0.61 | 4.13 | 0.06 | 1 | |||||||||||||||
Barclays U.S. High Yield 2% Issuer Cap Index | 0.37 | -0.75 | 4.64 | 0.10 | 1 | |||||||||||||||
Inception Date: July 15, 2014 |
CONCLUSION:
Based on the factors discussed above the Senior Officer’s conclusion is that the proposed advisory fee 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 in respect of the Portfolio is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: November 25, 2015
26 | The performance returns and risk measures shown in the table are for the Class A shares of the Portfolio. |
27 | The Adviser provided Portfolio and benchmark performance return information for periods through July 31, 2015. |
28 | 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. |
102 | • AB HIGH YIELD PORTFOLIO |
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 HIGH YIELD PORTFOLIO • | 103 |
AB Family of Funds
NOTES
104 | • AB HIGH YIELD PORTFOLIO |
NOTES
AB HIGH YIELD PORTFOLIO • | 105 |
NOTES
106 | • AB HIGH YIELD PORTFOLIO |
NOTES
AB HIGH YIELD PORTFOLIO • | 107 |
NOTES
108 | • AB HIGH YIELD PORTFOLIO |
AB HIGH YIELD PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
HY-0151-1015
OCT 10.31.15
ANNUAL REPORT
AB INTERMEDIATE BOND PORTFOLIO
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
Annual Report
This report provides management’s discussion of fund performance for AB Intermediate Bond Portfolio (the “Portfolio”) for the annual reporting period ended October 31, 2015. Effective January 20, 2015, the Portfolio’s named changed from AllianceBernstein Intermediate Bond Portfolio to AB Intermediate Bond Portfolio.
Investment Objective and Policies
The Portfolio’s investment objective is to generate income and price appreciation without assuming what AllianceBernstein L.P. (the “Adviser”) considers undue risk. The Portfolio invests, under normal circumstances, at least 80% of its net assets in fixed-income securities. The Portfolio expects to invest in readily marketable fixed-income securities with a range of maturities from short- to long-term and relatively attractive yields that do not involve undue risk of loss of capital. The Portfolio expects to invest in fixed-income securities with a dollar-weighted average maturity of between three to ten years and an average duration of three to six years. The Portfolio may invest up to 25% of its net assets in below investment-grade bonds. The Portfolio may use leverage for investment purposes.
The Portfolio may invest without limit in US dollar-denominated foreign fixed-income securities and may invest up to 25% 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 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 Portfolio. 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 Portfolio’s other holdings.
The Portfolio may invest in mortgage-related and other asset-backed securities, loan participations, inflation-protected securities, structured securities, variable, floating, and inverse floating-rate instruments and preferred stock, and may use other investment techniques. The Portfolio intends, among other things, to enter into transactions such as reverse repurchase agreements and dollar rolls. The Portfolio may invest, without limit, in derivatives, such as options, futures, forwards or swaps.
Investment Results
The table on page 5 shows the Portfolio’s performance compared with its benchmark, the Barclays US Aggregate Bond Index for the six- and 12-month periods ended October 31, 2015.
All share classes underperformed the benchmark for both periods, before sales charges. Sector positioning contributed to performance for both periods, specifically an overweight to collateralized mortgage obligations, asset-backed securities and commercial mortgage-backed securities, relative to
AB INTERMEDIATE BOND PORTFOLIO • | 1 |
the benchmark. Security selection detracted modestly, mainly from security selection within energy and agency mortgage-backed securities. Currency positioning contributed, specifically short positions in the Australian dollar, euro and Canadian dollar versus a long US dollar position. Yield-curve positioning detracted, specifically an underweight to the two-year portion of the yield curve for the six-month period and a general underweight to duration for the 12-month period, as interest rates rallied.
The Portfolio utilized derivatives including Treasury futures and interest rate swaps to manage duration and yield curve positioning for both periods. Credit default swaps were utilized for hedging and investment purposes, which had an immaterial impact during both periods in absolute terms; currency forwards were utilized for both hedging and investment purposes to manage the Portfolio’s overall currency exposure. Purchased and written options were utilized for hedging purposes, which had an immaterial impact on performance during both periods. Currency swaps were utilized for hedging purposes, which had an immaterial impact during both periods; inflation swaps were utilized to manage inflation protection.
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 INTERMEDIATE BOND PORTFOLIO |
DISCLOSURES AND RISKS
Benchmark Disclosure
The unmanaged Barclays US Aggregate Bond Index does not reflect fees and expenses associated with the active management of a mutual fund portfolio. The Barclays US Aggregate Bond Index represents the performance of securities within the US investment-grade fixed-rate bond market, with index components for government and 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 Portfolio.
A Word About Risk
Market Risk: The value of the Portfolio’s assets will fluctuate as the stock or bond market fluctuates. The value of its 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 investments in fixed-income securities tends to fall and this decrease in value may not be offset by higher income from new investments. The Portfolio may be subject to a heightened risk of rising interest rates due to the current period of historically low rates and the effect of government fiscal policy initiatives, including Federal Reserve actions, and market reaction to these initiatives. The current period of historically low rates is expected to end and rates are expected to begin rising in the near future. Interest rate risk is generally greater for fixed-income securities with longer maturities or durations.
Duration Risk: Duration is a measure that relates the expected price volatility of a fixed-income security to changes in interest rates. The duration of a fixed-income security may be shorter than or equal to full maturity of a fixed-income security. Fixed-income securities with longer durations have more risk and will decrease in price as interest rates rise. For example, a fixed-income security with a duration of three years will decrease in value by approximately 3% if interest rates increase by 1%.
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”) are subject to 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, 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 if the Portfolio invests a significant portion of its assets in 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.
(Disclosures, Risks and Note about Historical Performance continued on next page)
AB INTERMEDIATE BOND PORTFOLIO • | 3 |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
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 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.
Leverage Risk: To the extent the Portfolio uses leveraging techniques, its net asset value (“NAV”) may be more volatile because leverage tends to exaggerate the effects of changes in interest rates and any increase or decrease in the value of the Portfolio’s investments.
Derivatives Risk: Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Portfolio, and may be subject to counterparty risk to a greater degree than more traditional investments.
Liquidity Risk: Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Portfolio. Causes of liquidity risk may include low trading volumes, large positions and heavy redemptions of Fund shares. Over recent years liquidity risk has also increased because the capacity of dealers in the secondary market for fixed-income securities to make markets in these securities has decreased, even as the overall bond market has grown significantly, due to, among other things, structural changes, additional regulatory requirements and capital and risk restraints that have led to reduced inventories. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
Management Risk: The Portfolio 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 Portfolio’s prospectus. As with all investments, you may lose money by investing in the Portfolio.
An Important Note About Historical Performance
The investment return and principal value of an investment in the Portfolio will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. 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 visiting www.abglobal.com.
All fees and expenses related to the operation of the Portfolio have been deducted. NAV returns do not reflect sales charges; if sales charges were reflected, the Portfolio’s quoted performance would be lower. SEC returns reflect the applicable sales charges for each share class: a 4.25% maximum front-end sales charge for Class A shares; the applicable contingent deferred sales charge for Class B shares (3% year 1, 2% year 2, 1% year 3); a 1% 1-year contingent deferred sales charge for Class C shares. Returns for the different share classes will vary due to different expenses associated with each class. Performance assumes reinvestment of distributions and does not account for taxes.
4 | • AB INTERMEDIATE BOND PORTFOLIO |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE PORTFOLIO VS. ITS BENCHMARK PERIODS ENDED OCTOBER 31, 2015 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB Intermediate Bond Portfolio | ||||||||||
Class A | -0.57% | 1.45% | ||||||||
| ||||||||||
Class B* | -0.94% | 0.72% | ||||||||
| ||||||||||
Class C | -0.94% | 0.73% | ||||||||
| ||||||||||
Advisor Class† | -0.44% | 1.73% | ||||||||
| ||||||||||
Class R † | -0.69% | 1.23% | ||||||||
| ||||||||||
Class K † | -0.57% | 1.57% | ||||||||
| ||||||||||
Class I † | -0.44% | 1.73% | ||||||||
| ||||||||||
Class Z† | -0.44% | 1.72% | ||||||||
| ||||||||||
Barclays US Aggregate Bond Index | -0.10% | 1.96% | ||||||||
| ||||||||||
* Effective January 31, 2009, Class B shares are no longer available for purchase to new investors. Please see Note A for additional information.
† Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Portfolio. | ||||||||||
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance continued on next page)
AB INTERMEDIATE BOND PORTFOLIO • | 5 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
GROWTH OF A $10,000 INVESTMENT IN THE PORTFOLIO 10/31/05 TO 10/31/15 (unaudited)
This chart illustrates the total value of an assumed $10,000 investment in AB Intermediate Bond Portfolio Class A shares (from 10/31/05 to 10/31/15) as compared to the performance of the Portfolio’s benchmark. The chart reflects the deduction of the maximum 4.25% sales charge from the initial $10,000 investment in the Portfolio and assumes the reinvestment of dividends and capital gains distributions.
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance continued on next page)
6 | • AB INTERMEDIATE BOND PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF OCTOBER 31, 2015 (unaudited) | ||||||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | SEC Yields* | ||||||||||
Class A Shares | 2.06 | % | ||||||||||
1 Year | 1.45 | % | -2.87 | % | ||||||||
5 Years | 3.24 | % | 2.34 | % | ||||||||
10 Years | 4.67 | % | 4.21 | % | ||||||||
Class B Shares | 1.39 | % | ||||||||||
1 Year | 0.72 | % | -2.23 | % | ||||||||
5 Years | 2.53 | % | 2.53 | % | ||||||||
10 Years(a) | 4.29 | % | 4.29 | % | ||||||||
Class C Shares | 1.41 | % | ||||||||||
1 Year | 0.73 | % | -0.26 | % | ||||||||
5 Years | 2.53 | % | 2.53 | % | ||||||||
10 Years | 3.95 | % | 3.95 | % | ||||||||
Advisor Class Shares† | 2.40 | % | ||||||||||
1 Year | 1.73 | % | 1.73 | % | ||||||||
5 Years | 3.52 | % | 3.52 | % | ||||||||
10 Years | 4.98 | % | 4.98 | % | ||||||||
Class R Shares† | 1.76 | % | ||||||||||
1 Year | 1.23 | % | 1.23 | % | ||||||||
5 Years | 3.03 | % | 3.03 | % | ||||||||
10 Years | 4.45 | % | 4.45 | % | ||||||||
Class K Shares† | 2.07 | % | ||||||||||
1 Year | 1.57 | % | 1.57 | % | ||||||||
5 Years | 3.29 | % | 3.29 | % | ||||||||
10 Years | 4.71 | % | 4.71 | % | ||||||||
Class I Shares† | 2.39 | % | ||||||||||
1 Year | 1.73 | % | 1.73 | % | ||||||||
5 Years | 3.52 | % | 3.52 | % | ||||||||
10 Years | 4.97 | % | 4.97 | % | ||||||||
Class Z Shares† | 2.48 | % | ||||||||||
1 Year | 1.72 | % | 1.72 | % | ||||||||
Since Inception‡ | 2.86 | % | 2.86 | % |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance and footnotes continued on next page)
AB INTERMEDIATE BOND PORTFOLIO • | 7 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
The Portfolio’s prospectus fee table shows the Portfolio’s total annual operating expense ratios as 1.01%, 1.78%, 1.77%, 0.75%, 1.36%, 1.03%, 0.75% and 0.66% for Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I and Class Z shares, respectively, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements limit the Portfolio’s annual operating expense ratios to 0.85%, 1.60%, 1.60%, 0.60%, 1.10%, 0.85%, 0.60% and 0.60% for Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I and Class Z shares, respectively. These waivers/reimbursements may not be terminated before January 29, 2016 and may be extended by the Adviser for additional one-year terms. Absent reimbursements or waivers, performance would have been lower. The Financial Highlights section of this report sets forth expense ratio data for the current reporting period; the expense ratios shown above may differ from the expense ratios in the Financial Highlights sections since they are based on different time periods.
* | SEC yields are calculated based on SEC guidelines for the 30-day period ended October 31, 2015. |
(a) | Assumes conversion of Class B shares into Class A shares after six years. |
† | These share classes are offered at NAV to eligible investors and their SEC returns are the same as their NAV returns. Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Portfolio. |
‡ | Inception date: 4/25/2014. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance continued on next page)
8 | • AB INTERMEDIATE BOND PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END SEPTEMBER 30, 2015 (unaudited) | ||||
SEC Returns (reflects applicable sales charges) | ||||
Class A Shares | ||||
1 Year | -2.38 | % | ||
5 Years | 2.42 | % | ||
10 Years | 4.10 | % | ||
Class B Shares | ||||
1 Year | -1.70 | % | ||
5 Years | 2.61 | % | ||
10 Years(a) | 4.17 | % | ||
Class C Shares | ||||
1 Year | 0.29 | % | ||
5 Years | 2.61 | % | ||
10 Years | 3.84 | % | ||
Advisor Class Shares† | ||||
1 Year | 2.20 | % | ||
5 Years | 3.60 | % | ||
10 Years | 4.87 | % | ||
Class R Shares† | ||||
1 Year | 1.78 | % | ||
5 Years | 3.11 | % | ||
10 Years | 4.35 | % | ||
Class K Shares† | ||||
1 Year | 2.04 | % | ||
5 Years | 3.37 | % | ||
10 Years | 4.61 | % | ||
Class I Shares† | ||||
1 Year | 2.19 | % | ||
5 Years | 3.60 | % | ||
10 Years | 4.87 | % | ||
Class Z Shares† | ||||
1 Year | 2.29 | % | ||
Since Inception‡ | 2.88 | % |
(a) | Assumes conversion of Class B shares into Class A shares after six years. |
† | Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Portfolio. |
‡ | Inception date: 4/25/2014. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
AB INTERMEDIATE BOND PORTFOLIO • | 9 |
Historical Performance
EXPENSE EXAMPLE
(unaudited)
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions and (2) ongoing costs, including management fees; distribution (12b-1) fees; and other Fund expenses. 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, 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 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 also 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* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 994.30 | $ | 4.32 | 0.86 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.87 | $ | 4.38 | 0.86 | % | ||||||||
Class B | ||||||||||||||||
Actual | $ | 1,000 | $ | 990.60 | $ | 8.03 | 1.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,017.14 | $ | 8.13 | 1.60 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 990.60 | $ | 8.03 | 1.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,017.14 | $ | 8.13 | 1.60 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 995.60 | $ | 3.02 | 0.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.18 | $ | 3.06 | 0.60 | % | ||||||||
Class R | ||||||||||||||||
Actual | $ | 1,000 | $ | 993.10 | $ | 5.53 | 1.10 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.66 | $ | 5.60 | 1.10 | % | ||||||||
Class K | ||||||||||||||||
Actual | $ | 1,000 | $ | 994.30 | $ | 4.27 | 0.85 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.92 | $ | 4.33 | 0.85 | % | ||||||||
Class I | ||||||||||||||||
Actual | $ | 1,000 | $ | 995.60 | $ | 3.02 | 0.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.18 | $ | 3.06 | 0.60 | % | ||||||||
Class Z | ||||||||||||||||
Actual | $ | 1,000 | $ | 995.60 | $ | 3.02 | 0.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.18 | $ | 3.06 | 0.60 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
10 | • AB INTERMEDIATE BOND PORTFOLIO |
Expense Example
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $330.5
TOP TEN SECTORS (including derivatives)*
Corporates – Investment Grade | 24.4 | % | ||
Governments – Treasuries(a) | 22.4 | |||
Asset-Backed Securities | 16.1 | |||
Mortgage Pass-Throughs | 15.7 | |||
Commercial Mortgage-Backed Securities | 13.4 | |||
Collateralized Mortgage Obligations | 6.3 | |||
Corporates – Non Investment Grade(b) | 5.5 | |||
Inflation-Linked Securities(c) | 1.7 | |||
Quasi-Sovereigns | 0.9 | |||
Interest Rate Swaps(d) | -27.3 |
SECTOR BREAKDOWN (excluding derivatives)**
Corporates – Investment Grade | 23.0 | % | ||
Asset-Backed Securities | 15.5 | |||
Mortgage Pass-Throughs | 15.1 | |||
Commercial Mortgage-Backed Securities | 12.8 | |||
Governments – Treasuries | 11.3 | |||
Corporates – Non-Investment Grade | 6.3 | |||
Collateralized Mortgage Obligations | 6.0 | |||
Inflation-Linked Securities | 3.2 |
Quasi-Sovereigns | 0.9 | % | ||
Governments – Sovereign Agencies | 0.5 | |||
Local Governments – Municipal Bonds | 0.4 | |||
Common Stocks | 0.4 | |||
Preferred Stocks | 0.2 | |||
Short-Term | 4.3 | |||
Other | 0.1 | |||
|
| |||
100.0 | % | |||
|
|
* | All data are as of October 31, 2015. The Portfolio’s sectors include derivative exposure and are expressed as approximate percentages of the Portfolio’s total net assets, based on the Adviser’s internal classification. The percentages will vary over time. |
(a) | Includes Treasury Futures. |
(b) | Includes Credit Default Swaps. |
(c) | Includes Inflation (CPI) Swaps. |
(d) | Represents the exposure of the Portfolio’s fixed-rate payments on the Interest Rate Swaps. Interest Rate Swaps involve the exchange by a fund with another party of payments calculated by reference to specified interest rates (e.g., an exchange of floating-rate payments for fixed-rate payments). |
** | All data are as of October 31, 2015. The Portfolio’s sector breakdown is expressed as a percentage of total investments and may vary over time. The Portfolio 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). “Other” represents the following categories: Emerging Markets – Corporate Bonds and Governments – Sovereign Bonds. |
AB INTERMEDIATE BOND PORTFOLIO • | 11 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
October 31, 2015
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
CORPORATES – INVESTMENT GRADE – 23.9% | ||||||||||
Industrial – 15.2% | ||||||||||
Basic – 1.1% | ||||||||||
Barrick Gold Corp. | U.S.$ | 210 | $ | 195,058 | ||||||
Eastman Chemical Co. | 290 | 288,439 | ||||||||
Freeport-McMoran Oil & Gas LLC/FCX | 119 | 107,844 | ||||||||
Glencore Funding LLC | 286 | 230,945 | ||||||||
International Paper Co. | 133 | 131,529 | ||||||||
3.80%, 1/15/26 | 279 | 278,404 | ||||||||
4.75%, 2/15/22 | 194 | 208,274 | ||||||||
5.15%, 5/15/46 | 106 | 103,943 | ||||||||
LyondellBasell Industries NV | 766 | 867,549 | ||||||||
Minsur SA | 335 | 351,891 | ||||||||
Mosaic Co. (The) | 244 | 255,837 | ||||||||
Sociedad Quimica y Minera de Chile SA | 562 | 477,700 | ||||||||
Vale Overseas Ltd. | 180 | 146,538 | ||||||||
|
| |||||||||
3,643,951 | ||||||||||
|
| |||||||||
Capital Goods – 0.3% | ||||||||||
Odebrecht Finance Ltd. | 541 | 313,104 | ||||||||
Owens Corning | 55 | 58,379 | ||||||||
Yamana Gold, Inc. | 724 | 664,279 | ||||||||
|
| |||||||||
1,035,762 | ||||||||||
|
| |||||||||
Communications - Media – 2.4% | ||||||||||
21st Century Fox America, Inc. | 902 | 1,044,605 | ||||||||
6.55%, 3/15/33 | 142 | 169,362 | ||||||||
CBS Corp. | 290 | 282,598 | ||||||||
5.75%, 4/15/20 | 710 | 795,710 | ||||||||
CCO Safari II LLC | 435 | 442,170 | ||||||||
Cox Communications, Inc. | 233 | 209,765 |
12 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Discovery Communications LLC | U.S.$ | 467 | $ | 435,943 | ||||||
McGraw Hill Financial, Inc. | 584 | 597,736 | ||||||||
NBCUniversal Enterprise, Inc. | 604 | 643,260 | ||||||||
Time Warner Cable, Inc. | 230 | 186,293 | ||||||||
5.00%, 2/01/20 | 740 | 791,736 | ||||||||
Time Warner, Inc. | 518 | 515,807 | ||||||||
4.70%, 1/15/21 | 600 | 653,046 | ||||||||
7.625%, 4/15/31 | 154 | 196,747 | ||||||||
Viacom, Inc. | 803 | 761,509 | ||||||||
5.625%, 9/15/19 | 240 | 263,476 | ||||||||
|
| |||||||||
7,989,763 | ||||||||||
|
| |||||||||
Communications - | ||||||||||
American Tower Corp. | 1,185 | 1,288,153 | ||||||||
AT&T, Inc. | 1,275 | 1,237,238 | ||||||||
Deutsche Telekom International Finance BV | 50 | 51,642 | ||||||||
DIRECTV Holdings LLC/DIRECTV Financing Co., Inc. | 252 | 258,027 | ||||||||
4.45%, 4/01/24 | 349 | 359,872 | ||||||||
4.60%, 2/15/21 | 565 | 606,327 | ||||||||
5.00%, 3/01/21 | 225 | 245,968 | ||||||||
Rogers Communications, Inc. | CAD | 130 | 104,550 | |||||||
Telefonica Emisiones SAU | U.S.$ | 520 | 580,310 | |||||||
Verizon Communications, Inc. | 1,240 | 1,484,315 | ||||||||
|
| |||||||||
6,216,402 | ||||||||||
|
| |||||||||
Consumer Cyclical - Automotive – 1.0% | ||||||||||
Ford Motor Credit Co. LLC | 603 | 599,517 | ||||||||
5.875%, 8/02/21 | 1,291 | 1,471,584 | ||||||||
General Motors Co. | 340 | 345,647 | ||||||||
General Motors Financial Co., Inc. | 560 | 561,856 | ||||||||
3.25%, 5/15/18 | 43 | 43,523 | ||||||||
4.00%, 1/15/25 | 106 | 103,930 | ||||||||
4.30%, 7/13/25 | 135 | 137,387 | ||||||||
|
| |||||||||
3,263,444 | ||||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 13 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Cyclical - Retailers – 0.7% | ||||||||||
CVS Health Corp. | U.S.$ | 665 | $ | 683,983 | ||||||
Kohl’s Corp. | 839 | 832,586 | ||||||||
Walgreens Boots Alliance, Inc. | 885 | 878,367 | ||||||||
|
| |||||||||
2,394,936 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 3.6% | ||||||||||
AbbVie, Inc. | 437 | 429,583 | ||||||||
Actavis Funding SCS | 770 | 763,022 | ||||||||
3.85%, 6/15/24 | 238 | 236,831 | ||||||||
Agilent Technologies, Inc. | 217 | 233,200 | ||||||||
Altria Group, Inc. | 885 | 893,332 | ||||||||
AstraZeneca PLC | 235 | 306,906 | ||||||||
Baxalta, Inc. | 335 | 341,189 | ||||||||
Bayer US Finance LLC | 321 | 323,210 | ||||||||
Becton Dickinson and Co. | 388 | 396,985 | ||||||||
Biogen, Inc. | 683 | 691,423 | ||||||||
Bunge Ltd. Finance Corp. | 6 | 7,096 | ||||||||
Celgene Corp. | 735 | 736,937 | ||||||||
Gilead Sciences, Inc. | 656 | 663,221 | ||||||||
Grupo Bimbo SAB de CV | 538 | 530,344 | ||||||||
Kraft Heinz Foods Co. | 335 | 336,303 | ||||||||
3.50%, 7/15/22(a) | 430 | 438,228 | ||||||||
Kroger Co. (The) | 916 | 934,152 | ||||||||
Laboratory Corp. of America Holdings | 265 | 257,929 | ||||||||
Medtronic, Inc. | 890 | 911,357 | ||||||||
Perrigo Finance PLC | 217 | 212,322 | ||||||||
3.90%, 12/15/24 | 360 | 346,451 |
14 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Reynolds American, Inc. | U.S.$ | 616 | $ | 612,892 | ||||||
5.85%, 8/15/45 | 202 | 224,085 | ||||||||
Thermo Fisher Scientific, Inc. | 383 | 400,363 | ||||||||
Tyson Foods, Inc. | 164 | 165,283 | ||||||||
3.95%, 8/15/24 | 541 | 552,316 | ||||||||
|
| |||||||||
11,944,960 | ||||||||||
|
| |||||||||
Energy – 3.2% | ||||||||||
Diamond Offshore Drilling, Inc. | 292 | 205,662 | ||||||||
Encana Corp. | 415 | 385,941 | ||||||||
Energy Transfer Partners LP | 411 | 446,697 | ||||||||
7.50%, 7/01/38 | 237 | 246,768 | ||||||||
EnLink Midstream Partners LP | 562 | 453,229 | ||||||||
Enterprise Products Operating LLC | 735 | 698,613 | ||||||||
5.20%, 9/01/20 | 235 | 258,353 | ||||||||
Kinder Morgan Energy Partners LP | 1,460 | 1,358,933 | ||||||||
4.15%, 3/01/22 | 339 | 323,142 | ||||||||
Noble Energy, Inc. | 463 | 440,719 | ||||||||
8.25%, 3/01/19 | 1,232 | 1,435,142 | ||||||||
Noble Holding International Ltd. | 34 | 29,202 | ||||||||
Plains All American Pipeline LP/PAA Finance Corp. | 594 | 554,766 | ||||||||
Regency Energy Partners LP/Regency Energy Finance Corp. | 135 | 123,905 | ||||||||
5.75%, 9/01/20 | 420 | 445,316 | ||||||||
Reliance Holding USA, Inc. | 636 | 697,116 | ||||||||
Sunoco Logistics Partners Operations LP | 460 | 364,554 | ||||||||
TransCanada PipeLines Ltd. | 831 | 689,730 | ||||||||
Valero Energy Corp. | 770 | 871,401 | ||||||||
Williams Partners LP | 403 | 402,243 | ||||||||
|
| |||||||||
10,431,432 | ||||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 15 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Other Industrial – 0.1% | ||||||||||
Hutchison Whampoa International 14 Ltd. | U.S.$ | 340 | $ | 339,080 | ||||||
|
| |||||||||
Technology – 0.9% | ||||||||||
Hewlett Packard Enterprise Co. | 825 | 815,220 | ||||||||
Hewlett-Packard Co. | 266 | 276,417 | ||||||||
KLA-Tencor Corp. | 614 | 618,270 | ||||||||
Motorola Solutions, Inc. | 413 | 368,376 | ||||||||
7.50%, 5/15/25 | 30 | 33,996 | ||||||||
Seagate HDD Cayman | 336 | 301,772 | ||||||||
Total System Services, Inc. | 344 | 343,783 | ||||||||
3.75%, 6/01/23 | 350 | 342,061 | ||||||||
|
| |||||||||
3,099,895 | ||||||||||
|
| |||||||||
50,359,625 | ||||||||||
|
| |||||||||
Financial Institutions – 7.5% | ||||||||||
Banking – 4.4% | ||||||||||
ABN AMRO Bank NV | 272 | 274,281 | ||||||||
Bank of America Corp. | 1,053 | 1,065,421 | ||||||||
Barclays Bank PLC | EUR | 333 | 462,768 | |||||||
Barclays PLC | U.S.$ | 389 | 376,211 | |||||||
BPCE SA | 230 | 246,237 | ||||||||
Compass Bank | 1,339 | 1,427,903 | ||||||||
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA/Netherlands | 500 | 510,129 | ||||||||
Countrywide Financial Corp. | 62 | 63,654 | ||||||||
Credit Suisse Group Funding Guernsey Ltd. | 1,035 | 1,011,898 | ||||||||
Goldman Sachs Group, Inc. (The) | 254 | 255,844 | ||||||||
3.85%, 7/08/24 | 905 | 923,201 | ||||||||
Series D | 1,430 | 1,638,132 |
16 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Mizuho Financial Group Cayman 3 Ltd. | U.S.$ | 812 | $ | 832,845 | ||||||
Morgan Stanley | 478 | 532,582 | ||||||||
Series G | 825 | 848,388 | ||||||||
5.50%, 7/24/20 | 590 | 662,783 | ||||||||
Murray Street Investment Trust I | 125 | 129,970 | ||||||||
Rabobank Capital Funding Trust III | 430 | 437,998 | ||||||||
Santander UK PLC | 500 | 521,460 | ||||||||
Standard Chartered PLC | 1,310 | 1,328,628 | ||||||||
UBS AG/Stamford CT | 620 | 717,080 | ||||||||
UBS Group Funding Jersey Ltd. | 436 | 437,529 | ||||||||
|
| |||||||||
14,704,942 | ||||||||||
|
| |||||||||
Finance – 0.2% | ||||||||||
Aviation Capital Group Corp. | 552 | 637,530 | ||||||||
|
| |||||||||
Insurance – 2.5% | ||||||||||
American International Group, Inc. | 680 | 802,930 | ||||||||
8.175%, 5/15/58 | 940 | 1,240,800 | ||||||||
Dai-ichi Life Insurance Co., Ltd. (The) | 393 | 407,738 | ||||||||
Guardian Life Insurance Co. of America (The) | 542 | 711,825 | ||||||||
Hartford Financial Services Group, Inc. (The) | 726 | 811,327 | ||||||||
Lincoln National Corp. | 361 | 441,279 | ||||||||
MetLife Capital Trust IV | 699 | 866,760 | ||||||||
Nationwide Mutual Insurance Co. | 246 | 371,884 | ||||||||
Prudential Financial, Inc. | 920 | 962,780 | ||||||||
Swiss Reinsurance Co. via ELM BV | EUR | 850 | 952,036 | |||||||
ZFS Finance USA Trust V | U.S.$ | 538 | 550,105 | |||||||
|
| |||||||||
8,119,464 | ||||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 17 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
REITS – 0.4% | ||||||||||
Host Hotels & Resorts LP | U.S.$ | 545 | $ | 585,226 | ||||||
Trust F/1401 | 830 | 859,050 | ||||||||
|
| |||||||||
1,444,276 | ||||||||||
|
| |||||||||
24,906,212 | ||||||||||
|
| |||||||||
Utility – 1.2% | ||||||||||
Electric – 0.8% | ||||||||||
CMS Energy Corp. | 440 | 488,203 | ||||||||
Constellation Energy Group, Inc. | 260 | 284,206 | ||||||||
Entergy Corp. | 582 | 598,136 | ||||||||
Exelon Corp. | 320 | 329,357 | ||||||||
Exelon Generation Co. LLC | 337 | 343,400 | ||||||||
TECO Finance, Inc. | 380 | 414,808 | ||||||||
|
| |||||||||
2,458,110 | ||||||||||
|
| |||||||||
Natural Gas – 0.4% | ||||||||||
Talent Yield Investments Ltd. | 1,365 | 1,423,254 | ||||||||
|
| |||||||||
3,881,364 | ||||||||||
|
| |||||||||
Total Corporates – Investment Grade | 79,147,201 | |||||||||
|
| |||||||||
MORTGAGE PASS-THROUGHS – 16.2% | ||||||||||
Agency ARMs – 0.0% | ||||||||||
Federal Home Loan Mortgage Corp. | 67 | 71,673 | ||||||||
�� |
|
| ||||||||
Agency Fixed Rate 15-Year – 1.7% | ||||||||||
Federal National Mortgage Association | 2,245 | 2,287,448 | ||||||||
3.50%, 11/01/30, TBA | 3,193 | 3,371,608 | ||||||||
|
| |||||||||
5,659,056 | ||||||||||
|
| |||||||||
Agency Fixed Rate 30-Year – 14.5% | ||||||||||
Federal Home Loan Mortgage Corp. Gold | 3,392 | 3,663,160 | ||||||||
Series 2005 | 391 | 440,186 | ||||||||
Series 2007 | 51 | 57,281 |
18 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Federal National Mortgage Association | U.S.$ | 14,000 | $ | 14,717,313 | ||||||
3.50%, 11/01/45, TBA | 571 | 594,331 | ||||||||
4.00%, 10/01/44-12/01/44 | 5,144 | 5,565,559 | ||||||||
4.50%, 11/25/45, TBA | 6,312 | 6,839,644 | ||||||||
5.50%, 1/01/35 | 1,041 | 1,176,484 | ||||||||
Series 2003 | 379 | 427,949 | ||||||||
Series 2004 | 218 | 246,243 | ||||||||
Series 2005 | 163 | 183,541 | ||||||||
Series 2007 | 711 | 802,463 | ||||||||
Government National Mortgage Association | 4,856 | 4,961,087 | ||||||||
3.50%, 12/01/45, TBA | 4,865 | 5,086,966 | ||||||||
4.50%, 7/20/45 | 2,909 | 3,131,622 | ||||||||
Series 1990 | – 0 | –** | 34 | |||||||
Series 1999 | 48 | 52,622 | ||||||||
|
| |||||||||
47,946,485 | ||||||||||
|
| |||||||||
Total Mortgage Pass-Throughs | 53,677,214 | |||||||||
|
| |||||||||
ASSET-BACKED SECURITIES – 16.1% | ||||||||||
Autos - Fixed Rate – 9.9% | ||||||||||
Ally Auto Receivables Trust | 824 | 824,701 | ||||||||
Ally Master Owner Trust | 1,409 | 1,409,433 | ||||||||
Series 2015-3, Class A | 1,226 | 1,224,042 | ||||||||
AmeriCredit Automobile Receivables Trust | 778 | 778,174 | ||||||||
Series 2013-3, Class A3 | 760 | 760,169 | ||||||||
Series 2013-4, Class A3 | 338 | 338,563 | ||||||||
ARI Fleet Lease Trust | 212 | 212,146 |
AB INTERMEDIATE BOND PORTFOLIO • | 19 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Avis Budget Rental Car Funding AESOP LLC | U.S.$ | 1,005 | $ | 1,010,289 | ||||||
Series 2014-1A, Class A | 1,769 | 1,793,053 | ||||||||
Bank of The West Auto Trust | 1,182 | 1,183,364 | ||||||||
California Republic Auto Receivables Trust | 546 | 545,590 | ||||||||
Series 2015-2, Class A3 | 542 | 538,594 | ||||||||
Capital Auto Receivables Asset Trust | 220 | 221,564 | ||||||||
CarMax Auto Owner Trust | 497 | 496,976 | ||||||||
CPS Auto Receivables Trust | 320 | 320,009 | ||||||||
Series 2014-B, Class A | 282 | 281,664 | ||||||||
Drive Auto Receivables Trust | 461 | 460,994 | ||||||||
Series 2015-CA, Class A2A | 382 | 381,942 | ||||||||
Series 2015-DA, Class A2A | 494 | 493,974 | ||||||||
Enterprise Fleet Financing LLC | 253 | 253,229 | ||||||||
Series 2015-1, Class A2 | 1,210 | 1,208,336 | ||||||||
Exeter Automobile Receivables Trust | 1 | 519 | ||||||||
Series 2014-1A, Class A | 98 | 98,356 | ||||||||
Series 2014-2A, Class A | 104 | 104,230 | ||||||||
Fifth Third Auto Trust | 721 | 718,804 | ||||||||
Flagship Credit Auto Trust | 65 | 65,200 |
20 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Ford Credit Auto Lease Trust | U.S.$ | 644 | $ | 643,913 | ||||||
Ford Credit Auto Owner Trust | 523 | 522,980 | ||||||||
Series 2012-D, Class B | 440 | 438,666 | ||||||||
Series 2014-2, Class A | 322 | 324,048 | ||||||||
Ford Credit Floorplan Master Owner Trust | 906 | 899,861 | ||||||||
Ford Credit Floorplan Master Owner Trust A | 993 | 993,261 | ||||||||
GM Financial Automobile Leasing Trust | 1,149 | 1,152,033 | ||||||||
Series 2015-2, Class A3 | 1,080 | 1,079,822 | ||||||||
Series 2015-3, Class A3 | 1,155 | 1,152,555 | ||||||||
GMF Floorplan Owner Revolving Trust | 575 | 572,768 | ||||||||
Harley-Davidson Motorcycle Trust | 494 | 494,905 | ||||||||
Hertz Vehicle Financing LLC | 880 | 878,455 | ||||||||
Series 2013-1A, Class A2 | 2,370 | 2,366,569 | ||||||||
Hyundai Auto Lease Securitization Trust | 832 | 832,325 | ||||||||
Series 2015-B, Class A3 | 539 | 540,250 | ||||||||
Mercedes Benz Auto Lease Trust | 622 | 621,976 | ||||||||
Nissan Auto Lease Trust | 1,001 | 1,005,331 | ||||||||
Santander Drive Auto Receivables Trust | 84 | 83,815 | ||||||||
Series 2015-3, Class A2A | 578 | 578,103 | ||||||||
Series 2015-4,Class A2A | 548 | 547,551 |
AB INTERMEDIATE BOND PORTFOLIO • | 21 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
TCF Auto Receivables Owner Trust | U.S.$ | 777 | $ | 776,291 | ||||||
Westlake Automobile Receivables Trust | 557 | 556,817 | ||||||||
|
| |||||||||
32,786,210 | ||||||||||
|
| |||||||||
Credit Cards - Fixed Rate – 2.3% | ||||||||||
American Express Credit Account Master Trust | 400 | 401,413 | ||||||||
Barclays Dryrock Issuance Trust | 1,119 | 1,148,798 | ||||||||
Series 2015-2, Class A | 703 | 707,613 | ||||||||
Series 2015-4, Class A | 630 | 629,859 | ||||||||
Discover Card Execution Note Trust | 1,101 | 1,099,878 | ||||||||
Synchrony Credit Card Master Note Trust | 1,050 | 1,063,926 | ||||||||
Series 2015-3, Class A | 859 | 858,363 | ||||||||
World Financial Network Credit Card Master Trust | 890 | 895,292 | ||||||||
Series 2013-A, Class A | 570 | 571,089 | ||||||||
|
| |||||||||
7,376,231 | ||||||||||
|
| |||||||||
Other ABS - Fixed Rate – 1.4% | ||||||||||
Ascentium Equipment Receivables LLC | 1,054 | 1,054,000 | ||||||||
CIT Equipment Collateral | 722 | 723,521 | ||||||||
Series 2014-VT1, Class A2 | 816 | 816,004 | ||||||||
CNH Equipment Trust | 616 | 616,890 | ||||||||
Dell Equipment Finance Trust | 388 | 386,052 | ||||||||
Series 2015-2, Class A2A | 278 | 277,988 |
22 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
GE Equipment Small Ticket LLC | U.S.$ | 151 | $ | 150,850 | ||||||
SBA Tower Trust | 688 | 687,725 | ||||||||
|
| |||||||||
4,713,030 | ||||||||||
|
| |||||||||
Autos - Floating Rate – 1.3% | ||||||||||
BMW Floorplan Master Owner Trust | 997 | 992,059 | ||||||||
GE Dealer Floorplan Master Note Trust | 537 | 534,030 | ||||||||
Series 2015-1, Class A | 1,073 | 1,065,203 | ||||||||
Hertz Fleet Lease Funding LP | 677 | 677,807 | ||||||||
Navistar Financial Dealer Note Master Trust | 719 | 716,317 | ||||||||
Volkswagen Credit Auto Master Trust | 340 | 335,808 | ||||||||
|
| |||||||||
4,321,224 | ||||||||||
|
| |||||||||
Credit Cards - Floating Rate – 1.0% | ||||||||||
Discover Card Execution Note Trust | 964 | 960,880 | ||||||||
First National Master Note Trust | 882 | 882,255 | ||||||||
World Financial Network Credit Card Master Trust | 865 | 865,292 | ||||||||
Series 2015-A, Class A | 681 | 678,552 | ||||||||
|
| |||||||||
3,386,979 | ||||||||||
|
| |||||||||
Home Equity Loans - Floating Rate – 0.2% | ||||||||||
Asset Backed Funding Certificates Trust | 49 | 47,358 | ||||||||
GSAA Trust | 890 | 603,973 | ||||||||
|
| |||||||||
651,331 | ||||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 23 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Home Equity Loans - Fixed Rate – 0.0% | ||||||||||
Credit-Based Asset Servicing and Securitization LLC | U.S.$ | 97 | $ | 97,809 | ||||||
Nationstar NIM Ltd. | 18 | – 0 | – | |||||||
|
| |||||||||
97,809 | ||||||||||
|
| |||||||||
Total Asset-Backed Securities | 53,332,814 | |||||||||
|
| |||||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES – 13.4% | ||||||||||
Non-Agency Fixed Rate CMBS – 11.9% | ||||||||||
Banc of America Commercial Mortgage Trust | 1,687 | 1,778,541 | ||||||||
Series 2007-5, Class AM | 411 | 430,499 | ||||||||
Bear Stearns Commercial Mortgage Securities Trust | 538 | 542,662 | ||||||||
BHMS Mortgage Trust | 890 | 907,869 | ||||||||
CGRBS Commercial Mortgage Trust | 1,305 | 1,333,981 | ||||||||
Citigroup Commercial Mortgage Trust | 278 | 281,165 | ||||||||
Series 2013-GC17, Class D | 565 | 521,845 | ||||||||
Series 2015-GC27, Class A5 | 698 | 692,666 | ||||||||
COBALT CMBS Commercial Mortgage Trust | 611 | 644,534 | ||||||||
Commercial Mortgage Trust | 1,104 | 1,139,993 | ||||||||
Series 2007-GG9, Class A4 | 1,881 | 1,947,691 | ||||||||
Series 2007-GG9, Class AM | 829 | 858,011 | ||||||||
Series 2013-SFS, Class A1 | 521 | 510,235 |
24 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Credit Suisse Commercial Mortgage Trust | U.S.$ | 437 | $ | 447,271 | ||||||
CSAIL Commercial Mortgage Trust | 914 | 949,276 | ||||||||
DBUBS Mortgage Trust | 363 | 386,691 | ||||||||
Extended Stay America Trust | 890 | 887,643 | ||||||||
GS Mortgage Securities Corp. II | 1,269 | 1,290,418 | ||||||||
GS Mortgage Securities Trust | 530 | 554,293 | ||||||||
Series 2013-G1, Class A2 | 766 | 774,641 | ||||||||
JPMorgan Chase Commercial Mortgage Securities Trust | 276 | 274,942 | ||||||||
Series 2006-CB15, Class A4 | 1,970 | 1,991,165 | ||||||||
Series 2006-LDP9, Class AM | 356 | 363,820 | ||||||||
Series 2007-CB19, Class AM | 470 | 493,189 | ||||||||
Series 2007-LD12, Class A4 | 1,580 | 1,644,101 | ||||||||
Series 2007-LD12, Class AM | 795 | 843,820 | ||||||||
Series 2007-LDPX, Class A1A | 2,272 | 2,363,302 | ||||||||
Series 2008-C2, Class A1A | 701 | 750,187 | ||||||||
Series 2010-C2, Class A1 | 244 | 246,575 | ||||||||
Series 2011-C5, Class D | 262 | 272,787 | ||||||||
Series 2015-C32, Class C | 540 | 498,169 | ||||||||
JPMBB Commercial Mortgage Securities Trust | 964 | 1,008,160 |
AB INTERMEDIATE BOND PORTFOLIO • | 25 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
LSTAR Commercial Mortgage Trust | U.S.$ | 520 | $ | 528,647 | ||||||
Series 2015-3, Class A2 | 674 | 677,337 | ||||||||
Merrill Lynch Mortgage Trust | 755 | 772,437 | ||||||||
Merrill Lynch/Countrywide Commercial Mortgage Trust | 1,326 | 1,366,449 | ||||||||
Series 2007-9, Class A4 | 2,932 | 3,066,861 | ||||||||
Prudential Securities Secured Financing Corp. | 1,344 | 47 | ||||||||
UBS-Barclays Commercial Mortgage Trust | 552 | 563,525 | ||||||||
Series 2012-C4, Class A5 | 1,098 | 1,092,784 | ||||||||
Wachovia Bank Commercial Mortgage Trust | 1,345 | 1,348,140 | ||||||||
Series 2006-C26, Class A1A | 387 | 393,519 | ||||||||
WF-RBS Commercial Mortgage Trust | 170 | 165,536 | ||||||||
Series 2013-C14, Class A5 | 1,142 | 1,172,247 | ||||||||
Series 2014-C20, Class A2 | 546 | 563,730 | ||||||||
|
| |||||||||
39,341,401 | ||||||||||
|
| |||||||||
Non-Agency Floating Rate CMBS – 1.5% | ||||||||||
Carefree Portfolio Trust | 490 | 490,009 | ||||||||
Commercial Mortgage Trust | 647 | 643,699 | ||||||||
Series 2014-SAVA, Class A | 455 | 453,375 | ||||||||
H/2 Asset Funding NRE | 639 | 637,767 |
26 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
JPMorgan Chase Commercial Mortgage Securities Trust | U.S.$ | 902 | $ | 896,077 | ||||||
PFP III Ltd. | 205 | 204,316 | ||||||||
Resource Capital Corp., Ltd. | 383 | 380,713 | ||||||||
Starwood Retail Property Trust | 579 | 574,445 | ||||||||
Wells Fargo Commercial Mortgage Trust | 516 | 492,491 | ||||||||
|
| |||||||||
4,772,892 | ||||||||||
|
| |||||||||
Agency CMBS – 0.0% | ||||||||||
Government National Mortgage Association | 2,416 | 11,292 | ||||||||
|
| |||||||||
Total Commercial Mortgage-Backed Securities | 44,125,585 | |||||||||
|
| |||||||||
GOVERNMENTS – TREASURIES – 11.8% | ||||||||||
Brazil – 0.3% | ||||||||||
Brazil Notas do Tesouro Nacional | BRL | 4,630 | 1,136,239 | |||||||
|
| |||||||||
Canada – 1.0% | ||||||||||
Canadian Government Bond | CAD | 4,005 | 3,251,536 | |||||||
|
| |||||||||
United Kingdom – 0.8% | ||||||||||
United Kingdom Gilt | GBP | 1,461 | 2,548,588 | |||||||
|
| |||||||||
United States – 9.7% | ||||||||||
U.S. Treasury Bonds | U.S.$ | 1,151 | 1,048,385 | |||||||
2.875%, 8/15/45 | 800 | 790,461 | ||||||||
3.00%, 5/15/45 | 322 | 325,803 | ||||||||
3.125%, 8/15/44 | 10,677 | 11,074,161 | ||||||||
4.375%, 2/15/38 | 960 | 1,227,975 | ||||||||
U.S. Treasury Notes | 4,908 | 4,889,315 | ||||||||
1.50%, 5/31/19-11/30/19 | 2,941 | 2,958,217 |
AB INTERMEDIATE BOND PORTFOLIO • | 27 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
1.625%, 8/31/19 | U.S.$ | 2,155 | $ | 2,180,086 | ||||||
1.75%, 9/30/19-5/15/22 | 6,149 | 6,232,545 | ||||||||
2.25%, 11/15/24 | 1,187 | 1,199,533 | ||||||||
|
| |||||||||
31,926,481 | ||||||||||
|
| |||||||||
Total Governments – Treasuries | 38,862,844 | |||||||||
|
| |||||||||
CORPORATES – NON-INVESTMENT | ||||||||||
Industrial – 3.8% | ||||||||||
Basic – 0.4% | ||||||||||
Axalta Coating Systems US Holdings, Inc./Axalta Coating Systems Dutch Holding B | 700 | 740,250 | ||||||||
Novelis, Inc. | 75 | 75,562 | ||||||||
Teck Resources Ltd. | 750 | 510,000 | ||||||||
|
| |||||||||
1,325,812 | ||||||||||
|
| |||||||||
Capital Goods – 0.1% | ||||||||||
Rexam PLC | EUR | 360 | 395,874 | |||||||
|
| |||||||||
Communications - Media – 0.5% | ||||||||||
Arqiva Broadcast Finance PLC | GBP | 300 | 502,369 | |||||||
CSC Holdings LLC | U.S.$ | 118 | 125,375 | |||||||
Quebecor Media, Inc. | 391 | 400,775 | ||||||||
Unitymedia Hessen GmbH & Co. KG/Unitymedia NRW GmbH | 750 | 770,850 | ||||||||
|
| |||||||||
1,799,369 | ||||||||||
|
| |||||||||
Communications - | ||||||||||
Numericable-SFR SAS | EUR | 222 | 252,667 | |||||||
Sprint Capital Corp. | U.S.$ | 970 | 931,200 | |||||||
Wind Acquisition Finance SA | 700 | 738,500 | ||||||||
Windstream Services LLC | 750 | 594,375 | ||||||||
|
| |||||||||
2,516,742 | ||||||||||
|
| |||||||||
Consumer Cyclical - Automotive – 0.1% | ||||||||||
Goodyear Tire & Rubber Co. (The) | 158 | 165,268 | ||||||||
|
|
28 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Cyclical - Other – 0.1% | ||||||||||
KB Home | U.S.$ | 286 | $ | 281,251 | ||||||
MCE Finance Ltd. | 235 | 220,312 | ||||||||
|
| |||||||||
501,563 | ||||||||||
|
| |||||||||
Consumer Cyclical - Retailers – 0.3% | ||||||||||
Cash America International, Inc. | 295 | 297,212 | ||||||||
CST Brands, Inc. | 470 | 474,700 | ||||||||
Men’s Wearhouse, Inc. (The) | 379 | 394,160 | ||||||||
|
| |||||||||
1,166,072 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 0.5% | ||||||||||
First Quality Finance Co., Inc. | 475 | 440,562 | ||||||||
Priory Group No 3 PLC | GBP | 190 | 301,273 | |||||||
Valeant Pharmaceuticals International, Inc. | U.S.$ | 375 | 315,469 | |||||||
Voyage Care Bondco PLC | GBP | 320 | 503,178 | |||||||
|
| |||||||||
1,560,482 | ||||||||||
|
| |||||||||
Energy – 0.5% | ||||||||||
Global Partners LP/GLP Finance Corp. | U.S.$ | 361 | 332,120 | |||||||
ONEOK, Inc. | 877 | 752,028 | ||||||||
SM Energy Co. | 35 | 34,489 | ||||||||
Targa Resources Partners LP/Targa Resources Partners Finance Corp. | 440 | 426,800 | ||||||||
Transocean, Inc. | 355 | 284,298 | ||||||||
|
| |||||||||
1,829,735 | ||||||||||
|
| |||||||||
Other Industrial – 0.2% | ||||||||||
General Cable Corp. | 655 | 564,938 | ||||||||
|
| |||||||||
Technology – 0.3% | ||||||||||
Advanced Micro Devices, Inc. | 270 | 207,900 | ||||||||
Audatex North America, Inc. | 630 | 634,416 | ||||||||
|
| |||||||||
842,316 | ||||||||||
|
| |||||||||
12,668,171 | ||||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 29 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Financial Institutions – 2.2% | ||||||||||
Banking – 2.0% | ||||||||||
Bank of America Corp. | U.S.$ | 213 | $ | 222,587 | ||||||
Barclays Bank PLC | 129 | 147,705 | ||||||||
7.625%, 11/21/22 | 400 | 456,750 | ||||||||
7.75%, 4/10/23 | 402 | 436,673 | ||||||||
BNP Paribas SA | 330 | 341,550 | ||||||||
Credit Agricole SA | 249 | 255,225 | ||||||||
Credit Suisse Group AG | 363 | 382,965 | ||||||||
HBOS Capital Funding LP | EUR | 910 | 1,010,689 | |||||||
Intesa Sanpaolo SpA | U.S.$ | 569 | 569,917 | |||||||
LBG Capital No.1 PLC | 254 | 285,750 | ||||||||
Lloyds Banking Group PLC | 402 | 427,125 | ||||||||
Royal Bank of Scotland PLC (The) | 1,024 | 1,117,151 | ||||||||
Societe Generale SA | 130 | 132,519 | ||||||||
8.00%, 9/29/25(a)(c) | 330 | 334,658 | ||||||||
UniCredit Luxembourg Finance SA | 563 | 592,531 | ||||||||
|
| |||||||||
6,713,795 | ||||||||||
|
| |||||||||
Finance – 0.2% | ||||||||||
AerCap Aviation Solutions BV | 320 | 333,600 | ||||||||
International Lease Finance Corp. | 245 | 262,868 | ||||||||
Navient Corp. | 99 | 97,515 | ||||||||
|
| |||||||||
693,983 | ||||||||||
|
| |||||||||
7,407,778 | ||||||||||
|
| |||||||||
Utility – 0.4% | ||||||||||
Electric – 0.4% | ||||||||||
AES Corp./VA | 580 | 617,700 | ||||||||
NRG Energy, Inc. | 595 | 592,025 | ||||||||
|
| |||||||||
1,209,725 | ||||||||||
|
|
30 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Non Corporate Sectors – 0.1% | ||||||||||
Agencies - Not Government Guaranteed – 0.1% | ||||||||||
NOVA Chemicals Corp. | U.S.$ | 331 | $ | 338,679 | ||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | 21,624,353 | |||||||||
|
| |||||||||
COLLATERALIZED MORTGAGE OBLIGATIONS – 6.3% | ||||||||||
GSE Risk Share Floating Rate – 2.8% | ||||||||||
Bellemeade Re Ltd. | 476 | 475,867 | ||||||||
Federal Home Loan Mortgage Corp. Structured Agency Credit Risk Debt Notes | 1,040 | 1,034,768 | ||||||||
Series 2014-DN3, Class M3 | 870 | 838,886 | ||||||||
Series 2014-DN4, Class M3 | 300 | 298,944 | ||||||||
Series 2014-HQ3, Class M3 | 570 | 568,024 | ||||||||
Series 2015-DNA1, Class M3 | 265 | 250,045 | ||||||||
Series 2015-DNA2, Class M2 | 1,017 | 1,015,230 | ||||||||
Series 2015-HQ1, Class M2 | 400 | 396,671 | ||||||||
Series 2015-HQA1, Class M2 | 735 | 732,096 | ||||||||
Federal National Mortgage Association Connecticut Avenue Securities | 232 | 231,099 | ||||||||
Series 2014-C04, Class 1M2 | 511 | 512,434 | ||||||||
Series 2014-C04, Class 2M2 | 195 | 195,966 | ||||||||
Series 2015-C01, Class 1M2 | 355 | 344,017 | ||||||||
Series 2015-C01, Class 2M2 | 328 | 321,998 | ||||||||
Series 2015-C02, Class 2M2 | 430 | 408,734 | ||||||||
Series 2015-C03, Class 1M2 | 180 | 179,325 |
AB INTERMEDIATE BOND PORTFOLIO • | 31 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Series 2015-C03, Class 2M2 | U.S.$ | 490 | $ | 489,407 | ||||||
Series 2015-C04, Class 1M2 | 198 | 201,224 | ||||||||
Series 2015-C04, Class 2M2 | 304 | 308,696 | ||||||||
Wells Fargo Credit Risk Transfer Securities Trust | 394 | 391,734 | ||||||||
Series 2015-WF1, Class 2M2 | 105 | 104,342 | ||||||||
|
| |||||||||
9,299,507 | ||||||||||
|
| |||||||||
Non-Agency Floating Rate – 1.6% | ||||||||||
Chevy Chase Funding LLC Mortgage-Backed Certificates | 527 | 391,297 | ||||||||
Deutsche Alt-A Securities Mortgage Loan Trust | 957 | 597,720 | ||||||||
HomeBanc Mortgage Trust | 445 | 384,087 | ||||||||
Impac Secured Assets CMN Owner Trust | 511 | 368,083 | ||||||||
IndyMac Index Mortgage Loan Trust | 700 | 569,956 | ||||||||
JPMorgan Chase Commercial Mortgage Securities Trust | 825 | 824,284 | ||||||||
RALI Trust | 920 | 311,438 | ||||||||
RBSSP Resecuritization Trust | 478 | 398,356 | ||||||||
Residential Accredit Loans, Inc., Trust | 623 | 336,346 | ||||||||
Washington Mutual Alternative Mortgage Pass-Through Certificates Trust | 350 | 250,930 |
32 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Washington Mutual Mortgage Pass-Through Certificates Trust | U.S.$ | 1,176 | $ | 937,894 | ||||||
|
| |||||||||
5,370,391 | ||||||||||
|
| |||||||||
Non-Agency Fixed Rate – 1.6% | ||||||||||
Alternative Loan Trust | 325 | 298,443 | ||||||||
Series 2006-23CB, Class 1A7 | 181 | 175,808 | ||||||||
Series 2006-28CB, Class A14 | 344 | 292,402 | ||||||||
Series 2006-J1, Class 1A13 | 309 | 278,202 | ||||||||
Citigroup Mortgage Loan Trust, Inc. | 633 | 616,284 | ||||||||
Countrywide Alternative Loan Trust | 496 | 444,158 | ||||||||
Countrywide Home Loan Mortgage Pass-Through Trust | 386 | 349,916 | ||||||||
Series 2006-13, Class 1A19 | 139 | 126,170 | ||||||||
Credit Suisse Mortgage Trust | 391 | 328,408 | ||||||||
First Horizon Alternative Mortgage Securities Trust | 537 | 442,755 | ||||||||
JPMorgan Alternative Loan Trust | 985 | 819,548 | ||||||||
RBSSP Resecuritization Trust | 549 | 469,205 | ||||||||
Structured Asset Securities Corp. Mortgage Pass-Through Certificates | 628 | 548,014 | ||||||||
|
| |||||||||
5,189,313 | ||||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 33 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Agency Fixed Rate – 0.3% | ||||||||||
Countrywide Home Loan Mortgage Pass-Through Trust | U.S.$ | 689 | $ | 611,164 | ||||||
Fannie Mae Grantor Trust | 65 | 59,876 | ||||||||
Federal National Mortgage Association REMICS | 2,288 | 243,986 | ||||||||
|
| |||||||||
915,026 | ||||||||||
|
| |||||||||
Total Collateralized Mortgage Obligations | 20,774,237 | |||||||||
|
| |||||||||
INFLATION-LINKED SECURITIES – 3.3% | ||||||||||
United States – 3.3% | ||||||||||
U.S. Treasury Inflation Index | 10,994 | 10,976,508 | ||||||||
|
| |||||||||
QUASI-SOVEREIGNS – 0.9% | ||||||||||
Quasi-Sovereign Bonds – 0.9% | ||||||||||
Chile – 0.3% | ||||||||||
Corp. Nacional del Cobre de Chile | 554 | 549,501 | ||||||||
Empresa de Transporte de Pasajeros Metro SA | 358 | 372,827 | ||||||||
|
| |||||||||
922,328 | ||||||||||
|
| |||||||||
Malaysia – 0.4% | ||||||||||
Petronas Capital Ltd. | 1,385 | 1,510,780 | ||||||||
|
| |||||||||
Mexico – 0.2% | ||||||||||
Petroleos Mexicanos | 591 | 577,594 | ||||||||
|
| |||||||||
Total Quasi-Sovereigns | 3,010,702 | |||||||||
|
| |||||||||
GOVERNMENTS – SOVEREIGN | ||||||||||
Brazil – 0.2% | ||||||||||
Petrobras Global Finance BV | 672 | 573,518 | ||||||||
|
| |||||||||
Colombia – 0.1% | ||||||||||
Ecopetrol SA | 245 | 199,675 | ||||||||
|
|
34 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||||
| ||||||||||||
Israel – 0.2% | ||||||||||||
Israel Electric Corp. Ltd. | U.S.$ | 580 | $ | 602,098 | ||||||||
|
| |||||||||||
United Kingdom – 0.1% | ||||||||||||
Royal Bank of Scotland Group PLC | 500 | 517,500 | ||||||||||
|
| |||||||||||
Total Governments – Sovereign Agencies | 1,892,791 | |||||||||||
|
| |||||||||||
LOCAL GOVERNMENTS – MUNICIPAL | ||||||||||||
United States – 0.4% | ||||||||||||
State of California | 970 | 1,427,093 | ||||||||||
|
| |||||||||||
Shares | ||||||||||||
COMMON STOCKS – 0.4% | ||||||||||||
Mt Logan Re Ltd. (Preference Shares)(i)(j) | 700 | 743,028 | ||||||||||
Mt Logan Re Ltd. (Preference Shares)(i)(j) | 500 | 530,735 | ||||||||||
|
| |||||||||||
Total Common Stocks | 1,273,763 | |||||||||||
|
| |||||||||||
PREFERRED STOCKS – 0.2% | ||||||||||||
Financial Institutions – 0.2% | ||||||||||||
Insurance – 0.2% | ||||||||||||
Allstate Corp. (The) | 25,975 | 668,337 | ||||||||||
|
| |||||||||||
Principal Amount (000) | ||||||||||||
GOVERNMENTS – SOVEREIGN | ||||||||||||
Mexico – 0.1% | ||||||||||||
Mexico Government International Bond | 208 | 233,896 | ||||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 35 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||||
| ||||||||||||
EMERGING MARKETS – CORPORATE | ||||||||||||
Industrial – 0.1% | ||||||||||||
Communications - | ||||||||||||
Comcel Trust via Comunicaciones Celulares SA | U.S.$ | 207 | $ | 165,083 | ||||||||
|
| |||||||||||
Consumer Non-Cyclical – 0.0% | ||||||||||||
Virgolino de Oliveira Finance SA | 660 | 8,580 | ||||||||||
|
| |||||||||||
Total Emerging Markets – Corporate Bonds | 173,663 | |||||||||||
|
| |||||||||||
Shares | ||||||||||||
SHORT-TERM INVESTMENTS – 4.5% | ||||||||||||
Investment Companies – 2.0% | ||||||||||||
AB Fixed Income Shares, Inc. – Government STIF Portfolio, 0.13%(l)(m) | 6,763,382 | 6,763,382 | ||||||||||
|
| |||||||||||
Principal Amount (000) | ||||||||||||
Governments – Treasuries – 2.5% | ||||||||||||
Japan – 2.5% | ||||||||||||
Japan Treasury Discount Bill | JPY | 990,000 | 8,204,300 | |||||||||
|
| |||||||||||
Total Short-Term Investments | 14,967,682 | |||||||||||
|
| |||||||||||
Total Investments Before Securities Sold Short – 104.7% | 346,168,683 | |||||||||||
|
|
36 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
SECURITIES SOLD SHORT – (0.5)% | ||||||||||
MORTGAGE PASS-THROUGHS – (0.5)% | ||||||||||
Agency Fixed Rate 30-Year – (0.5)% | ||||||||||
Federal National Mortgage Association | U.S.$ | (1,748 | ) | $ | (1,766,982 | ) | ||||
|
| |||||||||
Total Investments – 104.2% | 344,401,701 | |||||||||
Other assets less liabilities – (4.2)% | (13,891,503 | ) | ||||||||
|
| |||||||||
Net Assets – 100.0% | $ | 330,510,198 | ||||||||
|
|
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at October 31, 2015 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Purchased Contracts |
| |||||||||||||||||||
U.S. T-Note 2 Yr (CBT) Futures | 61 | December 2015 | $ | 13,364,090 | $ | 13,338,031 | $ | (26,059 | ) | |||||||||||
U.S. T-Note 5 Yr (CBT) Futures | 316 | December 2015 | 37,990,164 | 37,848,407 | (141,757 | ) | ||||||||||||||
U.S. Ultra Bond (CBT) Futures | 43 | December 2015 | 6,968,805 | 6,869,250 | (99,555 | ) | ||||||||||||||
Sold Contracts |
| |||||||||||||||||||
Euro-BOBL Futures | 90 | December 2015 | 12,680,763 | 12,808,507 | (127,744 | ) | ||||||||||||||
U.S. T-Note 10 Yr (CBT) Futures | 80 | December 2015 | 10,170,029 | 10,215,000 | (44,971 | ) | ||||||||||||||
|
| |||||||||||||||||||
$ | (440,086 | ) | ||||||||||||||||||
|
|
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note D)
Counterparty | Contracts to Deliver (000) | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
BNP Paribas SA | USD | 1,611 | GBP | 1,063 | 11/10/15 | $ | 27,089 | |||||||||||||||||
Goldman Sachs Bank USA | BRL | 4,726 | USD | 1,225 | 11/04/15 | (746 | ) | |||||||||||||||||
Goldman Sachs Bank USA | USD | 1,169 | BRL | 4,726 | 11/04/15 | 56,221 | ||||||||||||||||||
Goldman Sachs Bank USA | TWD | 80,662 | USD | 2,528 | 12/04/15 | 44,349 | ||||||||||||||||||
Goldman Sachs Bank USA | BRL | 4,862 | USD | 1,057 | 1/04/17 | (42,634 | ) | |||||||||||||||||
HSBC Bank USA | GBP | 3,597 | USD | 5,529 | 11/10/15 | (16,142 | ) | |||||||||||||||||
HSBC Bank USA | JPY | 1,000,000 | USD | 8,344 | 11/16/15 | 55,867 | ||||||||||||||||||
JPMorgan Chase Bank | JPY | 595,000 | USD | 4,990 | 3/25/16 | 44,072 | ||||||||||||||||||
Morgan Stanley & Co., Inc. | USD | 825 | INR | 53,760 | 12/04/15 | (7,032 | ) | |||||||||||||||||
Royal Bank of Scotland PLC | CAD | 4,146 | USD | 3,094 | 11/19/15 | (76,734 | ) | |||||||||||||||||
Standard Chartered Bank | BRL | 4,726 | USD | 1,165 | 11/04/15 | (60,314 | ) | |||||||||||||||||
Standard Chartered Bank | USD | 1,225 | BRL | 4,726 | 11/04/15 | 746 | ||||||||||||||||||
Standard Chartered Bank | SGD | 6,998 | USD | 4,997 | 11/06/15 | 2,211 |
AB INTERMEDIATE BOND PORTFOLIO • | 37 |
Portfolio of Investments
Counterparty | Contracts to Deliver (000) | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
State Street Bank & Trust Co. | USD | 22 | GBP | 14 | 11/10/15 | $ | 391 | |||||||||||||||||
State Street Bank & Trust Co. | EUR | 7,296 | USD | 8,054 | 12/03/15 | 27,920 | ||||||||||||||||||
State Street Bank & Trust Co. | USD | 4,086 | JPY | 495,197 | 12/11/15 | 19,301 | ||||||||||||||||||
|
| |||||||||||||||||||||||
$ | 74,565 | |||||||||||||||||||||||
|
|
CURRENCY OPTIONS WRITTEN (see Note D)
Description | Exercise Price | Expiration Date | Contracts (000) | Premiums Received | U.S. $ Value | |||||||||||||||
Call – JPY/USD | JPY 119.300 | 11/04/15 | JPY 495,095 | $ | 9,815 | $ | (3,245 | ) |
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note D)
Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at October 31, 2015 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Buy Contracts | ||||||||||||||||||||
Morgan Stanley & Co., LLC/(CME Group): CDX-NAHY Series 23, 5 Year Index, 12/20/19* | (5.00 | )% | 3.09 | % | $ | 1,746 | $ | (135,257 | ) | $ | (35,961 | ) |
* | Termination date |
CENTRALLY CLEARED INTEREST RATE SWAPS (see Note D)
Rate Type | ||||||||||||||||||||
Clearing Broker/ (Exchange) | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | CAD | 16,500 | 3/10/17 | 0.973% | 3 Month CDOR | $ | (31,440 | ) | ||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 21,860 | 3/11/17 | 2.140% | 3 Month BBSW | (48,125 | ) | |||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | CAD | 14,990 | 6/05/17 | 1.054% | 3 Month CDOR | (48,971 | ) | |||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | NZD | 29,530 | 6/09/17 | 3.366% | 3 Month BKBM | (375,985 | ) | |||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 18,850 | 6/09/17 | 2.218% | 3Month BBSW | (67,029 | ) | |||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 13,670 | 10/30/17 | 1.915% | 3 Month BBSW | (855 | ) | ||||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | GBP | 2,999 | 6/05/20 | 6 Month LIBOR | 1.651% | 63,051 | ||||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 2,630 | 1/14/24 | 2.980% | 3 Month LIBOR | (238,666 | ) | |||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 2,300 | 2/14/24 | 2.889% | 3 Month LIBOR | (185,159 | ) | ||||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 3,330 | 3/11/25 | 6 Month BBSW | 2.973% | 22,928 | ||||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | NZD | 3,440 | 6/09/25 | 3 Month BKBM | 4.068% | 136,662 |
38 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Rate Type | ||||||||||||||||||||
Clearing Broker/ (Exchange) | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 2,040 | 6/09/25 | 6 Month BBSW | 3.384% | $ | 69,059 | |||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | GBP | 510 | 6/05/45 | 2.396% | 6 Month LIBOR | (51,168 | ) | |||||||||||||
|
| |||||||||||||||||||
$ | (755,698 | ) | ||||||||||||||||||
|
|
CREDIT DEFAULT SWAPS (see Note D)
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) | ||||||||||||||||||
Buy Contracts | ||||||||||||||||||||||||
Citibank, NA: | ||||||||||||||||||||||||
Advanced Micro Devices, Inc., | (5.00 | )% | 9.62 | % | $ | 271 | $ | 33,334 | $ | 16,406 | $ | 16,928 | ||||||||||||
Sprint Communications, Inc., | (5.00 | ) | 5.90 | 452 | 10,457 | (20,196 | ) | 30,653 | ||||||||||||||||
Sprint Communications, Inc., | (5.00 | ) | 5.90 | 518 | 11,985 | (23,998 | ) | 35,983 | ||||||||||||||||
Sale Contracts | ||||||||||||||||||||||||
Credit Suisse International: | ||||||||||||||||||||||||
Anadarko Petroleum Corp., | 1.00 | 0.57 | 1,360 | 11,817 | (18,060 | ) | 29,877 | |||||||||||||||||
Kohl’s Corp., | 1.00 | 0.97 | 61 | 35 | (539 | ) | 574 | |||||||||||||||||
Kohl’s Corp., | 1.00 | 0.97 | 103 | 58 | (1,016 | ) | 1,074 | |||||||||||||||||
Kohl’s Corp., | 1.00 | 0.97 | 42 | 23 | (410 | ) | 433 | |||||||||||||||||
Kohl’s Corp., | 1.00 | 0.97 | 42 | 23 | (412 | ) | 435 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 67,732 | $ | (48,225 | ) | $ | 115,957 | ||||||||||||||||||
|
|
|
|
|
|
* | Termination date |
AB INTERMEDIATE BOND PORTFOLIO • | 39 |
Portfolio of Investments
INFLATION (CPI) SWAPS (see Note D)
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 | $ | 5,210 | 3/04/16 | CPI | # | 1.170 | % | $ | 19,935 |
# | Variable interest rate based on the rate of inflation as determined by the Consumer Price Index (CPI). |
INTEREST RATE SWAPS (see Note D)
Rate Type | ||||||||||||||||
Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
JPMorgan Chase Bank, NA | $ | 5,590 | 1/30/17 | 1.059% | 3 Month LIBOR | $ | (44,990 | ) | ||||||||
JPMorgan Chase Bank, NA | 6,230 | 2/07/22 | 2.043% | 3 Month LIBOR | (154,153 | ) | ||||||||||
|
| |||||||||||||||
$ | (199,143 | ) | ||||||||||||||
|
|
** | Principal amount less than 500. |
(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 $73,512,023 or 22.2% 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) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities, which represent 0.00% of net assets as of October 31, 2015, are considered illiquid and restricted. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Nationstar NIM Ltd. | 04/04/07 | $ | 17,606 | $ | – 0 | – | 0.00 | % | ||||||||
Virgolino de Oliveira Finance SA | 1/24/14–1/27/14 | 365,927 | 8,580 | 0.00 | % |
(e) | Fair valued by the Adviser. |
(f) | Illiquid security. |
(g) | IO – Interest Only |
(h) | Variable rate coupon, rate shown as of October 31, 2015. |
(i) | The security is subject to a 12 month lock-up period, after which semi-annual redemptions are permitted. |
(j) | Restricted and illiquid security. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Mt Logan Re Ltd. | 12/30/14 | $ | 700,000 | $ | 743,028 | 0.22 | % | |||||||||
Mt Logan Re Ltd. | 1/02/14 | 500,000 | 530,735 | 0.16 | % |
40 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
(k) | Security is in default and is non-income producing. |
(l) | 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. |
(m) | Investment in affiliated money market mutual fund. The rate shown represents the 7-day yield as of period end. |
Currency Abbreviations:
AUD – Australian Dollar
BRL – Brazilian Real
CAD – Canadian Dollar
EUR – Euro
GBP – Great British Pound
INR – Indian Rupee
JPY – Japanese Yen
NZD – New Zealand Dollar
SGD – Singapore Dollar
TWD – New Taiwan Dollar
USD – United States Dollar
Glossary:
ABS – Asset-Backed Securities
ARMs – Adjustable Rate Mortgages
BBSW – Bank Bill Swap Reference Rate (Australia)
BKBM – Bank Bill Benchmark (New Zealand)
CBT – Chicago Board of Trade
CDOR – Canadian Dealer Offered Rate
CDX-NAHY – North American High Yield Credit Default Swap Index
CMBS – Commercial Mortgage-Backed Securities
CME – Chicago Mercantile Exchange
GSE – Government-Sponsored Enterprise
LIBOR – London Interbank Offered Rates
REIT – Real Estate Investment Trust
TBA – To Be Announced
TIPS – Treasury Inflation Protected Security
See notes to financial statements.
AB INTERMEDIATE BOND PORTFOLIO • | 41 |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
October 31, 2015
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $343,959,023) | $ | 339,405,301 | ||
Affiliated issuers (cost $6,763,382) | 6,763,382 | |||
Cash collateral due from broker | 936,156 | |||
Foreign currencies, at value (cost $5,065,647) | 5,021,081 | |||
Receivable for investment securities sold | 5,180,124 | |||
Interest receivable | 1,951,182 | |||
Receivable for capital stock sold | 598,638 | |||
Unrealized appreciation on forward currency exchange contracts | 278,167 | |||
Unrealized appreciation on credit default swaps | 115,957 | |||
Receivable for variation margin on exchange-traded derivatives | 31,801 | |||
Unrealized appreciation on inflation swaps | 19,935 | |||
Upfront premium paid on credit default swaps | 16,406 | |||
Receivable from class action settlement proceeds | 3,151 | |||
|
| |||
Total assets | 360,321,281 | |||
|
| |||
Liabilities | ||||
Due to custodian | 1,000,678 | |||
Options written, at value (premiums received $9,815) | 3,245 | |||
Payable for investment securities purchased | 25,507,688 | |||
Payable for securities sold short, at value (proceeds received $1,773,128) | 1,766,982 | |||
Payable for capital stock redeemed | 557,444 | |||
Unrealized depreciation on forward currency exchange contracts | 203,602 | |||
Unrealized depreciation on interest rate swaps | 199,143 | |||
Dividends payable | 128,942 | |||
Distribution fee payable | 92,242 | |||
Upfront premium received on credit default swaps | 64,631 | |||
Payable for variation margin on exchange-traded derivatives | 37,291 | |||
Transfer Agent fee payable | 26,170 | |||
Advisory fee payable | 17,798 | |||
Administrative fee payable | 13,738 | |||
Accrued expenses | 191,489 | |||
|
| |||
Total liabilities | 29,811,083 | |||
|
| |||
Net Assets | $ | 330,510,198 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 29,892 | ||
Additional paid-in capital | 332,944,325 | |||
Undistributed net investment income | 3,040,057 | |||
Accumulated net realized gain on investment and foreign currency transactions | 298,882 | |||
Net unrealized depreciation on investments and foreign currency denominated assets and liabilities | (5,802,958 | ) | ||
|
| |||
$ | 330,510,198 | |||
|
|
See notes to financial statements.
42 | • AB INTERMEDIATE BOND PORTFOLIO |
Statement of Assets & Liabilities
Net Asset Value Per Share—24 billion shares of capital stock authorized, $.001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 252,965,111 | 22,874,736 | $ | 11.06 | * | ||||||
| ||||||||||||
B | $ | 1,692,410 | 152,996 | $ | 11.06 | |||||||
| ||||||||||||
C | $ | 40,928,437 | 3,707,989 | $ | 11.04 | |||||||
| ||||||||||||
Advisor | $ | 22,703,876 | 2,052,032 | $ | 11.06 | |||||||
| ||||||||||||
R | $ | 2,936,453 | 265,556 | $ | 11.06 | |||||||
| ||||||||||||
K | $ | 3,921,684 | 354,346 | $ | 11.07 | |||||||
| ||||||||||||
I | $ | 511,109 | 46,167 | $ | 11.07 | |||||||
| ||||||||||||
Z | $ | 4,851,118 | 437,703 | $ | 11.08 | |||||||
|
* | The maximum offering price per share for Class A shares was $11.55 which reflects a sales charge of 4.25%. |
See notes to financial statements.
AB INTERMEDIATE BOND PORTFOLIO • | 43 |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Year Ended October 31, 2015
Investment Income | ||||||||
Interest | $ | 11,431,004 | ||||||
Dividends | ||||||||
Unaffiliated issuers | 91,311 | |||||||
Affiliated issuers | 23,258 | |||||||
Other income | 4,063 | $ | 11,549,636 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 1,534,060 | |||||||
Distribution fee—Class A | 740,873 | |||||||
Distribution fee—Class B | 22,841 | |||||||
Distribution fee—Class C | 420,074 | |||||||
Distribution fee—Class R | 12,841 | |||||||
Distribution fee—Class K | 11,363 | |||||||
Transfer agency—Class A | 387,804 | |||||||
Transfer agency—Class B | 3,933 | |||||||
Transfer agency—Class C | 63,440 | |||||||
Transfer agency—Advisor Class | 33,852 | |||||||
Transfer agency—Class R | 6,481 | |||||||
Transfer agency—Class K | 9,091 | |||||||
Transfer agency—Class I | 617 | |||||||
Transfer agency—Class Z | 177 | |||||||
Custodian | 216,191 | |||||||
Registration fees | 116,619 | |||||||
Audit and tax | 88,327 | |||||||
Printing | 68,759 | |||||||
Administrative | 45,081 | |||||||
Legal | 38,092 | |||||||
Directors’ fees | 18,760 | |||||||
Miscellaneous | 19,805 | |||||||
|
| |||||||
Total expenses | 3,859,081 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (604,712 | ) | ||||||
|
| |||||||
Net expenses | 3,254,369 | |||||||
|
| |||||||
Net investment income | 8,295,267 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain on: | ||||||||
Investment transactions | 2,579,236 | |||||||
Securities sold short | (4,887 | ) | ||||||
Futures | 121,615 | |||||||
Swaps | 93,827 | |||||||
Foreign currency transactions | 2,153,509 | |||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | (6,897,726 | ) | ||||||
Securities sold short | 6,146 | |||||||
Futures | (452,329 | ) | ||||||
Options written | 6,570 | |||||||
Swaps | (708,400 | ) | ||||||
Foreign currency denominated assets and liabilities and other assets | (229,171 | ) | ||||||
|
| |||||||
Net loss on investment and foreign currency transactions | (3,331,610 | ) | ||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 4,963,657 | ||||||
|
|
See notes to financial statements.
44 | • AB INTERMEDIATE BOND PORTFOLIO |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 8,295,267 | $ | 11,715,490 | ||||
Net realized gain on investment transactions and foreign currency transactions | 4,943,300 | 17,093,780 | ||||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities and other assets | (8,274,910 | ) | (9,973,154 | ) | ||||
|
|
|
| |||||
Net increase in net assets from operations | 4,963,657 | 18,836,116 | ||||||
Dividends to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (8,137,847 | ) | (8,778,788 | ) | ||||
Class B | (55,129 | ) | (97,320 | ) | ||||
Class C | (987,523 | ) | (1,049,284 | ) | ||||
Advisor Class | (793,874 | ) | (1,278,019 | ) | ||||
Class R | (71,771 | ) | (63,907 | ) | ||||
Class K | (140,957 | ) | (126,092 | ) | ||||
Class I | (14,707 | ) | (1,625 | ) | ||||
Class Z | (24,900 | ) | (161 | ) | ||||
Capital Stock Transactions | ||||||||
Net decrease | (17,247,645 | ) | (88,221,496 | ) | ||||
|
|
|
| |||||
Total decrease | (22,510,696 | ) | (80,780,576 | ) | ||||
Net Assets | ||||||||
Beginning of period | 353,020,894 | 433,801,470 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $3,040,057 and $2,534,258, respectively) | $ | 330,510,198 | $ | 353,020,894 | ||||
|
|
|
|
See notes to financial statements.
AB INTERMEDIATE BOND PORTFOLIO • | 45 |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
October 31, 2015
NOTE A
Significant Accounting Policies
AB Bond Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940 as an open-end management investment company. Prior to January 20, 2015, the Fund was known as AllianceBernstein Bond Fund, Inc. The Fund, which is a Maryland corporation, operates as a series company comprised of nine portfolios currently in operation: the AB Intermediate Bond Portfolio, the AB Bond Inflation Strategy Portfolio, the AB Municipal Bond Inflation Strategy Portfolio, the AB All Market Real Return Portfolio (formerly AllianceBernstein Real Asset Strategy), the AB Limited Duration High Income Portfolio, the AB Government Reserves Portfolio, the AB Tax-Aware Fixed Income Portfolio, the AB Credit Long/Short Portfolio and the AB High Yield Portfolio. They are each diversified Portfolios, with the exception of the AB Credit Long/Short Portfolio and the AB High Yield Portfolio, which are non-diversified. Each Portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to the AB Intermediate Bond Portfolio (the “Portfolio”). Prior to January 20, 2015, the Portfolio was known as AllianceBernstein Intermediate Bond Portfolio. The Portfolio offers Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I, and Class Z shares. Class A shares are sold with a front-end sales charge of up to 4.25% for purchases not exceeding $1,000,000. With respect to purchases of $1,000,000 or more, Class A shares redeemed within one year of purchase may be subject to a contingent deferred sales charge of 1%. Class B shares are currently sold with a contingent deferred sales charge which declines from 3% to zero depending on the period of time the shares are held. Effective January 31, 2009, sales of Class B shares of the Portfolio to new investors were suspended. Class B shares will only be issued (i) upon the exchange of Class B shares from another AB Mutual Fund, (ii) for purposes of dividend reinvestment, (iii) through the Portfolio’s Automatic Investment Program (the “Program”) for accounts that established the Program prior to January 31, 2009, and (iv) for purchases of additional shares by Class B shareholders as of January 31, 2009. The ability to establish a new Program for accounts containing Class B shares was suspended as of January 31, 2009. Class B shares will automatically convert to Class A shares six years after the end of the calendar month of purchase. Class C shares are subject to a contingent deferred sales charge of 1% on redemptions made within the first year after purchase. Class R and Class K shares are sold without an initial or contingent deferred sales charge. Advisor Class, Class I and Class Z shares are sold without an initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. All eight classes of shares have identical voting, dividend, liquidation and other rights, except that the classes bear different distribution and transfer agency expenses. Each class has exclusive voting rights with respect to its distribution plan. 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
46 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
statements and amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Fund 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 Fund’s Board of Directors (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 valued at the mid level between the current bid and ask prices. If either a current bid or current ask price is unavailable, AllianceBernstein L.P. (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
AB INTERMEDIATE BOND PORTFOLIO • | 47 |
Notes to Financial Statements
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 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
48 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
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.
Options are valued using market-based inputs to models, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency, where such inputs and models are available. Alternatively the values may be obtained through unobservable management determined inputs and/or management’s proprietary models. Where models are used, the selection of a particular model to value an option depends upon the contractual terms of, and specific risks inherent in, the option as well as the availability of pricing information in the market. Valuation models require a variety of inputs, including contractual terms, market prices, measures of volatility and correlations of such inputs. Exchange traded options generally will be classified as Level 2. For options that do not trade on exchange but trade in liquid markets, inputs can generally be verified and model selection does not involve significant management judgment. Options are classified within Level 2 on the fair value hierarchy when all of the significant inputs can be corroborated to market evidence. Otherwise such instruments 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, 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 INTERMEDIATE BOND PORTFOLIO • | 49 |
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 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Corporates – Investment Grade | $ | – 0 | – | $ | 79,147,201 | $ | – 0 | – | $ | 79,147,201 | ||||||
Mortgage Pass-Throughs | – 0 | – | 53,677,214 | – 0 | – | 53,677,214 | ||||||||||
Asset-Backed Securities | – 0 | – | 47,870,644 | 5,462,170 | ^ | 53,332,814 | ||||||||||
Commercial Mortgage-Backed Securities | – 0 | – | 34,513,102 | 9,612,483 | 44,125,585 | |||||||||||
Governments – Treasuries | – 0 | – | 38,862,844 | – 0 | – | 38,862,844 | ||||||||||
Corporates – Non-Investment Grade | – 0 | – | 21,327,141 | 297,212 | 21,624,353 | |||||||||||
Collateralized Mortgage Obligations | – 0 | – | 1,128,146 | 19,646,091 | 20,774,237 | |||||||||||
Inflation-Linked Securities | – 0 | – | 10,976,508 | – 0 | – | 10,976,508 | ||||||||||
Quasi-Sovereigns | – 0 | – | 3,010,702 | – 0 | – | 3,010,702 | ||||||||||
Governments – Sovereign Agencies | – 0 | – | 1,892,791 | – 0 | – | 1,892,791 | ||||||||||
Local Governments – Municipal Bonds | – 0 | – | 1,427,093 | – 0 | – | 1,427,093 | ||||||||||
Common Stocks | – 0 | – | – 0 | – | 1,273,763 | 1,273,763 | ||||||||||
Preferred Stocks | 668,337 | – 0 | – | – 0 | – | 668,337 | ||||||||||
Governments – Sovereign Bonds | – 0 | – | 233,896 | – 0 | – | 233,896 | ||||||||||
Emerging Markets – Corporate Bonds | – 0 | – | 173,663 | – 0 | – | 173,663 | ||||||||||
Short-Term Investments: | ||||||||||||||||
Investment Companies | 6,763,382 | – 0 | – | – 0 | – | 6,763,382 | ||||||||||
Governments – Treasuries | – 0 | – | 8,204,300 | – 0 | – | 8,204,300 | ||||||||||
Liabilities: | ||||||||||||||||
Mortgage Pass-Throughs | – 0 | – | (1,766,982 | ) | – 0 | – | (1,766,982 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 7,431,719 | 300,678,263 | 36,291,719 | 344,401,701 | ||||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets: | ||||||||||||||||
Forward Currency Exchange Contracts | – 0 | – | 278,167 | – 0 | – | 278,167 | ||||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | 291,700 | – 0 | – | 291,700 | # | |||||||||
Credit Default Swaps | – 0 | – | 115,957 | – 0 | – | 115,957 | ||||||||||
Inflation (CPI) Swaps | – 0 | – | 19,935 | – 0 | – | 19,935 |
50 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
Investments in | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities: | ||||||||||||||||
Futures | $ | (440,086 | ) | $ | – 0 | – | $ | – 0 | – | $ | (440,086 | )# | ||||
Forward Currency Exchange Contracts | – 0 | – | (203,602 | ) | – 0 | – | (203,602 | ) | ||||||||
Currency Options Written | – 0 | – | (3,245 | ) | – 0 | – | (3,245 | ) | ||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | (35,961 | ) | – 0 | – | (35,961 | )# | ||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | (1,047,398 | ) | – 0 | – | (1,047,398 | )# | ||||||||
Interest Rate Swaps | – 0 | – | (199,143 | ) | – 0 | – | (199,143 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total+ | $ | 6,991,633 | $ | 299,894,673 | $ | 36,291,719 | $ | 343,178,025 | ||||||||
|
|
|
|
|
|
|
|
^ | The Portfolio held securities with zero market value at period end. |
* | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. Other financial instruments may also include options written which are valued at market value. |
# | 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. |
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.
Asset-Backed Securities^ | Commercial Mortgage-Backed Securities | Corporates - Non-Investment Grade | ||||||||||
Balance as of 10/31/14 | $ | 3,767,594 | $ | 7,193,928 | $ | 306,800 | ||||||
Accrued discounts/(premiums) | 13,166 | (12,430 | ) | 1,613 | ||||||||
Realized gain (loss) | 23,268 | (1,089 | ) | – 0 | – | |||||||
Change in unrealized appreciation/depreciation | (25,368 | ) | (307,469 | ) | (11,201 | ) | ||||||
Purchases/Payups | 3,906,556 | 2,786,765 | – 0 | – | ||||||||
Sales/Paydowns | (1,149,222 | ) | (47,222 | ) | – 0 | – | ||||||
Settlements | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | (1,073,824 | ) | – 0 | – | – 0 | – | ||||||
|
|
|
|
|
| |||||||
Balance as of 10/31/15 | $ | 5,462,170 | $ | 9,612,483 | $ | 297,212 | ||||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 10/30/15* | $ | (25,368 | ) | $ | (307,469 | ) | $ | (11,201 | ) | |||
|
|
|
|
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 51 |
Notes to Financial Statements
Collateralized Mortgage Obligations | Common Stocks | Cross Currency Swaps | ||||||||||
Balance as of 10/31/14 | $ | 14,419,314 | $ | 746,394 | $ | 92,827 | ||||||
Accrued discounts/(premiums) | 93,170 | – 0 | – | – 0 | – | |||||||
Realized gain (loss) | (72,013 | ) | – 0 | – | 233,838 | |||||||
Change in unrealized appreciation/depreciation | (76,823 | ) | 27,369 | (92,827 | ) | |||||||
Purchases/Payups | 9,701,496 | 500,000 | – 0 | – | ||||||||
Sales/Paydowns | (4,419,053 | ) | – 0 | – | – 0 | – | ||||||
Settlements | – 0 | – | – 0 | – | (233,838 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
|
|
|
|
|
| |||||||
Balance as of 10/31/15 | $ | 19,646,091 | $ | 1,273,763 | $ | – 0 | – | |||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 10/30/15* | $ | (95,926 | ) | $ | 27,369 | $ | – 0 | – | ||||
|
|
|
|
|
| |||||||
Total | ||||||||||||
Balance as of 10/31/14 | $ | 26,526,857 | ||||||||||
Accrued discounts/(premiums) | 95,519 | |||||||||||
Realized gain (loss) | 184,004 | |||||||||||
Change in unrealized appreciation/depreciation | (486,319 | ) | ||||||||||
Purchases/Payups | 16,894,817 | |||||||||||
Sales/Paydowns | (5,615,497 | ) | ||||||||||
Settlements | (233,838 | ) | ||||||||||
Transfers in to Level 3 | – 0 | – | ||||||||||
Transfers out of Level 3 | (1,073,824 | ) | ||||||||||
|
| |||||||||||
Balance as of 10/31/15 | $ | 36,291,719 | + | |||||||||
|
| |||||||||||
Net change in unrealized appreciation/depreciation from investments held as of 10/30/15* | $ | (412,595 | ) | |||||||||
|
|
^ | The Portfolio held securities with zero market value at period end. |
* | 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. |
+ | There were de minimis transfers under 1% of net assets during the reporting period. |
The following presents information about significant unobservable inputs related to the Portfolio’s Level 3 investments at October 31, 2015. Securities priced i) at net asset value or ii) by third party vendors, are excluded from the following table.
Quantitative Information about Level 3 Fair Value Measurements | ||||||||
Fair Value at 10/31/15 | Valuation Technique | Unobservable Input | Range/ Weighted Average | |||||
Asset-Backed Securities | $ – 0 – | Qualitative | $0.00/N/A |
52 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
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 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. Currency Translation
Assets and liabilities denominated in foreign currencies and commitments under forward currency exchange contracts are translated into U.S. dollars at the mean of the quoted bid and ask prices of such currencies against the U.S. dollar. Purchases and sales of portfolio securities are translated into U.S. dollars at the rates of exchange prevailing when such securities were acquired or sold. Income and expenses are translated into U.S. dollars at rates of exchange prevailing when accrued.
Net realized gain or loss on foreign currency transactions represents foreign exchange gains and losses from sales and maturities of foreign fixed income investments, foreign currency exchange contracts, holding of foreign currencies, currency gains or losses realized between the trade and settlement dates on foreign investment transactions, and the difference between the amounts of dividends,
AB INTERMEDIATE BOND PORTFOLIO • | 53 |
Notes to Financial Statements
interest and foreign withholding taxes recorded on the Portfolio’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains and losses from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of net unrealized appreciation or depreciation of foreign currency denominated assets and liabilities.
4. 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. The Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued and applied to net investment income, net realized gains and net unrealized appreciation/depreciation as such income and/or gains are earned.
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.
5. Investment Income and Investment Transactions
Dividend income (or dividend expense) is recorded on the ex-dividend date or as soon as the Portfolio is informed of the dividend. Interest income (or interest expense) 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.
6. Class Allocations
All income earned and expenses incurred by the Portfolio are borne on a pro-rata basis by each outstanding class of shares, based on the proportionate interest in the Portfolio represented by the net assets of such class, except for class specific expenses which are allocated to the respective class. Expenses of the Fund are charged proportionately to each Portfolio or based on other appropriate methods. Realized and unrealized gains and losses are allocated among the various share classes based on respective net assets.
7. 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.
54 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
NOTE B
Advisory Fee and Other Transactions with Affiliates
Under the terms of the investment advisory agreement, the Portfolio pays the Adviser an advisory fee at an annual rate of .45% of the first $2.5 billion, .40% of the next $2.5 billion and .35% in excess of $5 billion, of the Portfolio’s average daily net assets. The fee is accrued daily and paid monthly. Effective February 1, 2013 (effective April 28, 2014 for Class Z shares), the Adviser has agreed to waive its fees and bear certain expenses to the extent necessary to limit total operating expenses on an annual basis (the “Expense Caps”) to .90%, 1.60%, 1.60%, .60%, 1.10%, .85%, .60%, and .60% of the daily average net assets for the Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I, and Class Z shares, respectively. Effective June 1, 2015, the expense cap on Class A was reduced to .85%. This waiver extends through January 29, 2016 and then may be extended by the Adviser for additional one year terms. For the year ended October 31, 2015, such reimbursements/waivers amounted to $604,712.
Pursuant to the investment advisory agreement, the Portfolio may reimburse the Adviser for certain legal and accounting services provided to the Portfolio by the Adviser. For the year ended October 31, 2015, the reimbursement for such services amounted to $45,081.
The Portfolio compensates AllianceBernstein Investor Services, Inc. (“ABIS”), a wholly-owned subsidiary of the Adviser, under a Transfer Agency Agreement for providing personnel and facilities to perform transfer agency services for the Portfolio. ABIS may make payments to intermediaries that provide omnibus account services, sub-accounting services and/or networking services. Such compensation retained by ABIS amounted to $234,555 for the year ended October 31, 2015.
AllianceBernstein Investments, Inc. (the “Distributor”), a wholly-owned subsidiary of the Adviser, serves as the distributor of the Portfolio’s shares. The Distributor has advised the Portfolio that it has retained front-end sales charges of $5,543 from the sale of Class A shares and received $2,355, $388 and $2,658 in contingent deferred sales charges imposed upon redemptions by shareholders of Class A, Class B and Class C shares, respectively, for the year ended October 31, 2015.
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
AB INTERMEDIATE BOND PORTFOLIO • | 55 |
Notes to Financial Statements
shares of the Government STIF Portfolio for the year ended October 31, 2015 is as follows:
Market Value October 31, 2014 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value October 31, 2015 (000) | Dividend Income (000) | ||||||||||||||
$ | 44,459 | $ | 135,451 | $ | 173,147 | $ | 6,763 | $ | 23 |
Brokerage commissions paid on investment transactions for the year ended October 31, 2015 amounted to $6,375, of which $0 and $0, respectively, was paid to Sanford C. Bernstein & Co. LLC and Sanford C. Bernstein Limited, affiliates of the Adviser.
NOTE C
Distribution Services Agreement
The Portfolio has adopted a Distribution Services Agreement (the “Agreement”) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Agreement, the Portfolio pays distribution and servicing fees to the Distributor at an annual rate of up to .30% of the Portfolio’s average daily net assets attributable to Class A shares, 1% of the Portfolio’s average daily net assets attributable to both Class B and Class C shares, .50% of the Portfolio’s average daily net assets attributable to Class R shares and .25% of the Portfolio’s average daily net assets attributable to Class K shares. Effective June 1, 2015, payments under the Agreement in respect of Class A shares are limited to an annual rate of .25% of Class A shares’ average daily net assets. There are no distribution and servicing fees on the Advisor Class, Class I and Class Z shares. The fees are accrued daily and paid monthly. The Agreement provides that the Distributor will use such payments in their entirety for distribution assistance and promotional activities. Since the commencement of the Portfolio’s operations, the Distributor has incurred expenses in excess of the distribution costs reimbursed by the Portfolio in the amounts of $0, $1,076,984, $122,996, and $54,256 for Class B, Class C, Class R and Class K shares, respectively. While such costs may be recovered from the Portfolio in future periods so long as the Agreement is in effect, the rate of the distribution and servicing fees payable under the Agreement may not be increased without a shareholder vote. In accordance with the Agreement, there is no provision for recovery of unreimbursed distribution costs incurred by the Distributor beyond the current fiscal year for Class A shares. The Agreement also provides that the Adviser may use its own resources to finance the distribution of the Portfolio’s shares.
56 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
NOTE D
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the year ended October 31, 2015 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding U.S. government securities) | $ | 101,854,126 | $ | 70,834,952 | ||||
U.S. government securities | 610,609,441 | 632,677,413 |
The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation (excluding futures, foreign currency and swap transactions) are as follows:
Cost | $ | 350,829,916 | ||
|
| |||
Gross unrealized appreciation | $ | 3,113,644 | ||
Gross unrealized depreciation | (7,774,877 | ) | ||
|
| |||
Net unrealized depreciation | $ | (4,661,233 | ) | |
|
|
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:
• | Futures |
The Portfolio may buy or sell futures for investment purposes or for the purpose of hedging its portfolio against adverse effects of potential movements in the market. The Portfolio bears the market risk that arises from changes in the value of these instruments and the imperfect correlation between movements in the price of the futures and movements in the price of the assets, reference rates or indices which they are designed to track. Among other things, the Portfolio may purchase or sell futures for foreign currencies or options thereon for non-hedging purposes as a means of making direct investment in foreign currencies, as described below under “Currency Transactions”.
At the time the Portfolio enters into futures, the Portfolio deposits and maintains as collateral an initial margin with the broker, as required by the exchange 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
AB INTERMEDIATE BOND PORTFOLIO • | 57 |
Notes to Financial Statements
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 exchange-traded futures is generally less than privately negotiated futures, since the clearinghouse, which is the issuer or counterparty to each exchange-traded future, 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.
Use of long futures subjects the Portfolio to risk of loss in excess of the amounts shown on the statement of assets and liabilities, up to the notional value of the futures. Use of short futures subjects the Portfolio to unlimited risk of loss. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of futures can vary from the previous day’s settlement price, which could effectively prevent liquidation of unfavorable positions.
During the year ended October 31, 2015, the Portfolio held futures for hedging and non-hedging purposes.
• | Forward Currency Exchange Contracts |
The Portfolio may enter into forward currency exchange contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings, to hedge certain firm purchase and sale commitments denominated in foreign currencies and for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions”.
A forward currency exchange contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. The gain or loss arising from the difference between the original contract and the closing of such contract would be included in net realized gain or loss on foreign currency transactions. Fluctuations in the value of open forward currency exchange contracts are recorded for financial reporting purposes as unrealized appreciation and/or depreciation by the Portfolio. Risks may arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar.
During the year ended October 31, 2015, the Portfolio held forward currency exchange contracts for hedging and non-hedging purposes.
• | Option Transactions |
For hedging and investment purposes, the Portfolio may purchase and write (sell) put and call options on U.S. and foreign securities, including government securities, and foreign currencies that are traded on U.S. and foreign securities exchanges and over-the-counter markets. Among other
58 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
things, the Portfolio may use options transactions for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions” and may use options strategies involving the purchase and/or writing of various combinations of call and/or put options, for hedging and investment purposes.
The risk associated with purchasing an option is that the Portfolio pays a premium whether or not the option is exercised. Additionally, the Portfolio bears the risk of loss of the premium and change in market value should the counterparty not perform under the contract. Put and call options purchased are accounted for in the same manner as portfolio securities. The cost of securities acquired through the exercise of call options is increased by premiums paid. The proceeds from securities sold through the exercise of put options are decreased by the premiums paid.
When the Portfolio writes an option, the premium received by the Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from written options which expire unexercised are recorded by the Portfolio on the expiration date as realized gains from options written. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium received is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium received is added to the proceeds from the sale of the underlying security or currency in determining whether the Portfolio has realized a gain or loss. If a put option is exercised, the premium received reduces the cost basis of the security or currency purchased by the Portfolio. In writing an option, the Portfolio bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Portfolio could result in the Portfolio selling or buying a security or currency at a price different from the current market value.
During the year ended October 31, 2015, the Portfolio held purchased options for hedging purposes. During the year ended October 31, 2015, the Portfolio held written options for hedging purposes.
For the year ended October 31, 2015, the Portfolio had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 10/31/14 | – 0 | – | $ | – 0 | – | |||
Options written | 495,095 | 9,815 | ||||||
Options expired | – 0 | – | – 0 | – | ||||
Options bought back | – 0 | – | – 0 | – | ||||
Options exercised | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Options written outstanding as of 10/31/15 | 495,095 | $ | 9,815 | |||||
|
|
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 59 |
Notes to Financial Statements
• | 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” or in order to take a “long” or “short” position with respect to an underlying referenced asset described below under “Total Return Swaps”. 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.
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
60 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
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.
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 year ended October 31, 2015, the Portfolio held interest rate swaps for hedging and non-hedging purposes.
AB INTERMEDIATE BOND PORTFOLIO • | 61 |
Notes to Financial Statements
Inflation (CPI) Swaps:
Inflation swap agreements 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 year ended October 31, 2015, the Portfolio held inflation (CPI) swaps for hedging and non-hedging purposes.
Currency Swaps:
The Portfolio may invest in currency swaps for hedging purposes to protect against adverse changes in exchange rates between the U.S. Dollar and other currencies or for non-hedging purposes as a means of making direct investments in foreign currencies, as described below under “Currency Transactions”. Currency swaps involve the individually negotiated exchange by a Portfolio with another party of a series of payments in specified currencies. Actual principal amounts of currencies may be exchanged by the counterparties at the initiation, and again upon the termination, of the transaction. Therefore, the entire principal value of a currency swap is subject to the risk that the swap counterparty will default on its contractual delivery obligations.
During the year ended October 31, 2015, the Portfolio held currency 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.
62 | • AB INTERMEDIATE BOND PORTFOLIO |
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 for its Sales 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 year ended October 31, 2015, the Portfolio held credit default swaps for hedging and non-hedging purposes.
Implied credit spreads over U.S. Treasuries 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 INTERMEDIATE BOND PORTFOLIO • | 63 |
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 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 Assets and Liabilities Location | Fair Value | Statement of Assets and Liabilities Location | Fair Value | ||||||||
Interest rate contracts | Receivable/ Payable for variation margin on exchange- traded derivatives | $ | 291,700 | * | Receivable/ Payable for variation margin on exchange- traded derivatives | $ | 1,487,484 | * | ||||
Credit contracts | Receivable/ Payable for variation margin on exchange- traded derivatives | 35,961 | * | |||||||||
Foreign exchange contracts | Unrealized |
| 278,167 |
| Unrealized |
| 203,602 |
|
64 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of Assets and Liabilities Location | Fair Value | Statement of Assets and Liabilities Location | Fair Value | ||||||||
Foreign exchange contracts | Options | $ | 3,245 |
| ||||||||
Interest rate contracts | Unrealized depreciation on interest rate swaps | 199,143 | ||||||||||
Interest rate contracts | Unrealized appreciation on inflation swaps | $ | 19,935 | |||||||||
Credit contracts | Unrealized appreciation on credit default swaps | 115,957 | ||||||||||
|
|
|
| |||||||||
Total | $ | 705,759 | $ | 1,929,435 | ||||||||
|
|
|
|
* | 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 year 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 futures; Net change in unrealized appreciation/depreciation of futures | $ | 121,615 | $ | (452,329 | ) | ||||
Foreign exchange contracts | Net realized gain (loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation of foreign currency denominated assets and liabilities | 721,251 | (205,568 | ) |
AB INTERMEDIATE BOND PORTFOLIO • | 65 |
Notes to Financial Statements
Derivative Type | Location of Gain | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Equity contracts | Net realized gain (loss) on investment transactions; Net change in unrealized appreciation/depreciation of investments | $ | (26,250 | ) | $ | 24,713 | ||||
Foreign exchange contracts | Net realized gain (loss) on options written; Net change in unrealized appreciation/depreciation of options written | – 0 | – | 6,570 | ||||||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (206,408 | ) | (633,159 | ) | |||||
Foreign exchange contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | – 0 | – | (92,827 | ) | |||||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 300,235 | 17,586 | |||||||
|
|
|
| |||||||
Total | $ | 910,443 | $ | (1,335,014 | ) | |||||
|
|
|
|
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the year ended October 31, 2015:
Futures: | ||||
Average original value of buy contracts | $ | 21,109,246 | ||
Average original value of sale contracts | $ | 21,810,654 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 5,981,516 | ||
Average principal amount of sale contracts | $ | 31,863,816 | ||
Purchased Options: | ||||
Average monthly cost | $ | 26,250 | (a) | |
Interest Rate Swaps: | ||||
Average notional amount | $ | 15,094,212 | ||
Inflation Swaps: | ||||
Average notional amount | $ | 5,210,000 | (b) | |
66 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 50,546,478 | ||
Cross Currency Swaps: | ||||
Average notional amount | $ | 1,637,610 | (c) | |
Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 1,777,969 | (b) | |
Average notional amount of sale contracts | $ | 2,059,385 | ||
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 1,764,000 | (d) |
(a) | Positions were open for one month during the year. |
(b) | Positions were open for eight months during the year. |
(c) | Positions were open for three months during the year. |
(d) | Positions were open for eleven months during the year. |
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: | ||||||||||||||||||||
Morgan Stanley & Co., LLC** | $ | 31,801 | $ | (31,801 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 31,801 | $ | (31,801 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Barclays Bank PLC | $ | 19,935 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 19,935 | |||||||
BNP Paribas SA | 27,089 | – 0 | – | – 0 | – | – 0 | – | 27,089 | ||||||||||||
Citibank, NA | 55,776 | – 0 | – | – 0 | – | – 0 | – | 55,776 | ||||||||||||
Credit Suisse International | 11,956 | – 0 | – | – 0 | – | – 0 | – | 11,956 | ||||||||||||
Goldman Sachs Bank USA | 100,570 | (43,380 | ) | – 0 | – | – 0 | – | 57,190 | ||||||||||||
HSBC Bank USA | 55,867 | (16,142 | ) | – 0 | – | – 0 | – | 39,725 | ||||||||||||
JPMorgan Chase Bank /JPMorgan Chase Bank, NA | 44,072 | (44,072 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Standard Chartered Bank | 2,957 | (2,957 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
State Street Bank & Trust Co. | 47,612 | – 0 | – | – 0 | – | – 0 | – | 47,612 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 365,834 | $ | (106,551 | ) | $ | – 0 | – | $ | – 0 | – | $ | 259,283 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 67 |
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 | |||||||||||||||
Exchange-Traded Derivatives: | ||||||||||||||||||||
Morgan Stanley & Co., LLC** | $ | 37,291 | $ | (31,801 | ) | $ | (5,490 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 37,291 | $ | (31,801 | ) | $ | (5,490 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Deutsche Bank AG | $ | 3,245 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 3,245 | |||||||
Goldman Sachs Bank USA | 43,380 | (43,380 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
HSBC Bank USA | 16,142 | (16,142 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
JPMorgan Chase Bank /JPMorgan Chase Bank, NA | 199,143 | (44,072 | ) | – 0 | – | – 0 | – | 155,071 | ||||||||||||
Morgan Stanley & Co., Inc. | 7,032 | – 0 | – | – 0 | – | – 0 | – | 7,032 | ||||||||||||
Royal Bank of Scotland PLC | 76,734 | – 0 | – | – 0 | – | – 0 | – | 76,734 | ||||||||||||
Standard Chartered Bank | 60,314 | (2,957 | ) | – 0 | – | – 0 | – | 57,357 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 405,990 | $ | (106,551 | ) | $ | – 0 | – | $ | – 0 | – | $ | 299,439 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | 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. |
2. Currency Transactions
The Portfolio may invest in non-U.S. dollar securities on a currency hedged or unhedged basis. The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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).
68 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
3. Short Sales
The Portfolio may sell securities short. A short sale is a transaction in which the Portfolio sells securities it does not own, but has borrowed, in anticipation of a decline in the market price of the securities. The Portfolio is obligated to replace the borrowed securities at their market price at the time of settlement. The Portfolio’s obligation to replace the securities borrowed in connection with a short sale will be fully secured by collateral deposited with the broker. The Portfolio is liable to the buyer for any dividends/interest payable on securities while those securities are in a short position. These dividends/interest are recorded as an expense of the Portfolio. Short sales by the Portfolio involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from a purchase of a security because losses from short sales may be unlimited, whereas losses from purchases cannot exceed the total amount invested.
4. TBA and Dollar Rolls
The Portfolio may invest in TBA mortgage-backed securities. A TBA, or “To Be Announced”, trade represents a contract for the purchase or sale of mortgage-backed securities to be delivered at a future agree-upon date; however, the specific mortgage pool numbers or the number of pools that will be delivered to fulfill the trade obligation or terms of the contract are unknown at the time of the trade. Mortgage pools (including fixed-rate or variable-rate mortgages) guaranteed by the Government National Mortgage Association, or GNMA, the Federal National Mortgage Association, or FNMA, or the Federal Home Loan Mortgage Corporation, or FHLMC, are subsequently allocated to the TBA transactions.
The Portfolio may enter into dollar rolls. Dollar rolls involve sales by the Portfolio of securities for delivery in the current month and the Portfolio’s simultaneously contracting to repurchase substantially similar (same type and coupon) securities on a specified future date. During the roll period, the Portfolio forgoes principal and interest paid on the securities. The Portfolio is compensated by the difference between the current sales price and the lower forward price for the future purchase (often referred to as the “drop”) as well as by the interest earned on the cash proceeds of the initial sale. Dollar rolls involve the risk that the market value of the securities the Portfolio is obligated to repurchase under the agreement may decline below the repurchase price. Dollar rolls are speculative techniques. For the year ended October 31, 2015, the Portfolio earned drop income of $1,045,308 which is included in interest income in the accompanying statement of operations.
5. Reverse Repurchase Agreements
The Portfolio may enter into reverse repurchase transactions (“RVP”) in accordance with the terms of a Master Repurchase Agreement (“MRA”), under which the Portfolio sells securities and agrees to repurchase them at a mutually agreed
AB INTERMEDIATE BOND PORTFOLIO • | 69 |
Notes to Financial Statements
upon date and price. At the time the Portfolio enters into a reverse repurchase agreement, it will establish a segregated account with the custodian containing liquid assets having a value comparable to the repurchase price. Under the MRA and other Master Agreements, the Portfolio is permitted to offset payables and/or receivables with collateral held and/or posted to the counterparty and create one single net payment due to or from the Portfolio in the event of a default. In the event of a default by a MRA counterparty, the Portfolio may be considered an unsecured creditor with respect to any excess collateral (collateral with a market value in excess of the repurchase price) held by and/or posted to the counterparty, and as such the return of such excess collateral may be delayed or denied. For the year ended October 31, 2015, the Portfolio had no transactions in reverse repurchase agreements.
NOTE E
Capital Stock
Each class consists of 3,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | Year Ended October 31, 2014 | Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 1,280,374 | 933,382 | $ | 14,319,956 | $ | 10,384,000 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 530,134 | 573,909 | 5,929,136 | 6,379,324 | ||||||||||||||||
| ||||||||||||||||||||
Shares converted from Class B | 123,507 | 149,844 | 1,384,960 | 1,663,533 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (3,441,024 | ) | (4,712,407 | ) | (38,513,706 | ) | (52,313,975 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (1,507,009 | ) | (3,055,272 | ) | $ | (16,879,654 | ) | $ | (33,887,118 | ) | ||||||||||
| ||||||||||||||||||||
Class B | ||||||||||||||||||||
Shares sold | 29,802 | 18,189 | $ | 334,102 | $ | 202,388 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 4,566 | 8,122 | 51,110 | 90,163 | ||||||||||||||||
| ||||||||||||||||||||
Shares converted to Class A | (123,462 | ) | (149,785 | ) | (1,384,960 | ) | (1,663,533 | ) | ||||||||||||
| ||||||||||||||||||||
Shares redeemed | (26,313 | ) | (94,252 | ) | (293,711 | ) | (1,044,053 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (115,407 | ) | (217,726 | ) | $ | (1,293,459 | ) | $ | (2,415,035 | ) | ||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 452,832 | 179,590 | $ | 5,052,767 | $ | 2,000,896 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 68,581 | 73,610 | 765,443 | 816,406 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (619,884 | ) | (776,478 | ) | (6,918,148 | ) | (8,588,355 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (98,471 | ) | (523,278 | ) | $ | (1,099,938 | ) | $ | (5,771,053 | ) | ||||||||||
| ||||||||||||||||||||
70 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | Year Ended October 31, 2014 | Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||||||||||||
|
| |||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 1,211,759 | 2,974,672 | $ | 13,604,515 | $ | 33,468,592 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 42,501 | 93,793 | 475,348 | 1,035,070 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (1,546,249 | ) | (7,399,876 | ) | (17,411,766 | ) | (81,798,132 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (291,989 | ) | (4,331,411 | ) | $ | (3,331,903 | ) | $ | (47,294,470 | ) | ||||||||||
| ||||||||||||||||||||
Class R | ||||||||||||||||||||
Shares sold | 80,356 | 59,606 | $ | 897,105 | $ | 661,932 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 6,409 | 5,744 | 71,629 | 63,862 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (31,961 | ) | (58,323 | ) | (358,491 | ) | (647,074 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 54,804 | 7,027 | $ | 610,243 | $ | 78,720 | ||||||||||||||
| ||||||||||||||||||||
Class K | ||||||||||||||||||||
Shares sold | 128,694 | 101,384 | $ | 1,445,071 | $ | 1,121,247 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 12,526 | 11,372 | 140,230 | 126,655 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (188,432 | ) | (25,439 | ) | (2,103,890 | ) | (282,557 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (47,212 | ) | 87,317 | $ | (518,589 | ) | $ | 965,345 | ||||||||||||
| ||||||||||||||||||||
Class I | ||||||||||||||||||||
Shares sold | 70,818 | 11,353 | $ | 799,450 | $ | 127,276 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,250 | 98 | 13,996 | 1,097 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (35,363 | ) | (3,219 | ) | (398,713 | ) | (36,261 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 36,705 | 8,232 | $ | 414,733 | $ | 92,112 | ||||||||||||||
| ||||||||||||||||||||
Class Z(a) | ||||||||||||||||||||
Shares sold | 529,910 | 897 | $ | 5,886,008 | $ | 10,003 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 2,243 | – 0 | – | 24,944 | – 0 | – | ||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (95,347 | ) | – 0 | – | (1,060,030 | ) | – 0 | – | ||||||||||||
| ||||||||||||||||||||
Net increase | 436,806 | 897 | $ | 4,850,922 | $ | 10,003 | ||||||||||||||
|
(a) | Commenced distribution on April 28, 2014. |
NOTE F
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
AB INTERMEDIATE BOND PORTFOLIO • | 71 |
Notes to Financial Statements
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.
Duration Risk—Duration is the measure that relates the expected price volatility of a fixed-income security to changes in interest rates. The duration of a fixed-income security may be shorter than or equal to full maturity of a fixed-income security. Fixed-income securities with longer durations have more risk and will decrease in price as interest rates rise. For example, a fixed-income security with a duration of three years will decrease in value by approximately 3% if interest rates increase by 1%.
Below Investment Grade Securities Risk—Investments in fixed-income securities with lower ratings (commonly known as “junk bonds”) are subject to 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, 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—Investments 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
72 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
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 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.
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.
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 in the statement of assets and liabilities.
Liquidity Risk—Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Portfolio. Causes of liquidity risk may include low trading volumes, large positions and heavy redemptions of fund shares. Over recent years, liquidity risk has also increased because the capacity of dealers in the secondary market for fixed-income securities to make markets in these securities has decreased, even as the overall bond market has grown significantly, due to, among other things, structural changes, additional regulatory requirements and capital and risk restraints that have led to reduced inventories. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
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.
AB INTERMEDIATE BOND PORTFOLIO • | 73 |
Notes to Financial Statements
NOTE G
Joint Credit Facility
A number of open-end mutual funds managed by the Adviser, including the Portfolio, participate in a $280 million revolving credit facility (the “Facility”) intended to provide short-term financing, if necessary, subject to certain restrictions in connection with abnormal redemption activity. Commitment fees related to the Facility are paid by the participating funds and are included in miscellaneous expenses in the statement of operations. The Portfolio did not utilize the Facility during the year ended October 31, 2015.
NOTE H
Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended October 31, 2015 and October 31, 2014 were as follows:
2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 10,226,708 | $ | 11,395,196 | ||||
|
|
|
| |||||
Total taxable distributions paid | $ | 10,226,708 | $ | 11,395,196 | ||||
|
|
|
|
As of October 31, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 3,273,994 | ||
Accumulated capital and other losses | (116,726 | )(a) | ||
Unrealized appreciation/(depreciation) | (5,359,855 | )(b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | (2,202,587 | )(c) | |
|
|
(a) | During the fiscal year ended October 31, 2015, the Portfolio utilized $2,128,951 of capital loss carryforwards to offset current year net realized gains. The Portfolio also had $10,356,014 of capital loss carryforwards expire during the fiscal year. As of October 31, 2015, the cumulative deferred loss on straddles was $116,726. |
(b) | The differences between book-basis and tax-basis unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses on wash sales, the tax treatment of passive foreign investment companies (PFICs), the difference between book and tax amortization methods for premium, the tax treatment of swaps and Treasury inflation-protected securities, and the realization for tax purposes of gains/losses on certain derivative instruments. |
(c) | The differences between book-basis and tax-basis components of accumulated earnings/(deficit) are attributable primarily to dividends payable and the tax treatment of defaulted securities. |
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 October 31, 2015, the Portfolio did not have any capital loss carryforwards.
74 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
During the current fiscal year, permanent differences primarily due to the tax treatment of swaps and swap clearing fees, reclassifications of foreign currency and paydown gains/losses, the tax treatment of Treasury inflation-protected securities, and the expiration of capital loss carryforwards resulted in a net increase in undistributed net investment income, a net decrease in accumulated net realized loss on investment and foreign currency transactions, and a net decrease in additional paid-in capital. These reclassifications had no effect on net assets.
NOTE I
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 J
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 INTERMEDIATE BOND PORTFOLIO • | 75 |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 11.24 | $ 11.00 | $ 11.40 | $ 11.04 | $ 10.98 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .28 | .35 | .26 | .26 | .37 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.12 | ) | .23 | (.35 | ) | .41 | # | .07 | ||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | .16 | .58 | (.09 | ) | .68 | .44 | ||||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.34 | ) | (.34 | ) | (.31 | ) | (.32 | ) | (.38 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.40 | $ 11.04 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(c) | 1.45 | % | 5.34 | %* | (.81 | ) %† | 6.27 | % | 4.11 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $252,965 | $273,962 | $301,764 | $370,672 | $381,577 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | .88 | % | .90 | % | .89 | % | .85 | % | .85 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.06 | % | 1.06 | % | 1.02 | % | .99 | % | 1.00 | % | ||||||||||
Net investment income(b) | 2.51 | % | 3.15 | % | 2.32 | % | 2.29 | % | 3.42 | % | ||||||||||
Portfolio turnover rate** | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 83.
76 | • AB INTERMEDIATE BOND PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class B | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 11.24 | $ 11.00 | $ 11.41 | $ 11.05 | $ 10.98 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .20 | .28 | .18 | .18 | .30 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.12 | ) | .22 | (.36 | ) | .42 | # | .08 | ||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | .08 | .50 | (.18 | ) | .61 | .38 | ||||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.26 | ) | (.26 | ) | (.23 | ) | (.25 | ) | (.31 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.41 | $ 11.05 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(c) | .72 | % | 4.61 | %* | (1.59 | )%† | 5.56 | % | 3.50 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $1,692 | $3,017 | $5,348 | $9,089 | $11,104 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.60 | % | 1.60 | % | 1.58 | % | 1.55 | % | 1.55 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.80 | % | 1.78 | % | 1.74 | % | 1.74 | % | 1.75 | % | ||||||||||
Net investment income(b) | 1.77 | % | 2.48 | % | 1.59 | % | 1.59 | % | 2.73 | % | ||||||||||
Portfolio turnover rate** | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 83.
AB INTERMEDIATE BOND PORTFOLIO • | 77 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 11.22 | $ 10.98 | $ 11.38 | $ 11.02 | $ 10.96 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .20 | .27 | .18 | .18 | .29 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.12 | ) | .23 | (.35 | ) | .41 | # | .07 | ||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | .08 | .50 | (.17 | ) | .60 | .36 | ||||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.26 | ) | (.26 | ) | (.23 | ) | (.24 | ) | (.30 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 11.04 | $ 11.22 | $ 10.98 | $ 11.38 | $ 11.02 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(c) | .73 | % | 4.63 | %* | (1.51 | )%† | 5.55 | % | 3.40 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $40,928 | $42,690 | $47,530 | $61,224 | $62,147 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.60 | % | 1.60 | % | 1.59 | % | 1.55 | % | 1.55 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.78 | % | 1.77 | % | 1.73 | % | 1.70 | % | 1.71 | % | ||||||||||
Net investment income(b) | 1.79 | % | 2.46 | % | 1.62 | % | 1.60 | % | 2.72 | % | ||||||||||
Portfolio turnover rate** | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 83.
78 | • AB INTERMEDIATE BOND PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 11.24 | $ 11.00 | $ 11.41 | $ 11.05 | $ 10.99 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .31 | .39 | .29 | .29 | .40 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.12 | ) | .22 | (.36 | ) | .41 | # | .07 | ||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | .19 | .61 | (.07 | ) | .71 | .47 | ||||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.37 | ) | (.37 | ) | (.34 | ) | (.35 | ) | (.41 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.41 | $ 11.05 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(c) | 1.73 | % | 5.65 | %* | (.61 | )%† | 6.59 | % | 4.43 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $22,705 | $26,352 | $73,445 | $94,584 | $88,402 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | .60 | % | .60 | % | .59 | % | .55 | % | .55 | % | ||||||||||
Expenses, before waivers/reimbursements | .77 | % | .75 | % | .72 | % | .69 | % | .70 | % | ||||||||||
Net investment income(b) | 2.78 | % | 3.51 | % | 2.60 | % | 2.59 | % | 3.70 | % | ||||||||||
Portfolio turnover rate** | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 83.
AB INTERMEDIATE BOND PORTFOLIO • | 79 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class R | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 11.24 | $ 11.00 | $ 11.40 | $ 11.04 | $ 10.98 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .26 | .33 | .24 | .23 | .34 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.12 | ) | .23 | (.36 | ) | .42 | # | .08 | ||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | .14 | .56 | (.12 | ) | .66 | .42 | ||||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.32 | ) | (.32 | ) | (.28 | ) | (.30 | ) | (.36 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.40 | $ 11.04 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(c) | 1.23 | % | 5.13 | %* | (1.01 | )%† | 6.05 | % | 3.91 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $2,936 | $2,368 | $2,241 | $1,568 | $1,168 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.10 | % | 1.10 | % | 1.09 | % | 1.05 | % | 1.05 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.38 | % | 1.36 | % | 1.31 | % | 1.29 | % | 1.31 | % | ||||||||||
Net investment income(b) | 2.29 | % | 2.94 | % | 2.13 | % | 2.07 | % | 3.16 | % | ||||||||||
Portfolio turnover rate** | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 83.
80 | • AB INTERMEDIATE BOND PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class K | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 11.24 | $ 11.01 | $ 11.41 | $ 11.05 | $ 10.99 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .28 | .35 | .27 | .26 | .38 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.10 | ) | .22 | (.36 | ) | .42 | # | .07 | ||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | .18 | .57 | (.09 | ) | .69 | .45 | ||||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.35 | ) | (.34 | ) | (.31 | ) | (.33 | ) | (.39 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 11.07 | $ 11.24 | $ 11.01 | $ 11.41 | $ 11.05 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(c) | 1.57 | % | 5.30 | %* | (.76 | ) %† | 6.32 | % | 4.17 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $3,922 | $4,515 | $3,459 | $3,823 | $2,869 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | .85 | % | .85 | % | .84 | % | .80 | % | .80 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.08 | % | 1.03 | % | .93 | % | .99 | % | 1.01 | % | ||||||||||
Net investment income(b) | 2.53 | % | 3.17 | % | 2.38 | % | 2.34 | % | 3.49 | % | ||||||||||
Portfolio turnover rate** | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 83.
AB INTERMEDIATE BOND PORTFOLIO • | 81 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class I | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 11.25 | $ 11.01 | $ 11.42 | $ 11.06 | $ 11.00 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .31 | .36 | .18 | .29 | .42 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.12 | ) | .25 | (.25 | ) | .41 | # | .05 | ||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | .19 | .61 | (.07 | ) | .71 | .47 | ||||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.37 | ) | (.37 | ) | (.34 | ) | (.35 | ) | (.41 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 11.07 | $ 11.25 | $ 11.01 | $ 11.42 | $ 11.06 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(c) | 1.73 | % | 5.65 | %* | (.62 | ) %† | 6.58 | % | 4.42 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $511 | $107 | $14 | $814 | $715 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | .60 | % | .60 | % | .56 | % | .55 | % | .55 | % | ||||||||||
Expenses, before waivers/reimbursements | .75 | % | .75 | % | .67 | % | .66 | % | .68 | % | ||||||||||
Net investment income(b) | 2.74 | % | 3.22 | % | 2.46 | % | 2.59 | % | 3.76 | % | ||||||||||
Portfolio turnover rate** | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 83.
82 | • AB INTERMEDIATE BOND PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class Z | ||||||||
Year Ended 2015 | April 28, 2014 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 11.26 | $ 11.15 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(a)(b) | .32 | .19 | ||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.13 | ) | .10 | |||||
|
| |||||||
Net increase in net asset value from operations | .19 | .29 | ||||||
|
| |||||||
Less: Dividends | ||||||||
Dividends from net investment income | (.37 | ) | (.18 | ) | ||||
|
| |||||||
Total dividends and distributions | (.37 | ) | (.18 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 11.08 | $ 11.26 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(c) | 1.72 | % | 2.61 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $4,851 | $10 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | .60 | % | .60 | %^ | ||||
Expenses, before waivers/reimbursements | .71 | % | .66 | %^ | ||||
Net investment income(b) | 2.91 | % | 3.29 | %^ | ||||
Portfolio turnover rate** | 198 | % | 221 | % |
(a) | Based on average shares outstanding. |
(b) | Net of fees waived and expenses reimbursed by the Adviser. |
(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. Initial sales charges or contingent deferred sales charges are not reflected in the calculation of total investment return. Total return does not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares. Total investment return calculated for a period of less than one year is not annualized. |
(d) | Commencement of distribution. |
# | Amount reclassified from realized gain (loss) on investment transactions. |
* | Includes the impact of proceeds received and credited to the Portfolio resulting from class action settlements, which enhanced the Portfolio’s performance for the year ended October 31, 2014 by 0.01% . |
† | Includes the impact of proceeds received and credited to the Portfolio resulting from third party regulatory settlements, which enhanced the Portfolio’s performance for the year ended October 31, 2013 by 0.14%. |
Includes the Adviser’s reimbursement in respect of the Lehman Bankruptcy Claim which contributed to the Portfolio’s performance by 0.07% for the year-ended October 31, 2012. |
^ | Annualized. |
** | The Portfolio accounts for dollar roll transactions as purchases and sales. |
See notes to financial statements.
AB INTERMEDIATE BOND PORTFOLIO • | 83 |
Financial Highlights
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors of AB Bond Fund, Inc. and the
Shareholders of AB Intermediate Bond Portfolio
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of AB Intermediate Bond Portfolio (the “Fund”), formerly known as AllianceBernstein Intermediate Bond Portfolio (one of the portfolios constituting the AB Bond Fund, Inc., formerly known as AllianceBernstein Bond Fund, Inc.), as of October 31, 2015, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented therein. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2015, by correspondence with the custodian and others, or by other appropriate auditing procedures where replies from others were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AB Intermediate Bond Portfolio (one of the portfolios constituting the AB Bond Fund, Inc.) at October 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented therein, in conformity with U.S. generally accepted accounting principles.
New York, New York
December 30, 2015
84 | • AB INTERMEDIATE BOND PORTFOLIO |
Report of Independent Registered Public Accounting Firm
2015 FEDERAL TAX INFORMATION
(unaudited)
For Federal income tax purposes, the following information is furnished with respect to the distributions paid by the Portfolio during the taxable year ended October 31, 2015.
For foreign shareholders, 57.90% of ordinary income dividends paid may be considered to be qualifying to be taxed as interest-related dividends.
Shareholders should not use the above information to prepare their income tax returns. The information necessary to complete your income tax returns will be included with your Form 1099-DIV which will be sent to you separately in January 2016.
AB INTERMEDIATE BOND PORTFOLIO • | 85 |
BOARD OF DIRECTORS
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 Paul J. DeNoon(2), Vice President Shawn E. Keegan(2) , Vice President Alison M. Martier(2) , Vice President Douglas J. Peebles(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 State Street Corporation CCB/5 1 Iron Street Boston, MA 02210
Principal Underwriter AllianceBernstein Investments, Inc. 1345 Avenue of the Americas New York, NY 10105
Transfer Agent AllianceBernstein Investor Services, Inc. P.O. Box 786003 San Antonio, TX 78278-6003 Toll-Free (800) 221-5672 | Independent Registered Public Ernst & Young LLP 5 Times Square New York, NY 10036
Legal Counsel Seward & Kissel LLP One Battery Park Plaza New York, NY 10004 |
(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 Fund’s portfolio are made by the Adviser’s U.S. Investment Grade Core Fixed Income Team. Mr. Paul J. DeNoon, Mr. Shawn E. Keegan, Ms. Alison M. Martier, Mr. Douglas J. Peebles and Mr. Greg J. Wilensky are the investment professionals with the most significant responsibility for the day-to-day management of the Fund’s portfolio. |
86 | • AB INTERMEDIATE BOND PORTFOLIO |
Board of Directors
MANAGEMENT OF THE FUND
Board of Directors Information
The business and affairs of the Fund are managed under the direction of the Board of Directors. Certain information concerning the Fund’s Directors is set forth below.
NAME, ADDRESS* AND AGE (YEAR FIRST ELECTED**) | PRINCIPAL DURING PAST FIVE YEARS | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC COMPANY DIRECTORSHIPS CURRENTLY HELD BY DIRECTOR | |||||
INTERESTED DIRECTOR | ||||||||
Robert M. Keith, + 1345 Avenue of the Americas New York, NY 10105 55 (2010) | Senior Vice President of AllianceBernstein L.P. (the “Adviser”) and head of AllianceBernstein Investments, Inc. (“ABI”) since July 2008; Director of ABI and President of the AB Mutual Funds. Previously, he served as Executive Managing Director of ABI from December 2006 to June 2008. Prior to joining ABI in 2006, Executive Managing Director of Bernstein Global Wealth Management, and prior thereto, Senior Managing Director and Global Head of Client Service and Sales of the Adviser’s institutional investment management business since 2004. Prior thereto, he was Managing Director and Head of North American Client Service and Sales in the Adviser’s institutional investment management business, with which he had been associated since prior to 2004. | 110 | None |
AB INTERMEDIATE BOND PORTFOLIO • | 87 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC COMPANY DIRECTORSHIPS CURRENTLY HELD BY DIRECTOR | |||||
DISINTERESTED DIRECTORS | ||||||||
Marshall C. Turner, Jr., # Chairman of the Board 74 (2005) | Private Investor since prior to 2010. Former Chairman and CEO of Dupont Photomasks, Inc. (components of semi-conductor manufacturing). He has extensive operating leadership and venture capital investing experience, including five interim or full-time CEO roles, and prior service as general partner of institutional venture capital partnerships. He also has extensive non-profit board leadership experience, and currently serves on the boards of two education and science-related non-profit organizations. He has served as a director of one AB fund since 1992, and director or trustee of multiple AB Funds since 2005. He has been Chairman of the AB Funds since January 2014, and the Chairman of the Independent Directors Committees of such Funds since February 2014. | 110 | Xilinx, Inc. (programmable logic semi-conductors) since 2007 | |||||
John H. Dobkin, # 73 (1998) | Independent Consultant since prior to 2010. Formerly, President of Save Venice, Inc. (preservation organization) from 2001-2002; Senior Advisor from June 1999-June 2000 and President of Historic Hudson Valley (historic preservation) from December 1989-May 1999. Previously, Director of the National Academy of Design. He has served as a director or trustee of various AB Funds since 1992, and as Chairman of the Audit Committees of a number of such Funds from 2001-2008. | 110 | None |
88 | • AB INTERMEDIATE BOND PORTFOLIO |
Management of the Fund,
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Michael J. Downey, # 71 (2005) | Private Investor since prior to 2010. Formerly, managing partner of Lexington Capital, LLC (investment advisory firm) from December 1997 until December 2003. He served as Director of The Merger Fund (registered investment company) since prior to 2010 until 2013. He served as a Director of Prospect Acquisition Corp. (financial services) from 2007 until 2009. From 1987 until 1993, Chairman and CEO of Prudential Mutual Fund Management, director of the Prudential mutual funds, and member of the Executive Committee of Prudential Securities Inc. He has served as a director or trustee of the AB Funds since 2005 and is a director and Chairman of one other registered investment company. | 110 | Asia Pacific Fund, Inc. (registered investment company) since prior to 2010 | |||||
William H. Foulk, Jr., # 83 (1998) | Investment Adviser and an Independent Consultant since prior to 2010. Previously, he was Senior Manager of Barrett Associates, Inc., a registered investment adviser. He was formerly Deputy Comptroller and Chief Investment Officer of the State of New York and, prior thereto, Chief Investment Officer of the New York Bank for Savings. He has served as a director or trustee of various AB Funds since 1983, and was Chairman of the Independent Directors Committees of the AB Funds from 2003 until early February 2014. He served as Chairman of such Funds from 2003 through December 2013. He is also active in a number of mutual fund related organizations and committees. | 110 | None |
AB INTERMEDIATE BOND PORTFOLIO • | 89 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
D. James Guzy, # 79 (2005) | Chairman of the Board of SRC Computers, Inc. (semi-conductors), with which he has been associated since prior to 2010. He served as Chairman of the Board of PLX Technology (semi-conductors) since prior to 2010 until November 2013. He was a Director of Cirrus Logic Corporation (semi-conductors) from 1984 until July 2011. He was a director of Intel Corporation (semi-conductors) from 1969 until 2008, and served as Chairman of the Finance Committee of such company for several years until May 2008. He has served as a director or trustee of one or more of the AB Funds since 1982. | 110 | None | |||||
Nancy P. Jacklin, # 67 (2006) | Professorial Lecturer at the Johns Hopkins School of Advanced International Studies (2008-2015). U.S. Executive Director of the International Monetary Fund (which is responsible for ensuring the stability of the international monetary system), (December 2002-May 2006); Partner, Clifford Chance (1992-2002); Sector Counsel, International Banking and Finance, and Associate General Counsel, Citicorp (1985-1992); Assistant General Counsel (International), Federal Reserve Board of Governors (1982-1985); and Attorney Advisor, U.S. Department of the Treasury (1973-1982). Member of the Bar of the District of Columbia and of New York; and member of the Council on Foreign Relations. She has served as a director or trustee of the AB Funds since 2006 and has been Chairman of the Governance and Nominating Committees of the Funds since August 2014. | 110 | None |
90 | • AB INTERMEDIATE BOND PORTFOLIO |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Garry L. Moody, # 63 (2008) | Independent Consultant. Formerly, Partner, Deloitte & Touche LLP (1995-2008) where he held a number of senior positions, including Vice Chairman, and U.S. and Global Investment Management Practice Managing Partner; President, Fidelity Accounting and Custody Services Company (1993-1995); and Partner, Ernst & Young LLP (1975-1993), where he served as the National Director of Mutual Fund Tax Services and Managing Partner of its Chicago Office Tax department. He is a member of the Trustee Advisory Board of BoardIQ, a biweekly publication focused on issues and news affecting directors of mutual funds. He has served as a director or trustee, and as Chairman of the Audit Committees, of the AB Funds since 2008. | 110 | None |
AB INTERMEDIATE BOND PORTFOLIO • | 91 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Earl D. Weiner, # 76 (2007) | Of Counsel, and Partner prior to January 2007, of the law firm Sullivan & Cromwell LLP and is a former member of the ABA Federal Regulation of Securities Committee Task Force to draft editions of the Fund Director’s Guidebook. He also serves as a director or trustee of various non-profit organizations and has served as Chairman or Vice Chairman of a number of them. He has served as a director or trustee of the AB Funds since 2007 and served as Chairman of the Governance and Nominating Committees of the AB Funds from 2007 until August 2014. | 110 | None |
* | The address for each of the Fund’s disinterested Directors is c/o AllianceBernstein L.P., Attention: Philip L. Kirstein, 1345 Avenue of the Americas, New York, NY 10105. |
** | There is no stated term of office for the Fund’s Directors. |
*** | The information above includes each Director’s principal occupation during the last five years and other information relating to the experience, attributes and skills relevant to each Director’s qualifications to serve as a Director, which led to the conclusion that each Director should serve as a Director for the Fund. |
+ | Mr. Keith is an “interested person” of the Fund as defined in the “40 Act”, due to his position as a Senior Vice President of the Adviser. |
# | Member of the Audit Committee, the Governance and Nominating Committee and the Independent Directors Committee. |
92 | • AB INTERMEDIATE BOND PORTFOLIO |
Management of the Fund
Officer Information
Certain information concerning the Fund’s Officers is set forth below.
NAME, ADDRESS* AND AGE | PRINCIPAL POSITION(S) HELD WITH FUND | PRINCIPAL OCCUPATION DURING PAST 5 YEARS | ||
Robert M. Keith 55 | President and Chief Executive Officer | See biography above. | ||
Philip L. Kirstein | Senior Vice President and Independent Compliance Officer | Senior Vice President and Independent Compliance Officer of the AB Funds, with which he has been associated since October 2004. Prior thereto, he was Of Counsel to Kirkpatrick & Lockhart, LLP from October 2003 to October 2004, and General Counsel of Merrill Lynch Investment Managers, L.P. since prior to March 2003. | ||
Paul J. DeNoon 53 | Vice President | Senior Vice President of the Adviser**, with which he has been associated since prior to 2010. | ||
Shawn E. Keegan 44 | Vice President | Vice President of the Adviser**, with which he has been associated since prior to 2010. | ||
Alison M. Martier 58 | Vice President | Senior Vice President of the Adviser**, with which she has been associated since prior to 2010. | ||
Douglas J. Peebles 50 | Vice President | Senior Vice President of the Adviser**, with which he has been associated since prior to 2010. | ||
Greg J. Wilensky 48 | Vice President | Senior Vice President of the Adviser**, with which he has been associated since prior to 2010. | ||
Emilie D. Wrapp 59 | Secretary | Senior Vice President, Assistant General Counsel and Assistant Secretary of ABI**, with which she has been associated since prior to 2010. | ||
Joseph J. Mantineo 56 | Treasurer and Chief Financial Officer | Senior Vice President of AllianceBernstein Investor Services, Inc. (“ABIS”)**, with which he has been associated since prior to 2010. | ||
Phyllis J. Clarke 54 | Controller | Vice President of ABIS**, with which she has been associated since prior to 2010. | ||
Vincent S. Noto 50 | Chief Compliance Officer | Senior Vice President since 2015 and Mutual Fund Chief Compliance Officer of the Adviser ** since 2014. Prior thereto, he was Vice President and Director of Mutual Fund Compliance of the Adviser** since 2010. |
* | The address for each of the Fund’s Officers is 1345 Avenue of the Americas, New York, NY 10105. |
** | The Adviser, ABI and ABIS are affiliates of the Fund. |
The Fund’s Statement of Additional Information (“SAI”) has additional information about the Fund’s Directors and Officers and is available without charge upon request. Contact your financial representative or AB at 1-800-227-4618, or visit www.abglobal.com, for a free prospectus or SAI. |
AB INTERMEDIATE BOND PORTFOLIO • | 93 |
Management of the Fund
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 Bond Fund, Inc. (the “Fund”) with respect to AB Intermediate Bond Portfolio (the “Portfolio”).2 The evaluation of the Investment Advisory Agreement was prepared by Philip L. Kirstein, the Senior Officer of the Fund, for the Directors of the Fund, 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 Directors of the Fund to perform its duties pursuant to Section 15 of the Investment Company Act of 1940 (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 Directors 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
1 | The Senior Officer’s fee evaluation was completed on October 22, 2015 and discussed with the Board of Directors on November 3-5, 2015. |
2 | Future references to the Portfolio do not include “AB.” References in the fee summary pertaining to performance and expense ratios refer to the Class A shares of the Portfolio. |
94 | • AB INTERMEDIATE BOND PORTFOLIO |
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
INVESTMENT ADVISORY FEES, NET ASSETS, EXPENSE CAPS & RATIOS
The Adviser proposed that the Portfolio pays the advisory fee set forth in the table below for receiving the services to be provided pursuant to the Investment Advisory Agreement. The fee schedule below, implemented in January 2004 in connection with the Adviser’s settlement with the NYAG in December 2003, is based on a master schedule that contemplates eight categories of funds with almost all funds in each category having the same advisory fee schedule.
Portfolio | Category | Advisory Fee Based on % of Average Daily Net Assets | Net Assets 09/30/15 ($MM) | |||||
Intermediate Bond Portfolio | Low Risk Income | 0.45% on 1st $2.5 billion 0.40% on next $2.5 billion 0.35% on the balance | $ | 329.0 |
The Adviser is reimbursed as specified in the Investment Advisory Agreement for certain clerical, legal, accounting, administrative and other services provided to the Portfolio. During the Portfolio’s fiscal year ended October 31, 2014, the Adviser received $56,402 (0.015% of the Portfolio’s average daily net assets) for such services.
3 | Jones v. Harris at 1427. |
AB INTERMEDIATE BOND PORTFOLIO • | 95 |
The Adviser agreed to waive that portion of its advisory fees and/or reimburse the Portfolio for that portion of the Portfolio’s total operating expenses to the degree necessary to limit the Portfolio’s expense ratios to the amounts set forth below for the Portfolio’s current fiscal year. The waiver is terminable by the Adviser upon at least 60 days’ notice prior to the Portfolio’s prospectus update. In addition, set forth below are the Portfolio’s gross expense ratios for the most recent semi-annual period:4
Portfolio | Expense Cap Pursuant to Expense Limitation Undertaking | Gross Expense Ratio5 | Fiscal Year End | |||||||||
Intermediate Bond Portfolio6 | Advisor Class A Class B Class C Class R Class K Class I Class Z |
| 0.60 0.85 1.60 1.60 1.10 0.85 0.60 0.60 | % % % % % % % % |
| 0.76 1.06 1.79 1.77 1.37 1.05 0.73 0.63 | % % % % % % % % | Oct. 31 (ratios as of Apr. 30, 2015) |
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, although as previously noted, the Adviser is reimbursed for providing such services. Also, retail mutual funds managed by the Adviser are widely held and accordingly, servicing the Portfolio’s investors is more time consuming and labor intensive compared to servicing institutional clients since the Adviser needs to communicate with a more extensive network of financial intermediaries and shareholders. 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
4 | Semi-annual total expense ratios are unaudited. |
5 | Annualized. |
6 | Effective June 1, 2015, the Rule 12b-1 fee for Class A shares was reduced from 0.30% to 0.25%. At the same time, the expense cap for the Class A shares was also reduced from 0.90% to 0.85%. |
96 | • AB INTERMEDIATE BOND PORTFOLIO |
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.7 In addition to the AB Institutional fee schedule, set forth below is what would have been the effective advisory fee for the Portfolio had the AB Institutional fee schedule been applicable to the Portfolio based on September 30, 2015 net assets.8
Portfolio | Net Assets 9/30/15 ($MM) | AB Institutional Fee Schedule | Effective AB Inst. Adv. Fee | Portfolio Advisory Fee | ||||||||
Intermediate Bond Portfolio | $329.0 | U.S. Strategic Core Plus Schedule 0.50% on 1st $30 million 0.20% on the balance Minimum account size: $25m | 0.227% | 0.450% |
7 | 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. |
8 | 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 INTERMEDIATE BOND PORTFOLIO • | 97 |
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 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 | Portfolio Advisory Fee | ||||||
Intermediate Bond Portfolio | Intermediate Duration Portfolio | 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% | 0.450% |
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 substantially similar investment style as the Portfolio.9 Also shown are what would have been the effective advisory fee of the Portfolio had the AVPS fee schedule been applicable to the Portfolio and the Portfolio’s advisory fees based on September 30, 2015 net assets:
Portfolio | AVPS Portfolio | Fee Schedule | AVPS Effective Fee | Portfolio Advisory Fee | ||||||
Intermediate Bond Fund | Intermediate Bond Portfolio | 0.45% on first $2.5 billion 0.40% on next $2.5 billion 0.35% on the balance | 0.450% | 0.450% |
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 are the Portfolio’s advisory fee, the advisory fee schedule of the sub-advised fund, and what would have been the
9 | The AVPS portfolio was also affected by the settlement between the Adviser and the NYAG. As a result, the Portfolio has the same breakpoints in its advisory fee schedule as the AVPS portfolio. |
98 | • AB INTERMEDIATE BOND PORTFOLIO |
effective management 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 | Portfolio Advisory Fee | ||||||
Intermediate Bond Portfolio10 | Client #111 | 0.29% on first $100 million 0.20% thereafter | 0.227% | 0.450% |
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 Portfolio, it is difficult to evaluate the relevance of such fees due to the differences in the services provided, risks involved and other competitive factors between the Portfolio 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 with fees charged to other investment companies for similar services by other investment advisers.12,13 Broadridge’s analysis included the comparison of each Portfolio’s
10 | It should be noted that the advisory fee paid by the shareholders of the sub-advisory relationship is higher than the fee charged to the Portfolio. |
11 | The sub-advisory relationship is with an affiliate of the Adviser. |
12 | 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. |
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 continued to be determined by Lipper. |
AB INTERMEDIATE BOND PORTFOLIO • | 99 |
contractual management fee,14 estimated at the approximate current asset level of the subject Portfolio, to the median of the Portfolio’s Broadridge Expense Group (“EG”)15 and the Portfolio’s contractual management fee ranking.
Broadridge describes an EG as a representative sample of comparable funds. Broadridge’s standard methodology for screening funds to be included in an EG entails the consideration of several fund criteria, including fund type, Lipper investment classification/objective, load type, similar 12b-1/non-12b-1 service fees, asset (size) comparability, expense components and attributes. An EG will typically consist of seven to twenty funds.
Portfolio | Contractual Management Fee (%) | Broadridge EG Median (%) | Rank | |||||||
Intermediate Bond Portfolio | 0.450 | 0.461 | 4/14 |
Broadridge also analyzed the Portfolio’s most recently completed fiscal year total expense ratios in comparison to the Portfolio’s EGs and Broadridge Expense Universe (“EU”). The EU is a broader group compared to the EG, consisting of all funds that have the same Lipper investment classification/objective and load type as the subject Fund.16 Set forth below is Broadridge’s comparison of the Portfolio’s total expense ratios and the median of the Portfolio’s EGs and EUs. The Portfolio’s total expense ratio rankings are also shown. Pro-forma total expense ratio (italicized) is shown to reflect the Portfolio’s 12b-1 fee reduction had the reduction been in effect during the Portfolio’s entire fiscal year.
Portfolio | Total Expense Ratio (%)17 | Broadridge Exp. Group Median (%) | Broadridge Group Rank | Broadridge Universe Median (%) | Broadridge Universe Rank | |||||||||||
Intermediate Bond Portfolio | 0.900 | 0.889 | 9/14 | 0.852 | 34/50 | |||||||||||
Pro-forma | 0.850 | 0.889 | 5/14 | 0.852 | 26/50 |
14 | The contractual management fee is calculated by Broadridge using the Portfolio’s contractual management fee rate at the hypothetical asset level. The hypothetical asset level is based on the combined net assets of all classes of the Portfolio, rounded up to the next $25 million. Broadridge’s total expense ratio information is based on the most recent annual report except as otherwise noted. A ranking of “1” would mean that the Portfolio had the lowest effective fee rate in the Broadridge peer group. |
15 | Broadridge does not consider average account size when constructing EGs. Funds with relatively small average account sizes tend to have a higher transfer agent expense ratio than comparable sized funds that have relatively large average account sizes. |
16 | Except for asset (size) comparability, Broadridge uses the same criteria for selecting an EG when selecting an EU. Unlike the EG, the EU allows for the same adviser to be represented by more than just one fund. |
17 | Most recently completed fiscal year Class A share total expense ratio. |
100 | • AB INTERMEDIATE BOND PORTFOLIO |
Based on this analysis, considering pro-forma information, the Portfolio has a more favorable ranking on a contractual management fee basis than on a total expense ratio basis.
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 an independent 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 Directors, was reviewed by the Senior Officer and the independent consultant. The Adviser’s profitability from providing investment advisory services to the Portfolio decreased during calendar year 2014 relative to 2013.
In addition to the Adviser’s direct profits from managing the Portfolio, certain of the Adviser’s affiliates have business relationships with the Portfolio and may earn a profit from providing other services to the Portfolio. The courts have referred to this type of business opportunity 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. These affiliates provide transfer agent and distribution related services to the Portfolio and receive transfer agent fees, front-end sales loads, Rule 12b-1 payments and contingent deferred sales charges (“CDSC”). During the Portfolio’s fiscal year ended October 21, 2014, ABI received from the Portfolio $4,583, $1,363,838 and $12,384 in front-end sales charges, Rule 12b-1 and CDSC fees, respectively.
AllianceBernstein Investments, Inc. (“ABI”), an affiliate of the Adviser, is the Portfolio’s principal underwriter. ABI and the Adviser have disclosed in the Portfolio’s prospectus that they may make revenue sharing payments from their own resources, in addition to revenues derived from sales loads and Rule 12b-1 fees, to firms that sell shares of the Portfolio. In 2014, ABI paid approximately 0.05% of the average monthly assets of the AllianceBernstein Mutual Funds or approximately $20.4 million for distribution services and educational support (revenue sharing payments).
AB INTERMEDIATE BOND PORTFOLIO • | 101 |
Fees and reimbursements for out of pocket expenses charged by AllianceBernstein Investor Services, Inc. (“ABIS”), the affiliated transfer agent for the Portfolio, are charged on a per account basis, based on the level of service
provided and the class of share held by the account. ABIS also receives a fee per shareholder sub-account for each account maintained by an intermediary on an omnibus basis. During the Portfolio’s fiscal year ended October 31, 2014, ABIS received $293,976 in fees from the Portfolio.
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 Directors 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.
Previously, in February 2008, the independent consultant provided the Board of Directors an update of the Deli18 study on advisory fees and various fund characteristics.19 The independent consultant first reiterated the results of his previous
18 | 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. |
19 | 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. |
102 | • AB INTERMEDIATE BOND PORTFOLIO |
two dimensional comparison analysis (fund size and family size) with the Board of Directors.20 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 shows the 1, 3, 5 and 10 year performance returns and rankings of the Portfolio21 relative to its Broadridge Performance Group (“PG”) and Broadridge Performance Universe (“PU”)22 for the period ended July 31, 2015.23
Portfolio | Portfolio (%) | PG (%) | PU (%) | PG Rank | PU Rank | |||||||||||
Intermediate Bond Portfolio | ||||||||||||||||
1 year | 2.25 | 1.90 | 2.02 | 2/15 | 16/63 | |||||||||||
3 year | 2.28 | 1.65 | 1.70 | 2/15 | 10/61 | |||||||||||
5 year | 3.75 | 3.17 | 3.40 | 2/15 | 15/57 | |||||||||||
10 year | 4.59 | 4.47 | 4.47 | 5/12 | 18/47 |
20 | 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. |
21 | The performance returns and rankings are for the Class A shares of the Portfolio. The performance returns of the Portfolios were provided Broadridge. |
22 | The Portfolio’s PG/PU is not identical to the Portfolio’s EG/EU as the criteria for including/excluding a fund in/from a PG/PU are somewhat different from that of an EG/EU. |
23 | The current Lipper investment classification/objective dictates the PG and PU throughout the life of the Portfolio even if the Portfolio may have had a different investment classification/objective at different points in time. |
AB INTERMEDIATE BOND PORTFOLIO • | 103 |
Set forth below are the 1, 3, 5, 10 year and since inception net performance returns of the Portfolio (in bold)24 versus its benchmark.25 Portfolio and benchmark volatility and reward-to-variability ratio (“Sharpe Ratio”) information is also shown.26
Period Ending July 31, 2015 Annualized Performance | ||||||||||||||||||||||||||||||||
Since Inception | Annualized | Risk Period (Year) | ||||||||||||||||||||||||||||||
1 Year (%) | 3 Year (%) | 5 Year (%) | 10 Year (%) | Volatility (%) | Sharpe (%) | |||||||||||||||||||||||||||
Intermediate Bond Portfolio | 2.25 | 2.28 | 3.75 | 4.59 | 5.04 | 4.29 | 0.73 | 10 | ||||||||||||||||||||||||
Barclays Capital U.S. Aggregate Bond Index | 2.82 | 1.60 | 3.27 | 4.61 | 5.37 | 3.25 | 0.96 | 10 | ||||||||||||||||||||||||
Inception Date: July 1, 1999 |
CONCLUSION:
Based on the factors discussed above the Senior Officer’s conclusion is that the proposed advisory fee 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 in respect of the Portfolio is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: November 25, 2015
24 | The performance returns and risk measures shown in the table are for the Class A shares of the Portfolio. |
25 | The Adviser provided Portfolio and benchmark performance return information for the periods through July 31, 2015. |
26 | 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. |
104 | • AB INTERMEDIATE BOND PORTFOLIO |
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 INTERMEDIATE BOND PORTFOLIO • | 105 |
AB Family of Funds
NOTES
106 | • AB INTERMEDIATE BOND PORTFOLIO |
NOTES
AB INTERMEDIATE BOND PORTFOLIO • | 107 |
NOTES
108 | • AB INTERMEDIATE BOND PORTFOLIO |
AB INTERMEDIATE BOND PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
IB-0151-1015
OCT 10.31.15
ANNUAL REPORT
AB MUNICIPAL BOND INFLATION STRATEGY
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
Annual Report
This report provides management’s discussion of fund performance for AB Municipal Bond Inflation Strategy (the “Strategy”) for the annual period ended October 31, 2015. Effective January 20, 2015, the Strategy’s name changed from AllianceBernstein Municipal Bond Inflation Strategy to AB Municipal Bond Inflation Strategy.
Investment Objectives and Policies
The Strategy seeks to maximize real after-tax return for investors subject to federal income taxes, without undue risk to principal. Real return is the rate of return after adjusting for inflation. The Strategy pursues its objective by investing principally in high-quality, predominantly investment-grade, municipal securities that pay interest exempt from federal taxation. As a fundamental policy, the Strategy will invest at least 80% of its net assets in municipal securities. These securities may be subject to the federal alternative minimum tax (“AMT”) for some taxpayers.
The Strategy will invest at least 80% of its total assets in fixed-income securities rated A or better or the equivalent by one or more national rating agency or deemed to be of comparable credit quality by AllianceBernstein L.P. (the “Adviser”). In deciding whether to take direct or indirect exposure, the Strategy may invest up to 20% of its total assets in fixed-income securities rated BB or B or the equivalent by one or more national rating agency (or deemed to be of comparable credit quality by the Adviser), which are not investment grade (“junk bonds”). If the rating of a fixed-income security falls below investment grade, the Strategy will not be obligated to sell the security and may continue to hold it if, in the Adviser’s opinion, the investment is appropriate under the circumstances.
The Strategy may invest in fixed-income securities with any maturity and duration.
To provide inflation protection, the Strategy will typically enter into inflation swap agreements. The Strategy may use other inflation-protected instruments. Payments to the Strategy pursuant to swap agreements will result in taxable income, either ordinary income or capital gains, rather than income exempt from federal income taxation. It is expected that the Strategy’s primary use of derivatives will be for the purpose of inflation protection.
The Strategy may also invest in 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, forwards and swaps.
The Strategy may also utilize leverage for investment purposes through the use of tender option bonds (“TOBs”) transactions. The Adviser will consider the impact of TOBs, swap agreements and other derivatives in making its assessments of the Strategy’s risks. The resulting exposures to markets, sectors, issuers or specific securities will be continuously monitored by the Adviser.
Investment Results
The table on page 5 shows the Strategy’s performance for the six- and 12-month periods ended October 31, 2015, compared to its benchmark, the Barclays 1-10 Year Treasury Inflation-Protected Securities (“TIPS”) Index and to the Lipper Intermediate Municipal Debt Funds Average (the “Lipper Average”). Funds in the Lipper Average have generally similar investment objectives to the Strategy, although some may have different
AB MUNICIPAL BOND INFLATION STRATEGY • | 1 |
investment policies and sales and management fees and fund expenses.
All share classes of the Strategy outperformed the benchmark, but underperformed the Lipper Average for the six-month period, before sales charges. All share classes of the Strategy underperformed the benchmark and the Lipper Average for the 12-month period, before sales charges. In order to pursue the investment objective of after-tax returns net of inflation, the Strategy invests in municipal bonds and uses derivatives for inflation protection.
For the six-month period, the positive performance relative to the benchmark was driven by the Strategy’s investment in municipal bonds, which outperformed US Treasuries. Derivatives, including inflation (“CPI”) swaps, are used in the Fund to hedge inflation and added to performance as they outperformed TIPs. During the 12-month period, the Strategy underperformed the benchmark as US Treasuries outperformed municipals and CPI swaps underperformed TIPs. Interest rate swaps were used for hedging purposes and had no material impact on absolute performance for either period.
Relative to the Lipper Average, the Strategy’s underperformance over both periods was driven primarily by nominal bond strategies outperforming strategies hedged with CPI swaps as global commodity prices fell.
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 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 Strategy 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 Strategy’s percentages of investments in municipal bonds that are insured and in insured municipal bonds that have been prerefunded or escrowed to maturity were 6.81% and 0%, respectively.
2 | • AB MUNICIPAL BOND INFLATION STRATEGY |
DISCLOSURES AND RISKS
Benchmark Disclosure
The Barclays 1-10 Year TIPS Index does not reflect fees and expenses associated with the active management of a mutual fund portfolio. The Barclays 1-10 Year TIPS Index represents the performance of inflation-protected securities issued by the US Treasury. An investor cannot invest directly in an index, and its results are not indicative of the performance for any specific investment, including the Strategy.
A Word About Risk
Market Risk: The value of the Strategy’s assets will fluctuate as the stock or bond market fluctuates. The value of the Strategy’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 (commonly referred to as “junk bonds”) 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 Strategy’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 Strategy invests more of its assets in a particular state’s municipal securities, the Strategy 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 Strategy’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.
Tax Risk: There is no guarantee that all of the Strategy’s income will remain exempt from federal or state income taxes. From time to time, the US government and the US Congress consider changes in federal tax law that could limit or eliminate the federal tax exemption for municipal bond income, which would in effect reduce the income received by shareholders from the Strategy by increasing taxes on that income. In such event, the Strategy’s net asset value (“NAV”) could also decline as yields on municipal bonds, which are typically lower than those on taxable bonds, would be expected to increase to approximately the yield of comparable taxable bonds. Actions or anticipated actions affecting the tax exempt status of municipal bonds could also result in significant shareholder redemptions of Strategy shares as investors anticipate adverse effects on the Strategy or seek higher yields to offset the potential loss of the tax deduction. As a result, the Strategy would be required to maintain higher levels of cash to meet the redemptions, which would negatively affect the Strategy’s yield.
Interest Rate Risk: Changes in interest rates will affect the value of investments in fixed-income securities. When interest rates rise, the value of 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.
(Disclosures, Risks and Note about Historical Performance continued on next page)
AB MUNICIPAL BOND INFLATION STRATEGY • | 3 |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
Duration Risk: Duration is a measure that relates the expected price volatility of a fixed-income security to changes in interest rates. The duration of a fixed-income security may be shorter than or equal to full maturity of a fixed-income security. Fixed-income securities with longer durations have more risk and will decrease in price as interest rates rise. For example, a fixed-income security with a duration of three years will decrease in value by approximately 3% if interest rates increase by 1%.
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 Strategy’s assets can decline as can the value of the Strategy’s distributions. This risk is significantly greater for fixed-income securities with longer maturities.
Derivatives Risk: The Strategy’s investments in derivatives, such as swaps, futures, options and forwards, may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Strategy, and may be subject to counterparty risk to a greater degree than more traditional investments. The use of inflation protection derivatives to help meet the Strategy’s investment objective may not be successful.
Leverage Risk: To the extent the Strategy uses leveraging techniques, its 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 Strategy’s investments.
Liquidity Risk: Liquidity risk exists when particular investments, such as lower-rated securities, are difficult to purchase or sell, possibly preventing the Strategy from selling out of these illiquid securities at an advantageous price. The Strategy 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.
Management Risk: The Strategy 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 Strategy’s prospectus. As with all investments, you may lose money by investing in the Strategy.
An Important Note About Historical Performance
The investment return and principal value of an investment in the Strategy will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. 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 visiting www.abglobal.com. For Class 1 shares click on “Private Clients”, then “Investments”, then “Stocks” or “Bonds”, then “Mutual Fund Performance at a Glance”.
All fees and expenses related to the operation of the Strategy have been deducted. NAV returns do not reflect sales charges; if sales charges were reflected, the Strategy’s quoted performance would be lower. SEC returns reflect the applicable sales charges for each share class: a 3.00% maximum front-end sales charge for Class A shares; and a 1% 1-year contingent deferred sales charge for Class C shares. Class 1 and 2 shares do not carry sales charges. Returns for the different share classes will vary due to different expenses associated with each class. Performance assumes reinvestment of distributions and does not account for taxes.
4 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE STRATEGY VS. ITS BENCHMARK PERIODS ENDED OCTOBER 31, 2015 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB Municipal Bond Inflation Strategy | ||||||||||
Class 1* | -0.22% | -1.62% | ||||||||
| ||||||||||
Class 2* | -0.17% | -1.52% | ||||||||
| ||||||||||
Class A | -0.32% | -1.83% | ||||||||
| ||||||||||
Class C | -0.70% | -2.56% | ||||||||
| ||||||||||
Advisor Class Shares† | -0.29% | -1.56% | ||||||||
| ||||||||||
Barclays 1-10 Year TIPS Index | -1.83% | -1.24% | ||||||||
| ||||||||||
Lipper Intermediate Municipal Debt Funds Average | 0.97% | 1.38% | ||||||||
| ||||||||||
* Class 1 shares are only available to Bernstein Global Wealth Management private client accounts. Class 2 shares are only available to large Bernstein Global Wealth Management private client accounts and the Adviser’s institutional clients or through other limited arrangements.
† Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Strategy. | ||||||||||
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance continued on next page)
AB MUNICIPAL BOND INFLATION STRATEGY • | 5 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
GROWTH OF A $10,000 INVESTMENT IN THE STRATEGY 1/26/10* TO 10/31/15 (unaudited)
This chart illustrates the total value of an assumed $10,000 investment in AB Municipal Bond Inflation Strategy Class A shares (from 1/26/10* to 10/31/15) as compared to the performance of its benchmark. The chart reflects the deduction of the maximum 3.00% sales charge from the initial $10,000 investment in the Strategy and assumes the reinvestment of dividends and capital gains distributions.
* | Inception date: 1/26/2010. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance continued on next page)
6 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF OCTOBER 31, 2015 (unaudited) | ||||||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | SEC Yields* | ||||||||||
Class 1 Shares† | 1.12 | % | ||||||||||
1 Year | -1.62 | % | -1.62 | % | ||||||||
5 Years | 1.75 | % | 1.75 | % | ||||||||
Since Inception‡ | 1.83 | % | 1.83 | % | ||||||||
Class 2 Shares† | 1.22 | % | ||||||||||
1 Year | -1.52 | % | -1.52 | % | ||||||||
5 Years | 1.86 | % | 1.86 | % | ||||||||
Since Inception‡ | 1.94 | % | 1.94 | % | ||||||||
Class A Shares | 0.86 | % | ||||||||||
1 Year | -1.83 | % | -4.74 | % | ||||||||
5 Years | 1.56 | % | 0.94 | % | ||||||||
Since Inception‡ | 1.65 | % | 1.11 | % | ||||||||
Class C Shares | 0.15 | % | ||||||||||
1 Year | -2.56 | % | -3.53 | % | ||||||||
5 Years | 0.83 | % | 0.83 | % | ||||||||
Since Inception‡ | 0.93 | % | 0.93 | % | ||||||||
Advisor Class Shares^ | 1.14 | % | ||||||||||
1 Year | -1.56 | % | -1.56 | % | ||||||||
5 Years | 1.83 | % | 1.83 | % | ||||||||
Since Inception‡ | 1.93 | % | 1.93 | % |
The Strategy’s current prospectus fee table shows the Strategy’s total annual operating expense ratios as 0.66%, 0.56%, 0.85%, 1.60%, and 0.60% for Class 1, Class 2, Class A, Class C and Advisor Class shares, respectively, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements limit the Strategy’s annual operating expense ratios, exclusive of interest expense, to 0.60%, 0.50%, 0.75%, 1.50%, and 0.50% for Class 1, Class 2, Class A, Class C, and Advisor Class shares, respectively. These waivers/ reimbursements may not be terminated prior to January 29, 2016 and may be extended by the Adviser for additional one-year terms. Absent reimbursements or waivers, performance would have been lower. The Financial Highlights section of this report sets forth expense ratio data for the current reporting period; the expense ratios shown above may differ from the expense ratios in the Financial Highlights sections since they are based on different time periods.
* | SEC yields are calculated based on SEC guidelines for the 30-day period ended October 31, 2015. |
† | Class 1 shares are only available to Bernstein Global Wealth Management private client accounts. Class 2 shares are only available to large Bernstein Global Wealth Management private client accounts and the Adviser’s institutional clients or through other limited arrangements. |
‡ | Inception date: 1/26/2010. |
^ | These share classes are offered at NAV to eligible investors and their SEC returns are the same as their NAV returns. Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Strategy. The inception date for these share classes is listed above. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance continued on next page)
AB MUNICIPAL BOND INFLATION STRATEGY • | 7 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END SEPTEMBER 30, 2015 (unaudited) | ||||
SEC Returns (reflects applicable sales charges) | ||||
Class 1 Shares* | ||||
1 Year | -2.70 | % | ||
5 Years | 1.65 | % | ||
Since Inception† | 1.69 | % | ||
Class 2 Shares* | ||||
1 Year | -2.60 | % | ||
5 Years | 1.74 | % | ||
Since Inception† | 1.78 | % | ||
Class A Shares | ||||
1 Year | -5.78 | % | ||
5 Years | 0.82 | % | ||
Since Inception† | 0.95 | % | ||
Class C Shares | ||||
1 Year | -4.60 | % | ||
5 Years | 0.73 | % | ||
Since Inception† | 0.78 | % | ||
Advisor Class Shares‡ | ||||
1 Year | -2.55 | % | ||
5 Years | 1.75 | % | ||
Since Inception† | 1.79 | % |
* | Class 1 shares are only available to Bernstein Global Wealth Management private client accounts. Class 2 shares are only available to large Bernstein Global Wealth Management private client accounts and the Adviser’s institutional clients or through other limited arrangements. |
† | Inception date: 1/26/2010. |
‡ | These share classes are offered at NAV to eligible investors and their SEC returns are the same as their NAV returns. Please note that these share classes are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Strategy. The inception date for these share classes is listed above. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
8 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Historical Performance
FUND EXPENSES
(unaudited)
As a shareholder of a mutual fund, you may incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions and (2) ongoing costs, including management fees; distribution (12b-1) fees; and other fund expenses. 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* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 996.80 | $ | 3.77 | 0.75 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.42 | $ | 3.82 | 0.75 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 993.00 | $ | 7.54 | 1.50 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,017.64 | $ | 7.63 | 1.50 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 997.10 | $ | 2.52 | 0.50 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.68 | $ | 2.55 | 0.50 | % | ||||||||
Class 1 | ||||||||||||||||
Actual | $ | 1,000 | $ | 997.80 | $ | 3.02 | 0.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.18 | $ | 3.06 | 0.60 | % | ||||||||
Class 2 | ||||||||||||||||
Actual | $ | 1,000 | $ | 998.30 | $ | 2.52 | 0.50 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.68 | $ | 2.55 | 0.50 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 9 |
Fund Expenses
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $788.6
* | All data are as of October 31, 2015. The Strategy’s quality rating breakdown is expressed as a percentage of the Strategy’s total investments in municipal securities and may vary over time. The Strategy 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). 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 Strategy 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 US 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. |
10 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
October 31, 2015
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
MUNICIPAL OBLIGATIONS – 100.6% | ||||||||
Long-Term Municipal Bonds – 100.6% | ||||||||
Alabama – 0.8% | ||||||||
Alabama Special Care Facilities Financing Authority-Birmingham AL | $ | 3,905 | $ | 4,526,051 | ||||
County of Jefferson AL Sewer Revenue | 1,825 | 1,964,960 | ||||||
|
| |||||||
6,491,011 | ||||||||
|
| |||||||
Alaska – 0.5% | ||||||||
Alaska Industrial Development & Export Authority | 400 | 424,584 | ||||||
City of Valdez AK | 3,140 | 3,163,990 | ||||||
|
| |||||||
3,588,574 | ||||||||
|
| |||||||
Arizona – 2.5% | ||||||||
Arizona State University COP | 8,345 | 9,826,253 | ||||||
City of Phoenix Civic Improvement Corp. | 3,330 | 3,918,411 | ||||||
County of Pima AZ Sewer System Revenue | 1,765 | 2,049,677 | ||||||
Salt River Project Agricultural Improvement & Power District | 3,140 | 3,763,698 | ||||||
|
| |||||||
19,558,039 | ||||||||
|
| |||||||
Arkansas – 0.1% | ||||||||
City of Fort Smith AR Sales & Use Tax Revenue | 130 | 130,064 | ||||||
City of Springdale AR Sales & Use Tax Revenue | 525 | 525,231 | ||||||
|
| |||||||
655,295 | ||||||||
|
|
AB MUNICIPAL BOND INFLATION STRATEGY • | 11 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
California – 2.9% | ||||||||
San Francisco City & County Airports Comm-San Francisco International Airport | $ | 450 | $ | 512,113 | ||||
NATL Series 2006 32F | 290 | 322,843 | ||||||
State of California | 275 | 286,869 | ||||||
Series 2011 | 5,000 | 5,892,500 | ||||||
Series 2012 | 9,305 | 10,948,077 | ||||||
Series 2014 | 4,250 | 5,164,651 | ||||||
|
| |||||||
23,127,053 | ||||||||
|
| |||||||
Colorado – 3.8% | ||||||||
City & County of Denver CO Airport System Revenue | 375 | 435,600 | ||||||
Series 2012A | 10,395 | 11,959,655 | ||||||
5.00%, 11/15/25 | 3,000 | 3,435,000 | ||||||
Denver City & County School District No 1 | 4,730 | 5,818,846 | ||||||
Denver Urban Renewal Authority | 200 | 201,078 | ||||||
Series 2013A | 5,655 | 6,477,489 | ||||||
Plaza Metropolitan District No 1 | 1,310 | 1,420,263 | ||||||
Regional Transportation District | 440 | 489,786 | ||||||
|
| |||||||
30,237,717 | ||||||||
|
| |||||||
Connecticut – 0.9% | ||||||||
State of Connecticut | 1,750 | 1,754,235 |
12 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
State of Connecticut | $ | 4,360 | $ | 5,286,674 | ||||
|
| |||||||
7,040,909 | ||||||||
|
| |||||||
Florida – 11.4% | ||||||||
Citizens Property Insurance Corp. | 315 | 323,442 | ||||||
Series 2012A | 7,315 | 8,660,667 | ||||||
Series 2012A-1 | 3,165 | 3,249,822 | ||||||
City of Jacksonville FL | 1,720 | 1,994,099 | ||||||
City of Jacksonville FL | 10,190 | 12,084,812 | ||||||
City of Tampa FL Water & Wastewater System Revenue | 1,565 | 1,851,223 | ||||||
County of Miami-Dade FL | 18,500 | 21,813,998 | ||||||
County of Miami-Dade FL Spl Tax | 1,500 | 1,786,845 | ||||||
Florida Department of Environmental Protection | 3,775 | 4,404,293 | ||||||
Series 2013A | 1,765 | 1,808,737 | ||||||
5.00%, 7/01/18-7/01/19 | 3,905 | 4,390,152 | ||||||
Florida Municipal Power Agency | 2,890 | 3,365,578 | ||||||
Series 2015B | 1,500 | 1,797,285 | ||||||
Florida State Board of Education | 16,440 | 17,588,334 | ||||||
Series 2015B | 1,725 | 2,057,925 |
AB MUNICIPAL BOND INFLATION STRATEGY • | 13 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Martin County Industrial Development Authority (Indiantown Cogeneration LP) | $ | 1,900 | $ | 1,925,384 | ||||
State of Florida Lottery Revenue | 550 | 567,358 | ||||||
|
| |||||||
89,669,954 | ||||||||
|
| |||||||
Georgia – 0.9% | ||||||||
Cherokee County Board of Education | 1,000 | 1,173,110 | ||||||
City of Atlanta Department of Aviation | 2,500 | 2,726,475 | ||||||
Municipal Electric Authority of Georgia | 3,045 | 3,562,163 | ||||||
|
| |||||||
7,461,748 | ||||||||
|
| |||||||
Idaho – 0.3% | ||||||||
Idaho Health Facilities Authority | 2,390 | 2,391,338 | ||||||
|
| |||||||
Illinois – 3.5% | ||||||||
Chicago O’Hare International Airport | 1,930 | 2,023,721 | ||||||
Series 2015B | 5,000 | 5,700,850 | ||||||
Chicago O’Hare International Airport | 2,500 | 2,844,300 | ||||||
5.50%, 1/01/25 | 2,250 | 2,606,693 | ||||||
Springfield Metropolitan Sanitation District | 2,170 | 2,455,637 | ||||||
State of Illinois | 1,040 | 1,124,292 | ||||||
Series 2010 | 500 | 529,120 | ||||||
Series 2013A | 4,030 | 4,398,664 |
14 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Series 2014 | $ | 4,180 | $ | 4,377,212 | ||||
State of Illinois | 1,450 | 1,549,151 | ||||||
|
| |||||||
27,609,640 | ||||||||
|
| |||||||
Indiana – 0.7% | ||||||||
Indiana Municipal Power Agency | 4,965 | 5,730,593 | ||||||
|
| |||||||
Kentucky – 1.1% | ||||||||
Kentucky Municipal Power Agency | 4,875 | 5,692,046 | ||||||
Kentucky Turnpike Authority | 2,275 | 2,703,110 | ||||||
|
| |||||||
8,395,156 | ||||||||
|
| |||||||
Louisiana – 1.3% | ||||||||
State of Louisiana Gasoline & Fuels Tax Revenue | 9,085 | 10,645,985 | ||||||
|
| |||||||
Maryland – 5.6% | ||||||||
State of Maryland | 10,165 | 11,950,381 | ||||||
5.00%, 8/01/21(a) | 26,600 | 31,848,446 | ||||||
|
| |||||||
43,798,827 | ||||||||
|
| |||||||
Massachusetts – 4.3% | ||||||||
Commonwealth of Massachusetts | 9,575 | 9,832,950 | ||||||
NATL Series 2000E | 4,525 | 4,204,277 | ||||||
Commonwealth of Massachusetts (Commonwealth of Massachusetts Fuel Tax) | 3,000 | 3,161,040 | ||||||
Massachusetts Bay Transportation Authority (Massachusetts Bay Transportation Authority Sales Tax) | 3,330 | 4,029,067 |
AB MUNICIPAL BOND INFLATION STRATEGY • | 15 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Massachusetts Clean Water Trust (The) (Massachusetts Water Pollution Abatement Trust (The) SRF) | $ | 3,240 | $ | 3,425,814 | ||||
Massachusetts School Building Authority (Massachusetts School Building Authority Sales Tax) | 2,475 | 2,976,584 | ||||||
Metropolitan Boston Transit Parking Corp. | 5,025 | 5,891,807 | ||||||
|
| |||||||
33,521,539 | ||||||||
|
| |||||||
Michigan – 2.1% | ||||||||
City of Detroit MI Sewage Disposal System Revenue | 3,750 | 4,224,787 | ||||||
Michigan Finance Authority | 10,545 | 12,290,936 | ||||||
|
| |||||||
16,515,723 | ||||||||
|
| |||||||
Minnesota – 1.1% | ||||||||
Minnesota Higher Education Facilities Authority (Gustavus Adolphus College) | 1,295 | 1,466,406 | ||||||
State of Minnesota | 6,715 | 7,487,964 | ||||||
|
| |||||||
8,954,370 | ||||||||
|
| |||||||
Mississippi – 0.4% | ||||||||
Mississippi Development Bank | 1,500 | 1,685,565 | ||||||
Series 2013A | 1,000 | 1,123,710 | ||||||
|
| |||||||
2,809,275 | ||||||||
|
| |||||||
Missouri – 0.2% | ||||||||
City of Springfield MO Public Utility Revenue | 1,390 | 1,505,384 | ||||||
|
|
16 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Nevada – 1.4% | ||||||||
City of Reno NV | $ | 1,000 | $ | 1,122,490 | ||||
Series 2013B | 2,210 | 2,489,764 | ||||||
County of Clark Department of Aviation (McCarran Intl Airport) | 775 | 887,481 | ||||||
Las Vegas Valley Water District | 1,500 | 1,746,450 | ||||||
Series 2015B | 4,250 | 4,999,233 | ||||||
|
| |||||||
11,245,418 | ||||||||
|
| |||||||
New Jersey – 3.0% | ||||||||
Morris-Union Jointure Commission COP | 2,340 | 2,458,685 | ||||||
New Jersey Economic Development Authority | 460 | 501,427 | ||||||
New Jersey Economic Development Authority (New Jersey Economic Development Authority State Lease) | 20 | 21,061 | ||||||
New Jersey Transportation Trust Fund Authority (New Jersey Transportation Trust Fund Authority State Lease) | 10,000 | 10,851,000 | ||||||
New Jersey Turnpike Authority | 1,800 | 2,146,518 | ||||||
Series 2014A | 4,785 | 5,597,254 | ||||||
Series 2014C | 1,590 | 1,896,091 | ||||||
|
| |||||||
23,472,036 | ||||||||
|
| |||||||
New York – 17.4% | ||||||||
City of New York NY | 4,250 | 5,016,572 | ||||||
Series 2014J | 6,100 | 7,236,979 |
AB MUNICIPAL BOND INFLATION STRATEGY • | 17 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
AGM Series 2005K | $ | 1,700 | $ | 1,718,530 | ||||
Metropolitan Transportation Authority | 9,065 | 10,780,345 | ||||||
Series 2012F | 3,635 | 4,291,990 | ||||||
Series 2013A | 2,300 | 2,697,624 | ||||||
Series 2013E | 8,510 | 10,110,476 | ||||||
New York City Industrial Development Agency | 4,135 | 4,143,146 | ||||||
New York City Municipal Water Finance Authority | 3,875 | 4,561,379 | ||||||
New York City Transitional Finance Authority Future Tax Secured Revenue | 6,650 | 6,960,621 | ||||||
Series 2012B | 6,830 | 8,165,675 | ||||||
New York State Dormitory Authority | 3,000 | 3,522,240 | ||||||
Series 2012A | 14,610 | 17,685,843 | ||||||
Series 2012B | 7,900 | 9,187,147 | ||||||
Series 2014A | 6,565 | 7,731,732 | ||||||
New York State Environmental Facilities Corp. | 3,000 | 3,561,480 | ||||||
New York State Thruway Authority | 17,025 | 20,177,179 | ||||||
Triborough Bridge & Tunnel Authority | 4,360 | 5,036,018 | ||||||
Series 2013B | 4,100 | 4,845,175 | ||||||
|
| |||||||
137,430,151 | ||||||||
|
|
18 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
North Carolina – 2.3% | ||||||||
North Carolina Eastern Municipal Power Agency | $ | 6,700 | $ | 7,932,800 | ||||
State of North Carolina | 2,330 | 2,385,524 | ||||||
State of North Carolina | 6,710 | 7,925,986 | ||||||
|
| |||||||
18,244,310 | ||||||||
|
| |||||||
Ohio – 0.1% | ||||||||
City of Cleveland OH COP | 700 | 747,509 | ||||||
|
| |||||||
Oregon – 1.9% | ||||||||
Deschutes County Administrative School District No 1 Bend-La Pine | 5,180 | 6,063,397 | ||||||
Tri-County Metropolitan Transportation District | 4,605 | 5,354,418 | ||||||
Washington & Multnomah Counties School District No 48J Beaverton | 3,195 | 3,810,037 | ||||||
|
| |||||||
15,227,852 | ||||||||
|
| |||||||
Pennsylvania – 6.3% | ||||||||
Allegheny County Sanitary Authority | 2,250 | 2,544,075 | ||||||
City of Philadelphia PA Water & Wastewater Revenue | 550 | 607,519 | ||||||
Commonwealth of Pennsylvania | 5,000 | 5,359,000 | ||||||
Montgomery County Industrial Development Authority/PA | 475 | 545,167 | ||||||
Moon Industrial Development Authority | 2,060 | 2,068,425 |
AB MUNICIPAL BOND INFLATION STRATEGY • | 19 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Pennsylvania Economic Development Financing Authority | $ | 13,085 | $ | 14,600,252 | ||||
Series 2012B | 7,550 | 8,216,891 | ||||||
Pennsylvania Economic Development Financing Authority | 3,055 | 3,132,414 | ||||||
Pennsylvania Industrial Development Authority | 1,840 | 1,897,077 | ||||||
5.00%, 7/01/16 | 3,160 | 3,256,728 | ||||||
School District of Philadelphia (The) | 1,800 | 2,034,108 | ||||||
State Public School Building Authority | 5,150 | 5,750,251 | ||||||
|
| |||||||
50,011,907 | ||||||||
|
| |||||||
Puerto Rico – 0.4% | ||||||||
Puerto Rico Electric Power Authority | 3,400 | 3,450,830 | ||||||
|
| |||||||
South Carolina – 0.8% | ||||||||
Renewable Water Resources | 2,570 | 2,993,510 | ||||||
South Carolina State Public Service Authority | 3,200 | 3,212,608 | ||||||
|
| |||||||
6,206,118 | ||||||||
|
| |||||||
Tennessee – 0.4% | ||||||||
Metropolitan Government of Nashville & Davidson County TN | 2,385 | 2,860,164 | ||||||
|
| |||||||
Texas – 8.8% | ||||||||
Austin Community College District Public Facility Corp. | 1,000 | 1,134,290 |
20 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Birdville Independent School District | $ | 3,825 | $ | 4,583,880 | ||||
City of Corpus Christi TX Utility System Revenue | 5,675 | 6,674,197 | ||||||
City of Garland TX | 500 | 573,400 | ||||||
City of Houston TX Airport System Revenue | 2,105 | 2,355,095 | ||||||
City of Houston TX Combined Utility System Revenue | 2,735 | 3,239,881 | ||||||
City of Lubbock TX | 1,740 | 1,963,451 | ||||||
City Public Service Board of San Antonio TX | 7,110 | 8,391,222 | ||||||
Conroe Independent School District | 6,240 | 7,200,391 | ||||||
Harris County-Houston Sports Authority | 4,220 | 4,969,936 | ||||||
North Texas Tollway Authority | 3,625 | 4,329,048 | ||||||
Rockwall Independent School District | 3,280 | 3,712,566 | ||||||
San Antonio Independent School District/TX | 1,710 | 1,990,047 | ||||||
Spring Branch Independent School District | 3,485 | 4,112,997 | ||||||
Tarrant County Cultural Education Facilities Finance Corp. | 900 | 920,412 |
AB MUNICIPAL BOND INFLATION STRATEGY • | 21 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Texas Public Finance Authority | $ | 11,605 | $ | 12,222,618 | ||||
University of Texas System (The) | 1,070 | 1,237,198 | ||||||
|
| |||||||
69,610,629 | ||||||||
|
| |||||||
Virginia – 1.7% | ||||||||
Fairfax County Economic Development Authority | 6,000 | 6,895,280 | ||||||
Virginia College Building Authority | 5,240 | 6,190,064 | ||||||
|
| |||||||
13,085,344 | ||||||||
|
| |||||||
Washington – 9.2% | ||||||||
Central Puget Sound Regional Transit Authority | 7,815 | 9,380,757 | ||||||
Chelan County Public Utility District No 1 | 3,305 | 3,893,720 | ||||||
City of Seattle WA | 9,770 | 11,146,398 | ||||||
City of Seattle WA Municipal Light & Power Revenue | 2,070 | 2,284,597 | ||||||
City of Tacoma WA Electric System Revenue | 4,000 | 4,561,955 | ||||||
Energy Northwest | 680 | 755,725 | ||||||
Series 2012A | 4,200 | 4,810,134 | ||||||
King County School District No 414 Lake Washington | 3,735 | 3,922,833 | ||||||
Port of Seattle WA | 4,820 | 5,549,796 |
22 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
State of Washington | $ | 710 | $ | 819,106 | ||||
Series 20102010E | 3,295 | 3,724,470 | ||||||
Series 2013D | 3,385 | 4,099,370 | ||||||
Series 2015R | 13,325 | 16,170,021 | ||||||
Washington State Housing Finance Commission (Heron’s Key Obligated Group) | 1,250 | 1,266,212 | ||||||
|
| |||||||
72,385,094 | ||||||||
|
| |||||||
Wisconsin – 2.5% | ||||||||
State of Wisconsin Clean Water Fund Leveraged Loan Portfolio | 4,490 | 5,428,904 | ||||||
Wisconsin Department of Transportation | 12,000 | 14,535,945 | ||||||
|
| |||||||
19,964,849 | ||||||||
|
| |||||||
Total Municipal Obligations | 793,650,341 | |||||||
|
| |||||||
CORPORATES – INVESTMENT | ||||||||
Financial Institutions – 3.5% | ||||||||
Banking – 3.5% | ||||||||
Bank of America Corp. | 2,585 | 2,690,134 | ||||||
Capital One Bank USA NA | 8,300 | 8,254,931 | ||||||
JPMorgan Chase & Co. | 8,885 | 8,900,389 | ||||||
Morgan Stanley | 3,362 | 3,373,942 | ||||||
Series G | 4,030 | 4,221,401 | ||||||
|
| |||||||
Total Corporates – Investment Grade | 27,440,797 | |||||||
|
| |||||||
AB MUNICIPAL BOND INFLATION STRATEGY • | 23 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
GOVERNMENTS – TREASURIES – 1.6% | ||||||||
United States – 1.6% | ||||||||
U.S. Treasury Notes | $ | 6,100 | $ | 6,103,216 | ||||
0.625%, 8/31/17(a) | 6,200 | 6,190,229 | ||||||
|
| |||||||
Total Governments – Treasuries | 12,293,445 | |||||||
|
| |||||||
Total Investments – 105.7% | 833,384,583 | |||||||
Other assets less liabilities – (5.7)% | (44,806,054 | ) | ||||||
|
| |||||||
Net Assets – 100.0% | $ | 788,578,529 | ||||||
|
|
INFLATION (CPI) SWAPS (see Note D)
Rate Type | ||||||||||||||||||||
Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Bank of America, NA | $ | 25,000 | 9/02/20 | 1.548 | % | CPI | # | $ | (142,240 | ) | ||||||||||
Barclays Bank PLC | 6,000 | 2/26/17 | 2.370 | % | CPI | # | (410,502 | ) | ||||||||||||
Barclays Bank PLC | 3,000 | 7/19/17 | 2.038 | % | CPI | # | (107,601 | ) | ||||||||||||
Barclays Bank PLC | 37,000 | 8/07/17 | 2.124 | % | CPI | # | (1,516,521 | ) | ||||||||||||
Barclays Bank PLC | 5,500 | 6/02/19 | 2.580 | % | CPI | # | (576,071 | ) | ||||||||||||
Barclays Bank PLC | 4,000 | 6/15/20 | 2.480 | % | CPI | # | (412,154 | ) | ||||||||||||
Barclays Bank PLC | 35,000 | 7/02/20 | 2.256 | % | CPI | # | (2,378,735 | ) | ||||||||||||
Barclays Bank PLC | 1,500 | 8/04/20 | 2.308 | % | CPI | # | (118,027 | ) | ||||||||||||
Barclays Bank PLC | 2,000 | 11/10/20 | 2.500 | % | CPI | # | (196,274 | ) | ||||||||||||
Barclays Bank PLC | 6,000 | 5/04/21 | 2.845 | % | CPI | # | (904,923 | ) | ||||||||||||
Barclays Bank PLC | 3,000 | 5/12/21 | 2.815 | % | CPI | # | (444,226 | ) | ||||||||||||
Barclays Bank PLC | 14,000 | 4/03/22 | 2.663 | % | CPI | # | (1,900,231 | ) | ||||||||||||
Barclays Bank PLC | 16,700 | 10/05/22 | 2.765 | % | CPI | # | (2,288,597 | ) | ||||||||||||
Barclays Bank PLC | 25,000 | 8/07/24 | 2.573 | % | CPI | # | (2,670,573 | ) | ||||||||||||
Barclays Bank PLC | 19,000 | 5/05/25 | 2.125 | % | CPI | # | (686,848 | ) | ||||||||||||
Barclays Bank PLC | 5,400 | 3/06/27 | 2.695 | % | CPI | # | (879,493 | ) | ||||||||||||
Citibank, NA | 10,000 | 5/04/16 | 2.710 | % | CPI | # | (706,407 | ) | ||||||||||||
Citibank, NA | 14,000 | 5/30/17 | 2.125 | % | CPI | # | (775,127 | ) | ||||||||||||
Citibank, NA | 11,500 | 6/21/17 | 2.153 | % | CPI | # | (648,675 | ) | ||||||||||||
Citibank, NA | 22,000 | 7/02/18 | 2.084 | % | CPI | # | (1,029,344 | ) | ||||||||||||
Citibank, NA | 9,000 | 6/29/22 | 2.398 | % | CPI | # | (950,906 | ) | ||||||||||||
Citibank, NA | 5,400 | 7/19/22 | 2.400 | % | CPI | # | (557,325 | ) | ||||||||||||
Citibank, NA | 4,000 | 8/10/22 | 2.550 | % | CPI | # | (468,252 | ) | ||||||||||||
Citibank, NA | 15,500 | 12/07/22 | 2.748 | % | CPI | # | (2,186,592 | ) | ||||||||||||
Citibank, NA | 47,000 | 5/24/23 | 2.533 | % | CPI | # | (5,362,981 | ) | ||||||||||||
Citibank, NA | 30,000 | 10/29/23 | 2.524 | % | CPI | # | (3,142,052 | ) | ||||||||||||
Citibank, NA | 15,800 | 2/08/28 | 2.940 | % | CPI | # | (3,114,476 | ) | ||||||||||||
Deutsche Bank AG | 11,000 | 6/20/21 | 2.655 | % | CPI | # | (1,462,259 | ) | ||||||||||||
Deutsche Bank AG | 9,800 | 9/07/21 | 2.400 | % | CPI | # | (1,009,397 | ) | ||||||||||||
Deutsche Bank AG | 25,000 | 9/02/25 | 1.880 | % | CPI | # | (289,562 | ) |
24 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Rate Type | ||||||||||||||||||||
Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
JPMorgan Chase Bank, NA | $ | 1,000 | 7/29/20 | 2.305 | % | CPI | # | $ | (78,928 | ) | ||||||||||
JPMorgan Chase Bank, NA | 19,000 | 8/17/22 | 2.523 | % | CPI | # | (2,149,324 | ) | ||||||||||||
JPMorgan Chase Bank, NA | 1,400 | 6/30/26 | 2.890 | % | CPI | # | (283,509 | ) | ||||||||||||
JPMorgan Chase Bank, NA | 3,300 | 7/21/26 | 2.935 | % | CPI | # | (698,092 | ) | ||||||||||||
JPMorgan Chase Bank, NA | 2,400 | 10/03/26 | 2.485 | % | CPI | # | (308,464 | ) | ||||||||||||
JPMorgan Chase Bank, NA | 5,400 | 11/14/26 | 2.488 | % | CPI | # | (701,406 | ) | ||||||||||||
JPMorgan Chase Bank, NA | 4,850 | 12/23/26 | 2.484 | % | CPI | # | (616,291 | ) | ||||||||||||
JPMorgan Chase Bank, NA | 21,350 | 2/20/28 | 2.899 | % | CPI | # | (4,045,594 | ) | ||||||||||||
JPMorgan Chase Bank, NA | 12,000 | 3/26/28 | 2.880 | % | CPI | # | (2,243,237 | ) | ||||||||||||
Morgan Stanley Capital Services LLC | 6,000 | 4/05/16 | 2.535 | % | CPI | # | (355,217 | ) | ||||||||||||
Morgan Stanley Capital Services LLC | 6,000 | 4/16/16 | 2.110 | % | CPI | # | (236,514 | ) | ||||||||||||
Morgan Stanley Capital Services LLC | 50,000 | 4/16/18 | 2.395 | % | CPI | # | (3,493,275 | ) | ||||||||||||
Morgan Stanley Capital Services LLC | 2,000 | 10/14/20 | 2.370 | % | CPI | # | (166,247 | ) | ||||||||||||
Morgan Stanley Capital Services LLC | 13,000 | 5/23/21 | 2.680 | % | CPI | # | (1,729,215 | ) | ||||||||||||
Morgan Stanley Capital Services LLC | 10,000 | 4/16/23 | 2.690 | % | CPI | # | (1,329,644 | ) | ||||||||||||
Morgan Stanley Capital Services LLC | 5,000 | 8/15/26 | 2.885 | % | CPI | # | (1,004,931 | ) | ||||||||||||
|
| |||||||||||||||||||
$ | (56,776,259 | ) | ||||||||||||||||||
|
|
# | Variable interest rate based on the rate of inflation as determined by the Consumer Price Index (CPI). |
AB MUNICIPAL BOND INFLATION STRATEGY • | 25 |
Portfolio of Investments
INTEREST RATE SWAPS (see Note D)
Rate Type | ||||||||||||||||||||
Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Citibank, NA | $ | 4,000 | 11/02/23 | 1.308 | % | SIFMA | * | $ | (1,689 | ) | ||||||||||
JPMorgan Chase Bank, NA | 24,100 | 10/26/22 | 1.123 | % | SIFMA | * | 88,268 | |||||||||||||
|
| |||||||||||||||||||
$ | 86,579 | |||||||||||||||||||
|
|
* | Variable interest rate based on the Securities Industry & Financial Markets Association (SIFMA) Municipal Swap Index. |
(a) | Position, or a portion thereof, has been segregated to collateralize OTC derivatives outstanding. |
(b) | 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 $2,686,475 or 0.3% of net assets. |
(c) | Variable rate coupon, rate shown as of October 31, 2015. |
(d) | 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 this security amounted to $4,204,277 or 0.53% of net assets. |
(e) | Coupon rate adjusts periodically based upon a predetermined schedule. Stated interest rate in effect at October 31, 2015. |
As of October 31, 2015, the Strategy’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 6.8% and 0.0%, respectively.
Glossary:
|
AGM – Assured Guaranty Municipal |
AMBAC – Ambac Assurance Corporation |
COP – Certificate of Participation |
DOT – Department of Transportation |
EDA – Economic Development Agency |
ETM – Escrowed to Maturity |
NATL – National Interstate Corporation |
SRF – State Revolving Fund |
See notes to financial statements.
26 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
October 31, 2015
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $806,645,550) | $ | 833,384,583 | ||
Cash | 2,154,053 | |||
Interest receivable | 10,398,290 | |||
Receivable for capital stock sold | 476,715 | |||
Receivable for investment securities sold | 120,000 | |||
Unrealized appreciation on interest rate swaps | 88,268 | |||
|
| |||
Total assets | 846,621,909 | |||
|
| |||
Liabilities | ||||
Unrealized depreciation on inflation swaps | 56,776,259 | |||
Payable for capital stock redeemed | 761,075 | |||
Advisory fee payable | 266,206 | |||
Distribution fee payable | 53,187 | |||
Administrative fee payable | 18,143 | |||
Transfer Agent fee payable | 10,602 | |||
Unrealized depreciation on interest rate swaps | 1,689 | |||
Accrued expenses | 156,219 | |||
|
| |||
Total liabilities | 58,043,380 | |||
|
| |||
Net Assets | $ | 788,578,529 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 77,912 | ||
Additional paid-in capital | 821,998,475 | |||
Undistributed net investment income | 1,091,678 | |||
Accumulated net realized loss on investment transactions | (4,638,889 | ) | ||
Net unrealized depreciation on investments | (29,950,647 | ) | ||
|
| |||
$ | 788,578,529 | |||
|
|
Net Asset Value Per Share—27 billion shares of capital stock authorized, $.001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 41,121,342 | 4,055,326 | $ | 10.14 | * | ||||||
| ||||||||||||
C | $ | 13,154,190 | 1,299,858 | $ | 10.12 | |||||||
| ||||||||||||
Advisor | $ | 171,788,589 | 16,933,460 | $ | 10.14 | |||||||
| ||||||||||||
1 | $ | 386,448,106 | 38,221,440 | $ | 10.11 | |||||||
| ||||||||||||
2 | $ | 176,066,302 | 17,402,311 | $ | 10.12 | |||||||
|
* | The maximum offering price per share for Class A shares was $10.45 which reflects a sales charge of 3.0%. |
See notes to financial statements.
AB MUNICIPAL BOND INFLATION STRATEGY • | 27 |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Year Ended October 31, 2015
Investment Income | ||||||||
Interest | $ | 18,767,586 | ||||||
Dividends—Affiliated issuers | 11,667 | $ | 18,779,253 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 4,151,538 | |||||||
Distribution fee—Class A | 132,034 | |||||||
Distribution fee—Class C | 169,905 | |||||||
Distribution fee—Class 1 | 400,283 | |||||||
Transfer agency—Class A | 21,590 | |||||||
Transfer agency—Class C | 7,439 | |||||||
Transfer agency—Advisor Class | 79,278 | |||||||
Transfer agency—Class 1 | 1,861 | |||||||
Transfer agency—Class 2 | 846 | |||||||
Custodian | 186,317 | |||||||
Registration fees | 92,232 | |||||||
Audit and tax | 82,260 | |||||||
Administrative | 54,539 | |||||||
Printing | 51,548 | |||||||
Legal | 42,068 | |||||||
Directors’ fees | 17,017 | |||||||
Miscellaneous | 29,255 | |||||||
|
| |||||||
Total expenses | 5,520,010 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (664,123 | ) | ||||||
|
| |||||||
Net expenses | 4,855,887 | |||||||
|
| |||||||
Net investment income | 13,923,366 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment Transactions | ||||||||
Net realized loss on: | ||||||||
Investment transactions | (89,113 | ) | ||||||
Swaps | (1,360,153 | ) | ||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | 3,980,212 | |||||||
Swaps | (30,732,129 | ) | ||||||
|
| |||||||
Net loss on investment transactions | (28,201,183 | ) | ||||||
|
| |||||||
Net Decrease in Net Assets from Operations | $ | (14,277,817 | ) | |||||
|
|
See notes to financial statements.
28 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 13,923,366 | $ | 12,962,394 | ||||
Net realized loss on investment transactions | (1,449,266 | ) | (3,189,623 | ) | ||||
Net change in unrealized appreciation/depreciation of investments | (26,751,917 | ) | 13,370,123 | |||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | (14,277,817 | ) | 23,142,894 | |||||
Dividends and Distributions to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (729,938 | ) | (916,215 | ) | ||||
Class C | (119,694 | ) | (109,940 | ) | ||||
Advisor Class | (3,103,460 | ) | (2,396,855 | ) | ||||
Class 1 | (6,702,371 | ) | (6,290,282 | ) | ||||
Class 2 | (3,244,378 | ) | (2,769,394 | ) | ||||
Net realized gain on investment transactions | ||||||||
Class A | – 0 | – | (2,586 | ) | ||||
Class C | – 0 | – | (790 | ) | ||||
Advisor Class | – 0 | – | (4,191 | ) | ||||
Class 1 | – 0 | – | (12,245 | ) | ||||
Class 2 | – 0 | – | (5,233 | ) | ||||
Capital Stock Transactions | ||||||||
Net decrease | (43,450,132 | ) | (58,073,019 | ) | ||||
|
|
|
| |||||
Total decrease | (71,627,790 | ) | (47,437,856 | ) | ||||
Net Assets | ||||||||
Beginning of period | 860,206,319 | 907,644,175 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $1,091,678 and $1,011,224, respectively) | $ | 788,578,529 | $ | 860,206,319 | ||||
|
|
|
|
See notes to financial statements.
AB MUNICIPAL BOND INFLATION STRATEGY • | 29 |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
October 31, 2015
NOTE A
Significant Accounting Policies
AB Bond Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940 as an open-end management investment company. Prior to January 20, 2015, the Fund was known as AllianceBernstein Bond Fund, Inc. The Fund, which is a Maryland corporation, operates as a series company comprised of nine portfolios currently in operation: the AB Intermediate Bond Portfolio, the AB Bond Inflation Strategy Portfolio, the AB Municipal Bond Inflation Strategy Portfolio, the AB All Market Real Return Portfolio, the AB Limited Duration High Income Portfolio, the AB Government Reserves Portfolio, the AB Tax-Aware Fixed Income Portfolio, the AB Credit Long/Short Portfolio and the AB High Yield Portfolio. They are each diversified portfolios, with the exception of the AB Credit Long/Short Portfolio and the AB High Yield Portfolio, which are non-diversified. Each portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to the AB Municipal Bond Inflation Strategy Portfolio (the “Strategy”). Prior to January 20, 2015, the Strategy was known as AllianceBernstein Municipal Bond Inflation Strategy Portfolio. The Strategy offers Class A, Class C, Advisor Class, Class 1 and Class 2 shares. Class 1 shares are sold only to the private clients of Sanford C. Bernstein & Co. LLC by its registered representatives. Class B, Class R, Class K and Class I shares have been authorized by the Strategy but are not currently being offered. Class A shares are sold with a front-end sales charge of up to 3.0% for purchases not exceeding $500,000. With respect to purchases of $500,000 or more, Class A shares redeemed within one year of purchase may be subject to a contingent deferred sales charge of 1%. Class C shares are subject to a contingent deferred sales charge of 1% on redemptions made within the first year after purchase. Advisor Class, Class I, and Class 2 shares are sold without an initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. Class 1 shares are sold without an initial or contingent deferred sales charge, but are subject to ongoing distribution expenses. All nine classes of shares have identical voting, dividend, liquidation and other rights, except that the classes bear different distribution and transfer agency expenses. Each class has exclusive voting rights with respect to its distribution plan. 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 Fund 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 Strategy.
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 Fund’s Board of Directors (the “Board”).
30 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
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 valued at the mid level between the current bid and ask prices. If either a current bid or current ask price is unavailable, AllianceBernstein L.P. (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 Strategy may use fair value pricing for securities primarily traded in non-U.S. markets because most foreign markets close well before the Strategy 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.
AB MUNICIPAL BOND INFLATION STRATEGY • | 31 |
Notes to Financial Statements
2. Fair Value Measurements
In accordance with U.S. GAAP regarding fair value measurements, fair value is defined as the price that the Strategy 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 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 Strategy. Unobservable inputs reflect the Strategy’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 Strategy’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 rates, coupon rates, yield curves, option adjusted spreads, default rates, credit spreads and other unique security features in order to estimate the relevant cash flows which is 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.
32 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
The following table summarizes the valuation of the Strategy’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 | $ | – 0 | – | $ | 781,859,530 | $ | 11,790,811 | $ | 793,650,341 | |||||||
Corporates – Investment Grade | – 0 | – | 27,440,797 | – 0 | – | 27,440,797 | ||||||||||
Governments – Treasuries | – 0 | – | 12,293,445 | – 0 | – | 12,293,445 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | – 0 | – | 821,593,772 | 11,790,811 | 833,384,583 | |||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets: | ||||||||||||||||
Interest Rate Swaps | – 0 | – | 88,268 | – 0 | – | 88,268 | ||||||||||
Liabilities: | ||||||||||||||||
Inflation (CPI) Swaps | – 0 | – | (56,776,259 | ) | – 0 | – | (56,776,259 | ) | ||||||||
Interest Rate Swaps | – 0 | – | (1,689 | ) | – 0 | – | (1,689 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total^ | $ | – 0 | – | $ | 764,904,092 | $ | 11,790,811 | $ | 776,694,903 | |||||||
|
|
|
|
|
|
|
|
* | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
^ | There were no transfers between any levels during the reporting period. |
The Strategy 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 10/31/14 | $ | 3,858,510 | $ | 3,858,510 | ||||
Accrued discounts/(premiums) | (18,194 | ) | (18,194 | ) | ||||
Realized gain (loss) | – 0 | – | – 0 | – | ||||
Change in unrealized appreciation/depreciation | 29,696 | 29,696 | ||||||
Purchases | 7,920,799 | 7,920,799 | ||||||
Sales | – 0 | – | – 0 | – | ||||
Transfers in to Level 3 | – 0 | – | – 0 | – | ||||
Transfers out of Level 3 | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Balance as of 10/31/15 | $ | 11,790,811 | $ | 11,790,811 | ||||
|
|
|
| |||||
Net change in unrealized appreciation/depreciation from investments held as of 10/31/15* | $ | 29,696 | $ | 29,696 | ||||
|
|
|
|
* | 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. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 33 |
Notes to Financial Statements
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 Strategy. 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 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 Strategy’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 Strategy’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 Strategy’s financial statements.
34 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
4. Investment Income and Investment Transactions
Dividend income is recorded on the ex-dividend date or as soon as the Strategy 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 Strategy amortizes premiums and accretes original issue discounts and market discounts as adjustments to interest income.
5. Class Allocations
All income earned and expenses incurred by the Strategy are borne on a pro-rata basis by each outstanding class of shares, based on the proportionate interest in the Strategy represented by the net assets of such class, except for class specific expenses which are allocated to the respective class. Expenses of the Fund are charged proportionately to each Strategy or based on other appropriate methods. Realized and unrealized gains and losses are allocated among the various share classes based on respective net assets.
6. 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 investment advisory agreement, the Strategy pays the Adviser an advisory fee at an annual rate of .50% of the first $2.5 billion, ..45% of the next $2.5 billion and .40% in excess of $5 billion, of the Strategy’s average daily net assets. The fee is accrued daily and paid monthly. The Adviser has agreed to waive its fees and bear certain expenses to the extent necessary to limit total operating expenses on an annual basis (the “Expense Caps”) .75% (.80% prior to January 30, 2015), 1.50%, .50%, .60% and .50% of the daily average net assets for the Class A, Class C, Advisor Class, Class 1 and Class 2 shares, respectively. This fee waiver and/or expense reimbursement agreement will remain in effect until January 29, 2016 and then may be extended by the Adviser for additional one-year terms. For the year ended October 31, 2015, such reimbursement/waivers amounted to $664,123.
Pursuant to the investment advisory agreement, the Strategy may reimburse the Adviser for certain legal and accounting services provided to the Strategy by the Adviser. For the year ended October 31, 2015, the reimbursement for such services amounted to $54,539.
AB MUNICIPAL BOND INFLATION STRATEGY • | 35 |
Notes to Financial Statements
The Strategy compensates AllianceBernstein Investor Services, Inc. (“ABIS”), a wholly-owned subsidiary of the Adviser, under a Transfer Agency Agreement for providing personnel and facilities to perform transfer agency services for the Strategy. ABIS may make payments to intermediaries that provide omnibus account services, sub-accounting services and/or networking services. Such compensation retained by ABIS amounted to $55,822 for the year ended October 31, 2015.
AllianceBernstein Investments, Inc. (the “Distributor”), a wholly-owned subsidiary of the Adviser, serves as the distributor of the Strategy’s shares. The Distributor has advised the Strategy that it has retained front-end sales charges of $0 from the sale of Class A shares and received $5,626 and $619 in contingent deferred sales charges imposed upon redemptions by shareholders of Class A and Class C shares, respectively, for the year ended October 31, 2015.
The Strategy 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 Strategy’s transactions in shares of the Government STIF Portfolio for the year ended October 31, 2015 is as follows:
Market Value October 31, 2014 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value October 31, 2015 (000) | Dividend Income (000) | ||||||||||||||
$ | 8,377 | $ | 220,325 | $ | 228,702 | $ | – 0 | – | $ | 12 |
NOTE C
Distribution Services Agreement
The Strategy has adopted a Distribution Services Agreement (the “Agreement”) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Agreement, the Strategy pays distribution and servicing fees to the Distributor at an annual rate of up to .30% of the Strategy’s average daily net assets attributable to Class A shares, 1% of the Strategy’s average daily net assets attributable to Class C shares and .10% of the Strategy’s average daily net assets attributable to Class 1 shares. There are no distribution and servicing fees on the Advisor Class and Class 2 shares. Effective January 30, 2015, payments under the Agreement in respect of Class A shares are limited to an annual rate of .25% of Class A shares’ average daily net assets. The fees are accrued daily and paid monthly. The Agreement provides that the Distributor will use such payments in their entirety for distribution assistance and promotional activities. Since the commencement of the Strategy’s operations, the Distributor has incurred expenses in excess of the distribution costs reimbursed by the Strategy in the amount of $314,332 and $2,043,431 for Class C and Class 1 shares, respectively. While such costs
36 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
may be recovered from the Strategy in future periods so long as the Agreement is in effect, the rate of the distribution and servicing fees payable under the Agreement may not be increased without a shareholder vote. In accordance with the Agreement, there is no provision for recovery of unreimbursed distribution costs incurred by the Distributor beyond the current fiscal year for Class A shares. The Agreement also provides that the Adviser may use its own resources to finance the distribution of the Strategy’s shares.
NOTE D
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the year ended October 31, 2015 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 143,300,013 | $ | 169,646,994 | ||||
U.S. government securities | 6,190,547 | 5,491,027 |
The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation (excluding swap transactions) are as follows:
Cost | $ | 806,645,550 | ||
|
| |||
Gross unrealized appreciation | $ | 27,564,452 | ||
Gross unrealized depreciation | (825,419 | ) | ||
|
| |||
Net unrealized appreciation | $ | 26,739,033 | ||
|
|
1. Derivative Financial Instruments
The Strategy 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 Strategy, as well as the methods in which they may be used are:
• | Swaps |
The Strategy may enter into swaps to hedge its exposure to interest rates or credit risk. 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 Strategy in accordance with the terms of the respective swaps to provide value and recourse to the Strategy or its counterparties in the event of default, bankruptcy or insolvency by one of the parties to the swap.
AB MUNICIPAL BOND INFLATION STRATEGY • | 37 |
Notes to Financial Statements
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 Strategy, and/or the termination value at the end of the contract. Therefore, the Strategy 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 Strategy and the counterparty and by the posting of collateral by the counterparty to the Strategy to cover the Strategy’s exposure to the counterparty. Additionally, risks may arise from unanticipated movements in interest rates or in the value of the underlying securities. The Strategy 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.
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 the Strategy 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 year ended October 31, 2015, the Strategy held inflation (CPI) swaps for hedging purposes.
Interest Rate Swaps:
The Strategy is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. Because the Strategy 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 Strategy may enter into interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional amount. The Strategy 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.
38 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
In addition, the Strategy 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 Strategy anticipates purchasing at a later date. Interest rate swaps involve the exchange by a Strategy 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 Strategy receiving or paying, as the case may be, only the net amount of the two payments).
During the year ended October 31, 2015, the Strategy held interest rate swaps for hedging purposes.
The Strategy 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 Strategy 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 Strategy 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 Strategy’s net liability, held by the defaulting party, may be delayed or denied.
The Strategy’s Master Agreements may contain provisions for early termination of OTC derivative transactions in the event the net assets of the Strategy decline below specific levels (“net asset contingent features”). If these levels are triggered, the Strategy’s counterparty has the right to terminate such transaction
AB MUNICIPAL BOND INFLATION STRATEGY • | 39 |
Notes to Financial Statements
and require the Strategy 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 Strategy had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of Assets and Liabilities Location | Fair Value | Statement of Assets and Liabilities Location | Fair Value | ||||||||
Interest rate contracts | Unrealized appreciation on interest rate swaps | $ | 88,268 | Unrealized depreciation on interest rate swaps | $ | 1,689 | ||||||
Interest rate contracts | Unrealized depreciation on inflation swaps | 56,776,259 | ||||||||||
|
|
|
| |||||||||
Total | $ | 88,268 | $ | 56,777,948 | ||||||||
|
|
|
|
The effect of derivative instruments on the statement of operations for the year ended October 31, 2015:
Derivative Type | Location of Gain or (Loss) on Derivatives | 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 | $ | (1,360,153 | ) | $ | (30,732,129 | ) | |||
|
|
|
| |||||||
Total | $ | (1,360,153 | ) | $ | (30,732,129 | ) | ||||
|
|
|
|
The following table represents the average monthly volume of the Strategy’s derivative transactions during the year ended October 31, 2015:
Interest Rate Swaps: | ||||
Average notional amount | $ | 24,988,889 | (a) | |
Inflation Swaps: | ||||
Average notional amount | $ | 575,415,385 |
(a) | Positions were open for less than one month during the year. |
For financial reporting purposes, the Strategy does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the statement of assets and liabilities.
40 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
All derivatives held at period end were subject to netting arrangements. The following table presents the Strategy’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 Strategy 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 | |||||||||||||||
OTC Derivatives: |
| |||||||||||||||||||
JPMorgan Chase Bank, NA | $ | 88,268 | $ | (88,268 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 88,268 | $ | (88,268 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged | Security Collateral Pledged* | Net Amount of Derivatives Liabilities | |||||||||||||||
OTC Derivatives: |
| |||||||||||||||||||
Bank of America, NA | $ | 142,240 | $ | – 0 | – | $ | – 0 | – | $ | (107,600 | ) | $ | 34,640 | |||||||
Barclays Bank PLC | 15,490,776 | – 0 | – | – 0 | – | (15,490,776 | ) | – 0 | – | |||||||||||
Citibank, NA | 18,943,826 | – 0 | – | – 0 | – | (18,943,826 | ) | – 0 | – | |||||||||||
Deutsche Bank AG | 2,761,218 | – 0 | – | – 0 | – | (2,761,218 | ) | – 0 | – | |||||||||||
JPMorgan Chase Bank, NA | 11,124,845 | (88,268 | ) | – 0 | – | (11,036,577 | ) | – 0 | – | |||||||||||
Morgan Stanley Capital Services LLC | 8,315,043 | – 0 | – | – 0 | – | (8,197,984 | ) | 117,059 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 56,777,948 | $ | (88,268 | ) | $ | – 0 | – | $ | (56,537,981 | ) | $ | 151,699 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | The actual collateral received/pledged may be more than the amount reported due to overcollateralization. |
^ | 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. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 41 |
Notes to Financial Statements
NOTE E
Capital Stock
Each class consists of 3,000,000,000 authorized shares. Transactions in capital shares for Class A, Class C, Advisor Class, Class 1 and Class 2 were as follows:
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | Year Ended October 31, 2014 | Year Ended October 31, 2015 | Year Ended October 31, 2014 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 574,262 | 1,381,976 | $ | 5,854,217 | $ | 14,378,468 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 50,831 | 64,886 | 519,144 | 676,433 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (2,298,134 | ) | (4,945,588 | ) | (23,438,197 | ) | (51,592,286 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (1,673,041 | ) | (3,498,726 | ) | $ | (17,064,836 | ) | $ | (36,537,385 | ) | ||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 72,666 | 186,022 | $ | 748,781 | $ | 1,936,753 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 9,189 | 8,462 | 93,690 | 88,112 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (778,319 | ) | (1,079,313 | ) | (7,932,614 | ) | (11,205,231 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (696,464 | ) | (884,829 | ) | $ | (7,090,143 | ) | $ | (9,180,366 | ) | ||||||||||
| ||||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 5,702,013 | 8,998,760 | $ | 58,371,560 | $ | 93,830,198 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 206,101 | 153,682 | 2,103,606 | 1,604,984 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (6,633,298 | ) | (8,845,646 | ) | (67,756,331 | ) | (91,557,536 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (725,184 | ) | 306,796 | $ | (7,281,165 | ) | $ | 3,877,646 | ||||||||||||
| ||||||||||||||||||||
Class 1 | ||||||||||||||||||||
Shares sold | 6,726,352 | 11,373,052 | $ | 68,580,370 | $ | 118,277,228 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 508,639 | 447,445 | 5,176,475 | 4,657,848 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (8,073,275 | ) | (13,388,007 | ) | (82,131,654 | ) | (139,824,360 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (838,284 | ) | (1,567,510 | ) | $ | (8,374,809 | ) | $ | (16,889,284 | ) | ||||||||||
| ||||||||||||||||||||
Class 2 | ||||||||||||||||||||
Shares sold | 3,789,659 | 3,899,558 | $ | 38,748,186 | $ | 40,622,722 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 221,546 | 173,015 | 2,255,832 | 1,801,773 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (4,381,725 | ) | (4,031,011 | ) | (44,643,197 | ) | (41,768,125 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (370,520 | ) | 41,562 | $ | (3,639,179 | ) | $ | 656,370 | ||||||||||||
|
42 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
NOTE F
Risks Involved in Investing in the Strategy
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 (commonly known as “junk bonds”) are subject to 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 Strategy’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 Strategy invests more of its assets in a particular state’s municipal securities, the Strategy 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 Strategy’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 investments in fixed-income securities tends to fall and this decrease in value may not be offset by higher income from new investments. The Portfolio may be subject to a heightened risk of rising interest rates as the current period of historically low rates is expected to end, and rates are expected to begin rising in the near future. Interest rate risk is generally greater for fixed-income securities with longer maturities or durations.
Duration Risk—Duration is the measure that relates the expected price volatility of a fixed-income security to changes in interest rates. The duration of a fixed-income security may be shorter than or equal to full maturity of a fixed-income security. Fixed-income securities with longer durations have more risk and will decrease in price as interest rates rise. For example, a fixed-income security with a duration of three years will decrease in value by approximately 3% if interest rates increase by 1%.
AB MUNICIPAL BOND INFLATION STRATEGY • | 43 |
Notes to Financial Statements
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 Strategy’s assets can decline as can the value of the Strategy’s distributions. This risk is significantly greater for fixed-income securities with longer maturities.
Derivatives Risk—The Strategy 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 Strategy, 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 in the statement of assets and liabilities.
Leverage Risk—When the Fund 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 Fund’s investments. The Fund 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 Fund, such as forwards, futures, options and swaps, may also result in a form of leverage. Leverage may result in higher returns to the Fund than if the Fund were not leveraged, but may also adversely affect returns, particularly if the market is declining.
Liquidity Risk—Liquidity risk occurs when certain investments become difficult to purchase or sell. Difficulty in selling less liquid securities may result in sales at disadvantageous prices affecting the value of your investment in the Strategy. Causes of liquidity risk may include low trading volumes, large positions and heavy redemptions of fixed-income mutual fund shares. Over recent years, liquidity risk has also increased because the capacity of dealers in the secondary market for fixed-income securities to make markets in these securities has decreased, even as the overall bond market has grown significantly, due to, among other things, structural changes, additional regulatory requirements and capital and risk restraints that have led to reduced inventories. Liquidity risk may be higher in a rising interest rate environment, when the value and liquidity of fixed-income securities generally go down.
Indemnification Risk—In the ordinary course of business, the Strategy enters into contracts that contain a variety of indemnifications. The Strategy’s maximum exposure under these arrangements is unknown. However, the Strategy has not had prior claims or losses pursuant to these indemnification provisions and expects the risk of loss thereunder to be remote. Therefore, the Strategy has not accrued any liability in connection with these indemnification provisions.
44 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
NOTE G
Joint Credit Facility
A number of open-end mutual funds managed by the Adviser, including the Strategy, participate in a $280 million revolving credit facility (the “Facility”) intended to provide short-term financing, if necessary, subject to certain restrictions in connection with abnormal redemption activity. Commitment fees related to the Facility are paid by the participating funds and are included in miscellaneous expenses in the statement of operations. The Strategy did not utilize the Facility during the year ended October 31, 2015.
NOTE H
Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended October 31, 2015 and 2014 were as follows:
2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 456,565 | $ | 483,823 | ||||
Long-term capital gains | – 0 | – | 22,282 | |||||
|
|
|
| |||||
Total taxable distributions | 456,565 | 506,105 | ||||||
Tax-exempt distributions | 13,443,276 | 12,001,626 | ||||||
|
|
|
| |||||
Total distributions paid | $ | 13,899,841 | $ | 12,507,731 | ||||
|
|
|
|
As of October 31, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed tax-exempt income | $ | 1,087,919 | ||
Accumulated capital and other losses | (4,638,889 | )(a) | ||
Unrealized appreciation/(depreciation) | (29,946,888 | )(b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | (33,497,858 | ) | |
|
|
(a) | As of October 31, 2015, the Strategy had a net capital loss carryforward of $4,638,889. |
(b) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the tax treatment of swaps. |
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 October 31, 2015, the Strategy had a net short-term capital loss carryforward of $468,265 and a net long-term capital loss carryforward of $4,170,624 which may be carried forward for an indefinite period.
During the current fiscal year, permanent differences primarily due to nondeductible offering costs resulted in a net increase in undistributed net investment income and a corresponding net decrease to additional paid-in capital. This reclassification had no effect on net assets.
AB MUNICIPAL BOND INFLATION STRATEGY • | 45 |
Notes to Financial Statements
NOTE I
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 J
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 Strategy’s financial statements through this date.
46 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.48 | $ 10.35 | $ 10.80 | $ 10.32 | $ 10.09 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .15 | .13 | .12 | .14 | .16 | |||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | (.34 | ) | .12 | (.44 | ) | .50 | .26 | |||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.19 | ) | .25 | (.32 | ) | .64 | .42 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.15 | ) | (.12 | ) | (.11 | ) | (.14 | ) | (.17 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | (.00 | )(c) | (.02 | ) | (.02 | ) | (.02 | ) | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.15 | ) | (.12 | ) | (.13 | ) | (.16 | ) | (.19 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.14 | $ 10.48 | $ 10.35 | $ 10.80 | $ 10.32 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (1.83 | )% | 2.44 | % | (2.98 | )% | 6.22 | % | 4.24 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $41,122 | $60,016 | $95,466 | $79,735 | $64,342 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | .76 | % | .80 | % | .80 | % | .80 | % | .80 | % | ||||||||||
Expenses, before waivers/reimbursements | .87 | % | .90 | % | .91 | % | .95 | % | 1.20 | % | ||||||||||
Net investment income(a) | 1.49 | % | 1.24 | % | 1.10 | % | 1.34 | % | 1.57 | % | ||||||||||
Portfolio turnover rate | 17 | % | 18 | % | 15 | % | 10 | % | 26 | % |
See footnote summary on page 51.
AB MUNICIPAL BOND INFLATION STRATEGY • | 47 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.46 | $ 10.33 | $ 10.78 | $ 10.30 | $ 10.08 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .08 | .06 | .04 | .07 | .09 | |||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | (.35 | ) | .12 | (.43 | ) | .50 | .25 | |||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.27 | ) | .18 | (.39 | ) | .57 | .34 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.07 | ) | (.05 | ) | (.04 | ) | (.07 | ) | (.10 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | (.00 | )(c) | (.02 | ) | (.02 | ) | (.02 | ) | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.07 | ) | (.05 | ) | (.06 | ) | (.09 | ) | (.12 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.12 | $ 10.46 | $ 10.33 | $ 10.78 | $ 10.30 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (2.56 | )% | 1.72 | % | (3.67 | )% | 5.51 | % | 3.45 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $13,154 | $20,873 | $29,748 | $35,436 | $23,919 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.50 | % | 1.50 | % | 1.50 | % | 1.50 | % | 1.50 | % | ||||||||||
Expenses, before waivers/reimbursements | 1.61 | % | 1.60 | % | 1.61 | % | 1.65 | % | 1.91 | % | ||||||||||
Net investment income(a) | .75 | % | .54 | % | .41 | % | .64 | % | .87 | % | ||||||||||
Portfolio turnover rate | 17 | % | 18 | % | 15 | % | 10 | % | 26 | % |
See footnote summary on page 51.
48 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.48 | $ 10.35 | $ 10.81 | $ 10.32 | $ 10.10 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .18 | .16 | .15 | .17 | .19 | |||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | (.34 | ) | .12 | (.45 | ) | .51 | .25 | |||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.16 | ) | .28 | (.30 | ) | .68 | .44 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.18 | ) | (.15 | ) | (.14 | ) | (.17 | ) | (.20 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | (.00 | )(c) | (.02 | ) | (.02 | ) | (.02 | ) | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.18 | ) | (.15 | ) | (.16 | ) | (.19 | ) | (.22 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.14 | $ 10.48 | $ 10.35 | $ 10.81 | $ 10.32 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (1.56 | )% | 2.75 | % | (2.78 | )% | 6.64 | % | 4.44 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $171,789 | $185,106 | $179,620 | $85,781 | $41,924 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | .50 | % | .50 | % | .50 | % | .50 | % | .50 | % | ||||||||||
Expenses, before waivers/reimbursements | .61 | % | .60 | % | .61 | % | .65 | % | .88 | % | ||||||||||
Net investment income(a) | 1.76 | % | 1.55 | % | 1.39 | % | 1.63 | % | 1.85 | % | ||||||||||
Portfolio turnover rate | 17 | % | 18 | % | 15 | % | 10 | % | 26 | % |
See footnote summary on page 51.
AB MUNICIPAL BOND INFLATION STRATEGY • | 49 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class 1 | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.45 | $ 10.33 | $ 10.78 | $ 10.30 | $ 10.08 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .17 | .15 | .14 | .16 | .17 | |||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | (.34 | ) | .12 | (.43 | ) | .50 | .27 | |||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.17 | ) | .27 | (.29 | ) | .66 | .44 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | (.17 | ) | (.15 | ) | (.14 | ) | (.16 | ) | (.20 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | (.00 | )(c) | (.02 | ) | (.02 | ) | (.02 | ) | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.17 | ) | (.15 | ) | (.16 | ) | (.18 | ) | (.22 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.11 | $ 10.45 | $ 10.33 | $ 10.78 | $ 10.30 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (1.62 | )% | 2.60 | % | (2.76 | )% | 6.45 | % | 4.40 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $386,448 | $408,307 | $419,573 | $236,285 | $111,857 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursements | .60 | % | .60 | % | .60 | % | .60 | % | .60 | % | ||||||||||
Expenses, before waivers/reimbursements | .67 | % | .66 | % | .67 | % | .74 | % | .92 | % | ||||||||||
Net investment income(a) | 1.66 | % | 1.44 | % | 1.30 | % | 1.54 | % | 1.66 | % | ||||||||||
Portfolio turnover rate | 17 | % | 18 | % | 15 | % | 10 | % | 26 | % |
See footnote summary on page 51.
50 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class 2 | ||||||||||||||||||||
Year Ended October 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 10.46 | $ 10.33 | $ 10.79 | $ 10.31 | $ 10.08 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(a)(b) | .18 | .16 | .15 | .17 | .17 | |||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | (.34 | ) | .13 | (.44 | ) | .50 | .28 | |||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.16 | ) | .29 | (.29 | ) | .67 | .45 | |||||||||||||
|
| |||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||
Dividends from net investment income | (.18 | ) | (.16 | ) | (.15 | ) | (.17 | ) | (.20 | ) | ||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | (.00 | )(c) | (.02 | ) | (.02 | ) | (.02 | ) | ||||||||||
|
| |||||||||||||||||||
Total dividends and distributions | (.18 | ) | (.16 | ) | (.17 | ) | (.19 | ) | (.22 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 10.12 | $ 10.46 | $ 10.33 | $ 10.79 | $ 10.31 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(d) | (1.52 | )% | 2.79 | % | (2.75 | )% | 6.54 | % | 4.54 | % | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period | $176,066 | $185,904 | $183,237 | $92,507 | $43,368 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers | .50 | % | .50 | % | .50 | % | .50 | % | .50 | % | ||||||||||
Expenses, before waivers | .57 | % | .56 | % | .57 | % | .64 | % | .85 | % | ||||||||||
Net investment income(a) | 1.76 | % | 1.54 | % | 1.39 | % | 1.64 | % | 1.77 | % | ||||||||||
Portfolio turnover rate. | 17 | % | 18 | % | 15 | % | 10 | % | 26 | % |
(a) | Net of fees waived and expenses reimbursed by the Adviser. |
(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. Initial sales charges or contingent deferred sales charges are not reflected in the calculation of total investment return. Total return does not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares. Total investment return calculated for a period of less than one year is not annualized. |
See notes to financial statements.
AB MUNICIPAL BOND INFLATION STRATEGY • | 51 |
Financial Highlights
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of AB Municipal Bond Inflation Strategy Portfolio
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of AB Municipal Bond Inflation Strategy Portfolio (the “Fund”) (formerly AllianceBernstein Municipal Bond Inflation Strategy Portfolio), one of the portfolios constituting AB Bond Fund, Inc. (formerly AllianceBernstein Bond Fund, Inc.), as of October 31, 2015, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2015, by correspondence with the custodian and others, or by other appropriate auditing procedures where replies from others were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the AB Municipal Bond Inflation Strategy Portfolio, one of the portfolios constituting AB Bond Fund, Inc., at October 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
December 30, 2015
52 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Report of Independent Registered Public Accounting Firm
BOARD OF DIRECTORS
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, 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 State Street Corporation CCB/5 1 Iron Street Boston, MA 02210
Principal Underwriter AllianceBernstein Investments, Inc. 1345 Avenue of the Americas New York, NY 10105
Transfer Agent AllianceBernstein Investor Services, Inc. P.O. Box 786003 San Antonio, TX 78278-6003 Toll-Free (800) 221-5672 | Independent Registered Public Ernst & Young LLP 5 Times Square New York, NY 10036
Legal Counsel Seward & Kissel LLP One Battery Park Plaza New York, NY 10004 |
(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 Strategy’s portfolio are made by the Adviser’s Municipal Bond Investment Team. Messrs. Michael G. Brooks, Robert “Guy” B. Davidson III, Wayne D. Godlin and Terrance T. Hults are the investment professionals with the most significant responsibility for the day-to-day management of the Strategy’s portfolio. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 53 |
Board of Directors
MANAGEMENT OF THE FUND
Board of Directors Information
The business and affairs of the Strategy are managed under the direction of the Board of Directors. Certain information concerning the Strategy’s Directors is set forth below.
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL DURING PAST FIVE | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD BY DIRECTOR | |||||
INTERESTED DIRECTOR | ||||||||
Robert M. Keith, + 1345 Avenue of the Americas New York, NY 10105 55 (2010) | Senior Vice President of AllianceBernstein L.P. (the “Adviser”) and the head of AllianceBernstein Investments, Inc. (“ABI”) since July 2008; Director of ABI and President of the AB Mutual Funds. Previously, he served as Executive Managing Director of ABI from December 2006 to June 2008. Prior to joining ABI in 2006, Executive Managing Director of Bernstein Global Wealth Management, and prior thereto, Senior Managing Director and Global Head of Client Service and Sales of the Adviser’s institutional investment management business since 2004. Prior thereto, he was Managing Director and Head of North American Client Service and Sales in the Adviser’s institutional investment management business, with which he had been associated since prior to 2004. | 110 | None |
54 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL DURING PAST FIVE | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD | |||||
DISINTERESTED DIRECTORS | ||||||||
Marshall C. Turner, Jr., ++ Chairman of the Board 74 (2005) | Private Investor since prior to 2010. Former Chairman CEO of Dupont Photomasks, Inc. (components of semi-conductor manufacturing). He has extensive operating leadership and venture capital investment experience, including five interim or full-time CEO roles and prior service as general partner of institutional venture capital partnerships. He also has extensive non-profit board leadership experience, and currently serves on the boards of two education and science-related non-profit organizations. He has served as a director of one AB fund since 1992, and director or trustee of multiple AB Funds since 2005. He has been Chairman of the AB Funds since January 2014, and the Chairman of the Independent Directors Committees of such Funds since February 2014. | 110 | Xilinx, Inc. (programmable logic semi-conductors) since 2007 | |||||
John H. Dobkin, ++ 73 (1998) | Independent Consultant since prior to 2010. Formerly, President of Save Venice, Inc. (preservation organization) from 2001-2002; Senior Advisor from June 1999-June 2000 and President of Historic Hudson Valley (historic preservation) from December 1989-May 1999. Previously, Director of the National Academy of Design. He has served as a director or trustee of various AB Funds since 1992, and as Chairman of the Audit Committees of a number of such Funds from 2001-2008. | 110 | None |
AB MUNICIPAL BOND INFLATION STRATEGY • | 55 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL DURING PAST FIVE | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD BY DIRECTOR | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Michael J. Downey, ++ 71 (2005) | Private Investor since prior to 2010. Formerly, managing partner of Lexington Capital, LLC (investment advisory firm) from December 1997 until December 2003. He served as Director of The Merger Fund (registered investment company) since prior to 2009 until 2013. He served as a Director of Prospect Acquisition Corp. (financial services) from 2007 until 2009. From 1987 until 1993, Chairman and CEO of Prudential Mutual Fund Management, director of the Prudential mutual funds, and member of the Executive Committee of Prudential Securities Inc. He has served as a director or trustee of the AB Funds since 2005 and is a director and Chairman of one other registered investment company. | 110 | Asia Pacific Fund, Inc. (registered investment company) since prior to 2010 | |||||
William H. Foulk, Jr., ++ 83 (1998) | Investment Adviser and an Independent Consultant since prior to 2010. Previously, he was Senior Manager of Barrett Associates, Inc., a registered investment adviser. He was formerly Deputy Comptroller and Chief Investment Officer of the State of New York and, prior thereto, Chief Investment Officer of the New York Bank for Savings. He has served as a director or trustee of various AB Funds since 1983, and was Chairman of the Independent Directors Committees of the AB Funds from 2003 until early February 2014. He served as Chairman of such Funds from 2003 through December 2013. He is also active in a number of mutual fund related organizations and committees. | 110 | None |
56 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL DURING PAST FIVE | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
D. James Guzy, ++ 79 (2005) | Chairman of the Board of SRC Computers, Inc. (semi-conductors), with which he has been associated since prior to 2010. He served as Chairman of the Board of PLX Technology (semi-conductors) since prior to 2010 until November 2013. He was Director of Cirrus Logic Corporation (semi-conductors) from 1984 until July 2011. He was a director of Intel Corporation (semi-conductors) from 1969 until 2008, and served as Chairman of the Finance Committee of such company for several years until May 2008. He has served as a director or trustee of one or more of the AB Funds since 1982. | 110 | None | |||||
Nancy P. Jacklin, ++ 67 (2006) | Professorial Lecturer at the Johns Hopkins School of Advanced International Studies (2008-2015). U.S. Executive Director of the International Monetary Fund (which is responsible for ensuring the stability of the international monetary system), (December 2002-May 2006); Partner, Clifford Chance (1992-2002); Sector Counsel, International Banking and Finance, and Associate General Counsel, Citicorp (1985-1992); Assistant General Counsel (International), Federal Reserve Board of Governors (1982-1985); and Attorney Advisor, U.S. Department of the Treasury (1973-1982). Member of the Bar of the District of Columbia and of New York; and member of the Council on Foreign Relations. She has served as a director or trustee of the AB Funds since 2006 and has been Chairman of the Governance and Nominating Committees of the Funds since August 2014. | 110 | None |
AB MUNICIPAL BOND INFLATION STRATEGY • | 57 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL DURING PAST FIVE | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Garry L. Moody, ++ 63 (2008) | Independent Consultant. Formerly, Partner, Deloitte & Touche LLP (1995-2008) where he held a number of senior positions, including Vice Chairman, and U.S. and Global Investment Management Practice Managing Partner; President, Fidelity Accounting and Custody Services Company (1993-1995); and Partner, Ernst & Young LLP (1975-1993), where he served as the National Director of Mutual Fund Tax Services and Managing Partner of its Chicago Office Tax department. He is a member of the Trustee Advisory Board of BoardIQ, a biweekly publication focused on issues and news affecting directors of mutual funds. He has served as a director or trustee, and as Chairman of the Audit Committees, of the AB Funds since 2008. | 110 | None |
58 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL DURING PAST FIVE | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC DIRECTORSHIPS CURRENTLY HELD | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Earl D. Weiner, ++ 76 (2007) | Of Counsel, and Partner prior to January 2007, of the law firm Sullivan & Cromwell LLP and is a former member of the ABA Federal Regulation of Securities Committee Task Force to draft editions of the Fund Director’s Guidebook. He also serves as a director or trustee of various non-profit organizations and has served as Chairman or Vice Chairman of a number of them. He has served as a director or trustee of the AB Funds since 2007 and served as Chairman of the Governance and Nominating Committees of the AB Funds from 2007 until August 2014. | 110 | None |
* | The address for each of the Strategy’s disinterested Directors is c/o AllianceBernstein L.P., Attention: Philip L. Kirstein, 1345 Avenue of the Americas, New York, NY 10105. |
** | There is no stated term of office for the Strategy’s Directors. |
*** | The information above includes each Director’s principal occupation during the last five years and other information relating to the experience, attributes and skills relevant to each Director’s qualifications to serve as a Director, which led to the conclusion that each Director should serve as a Director for the Strategy. |
+ | Mr. Keith is an “interested person” of the Strategy as defined in the “40 Act,” due to his position as a Senior Vice President of the Adviser. |
++ | Member of the Audit Committee, the Governance and Nominating Committee and the Independent Directors Committee. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 59 |
Management of the Fund
Officer Information
Certain information concerning the Strategy’s Officers is listed below.
NAME, ADDRESS* AND AGE | PRINCIPAL POSITION(S) HELD WITH FUND | PRINCIPAL OCCUPATION DURING PAST 5 YEARS | ||
Robert M. Keith 55 | President and Chief Executive Officer | See biography above. | ||
Philip L. Kirstein 70 | Senior Vice President and Independent Compliance Officer | Senior Vice President and Independent Compliance Officer of the AB Funds, with which he has been associated since October 2004. Prior thereto, he was Of Counsel to Kirkpatrick & Lockhart, LLP from October 2003 to October 2004, and General Counsel of Merrill Lynch Investment Managers, L.P. since prior to March 2003. | ||
Michael G. Brooks 67 | Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Robert “Guy” B. Davidson III 54 | Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Wayne D. Godlin 54 | Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Terrance T. Hults 49 | Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Emilie D. Wrapp 59 | Secretary | Senior Vice President, Assistant General Counsel and Assistant Secretary of ABI,** with which she has been associated since prior to 2010. | ||
Joseph J. Mantineo 56 | Treasurer and Chief Financial Officer | Senior Vice President of AllianceBernstein Investor Services, Inc. (“ABIS”),** with which he has been associated since prior to 2010. | ||
Phyllis J. Clarke 54 | Controller | Vice President of ABIS,** with which she has been associated since prior to 2010. | ||
Vincent S. Noto 50 | Chief Compliance Officer | Senior Vice President since 2015 and Mutual Fund Chief Compliance Officer of the Adviser** since 2014. Prior thereto, he was Vice President and Director of Mutual Fund Compliance of the Adviser** since 2010. |
60 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Management of the Fund
* | The address for each of the Fund’s Officers is 1345 Avenue of the Americas, New York, NY 10105. |
** | The Adviser, ABI and ABIS are affiliates of the Strategy. |
The Fund’s Statement of Additional Information (“SAI”) has additional information about the Strategy’s Directors and Officers and is available without charge upon request. Contact your financial representative or AllianceBernstein at 1-800-227-4618, or visit www.alliancebernstein.com, for a free prospectus or SAI. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 61 |
Management of the Fund
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 Bond Fund, Inc. (the “Fund”) in respect of AB Municipal Bond Inflation Strategy (the “Strategy”).2 The evaluation of the Investment Advisory Agreement was prepared by Philip L. Kirstein, the Senior Officer of the Fund, for the Directors of the Fund, 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 Directors of the Fund to perform its duties pursuant to Section 15 of the Investment Company Act of 1940 (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 Strategy which was provided to the Directors 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 Strategy grows larger; and |
6. | Nature and quality of the Adviser’s services including the performance of the Strategy. |
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 fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of
1 | The Senior Officer’s fee evaluation was completed on October 22, 2015 and discussed with the Board of Directors on November 3-5, 2015. |
2 | Future references to the Fund or the Strategy do not include “AB.” |
62 | • AB MUNICIPAL BOND INFLATION STRATEGY |
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
INVESTMENT ADVISORY FEES, NET ASSETS, EXPENSE CAPS & RATIOS
The Adviser proposed that the Strategy pay the advisory fee set forth in the table below for receiving the services to be provided pursuant to the Investment Advisory Agreement. The fee schedule below, implemented in January 2004 in connection with the Adviser’s settlement with the NYAG in December 2003, is based on a master schedule that contemplates eight categories of funds with almost all funds in each category having the same advisory fee schedule.4
Strategy | Category | Advisory Fee Based on % of Average Daily Net Assets | Net Assets 09/30/15 ($MM) | |||||
Municipal Bond Inflation Strategy | High Income | 0.50% on 1st $2.5 billion 0.45% on next $2.5 billion 0.40% on the balance | $ | 799.3 |
The Adviser is reimbursed as specified in the Investment Advisory Agreement for certain clerical, legal, accounting, administrative and other services provided to the Strategy. During the Strategy’s fiscal year ended October 31, 2014, the Adviser received $60,253 (0.007% of the Strategy’s average daily net assets) for such services.
The Adviser agreed to waive that portion of its advisory fees and/or reimburse the Strategy for that portion of the Strategy’s total operating expenses to the degree necessary to limit the Strategy’s expense ratios to the amounts set forth below for the Strategy’s current fiscal year. The waiver is terminable by the Adviser upon at least 60 days’ notice prior to the Strategy’s prospectus update. In addition, set forth below are the Strategy’s gross expense ratios for the most recent semi-annual period:5
Strategy | Expense Cap Pursuant to Expense Limitation Undertaking | Gross Expense Ratio6 | Fiscal Year End | |||||||
Municipal Bond Inflation Strategy7 | Advisor Class A Class C Class 1 Class 2 |
| 0.50 0.75 1.50 0.60 0.50 | % % % % % | 0.60% 0.88% 1.60% 0.66% 0.56% | October 31 (ratio as of April 30, 2015) |
3 | Jones v. Harris at 1427. |
4 | Most of the AB Mutual Funds, which the Adviser manages, were affected by the Adviser’s settlement with the NYAG. |
5 | Semi-annual total expense ratios are unaudited. |
6 | Annualized. |
7 | Effective January 30, 2015, the Rule 12b-1 fee for Class A shares of the Strategy was reduced from 0.30% to 0.25%. At the same time, the expense cap for the Class A shares was also reduced from 0.80% to 0.75%. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 63 |
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 Strategy 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 Strategy’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 Strategy are more costly than those for institutional client assets due to the greater complexities and time required for investment companies, although as previously noted, the Adviser is reimbursed for providing such services. Also, retail mutual funds managed by the Adviser are widely held and accordingly, servicing the Strategy’s investors is more time consuming and labor intensive compared to servicing institutional clients since the Adviser needs to communicate with a more extensive network of financial intermediaries and shareholders. 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 Strategy 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 Strategy.8 However, with respect to the Strategy, the
8 | 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. |
64 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Adviser represented that there is no category in the Form ADV for institutional products that have a substantially similar investment styles as the Strategy.
The Adviser represented that it does not sub-advise any registered investment companies that have a similar investment strategy as the Strategy.
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 Strategy with fees charged to other investment companies for similar services offered by other investment advisers.9,10 Broadridge’s analysis included the comparison of the Strategy’s contractual management fee, estimated at the approximate current asset level of the Strategy, to the median of the Strategy’s Broadridge Expense Group (“EG”)11 and the Strategy’s contractual management fee ranking.12
Broadridge describes an EG as a representative sample of comparable funds. Broadridge’s standard methodology for screening funds to be included in an EG entails the consideration of several fund criteria, including fund type, Lipper investment classification/objective, load type and similar 12b-1/non-12b-1 service fees, asset (size) comparability, expense components and attributes. An EG will typically consist of seven to twenty funds.
Strategy | Contractual Management Fee (%) | Broadridge EG Median (%) | Broadridge EG Rank | |||||||||
Municipal Bond Inflation Strategy | 0.500 | 0.505 | 5/14 |
9 | 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. |
10 | On June 5, 2015, Broadridge acquired the Fiduciary Services and Competitive Intelligence unit, i.e., the group responsible for providing the Strategy’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 Strategy’s investment classification/objective continued to be determined by Lipper. |
11 | Broadridge does not consider average account size when constructing EGs. Funds with relatively small average account sizes tend to have higher transfer agent expense ratios than comparable sized funds that have relatively large average account sizes. There are limitations to Lipper expense category data because different funds categorize expenses differently. |
12 | The contractual management fee is calculated by Broadridge using the Strategy’s contractual management fee rate at the hypothetical asset level. The hypothetical asset level is based on the combined net assets of all classes of the Strategy, rounded up to the next $25 million. Broadridge’s total expense ratio information is based on the most recent annual report except as otherwise noted. A ranking of “1” would mean that Strategy had the lowest effective fee rate in the Broadridge peer group. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 65 |
Broadridge also compared the Strategy’s total expense ratio to the medians of the Strategy’s EG and Broadridge Expense Universe (“EU”). The EU is a broader group compared to the EG, consisting of all funds that have the same investment classifications/
objective and load type as the subject Strategy.13 Pro-forma total expense ratio (italicized) is shown to reflect the Strategy’s 12b-1 fee reduction had the reduction been in effect during the Portfolio’s entire fiscal year.
Strategy | Total Expense Ratio (%)14 | Broadridge EG Median (%) | Broadridge EG Rank | Broadridge EU Median (%) | Broadridge EU Rank | |||||||||||
Municipal Bond Inflation Strategy | 0.800 | 0.810 | 5/14 | 0.753 | 28/44 | |||||||||||
Pro-forma | 0.750 | 0.810 | 2/14 | 0.753 | 22/44 |
Based on this analysis, considering pro-forma information where available, the Strategy has a more favorable ranking on a total expense ratio basis than on a contractual management fee basis.
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 Strategy. The Senior Officer has retained an independent 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 Strategy, prepared by the Adviser for the Board of Directors, was reviewed by the Senior Officer and the independent consultant. The Adviser’s profitability from providing investment advisory services to the Strategy increased during calendar year 2014, relative to 2013.
In addition to the Adviser’s direct profits from managing the Strategy, certain of the Adviser’s affiliates have business relationships with the Strategy and may earn a profit from providing other services to the Strategy. The courts have referred to this type of business opportunity as “fall-out benefits” to the Adviser and
13 | Except for asset (size) comparability, Broadridge uses the same criteria for selecting an EG when selecting an EU. Unlike the EG, the EU allows for the same adviser to be represented by more than just one fund. |
14 | Most recently completed fiscal year Class A share total expense ratio. |
66 | • AB MUNICIPAL BOND INFLATION STRATEGY |
indicated that such benefits should be factored into the evaluation of the total relationship between the Strategy 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. These affiliates provide transfer agent and distribution related services to the Strategy and receive transfer agent fees, front-end sales loads, Rule 12b-1 payments and contingent deferred sales charges (“CDSC”). During the Strategy’s fiscal year ended October 31, 2014, ABI received from the Strategy $926,617 and $39,273 in Rule 12b-1 and CDSC fees, respectively.
AllianceBernstein Investments, Inc. (“ABI”), an affiliate of the Adviser, is the Strategy’s principal underwriter. ABI and the Adviser have disclosed in the Strategy’s prospectus that they may make revenue sharing payments from their own resources, in addition to revenues derived from sales loads and Rule 12b-1 fees, to firms that sell shares of the Strategy. In 2014, ABI paid approximately 0.05% of the average monthly assets of the AB Mutual Funds or approximately $20.4 million for distribution services and educational support (revenue sharing payments).
Fees and reimbursements for out of pocket expenses charged by AllianceBernstein Investor Services, Inc. (“ABIS”), the affiliated transfer agent for the Strategy, are charged on a per account basis, based on the level of service provided and the class of share held by the account. ABIS also receives a fee per shareholder sub-account for each account maintained by an intermediary on an omnibus basis. During the Strategy’s fiscal year ended October 31, 2014, ABIS received $46,498 in fees from the Strategy.
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 Directors 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
AB MUNICIPAL BOND INFLATION STRATEGY • | 67 |
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 Directors an update of the Deli15 study on advisory fees and various fund characteristics.16 The independent consultant first reiterated the results of his previous two dimensional comparison analysis (fund size and family size) with the Board of Directors.17 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 Strategy.
15 | 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. |
16 | 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. |
17 | 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. |
68 | • AB MUNICIPAL BOND INFLATION STRATEGY |
The information below shows the 1, 3 and 5 year performance return and rankings of the Strategy18 relative to its Broadridge Performance Group (“PG”) and Broadridge Performance Universe (“PU”)19 for the period ended July 31, 2015.20
Strategy | Strategy Return (%) | PG Median (%) | PU Median (%) | PG Rank | PU Rank | |||||||||||
Municipal Bond Inflation Strategy | ||||||||||||||||
1 year | -2.93 | 2.23 | 2.12 | 14/14 | 51/53 | |||||||||||
3 year | -0.46 | 2.09 | 1.87 | 14/14 | 45/47 | |||||||||||
5 year | 1.78 | 3.66 | 3.29 | 14/14 | 37/39 |
Set forth below are the 1, 3, 5 year and since inception net performance returns of the Strategy (in bold)21 versus its benchmark.22 Strategy and benchmark volatility and reward-to-variability ratio (“Sharpe Ratio”) information is also shown.23
Period Ending July 31, 2015 Annualized Performance | ||||||||||||||||||||||||||||
Since | Annualized | Risk Period (Year) | ||||||||||||||||||||||||||
1 Year (%) | 3 Year (%) | 5 Year (%) | Inception (%) | Volatility (%) | Sharpe (%) | |||||||||||||||||||||||
Municipal Bond Inflation Strategy | -2.93 | -0.46 | 1.78 | 1.66 | 3.00 | 0.57 | 5 | |||||||||||||||||||||
Barclays Capital 1-10yr TIPS Index | -1.80 | -0.92 | 2.25 | 2.43 | 3.68 | 0.60 | 5 | |||||||||||||||||||||
Inception Date: January 26, 2010 |
18 | The performance returns and rankings are for the Class A shares of the Strategy. The performance returns of the Strategy were provided Broadridge. |
19 | The Strategy’s PG is identical to the Strategy’s EG. The Strategy’s PU is not identical to the Strategy’s EU as the criteria for including/excluding a Strategy in/from a PU are somewhat different from that of an EU. |
20 | The current Lipper investment classification/objective dictates the PG and PU throughout the life of the Strategy even if the Strategy may have had a different investment classification/objective at different points in time. |
21 | The performance returns and risk measures shown in the table are for the Class A shares of the Strategy. |
22 | The Adviser provided Strategy and benchmark performance return information for the periods through July 31, 2015. |
23 | Strategy 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 strategy with a greater volatility would be viewed as more risky than a strategy with equivalent performance but lower volatility; for that reason, a greater return would be demanded for the more risky fund. A strategy with a higher Sharpe Ratio would be viewed as better performing than a strategy with a lower Sharpe Ratio. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 69 |
CONCLUSION:
Based on the factors discussed above the Senior Officer’s conclusion is that the proposed advisory fee for the Strategy 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 in respect of the Strategy is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: November 25, 2015
70 | • AB MUNICIPAL BOND INFLATION STRATEGY |
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 MUNICIPAL BOND INFLATION STRATEGY • | 71 |
AB Family of Funds
NOTES
72 | • AB MUNICIPAL BOND INFLATION STRATEGY |
NOTES
AB MUNICIPAL BOND INFLATION STRATEGY • | 73 |
NOTES
74 | • AB MUNICIPAL BOND INFLATION STRATEGY |
NOTES
AB MUNICIPAL BOND INFLATION STRATEGY • | 75 |
NOTES
76 | • AB MUNICIPAL BOND INFLATION STRATEGY |
AB MUNICIPAL BOND INFLATION STRATEGY
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
MBIS-0151-1015
OCT 10.31.15
ANNUAL REPORT
AB TAX-AWARE FIXED INCOME PORTFOLIO
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
Annual Report
This report provides management’s discussion of fund performance for AB Tax-Aware Fixed Income Portfolio (the “Fund”) for the annual reporting period ended October 31, 2015. Effective January 20, 2015, the Fund’s name changed from AllianceBernstein Tax-Aware Fixed Income Portfolio to AB Tax-Aware Fixed Income Portfolio.
Investment Objectives and Policies
The investment objective of the Fund is to maximize after-tax return and income. The Fund pursues its objective by investing principally in a national portfolio of both municipal and taxable fixed-income securities. The Fund invests, under normal circumstances, at least 80% of its net assets in fixed-income securities. The Fund also invests, under normal circumstances, at least 65% of its total 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 income earned and distributed to shareholders on non-municipal securities would not be exempt from Federal income tax. The Fund may invest in fixed-income securities rated below investment grade (commonly known as “junk bonds”), although such securities are not expected to be the Fund’s primary focus.
AllianceBernstein L.P. (the “Adviser”) selects securities for the Fund based on a variety of factors, including credit quality, maturity, diversification benefits, and the relative expected after-tax returns of taxable and municipal securities (considering Federal tax rates and
without regard to state and local income taxes). As the objective is to increase the after-tax return of the portfolio, an investor in the Fund may incur a tax liability that will generally be greater than the same investor would have in a fund investing exclusively in municipal securities, and that will be higher if the investor is in a higher tax bracket. In addition, the tax implications of the Fund’s trading activity, such as realizing taxable gains, are considered in making purchase and sale decisions for the Fund. The Fund may invest in fixed-income securities of any maturity from short- to long-term.
The Fund may also invest in forward commitments, zero-coupon municipal securities and variable, floating and inverse floating rate municipal securities.
The Fund may use derivatives, such as swaps, options, futures, and forwards, to achieve its investment strategies. For example, the Fund may enter into credit default and interest rate swaps relating to municipal and taxable fixed-income securities or securities indices. Derivatives may provide more efficient and economical exposure to fixed-income securities markets than direct investments.
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.
For the six-month period, Advisor Class and Class A shares outperformed the benchmark, while Class C shares
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 1 |
underperformed, before sales charges. All share classes underperformed the benchmark for the 12-month period, before sales charges. For the six-month period, security selection in the special tax, industrials, transportation and leasing sectors contributed to relative performance; security selection in the education sector detracted. During the 12-month period, sector selection in inflation-linked bonds detracted as did security selection in the state general obligation sector; security selection in the industrials, health care, leasing and insured sectors contributed positively. The impact to performance of owning taxable bonds versus comparable risk tax-exempts was immaterial, as was the impact of owning taxable bonds versus comparable risk tax-exempts.
The Fund used interest rate swaps and inflation (“CPI”) swaps for hedging purposes, over both periods and the effect on absolute performance was immaterial.
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 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 credit-worthiness 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 2.76% and 0%, respectively.
2 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
DISCLOSURES AND RISKS
Benchmark Disclosure
The unmanaged Barclays Municipal Bond Index does not reflect fees and expenses associated with the active management of a mutual fund portfolio. 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.
Below Investment Grade Securities Risk: Investments in fixed-income securities with lower ratings are subject to 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 municipal or corporate developments, negative performance of the junk bond market generally and less secondary market liquidity.
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.
The Fund may invest in municipal securities of issuers in Puerto Rico or other US territories, which are exempt from federal, state, and, where applicable, local income taxes. These municipal securities may have more risks than those of most other US issuers of tax-exempt securities. Like many US states and municipalities, Puerto Rico experienced a significant downturn during the recent recession. Puerto Rico’s downturn was particularly severe, and it continues to face a very challenging economic and fiscal environment. As a result, securities issued by many Puerto Rican issuers have low credit ratings or are on “negative watch” by credit rating organizations, and markets in such securities have been volatile. If the economic situation in Puerto Rico persists or worsens, the volatility and credit quality of Puerto Rican municipal securities could be adversely affected, and the market for such securities may experience continued volatility.
Tax Risk: From time to time, the US Government and the US Congress consider changes in federal tax law that could limit or eliminate the federal tax exemption for municipal bond income, which would in effect reduce the income received by shareholders from the Fund by increasing taxes on that income. In such event, the Fund’s
(Disclosures, Risks and Note about Historical Performance continued on next page)
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 3 |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
net asset value (“NAV”) could also decline as yields on municipal bonds, which are typically lower than those on taxable bonds, would be expected to increase to approximately the yield of comparable taxable bonds. Actions or anticipated actions affecting the tax exempt status of municipal bonds could also result in significant shareholder redemptions of Fund shares as investors anticipate adverse effects on the Fund or seek higher yields to offset the potential loss of the tax deduction. As a result, the Fund would be required to maintain higher levels of cash to meet the redemptions, which would negatively affect the Fund’s yield.
Interest Rate Risk: Changes in interest rates will affect the value of investments in fixed-income securities. When interest rates rise, the value of 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.
Duration Risk: Duration is a measure that relates the expected price volatility of a fixed-income security to changes in interest rates. The duration of a fixed-income security may be shorter than or equal to full maturity of a fixed-income security. Fixed income securities with longer durations have more risk and will decrease in price as interest rates rise. For example, a fixed income security with a duration of three years will decrease in value by approximately 3% if interest rates increase by 1%.
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.
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. Derivatives and securities involving substantial market and credit risk tend to involve greater liquidity risk. The Fund is subject to liquidity risk because the market for municipal securities is generally smaller than many other markets.
Derivatives Risk: Investments in derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Portfolios, 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 and other risks are more 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 investment return and principal value of an investment in the Fund will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. 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 visiting www.abglobal.com.
All fees and expenses related to the operation of the Fund have been deducted. NAV returns do not reflect sales charges; if sales charges were reflected, the Portfolios’ quoted performance would be lower. SEC returns and the Portfolios’ returns shown in the line graphs reflect the applicable sales charges for each share class: a 3% maximum front-end sales charge for Class A shares; a 1% 1 year contingent deferred sales charge for Class C shares. Returns for the different share classes will vary due to their different expenses associated with each class. Performance assumes reinvestment of distributions and does not account for taxes.
4 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE FUND VS. ITS BENCHMARK PERIODS ENDED OCTOBER 31, 2015 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB Tax-Aware Fixed Income Portfolio | ||||||||||
Class A | 1.70% | 2.64% | ||||||||
| ||||||||||
Class C | 1.22% | 1.78% | ||||||||
| ||||||||||
Advisor Class* | 1.73% | 2.81% | ||||||||
| ||||||||||
Barclays Municipal Bond Index | 1.68% | 2.87% | ||||||||
| ||||||||||
* Please note that Advisor Class shares are for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/ or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. | ||||||||||
GROWTH OF A $10,000 INVESTMENT IN THE FUND
12/11/13* TO 10/31/15 (unaudited)
This chart illustrates the total value of an assumed $10,000 investment in AB Tax-Aware Fixed Income Portfolio Class A shares (from 12/11/2013* to 10/31/15) as compared to the performance of its benchmark. The chart reflects the deduction of the maximum 3.00% sales charge from the initial $10,000 investment in the Strategy and assumes the reinvestment of dividends and capital gains distributions.
* | Inception date: 12/11/2013. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance continued on next page)
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 5 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF OCTOBER 31, 2015 (unaudited) | ||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | |||||||
Class A | ||||||||
1 Year | 2.64 | % | -0.49 | % | ||||
Since Inception* | 4.80 | % | 3.12 | % | ||||
Class C | ||||||||
1 Year | 1.78 | % | 0.78 | % | ||||
Since Inception* | 4.06 | % | 4.06 | % | ||||
Advisor Class† | ||||||||
1 Year | 2.81 | % | 2.81 | % | ||||
Since Inception* | 5.10 | % | 5.10 | % |
The Fund’s current prospectus fee table shows the Fund’s total annual operating expense ratios as 3.54%, 4.33% and 3.82% for Class A, Class C and Advisor Class, respectively, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements will limit the Fund’s annual operating expenses, excluding any interest expense, to 0.80%, 1.55% and 0.55% for Class A, Class C and Advisor Class, respectively. These waivers/ reimbursements may not be terminated prior to January 30, 2016 and may be extended by the Adviser for additional one-year terms. Absent reimbursements or waivers, performance would have been lower. The Financial Highlights section of this report sets forth expense ratio data for the current reporting period; the expense ratios shown above may differ from the expense ratios in the Financial Highlights section since they are based on different time periods.
* | Inception date: 12/11/2013. |
† | Please note that this share class is for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
(Historical Performance continued on next page)
6 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END SEPTEMBER 30, 2015 (unaudited) | ||||
SEC Returns (reflects applicable sales charges) | ||||
Class A | ||||
1 Year | -0.53 | % | ||
Since Inception* | 2.95 | % | ||
Class C | ||||
1 Year | 0.85 | % | ||
Since Inception* | 4.04 | % | ||
Advisor Class† | ||||
1 Year | 2.88 | % | ||
Since Inception* | 5.07 | % |
* | Inception date: 12/11/2013. |
† | Please note that this share class is for investors purchasing shares through accounts established under certain fee-based programs sponsored and maintained by certain broker-dealers and financial intermediaries, institutional pension plans and/or investment advisory clients of, and certain other persons associated with, the Adviser and its affiliates or the Fund. |
See Disclosures, Risks and Note about Historical Performance on pages 3-4.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 7 |
Historical Performance
EXPENSE EXAMPLE
(unaudited)
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions and (2) ongoing costs, including management fees; distribution (12b-1) fees; and other Fund expenses. 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, 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 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 also 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* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,017.00 | $ | 4.07 | 0.80 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.17 | $ | 4.08 | 0.80 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,012.20 | $ | 7.86 | 1.55 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,017.39 | $ | 7.88 | 1.55 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,017.30 | $ | 2.80 | 0.55 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.43 | $ | 2.80 | 0.55 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
8 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Expense Example
PORTFOLIO SUMMARY
October 31, 2015 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $32.6
* | All data are as of October 31, 2015. The Fund’s quality rating and state breakdowns are expressed as a percentage of the Fund’s total investments in municipal securities 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). 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. |
† | “Other” represents less than 1.4% in 15 different states and Puerto Rico. |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 9 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
October 31, 2015
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
MUNICIPAL OBLIGATIONS – 89.1% | ||||||||
Long-Term Municipal Bonds – 89.1% | ||||||||
Alabama – 0.4% | ||||||||
County of Jefferson AL Sewer Revenue | $ | 110 | $ | 123,473 | ||||
|
| |||||||
Arizona – 2.1% | ||||||||
Arizona Health Facilities Authority (Beatitudes Campus (The)) | 110 | 108,089 | ||||||
City of Phoenix Civic Improvement Corp. | 300 | 362,067 | ||||||
Industrial Development Authority of the City of Phoenix (The) | 100 | 100,973 | ||||||
Salt Verde Financial Corp. | 100 | 111,589 | ||||||
|
| |||||||
682,718 | ||||||||
|
| |||||||
California – 1.2% | ||||||||
California Pollution Control Financing Authority (Poseidon Resources Channelside LP) | 250 | 263,728 | ||||||
Golden State Tobacco Securitization Corp. | 165 | 139,149 | ||||||
|
| |||||||
402,877 | ||||||||
|
| |||||||
Colorado – 3.4% | ||||||||
Colorado Health Facilities Authority (Catholic Health Initiatives) | 170 | 185,536 | ||||||
Colorado Health Facilities Authority (Parkview Medical Center, Inc. Obligated Group) | 200 | 222,288 | ||||||
Denver City & County School District No 1 | 560 | 688,912 | ||||||
|
| |||||||
1,096,736 | ||||||||
|
|
10 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Connecticut – 0.5% | ||||||||
State of Connecticut | $ | 130 | $ | 155,168 | ||||
|
| |||||||
Florida – 10.6% | ||||||||
Brevard County School District COP | 290 | 346,637 | ||||||
Capital Trust Agency, Inc. | 100 | 94,514 | ||||||
Citizens Property Insurance Corp. | 560 | 649,333 | ||||||
Collier County Industrial Development Authority (Arlington of Naples (The)) | 100 | 116,863 | ||||||
County of Miami-Dade FL | 780 | 895,682 | ||||||
County of Miami-Dade FL Aviation Revenue | 265 | 297,325 | ||||||
County of Orange FL Tourist Development Tax Revenue | 435 | 517,250 | ||||||
Florida Development Finance Corp. | 100 | 103,804 | ||||||
School District of Broward County/FL | 365 | 439,383 | ||||||
|
| |||||||
3,460,791 | ||||||||
|
| |||||||
Georgia – 1.1% | ||||||||
City of Atlanta Department of Aviation | 310 | 350,945 | ||||||
|
| |||||||
Hawaii – 1.7% | ||||||||
State of Hawaii | 460 | 561,600 | ||||||
|
|
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 11 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Idaho – 0.3% | ||||||||
Idaho Health Facilities Authority (The Terraces at Boise) | $ | 100 | $ | 104,628 | ||||
|
| |||||||
Illinois – 8.2% | ||||||||
Chicago Board of Education | 40 | 34,486 | ||||||
Chicago O’Hare International Airport | 335 | 362,061 | ||||||
City of Chicago IL | 100 | 100,365 | ||||||
Illinois Finance Authority | 50 | 52,511 | ||||||
Illinois Finance Authority | 100 | 60,231 | ||||||
Illinois Finance Authority | 100 | 99,681 | ||||||
Illinois Finance Authority | 250 | 272,808 | ||||||
Illinois Municipal Electric Agency | 465 | 544,673 | ||||||
Metropolitan Pier & Exposition Authority | 600 | 618,228 | ||||||
State of Illinois | 100 | 103,499 | ||||||
Series 2013 | 270 | 298,914 | ||||||
Series 2014 | 130 | 133,898 | ||||||
|
| |||||||
2,681,355 | ||||||||
|
|
12 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Indiana – 1.5% | ||||||||
Indiana Finance Authority | $ | 160 | $ | 174,406 | ||||
Indiana Finance Authority | 190 | 203,131 | ||||||
Indiana Finance Authority | 100 | 104,256 | ||||||
|
| |||||||
481,793 | ||||||||
|
| |||||||
Iowa – 0.9% | ||||||||
Iowa Finance Authority | 255 | 284,501 | ||||||
|
| |||||||
Kentucky – 0.2% | ||||||||
Kentucky Economic Development Finance Authority | 65 | 64,313 | ||||||
|
| |||||||
Louisiana – 1.1% | ||||||||
City of New Orleans LA Water Revenue | 100 | 110,917 | ||||||
Louisiana Public Facilities Authority | 250 | 258,175 | ||||||
|
| |||||||
369,092 | ||||||||
|
| |||||||
Maine – 0.6% | ||||||||
Maine Health & Higher Educational Facilities Authority | 165 | 195,347 | ||||||
|
| |||||||
Maryland – 1.2% | ||||||||
University System of Maryland | 365 | 402,416 | ||||||
|
|
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 13 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Massachusetts – 0.4% | ||||||||
Commonwealth of Massachusetts NATL | $ | 125 | $ | 116,140 | ||||
|
| |||||||
Michigan – 4.3% | ||||||||
City of Detroit MI Sewage Disposal System Revenue | 115 | 130,267 | ||||||
Michigan Finance Authority | 200 | 199,944 | ||||||
Michigan Finance Authority | 735 | 816,438 | ||||||
Michigan Finance Authority | 235 | 260,190 | ||||||
|
| |||||||
1,406,839 | ||||||||
|
| |||||||
Minnesota – 2.9% | ||||||||
City of Minneapolis MN | 200 | 225,914 | ||||||
Housing & Redevelopment Authority of The City of St Paul Minnesota | 100 | 107,482 | ||||||
State of Minnesota | 580 | 624,567 | ||||||
|
| |||||||
957,963 | ||||||||
|
| |||||||
Nebraska – 0.3% | ||||||||
Central Plains Energy Project | 100 | 107,212 | ||||||
|
| |||||||
New Hampshire – 0.4% | ||||||||
New Hampshire Health and Education Facilities Authority Act | 115 | 118,805 | ||||||
|
|
14 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
New Jersey – 3.9% | ||||||||
Burlington County Bridge Commission (Evergreens (The)) | $ | 140 | $ | 142,131 | ||||
New Jersey Economic Development Authority | 30 | 34,640 | ||||||
New Jersey Economic Development Authority (New Jersey Economic Development Authority State Lease) | 260 | 280,826 | ||||||
New Jersey Economic Development Authority (United Airlines, Inc.) | 85 | 92,440 | ||||||
New Jersey Transportation Trust Fund Authority (New Jersey Transportation Trust Fund Authority State Lease) | 240 | 260,424 | ||||||
New Jersey Turnpike Authority | 315 | 353,159 | ||||||
Tobacco Settlement Financing Corp./NJ | 115 | 92,501 | ||||||
|
| |||||||
1,256,121 | ||||||||
|
| |||||||
New York – 6.4% | ||||||||
Build NYC Resource Corp. | 100 | 97,091 | ||||||
City of New York NY | 340 | 403,373 | ||||||
Metropolitan Transportation Authority | 315 | 366,165 | ||||||
New York State Dormitory Authority | 425 | 500,531 |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 15 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
New York State Energy Research & Development Authority | $ | 200 | $ | 178,925 | ||||
New York State Thruway Authority | 365 | 429,587 | ||||||
Ulster County Industrial Development Agency (Kingston Regional Senior Living Corp.) | 120 | 120,913 | ||||||
|
| |||||||
2,096,585 | ||||||||
|
| |||||||
Ohio – 4.9% | ||||||||
Buckeye Tobacco Settlement Financing Authority | 110 | 94,095 | ||||||
City of Akron OH | 445 | 505,124 | ||||||
City of Columbus OH | 225 | 238,234 | ||||||
Series 2014A | 110 | 130,457 | ||||||
County of Cuyahoga OH | 365 | 420,422 | ||||||
Dayton-Montgomery County Port Authority (StoryPoint Troy Project) | 100 | 100,053 | ||||||
Ohio Air Quality Development Authority (FirstEnergy Nuclear Generation LLC) | 100 | 102,493 | ||||||
|
| |||||||
1,590,878 | ||||||||
|
| |||||||
Pennsylvania – 4.4% | ||||||||
Commonwealth of Pennsylvania | 380 | 403,579 | ||||||
Montour School District AGM | 450 | 508,104 |
16 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Moon Industrial Development Authority | $ | 100 | $ | 99,293 | ||||
Pennsylvania Economic Development Financing Authority | 100 | 107,370 | ||||||
Pennsylvania Economic Development Financing Authority | 300 | 320,166 | ||||||
|
| |||||||
1,438,512 | ||||||||
|
| |||||||
Puerto Rico – 0.3% | ||||||||
Puerto Rico Industrial Tourist Educational Medical & Envirml Ctl Facs Fing Auth | 100 | 92,001 | ||||||
|
| |||||||
South Carolina – 0.9% | ||||||||
Spartanburg County School District No 1/SC | 250 | 300,600 | ||||||
|
| |||||||
Texas – 19.0% | ||||||||
Central Texas Regional Mobility Authority | 100 | 105,783 | ||||||
City of Houston TX | 260 | 295,508 | ||||||
Series 2015 | 160 | 181,851 | ||||||
Dallas Area Rapid Transit | 580 | 709,723 | ||||||
Dallas County Flood Control District No 1 | 100 | 101,720 | ||||||
Grand Parkway Transportation Corp. | 285 | 292,806 |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 17 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Love Field Airport Modernization Corp. | $ | 500 | $ | 568,200 | ||||
New Hope Cultural Education Facilities Corp. (Wesleyan Homes, Inc.) | 100 | 99,388 | ||||||
North Texas Tollway Authority | 250 | 280,195 | ||||||
Tarrant County Cultural Education Facilities Finance Corp. | 100 | 103,632 | ||||||
Tarrant Regional Water District | 325 | 393,829 | ||||||
Texas Transportation Commission State Highway Fund | 1,300 | 1,513,915 | ||||||
Travis County Cultural Education Facilities Finance Corp. | 160 | 161,975 | ||||||
Travis County Health Facilities Development Corp. | 55 | 61,335 | ||||||
Trinity River Authority Central Regional Wastewater System Revenue | 795 | 938,313 | ||||||
Trinity River Authority LLC | 335 | 392,409 | ||||||
|
| |||||||
6,200,582 | ||||||||
|
| |||||||
Virginia – 0.2% | ||||||||
Tobacco Settlement Financing Corp/VA | 100 | 75,182 | ||||||
|
| |||||||
Washington – 5.8% | ||||||||
City of Seattle WA | 125 | 133,349 |
18 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
City of Seattle WA Municipal Light & Power Revenue | $ | 555 | $ | 670,551 | ||||
Port of Seattle WA | 510 | 561,535 | ||||||
State of Washington | 380 | 407,873 | ||||||
Washington State Housing Finance Commission (Rockwood Retirement Communities) | 100 | 112,532 | ||||||
|
| |||||||
1,885,840 | ||||||||
|
| |||||||
Total Municipal Obligations | 29,061,013 | |||||||
|
| |||||||
CORPORATES – INVESTMENT GRADE – 1.2% | ||||||||
Financial Institutions – 0.7% | ||||||||
Banking – 0.6% | ||||||||
JPMorgan Chase & Co. | 120 | 119,219 | ||||||
Morgan Stanley | 70 | 70,249 | ||||||
|
| |||||||
189,468 | ||||||||
|
| |||||||
REITS – 0.1% | ||||||||
Welltower, Inc. | 50 | 50,509 | ||||||
|
| |||||||
239,977 | ||||||||
|
| |||||||
Industrial – 0.5% | ||||||||
Consumer Non-Cyclical – 0.2% | ||||||||
Bunge Ltd. Finance Corp. | 50 | 50,498 | ||||||
|
| |||||||
Energy – 0.1% | ||||||||
Kinder Morgan Energy Partners LP | 50 | 50,353 | ||||||
|
| |||||||
Technology – 0.2% | ||||||||
Xerox Corp. | 50 | 50,892 | ||||||
|
| |||||||
151,743 | ||||||||
|
| |||||||
Total Corporates – Investment Grade | 391,720 | |||||||
|
|
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 19 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
ASSET-BACKED SECURITIES – 1.0% | ||||||||
Autos - Fixed Rate – 0.7% | ||||||||
Chrysler Capital Auto Receivables Trust | $ | 32 | $ | 31,745 | ||||
Hyundai Auto Lease Securitization Trust | 100 | 100,039 | ||||||
Volkswagen Auto Loan Enhanced Trust | 100 | 99,466 | ||||||
|
| |||||||
231,250 | ||||||||
|
| |||||||
Credit Cards - Floating Rate – 0.3% | ||||||||
Cabela’s Credit Card Master Note Trust | 100 | 99,802 | ||||||
|
| |||||||
Total Asset-Backed Securities | 331,052 | |||||||
|
| |||||||
Shares | ||||||||
SHORT-TERM INVESTMENTS – 7.3% | ||||||||
Investment Companies – 7.3% | ||||||||
AB Fixed Income Shares, Inc. – Government STIF Portfolio, 0.13%(f)(g) | 2,385,557 | 2,385,557 | ||||||
|
| |||||||
Total Investments – 98.6% | 32,169,342 | |||||||
Other assets less liabilities – 1.4% | 464,210 | |||||||
|
| |||||||
Net Assets – 100.0% | $ | 32,633,552 | ||||||
|
|
INFLATION (CPI) SWAPS (see Note D)
Rate Type | ||||||||||||||||||||
Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Bank of America, NA | $ | 100 | 9/04/20 | 1.450 | % | CPI | # | $ | (81 | ) | ||||||||||
Citibank, NA | 200 | 9/15/20 | 1.451 | % | CPI | # | (159 | ) | ||||||||||||
|
| |||||||||||||||||||
$ | (240 | ) | ||||||||||||||||||
|
|
# | Variable interest rate based on the rate of inflation as determined by the Consumer Price Index (CPI). |
20 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
INTEREST RATE SWAPS (see Note D)
Rate Type | ||||||||||||||||||||
Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Citibank, NA | $ | 500 | 10/20/22 | 1.140 | % | SIFMA | * | $ | 1,088 |
* | 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 $1,129,430 or 3.5% of net assets. |
(b) | Coupon rate adjusts periodically based upon a predetermined schedule. Stated interest rate in effect at October 31, 2015. |
(c) | 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 $295,065 or 0.90% of net assets. |
(d) | When-Issued or delayed delivery security. |
(e) | Floating Rate Security. Stated interest rate was in effect at October 31, 2015. |
(f) | 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. |
(g) | 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 2.8% and 0.0%, respectively.
Glossary:
AGM – Assured Guaranty Municipal
COP – Certificate of Participation
ETM – Escrowed to Maturity
NATL – National Interstate Corporation
REIT – Real Estate Investment Trust
SRF – State Revolving Fund
XLCA – XL Capital Assurance Inc.
See notes to financial statements.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 21 |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
October 31, 2015
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $28,967,831) | $ | 29,783,785 | ||
Affiliated issuers (cost $2,385,557) | 2,385,557 | |||
Cash | 161,472 | |||
Interest receivable | 334,946 | |||
Receivable for capital stock sold | 290,901 | |||
Receivable due from Adviser | 28,245 | |||
Unrealized appreciation on interest rate swaps | 1,088 | |||
|
| |||
Total assets | 32,985,994 | |||
|
| |||
Liabilities | ||||
Payable for capital stock redeemed | 108,282 | |||
Payable for investment securities purchased | 101,969 | |||
Audit and tax fee payable | 53,035 | |||
Registration fee payable | 21,223 | |||
Dividends payable | 18,466 | |||
Distribution fee payable | 2,301 | |||
Transfer Agent fee payable | 1,613 | |||
Unrealized depreciation on inflation swaps | 240 | |||
Accrued expenses | 45,313 | |||
|
| |||
Total liabilities | 352,442 | |||
|
| |||
Net Assets | $ | 32,633,552 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 3,082 | ||
Additional paid-in capital | 31,840,786 | |||
Undistributed net investment income | 13,754 | |||
Accumulated net realized loss on investment transactions | (40,872 | ) | ||
Net unrealized appreciation on investments | 816,802 | |||
|
| |||
$ | 32,633,552 | |||
|
|
Net Asset Value Per Share—18 billion shares of capital stock authorized, $.001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 4,783,032 | 451,785 | $ | 10.59 | * | ||||||
| ||||||||||||
C | $ | 1,517,743 | 143,331 | $ | 10.59 | |||||||
| ||||||||||||
Advisor | $ | 26,332,777 | 2,486,835 | $ | 10.59 | |||||||
|
* | The maximum offering price per share for Class A shares was $10.92 which reflects a sales charge of 3.0%. |
See notes to financial statements.
22 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Year Ended October 31, 2015
Investment Income | ||||||||
Interest | $ | 648,310 | ||||||
Dividends—Affiliated issuers | 1,650 | $ | 649,960 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 127,771 | |||||||
Distribution fee—Class A | 7,589 | |||||||
Distribution fee—Class C | 12,048 | |||||||
Transfer agency—Class A | 2,656 | |||||||
Transfer agency—Class C | 1,093 | |||||||
Transfer agency—Advisor Class | 19,582 | |||||||
Custodian | 81,977 | |||||||
Audit and tax | 58,185 | |||||||
Registration fees | 53,966 | |||||||
Administrative | 50,921 | |||||||
Legal | 38,487 | |||||||
Printing | 20,853 | |||||||
Directors’ fees | 17,177 | |||||||
Amortization of offering expenses | 15,066 | |||||||
Miscellaneous | 2,479 | |||||||
|
| |||||||
Total expenses | 509,850 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (349,529 | ) | ||||||
|
| |||||||
Net expenses | 160,321 | |||||||
|
| |||||||
Net investment income | 489,639 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment Transactions | ||||||||
Net realized loss on investment transactions | (36,858 | ) | ||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | 227,485 | |||||||
Swaps | 848 | |||||||
|
| |||||||
Net gain on investment transactions | 191,475 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 681,114 | ||||||
|
|
See notes to financial statements.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 23 |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Year Ended October 31, 2015 | December 11, 2013(a) to October 31, 2014 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 489,639 | $ | 202,860 | ||||
Net realized gain (loss) on investment transactions | (36,858 | ) | 21,853 | |||||
Net change in unrealized appreciation/depreciation of investments | 228,333 | 588,469 | ||||||
|
|
|
| |||||
Net increase in net assets from operations | 681,114 | 813,182 | ||||||
Dividends and Distributions to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (51,320 | ) | (8,422 | ) | ||||
Class C | (11,889 | ) | (900 | ) | ||||
Advisor Class | (426,246 | ) | (193,956 | ) | ||||
Net realized gain on investment transactions | ||||||||
Class A | (2,414 | ) | – 0 | – | ||||
Class C | (440 | ) | – 0 | – | ||||
Advisor Class | (19,264 | ) | – 0 | – | ||||
Capital Stock Transactions | ||||||||
Net increase | 15,557,455 | 16,296,652 | ||||||
|
|
|
| |||||
Total increase | 15,726,996 | 16,906,556 | ||||||
Net Assets | ||||||||
Beginning of period | 16,906,556 | – 0 | – | |||||
|
|
|
| |||||
End of period (including undistributed net investment income of $13,754 and $4,558, respectively) | $ | 32,633,552 | $ | 16,906,556 | ||||
|
|
|
|
(a) | Commencement of operations. |
See notes to financial statements.
24 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
October 31, 2015
NOTE A
Significant Accounting Policies
AB Bond Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940 as an open-end management investment company. Prior to January 20, 2015, the Fund was known as AllianceBernstein Bond Fund, Inc. The Fund, which is a Maryland corporation, operates as a series company comprised of nine portfolios currently in operation: the AB Intermediate Bond Portfolio, the AB Bond Inflation Strategy Portfolio, the AB Municipal Bond Inflation Strategy Portfolio, the AB All Market Real Return Portfolio (formerly AllianceBernstein Real Asset Strategy), the AB Limited Duration High Income Portfolio, the AB Government Reserves Portfolio, the AB Tax-Aware Fixed Income Portfolio, the AB Credit Long/Short Portfolio and the AB High Yield Portfolio. They are each diversified portfolios, with the exception of the AB Credit Long/Short Portfolio and the AB High Yield Portfolio, which are non-diversified. Each portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to the AB Tax-Aware Fixed Income Portfolio (the “Portfolio”). Prior to January 20, 2015, the Portfolio was known as AllianceBernstein Tax-Aware Fixed Income Portfolio. The Portfolio has authorized the issuance of Class A, Class B, Class C, Advisor Class, Class 1 and Class 2 shares. Class B, Class 1 and Class 2 shares are not currently being offered. Class A shares are sold with a front-end sales charge of up to 3.0% for purchases not exceeding $500,000. With respect to purchases of $500,000 or more, Class A shares redeemed within one year of purchase may be subject to a contingent deferred sales charge of 1%. Class C shares are subject to a contingent deferred sales charge of 1% on redemptions made within the first year after purchase. Advisor Class shares are sold without any initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. All six classes of shares have identical voting, dividend, liquidation and other rights, except that the classes bear different distribution and transfer agency expenses. Each class has exclusive voting rights with respect to its distribution plan. 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 Fund 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 Fund’s Board of Directors (the “Board”).
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 25 |
Notes to Financial Statements
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 valued at the mid level between the current bid and ask prices. If either a current bid or current ask price is unavailable, AllianceBernstein L.P. (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
26 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
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 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
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 27 |
Notes to Financial Statements
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, 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: | ||||||||||||||||
Long-Term Municipal Bonds | $ | – 0 | – | $ | 27,220,029 | $ | 1,840,984 | $ | 29,061,013 | |||||||
Corporates — Investment Grade | – 0 | – | 391,720 | – 0 | – | 391,720 | ||||||||||
Asset-Backed Securities | – 0 | – | 331,052 | – 0 | – | 331,052 | ||||||||||
Short-Term Investments | 2,385,557 | – 0 | – | – 0 | – | 2,385,557 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 2,385,557 | 27,942,801 | 1,840,984 | 32,169,342 | ||||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets: | ||||||||||||||||
Interest Rate Swaps | – 0 | – | 1,088 | – 0 | – | 1,088 | ||||||||||
Liabilities: | ||||||||||||||||
Inflation (CPI) Swaps | – 0 | – | (240 | ) | – 0 | – | (240 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total^ | $ | 2,385,557 | $ | 27,943,649 | $ | 1,840,984 | $ | 32,170,190 | ||||||||
|
|
|
|
|
|
|
|
* | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
^ | 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.
28 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
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 10/31/14 | $ | 1,151,817 | $ | 1,151,817 | ||||
Accrued discounts/(premiums) | 1,068 | 1,068 | ||||||
Realized gain (loss) | – 0 | – | – 0 | – | ||||
Change in unrealized appreciation/depreciation | 10,789 | 10,789 | ||||||
Purchases | 677,310 | 677,310 | ||||||
Sales | – 0 | – | – 0 | – | ||||
Transfers in to Level 3 | – 0 | – | – 0 | – | ||||
Transfers out of Level 3 | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Balance as of 10/31/15 | $ | 1,840,984 | $ | 1,840,984 | ||||
|
|
|
| |||||
Net change in unrealized appreciation/depreciation from investments held as of 10/31/15* | $ | 10,789 | $ | 10,789 | ||||
|
|
|
|
* | 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 3) daily review of unpriced, stale, and variance reports with exceptions reviewed by senior management and the Committee.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 29 |
Notes to Financial Statements
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. Currency Translation
Assets and liabilities denominated in foreign currencies and commitments under forward currency exchange contracts are translated into U.S. dollars at the mean of the quoted bid and ask prices of such currencies against the U.S. dollar. Purchases and sales of portfolio securities are translated into U.S. dollars at the rates of exchange prevailing when such securities were acquired or sold. Income and expenses are translated into U.S. dollars at rates of exchange prevailing when accrued.
Net realized gain or loss on foreign currency transactions represents foreign exchange gains and losses from sales and maturities of foreign fixed income investments, foreign currency exchange contracts, holding of foreign currencies, currency gains or losses realized between the trade and settlement dates on foreign investment transactions, and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Portfolio’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains and losses from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of net unrealized appreciation or depreciation of foreign currency denominated assets and liabilities.
4. 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. The Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued and applied to net investment income, net realized gains and net unrealized appreciation/depreciation as such income and/or gains are earned.
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 tax year) and has concluded that no provision for income tax is required in the Portfolio’s financial statements.
5. 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
30 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
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.
6. Class Allocations
All income earned and expenses incurred by the Portfolio are borne on a pro-rata basis by each outstanding class of shares, based on the proportionate interest in the Portfolio represented by the net assets of such class, except for class specific expenses which are allocated to the respective class. Expenses of the Fund are charged proportionately to each Portfolio or based on other appropriate methods. Realized and unrealized gains and losses are allocated among the various share classes based on respective net assets.
7. 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.
8. Offering Expenses
Offering expenses of $136,907 have been deferred and were amortized on a straight line basis over a one year period starting from December 11, 2013 (commencement of the Portfolio’s operations).
NOTE B
Advisory Fee and Other Transactions with Affiliates
Under the terms of the investment advisory agreement, the Portfolio pays the Adviser a management fee at an annual rate of 0.50% of the Portfolio’s average daily net assets. The Adviser has agreed to waive its fees and bear certain expenses to the extent necessary to limit total operating expenses on an annual basis (the “Expense Caps”) to 0.80% (0.85% prior to January 30, 2015) , 1.55% and 0.55%, of average daily net assets for Class A, Class C and Advisor Class shares, respectively. Any fees waived and expenses borne by the Adviser are subject to repayment by the Portfolio until December 11, 2016. No repayment will be made that would cause the Fund’s total annualized operating expenses to exceed the net fee percentage set forth above or would exceed the amount of offering expenses as recorded by the Fund on or before December 11, 2014. The Expense Caps may not be terminated before January 30, 2016. For the year ended October 31, 2015, such reimbursements/waivers amounted to $298,608.
Pursuant to the investment advisory agreement, the Portfolio may reimburse the Adviser for certain legal and accounting services provided to the Portfolio by the Adviser. For the year ended October 31, 2015, the Adviser voluntarily agreed to waive such fees in the amount of $50,921.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 31 |
Notes to Financial Statements
The Portfolio compensates AllianceBernstein Investor Services, Inc. (“ABIS”), a wholly-owned subsidiary of the Adviser, under a Transfer Agency Agreement for providing personnel and facilities to perform transfer agency services for the Portfolio. ABIS may make payments to intermediaries that provide omnibus account services, sub-accounting services and/or networking services. Such compensation retained by ABIS amounted to $18,168 for the year ended October 31, 2015.
AllianceBernstein Investments, Inc. (the “Distributor”), a wholly-owned subsidiary of the Adviser, serves as the distributor of the Portfolio’s shares. The Distributor has advised the Portfolio that it has retained front-end sales charges of $42 from the sale of Class A shares and received $0 and $686 in contingent deferred sales charges imposed upon redemptions by shareholders of Class A and Class C shares, respectively, for the year ended October 31, 2015.
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 year ended October 31, 2015 is as follows:
Market Value October 31, 2014 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value October 31, 2015 (000) | Dividend Income (000) | ||||||||||||||
$ | 181 | $ | 24,564 | $ | 22,359 | $ | 2,386 | $ | 2 |
Brokerage commissions paid on investment transactions for the year 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.
NOTE C
Distribution Services Agreement
The Portfolio has adopted a Distribution Services Agreement (the “Agreement”) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Agreement, the Portfolio pays distribution and servicing fees to the Distributor at an annual rate of up to 0.30% of the Portfolio’s average daily net assets attributable to Class A shares and 1% of the Portfolio’s average daily net assets attributable to Class C shares. Effective January 30, 2015, payments under the Agreement in respect of Class A shares are limited to an annual rate of 0.25% of Class A Shares’ average daily net assets. The fees are accrued daily and paid monthly. The Agreement provides that the Distributor will use such payments in
32 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
their entirety for distribution assistance and promotional activities. Since the commencement of the Portfolio’s operations, the Distributor has incurred expenses in excess of the distribution costs reimbursed by the Portfolio in the amount of $5,127 for Class C shares. While such costs may be recovered from the Portfolio in future periods so long as the Agreement is in effect, the rate of the distribution and servicing fees payable under the Agreement may not be increased without a shareholder vote. In accordance with the Agreement, there is no provision for recovery of unreimbursed distribution costs incurred by the Distributor beyond the current fiscal year for Class A shares. The Agreement also provides that the Adviser may use its own resources to finance the distribution of the Portfolio’s shares.
NOTE D
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the year ended October 31, 2015 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 20,592,057 | $ | 6,834,855 | ||||
U.S. government securities | 843,227 | 1,684,477 |
The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation are as follows:
Cost | $ | 31,353,388 | ||
|
| |||
Gross unrealized appreciation | $ | 866,688 | ||
Gross unrealized depreciation | (50,734 | ) | ||
|
| |||
Net unrealized appreciation | $ | 815,954 | ||
|
|
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 their exposure to interest rates or credit risk. 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
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 33 |
Notes to Financial Statements
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 in connection with credit default swap contracts 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 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
34 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
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, each 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 year 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 the 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 year ended October 31, 2015, the Portfolio held inflation (CPI) swaps for hedging purposes.
The Portfolio typically enters into International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreement”) or similar master
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 35 |
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.
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 | Unrealized appreciation on interest rate swaps | $ | 1,088 | |||||||||
Interest rate contracts | Unrealized depreciation on inflation swaps | $ | 240 | |||||||||
|
|
|
| |||||||||
Total | $ | 1,088 | $ | 240 | ||||||||
|
|
|
|
The effect of derivative instruments on the statement of operations for the year 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 | $ | – 0 | – | $ | 848 | ||||
|
|
|
| |||||||
Total | $ | – 0 | – | $ | 848 | |||||
|
|
|
|
36 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the year ended October 31, 2015:
Interest Rate Swaps: | ||||
Average notional amount | $ | 500,000 | (a) | |
Inflation Swaps: | ||||
Average notional amount | $ | 300,000 | (b) |
(a) | Positions were open for less than one month during the year. |
(b) | Positions were open for two months during the year. |
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 | |||||||||||||||
OTC Derivatives: | ||||||||||||||||||||
Citibank, NA | $ | 1,088 | $ | (159 | ) | $ | – 0 | – | $ | – 0 | – | $ | 929 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 1,088 | $ | (159 | ) | $ | – 0 | – | $ | – 0 | – | $ | 929 | ^ | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged | Security Collateral Pledged | Net Amount of Derivatives Liabilities | |||||||||||||||
OTC Derivatives: | ||||||||||||||||||||
Bank of America, NA | $ | 81 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 81 | |||||||
Citibank, NA | 159 | (159 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 240 | $ | (159 | ) | $ | – 0 | – | $ | – 0 | – | $ | 81 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
^ | 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. |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 37 |
Notes to Financial Statements
NOTE E
Capital Stock
Each class consists of 3,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||||||||||
Year Ended October 31, 2015 | December 11, 2013(a) to October 31, 2014 | Year Ended October 31, 2015 | December 11, October 31, 2014 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 282,686 | 186,230 | $ | 2,977,235 | $ | 1,934,806 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 1,770 | 153 | 18,635 | 1,594 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (18,562 | ) | (492 | ) | (194,825 | ) | (5,039 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 265,894 | 185,891 | $ | 2,801,045 | $ | 1,931,361 | ||||||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 142,063 | 35,246 | $ | 1,504,726 | $ | 365,925 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 840 | 22 | 8,846 | 240 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (34,616 | ) | (224 | ) | (365,493 | ) | (2,321 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 108,287 | 35,044 | $ | 1,148,079 | $ | 363,844 | ||||||||||||||
| ||||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 1,829,437 | 1,564,205 | $ | 19,266,170 | $ | 15,850,833 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 16,538 | 3,466 | 174,157 | 36,046 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (745,995 | ) | (180,816 | ) | (7,831,996 | ) | (1,885,432 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 1,099,980 | 1,386,855 | $ | 11,608,331 | $ | 14,001,447 | ||||||||||||||
|
(a) | Commencement of operations. |
NOTE F
Risks Involved in Investing in the Portfolio
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.
38 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
Below Investment Grade Securities—Investments in fixed-income securities with lower ratings are subject to 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 performance of the junk bond market generally and less secondary market liquidity.
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 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. To the extent that the Portfolio invests more of its assets in a particular state’s municipal securities, the Portfolio’s 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.
The Portfolio may invest in municipal securities of issuers in Puerto Rico or other U.S. territories, which are exempt from federal, state, and, where applicable, local income taxes. These municipal securities may have more risks than those of most other U.S. issuers of tax-exempt securities. Like many U.S. states and municipalities, Puerto Rico experienced a significant downturn during the recent recession. Puerto Rico’s downturn was particularly severe, and it continues to face a very challenging economic and fiscal environment. As a result, securities issued by many Puerto Rican issuers have low credit ratings or are on “negative watch” by credit rating organizations, and markets in such securities have been volatile. If the economic situation in Puerto Rico persists or worsens, the volatility and credit quality of Puerto Rican municipal securities could be adversely affected, and the market for such securities may experience continued volatility.
Tax Risk—From time to time, the U.S. Government and the U.S. Congress consider changes in federal tax law that could limit or eliminate the federal tax exemption for municipal bond income, which would in effect reduce the net income received by shareholders from the Portfolio by increasing taxes on that income. In such event, the Portfolio’s NAV could also decline as yields on municipal bonds, which are typically lower than those on taxable bonds, would be expected to increase to approximately the yield of comparable taxable bonds. Actions or anticipated actions affecting the tax exempt status of municipal bonds could also result in significant shareholder redemptions of Portfolio shares as investors anticipate adverse effects on the Portfolio or seek higher yields to offset
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 39 |
Notes to Financial Statements
the potential loss of the tax deduction. As a result, the Portfolio would be required to maintain higher levels of cash to meet the redemptions, which would negatively affect the Portfolio’s yield.
Interest Rate Risk—Changes in interest rates will affect the value of investments in fixed-income securities. When interest rates rise, the value of investments in fixed-income securities tends to fall and this decrease in value may not be offset by higher income from new investments. The Portfolio may be subject to a heightened risk of rising interest rates as the current period of historically low rates is expected to end, and rates are expected to begin rising in the near future. Interest rate risk is generally greater for fixed-income securities with longer maturities or durations.
Duration Risk—Duration is the measure that relates the expected price volatility of a fixed-income security to changes in interest rates. The duration of a fixed-income security may be shorter than or equal to full maturity of a fixed-income security. Fixed-income securities with longer durations have more risk and will decrease in price as interest rates rise. For example, a fixed-income security with a duration of three years will decrease in value by approximately 3% if interest rates increase by 1%.
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.
Liquidity Risk—Liquidity risk exists when particular investments are difficult to purchase or sell, possibly preventing the Portfolio from selling out of these securities at an advantageous price. Derivatives and securities involving substantial market and credit risk tend to involve greater liquidity risk. The Portfolio is subject to liquidity risk because the market for municipal securities is generally smaller than many other markets.
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
40 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
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 G
Joint Credit Facility
A number of open-end mutual funds managed by the Adviser, including the Portfolio, participate in a $280 million revolving credit facility (the “Facility”) intended to provide short-term financing, if necessary, subject to certain restrictions in connection with abnormal redemption activity. Commitment fees related to the Facility are paid by the participating funds and are included in miscellaneous expenses in the statement of operations. The Portfolio did not utilize the Facility during the year ended October 31, 2015.
NOTE H
Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended October 31, 2015 and October 31, 2014 were as follows:
2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 42,656 | $ | 5,493 | ||||
|
|
|
| |||||
Total taxable distributions | 42,656 | 5,493 | ||||||
Tax exempt distributions | 468,917 | 197,785 | ||||||
|
|
|
| |||||
Total distributions paid | $ | 511,573 | $ | 203,278 | ||||
|
|
|
|
As of October 31, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed tax-exempt income | $ | 32,036 | ||
Accumulated capital and other losses | (40,872 | )(a) | ||
Unrealized appreciation/(depreciation) | 816,986 | (b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | 808,150 | (c) | |
|
|
(a) | As of October 31, 2015, the Portfolio had a net capital loss carryforward of $40,872. |
(b) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to 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 October 31, 2015, the Portfolio had a net short-term capital loss carryforward of $40,872 which may be carried forward for an indefinite period.
During the current fiscal year, permanent differences primarily due to the tax treatment of offering costs, a redesignation of dividends, and the tax treatment
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 41 |
Notes to Financial Statements
of Treasury inflation-protected securities resulted in a net increase in undistributed net investment income, a net increase in accumulated net realized loss on investment transactions, and a net decrease in additional paid-in capital. These reclassifications had no effect on net assets.
NOTE I
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 J
Subsequent Event
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.
42 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||
Year Ended October 31, 2015 | December 11, 2013(a) to October 31, 2014 | |||||||
Net asset value, beginning of period | $ 10.51 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .18 | .14 | ||||||
Net realized and unrealized gain on investment transactions | .09 | .50 | ||||||
|
| |||||||
Net increase in net asset value from operations | .27 | .64 | ||||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | (.18 | ) | (.13 | ) | ||||
Distributions from net realized gain on investment transactions | (.01 | ) | – 0 | – | ||||
|
| |||||||
Total dividends and distributions | (.19 | ) | (.13 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 10.59 | $ 10.51 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | 2.64 | % | 6.44 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $4,783 | $1,954 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | .81 | % | .85 | %^ | ||||
Expenses, before waivers/reimbursements | 2.19 | % | 3.59 | %^ | ||||
Net investment income(c) | 1.75 | % | 1.57 | %^ | ||||
Portfolio turnover rate | 35 | % | 42 | % |
See footnote summary on page 45.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 43 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||
Year Ended October 31, 2015 | December 11, 2013(a) to October 31, 2014 | |||||||
Net asset value, beginning of period | $ 10.52 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .10 | .07 | ||||||
Net realized and unrealized gain on investment transactions | .09 | .52 | ||||||
|
| |||||||
Net increase in net asset value from operations | .19 | .59 | ||||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | (.11 | ) | (.07 | ) | ||||
Distributions from net realized gain on investment transactions | (.01 | ) | – 0 | – | ||||
|
| |||||||
Total dividends and distributions | (.12 | ) | (.07 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 10.59 | $ 10.52 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | 1.78 | % | 5.92 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $1,518 | $369 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | 1.55 | % | 1.55 | %^ | ||||
Expenses, before waivers/reimbursements | 2.85 | % | 4.33 | %^ | ||||
Net investment income(c) | .99 | % | .82 | %^ | ||||
Portfolio turnover rate | 35 | % | 42 | % |
See footnote summary on page 45.
44 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||
Year Ended October 31, 2015 | December 11, 2013(a) to October 31, 2014 | |||||||
Net asset value, beginning of period | $ 10.52 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .21 | .16 | ||||||
Net realized and unrealized gain on investment transactions | .08 | .52 | ||||||
|
| |||||||
Net increase in net asset value from operations | .29 | .68 | ||||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | (.21 | ) | (.16 | ) | ||||
Distributions from net realized gain on investment transactions | (.01 | ) | – 0 | – | ||||
|
| |||||||
Total dividends and distributions | (.22 | ) | (.16 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 10.59 | $ 10.52 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | 2.81 | % | 6.84 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $26,333 | $14,584 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements | .55 | % | .55 | %^ | ||||
Expenses, before waivers/reimbursements | 1.92 | % | 3.82 | %^ | ||||
Net investment income(c) | 1.99 | % | 1.76 | %^ | ||||
Portfolio turnover rate | 35 | % | 42 | % |
(a) | Commencement of operations. |
(b) | Based on average shares outstanding. |
(c) | Net of fees and expenses waived/reimbursed by the Adviser. |
(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. Initial sales charges or contingent deferred sales charges are not reflected in the calculation of total investment return. 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. |
^ | Annualized. |
See notes to financial statements.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 45 |
Financial Highlights
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of AB Tax-Aware Fixed Income Portfolio
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of AB Tax-Aware Fixed Income Portfolio (the “Fund”) (formerly AllianceBernstein Tax-Aware Fixed Income Portfolio), one of the portfolios constituting AB Bond Fund, Inc. (formerly AllianceBernstein Bond Fund, Inc.), as of October 31, 2015, and the related statement of operations for the year then ended, and the statements of changes in net assets and the financial highlights for the year then ended and for the period December 11, 2013 (commencement of operations) through October 31, 2014. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2015, by correspondence with the custodian and others, or by other appropriate auditing procedures where replies from others were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the AB Tax-Aware Fixed Income Portfolio, one of the portfolios constituting the AB Bond Fund, Inc., at October 31, 2015, the results of its operations for the year then ended, and the changes in its net assets and financial highlights for the year then ended and for the period December 11, 2013 (commencement of operations) through October 31, 2014, in conformity with U.S. generally accepted accounting principles.
New York, New York
December 30, 2015
46 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Report of Independent Registered Public Accounting Firm
2015 FEDERAL TAX INFORMATION
(unaudited)
For Federal income tax purposes, the following information is furnished with respect to the distributions paid by the Portfolio during the taxable year ended October 31, 2015. For foreign shareholders, 47.25% of ordinary dividends paid may be considered to be qualifying to be taxed as interest-related dividends.
Shareholders should not use the above information to prepare their income tax returns. The information necessary to complete your income tax returns will be included with your Form 1099-DIV which will be sent to you separately in January 2016.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 47 |
BOARD OF DIRECTORS
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 Robert “Guy” B. Davidson III(2), Vice President Jon P. Denfeld(2), Vice President Terrance T. Hults(2), Vice President | Shawn E. Keegan(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 State Street Corporation CCB/5 1 Iron Street Boston, MA 02210
Principal Underwriter AllianceBernstein Investments, Inc. 1345 Avenue of the Americas New York, NY 10105
Transfer Agent AllianceBernstein Investor Services, Inc. P.O. Box 786003 San Antonio, TX 78278-6003 Toll-Free (800) 221-5672 | Independent Registered Public Accounting Firm Ernst & Young LLP 5 Times Square New York, NY 10036
Legal Counsel Seward & Kissel LLP One Battery Park Plaza New York, NY 10004 |
(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 Fund are made by its senior investment management team. Messrs. Davidson, Denfeld, Hults and Keegan are the investment professionals with the most significant responsibility for the day-to-day management of the Fund’s portfolio. |
48 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Board of Directors
MANAGEMENT OF THE FUND
Board of Directors Information
The business and affairs of the Fund are managed under the direction of the Board of Directors. Certain information concerning the Fund’s Directors is set forth below.
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC COMPANY DIRECTORSHIPS CURRENTLY HELD | |||||
INTERESTED DIRECTOR | ||||||||
Robert M. Keith, # 1345 Avenue of the Americas New York, NY 10105 55 (2013) | Senior Vice President of AllianceBernstein L.P. (the “Adviser”) and the head of AllianceBernstein Investments, Inc. (“ABI”) since July 2008; Director of ABI and President of the AB Mutual Funds. Previously, he served as Executive Managing Director of ABI from December 2006 to June 2008. Prior to joining ABI in 2006, Executive Managing Director of Bernstein Global Wealth Management, and prior thereto, Senior Managing Director and Global Head of Client Service and Sales of the Adviser’s institutional investment management business since 2004. Prior thereto, he was Managing Director and Head of North American Client Service and Sales in the Adviser’s institutional investment management business, with which he had been associated since prior to 2004. | 110 | None |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 49 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC COMPANY DIRECTORSHIPS CURRENTLY HELD | |||||
DISINTERESTED DIRECTORS | ||||||||
Marshall C. Turner, Jr., ## Chairman of the Board 74 (2013) | Private Investor since prior to 2010. Former Chairman and CEO of Dupont Photomasks, Inc. (components of semi-conductor manufacturing). He has extensive operating leadership and venture capital investing experience, including five interim or full-time CEO roles, and prior service as general partner of institutional venture capital partnerships. He also has extensive non-profit board leadership experience, and currently serves on the boards of two education and science-related non-profit organizations. He has served as a director of one AB fund since 1992, and director or trustee of multiple AB Funds since 2005. He has been Chairman of the AB Funds since January 2014, and the Chairman of the Independent Directors Committees of such Funds since February 2014. | 110 | Xilinx, Inc. (programmable logic semi-conductors) since 2007 | |||||
John H. Dobkin, ## 73 (2013) | Independent Consultant since prior to 2010. Formerly, President of Save Venice, Inc. (preservation organization) from 2001-2002; Senior Advisor from June 1999-June 2000 and President of Historic Hudson Valley (historic preservation) from December 1989-May 1999. Previously, Director of the National Academy of Design. He has served as a director or trustee of various AB Funds since 1992, and as Chairman of the Audit Committees of a number of such Funds from 2001-2008. | 110 | None | |||||
50 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC COMPANY DIRECTORSHIPS CURRENTLY HELD | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Michael J. Downey, ## 71 (2013) | Private Investor since prior to 2010. Formerly, managing partner of Lexington Capital, LLC (investment advisory firm) from December 1997 until December 2003. He was a Director of The Merger Fund (registered investment company) since prior to 2010 until 2013. He served as a Director of Prospect Acquisition Corp. (financial services) from 2007 until 2009. From 1987 until 1993, Chairman and CEO of Prudential Mutual Fund Management, director of the Prudential mutual funds, and member of the Executive Committee of Prudential Securities Inc. He has served as a director or trustee of the AB Funds since 2005 and is a director and Chairman of one other registered investment company. | 110 | Asia Pacific Fund, Inc. (registered investment company) since prior to 2010 | |||||
William H. Foulk, Jr., ## 83 (2013) | Investment Adviser and an Independent Consultant since prior to 2010. Previously, he was Senior Manager of Barrett Associates, Inc., a registered investment adviser. He was formerly Deputy Comptroller and Chief Investment Officer of the State of New York and, prior thereto, Chief Investment Officer of the New York Bank for Savings. He has served as a director or trustee of various AB Funds since 1983, and was Chairman of the Independent Directors Committees of the AB Funds from 2003 until early February 2014. He served as Chairman of such Funds from 2003 through December 2013. He is also active in a number of mutual fund related organizations and committees. | 110 | None |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 51 |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC COMPANY DIRECTORSHIPS CURRENTLY HELD | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
D. James Guzy, ## 79 (2013) | Chairman of the Board of SRC Computers, Inc. (semi-conductors), with which he has been associated since prior to 2010. He served as Chairman of the Board of PLX Technology (semi-conductors) since prior to 2010 until November 2013. He was a Director of Cirrus Logic Corporation (semi-conductors) from 1984 until July 2011. He was a director of Intel Corporation (semi-conductors) from 1969 until 2008, and served as Chairman of the Finance Committee of such company for several years until May 2008. He has served as a director or trustee of one or more of the AB Funds since 1982. | 110 | None | |||||
Nancy P. Jacklin, ## 67 (2013) | Professorial Lecturer at the Johns Hopkins School of Advanced International Studies (2008-2015). U.S. Executive Director of the International Monetary Fund (which is responsible for ensuring the stability of the international monetary system), (December 2002-May 2006); Partner, Clifford Chance (1992-2002); Sector Counsel, International Banking and Finance, and Associate General Counsel, Citicorp (1985-1992); Assistant General Counsel (International), Federal Reserve Board of Governors (1982-1985); and Attorney Advisor, U.S. Department of the Treasury (1973-1982). Member of the Bar of the District of Columbia and of New York; and member of the Council on Foreign Relations. She has served as a director or trustee of the AB Funds since 2006 and has been Chairman of the Governance and Nominating Committees of the AB Funds since August 2014. | 110 | None |
52 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Management of the Fund
NAME, ADDRESS*, AGE, (YEAR FIRST ELECTED**) | PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND OTHER RELEVANT QUALIFICATIONS*** | PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR | OTHER PUBLIC COMPANY DIRECTORSHIPS CURRENTLY HELD BY DIRECTOR | |||||
DISINTERESTED DIRECTORS (continued) | ||||||||
Garry L. Moody, ## 63 (2013) | Independent Consultant. Formerly, Partner, Deloitte & Touche LLP (1995-2008) where he held a number of senior positions, including Vice Chairman, and U.S. and Global Investment Management Practice Managing Partner; President, Fidelity Accounting and Custody Services Company (1993-1995); and Partner, Ernst & Young LLP (1975-1993), where he served as the National Director of Mutual Fund Tax Services and Managing Partner of its Chicago Office Tax department. He is a member of the Trustee Advisory Board of BoardIQ, a biweekly publication focused on issues and news affecting directors of mutual funds. He has served as a director or trustee, and as Chairman of the Audit Committees, of the AB Funds since 2008. | 110 | None | |||||
Earl D. Weiner, ## 76 (2013) | Of Counsel, and Partner prior to January 2007, of the law firm Sullivan & Cromwell LLP and is a former member of the ABA Federal Regulation of Securities Committee Task Force to draft editions of the Fund Director’s Guidebook. He also serves as a director or trustee of various non-profit organizations and has served as Chairman or Vice Chairman of a number of them. He has served as a director or trustee of the AB Funds since 2007 and served as Chairman of the Governance and Nominating Committees of the AB Funds from 2007 until August 2014. | 110 | None |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 53 |
Management of the Fund
* | The address for each of the Fund’s disinterested Directors is c/o AllianceBernstein L.P., Attention: Philip L. Kirstein, 1345 Avenue of the Americas, New York, NY 10105. |
** | There is no stated term of office for the Fund’s Directors. |
*** | The information above includes each Director’s principal occupation during the last five years and other information relating to the experience, attributes and skills relevant to each Director’s qualifications to serve as a Director, which led to the conclusion that each Director should serve as a Director for the Fund. |
# | Mr. Keith is an “interested person” of the Fund, as defined in the 1940 Act, due to his position as a Senior Vice President of the Adviser. |
## | Member of the Audit Committee, the Governance and Nominating Committee and the Independent Directors Committee. |
54 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Management of the Fund
Officer Information
Certain information concerning the Fund’s Officers is listed below.
NAME, ADDRESS* AND AGE | POSITION(S) HELD WITH FUND | PRINCIPAL OCCUPATION DURING PAST 5 YEARS | ||
Robert M. Keith 55 | President and Chief Executive Officer | See biography above. | ||
Philip L. Kirstein 70 | Senior Vice President and Independent Compliance Officer | Senior Vice President and Independent Compliance Officer of the AB Funds, with which he has been associated since October 2004. Prior thereto, he was Of Counsel to Kirkpatrick & Lockhart, LLP from October 2003 to October 2004, and General Counsel of Merrill Lynch Investment Managers, L.P. since prior to March 2003. | ||
Robert “Guy” 54 | Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Jon P. Denfeld 45 | Vice President | Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Terrance T. Hults 49 | Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Shawn E. Keegan 44 | Vice President | Senior Vice President of the Adviser,** with which he has been associated since prior to 2010. | ||
Emilie D. Wrapp 59 | Secretary | Senior Vice President, Assistant General Counsel and Assistant Secretary of ABI,** with which she has been associated since prior to 2010. | ||
Joseph J. Mantineo 56 | Treasurer and Chief Financial Officer | Senior Vice President of AllianceBernstein Investor Services, Inc. (“ABIS”),** with which he has been associated since prior to 2010. | ||
Phyllis J. Clarke 54 | Controller | Vice President of ABIS,** with which she has been associated since prior to 2010. | ||
Vincent S. Noto 51 | Chief Compliance Officer | Senior Vice President since 2015 and Mutual Fund Chief Compliance Officer of the Adviser** since 2014. Prior thereto, he was Vice President and Director of Mutual Fund Compliance of the Adviser** since prior to 2010. |
* | The address for the Fund’s Officers is 1345 Avenue of the Americas, New York, NY 10105. |
** | The Adviser, ABI and ABIS are affiliates of the Fund. |
The Fund’s Statement of Additional Information (“SAI”) has additional information about the Fund’s Directors and Officers and is available without charge upon request. Contact your financial representative or AB at 1-800-227-4618, or visit www.ABglobal.com, for a free prospectus of SAI. |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 55 |
Management of the Fund
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 Bond Fund, Inc. (the “Fund”), in respect of AB Tax-Aware Fixed Income Portfolio (the “Portfolio”),2 prepared by Philip L. Kirstein, the Senior Officer of the Fund for the Directors of the Fund, as required by the August 2004 agreement 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 Directors of the Fund to perform its duties pursuant to Section 15 of the Investment Company Act of 1940 (the “40 Act”) and applicable state law. The purpose of the 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 Directors 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
1 | The information in the fee evaluation was completed on October 22, 2015 and discussed with the Board of Directors on November 3-5, 2015. |
2 | Future references to the Portfolio do not include “AB.” |
56 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
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 the Jones decision, 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
ADVISORY FEES, NET ASSETS, & EXPENSE RATIOS
The Adviser proposed that the Portfolio pays the advisory fee set forth below for receiving the services to be provided pursuant to the Investment Advisory Agreement. Also shown are the Fund’s net assets on September 30, 2015.
Portfolio | Net Assets 9/30/15 ($MM) | Advisory Fee Schedule Based on the Average Daily Net Assets of the Portfolio | ||
Tax-Aware Fixed Income Portfolio4 | $31.3 | 0.50% of average daily net assets |
The Portfolio’s Investment Advisory Agreement provides for the Adviser to be reimbursed for certain clerical, legal, accounting, administrative and other services provided to the Fund. During the Portfolio’s fiscal year ended October 31, 2014, the Adviser was entitled to receive $56,885 (0.434% of the Portfolio’s average daily net assets) for providing such services but waived the amount in its entirety.
The Adviser has agreed to waive that portion of its management fees and/or reimburse the Portfolio for that portion of the Portfolio’s total operating expenses to the degree necessary to limit the Portfolio’s expense ratio to the amounts set forth below for the Portfolio’s current fiscal year. The waiver is terminable by the Adviser at the end of the Portfolio’s fiscal year upon at least
3 | Jones v. Harris at 1427. |
4 | The advisory fee schedule for the Portfolio has a higher effective fee rate than the advisory fee schedule of the Low Risk and High Income categories, in which the Portfolio would have been categorized had the Adviser implemented the NYAG related fee schedule. The advisory fee schedules for the Low Risk and High Income categories are as follows: 0.45% on the first $2.5 billion, 0.40% on the next $2.5 billion, 0.35% on the balance for the Low Income category and 0.50% on the first $2.5 billion, 0.45% on the next $2.5 billion and 0.40% on the balance for the High Income category. |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 57 |
60 days’ notice prior to the Portfolio’s prospectus update. In addition, set forth below are the Portfolio’s gross expense ratios for the most recent semi-annual period:5
Portfolio | Expense Cap Pursuant to Expense Limitation Undertaking | Gross Expense Ratio6 | Fiscal Year End | |||||||||
Tax-Aware Fixed Income Portfolio7,8 | Advisor Class A Class C |
| 0.55 0.80 1.55 | % % % |
| 2.13 2.42 3.00 | % % % | October 31 (ratios as of |
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 and sub-advised investment companies 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 assets due to the greater complexities and time required for investment companies, although the Adviser is entitled to be reimbursed for providing such services. Managing the cash flow of an investment company is more difficult than that of a stable pool of assets, such as an institutional account with little cash movement in either direction, particularly if a fund 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. 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 still not equal to those related to the mutual fund industry.
5 | Semi-annual total expense ratios are unaudited. |
6 | Annualized. |
7 | Effective January 30, 2015, the Rule 12b-1 fee for Class A shares of the Portfolio was reduced from 0.30% to 0.25%. At the same time, the expense cap for the Class A shares was also reduced from 0.85% to 0.80%. |
8 | The net expense ratio for Class A shares of the Portfolio during the semi-annual period ended March 31, 2015 was 0.82%. |
58 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
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.9 However, the Adviser has represented that there is no category in the Form ADV for institutional products that have a substantially similar investment style as the Portfolio.
The Adviser has represented that it does not provide sub-advisory investment services to other investment 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 offered by other investment advisers.10,11 Broadridge’s analysis included the comparison of the Portfolio’s contractual management fee, estimated at the approximate current asset level of the Portfolio, to the median of the Fund’s Broadridge Expense Group (“EG”)12 and the Portfolio’s contractual management fee ranking.13
9 | 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. |
10 | 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. |
11 | 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. |
12 | Broadridge does not consider average account size when constructing EGs. Funds with relatively small average account sizes tend to have higher transfer agent expense ratios than comparable sized funds that have relatively large average account sizes. There are limitations to Lipper expense category data because different funds categorize expenses differently. |
13 | The contractual management fee is calculated by Broadridge using the Portfolio’s contractual management fee rate at the hypothetical asset level. The hypothetical asset level is based on the combined net assets of all classes of the Portfolio, rounded up to the next $25 million. Broadridge’s total expense ratio information is based on the most recent annual report except as otherwise noted. A ranking of “1” would mean that Portfolio had the lowest effective fee rate in the Broadridge peer group. |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 59 |
Broadridge describes an EG as a representative sample of comparable funds. Broadridge’s standard methodology for screening funds to be included in an EG entails the consideration of several fund criteria, including fund type, Lipper investment classification/objective, load type and similar 12b-1/non-12b-1 service fees, asset (size) comparability, expense components and attributes. An EG will typically consist of seven to twenty funds.
Portfolio | Contractual Management Fee (%)14 | Broadridge EG Median (%) | Broadridge EG Rank | |||||||||
Tax Aware Fixed Income Portfolio | 0.500 | 0.511 | 5/15 |
Broadridge also compared the Portfolio’s total expense ratio to the medians of the Portfolio’s EG and Broadridge Expense Universe (“EU”). The EU is a broader group compared to the EG, consisting of all funds that have the same investment classifications/objective and load type as the subject Portfolio.15 Pro-forma total expense ratio (italicized) is shown to reflect the Portfolio’s 12b-1 fee reduction had the reduction been in effect during the Portfolio’s entire fiscal year.
Portfolio | Expense Ratio (%)16 | Broadridge Median (%) | Broadridge Group Rank | Broadridge EU Median (%) | Broadridge Rank | |||||||||||||||
Tax-Aware Fixed Income Portfolio | 0.850 | 0.850 | 8/15 | 0.804 | 39/57 | |||||||||||||||
Pro-forma | 0.800 | 0.850 | 4/15 | 0.804 | 26/57 |
Based on this analysis, considering pro-forma information where available, the Portfolio has a more favorable ranking on a total expense ratio basis than on a contractual management fee basis.
III. | COSTS TO THE ADVISER AND ITS AFFILIATES OF SUPPLYING SERVICES PURSUANT TO THE MANAGEMENT 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
14 | The contractual management fee does not reflect any expense reimbursements made by the Portfolio to the Adviser for certain clerical, legal, accounting, administrative, and other services. In addition, the contractual management fee does not reflect any advisory fee waivers for expense caps. |
15 | Except for asset (size) comparability, Broadridge uses the same criteria for selecting an EG when selecting an EU. Unlike the EG, the EU allows for the same adviser to be represented by more than just one fund. |
16 | Most recently completed fiscal year Class A share total expense ratio. |
60 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
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 Portfolio’s profitability information, prepared by the Adviser for the Board of Directors, was reviewed by the Senior Officer and the consultant. The Adviser’s profitability from providing investment advisory services to the Portfolio was negative, during calendar year 2014.
In addition to the Adviser’s direct profits from managing the Portfolio, certain of the Adviser’s affiliates have business relationships with the Portfolio and may earn a profit from providing other services to the Portfolio. The courts have referred to this type of business opportunity 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 and the relationship otherwise complies with the 40 Act restrictions. These affiliates provide transfer agent and distribution related services to the Portfolio and receive transfer agent fees, Rule 12b-1 payments, front-end sales loads and contingent deferred sales charges (“CDSC”). During the Portfolio’s most recently completed fiscal year, ABI received from the Portfolio $2,703 and $10 in Rule 12b-1 and CDSC fees, respectively.
AllianceBernstein Investments, Inc. (“ABI”), an affiliate of the Adviser, is the Fund’s principal underwriter. ABI and the Adviser have disclosed in the Portfolio’s prospectus that they may make revenue sharing payments from their own resources, in addition to resources derived from sales loads and Rule 12b-1 fees, to firms that sell shares of the Portfolio. In 2014, ABI paid approximately 0.05% of the average monthly assets of the AB Mutual Funds or approximately $20.4 million for distribution services and educational support (revenue sharing payments).
Fees and reimbursements for out of pocket expenses charged by AllianceBernstein Investor Services, Inc. (“ABIS”), the affiliated transfer agent for the Portfolio, are based on the level of the network account and the class of shares held by the account. ABIS also receives a fee per shareholder sub-account for each account maintained by an intermediary on an omnibus basis. ABIS received $15,037 in fees from the Portfolio during the Portfolio’s most recently completed fiscal year.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 61 |
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 Directors 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 Directors an update of the Deli17 study on advisory fees and various fund characteristics.18 The independent consultant first reiterated the results of his previous two dimensional comparison analysis (fund size and family size) with the Board of Directors.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,
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. |
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. |
62 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
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 FUND |
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 prepared by Broadridge shows the 1 year performance returns and rankings20 of the Portfolio relative to its Broadridge Performance Group (“PG”) and Broadridge Performance Universe (“PU”)21 for the period ended July 31, 2015.22
Tax-Aware Fixed Income Portfolio | Fund Return (%) | PG Median (%) | PU Median (%) | PG Rank | PU Rank | |||||||||||
1 year | 2.75 | 3.20 | 3.81 | 12/15 | 56/62 |
20 | The performance return and rankings are for the Portfolio’s Class A shares. The performance return of the Portfolio was provided by Broadridge. |
21 | The Portfolio’s PG is identical to the Portfolio’s EG. The Portfolio’s PU is not identical to the Portfolio’s EU as the criteria for including/excluding a fund from a PU is somewhat different from that of an EU. |
22 | The current Lipper investment classification/objective dictates the PG and PU throughout the life of the Portfolio even if the Portfolio had a different investment classification/objective at a different point in time. |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 63 |
Set forth below are the 1 year and since inception performance returns of the Portfolio (in bold)23 versus its benchmark.24 Portfolio and benchmark volatility and reward-to-variability ratio (“Sharpe Ratio”) information is also shown.25
Period Ending July 31, 2015 Annualized Net Performance (%) | ||||||||||||||||||||
1 Year (%) | Since (%) | Volatility (%) | Sharpe (%) | Risk Period (Year) | ||||||||||||||||
Tax-Aware Fixed Income Portfolio | 2.76 | 4.64 | 2.40 | 1.09 | 1 | |||||||||||||||
Barclays Municipal Bond Index | 3.56 | 5.92 | 2.52 | 1.34 | 1 | |||||||||||||||
Inception Date: December 11, 2013 |
CONCLUSION:
Based on the factors discussed above the Senior Officer’s conclusion is that the proposed advisory fee 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 in respect of the Portfolio is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: November 25, 2015
23 | The performance returns and risk measures shown in the table are for the Class A shares of the Portfolio. |
24 | The Adviser provided Portfolio and benchmark performance return information for periods through July 31, 2015. |
25 | 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. |
64 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
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 TAX-AWARE FIXED INCOME PORTFOLIO • | 65 |
AB Family of Funds
NOTES
66 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
NOTES
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 67 |
NOTES
68 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
AB TAX-AWARE FIXED INCOME PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
TAFI-0151-1015
ITEM 2. | CODE OF ETHICS. |
(a) The registrant has adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer. A copy of the registrant’s code of ethics is filed herewith as Exhibit 12(a)(1).
(b) During the period covered by this report, no material amendments were made to the provisions of the code of ethics adopted in 2(a) above.
(c) During the period covered by this report, no implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a) above were granted.
ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
The registrant’s Board of Directors has determined that independent directors Garry L. Moody, William H. Foulk, Jr. and Marshall C. Turner, Jr. qualify as audit committee financial experts.
ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
(a) - (c) The following table sets forth the aggregate fees billed by the independent registered public accounting firm Ernst & Young LLP, for the Fund’s last two fiscal years for professional services rendered for: (i) the audit of the Fund’s annual financial statements included in the Fund’s annual report to stockholders; (ii) assurance and related services that are reasonably related to the performance of the audit of the Fund’s financial statements and are not reported under (i), which include advice and education related to accounting and auditing issues and quarterly press release review (for those Funds which issue press releases), and preferred stock maintenance testing (for those Funds that issue preferred stock); and (iii) tax compliance, tax advice and tax return preparation.
Audit Fees | Audit - Related Fees | Tax Fees | ||||||||||||||
AB Intermediate Bond | 2014 | $ | 65,781 | $ | — | $ | 13,839 | |||||||||
2015 | $ | 67,775 | $ | — | $ | 20,261 | ||||||||||
AB Bond Inflation Strategy | 2014 | $ | 67,918 | $ | — | $ | 15,678 | |||||||||
2015 | $ | 69,976 | $ | — | $ | 19,285 | ||||||||||
AB Municipal Bond Inflation Strategy | 2014 | $ | 62,424 | $ | — | $ | 13,838 | |||||||||
2015 | $ | 64,315 | $ | — | $ | 17,713 | ||||||||||
AB All Market Real Return | 2014 | $ | 74,939 | $ | — | $ | 26,069 | |||||||||
2015 | $ | 77,210 | $ | — | $ | 37,241 | ||||||||||
AB Credit Long/Short | 2014 | $ | 63,750 | $ | — | $ | 15,552 | |||||||||
2015 | $ | 87,576 | $ | 25,575 | ||||||||||||
AB High Yield | 2014 | $ | 67,500 | $ | — | $ | 17,573 | |||||||||
2015 | $ | 92,727 | $ | — | $ | 22,832 | ||||||||||
AB Tax Aware Fixed Income | 2014 | $ | 25,500 | $ | — | $ | 17,957 | |||||||||
2015 | $ | 35,030 | $ | — | $ | 21,073 |
(d) Not applicable.
(e) (1) Beginning with audit and non-audit service contracts entered into on or after May 6, 2003, the Fund’s Audit Committee policies and procedures require the pre-approval of all audit and non-audit services provided to the Fund by the Fund’s independent registered public accounting firm. The Fund’s Audit Committee policies and procedures also require pre-approval of all audit and non-audit services provided to the Adviser and Service Affiliates to the extent that these services are directly related to the operations or financial reporting of the Fund.
(e) (2) All of the amounts for Audit Fees, Audit-Related Fees and Tax Fees in the table under Item 4 (a) – (c) are for services pre-approved by the Fund’s Audit Committee.
(f) Not applicable.
(g) The following table sets forth the aggregate non-audit services provided to the Fund, the Fund’s Adviser and entities that control, are controlled by or under common control with the Adviser that provide ongoing services to the Fund:
All Fees for Non-Audit Services Provided to the Portfolio, the Adviser and Service Affiliates | Pre-approved by the Audit Committee (Portion Comprised of Audit Related Fees) (Portion Comprised of Tax Fees) | |||||||||||
AB Intermediate Bond | 2014 | $ | 424,494 | $ | 13,839 | |||||||
$ | — | |||||||||||
$ | (13,839 | ) | ||||||||||
2015 | $ | 438,336 | $ | 20,261 | ||||||||
$ | — | |||||||||||
$ | (20,261 | ) | ||||||||||
AB Bond Inflation Strategy | 2014 | $ | 426,333 | $ | 15,678 | |||||||
$ | — | |||||||||||
$ | (15,678 | ) | ||||||||||
2015 | $ | 437,360 | $ | 19,285 | ||||||||
$ | — | |||||||||||
$ | (19,285 | ) | ||||||||||
AB Municipal Bond Inflation Strategy | 2014 | $ | 424,493 | $ | 13,838 | |||||||
$ | — | |||||||||||
$ | (13,838 | ) | ||||||||||
2015 | $ | 435,788 | $ | 17,713 | ||||||||
$ | — | |||||||||||
$ | (17,713 | ) | ||||||||||
AB All Market Real Return | 2014 | $ | 436,724 | $ | 26,069 | |||||||
$ | — | |||||||||||
$ | (26,069 | ) | ||||||||||
2015 | $ | 455,316 | $ | 37,241 | ||||||||
$ | — | |||||||||||
$ | (37,241 | ) | ||||||||||
AB Credit Long/Short | 2014 | $ | 426,207 | $ | 15,552 | |||||||
$ | — | |||||||||||
$ | (15,552 | ) | ||||||||||
2015 | $ | 443,650 | $ | 25,575 | ||||||||
$ | — | |||||||||||
$ | (25,575 | ) | ||||||||||
AB High Yield | 2014 | $ | 428,228 | $ | 17,573 | |||||||
$ | — | |||||||||||
$ | (17,573 | ) | ||||||||||
2015 | $ | 440,907 | $ | 22,832 | ||||||||
$ | — | |||||||||||
$ | (22,832 | ) | ||||||||||
AB Tax Aware Fixed Income | 2014 | $ | 428,612 | $ | 17,957 | |||||||
$ | — | |||||||||||
$ | (17,957 | ) | ||||||||||
2015 | $ | 439,148 | $ | 21,073 | ||||||||
$ | — | |||||||||||
$ | (21,073 | ) |
(h) The Audit Committee of the Fund has considered whether the provision of any non-audit services not pre-approved by the Audit Committee provided by the Fund’s independent registered public accounting firm to the Adviser and Service Affiliates is compatible with maintaining the auditor’s independence.
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-3 (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 (a) (1) | Code of Ethics that is subject to the disclosure of Item 2 hereof | |
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 Bond Fund, Inc. | ||
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