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, 2016
Date of reporting period: April 30, 2016
ITEM 1. | REPORTS TO STOCKHOLDERS. |
APR 04.30.16
SEMI-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.
June 24, 2016
Semi-Annual Report
This report provides management’s discussion of fund performance for AB All Market Real Return Portfolio (the “Fund”) for the semi-annual reporting period ended April 30, 2016.
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 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
AB ALL MARKET REAL RETURN PORTFOLIO • | 1 |
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 contracts, 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 April 30, 2016.
All share classes of the Fund underperformed the primary benchmark, the MSCI AC World Commodity Producers Index, for the six-month period, but outperformed for the 12-month period, before sales charges. All share classes of the Fund underperformed the secondary benchmark, the All Market Real Return Portfolio Benchmark for both periods.
The outperformance versus the primary benchmark during the 12-month
2 | • AB ALL MARKET REAL RETURN PORTFOLIO |
period was driven by a strategic exposure to global real estate, which strongly outperformed the benchmark. The Fund’s strategic allocation to commodity futures detracted slightly from performance. Over the six-month period, both the strategic exposure to commodity futures and global real estate detracted, as commodity producers rallied strongly, especially gold producers that benefitted initially from gold’s safe haven status and subsequently by falling yields. During both periods, an overweight to the US dollar and gold futures, in addition to security selection, outperformed relative to the benchmark, which helped returns; long-dated oil futures detracted for both periods.
The underperformance versus the secondary benchmark during both periods was driven by an overweight to energy and energy futures, while security selection and foreign exchange exposure contributed to performance. An underweight to mining equities detracted for the six-month period, but contributed during the 12-month period.
The Fund utilized derivatives for hedging and investment purposes, including Treasury futures, inflation swaps and written options, which detracted for both periods, in absolute terms; currency forwards and total return swaps added for the six-month period and detracted for the 12-month period; purchased options detracted for the six-month period and added for the 12-month period. Interest rate swaps for hedging purposes added for both periods.
Market Review and Investment Strategy
The six- and 12-month periods were marked by materially different risk episodes. After a relatively calm fourth
quarter in 2015, risk assets fell sharply in the first quarter of 2016, moving in lockstep with commodities such as oil and metals, as uncertainty regarding Chinese economic policy reverberated around global financial markets. Another major headwind for commodities was that the US dollar continued to strengthen against most major currencies, as markets continued to price in monetary policy divergence between the US and the rest of the world.
February was a turning point for risk assets, as a combination of stimulus measures announced by Chinese officials and a dovish stance by most central banks helped ease frayed investor nerves. As a result, commodities rallied sharply on short covering, Chinese stimulus and a change in course for the US dollar as markets started pricing a materially more dovish US Federal Reserve (the “Fed”). TIPS had positive returns as commodities rebounded and inflation readings were firmer than in the past.
Real estate moved in parallel and experienced a large rally in February and March. A dovish Fed is positive for risk assets, and REITs in particular, because they pay dividends and are yield instruments that do well as rates fall.
On June 23, 2016, the UK voted to leave the European Union (“EU”) in a popular referendum. At this moment in time, the UK remains a member of the EU and the rules and regulations remain unchanged, as do all the protections in place. Exactly how the UK’s role in the EU will change will become clear over time. The Adviser continues to monitor the heightened market volatility.
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 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 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 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. The Fund may be subject to a heightened risk of rising interest rates as the current period of historically low rates is beginning to end and rates have begun rising. 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.
(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)
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.
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 the Fund’s 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.
(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)
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.
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 ENDED APRIL 30, 2016 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB All Market Real Return Portfolio | ||||||||||
Class 1* | 1.55% | -13.69% | ||||||||
| ||||||||||
Class 2* | 1.56% | -13.49% | ||||||||
| ||||||||||
Class A | 1.38% | -13.87% | ||||||||
| ||||||||||
Class C | 1.07% | -14.48% | ||||||||
| ||||||||||
Advisor Class† | 1.50% | -13.68% | ||||||||
| ||||||||||
Class R† | 1.28% | -14.09% | ||||||||
| ||||||||||
Class K† | 1.42% | -13.85% | ||||||||
| ||||||||||
Class I† | 1.64% | -13.52% | ||||||||
| ||||||||||
Class Z† | 1.58% | -13.56% | ||||||||
| ||||||||||
Primary Benchmark: MSCI AC World Commodity Producers Index (net) | 7.82% | -14.60% | ||||||||
| ||||||||||
All Market Real Return Portfolio Benchmark | 3.33% | -10.42% | ||||||||
| ||||||||||
* 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)
AVERAGE ANNUAL RETURNS AS OF APRIL 30, 2016 (unaudited) | ||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | |||||||
Class 1 Shares* | ||||||||
1 Year | -13.69 | % | -13.69 | % | ||||
5 Years | -6.94 | % | -6.94 | % | ||||
Since Inception† | -1.51 | % | -1.51 | % | ||||
Class 2 Shares* | ||||||||
1 Year | -13.49 | % | -13.49 | % | ||||
5 Years | -6.72 | % | -6.72 | % | ||||
Since Inception† | -1.28 | % | -1.28 | % | ||||
Class A Shares | ||||||||
1 Year | -13.87 | % | -17.50 | % | ||||
5 Years | -7.02 | % | -7.82 | % | ||||
Since Inception† | -1.58 | % | -2.27 | % | ||||
Class C Shares | ||||||||
1 Year | -14.48 | % | -15.33 | % | ||||
5 Years | -7.68 | % | -7.68 | % | ||||
Since Inception† | -2.28 | % | -2.28 | % | ||||
Advisor Class Shares‡ | ||||||||
1 Year | -13.68 | % | -13.68 | % | ||||
5 Years | -6.76 | % | -6.76 | % | ||||
Since Inception† | -1.31 | % | -1.31 | % | ||||
Class R Shares‡ | ||||||||
1 Year | -14.09 | % | -14.09 | % | ||||
5 Years | -7.23 | % | -7.23 | % | ||||
Since Inception† | -1.81 | % | -1.81 | % | ||||
Class K Shares‡ | ||||||||
1 Year | -13.85 | % | -13.85 | % | ||||
5 Years | -6.98 | % | -6.98 | % | ||||
Since Inception† | -1.55 | % | -1.55 | % | ||||
Class I Shares‡ | ||||||||
1 Year | -13.52 | % | -13.52 | % | ||||
5 Years | -6.72 | % | -6.72 | % | ||||
Since Inception† | -1.28 | % | -1.28 | % | ||||
Class Z Shares‡ | ||||||||
1 Year | -13.56 | % | -13.56 | % | ||||
Since Inception† | -9.23 | % | -9.23 | % |
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
(Historical Performance and footnotes continued on next page)
8 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
The Fund’s prospectus fee table shows the Fund’s total annual operating expense ratios as 1.16%, 0.92%, 1.42%, 2.16%, 1.17%, 1.64%, 1.34%, 0.96% and 0.96% 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 to 1.25%, 1.00%, 1.30%, 2.05%, 1.05%, 1.55%, 1.30%, 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, 2017 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 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. |
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
(Historical Performance continued on next page)
AB ALL MARKET REAL RETURN PORTFOLIO • | 9 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END MARCH 31, 2016 (unaudited) | ||||
SEC Returns (reflects applicable sales charges) | ||||
Class 1 Shares* | ||||
1 Year | -14.49 | % | ||
5 Years | -7.53 | % | ||
Since Inception† | -2.59 | % | ||
Class 2 Shares* | ||||
1 Year | -14.30 | % | ||
5 Years | -7.31 | % | ||
Since Inception† | -2.36 | % | ||
Class A Shares | ||||
1 Year | -18.27 | % | ||
5 Years | -8.42 | % | ||
Since Inception† | -3.36 | % | ||
Class C Shares | ||||
1 Year | -16.07 | % | ||
5 Years | -8.27 | % | ||
Since Inception† | -3.36 | % | ||
Advisor Class Shares‡ | ||||
1 Year | -14.37 | % | ||
5 Years | -7.33 | % | ||
Since Inception† | -2.38 | % | ||
Class R Shares‡ | ||||
1 Year | -14.87 | % | ||
5 Years | -7.82 | % | ||
Since Inception† | -2.89 | % | ||
Class K Shares‡ | ||||
1 Year | -14.64 | % | ||
5 Years | -7.57 | % | ||
Since Inception† | -2.63 | % | ||
Class I Shares‡ | ||||
1 Year | -14.43 | % | ||
5 Years | -7.34 | % | ||
Since Inception† | -2.38 | % | ||
Class Z Shares‡ | ||||
1 Year | -14.38 | % | ||
Since Inception† | -12.32 | % |
* | 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. |
See Disclosures, Risks and Note about Historical Performance on pages 4-6.
10 | • AB ALL MARKET REAL RETURN PORTFOLIO |
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 November 1, 2015 | Ending Account Value April 30, 2016 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,013.80 | $ | 6.51 | 1.30 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,018.40 | $ | 6.52 | 1.30 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,010.70 | $ | 10.10 | 2.02 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,014.82 | $ | 10.12 | 2.02 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,015.00 | $ | 5.16 | 1.03 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.74 | $ | 5.17 | 1.03 | % | ||||||||
Class R | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,012.80 | $ | 7.66 | 1.53 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,017.26 | $ | 7.67 | 1.53 | % | ||||||||
Class K | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,014.20 | $ | 6.41 | 1.28 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,018.50 | $ | 6.42 | 1.28 | % |
AB ALL MARKET REAL RETURN PORTFOLIO • | 11 |
Expense Example
EXPENSE EXAMPLE
(unaudited)
(continued from previous page)
Beginning Account Value November 1, 2015 | Ending Account Value April 30, 2016 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class I | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,016.40 | $ | 4.66 | 0.93 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.24 | $ | 4.67 | 0.93 | % | ||||||||
Class 1 | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,015.50 | $ | 5.81 | 1.16 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.10 | $ | 5.82 | 1.16 | % | ||||||||
Class 2 | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,015.60 | $ | 4.56 | 0.91 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.34 | $ | 4.57 | 0.91 | % | ||||||||
Class Z | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,015.80 | $ | 4.71 | 0.94 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.19 | $ | 4.72 | 0.94 | % |
* | Expenses are equal to the Portfolio’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
12 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Expense Example
PORTFOLIO SUMMARY
April 30, 2016 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $568.0
PORTFOLIO BREAKDOWN* | ||||||
Commodity Related Derivatives | 41.2 | % | ||||
Commodity Related Stocks | 34.9 | % | ||||
Real Estate Stocks | 26.3 | % | ||||
Other | (2.4 | )% |
* | All data are as of April 30, 2016. The portfolio breakdown is expressed as an approximate percentage of the Fund’s net assets inclusive of derivative exposure, based on the Adviser’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). |
AB ALL MARKET REAL RETURN PORTFOLIO • | 13 |
Portfolio Summary
TEN LARGEST EQUITY HOLDINGS*
April 30, 2016 (unaudited)
Company | U.S. $ Value | Percent of Net Assets | ||||||
Exxon Mobil Corp. | $ | 29,598,707 | 5.2 | % | ||||
Royal Dutch Shell PLC – Class A & Class B | 25,471,193 | 4.5 | ||||||
SPDR S&P Dividend ETF | 17,546,040 | 3.1 | ||||||
TOTAL SA | 15,179,473 | 2.7 | ||||||
Chevron Corp. | 14,573,320 | 2.5 | ||||||
Vanguard Dividend Appreciation ETF | 11,322,624 | 2.0 | ||||||
Simon Property Group, Inc. | 8,558,576 | 1.5 | ||||||
BP PLC | 7,391,429 | 1.3 | ||||||
Occidental Petroleum Corp. | 7,389,749 | 1.3 | ||||||
EOG Resources, Inc. | 7,327,485 | 1.3 | ||||||
$ | 144,358,596 | 25.4 | % |
* | Long-term investments. |
14 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Ten Largest Equity Holdings
CONSOLIDATED PORTFOLIO OF INVESTMENTS
April 30, 2016 (unaudited)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
COMMON STOCKS – 61.1% | ||||||||
Energy – 26.8% | ||||||||
Integrated Oil & Gas – 17.6% | ||||||||
BP PLC | 1,341,608 | $ | 7,391,429 | |||||
Chevron Corp. | 142,624 | 14,573,320 | ||||||
China Petroleum & Chemical Corp. – Class H | 2,214,000 | 1,562,993 | ||||||
Eni SpA | 8,990 | 146,869 | ||||||
Exxon Mobil Corp. | 334,827 | 29,598,707 | ||||||
Galp Energia SGPS SA | 83,690 | 1,149,853 | ||||||
LUKOIL PJSC (Sponsored ADR) | 48,330 | 2,054,025 | ||||||
Petroleo Brasileiro SA (Sponsored ADR)(a) | 172,330 | 1,016,747 | ||||||
Royal Dutch Shell PLC (Euronext Amsterdam) – Class A | 307,616 | 8,126,563 | ||||||
Royal Dutch Shell PLC – Class A | 412,416 | 10,802,494 | ||||||
Royal Dutch Shell PLC – Class B | 249,178 | 6,542,136 | ||||||
Statoil ASA | 8,085 | 142,306 | ||||||
TOTAL SA | 300,341 | 15,179,473 | ||||||
YPF SA (Sponsored ADR) | 78,350 | 1,578,753 | ||||||
|
| |||||||
99,865,668 | ||||||||
|
| |||||||
Oil & Gas Drilling – 0.2% | ||||||||
Helmerich & Payne, Inc. | 18,390 | 1,215,947 | ||||||
|
| |||||||
Oil & Gas Equipment & Services – 0.8% | ||||||||
Aker Solutions ASA(a)(b) | 221,750 | 847,707 | ||||||
Petrofac Ltd. | 89,160 | 1,104,647 | ||||||
RPC, Inc. | 39,140 | 591,797 | ||||||
Schlumberger Ltd. | 7,560 | 607,370 | ||||||
Tenaris SA | 92,000 | 1,244,070 | ||||||
|
| |||||||
4,395,591 | ||||||||
|
| |||||||
Oil & Gas Exploration & Production – 7.5% | ||||||||
Anadarko Petroleum Corp. | 77,900 | 4,110,004 | ||||||
California Resources Corp. | 3,488 | 7,674 | ||||||
Canadian Natural Resources Ltd. | 147,040 | 4,415,771 | ||||||
CNOOC Ltd. | 2,513,200 | 3,104,607 | ||||||
Concho Resources, Inc.(a) | 5,600 | 650,552 | ||||||
ConocoPhillips | 103,142 | 4,929,156 | ||||||
Det Norske Oljeselskap ASA(a) | 149,987 | 1,334,442 | ||||||
EOG Resources, Inc. | 88,689 | 7,327,485 | ||||||
Gran Tierra Energy, Inc.(a) | 207,720 | 612,548 | ||||||
Hess Corp. | 70,855 | 4,224,375 | ||||||
Inpex Corp. | 98,100 | 779,879 | ||||||
Murphy Oil Corp. | 54,590 | 1,951,047 | ||||||
Occidental Petroleum Corp. | 96,409 | 7,389,749 | ||||||
Pioneer Natural Resources Co. | 7,527 | 1,250,235 | ||||||
Woodside Petroleum Ltd. | 35,335 | 756,522 | ||||||
|
| |||||||
42,844,046 | ||||||||
|
| |||||||
Oil & Gas Refining & Marketing – 0.7% | ||||||||
Cosan SA Industria e Comercio | 82,300 | 761,920 | ||||||
JX Holdings, Inc. | 442,200 | 1,900,534 | ||||||
Tupras Turkiye Petrol Rafinerileri AS | 46,920 | 1,237,536 | ||||||
|
| |||||||
3,899,990 | ||||||||
|
| |||||||
152,221,242 | ||||||||
|
|
AB ALL MARKET REAL RETURN PORTFOLIO • | 15 |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Equity: Other – 8.8% | ||||||||
Diversified/Specialty – 6.8% | ||||||||
Alexandria Real Estate Equities, Inc. | 4,974 | $ | 462,333 | |||||
Armada Hoffler Properties, Inc. | 33,380 | 390,546 | ||||||
Ayala Land, Inc. | 696,260 | 513,717 | ||||||
Azrieli Group Ltd. | 2,418 | 96,864 | ||||||
Beni Stabili SpA SIIQ | 70,381 | 52,255 | ||||||
British Land Co. PLC (The) | 66,299 | 697,564 | ||||||
Bumi Serpong Damai Tbk PT | 513,600 | 71,699 | ||||||
Buzzi Unicem SpA | 24,870 | 472,394 | ||||||
CA Immobilien Anlagen AG(a) | 28,362 | 541,765 | ||||||
Canadian Real Estate Investment Trust | 4,912 | 173,390 | ||||||
CapitaLand Ltd. | 168,600 | 388,358 | ||||||
CBRE Group, Inc. – Class A(a) | 16,430 | 486,821 | ||||||
Central Pattana PCL | 89,851 | 135,690 | ||||||
Cheung Kong Property Holdings Ltd. | 400,500 | 2,735,210 | ||||||
Ciputra Development Tbk PT | 760,173 | 71,498 | ||||||
City Developments Ltd. | 41,400 | 256,074 | ||||||
Cofinimmo SA(a) | 1,329 | 165,203 | ||||||
Colony Starwood Homes | 35,080 | 854,900 | ||||||
Country Garden Holdings Co., Ltd. | 480,000 | 188,778 | ||||||
Dalian Wanda Commercial Properties Co., Ltd. – Class H(b)(c)(d) | 45,000 | 291,776 | ||||||
Digital Realty Trust, Inc. | 9,274 | 815,926 | ||||||
East Japan Railway Co. | 4,400 | 387,095 | ||||||
Emira Property Fund Ltd. | 243,820 | 273,361 | ||||||
Evergrande Real Estate Group Ltd. | 355,250 | 263,418 | ||||||
Fastighets AB Balder – Class B(a) | 6,015 | 153,425 | ||||||
Fibra Uno Administracion SA de CV | 155,170 | 368,609 | ||||||
Fonciere Des Regions(a) | 2,331 | 220,526 | ||||||
Forest City Realty Trust, Inc. – Class A | 17,824 | 370,383 | ||||||
Fortress Income Fund Ltd. – Class A | 35,319 | 39,716 | ||||||
Fortress Income Fund Ltd. – Class B | 35,319 | 93,447 | ||||||
Frasers Centrepoint Ltd. | 163,500 | 202,761 | ||||||
Fukuoka REIT Corp. | 210 | 382,730 | ||||||
Gecina SA | 2,459 | 355,349 | ||||||
Globe Trade Centre SA(a) | 22,291 | 41,172 | ||||||
Goldin Properties Holdings Ltd.(a) | 84,000 | 34,748 | ||||||
GPT Group (The) | 311,726 | 1,187,208 | ||||||
Gramercy Property Trust | 144,235 | 1,221,670 | ||||||
Great Portland Estates PLC | 22,410 | 248,487 | ||||||
Growthpoint Properties Ltd. | 166,863 | 295,290 | ||||||
H&R Real Estate Investment Trust | 18,832 | 329,001 | ||||||
Henderson Land Development Co., Ltd. | 66,457 | 414,196 | ||||||
Hufvudstaden AB – Class A | 7,235 | 112,276 | ||||||
Hulic Co., Ltd. | 23,750 | 236,383 | ||||||
IMMOFINANZ AG(a) | 431,620 | 1,018,177 | ||||||
IOI Properties Group Bhd | 128,900 | 79,851 | ||||||
Kaisa Group Holdings Ltd.(a)(c)(d) | 805,000 | 80,947 | ||||||
Kennedy Wilson Europe Real Estate PLC | 56,583 | 901,051 | ||||||
Kiwi Property Group Ltd. | 83,867 | 86,587 |
16 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
KLCCP Stapled Group | 30,200 | $ | 55,687 | |||||
Land & Houses PCL | 249,200 | 61,355 | ||||||
Land Securities Group PLC | 51,402 | 851,392 | ||||||
Lippo Karawaci Tbk PT | 1,265,600 | 97,242 | ||||||
Longfor Properties Co., Ltd. | 96,700 | 136,159 | ||||||
Mah Sing Group Bhd | 104,150 | 38,902 | ||||||
Mapletree Greater China Commercial Trust(b) | 125,000 | 95,562 | ||||||
Merlin Properties Socimi SA | 97,233 | 1,131,759 | ||||||
Mitsubishi Estate Co., Ltd. | 116,600 | 2,215,704 | ||||||
Mitsui Fudosan Co., Ltd. | 103,400 | 2,525,278 | ||||||
New World Development Co., Ltd. | 541,182 | 538,905 | ||||||
Nomura Real Estate Master Fund, Inc. | 235 | 368,656 | ||||||
Orix JREIT, Inc. | 153 | 254,837 | ||||||
Pakuwon Jati Tbk PT | 1,550,500 | 61,433 | ||||||
Premier Investment Corp. | 470 | 599,731 | ||||||
Pruksa Real Estate PCL | 44,500 | 32,805 | ||||||
Quality Houses PCL | 306,483 | 19,479 | ||||||
Redefine Properties Ltd. | 268,028 | 231,359 | ||||||
Resilient REIT Ltd. | 15,711 | 150,105 | ||||||
SA Corporate Real Estate Fund Nominees Pty Ltd. | 479,843 | 169,223 | ||||||
SM Prime Holdings, Inc. | 517,300 | 249,451 | ||||||
SP Setia Bhd Group | 59,900 | 49,374 | ||||||
Sponda Oyj | 15,599 | 67,929 | ||||||
STORE Capital Corp. | 35,580 | 913,339 | ||||||
Sumitomo Realty & Development Co., Ltd. | 61,700 | 1,794,006 | ||||||
Summarecon Agung Tbk PT | 721,800 | 85,159 | ||||||
Sun Hung Kai Properties Ltd. | 180,923 | 2,280,195 | ||||||
Sunac China Holdings Ltd. | 116,600 | 74,397 | ||||||
Suntec Real Estate Investment Trust | 160,000 | 199,908 | ||||||
Supalai PCL | 40,400 | 23,710 | ||||||
Swiss Prime Site AG (REG)(a) | 4,133 | 362,325 | ||||||
TLG Immobilien AG | 13,470 | 285,324 | ||||||
United Urban Investment Corp. | 438 | 755,990 | ||||||
UOL Group Ltd.(a) | 215,364 | 980,708 | ||||||
VEREIT, Inc. | 62,249 | 552,771 | ||||||
Wallenstam AB – Class B | 13,072 | 109,955 | ||||||
WHA Corp. PCL(a) | 266,200 | 23,168 | ||||||
Wharf Holdings Ltd. (The) | 88,000 | 475,078 | ||||||
WP Carey, Inc. | 6,037 | 368,800 | ||||||
|
| |||||||
38,547,785 | ||||||||
|
| |||||||
Health Care – 1.6% | ||||||||
Assura PLC | 288,170 | 238,530 | ||||||
Care Capital Properties, Inc. | 13,582 | 362,232 | ||||||
Chartwell Retirement Residences | 11,684 | 128,788 | ||||||
HCP, Inc. | 31,479 | 1,064,935 | ||||||
LTC Properties, Inc. | 16,470 | 764,043 | ||||||
Medical Properties Trust, Inc. | 43,430 | 578,053 | ||||||
Omega Healthcare Investors, Inc. | 11,278 | 380,858 | ||||||
Ventas, Inc. | 53,543 | 3,326,091 | ||||||
Welltower, Inc. | 31,608 | 2,194,228 | ||||||
|
| |||||||
9,037,758 | ||||||||
|
|
AB ALL MARKET REAL RETURN PORTFOLIO • | 17 |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Triple Net – 0.4% | ||||||||
National Retail Properties, Inc. | 28,926 | $ | 1,265,801 | |||||
Realty Income Corp. | 17,819 | 1,054,885 | ||||||
|
| |||||||
2,320,686 | ||||||||
|
| |||||||
49,906,229 | ||||||||
|
| |||||||
Materials – 7.3% | ||||||||
Commodity Chemicals – 0.4% | ||||||||
LyondellBasell Industries NV – Class A | 25,480 | 2,106,432 | ||||||
|
| |||||||
Diversified Chemicals – 0.2% | ||||||||
Arkema SA | 15,332 | 1,223,746 | ||||||
|
| |||||||
Diversified Metals & Mining – 2.5% | ||||||||
Antofagasta PLC | 143,740 | 1,018,004 | ||||||
Boliden AB | 58,600 | 1,024,934 | ||||||
First Quantum Minerals Ltd. | 134,060 | 1,142,187 | ||||||
Glencore PLC(a) | 1,526,046 | 3,647,125 | ||||||
Korea Zinc Co., Ltd. | 2,450 | 1,062,394 | ||||||
Lundin Mining Corp.(a) | 164,300 | 645,572 | ||||||
Rio Tinto PLC | 118,040 | 3,959,807 | ||||||
South32 Ltd.(a) | 818,580 | 1,023,747 | ||||||
Syrah Resources Ltd.(a) | 170,230 | 607,483 | ||||||
|
| |||||||
14,131,253 | ||||||||
|
| |||||||
Fertilizers & Agricultural Chemicals – 1.2% | ||||||||
Agrium, Inc. (Toronto) | 5,012 | 431,894 | ||||||
CF Industries Holdings, Inc. | 8,364 | 276,598 | ||||||
Monsanto Co. | 33,268 | 3,116,546 | ||||||
Potash Corp. of Saskatchewan, Inc. | 30,968 | 547,931 | ||||||
Syngenta AG (REG) | 3,339 | 1,339,490 | ||||||
UPL Ltd. | 158,480 | 1,287,067 | ||||||
|
| |||||||
6,999,526 | ||||||||
|
| |||||||
Forest Products – 0.0% | ||||||||
West Fraser Timber Co., Ltd. | 2,524 | 83,161 | ||||||
|
| |||||||
Gold – 1.7% | ||||||||
Agnico Eagle Mines Ltd. | 32,207 | 1,522,433 | ||||||
Barrick Gold Corp. | 33,890 | 656,449 | ||||||
Barrick Gold Corp. (Toronto) | 69,604 | 1,347,478 | ||||||
Franco-Nevada Corp. | 8,769 | 615,724 | ||||||
Goldcorp, Inc. | 125,997 | 2,538,619 | ||||||
Newcrest Mining Ltd.(a) | 41,327 | 602,615 | ||||||
Newmont Mining Corp. | 30,792 | 1,076,796 | ||||||
Randgold Resources Ltd. | 14,134 | 1,411,820 | ||||||
Real Gold Mining Ltd.(a)(c)(d) | 124,500 | – 0 | –^ | |||||
|
| |||||||
9,771,934 | ||||||||
|
| |||||||
Paper Packaging – 0.3% | ||||||||
International Paper Co. | 14,773 | 639,228 | ||||||
Smurfit Kappa Group PLC | 31,450 | 833,646 | ||||||
|
| |||||||
1,472,874 | ||||||||
|
|
18 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Paper Products – 0.2% | ||||||||
Mondi PLC | 38,183 | $ | 731,378 | |||||
Oji Holdings Corp. | 29,000 | 119,090 | ||||||
Stora Enso Oyj – Class R | 19,796 | 173,078 | ||||||
UPM-Kymmene Oyj | 19,368 | 370,744 | ||||||
|
| |||||||
1,394,290 | ||||||||
|
| |||||||
Precious Metals & Minerals – 0.1% | ||||||||
Fresnillo PLC | 12,143 | 197,938 | ||||||
Industrias Penoles SAB de CV | 7,793 | 121,751 | ||||||
Silver Wheaton Corp. | 22,914 | 480,122 | ||||||
|
| |||||||
799,811 | ||||||||
|
| |||||||
Silver – 0.2% | ||||||||
Silver Wheaton Corp. | 42,990 | 900,779 | ||||||
|
| |||||||
Specialty Chemicals – 0.1% | ||||||||
Johnson Matthey PLC | 12,674 | 535,665 | ||||||
|
| |||||||
Steel – 0.4% | ||||||||
NLMK PJSC (GDR)(b) | 67,720 | 919,872 | ||||||
Severstal PAO (GDR)(b) | 53,830 | 626,919 | ||||||
voestalpine AG | 16,120 | 581,688 | ||||||
|
| |||||||
2,128,479 | ||||||||
|
| |||||||
41,547,950 | ||||||||
|
| |||||||
Residential – 5.9% | ||||||||
Multi-Family – 4.6% | ||||||||
Advance Residence Investment Corp. | 85 | 228,937 | ||||||
Apartment Investment & Management Co. – Class A | 10,666 | 427,280 | ||||||
AvalonBay Communities, Inc. | 22,072 | 3,902,109 | ||||||
BUWOG AG(a) | 3,923 | 82,585 | ||||||
Camden Property Trust | 15,498 | 1,251,154 | ||||||
Canadian Apartment Properties REIT | 7,462 | 177,406 | ||||||
China Overseas Land & Investment Ltd. | 834,140 | 2,647,782 | ||||||
China Resources Land Ltd. | 733,908 | 1,801,101 | ||||||
China Vanke Co., Ltd. – Class H | 227,574 | 569,783 | ||||||
CIFI Holdings Group Co., Ltd. | 1,414,000 | 327,212 | ||||||
Comforia Residential REIT, Inc. | 171 | 388,121 | ||||||
Corp. GEO SAB de CV Series B(a) | 236 | 127 | ||||||
Cyrela Brazil Realty SA Empreendimentos e Participacoes | 18,000 | 53,750 | ||||||
Desarrolladora Homex SAB de CV(a) | 1,460 | 289 | ||||||
Deutsche Wohnen AG | 22,404 | 686,948 | ||||||
Emlak Konut Gayrimenkul Yatirim Ortakligi AS | 499,408 | 536,723 | ||||||
Equity Residential | 33,307 | 2,267,207 | ||||||
Essex Property Trust, Inc. | 4,471 | 985,632 | ||||||
Greentown China Holdings Ltd.(a) | 269,500 | 199,929 | ||||||
Independence Realty Trust, Inc. | 120,160 | 861,547 | ||||||
Kenedix Residential Investment Corp. | 130 | 364,455 | ||||||
Killam Apartment Real Estate Investment Trust | 45,570 | 427,480 | ||||||
LEG Immobilien AG(a) | 3,829 | 355,194 |
AB ALL MARKET REAL RETURN PORTFOLIO • | 19 |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Mid-America Apartment Communities, Inc. | 16,832 | $ | 1,610,990 | |||||
Mirvac Group | 473,460 | 669,866 | ||||||
MRV Engenharia e Participacoes SA | 18,450 | 64,482 | ||||||
Shenzhen Investment Ltd. | 192,000 | 77,202 | ||||||
Shimao Property Holdings Ltd. | 82,500 | 113,864 | ||||||
Sino-Ocean Land Holdings Ltd. | 239,080 | 107,216 | ||||||
Stockland | 150,545 | 497,927 | ||||||
Sun Communities, Inc. | 14,556 | 987,916 | ||||||
UDR, Inc. | 17,751 | 619,865 | ||||||
UNITE Group PLC (The) | 81,573 | 754,308 | ||||||
Urbi Desarrollos Urbanos SAB de CV(a)(c)(d) | 120,400 | – 0 | –^ | |||||
Vonovia SE | 44,901 | 1,513,530 | ||||||
Wing Tai Holdings Ltd. | 620,000 | 863,013 | ||||||
|
| |||||||
26,422,930 | ||||||||
|
| |||||||
Self Storage – 1.3% | ||||||||
Big Yellow Group PLC | 43,380 | 510,992 | ||||||
CubeSmart | 28,784 | 852,294 | ||||||
Extra Space Storage, Inc. | 18,416 | 1,564,439 | ||||||
National Storage Affiliates Trust | 11,151 | 217,668 | ||||||
Public Storage | 12,569 | 3,077,017 | ||||||
Safestore Holdings PLC | 68,550 | 339,855 | ||||||
Sovran Self Storage, Inc. | 6,970 | 740,353 | ||||||
|
| |||||||
7,302,618 | ||||||||
|
| |||||||
33,725,548 | ||||||||
|
| |||||||
Retail – 5.7% | ||||||||
Regional Mall – 2.4% | ||||||||
BR Malls Participacoes SA | 27,840 | 137,045 | ||||||
CapitaLand Mall Trust | 171,300 | 262,971 | ||||||
General Growth Properties, Inc. | 41,687 | 1,168,487 | ||||||
Macerich Co. (The) | 10,735 | 816,719 | ||||||
Multiplan Empreendimentos Imobiliarios SA | 4,980 | 85,359 | ||||||
Pennsylvania Real Estate Investment Trust | 23,990 | 550,331 | ||||||
Simon Property Group, Inc. | 42,544 | 8,558,576 | ||||||
Westfield Corp. | 280,623 | 2,143,287 | ||||||
|
| |||||||
13,722,775 | ||||||||
|
| |||||||
Shopping Center/Other Retail – 3.3% | ||||||||
Aeon Mall Co., Ltd. | 25,400 | 349,330 | ||||||
Capital & Counties Properties PLC | 46,655 | 241,388 | ||||||
Capitaland Malaysia Mall Trust | 72,900 | 26,853 | ||||||
Citycon Oyj | 25,490 | 64,631 | ||||||
DDR Corp. | 47,763 | 835,852 | ||||||
Federal Realty Investment Trust | 4,673 | 710,670 | ||||||
Fibra Shop Portafolios Inmobiliarios SAPI de CV | 452,304 | 436,408 | ||||||
Frontier Real Estate Investment Corp. | 92 | 461,466 | ||||||
Hammerson PLC | 50,485 | 432,046 | ||||||
Hyprop Investments Ltd. | 42,535 | 366,775 | ||||||
IGB Real Estate Investment Trust | 110,100 | 42,557 | ||||||
Intu Properties PLC | 60,614 | 269,924 | ||||||
Japan Retail Fund Investment Corp. | 161 | 395,556 |
20 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Kimco Realty Corp. | 28,090 | $ | 789,891 | |||||
Kite Realty Group Trust | 31,380 | 854,477 | ||||||
Klepierre | 32,431 | 1,525,310 | ||||||
Link REIT | 326,923 | 1,981,299 | ||||||
Mercialys SA | 29,660 | 660,649 | ||||||
Ramco-Gershenson Properties Trust | 48,983 | 867,489 | ||||||
Regency Centers Corp. | 24,058 | 1,773,075 | ||||||
Retail Opportunity Investments Corp. | 25,637 | 504,280 | ||||||
RioCan Real Estate Investment Trust (Toronto) | 21,724 | 472,329 | ||||||
Scentre Group | 603,779 | 2,143,125 | ||||||
Shaftesbury PLC | 18,034 | 239,879 | ||||||
Smart Real Estate Investment Trust | 7,519 | 201,833 | ||||||
Unibail-Rodamco SE | 6,368 | 1,706,912 | ||||||
Vicinity Centres | 233,980 | 588,129 | ||||||
|
| |||||||
18,942,133 | ||||||||
|
| |||||||
32,664,908 | ||||||||
|
| |||||||
Office – 3.0% | ||||||||
Office – 3.0% | ||||||||
Allied Properties Real Estate Investment Trust | 25,473 | 717,678 | ||||||
alstria office REIT-AG(a) | 80,173 | 1,125,769 | ||||||
Ascendas India Trust | 45,900 | 32,594 | ||||||
Befimmo SA | 1,103 | 73,772 | ||||||
Boston Properties, Inc. | 25,234 | 3,251,653 | ||||||
Brandywine Realty Trust | 62,870 | 939,906 | ||||||
Castellum AB | 10,700 | 171,398 | ||||||
Cominar Real Estate Investment Trust | 11,472 | 157,995 | ||||||
Derwent London PLC | 6,442 | 309,617 | ||||||
Dream Office Real Estate Investment Trust | 36,075 | 602,064 | ||||||
Entra ASA(b) | 4,099 | 38,706 | ||||||
Fabege AB | 8,676 | 144,884 | ||||||
Green REIT PLC | 43,704 | 72,162 | ||||||
Highwoods Properties, Inc. | 17,330 | 809,831 | ||||||
Hongkong Land Holdings Ltd. | 77,800 | 492,841 | ||||||
ICADE | 8,940 | 703,341 | ||||||
Ichigo Office REIT Investment | 594 | 459,977 | ||||||
Inmobiliaria Colonial SA(a) | 1,166,909 | 896,451 | ||||||
Investa Office Fund | 160,050 | 505,361 | ||||||
Japan Real Estate Investment Corp. | 80 | 498,161 | ||||||
Kenedix Office Investment Corp. – Class A | 127 | 743,593 | ||||||
Kilroy Realty Corp. | 6,323 | 409,794 | ||||||
Liberty Property Trust | 10,245 | 357,551 | ||||||
Mori Hills REIT Investment Corp. | 253 | 379,647 | ||||||
Nippon Building Fund, Inc. | 89 | 563,815 | ||||||
Norwegian Property ASA(a) | 16,700 | 18,646 | ||||||
PSP Swiss Property AG (REG) | 2,632 | 253,841 | ||||||
SL Green Realty Corp. | 6,796 | 714,124 | ||||||
Vornado Realty Trust | 11,687 | 1,118,797 | ||||||
Workspace Group PLC | 57,349 | 700,299 | ||||||
|
| |||||||
17,264,268 | ||||||||
|
|
AB ALL MARKET REAL RETURN PORTFOLIO • | 21 |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Industrials – 1.9% | ||||||||
Industrial Warehouse Distribution – 1.4% | ||||||||
Ascendas Real Estate Investment Trust | 129,200 | $ | 235,801 | |||||
DCT Industrial Trust, Inc. | 24,750 | 999,158 | ||||||
Duke Realty Corp. | 23,622 | 516,613 | ||||||
Global Logistic Properties Ltd. | 205,700 | 291,693 | ||||||
GLP J-Reit | 398 | 483,453 | ||||||
Granite Real Estate Investment Trust | 14,058 | 419,069 | ||||||
Macquarie Mexico Real Estate Management SA de CV(a) | 378,169 | 525,337 | ||||||
PLA Administradora Industrial S de RL de CV(a) | 170,060 | 312,747 | ||||||
Prologis, Inc. | 50,543 | 2,295,157 | ||||||
Pure Industrial Real Estate Trust | 100,660 | 401,132 | ||||||
Rexford Industrial Realty, Inc. | 46,450 | 871,867 | ||||||
Segro PLC | 47,935 | 292,876 | ||||||
Warehouses De Pauw CVA | 5,100 | 464,611 | ||||||
|
| |||||||
8,109,514 | ||||||||
|
| |||||||
Mixed Office Industrial – 0.5% | ||||||||
Axiare Patrimonio SOCIMI SA | 31,140 | 474,236 | ||||||
BR Properties SA | 12,640 | 37,745 | ||||||
Goodman Group | 269,617 | 1,404,667 | ||||||
Kungsleden AB | 76,252 | 524,888 | ||||||
|
| |||||||
2,441,536 | ||||||||
|
| |||||||
10,551,050 | ||||||||
|
| |||||||
Lodging – 0.7% | ||||||||
Lodging – 0.7% | ||||||||
Chesapeake Lodging Trust | 32,160 | 792,101 | ||||||
Host Hotels & Resorts, Inc. | 52,851 | 836,103 | ||||||
Pebblebrook Hotel Trust | 18,890 | 522,120 | ||||||
RLJ Lodging Trust | 26,498 | 558,313 | ||||||
Summit Hotel Properties, Inc. | 67,010 | 763,914 | ||||||
Wyndham Worldwide Corp. | 5,070 | 359,716 | ||||||
|
| |||||||
3,832,267 | ||||||||
|
| |||||||
Food Beverage & Tobacco – 0.6% | ||||||||
Agricultural Products – 0.5% | ||||||||
Archer-Daniels-Midland Co. | 52,129 | 2,082,032 | ||||||
Bunge Ltd. | 5,458 | 341,125 | ||||||
Wilmar International Ltd. | 70,700 | 194,211 | ||||||
|
| |||||||
2,617,368 | ||||||||
|
| |||||||
Packaged Foods & Meats – 0.1% | ||||||||
Tyson Foods, Inc. – Class A | 8,750 | 575,925 | ||||||
|
| |||||||
3,193,293 | ||||||||
|
| |||||||
Real Estate – 0.2% | ||||||||
Developers – 0.0% | ||||||||
Daelim Industrial Co., Ltd. | 3,160 | 250,078 | ||||||
|
| |||||||
Diversified Real Estate Activities – 0.2% | ||||||||
MMC Norilsk Nickel PJSC (ADR) | 64,370 | 950,963 | ||||||
|
| |||||||
1,201,041 | ||||||||
|
|
22 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Mortgage – 0.2% | ||||||||
Mortgage – 0.2% | ||||||||
Blackstone Mortgage Trust, Inc. – Class A | 14,360 | $ | 394,613 | |||||
Concentradora Hipotecaria SAPI de CV | 251,130 | 364,478 | ||||||
First American Financial Corp. | 10,240 | 368,845 | ||||||
|
| |||||||
1,127,936 | ||||||||
|
| |||||||
Total Common Stocks | 347,235,732 | |||||||
|
| |||||||
Principal Amount (000) | ||||||||
INFLATION-LINKED SECURITIES – 20.4% |
| |||||||
United States – 20.4% | ||||||||
U.S. Treasury Inflation Index | ||||||||
Total Inflation-Linked Securities | $ | 112,855 | 115,924,879 | |||||
|
| |||||||
Shares | ||||||||
INVESTMENT COMPANIES – 5.5% | ||||||||
Funds and Investment Trusts – 5.5% | ||||||||
iShares US Real Estate ETF | 27,630 | 2,118,392 | ||||||
SPDR S&P Dividend ETF | 217,450 | 17,546,040 | ||||||
Vanguard Dividend Appreciation ETF | 139,820 | 11,322,624 | ||||||
|
| |||||||
Total Investment Companies | 30,987,056 | |||||||
|
| |||||||
WARRANTS – 0.1% | ||||||||
Equity: Other – 0.1% | ||||||||
Diversified/Specialty – 0.0% | ||||||||
Eastern & Oriental Bhd, | 12,100 | 596 | ||||||
|
| |||||||
Health Care – 0.1% | ||||||||
Emaar Properties PJSC, Merrill Lynch Intl & Co., expiring 9/06/18(a) | 75,327 | 139,479 | ||||||
|
| |||||||
140,075 | ||||||||
|
| |||||||
Financial: Other – 0.0% | ||||||||
Financial: Other – 0.0% | ||||||||
DLF Ltd., Merrill Lynch Intl & Co., expiring 5/23/18(a) | 29,860 | 58,219 | ||||||
|
| |||||||
Total Warrants | 198,294 | |||||||
|
|
AB ALL MARKET REAL RETURN PORTFOLIO • | 23 |
Consolidated Portfolio of Investments
Company | Contracts | U.S. $ Value | ||||||
| ||||||||
OPTIONS PURCHASED – CALLS – 0.0% | ||||||||
Options on Equity Indices – 0.0% | ||||||||
PowerShares DB US Dollar Index Bullish Fund Expiration: Jun 2016, | 5,100 | $ | 30,600 | |||||
PowerShares DB US Dollar Index Bullish Fund Expiration: Jun 2016, | 63,749 | 159,373 | ||||||
|
| |||||||
Total Options Purchased – Calls | 189,973 | |||||||
|
| |||||||
Shares | ||||||||
SHORT-TERM INVESTMENTS – 10.7% | ||||||||
Investment Companies – 10.7% | ||||||||
AB Fixed Income Shares, Inc. – Government STIF Portfolio, 0.36%(g)(h) | 60,779,634 | 60,779,634 | ||||||
|
| |||||||
Total Investments – 97.8% | 555,315,568 | |||||||
Other assets less liabilities – 2.2% | 12,694,038 | |||||||
|
| |||||||
Net Assets – 100.0% | $ | 568,009,606 | ||||||
|
|
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at April 30, 2016 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Purchased Contracts |
| |||||||||||||||||||
Cattle Feeder Futures | 18 | August 2016 | $ | 1,302,039 | $ | 1,263,375 | $ | (38,664 | ) | |||||||||||
Copper Futures | 16 | July 2016 | 868,839 | 913,400 | 44,561 | |||||||||||||||
Corn Futures | 69 | July 2016 | 1,262,041 | 1,351,537 | 89,496 | |||||||||||||||
Gasoline RBOB Futures | 86 | May 2016 | 4,602,785 | 5,795,093 | 1,192,308 | |||||||||||||||
Gasoline RBOB Futures | 47 | June 2016 | 2,557,261 | 3,174,982 | 617,721 | |||||||||||||||
Gold 100 OZ Futures | 91 | June 2016 | 11,137,131 | 11,743,550 | 606,419 | |||||||||||||||
KC HRW Wheat Futures | 14 | July 2016 | 320,466 | 334,950 | 14,484 | |||||||||||||||
Live Cattle Futures | 28 | June 2016 | 1,354,946 | 1,287,160 | (67,786 | ) | ||||||||||||||
LME Nickel Futures | 15 | May 2016 | 764,828 | 847,530 | 82,702 | |||||||||||||||
LME Zinc Futures | 9 | June 2016 | 426,632 | 435,375 | 8,743 | |||||||||||||||
Palladium Futures | 9 | June 2016 | 449,483 | 564,885 | 115,402 | |||||||||||||||
Platinum Futures | 5 | July 2016 | 249,838 | 269,600 | 19,762 | |||||||||||||||
Silver Futures | 78 | July 2016 | 6,614,076 | 6,949,410 | 335,334 | |||||||||||||||
Soybean Futures | 31 | July 2016 | 1,464,842 | 1,596,113 | 131,271 | |||||||||||||||
Soybean Meal Futures | 47 | July 2016 | 1,374,978 | 1,573,560 | 198,582 | |||||||||||||||
Sold Contracts | ||||||||||||||||||||
LME Nickel Futures | 8 | May 2016 | 436,724 | 452,016 | (15,292 | ) | ||||||||||||||
LME PRI Aluminum Futures | 46 | June 2016 | 1,820,597 | 1,931,713 | (111,116 | ) | ||||||||||||||
|
| |||||||||||||||||||
$ | 3,223,927 | |||||||||||||||||||
|
|
24 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note D)
Counterparty | Contracts to Deliver | In Exchange For | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
Bank of America, NA | JPY | 598,476 | USD | 5,386 | 6/17/16 | $ | (244,539 | ) | ||||||||||||||||
Bank of America, NA | SEK | 10,036 | USD | 1,188 | 6/17/16 | (63,279 | ) | |||||||||||||||||
Bank of America, NA | USD | 2,554 | JPY | 287,240 | 6/17/16 | 148,717 | ||||||||||||||||||
Bank of America, NA | USD | 3,121 | RUB | 243,742 | 6/17/16 | 599,470 | ||||||||||||||||||
Bank of America, NA | USD | 3,467 | RUB | 226,995 | 6/17/16 | (1,511 | ) | |||||||||||||||||
Barclays Bank PLC | AUD | 5,200 | USD | 3,853 | 6/17/16 | (93,221 | ) | |||||||||||||||||
Barclays Bank PLC | EUR | 1,262 | USD | 1,377 | 6/17/16 | (69,851 | ) | |||||||||||||||||
Barclays Bank PLC | GBP | 5,237 | USD | 7,299 | 6/17/16 | (353,892 | ) | |||||||||||||||||
Barclays Bank PLC | INR | 55,489 | USD | 812 | 6/17/16 | (16,798 | ) | |||||||||||||||||
Barclays Bank PLC | KRW | 5,460,984 | USD | 4,505 | 6/17/16 | (254,855 | ) | |||||||||||||||||
Barclays Bank PLC | TWD | 134,575 | USD | 4,089 | 6/17/16 | (76,909 | ) | |||||||||||||||||
Barclays Bank PLC | USD | 3,551 | EUR | 3,112 | 6/17/16 | 17,519 | ||||||||||||||||||
Barclays Bank PLC | USD | 1,618 | JPY | 179,774 | 6/17/16 | 73,092 | ||||||||||||||||||
Barclays Bank PLC | USD | 5,973 | RUB | 437,081 | 6/17/16 | 699,030 | ||||||||||||||||||
BNP Paribas SA | USD | 5,669 | JPY | 604,411 | 6/17/16 | 18,299 | ||||||||||||||||||
BNP Paribas SA | USD | 10,833 | NOK | 89,099 | 6/17/16 | 230,045 | ||||||||||||||||||
BNP Paribas SA | USD | 568 | SGD | 788 | 6/17/16 | 16,941 | ||||||||||||||||||
Citibank | EUR | 26,798 | USD | 29,868 | 6/17/16 | (858,445 | ) | |||||||||||||||||
Citibank | GBP | 2,968 | USD | 4,224 | 6/17/16 | (113,506 | ) | |||||||||||||||||
Deutsche Bank AG | BRL | 4,054 | USD | 1,147 | 5/03/16 | (31,279 | ) | |||||||||||||||||
Deutsche Bank AG | USD | 1,175 | BRL | 4,054 | 5/03/16 | 3,945 | ||||||||||||||||||
Deutsche Bank AG | USD | 1,127 | BRL | 4,054 | 7/05/16 | 28,264 | ||||||||||||||||||
Goldman Sachs Bank USA | JPY | 396,789 | USD | 3,539 | 6/17/16 | (194,341 | ) | |||||||||||||||||
Goldman Sachs Bank USA | RUB | 192,367 | USD | 2,750 | 6/17/16 | (186,846 | ) | |||||||||||||||||
Goldman Sachs Bank USA | USD | 4,207 | CNY | 27,428 | 6/17/16 | 14,535 | ||||||||||||||||||
Goldman Sachs Bank USA | USD | 8,966 | JPY | 1,005,295 | 6/17/16 | 493,177 | ||||||||||||||||||
Goldman Sachs Bank USA | USD | 2,292 | RUB | 174,276 | 6/17/16 | 368,757 | ||||||||||||||||||
HSBC Bank USA | CAD | 1,869 | USD | 1,406 | 6/17/16 | (83,144 | ) | |||||||||||||||||
HSBC Bank USA | GBP | 1,153 | USD | 1,647 | 6/17/16 | (38,277 | ) | |||||||||||||||||
HSBC Bank USA | USD | 5,197 | CAD | 6,560 | 6/17/16 | 31,594 | ||||||||||||||||||
HSBC Bank USA | USD | 1,565 | SEK | 12,839 | 6/17/16 | 35,863 | ||||||||||||||||||
JPMorgan Chase Bank | NOK | 42,726 | USD | 5,024 | 6/17/16 | (281,769 | ) | |||||||||||||||||
JPMorgan Chase Bank | USD | 4,332 | GBP | 3,028 | 6/17/16 | 92,548 | ||||||||||||||||||
JPMorgan Chase Bank | USD | 2,448 | JPY | 265,759 | 6/17/16 | 52,794 | ||||||||||||||||||
JPMorgan Chase Bank | USD | 5,681 | NOK | 45,824 | 6/17/16 | 8,853 | ||||||||||||||||||
JPMorgan Chase Bank | USD | 5,343 | TRY | 15,678 | 6/17/16 | 190,989 | ||||||||||||||||||
Morgan Stanley & Co., Inc. | EUR | 1,688 | USD | 1,914 | 6/17/16 | (21,874 | ) | |||||||||||||||||
Morgan Stanley & Co., Inc. | USD | 5,690 | AUD | 7,366 | 6/17/16 | (99,308 | ) | |||||||||||||||||
Morgan Stanley & Co., Inc. | USD | 5,598 | AUD | 7,382 | 6/17/16 | 4,712 | ||||||||||||||||||
Morgan Stanley & Co., Inc. | USD | 10,696 | EUR | 9,519 | 6/17/16 | 218,356 | ||||||||||||||||||
Morgan Stanley & Co., Inc. | USD | 2,324 | ZAR | 36,491 | 6/17/16 | 216,489 | ||||||||||||||||||
Nomura Global Financial Products, Inc. | JPY | 329,801 | USD | 2,950 | 6/17/16 | (152,771 | ) | |||||||||||||||||
Nomura Global Financial Products, Inc. | USD | 4,863 | TWD | 156,895 | 6/17/16 | (7,116 | ) | |||||||||||||||||
Royal Bank of Scotland PLC | GBP | 1,376 | USD | 1,968 | 6/17/16 | (43,159 | ) | |||||||||||||||||
Royal Bank of Scotland PLC | USD | 5,691 | BRL | 20,861 | 6/17/16 | 287,694 | ||||||||||||||||||
Royal Bank of Scotland PLC | USD | 5,083 | CAD | 6,633 | 6/17/16 | 203,428 | ||||||||||||||||||
Royal Bank of Scotland PLC | USD | 3,210 | HKD | 24,889 | 6/17/16 | 259 | ||||||||||||||||||
Royal Bank of Scotland PLC | USD | 4,841 | KRW | 5,604,850 | 6/17/16 | 44,285 | ||||||||||||||||||
Royal Bank of Scotland PLC | USD | 887 | MYR | 3,695 | 6/17/16 | 55,166 | ||||||||||||||||||
Royal Bank of Scotland PLC | USD | 5,179 | ZAR | 82,675 | 6/17/16 | 577,306 | ||||||||||||||||||
Societe Generale | EUR | 3,112 | USD | 3,457 | 6/17/16 | (111,670 | ) | |||||||||||||||||
Societe Generale | NOK | 47,032 | USD | 5,471 | 6/17/16 | (369,096 | ) |
AB ALL MARKET REAL RETURN PORTFOLIO • | 25 |
Consolidated Portfolio of Investments
Counterparty | Contracts to Deliver (000) | In Exchange For | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
Standard Chartered Bank | CNY | 23,168 | USD | 3,524 | 6/17/16 | $ | (41,197 | ) | ||||||||||||||||
Standard Chartered Bank | GBP | 2,012 | USD | 2,859 | 6/17/16 | (81,245 | ) | |||||||||||||||||
Standard Chartered Bank | USD | 754 | IDR | 10,096,953 | 6/17/16 | 5,188 | ||||||||||||||||||
State Street Bank & Trust Co. | USD | 1,009 | BRL | 4,054 | 5/03/16 | 170,087 | ||||||||||||||||||
State Street Bank & Trust Co. | CAD | 16,175 | USD | 12,080 | 6/17/16 | (812,018 | ) | |||||||||||||||||
State Street Bank & Trust Co. | EUR | 1,163 | USD | 1,300 | 6/17/16 | (33,819 | ) | |||||||||||||||||
State Street Bank & Trust Co. | NOK | 2,365 | USD | 278 | 6/17/16 | (15,407 | ) | |||||||||||||||||
State Street Bank & Trust Co. | NZD | 58 | USD | 39 | 6/17/16 | (1,454 | ) | |||||||||||||||||
State Street Bank & Trust Co. | TRY | 3,455 | USD | 1,154 | 6/17/16 | (65,750 | ) | |||||||||||||||||
State Street Bank & Trust Co. | USD | 4,583 | JPY | 516,306 | 6/17/16 | 274,495 | ||||||||||||||||||
State Street Bank & Trust Co. | USD | 5,766 | NOK | 49,397 | 6/17/16 | 367,842 | ||||||||||||||||||
UBS AG | CAD | 2,600 | USD | 1,897 | 6/17/16 | (175,176 | ) | |||||||||||||||||
UBS AG | USD | 1,729 | CHF | 1,709 | 6/17/16 | 55,607 | ||||||||||||||||||
|
| |||||||||||||||||||||||
$ | 611,824 | |||||||||||||||||||||||
|
|
INFLATION (CPI) SWAPS (see Note D)
Rate Type | ||||||||||||||||
Swap Counterparty | Notional Amount (000) | Termination Date | Payments made by the | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
Deutsche Bank AG | $ | 43,120 | 3/09/19 | 1.508% | CPI# | $ | 221,811 | |||||||||
Deutsche Bank AG | 8,719 | 3/25/25 | 2.205% | CPI# | (88,056 | ) | ||||||||||
Deutsche Bank AG | 38,982 | 3/25/25 | 2.205% | CPI# | (393,691 | ) | ||||||||||
Deutsche Bank AG | 46,779 | 3/25/25 | 2.205% | CPI# | (472,435 | ) | ||||||||||
Deutsche Bank AG | 18,987 | 3/26/25 | 2.195% | CPI# | (182,288 | ) | ||||||||||
Deutsche Bank AG | 37,975 | 3/26/25 | 2.170% | CPI# | (318,556 | ) | ||||||||||
Deutsche Bank AG | 54,500 | 7/30/25 | 2.278% | CPI# | (656,629 | ) | ||||||||||
JPMorgan Chase Bank, NA | 76,719 | 3/30/25 | 2.170% | CPI# | (637,744 | ) | ||||||||||
JPMorgan Chase Bank, NA | 76,719 | 4/01/25 | 2.170% | CPI# | (637,425 | ) | ||||||||||
|
| |||||||||||||||
$ | (3,165,013 | ) | ||||||||||||||
|
|
# | 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 |
| |||||||||||||||||||
Goldman Sachs International Bloomberg Commodity Index 2 Month Forwards | 457,386 | 0.11 | % | 81,292 | 6/15/16 | $ | 5,026,520 | |||||||||||||
JPMorgan Chase Bank, NA BBG industrial Metals | 29,150 | 0.09 | % | 2,737 | 7/15/16 | 150,059 | ||||||||||||||
BBG industrial Metals | 28,610 | 0.09 | % | 2,780 | 7/15/16 | 54,112 | ||||||||||||||
Bloomberg Agriculture Subindex | 99,297 | 0.15 | % | 5,615 | 7/15/16 | 50,483 | ||||||||||||||
Bloomberg Commodity Index 2 Month Forwards | 478,021 | 0.11 | % | 84,960 | 6/15/16 | 5,253,292 | ||||||||||||||
Bloomberg Commodity Index 2 Month Forwards | 55,933 | 0.11 | % | 9,941 | 6/15/16 | 614,685 | ||||||||||||||
|
| |||||||||||||||||||
$ | 11,149,151 | |||||||||||||||||||
|
|
26 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Portfolio of Investments
^ | 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 April 30, 2016, the aggregate market value of these securities amounted to $2,820,542 or 0.5% of net assets. |
(c) | Illiquid security. |
(d) | Fair valued by the Adviser. |
(e) | Position, or a portion thereof, has been segregated to collateralize OTC derivatives outstanding. |
(f) | One contract relates to 100 shares. |
(g) | Investment in affiliated money market mutual fund. The rate shown represents the 7-day yield as of period end. |
(h) | 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
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
TRY – Turkish Lira
TWD – New Taiwan Dollar
USD – United States Dollar
ZAR – South African Rand
Glossary:
ADR – American Depositary Receipt
ETF – Exchange Traded Fund
GDR – Global Depositary Receipt
J-REIT – Japanese Real Estate Investment Trust
KC HRW – Kansas City Hard Red Winter
LME – London Metal Exchange
PJSC – Public Joint Stock Company
REG – Registered Shares
REIT – Real Estate Investment Trust
SPDR – Standard & Poor’s Depository Receipt
See notes to consolidated financial statements.
AB ALL MARKET REAL RETURN PORTFOLIO • | 27 |
Consolidated Portfolio of Investments
CONSOLIDATED STATEMENT OF ASSETS & LIABILITIES
April 30, 2016 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $486,760,676) | $ | 494,535,934 | ||
Affiliated issuers (cost $60,779,634) | 60,779,634 | |||
Cash collateral due from broker | 2,244,995 | |||
Foreign currencies, at value (cost $2,522,383) | 2,545,230 | |||
Unrealized appreciation on total return swaps | 11,149,151 | |||
Unrealized appreciation on forward currency exchange contracts | 5,605,346 | |||
Receivable for investment securities sold and foreign currency transactions | 3,550,043 | |||
Interest and dividends receivable | 1,447,406 | |||
Receivable for capital stock sold | 789,412 | |||
Receivable for variation margin on exchange-traded derivatives | 325,292 | |||
Unrealized appreciation on inflation swaps | 221,811 | |||
|
| |||
Total assets | 583,194,254 | |||
|
| |||
Liabilities | ||||
Unrealized depreciation on forward currency exchange contracts | 4,993,522 | |||
Cash collateral due to broker | 3,830,000 | |||
Unrealized depreciation on inflation swaps | 3,386,824 | |||
Payable for investment securities purchased and foreign currency transactions | 1,222,726 | |||
Payable for capital stock redeemed | 1,033,910 | |||
Management fee payable | 346,545 | |||
Distribution fee payable | 107,219 | |||
Transfer Agent fee payable | 36,055 | |||
Administrative fee payable | 13,717 | |||
Accrued expenses and other liabilities | 214,130 | |||
|
| |||
Total liabilities | 15,184,648 | |||
|
| |||
Net Assets | $ | 568,009,606 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 70,941 | ||
Additional paid-in capital | 673,514,895 | |||
Undistributed net investment income | 217,854 | |||
Accumulated net realized loss on investment and foreign currency transactions | (125,236,706 | ) | ||
Net unrealized appreciation on investments and foreign currency denominated assets and liabilities | 19,442,622 | |||
|
| |||
$ | 568,009,606 | |||
|
|
See notes to consolidated financial statements.
28 | • 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 | $ | 13,837,483 | 1,702,276 | $ | 8.13 | * | ||||||
| ||||||||||||
C | $ | 3,160,272 | 390,715 | $ | 8.09 | |||||||
| ||||||||||||
Advisor | $ | 27,461,412 | 3,389,156 | $ | 8.10 | |||||||
| ||||||||||||
R | $ | 147,090 | 18,286 | $ | 8.04 | |||||||
| ||||||||||||
K | $ | 1,757,917 | 218,617 | $ | 8.04 | |||||||
| ||||||||||||
I | $ | 15,056,924 | 1,870,886 | $ | 8.05 | |||||||
| ||||||||||||
1 | $ | 498,779,853 | 62,380,721 | $ | 8.00 | |||||||
| ||||||||||||
2 | $ | 8,161 | 1,000 | $ | 8.16 | |||||||
| ||||||||||||
Z | $ | 7,800,494 | 969,202 | $ | 8.05 | |||||||
|
* | 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 • | 29 |
Consolidated Statement of Assets & Liabilities
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended April 30, 2016 (unaudited)
Investment Income | ||||||||
Dividends | ||||||||
Unaffiliated issuers (net of foreign taxes withheld of $340,417) | $ | 6,846,528 | ||||||
Affiliated issuers | 67,911 | |||||||
Interest* | (1,003,029 | ) | $ | 5,911,410 | ||||
|
| |||||||
Expenses | ||||||||
Management fee (see Note B) | 1,915,977 | |||||||
Distribution fee—Class A | 17,675 | |||||||
Distribution fee—Class C | 16,613 | |||||||
Distribution fee—Class R | 326 | |||||||
Distribution fee—Class K | 1,904 | |||||||
Distribution fee—Class 1 | 558,533 | |||||||
Transfer agency—Class A | 17,535 | |||||||
Transfer agency—Class C | 4,793 | |||||||
Transfer agency—Advisor Class | 35,243 | |||||||
Transfer agency—Class R | 171 | |||||||
Transfer agency—Class K | 1,540 | |||||||
Transfer agency—Class I | 1,511 | |||||||
Transfer agency—Class 1 | 12,883 | |||||||
Transfer agency—Class Z | 765 | |||||||
Custodian | 143,833 | |||||||
Registration fees | 69,733 | |||||||
Audit and tax | 52,287 | |||||||
Printing | 32,022 | |||||||
Administrative | 25,253 | |||||||
Legal | 21,236 | |||||||
Directors’ fees | 9,605 | |||||||
Miscellaneous | 51,711 | |||||||
|
| |||||||
Total expenses | 2,991,149 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (33,611 | ) | ||||||
|
| |||||||
Net expenses | 2,957,538 | |||||||
|
| |||||||
Net investment income | 2,953,872 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized loss on: | ||||||||
Investment transactions | (25,025,786 | )(a) | ||||||
Futures | (23,178,082 | ) | ||||||
Options written | (3,085,409 | ) | ||||||
Swaps | (15,427,431 | ) | ||||||
Foreign currency transactions | (1,987,431 | ) | ||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | 40,933,103 | (b) | ||||||
Futures | 18,287,986 | |||||||
Swaps | 15,130,558 | |||||||
Foreign currency denominated assets and liabilities | 2,420,612 | |||||||
|
| |||||||
Net gain on investment and foreign currency transactions | 8,068,120 | |||||||
|
| |||||||
Contributions from Affiliates (see Note B) | 3,148 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 11,025,140 | ||||||
|
|
(a) | Net of foreign capital gains taxes of $484. |
(b) | Net of decrease in accrued foreign capital gains taxes of $2,950. |
* | 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.
30 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Statement of Operations
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 2,953,872 | $ | 4,570,447 | ||||
Net realized loss on investment transactions and foreign currency transactions | (68,704,139 | ) | (92,610,596 | ) | ||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | 76,772,259 | (48,846,620 | ) | |||||
Contributions from Affiliates | 3,148 | 306 | ||||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | 11,025,140 | (136,886,463 | ) | |||||
Dividends to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (174,718 | ) | (483,613 | ) | ||||
Class C | (11,593 | ) | (100,388 | ) | ||||
Advisor Class | (479,187 | ) | (1,240,758 | ) | ||||
Class R | (1,815 | ) | (4,403 | ) | ||||
Class K | (27,392 | ) | (50,051 | ) | ||||
Class I | (300,575 | ) | (452,178 | ) | ||||
Class 1 | (8,849,159 | ) | (12,070,530 | ) | ||||
Class 2 | (172 | ) | (270 | ) | ||||
Class Z | (162,962 | ) | (254 | ) | ||||
Capital Stock Transactions | ||||||||
Net increase | 21,495,537 | 64,070,635 | ||||||
|
|
|
| |||||
Total increase (decrease) | 22,513,104 | (87,218,273 | ) | |||||
Net Assets | ||||||||
Beginning of period | 545,496,502 | 632,714,775 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $217,854 and $7,271,555, respectively) | $ | 568,009,606 | $ | 545,496,502 | ||||
|
|
|
|
See notes to consolidated financial statements.
AB ALL MARKET REAL RETURN PORTFOLIO • | 31 |
Consolidated Statement of Changes in Net Assets
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2016 (unaudited)
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. The Fund, which is a Maryland corporation, operates as a series company comprised of ten 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, the AB High Yield Portfolio and the AB Income Fund. 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. The AB Income Fund commenced operations on April 21, 2016. This report relates only to the AB All Market Real Return Portfolio (the “Portfolio”). 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 April 30, 2016, net assets of the Portfolio were $568,009,606, of which $108,479,367, 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 April 30, 2016, 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 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
32 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
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 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, 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
AB ALL MARKET REAL RETURN PORTFOLIO • | 33 |
Notes to Consolidated Financial Statements
“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. 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.
34 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
• | 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 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.
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
AB ALL MARKET REAL RETURN PORTFOLIO • | 35 |
Notes to Consolidated Financial Statements
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 April 30, 2016:
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Common Stocks: | ||||||||||||||||
Energy | $ | 88,867,182 | $ | 63,354,060 | $ | – 0 | – | $ | 152,221,242 | |||||||
Equity: Other | 19,172,046 | 30,653,236 | 80,947 | 49,906,229 | ||||||||||||
Materials | 18,249,700 | 23,298,250 | – 0 | –(a) | 41,547,950 | |||||||||||
Residential | 20,089,005 | 13,636,543 | – 0 | –(a) | 33,725,548 | |||||||||||
Retail | 18,805,378 | 13,859,530 | – 0 | – | 32,664,908 | |||||||||||
Office | 9,202,795 | 8,061,473 | – 0 | – | 17,264,268 | |||||||||||
Industrials | 6,853,061 | 3,697,989 | – 0 | – | 10,551,050 | |||||||||||
Lodging | 3,832,267 | – 0 | – | – 0 | – | 3,832,267 | ||||||||||
Food Beverage & Tobacco | 2,999,082 | 194,211 | – 0 | – | 3,193,293 | |||||||||||
Real Estate | 506,758 | 694,283 | – 0 | – | 1,201,041 | |||||||||||
Mortgage | 1,127,936 | – 0 | – | – 0 | – | 1,127,936 | ||||||||||
Inflation-Linked Securities | – 0 | – | 115,924,879 | – 0 | – | 115,924,879 | ||||||||||
Investment Companies | 30,987,056 | – 0 | – | – 0 | – | 30,987,056 | ||||||||||
Warrants | 596 | 197,698 | – 0 | – | 198,294 | |||||||||||
Options Purchased – Calls | – 0 | – | 189,973 | – 0 | – | 189,973 | ||||||||||
Short-Term Investments | 60,779,634 | – 0 | – | – 0 | – | 60,779,634 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 281,472,496 | 273,762,125 | 80,947 | 555,315,568 | ||||||||||||
Other Financial Instruments(b): | ||||||||||||||||
Assets: | ||||||||||||||||
Futures | 3,456,785 | – 0 | – | – 0 | – | 3,456,785 | (c) | |||||||||
Forward Currency Exchange Contracts | – 0 | – | 5,605,346 | – 0 | – | 5,605,346 | ||||||||||
Inflation (CPI) Swaps | – 0 | – | 221,811 | – 0 | – | 221,811 | ||||||||||
Total Return Swaps | – 0 | – | 11,149,151 | – 0 | – | 11,149,151 | ||||||||||
Liabilities: | ||||||||||||||||
Futures | (232,858 | ) | – 0 | – | – 0 | – | (232,858 | )(c) | ||||||||
Forward Currency Exchange Contracts | – 0 | – | (4,993,522 | ) | – 0 | – | (4,993,522 | ) | ||||||||
Inflation (CPI) Swaps | – 0 | – | (3,386,824 | ) | – 0 | – | (3,386,824 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total(d) | $ | 284,696,423 | $ | 282,358,087 | $ | 80,947 | $ | 567,135,457 | ||||||||
|
|
|
|
|
|
|
|
(a) | Amount less than $0.50. |
(b) | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
(c) | 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. |
(d) | There were de minimis transfers under 1% of net assets between Level 1 and Level 2 during the reporting period. |
36 | • 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 10/31/15 | $ | 147,589 | $ | – 0 | –(a) | $ | – 0 | –(a) | ||||
Accrued discounts/(premiums) | – 0 | – | – 0 | – | – 0 | – | ||||||
Realized gain (loss) | – 0 | – | – 0 | – | – 0 | – | ||||||
Change in unrealized appreciation/depreciation | (66,642 | ) | – 0 | – | – 0 | – | ||||||
Purchases | – 0 | – | – 0 | – | – 0 | – | ||||||
Sales | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers in to Level 3 | – 0 | – | –0 | – | – 0 | – | ||||||
Transfers out of Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
|
|
|
|
|
| |||||||
Balance as of 4/30/16 | $ | 80,947 | $ | – 0 | –(a) | $ | – 0 | –(a) | ||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(b) | $ | (66,642 | ) | $ | – 0 | – | $ | – 0 | – | |||
|
|
|
|
|
| |||||||
Total | ||||||||||||
Balance as of 10/31/15 | $ | 147,589 | ||||||||||
Accrued discounts/(premiums) | – 0 | – | ||||||||||
Realized gain (loss) | – 0 | – | ||||||||||
Change in unrealized appreciation/depreciation | (66,642 | ) | ||||||||||
Purchases | – 0 | – | ||||||||||
Sales | – 0 | – | ||||||||||
Transfers in to Level 3 | – 0 | – | ||||||||||
Transfers out of Level 3 | – 0 | – | ||||||||||
|
| |||||||||||
Balance as of 4/30/16 | $ | 80,947 | ||||||||||
|
| |||||||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(b) | $ | (66,642 | ) | |||||||||
|
|
(a) | Amount less than $0.50. |
(b) | 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 valuation policies and procedures established by the Adviser and approved by the
AB ALL MARKET REAL RETURN PORTFOLIO • | 37 |
Notes to Consolidated Financial Statements
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 and the U.S. dollar equivalent amounts actually received or paid. Net
38 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
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 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.
AB ALL MARKET REAL RETURN PORTFOLIO • | 39 |
Notes to Consolidated Financial Statements
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. The Adviser 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 1.30%, 2.05%, 1.05%, 1.55%, 1.30%, 1.05%, 1.30%, 1.05% and 1.05% 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, 2017. For the six months ended April 30, 2016, such reimbursement amounted to $33,611. Prior to January 29, 2016, 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 2.00%, 1.00%, 1.50%, 1.25%, 1.00%, 1.25%, 1.00% and 1.00% of daily average net assets for Class C, Advisor Class, Class R, Class K, Class I, Class 1, Class 2 and Class Z 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 six months ended April 30, 2016 and the year October 31, 2015 the Adviser reimbursed the Strategy $3,148 and $306, 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 six months ended April 30, 2016, the reimbursement for such services amounted to $25,253.
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 $15,664 for the six months ended April 30, 2016.
40 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
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 $19 from the sale of Class A shares and received $0 and $64 in contingent deferred sales charges imposed upon redemptions by shareholders of Class A and Class C shares, respectively, for the six months ended April 30, 2016.
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 currently available for direct purchase by members of the public. The Government STIF Portfolio currently pays no investment management fees but does bear its own expenses. A summary of the Portfolio’s transactions in shares of the Government STIF Portfolio for the six months ended April 30, 2016 is as follows:
Market Value October 31, 2015 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value April 30, 2016 (000) | Dividend Income (000) | ||||||||||||||
$ | 49,719 | $ | 174,855 | $ | 163,794 | $ | 60,780 | $ | 68 |
Brokerage commissions paid on investment transactions for the six months ended April 30, 2016 amounted to $218,573, 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. Effective January 29, 2016, payments under the Plan were limited to .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 Portfolio’s operations, the Distributor has incurred expenses in excess of the distribution costs reimbursed by the Portfolio in the amounts of $151,871, $14,788, $19,126 and $1,835,060 for Class C,
AB ALL MARKET REAL RETURN PORTFOLIO • | 41 |
Notes to Consolidated Financial Statements
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 six months ended April 30, 2016 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 111,282,536 | $ | 80,790,451 | ||||
U.S. government securities | 115,701,244 | 137,195,547 |
The cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation (excluding futures, foreign currency, written options and swap transactions) are as follows:
Gross unrealized appreciation | $ | 24,755,318 | ||
Gross unrealized depreciation | (16,980,060 | ) | ||
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| |||
Net unrealized appreciation | $ | 7,775,258 | ||
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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”.
42 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
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 six months ended April 30, 2016, 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.
AB ALL MARKET REAL RETURN PORTFOLIO • | 43 |
Notes to Consolidated Financial Statements
During the six months ended April 30, 2016, the Portfolio held forward currency exchange contracts for hedging 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.
During the six months ended April 30, 2016, the Portfolio held purchased options for hedging and non-hedging purposes.
During the six months ended April 30, 2016, the Portfolio held written options for hedging and non-hedging purposes.
44 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
For the six months ended April 30, 2016, the Portfolio had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 10/31/15 | – 0 | – | $ | – 0 | – | |||
Options written | 22,434,200 | 2,260,165 | ||||||
Options expired | (7,614,200 | ) | (652,195 | ) | ||||
Options bought back | (14,820,000 | ) | (1,607,970 | ) | ||||
Options exercised | – 0 | – | – 0 | – | ||||
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Options written outstanding as of 04/30/16 | – 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 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
AB ALL MARKET REAL RETURN PORTFOLIO • | 45 |
Notes to Consolidated Financial Statements
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 six months ended April 30, 2016, the Portfolio held interest rate swaps for 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.
During the six months ended April 30, 2016, the Portfolio held inflation (CPI) swaps for hedging and non-hedging purposes.
46 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
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 six months ended April 30, 2016, 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 • | 47 |
Notes to Consolidated Financial Statements
At April 30, 2016, the Portfolio had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Consolidated | Fair Value | Consolidated | Fair Value | ||||||||
Commodity contracts | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 3,456,785 | * | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 232,858 | * | ||||
Foreign exchange contracts | Unrealized appreciation on forward currency exchange contracts |
| 5,605,346 |
| Unrealized depreciation on forward currency exchange contracts | | 4,993,522 | | ||||
Equity contracts | Investments in securities, at value | 189,973 | ||||||||||
Interest rate contracts | Unrealized appreciation on inflation swaps | | 221,811 | | Unrealized depreciation on inflation swaps | | 3,386,824 | | ||||
Equity contracts | Unrealized appreciation on total return swaps | 11,149,151 | ||||||||||
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Total | $ | 20,623,066 | $ | 8,613,204 | ||||||||
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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. |
Derivative Type | Location of Gain or (Loss) on Derivatives Within Consolidated | 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 | $ | (122,937 | ) | $ | – 0 | – | |||
Commodity contracts | Net realized gain (loss) on futures; Net change in unrealized appreciation/depreciation of futures | (23,055,145 | ) | 18,287,986 |
48 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
Derivative Type | Location of Gain or (Loss) on Derivatives Within Consolidated | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Foreign exchange contracts | Net realized gain (loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation of foreign currency denominated assets and liabilities | $ | (1,459,469 | ) | $ | 2,056,869 | ||||
Equity contracts | Net realized gain (loss) on investment transactions; Net change in unrealized appreciation/depreciation of investments | (317,500 | ) | (720,667 | ) | |||||
Equity contracts | Net realized gain (loss) on options written; Net change in unrealized appreciation/depreciation of options written | (3,085,409 | ) | – 0 | – | |||||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 38,921 | (613,293 | ) | ||||||
Equity contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (15,466,352 | ) | 15,743,851 | ||||||
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Total | $ | (43,467,891 | ) | $ | 34,754,746 | |||||
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The following table represents the average monthly volume of the Portfolio’s derivative transactions during the six months ended April 30, 2016:
Futures: | ||||
Average original value of buy contracts | $ | 61,093,573 | ||
Average original value of sale contracts | $ | 4,986,749 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 83,695,710 | ||
Average principal amount of sale contracts | $ | 102,218,388 | ||
Purchased Options: | ||||
Average monthly cost | $ | 910,640 | (a) | |
Inflation Swaps: | ||||
Average notional amount | $ | 371,700,000 | ||
Total Return Swaps: | ||||
Average notional amount | $ | 176,612,467 |
(a) | Positions were open for two months during the period. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 49 |
Notes to Consolidated Financial Statements
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.
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 April 30, 2016:
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: | ||||||||||||||||||||
Bank of America, NA | $ | 748,187 | $ | (309,329 | ) | $ | – 0 | – | $ | – 0 | – | $ | 438,858 | |||||||
Barclays Bank PLC | 772,122 | (772,122 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
BNP Paribas SA | 265,285 | – 0 | – | – 0 | – | – 0 | – | 265,285 | ||||||||||||
Deutsche Bank AG | 254,020 | (254,020 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Goldman Sachs Bank USA | 876,469 | (381,187 | ) | – 0 | – | – 0 | – | 495,282 | ||||||||||||
HSBC Bank USA | 67,457 | (67,457 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
JPMorgan Chase Bank/ JPMorgan Chase Bank, NA | 345,184 | (345,184 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Morgan Stanley & Co., Inc. | 439,557 | (121,182 | ) | – 0 | – | – 0 | – | 318,375 | ||||||||||||
Royal Bank of Scotland PLC | 1,168,138 | (43,159 | ) | – 0 | – | – 0 | – | 1,124,979 | ||||||||||||
Standard Chartered Bank | 5,188 | (5,188 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
State Street Bank & Trust Co. | 812,424 | (812,424 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
UBS AG | 55,607 | (55,607 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
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Total | $ | 5,809,638 | $ | (3,166,859 | ) | $ | – 0 | – | $ | – 0 | – | $ | 2,642,779 | ^ | ||||||
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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: |
| |||||||||||||||||||
Bank of America, NA | $ | 309,329 | $ | (309,329 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
Barclays Bank PLC | 865,526 | (772,122 | ) | – 0 | – | – 0 | – | 93,404 | ||||||||||||
Citibank | 971,951 | – 0 | – | – 0 | – | – 0 | – | 971,951 | ||||||||||||
Deutsche Bank AG | 2,142,934 | (254,020 | ) | – 0 | – | (1,529,708 | ) | 359,206 | ||||||||||||
Goldman Sachs Bank USA | 381,187 | (381,187 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
HSBC Bank USA | 121,421 | (67,457 | ) | – 0 | – | – 0 | – | 53,964 | ||||||||||||
JPMorgan Chase Bank/ JPMorgan Chase Bank, NA | 1,556,938 | (345,184 | ) | – 0 | – | (825,459 | ) | 386,295 |
50 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged | Security Collateral Pledged | Net Amount of Derivatives Liabilities | |||||||||||||||
Morgan Stanley & Co., Inc. | $ | 121,182 | $ | (121,182 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
Nomura Global Financial Products, Inc. | 159,887 | – 0 | – | – 0 | – | – 0 | – | 159,887 | ||||||||||||
Royal Bank of Scotland PLC | 43,159 | (43,159 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Societe Generale | 369,096 | – 0 | – | – 0 | – | – 0 | – | 369,096 | ||||||||||||
Standard Chartered Bank | 122,442 | (5,188 | ) | – 0 | – | – 0 | – | 117,254 | ||||||||||||
State Street Bank & Trust Co. | 928,448 | (812,424 | ) | – 0 | – | – 0 | – | 116,024 | ||||||||||||
UBS AG | 175,176 | (55,607 | ) | – 0 | – | – 0 | – | 119,569 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 8,268,676 | $ | (3,166,859 | ) | $ | – 0 | – | $ | (2,355,167 | ) | $ | 2,746,650 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
^ | 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. |
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: | ||||||||||||||||||||
Deutsche Bank AG** | $ | 189,973 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 189,973 | |||||||
Morgan Stanley & Co., Inc.** | 325,292 | – 0 | – | – 0 | – | – 0 | – | 325,292 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 515,265 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 515,265 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Barclays Bank PLC | $ | 17,519 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 17,519 | |||||||
Goldman Sachs International | 5,026,520 | – 0 | – | (3,830,000 | ) | – 0 | – | 1,196,520 | ||||||||||||
JPMorgan Chase Bank, NA | 6,122,631 | – 0 | – | – 0 | – | – 0 | – | 6,122,631 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 11,166,670 | $ | – 0 | – | $ | (3,830,000 | ) | $ | – 0 | – | $ | 7,336,670 | ^ | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged | Security Collateral Pledged | Net Amount of Derivatives Liabilities | |||||||||||||||
OTC Derivatives: | ||||||||||||||||||||
Societe Generale | $ | 111,670 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 111,670 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 111,670 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 111,670 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
** | Cash and securities have been posted for initial margin requirements for exchange-traded derivatives outstanding at April 30, 2016. |
^ | 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 ALL MARKET REAL RETURN PORTFOLIO • | 51 |
Notes to Consolidated 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).
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 | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended 2015 | Six Months Ended (unaudited) | Year Ended October 31, 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 159,640 | 374,648 | $ | 1,114,163 | $ | 3,531,705 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 20,294 | 37,166 | 151,390 | 350,845 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (520,815 | ) | (1,070,575 | ) | (4,093,495 | ) | (10,041,550 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (340,881 | ) | (658,761 | ) | $ | (2,827,942 | ) | $ | (6,159,000 | ) | ||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 13,131 | 37,945 | $ | 95,505 | $ | 351,368 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,376 | 9,857 | 10,241 | 92,557 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (146,786 | ) | (344,737 | ) | (1,054,471 | ) | (3,093,893 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (132,279 | ) | (296,935 | ) | $ | (948,725 | ) | $ | (2,649,968 | ) | ||||||||||
| ||||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 435,283 | 1,189,217 | $ | 3,113,145 | $ | 10,830,265 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 51,231 | 98,208 | 380,640 | 925,118 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (852,668 | ) | (3,060,481 | ) | (6,354,861 | ) | (28,495,992 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (366,154 | ) | (1,773,056 | ) | $ | (2,861,076 | ) | $ | (16,740,609 | ) | ||||||||||
|
52 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
Shares | Amount | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended 2015 | Six Months Ended (unaudited) | Year Ended October 31, 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Class R | ||||||||||||||||||||
Shares sold | 2,309 | 7,416 | $ | 16,834 | $ | 63,929 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 246 | 442 | 1,815 | 4,154 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (4,413 | ) | (5,045 | ) | (34,993 | ) | (45,082 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (1,858 | ) | 2,813 | $ | (16,344 | ) | $ | 23,001 | ||||||||||||
| ||||||||||||||||||||
Class K | ||||||||||||||||||||
Shares sold | 43,180 | 62,469 | $ | 326,061 | $ | 557,586 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 3,711 | 5,336 | 27,392 | 50,051 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (34,775 | ) | (68,385 | ) | (257,918 | ) | (611,048 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 12,116 | (580 | ) | $ | 95,535 | $ | (3,411 | ) | ||||||||||||
| ||||||||||||||||||||
Class I | ||||||||||||||||||||
Shares sold | 68,424 | 150,454 | $ | 499,429 | $ | 1,362,834 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 40,784 | 48,155 | 300,575 | 452,178 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (28,263 | ) | (433,520 | ) | (205,228 | ) | (4,392,159 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 80,945 | (234,911 | ) | $ | 594,776 | $ | (2,577,147 | ) | ||||||||||||
| ||||||||||||||||||||
Class 1 | ||||||||||||||||||||
Shares sold | 10,260,705 | 18,003,797 | $ | 73,242,216 | $ | 160,040,128 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,068,927 | 1,118,730 | 7,835,240 | 10,437,747 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (7,944,276 | ) | (9,227,855 | ) | (58,111,036 | ) | (81,519,998 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 3,385,356 | 9,894,672 | $ | 22,966,420 | $ | 88,957,877 | ||||||||||||||
| ||||||||||||||||||||
Class Z | ||||||||||||||||||||
Shares sold | 657,886 | 563,425 | $ | 5,080,500 | $ | 4,665,612 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 22,111 | – 0 | – | 162,962 | – 0 | – | ||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (101,098 | ) | (174,072 | ) | (750,569 | ) | (1,445,720 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 578,899 | 389,353 | $ | 4,492,893 | $ | 3,219,892 | ||||||||||||||
|
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
AB ALL MARKET REAL RETURN PORTFOLIO • | 53 |
Notes to Consolidated Financial Statements
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.
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,
54 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
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.
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 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.
AB ALL MARKET REAL RETURN PORTFOLIO • | 55 |
Notes to Consolidated 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 consolidated statement of operations. The Portfolio did not utilize the Facility during the six months ended April 30, 2016.
NOTE H
Distributions to Shareholders
The tax character of distributions to be paid for the year ending October 31, 2016 will be determined at the end of the current fiscal year. 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.
56 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Notes to Consolidated Financial Statements
As of October 31, 2015, the Portfolio had a net capital loss carryforward of $45,176,677 which will expire as follows:
Short-Term Amount | Long-Term Amount | Expiration | ||
$ 6,012,702 | n/a | 2019 | ||
24,477,600 | $14,686,375 | No expiration |
NOTE I
New Accounting Pronouncement
In May 2015, the Financial Accounting Standards Board issued an Accounting Standards Update, ASU 2015-07 (the “ASU”) 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 requirement to make certain disclosures for investments that are eligible to be measured at fair value using the net asset value per share practical expedient but do not utilize that practical expedient. 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 consolidated financial statements.
NOTE J
Subsequent Events
The Government STIF Portfolio, prior to June 1, 2016, was offered as a cash management option to mutual funds and other institutional accounts of the Adviser, and was not available for direct purchase by members of the public. Prior to June 1, 2016, the Government STIF Portfolio paid no investment management fees but did bear its own expenses. As of June 1, 2016, the Government STIF Portfolio, which was renamed “AB Government Money Market Portfolio” (the “Government Money Market Portfolio”), will have a contractual investment management fee rate of .20% and will continue to bear its own expenses. In connection with the investment by the Portfolio in the Government Money Market Portfolio, the Adviser will waive its investment management fee from the Portfolio in an amount equal to Government Money Market Portfolio’s effective management fee.
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 other material events that would require disclosure in the Portfolio’s consolidated financial statements through this date.
AB ALL MARKET REAL RETURN PORTFOLIO • | 57 |
Notes to Consolidated Financial Statements
CONSOLIDATED FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 8.13 | $ 10.52 | $ 11.04 | $ 11.33 | $ 11.05 | $ 11.25 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .04 | .06 | .12 | .10 | .11 | .16 | ||||||||||||||||||
Net realized and unrealized | .06 | (2.26 | ) | (.50 | ) | (.13 | ) | .25 | (.01 | ) | ||||||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .10 | (2.20 | ) | (.38 | ) | (.03 | ) | .36 | .15 | |||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.10 | ) | (.19 | ) | (.14 | ) | (.26 | ) | (.08 | ) | (.35 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 8.13 | $ 8.13 | $ 10.52 | $ 11.04 | $ 11.33 | $ 11.05 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 1.38 | % | (21.16 | )% | (3.45 | )% | (.27 | )% | 3.36 | % | 1.32 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period | $13,837 | $16,611 | $28,434 | $64,800 | $67,989 | $70,081 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.30 | %^ | 1.30 | % | 1.23 | % | 1.05 | % | 1.05 | % | 1.05 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.45 | %^ | 1.47 | % | 1.30 | % | 1.34 | % | 1.28 | % | 1.61 | % | ||||||||||||
Net investment income(b) | 1.00 | %^ | .62 | % | 1.03 | % | .86 | % | 1.02 | % | 1.44 | % | ||||||||||||
Portfolio turnover rate | 47 | % | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 66.
58 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 8.03 | $ 10.40 | $ 10.90 | $ 11.18 | $ 10.93 | $ 11.19 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income (loss)(a)(b) | .01 | (.01 | ) | .04 | .02 | .03 | .08 | |||||||||||||||||
Net realized and unrealized | .07 | (2.23 | ) | (.49 | ) | (.12 | ) | .25 | (.01 | ) | ||||||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from | .08 | (2.24 | ) | (.45 | ) | (.10 | ) | .28 | .07 | |||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.02 | ) | (.13 | ) | (.05 | ) | (.18 | ) | (.03 | ) | (.33 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of | $ 8.09 | $ 8.03 | $ 10.40 | $ 10.90 | $ 11.18 | $ 10.93 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based | 1.07 | % | (21.75 | )% | (4.13 | )% | (.92 | )% | 2.58 | % | .61 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period | $3,160 | $4,202 | $8,531 | $13,063 | $15,974 | $17,414 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | 2.02 | %^ | 2.00 | % | 1.93 | % | 1.75 | % | 1.75 | % | 1.75 | % | ||||||||||||
Expenses, before waivers/reimbursements | 2.20 | %^ | 2.16 | % | 2.02 | % | 2.04 | % | 1.99 | % | 2.31 | % | ||||||||||||
Net investment income (loss)(b) | .28 | %^ | (.07 | )% | .34 | % | .16 | % | .32 | % | .73 | % | ||||||||||||
Portfolio turnover rate | 47 | % | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See | footnote summary on page 66. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 59 |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 8.13 | $ 10.56 | $ 11.09 | $ 11.37 | $ 11.08 | $ 11.26 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .05 | .09 | .15 | .13 | .15 | .19 | ||||||||||||||||||
Net realized and unrealized | .06 | (2.27 | ) | (.50 | ) | (.12 | ) | .25 | (.01 | ) | ||||||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .11 | (2.18 | ) | (.35 | ) | .01 | .40 | .18 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.14 | ) | (.25 | ) | (.18 | ) | (.29 | ) | (.11 | ) | (.36 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 8.10 | $ 8.13 | $ 10.56 | $ 11.09 | $ 11.37 | $ 11.08 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 1.50 | % | (20.95 | )% | (3.20 | )% | .12 | % | 3.69 | % | 1.55 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period | $27,462 | $30,541 | $58,399 | $64,911 | $72,529 | $50,795 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.03 | %^ | 1.00 | % | .94 | % | .75 | % | .75 | % | .75 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.18 | %^ | 1.17 | ��% | 1.02 | % | 1.04 | % | .99 | % | 1.29 | % | ||||||||||||
Net investment income(b) | 1.29 | %^ | .95 | % | 1.33 | % | 1.18 | % | 1.33 | % | 1.69 | % | ||||||||||||
Portfolio turnover rate | 47 | % | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See | footnote summary on page 66. |
60 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class R | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 8.06 | $ 10.51 | $ 11.04 | $ 11.32 | $ 11.02 | $ 11.23 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .03 | .04 | .15 | .08 | .09 | .16 | ||||||||||||||||||
Net realized and unrealized | .05 | (2.24 | ) | (.55 | ) | (.13 | ) | .26 | (.04 | ) | ||||||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .08 | (2.20 | ) | (.40 | ) | (.05 | ) | .35 | .12 | |||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.10 | ) | (.25 | ) | (.13 | ) | (.23 | ) | (.05 | ) | (.33 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 8.04 | $ 8.06 | $ 10.51 | $ 11.04 | $ 11.32 | $ 11.02 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 1.28 | % | (21.37 | )% | (3.66 | )% | (.47 | )% | 3.20 | % | 1.03 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period | $148 | $162 | $182 | $38 | $17 | $11 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.53 | %^ | 1.50 | % | 1.44 | % | 1.25 | % | 1.25 | % | 1.25 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.67 | %^ | 1.64 | % | 1.55 | % | 1.65 | % | 1.64 | % | 2.87 | % | ||||||||||||
Net investment income(b) | .77 | %^ | .42 | % | 1.36 | % | .76 | % | .82 | % | 1.39 | % | ||||||||||||
Portfolio turnover rate | 47 | % | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 66.
AB ALL MARKET REAL RETURN PORTFOLIO • | 61 |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class K | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 8.07 | $ 10.50 | $ 11.03 | $ 11.32 | $ 11.05 | $ 11.25 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .04 | .06 | .12 | .10 | .10 | .15 | ||||||||||||||||||
Net realized and unrealized | .06 | (2.25 | ) | (.49 | ) | (.12 | ) | .27 | – 0 | – | ||||||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .10 | (2.19 | ) | (.37 | ) | (.02 | ) | .37 | .15 | |||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.13 | ) | (.24 | ) | (.16 | ) | (.27 | ) | (.10 | ) | (.35 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 8.04 | $ 8.07 | $ 10.50 | $ 11.03 | $ 11.32 | $ 11.05 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 1.42 | % | (21.19 | )% | (3.39 | )% | (.19 | )% | 3.43 | % | 1.33 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period | $1,758 | $1,668 | $2,174 | $1,684 | $1,286 | $128 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.28 | %^ | 1.25 | % | 1.19 | % | 1.00 | % | 1.00 | % | 1.00 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.36 | %^ | 1.34 | % | 1.24 | % | 1.33 | % | 1.35 | % | 1.91 | % | ||||||||||||
Net investment income(b) | 1.04 | %^ | .67 | % | 1.10 | % | .95 | % | .89 | % | 1.38 | % | ||||||||||||
Portfolio turnover rate | 47 | % | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 66.
62 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class I | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 8.11 | $ 10.54 | $ 11.07 | $ 11.36 | $ 11.07 | $ 11.27 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a) | .05 | .09 | .15 | .13 | (b) | .14 | (b) | .15 | (b) | |||||||||||||||
Net realized and unrealized | .06 | (2.25 | ) | (.49 | ) | (.13 | ) | .26 | .02 | † | ||||||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .11 | (2.16 | ) | (.34 | ) | – 0 | – | .40 | .17 | |||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.17 | ) | (.27 | ) | (.19 | ) | (.29 | ) | (.11 | ) | (.37 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 8.05 | $ 8.11 | $ 10.54 | $ 11.07 | $ 11.36 | $ 11.07 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 1.64 | % | (20.97 | )% | (3.09 | )% | .04 | % | 3.69 | % | 1.53 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period | $15,057 | $14,508 | $21,341 | $19,303 | $18,790 | $15,850 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | .93 | %^ | .96 | % | .91 | % | .75 | % | .75 | % | .75 | % | ||||||||||||
Expenses, before waivers/reimbursements | .93 | %^ | .96 | % | .91 | % | .97 | % | .98 | % | 1.38 | % | ||||||||||||
Net investment income | 1.39 | %^ | .99 | % | 1.37 | % | 1.17 | %(b) | 1.32 | %(b) | 1.42 | %(b) | ||||||||||||
Portfolio turnover rate | 47 | % | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See | footnote summary on page 66. |
AB ALL MARKET REAL RETURN PORTFOLIO • | 63 |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class 1 | ||||||||||||||||||||||||
Six Months April 30, (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 8.05 | $ 10.46 | $ 11.00 | $ 11.29 | $ 11.01 | $ 11.25 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a) | .04 | .07 | .13 | .10 | (b) | .12 | (b) | .15 | (b) | |||||||||||||||
Net realized and unrealized | .06 | (2.24 | ) | (.50 | ) | (.12 | ) | .25 | (.01 | ) | ||||||||||||||
Contributions from Affiliates | �� | .00 | (c) | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .10 | (2.17 | ) | (.37 | ) | (.02 | ) | .37 | .14 | |||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.15 | ) | (.24 | ) | (.17 | ) | (.27 | ) | (.09 | ) | (.38 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 8.00 | $ 8.05 | $ 10.46 | $ 11.00 | $ 11.29 | $ 11.01 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 1.55 | % | (21.12 | )% | (3.35 | )% | (.19 | )% | 3.47 | % | 1.25 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period | $498,780 | $474,631 | $513,633 | $420,593 | $221,971 | $182,720 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | 1.16 | %^ | 1.16 | % | 1.14 | % | 1.00 | % | 1.00 | % | 1.00 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.16 | %^ | 1.16 | % | 1.14 | % | 1.16 | % | 1.21 | % | 1.47 | % | ||||||||||||
Net investment income | 1.15 | %^ | .79 | % | 1.16 | % | .95 | %(b) | 1.07 | %(b) | 1.40 | %(b) | ||||||||||||
Portfolio turnover rate | 47 | % | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 66.
64 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class 2 | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 8.22 | $ 10.68 | $ 11.19 | $ 11.48 | $ 11.07 | $ 11.27 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a) | .05 | .09 | .15 | .13 | (b) | .15 | (b) | .14 | (b) | |||||||||||||||
Net realized and unrealized | .06 | (2.28 | ) | (.50 | ) | (.12 | ) | .26 | .03 | † | ||||||||||||||
Contributions from Affiliates | .00 | (c) | .00 | (c) | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .11 | (2.19 | ) | (.35 | ) | .01 | .41 | .17 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.17 | ) | (.27 | ) | (.16 | ) | (.30 | ) | – 0 | – | (.37 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 8.16 | $ 8.22 | $ 10.68 | $ 11.19 | $ 11.48 | $ 11.07 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 1.56 | % | (20.85 | )% | (3.12 | )% | .05 | % | 3.70 | % | 1.50 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period | $8 | $8 | $11 | $11 | $11 | $11 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | .91 | %^ | .92 | % | .89 | % | .75 | % | .75 | % | .75 | % | ||||||||||||
Expenses, before waivers/reimbursements | .91 | %^ | .92 | % | .89 | % | 1.93 | % | .96 | % | 3.72 | % | ||||||||||||
Net investment income | 1.37 | %^ | .92 | % | 1.36 | % | 1.16 | %(b) | 1.32 | %(b) | 1.19 | %(b) | ||||||||||||
Portfolio turnover rate | 47 | % | 53 | % | 73 | % | 54 | % | 118 | % | 120 | % |
See footnote summary on page 66.
AB ALL MARKET REAL RETURN PORTFOLIO • | 65 |
Consolidated Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class Z | ||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | January 31, 2014(e) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 8.11 | $ 10.55 | $ 10.53 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(a) | .05 | .07 | .13 | |||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .06 | (2.24 | ) | (.11 | ) | |||||||
Contributions from Affiliates(c) | .00 | .00 | .00 | |||||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .11 | (2.17 | ) | .02 | ||||||||
|
| |||||||||||
Less: Dividends | ||||||||||||
Dividends from net investment income | (.17 | ) | (.27 | ) | – 0 | – | ||||||
|
| |||||||||||
Net asset value, end of period | $ 8.05 | $ 8.11 | $ 10.55 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 1.58 | % | (20.94 | )% | .19 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period | $7,800 | $3,166 | $10 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses | .94 | %^ | .96 | % | .88 | %^ | ||||||
Net investment income | 1.33 | %^ | .92 | % | 1.59 | %^ | ||||||
Portfolio turnover rate | 47 | % | 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 distributions. |
^ | Annualized. |
† | Due to timing of sales and repurchase of capital shares, the net realized and unrealized gain (loss) per share is not in accord with the Portfolio’s change in net realized and unrealized gain (loss) on investment transactions for the period. |
See notes to consolidated financial statements.
66 | • AB ALL MARKET REAL RETURN PORTFOLIO |
Consolidated Financial Highlights
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 • | 67 |
Board of Directors
Information Regarding the Review and Approval of the Portfolio’s Investment Advisory Contract
The disinterested directors (the “directors”) of AB Bond Fund, Inc. (the “Fund”) unanimously approved the continuance of the Fund’s Investment Advisory Contract (the “Advisory Agreement”) with the Adviser in respect of AB All Market Real Return Portfolio (formerly AllianceBernstein Real Asset Strategy) (the “Portfolio”) at a meeting held on November 3-5, 2015.
Prior to approval of the continuance of the Advisory Agreement in respect of the Portfolio, the directors had requested from the Adviser, and received and evaluated, extensive materials. They reviewed the proposed continuance of the Advisory Agreement with the Adviser and with experienced counsel who are independent of the Adviser, who advised on the relevant legal standards. The directors also reviewed an independent evaluation prepared by the Fund’s Senior Officer (who is also the Fund’s Independent Compliance Officer) of the reasonableness of the advisory fee, in which the Senior Officer concluded that the contractual fee for the Portfolio was reasonable. The directors also discussed the proposed continuance in private sessions with counsel and the Fund’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services provided by the Adviser to the Portfolio gained from their experience as directors or trustees of most of the registered investment companies advised by the Adviser, their overall confidence in the Adviser’s integrity and competence they have gained from that experience, the Adviser’s initiative in identifying and raising potential issues with the directors and its responsiveness, frankness and attention to concerns raised by the directors in the past, including the Adviser’s willingness to consider and implement organizational and operational changes designed to improve investment results and the services provided to the AB Funds. The directors noted that they have four regular meetings each year, at each of which they receive presentations from the Adviser on the investment results of the Portfolio and review extensive materials and information presented by the Adviser.
The directors also considered all other factors they believed relevant, including the specific matters discussed below. In their deliberations, the directors did not identify any particular information that was all-important or controlling, and different directors may have attributed different weights to the various factors. The directors determined that the selection of the Adviser to manage the Portfolio and the overall arrangements between the Portfolio and the Adviser, as provided in the Advisory Agreement, including the advisory fee, were fair and reasonable in light of the services performed, expenses incurred and such other matters as the directors considered relevant in the exercise of their business
68 | • AB ALL MARKET REAL RETURN PORTFOLIO |
judgment. The material factors and conclusions that formed the basis for the directors’ determinations included the following:
Nature, Extent and Quality of Services Provided
The directors considered the scope and quality of services provided by the Adviser under the Advisory Agreement, including the quality of the investment research capabilities of the Adviser and the other resources it has dedicated to performing services for the Portfolio. They noted the professional experience and qualifications of the Portfolio’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Portfolio will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Portfolio by employees of the Adviser or its affiliates. Requests for these reimbursements are made on a quarterly basis and subject to approval by the directors. Reimbursements, to the extent requested and paid, result in a higher rate of total compensation from the Portfolio to the Adviser than the fee rate stated in the Portfolio’s Advisory Agreement. The directors noted that the methodology used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Fund’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Portfolio’s other service providers, also was considered. The directors concluded that, overall, they were satisfied with the nature, extent and quality of services provided to the Portfolio under the Advisory Agreement.
Costs of Services Provided and Profitability
The directors reviewed a schedule of the revenues, expenses and related notes indicating the profitability of the Portfolio to the Adviser for calendar years 2013 and 2014 that had been prepared with an expense allocation methodology arrived at in consultation with an independent consultant retained by the Fund’s Senior Officer. The directors noted the assumptions and methods of allocation used by the Adviser in preparing fund-specific profitability data and understood that there are a number of potentially acceptable allocation methodologies for information of this type. The directors noted that the profitability information reflected all revenues and expenses of the Adviser’s relationship with the Portfolio, including those relating to its subsidiaries that provide transfer agency, distribution and brokerage services to the Portfolio. The directors recognized that it is difficult to make comparisons of the profitability of the Advisory Agreement with the profitability of advisory contracts for unaffiliated funds because comparative information is not generally publicly available and is affected by numerous factors. The directors focused on the profitability of the Adviser’s relationship with the Portfolio before taxes and distribution expenses. The directors were satisfied that the Adviser’s level of profitability from its relationship with the Portfolio was not unreasonable.
AB ALL MARKET REAL RETURN PORTFOLIO • | 69 |
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their relationships with the Portfolio, including, but not limited to, benefits relating to soft dollar arrangements (whereby the Adviser receives brokerage and research services from brokers that execute transactions for certain clients, including the Portfolio); 12b-1 fees and sales charges received by the Fund’s principal underwriter (which is a wholly owned subsidiary of the Adviser) in respect of certain classes of the Portfolio’s shares; transfer agency fees paid by the Portfolio to a wholly owned subsidiary of the Adviser; and brokerage commissions paid by the Portfolio to certain brokers affiliated with the Adviser. The directors recognized that the Adviser’s profitability would be somewhat lower without these benefits. The directors understood that the Adviser also might derive reputational and other benefits from its association with the Portfolio.
Investment Results
In addition to the information reviewed by the directors in connection with the meeting, the directors receive detailed performance information for the Portfolio at each regular Board meeting during the year. At the November 2015 meeting, the directors reviewed information prepared by Broadridge showing the performance of the Class A Shares of the Portfolio as compared with that of a group of similar funds selected by Broadridge (the “Performance Group”) and as compared with that of a broad array of funds selected by Broadridge (the “Performance Universe”), and information prepared by the Adviser showing performance of the Class A Shares as compared with the Morgan Stanley Capital International All Country World Commodity Producers Index (the “MSCI AC Index”) and the All Market Real Return Portfolio Benchmark (composed of equal weightings of the MSCI AC Index, the Financial Times Stock Exchange European Public Real Estate Association/National Association of Real Estate Investment Trusts Global Index and the Dow Jones-UBS Commodity Index) (the “All Market Benchmark”), in each case for the 1-, 3- and 5-year periods ended July 31, 2015 and (in the case of comparisons with the benchmarks) the period since inception (March 2010 inception). The directors noted that the Portfolio was in the 5th quintile of the Performance Group and the Performance Universe for all periods. The Portfolio outperformed the MSCI AC Index in all periods (although all returns were negative) except in the 3-year period. It lagged the All Market Benchmark in all periods. Based on their review and their discussion with the Adviser of the reasons for the Portfolio’s performance, the directors retained confidence in the Adviser’s ability to manage the Portfolio’s assets.
Advisory Fees and Other Expenses
The directors considered the advisory fee rate paid by the Portfolio to the Adviser and information prepared by Broadridge concerning advisory fee rates paid by other funds in the same Broadridge category as the Portfolio at a common asset level. The directors recognized that it is difficult to make comparisons
70 | • AB ALL MARKET REAL RETURN PORTFOLIO |
of advisory fees because there are variations in the services that are included in the fees paid by other funds. The directors noted that, at the Portfolio’s current size, its contractual advisory fee rate of 75 basis points, plus the 1 basis point impact of the administrative expense reimbursement in the latest fiscal year, was lower than the Expense Group median.
The directors also considered the Adviser’s fee schedule for non-fund clients pursuing a similar investment style. For this purpose, they reviewed the relevant advisory fee information from the Adviser’s Form ADV and the evaluation from the Fund’s Senior Officer. The directors noted that the institutional fee schedule started at a rate equal to the Portfolio’s flat rate but had breakpoints. The application of the institutional fee schedule to the Portfolio’s net assets would result in a fee rate lower than the rate at the same asset level provided in the Portfolio’s Advisory Agreement. The directors noted that the Adviser may, in some cases, agree to fee rates with large institutional clients that are lower than those reviewed by the directors and that they had previously discussed with the Adviser its policies in respect of such arrangements.
The Adviser reviewed with the directors the significantly greater scope of the services it provides to the Portfolio relative to institutional clients. The Adviser also noted that because mutual funds are constantly issuing and redeeming shares, they are more difficult to manage than an institutional account, where the assets tend to be relatively stable. In light of the substantial differences in services rendered by the Adviser to institutional clients as compared to funds such as the Portfolio, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors noted that the Portfolio invests in shares of exchange-traded funds (“ETFs”), subject to restrictions and limitations of the Investment Company Act of 1940 as these may be varied as a result of exemptive orders issued by the SEC. The directors noted that ETFs pay advisory fees pursuant to their advisory contracts, and that the Adviser had provided, and they had reviewed, information about the expense ratios of the relevant ETFs. The directors concluded, based on the Adviser’s explanation of how it uses ETFs when they are the most cost-effective way to obtain desired exposures for a fund or to temporarily “equitize” cash inflows pending purchases of underlying securities, that the advisory fee for the Portfolio would be paid for services that would be in addition to, rather than duplicative of, the services to be provided under the advisory contracts of the ETFs.
The directors also considered the total expense ratio of the Class A shares of the Portfolio in comparison to the fees and expenses of funds within two comparison groups created by Broadridge: an Expense Group and an Expense Universe. Broadridge described an Expense Group as a representative sample of funds similar to the Portfolio and an Expense Universe as a broader group than the
AB ALL MARKET REAL RETURN PORTFOLIO • | 71 |
Expense Group, consisting of all funds in the investment classification/objective with a similar load type as the Portfolio. The Class A expense ratio of the Portfolio was based on the Portfolio’s latest fiscal year and the information included the pro forma expense ratio to reflect a reduction in the 12b-1 fee effective February 1, 2016. The directors noted that it was likely that the expense ratios of some of the other funds in the Portfolio’s Broadridge category were lowered by waivers or reimbursements by those funds’ investment advisers, which in some cases might be voluntary or temporary. The directors view the expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Portfolio by others.
The directors noted that the Portfolio’s pro forma total expense ratio, which had been capped by the Adviser (although the pro forma expense ratio was currently lower than the cap), was lower than the Expense Group and the Expense Universe medians. The directors concluded that the Portfolio’s pro forma expense ratio was satisfactory.
Economies of Scale
The directors noted that the advisory fee schedule for the Portfolio does not contain breakpoints and that they had discussed their strong preference, and that of the Senior Officer, for breakpoints in advisory contracts with the Adviser. The directors took into consideration prior presentations by an independent consultant on economies of scale in the mutual fund industry and for the AB Funds, and by the Adviser concerning certain of its views on economies of scale. The directors also had requested and received from the Adviser certain updates on economies of scale at the May 2015 meeting. The directors believe that economies of scale may be realized (if at all) by the Adviser across a variety of products and services, and not only in respect of a single fund. The directors noted that there is no established methodology for setting breakpoints that give effect to the fund-specific services provided by a fund’s adviser and to the economies of scale that an adviser may realize in its overall mutual fund business or those components of it which directly or indirectly affect a fund’s operations. The directors observed that in the mutual fund industry as a whole, as well as among funds similar to the Portfolio, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. The directors also noted that the advisory agreements for many funds do not have breakpoints at all. The directors informed the Adviser that they would monitor the Portfolio’s assets and its profitability to the Adviser and anticipated revisiting the question of breakpoints in the future if circumstances warranted doing so.
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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. |
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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 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 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
4 | Jones v. Harris at 1427. |
5 | Semi-annual total expense ratios are unaudited. |
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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 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
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 • | 75 |
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% |
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
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. |
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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 • | 77 |
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. |
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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 • | 79 |
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. |
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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 • | 81 |
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. |
82 | • 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
International Strategic Core 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
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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 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 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.
AB ALL MARKET REAL RETURN PORTFOLIO • | 83 |
AB Family of Funds
NOTES
84 | • 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-0152-0416
APR 04.30.16
SEMI-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.
June 24, 2016
Semi-Annual Report
This report provides management’s discussion of fund performance for AB Bond Inflation Strategy (the “Strategy”) for the semi-annual reporting period ended April 30, 2016.
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 Consumer Price Index (“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 also 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 resulting exposures to markets, sectors, issuers or specific securities will be continuously monitored by the Adviser.
AB BOND INFLATION STRATEGY • | 1 |
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 7 shows the Strategy’s performance compared to its benchmark, the Barclays 1-10 Year TIPS Index, and to the Lipper Inflation Protected Bond Funds Average (the “Lipper Average”), for the six- and 12-month periods ended April 30, 2016. 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.
For the six-month period, all share classes outperformed the benchmark, before sales charges, and also outperformed the Lipper Average. For the 12-month period, all share classes outperformed the benchmark, before sales charges, except Class A, Class C and Class R shares; all share classes outperformed the Lipper Average.
For the six-month period, TIPS performed strongly in absolute terms and also outperformed relative to Treasuries, as commodity prices rebounded in the last few months, which contributed to performance. In the 12-month period, TIPS had modestly positive absolute performance, and underperformed relative to comparable maturity Treasuries, as oil and commodity prices fell through much of the period, which detracted from performance. For both periods, sector allocation contributed positively to performance relative to the benchmark, due to beneficial exposures to investment-grade corporates and agency risk-sharing transactions. In the 12-month period, allocations to asset-backed securities, commercial mortgage-backed securities and non-agency mortgages contributed as well. Currency positioning also contributed for both periods, helped in the six-month period by a small overweight in the Brazilian real, and in the 12-month period by an underweight in the Australian dollar and overweights in the Japanese yen and Mexican peso. Yield-curve positioning was a small positive in both periods, as gains from being overweight the intermediate part of the curve were mostly offset by losses from an underweight in shorter maturities.
2 | • AB BOND INFLATION STRATEGY |
During both periods, the Strategy utilized derivatives including currency forwards and options to hedge currency risk and actively manage currency positions. Credit default swaps were utilized for hedging and investment purposes, which had an immaterial impact on absolute performance during both periods. Treasury futures, and interest rate and CPI swaps, were utilized to manage the duration, inflation protection, country exposure and yield-curve positioning of the Strategy.
Market Review and Investment Strategy
Bond markets were volatile over the six- and 12-month periods ended April 30, 2016, as economic growth trends and monetary policies in the world’s largest economies continued to diverge. Commodity prices declined through much of the 12-month period, with oil prices dipping below $26 per barrel in February, before beginning to stabilize in March and April—despite a breakdown in formal discussions about a potential production freeze. Government bond yields continued their volatility, and the yield on the US 10-Year Treasury ranged from about 1.6% to just below 2.5%, ultimately ending the period at 1.8%. The US dollar appreciated against many developed- and emerging-market currencies during much of the 12-month period, yet during the early part of 2016 the dollar reversed course and depreciated against many of these same currencies. The US Federal Reserve made its first official rate hike in nearly a decade in December, which investors generally accepted smoothly.
European markets declined in the second quarter of 2015 on fears of Greece’s departure from the European Union, but rebounded when stop-gap measures were reached with the country’s creditors in the third quarter to avoid an exit. Volatility was somewhat contained as the European Central Bank (“ECB”) maintained an easing bias through the period, though additional measures announced in December fell far short of investor expectations, putting pressure on markets in the region. However, the ECB surprised investors with aggressive expansion of its quantitative easing program in March. Other central banks cut rates, with some, including the Bank of Japan and the ECB, dipping into negative rate territory.
Economic activity in emerging-market economies continued to slow: Asia struggled with sluggish exports and weak domestic demand; Latin America continued to face weak growth and political upheaval in many parts of the region; and Eastern Europe’s growth picture was varied, as those countries tied to Western Europe fared better than those tied to commodities. Emerging-market sentiment was bolstered toward the end of the 12-month period. This was due to an uptick in oil prices, signs that China’s slowdown may be less pronounced than feared, encouraging political developments regarding Brazilian president Dilma Rousseff’s impeachment on corruption charges and Argentina’s progress on negotiations with its creditors that culminated in April with the country’s first new security issuance in 15 years.
AB BOND INFLATION STRATEGY • | 3 |
Against this backdrop, fixed-income performance varied across regions and sectors during the 12-month period. Credit securities generally underperformed developed-market Treasuries; developed-market Treasuries also outperformed emerging-market local-currency government bonds (despite the emerging-market rally in the last three months of the period). The positive performance of investment-grade securities generally outpaced negative returns from high-yield sectors, which saw a fairly wide divergence across sector returns. Commodity-linked sectors had the
worst performance—suffering on negative oil price action—with energy down the most, followed by basic industries.
On June 23, 2016, the UK voted to leave the European Union (“EU”) in a popular referendum. At this moment in time, the UK remains a member of the EU and the rules and regulations remain unchanged, as do all the protections in place. Exactly how the UK’s role in the EU will change will become clear over time. The Adviser continues to monitor the heightened market volatility.
4 | • AB BOND INFLATION STRATEGY |
DISCLOSURES AND RISKS
Benchmark Disclosure
The Barclays 1-10 Year TIPS Index is unmanaged and 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 as the current period of historically low rates is beginning to end and rates have begun rising. 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)
AB BOND INFLATION STRATEGY • | 5 |
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.
6 | • AB BOND INFLATION STRATEGY |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE STRATEGY VS. ITS BENCHMARK PERIODS ENDED APRIL 30, 2016 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB Bond Inflation Strategy | ||||||||||
Class 1* | 4.07% | 1.46% | ||||||||
| ||||||||||
Class 2* | 4.09% | 1.54% | ||||||||
| ||||||||||
Class A | 3.87% | 1.18% | ||||||||
| ||||||||||
Class C | 3.62% | 0.57% | ||||||||
| ||||||||||
Advisor Class† | 4.01% | 1.46% | ||||||||
| ||||||||||
Class R† | 3.86% | 1.09% | ||||||||
| ||||||||||
Class K† | 3.99% | 1.32% | ||||||||
| ||||||||||
Class I† | 4.06% | 1.50% | ||||||||
| ||||||||||
Class Z† | 4.08% | 1.64% | ||||||||
| ||||||||||
Barclays 1-10 Year TIPS Index | 3.12% | 1.23% | ||||||||
| ||||||||||
Lipper Inflation Protected Bond Funds Average | 2.97% | 0.29% | ||||||||
| ||||||||||
* 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 5-6.
(Historical Performance continued on next page)
AB BOND INFLATION STRATEGY • | 7 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF APRIL 30, 2016 (unaudited) | ||||||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | SEC Yields* | ||||||||||
Class 1 Shares† | 0.38 | % | ||||||||||
1 Year | 1.46 | % | 1.46 | % | ||||||||
5 Years | 1.68 | % | 1.68 | % | ||||||||
Since Inception‡ | 2.85 | % | 2.85 | % | ||||||||
Class 2 Shares† | 0.48 | % | ||||||||||
1 Year | 1.54 | % | 1.54 | % | ||||||||
5 Years | 1.78 | % | 1.78 | % | ||||||||
Since Inception‡ | 2.93 | % | 2.93 | % | ||||||||
Class A Shares | 0.01 | % | ||||||||||
1 Year | 1.18 | % | -3.14 | % | ||||||||
5 Years | 1.46 | % | 0.58 | % | ||||||||
Since Inception‡ | 2.62 | % | 1.92 | % | ||||||||
Class C Shares | -0.74 | % | ||||||||||
1 Year | 0.57 | % | -0.43 | % | ||||||||
5 Years | 0.78 | % | 0.78 | % | ||||||||
Since Inception‡ | 1.91 | % | 1.91 | % | ||||||||
Advisor Class Shares^ | 0.26 | % | ||||||||||
1 Year | 1.46 | % | 1.46 | % | ||||||||
5 Years | 1.75 | % | 1.75 | % | ||||||||
Since Inception‡ | 2.92 | % | 2.92 | % | ||||||||
Class R Shares^ | -0.54 | % | ||||||||||
1 Year | 1.09 | % | 1.09 | % | ||||||||
5 Years | 1.27 | % | 1.27 | % | ||||||||
Since Inception‡ | 2.43 | % | 2.43 | % | ||||||||
Class K Shares^ | 0.04 | % | ||||||||||
1 Year | 1.32 | % | 1.32 | % | ||||||||
5 Years | 1.53 | % | 1.53 | % | ||||||||
Since Inception‡ | 2.68 | % | 2.68 | % | ||||||||
Class I Shares^ | 0.38 | % | ||||||||||
1 Year | 1.50 | % | 1.50 | % | ||||||||
5 Years | 1.79 | % | 1.79 | % | ||||||||
Since Inception‡ | 2.94 | % | 2.94 | % | ||||||||
Class Z Shares^ | 0.47 | % | ||||||||||
1 Year | 1.64 | % | 1.64 | % | ||||||||
Since Inception‡ | 2.29 | % | 2.29 | % |
See Disclosures, Risks and Note about Historical Performance on pages 5-6.
(Historical Performance and footnotes 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 0.87%, 0.77%, 1.31%, 2.07%, 1.06%, 1.50%, 1.17%, 0.76% and 0.84% 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%, 0.75%, 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, 2017 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 April 30, 2016. |
† | 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. |
See Disclosures, Risks and Note about Historical Performance on pages 5-6.
(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 MARCH 31, 2016 (unaudited) | ||||
SEC Returns (reflects applicable sales charges) | ||||
Class 1 Shares* | ||||
1 Year | 1.36 | % | ||
5 Years | 1.98 | % | ||
Since Inception† | 2.75 | % | ||
Class 2 Shares* | ||||
1 Year | 1.45 | % | ||
5 Years | 2.06 | % | ||
Since Inception† | 2.83 | % | ||
Class A Shares | ||||
1 Year | -3.09 | % | ||
5 Years | 0.87 | % | ||
Since Inception† | 1.80 | % | ||
Class C Shares | ||||
1 Year | -0.62 | % | ||
5 Years | 1.05 | % | ||
Since Inception† | 1.79 | % | ||
Advisor Class Shares‡ | ||||
1 Year | 1.47 | % | ||
5 Years | 2.05 | % | ||
Since Inception† | 2.82 | % | ||
Class R Shares‡ | ||||
1 Year | 0.99 | % | ||
5 Years | 1.56 | % | ||
Since Inception† | 2.33 | % | ||
Class K Shares‡ | ||||
1 Year | 1.22 | % | ||
5 Years | 1.83 | % | ||
Since Inception† | 2.57 | % | ||
Class I Shares‡ | ||||
1 Year | 1.50 | % | ||
5 Years | 2.09 | % | ||
Since Inception† | 2.84 | % | ||
Class Z Shares‡ | ||||
1 Year | 1.45 | % | ||
Since Inception† | 1.70 | % |
See Disclosures, Risks and Note about Historical Performance on pages 5-6.
(Historical Performance and footnotes 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. |
See Disclosures, Risks and Note about Historical Performance on pages 5-6.
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 November 1, 2015 | Ending Account Value April 30, 2016 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,038.70 | $ | 4.87 | 0.96 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.09 | $ | 4.82 | 0.96 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,036.20 | $ | 8.51 | 1.68 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,016.51 | $ | 8.42 | 1.68 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,040.10 | $ | 3.45 | 0.68 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.48 | $ | 3.42 | 0.68 | % | ||||||||
Class R | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,038.60 | $ | 5.98 | 1.18 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.00 | $ | 5.92 | 1.18 | % | ||||||||
Class K | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,039.90 | $ | 4.72 | 0.93 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.24 | $ | 4.67 | 0.93 | % | ||||||||
Class I | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,040.60 | $ | 3.45 | 0.68 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.48 | $ | 3.42 | 0.68 | % |
12 | • AB BOND INFLATION STRATEGY |
Expense Example
Beginning Account Value November 1, 2015 | Ending Account Value April 30, 2016 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class 1 | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,040.70 | $ | 3.96 | 0.78 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.98 | $ | 3.92 | 0.78 | % | ||||||||
Class 2 | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,040.90 | $ | 3.45 | 0.68 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.48 | $ | 3.42 | 0.68 | % | ||||||||
Class Z | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,040.80 | $ | 3.45 | 0.68 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.48 | $ | 3.42 | 0.68 | % |
* | Expenses are equal to each classes’ annualized expense ratios, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
AB BOND INFLATION STRATEGY • | 13 |
Expense Example
PORTFOLIO SUMMARY
April 30, 2016 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $325.6 Total Investments ($mil): $446.1
INFLATION PROTECTION BREAKDOWN* | ||||
U.S. Inflation-Protected Exposure | 100.0 | % | ||
Non-U.S. | — | |||
Non-Inflation Exposure | — | |||
|
| |||
100.0 | % |
SECTOR BREAKDOWN OF NET PORTFOLIO ASSETS, EXCLUDING TREASURY SECURITIES, TIPS, INTEREST RATE DERIVATIVES AND NET CASH EQUIVALENTS* | ||||
Corporates – Investment Grade | 14.4 | % | ||
Commercial Mortgage-Backed Securities | 10.4 | % | ||
Asset-Backed Securities | 9.3 | % | ||
Collateralized Mortgage Obligations | 5.1 | % | ||
Corporates – Non-Investment Grade | 0.7 | % | ||
Governments – Sovereign Agencies | 0.6 | % | ||
Quasi-Sovereigns | 0.5 | % | ||
Common Stocks | 0.2 | % | ||
Governments – Sovereign Bonds | 0.1 | % | ||
Emerging Markets – Corporate Bonds | 0.1 | % |
SECTOR BREAKDOWN OF TOTAL PORTFOLIO INVESTMENTS, EXCLUDING DERIVATIVES† | ||||
Inflation-Linked Securities | 63.5 | % | ||
Corporates – Investment Grade | 13.7 | % | ||
Commercial Mortgage-Backed Securities | 7.6 | % | ||
Asset-Backed Securities | 6.8 | % | ||
Collateralized Mortgage Obligations | 3.7 | % | ||
Corporates – Non-Investment Grade | 2.5 | % | ||
Emerging Markets – Treasuries | 0.6 | % | ||
Governments – Sovereign Agencies | 0.4 | % | ||
Quasi-Sovereigns | 0.4 | % | ||
Common Stocks | 0.1 | % | ||
Governments – Sovereign Bonds | 0.1 | % | ||
Short-Term | 0.6 | % |
* | All data are as of April 30, 2016. 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. |
14 | • AB BOND INFLATION STRATEGY |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
April 30, 2016 (unaudited)
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
INFLATION-LINKED SECURITIES – 86.9% | ||||||||||
United States – 86.9% | ||||||||||
U.S. Treasury Inflation Index | U.S.$ | 26,344 | $ | 26,614,458 | ||||||
0.125%, 4/15/18-7/15/24 (TIPS)(a) | 111,564 | 113,508,616 | ||||||||
0.25%, 1/15/25 (TIPS)(a) | 28,820 | 29,177,346 | ||||||||
0.375%, 7/15/23-7/15/25 (TIPS) | 45,939 | 47,279,150 | ||||||||
0.625%, 7/15/21 (TIPS)(a) | 26,681 | 28,027,734 | ||||||||
0.625%, 1/15/24 (TIPS) | 19,028 | 19,891,370 | ||||||||
1.375%, 1/15/20 (TIPS) | 5,861 | 6,265,262 | ||||||||
2.00%, 1/15/26 (TIPS) | 10,478 | 12,313,472 | ||||||||
|
| |||||||||
Total Inflation-Linked Securities | 283,077,408 | |||||||||
|
| |||||||||
CORPORATES – INVESTMENT GRADE – 18.8% | ||||||||||
Industrial – 12.4% | ||||||||||
Basic – 1.2% | ||||||||||
Barrick Gold Corp. | 47 | 48,532 | ||||||||
Dow Chemical Co. (The) | 67 | 80,009 | ||||||||
Eastman Chemical Co. | 300 | 310,894 | ||||||||
Glencore Funding LLC | 1,720 | 1,642,600 | ||||||||
International Paper Co. | 592 | 658,536 | ||||||||
LyondellBasell Industries NV | 405 | 472,333 | ||||||||
Minsur SA | 314 | 303,695 | ||||||||
Sociedad Quimica y Minera de Chile SA | 393 | 369,420 | ||||||||
|
| |||||||||
3,886,019 | ||||||||||
|
| |||||||||
Capital Goods – 0.2% | ||||||||||
General Electric Co. | 191 | 198,401 | ||||||||
Yamana Gold, Inc. | 403 | 370,676 | ||||||||
|
| |||||||||
569,077 | ||||||||||
|
| |||||||||
Communications - Media – 1.5% | ||||||||||
21st Century Fox America, Inc. | 1,095 | 1,138,077 | ||||||||
6.15%, 2/15/41 | 115 | 142,106 |
AB BOND INFLATION STRATEGY • | 15 |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
CBS Corp. | U.S.$ | 300 | $ | 309,552 | ||||||
5.75%, 4/15/20 | 325 | 370,796 | ||||||||
Cox Communications, Inc. | 163 | 153,487 | ||||||||
Discovery Communications LLC | 323 | 314,266 | ||||||||
NBCUniversal Enterprise, Inc. | 409 | 423,315 | ||||||||
RELX Capital, Inc. | 460 | 533,130 | ||||||||
S&P Global, Inc. | 611 | 676,695 | ||||||||
Time Warner Cable, Inc. | 235 | 220,147 | ||||||||
5.00%, 2/01/20 | 35 | 38,192 | ||||||||
8.75%, 2/14/19 | 25 | 29,493 | ||||||||
Time Warner, Inc. | 537 | 559,367 | ||||||||
|
| |||||||||
4,908,623 | ||||||||||
|
| |||||||||
Communications - Telecommunications – 1.0% | ||||||||||
American Tower Corp. | 300 | 307,284 | ||||||||
4.70%, 3/15/22 | 395 | 424,684 | ||||||||
5.05%, 9/01/20 | 35 | 38,307 | ||||||||
AT&T, Inc. | 1,255 | 1,283,629 | ||||||||
3.80%, 3/15/22 | 274 | 290,219 | ||||||||
Rogers Communications, Inc. | CAD | 55 | 47,756 | |||||||
Telefonica Emisiones SAU | U.S.$ | 400 | 454,831 | |||||||
Verizon Communications, Inc. | 602 | 605,348 | ||||||||
|
| |||||||||
3,452,058 | ||||||||||
|
| |||||||||
Consumer Cyclical - Automotive – 0.5% | ||||||||||
Ford Motor Credit Co. LLC | 400 | 406,223 | ||||||||
5.875%, 8/02/21 | 640 | 738,803 | ||||||||
General Motors Co. | 425 | 438,540 | ||||||||
|
| |||||||||
1,583,566 | ||||||||||
|
| |||||||||
Consumer Cyclical - Retailers – 0.8% | ||||||||||
CVS Health Corp. | 695 | 750,198 |
16 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Kohl’s Corp. | U.S.$ | 876 | $ | 864,906 | ||||||
Walgreens Boots Alliance, Inc. | 935 | 975,710 | ||||||||
|
| |||||||||
2,590,814 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 3.7% | ||||||||||
AbbVie, Inc. | 455 | 476,758 | ||||||||
Actavis Funding SCS | 803 | 824,415 | ||||||||
3.85%, 6/15/24 | 278 | 285,566 | ||||||||
Agilent Technologies, Inc. | 7 | 7,714 | ||||||||
Altria Group, Inc. | 930 | 963,928 | ||||||||
4.75%, 5/05/21 | 195 | 220,966 | ||||||||
Baxalta, Inc. | 700 | 719,155 | ||||||||
Bayer US Finance LLC | 374 | 397,603 | ||||||||
Becton Dickinson and Co. | 388 | 413,034 | ||||||||
Biogen, Inc. | 436 | 465,222 | ||||||||
Bunge Ltd. Finance Corp. | 81 | 94,154 | ||||||||
Celgene Corp. | 520 | 547,833 | ||||||||
Gilead Sciences, Inc. | 335 | 357,940 | ||||||||
Grupo Bimbo SAB de CV | 648 | 660,963 | ||||||||
Kraft Heinz Foods Co. | 350 | 360,170 | ||||||||
3.50%, 7/15/22(b) | 447 | 471,720 | ||||||||
Laboratory Corp. of America Holdings | 275 | 280,302 | ||||||||
Medtronic, Inc. | 895 | 959,963 | ||||||||
Newell Brands, Inc. | 814 | 843,104 | ||||||||
3.85%, 4/01/23 | 238 | 248,857 | ||||||||
Perrigo Finance Unlimited Co. | 217 | 221,149 | ||||||||
3.90%, 12/15/24 | 310 | 314,478 | ||||||||
Reynolds American, Inc. | 611 | 664,428 |
AB BOND INFLATION STRATEGY • | 17 |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Thermo Fisher Scientific, Inc. | U.S.$ | 363 | $ | 390,617 | ||||||
Tyson Foods, Inc. | 199 | 204,282 | ||||||||
3.95%, 8/15/24 | 650 | 701,764 | ||||||||
|
| |||||||||
12,096,085 | ||||||||||
|
| |||||||||
Energy – 2.5% |
| |||||||||
Energy Transfer Partners LP | 510 | 515,240 | ||||||||
6.125%, 2/15/17 | 145 | 148,087 | ||||||||
EnLink Midstream Partners LP | 352 | 264,561 | ||||||||
Enterprise Products Operating LLC | 771 | 784,199 | ||||||||
5.20%, 9/01/20 | 335 | 368,533 | ||||||||
Halliburton Co. | 860 | 876,122 | ||||||||
Husky Energy, Inc. | 93 | 103,802 | ||||||||
Kinder Morgan Energy Partners LP | 846 | 835,525 | ||||||||
4.15%, 3/01/22 | 104 | 102,503 | ||||||||
Marathon Petroleum Corp. | 280 | 303,611 | ||||||||
Noble Energy, Inc. | 491 | 488,175 | ||||||||
4.15%, 12/15/21 | 127 | 129,603 | ||||||||
8.25%, 3/01/19 | 387 | 432,995 | ||||||||
Plains All American Pipeline LP/PAA Finance Corp. | 621 | 556,853 | ||||||||
Regency Energy Partners LP/Regency Energy Finance Corp. | 115 | 107,245 | ||||||||
Schlumberger Holdings Corp. | 845 | 868,972 | ||||||||
Spectra Energy Capital LLC | 8 | 9,189 | ||||||||
Valero Energy Corp. | 476 | 530,479 | ||||||||
Williams Partners LP | 350 | 306,600 | ||||||||
4.125%, 11/15/20 | 300 | 282,432 | ||||||||
|
| |||||||||
8,014,726 | ||||||||||
|
| |||||||||
Other Industrial – 0.1% |
| |||||||||
Hutchison Whampoa International 14 Ltd. | 356 | 355,931 | ||||||||
|
|
18 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Services – 0.1% |
| |||||||||
eBay, Inc. | U.S.$ | 217 | $ | 226,906 | ||||||
|
| |||||||||
Technology – 0.8% | ||||||||||
Fidelity National Information Services, Inc. | 102 | 103,360 | ||||||||
5.00%, 10/15/25 | 2 | 2,208 | ||||||||
KLA-Tencor Corp. | 639 | 667,164 | ||||||||
Micron Technology, Inc. | 209 | 216,315 | ||||||||
Motorola Solutions, Inc. | 483 | 568,303 | ||||||||
Seagate HDD Cayman | 398 | 303,111 | ||||||||
Tencent Holdings Ltd. | 426 | 440,583 | ||||||||
Total System Services, Inc. | 259 | 259,128 | ||||||||
|
| |||||||||
2,560,172 | ||||||||||
|
| |||||||||
40,243,977 | ||||||||||
|
| |||||||||
Financial Institutions – 5.5% |
| |||||||||
Banking – 3.4% |
| |||||||||
ABN AMRO Bank NV | 150 | 152,922 | ||||||||
Bank of America Corp. | EUR | 900 | 1,025,970 | |||||||
Barclays Bank PLC | 101 | 137,617 | ||||||||
Barclays PLC | U.S.$ | 294 | 282,155 | |||||||
BPCE SA | 213 | 226,499 | ||||||||
Capital One Financial Corp. | 150 | 154,357 | ||||||||
Citigroup, Inc. | 655 | 651,367 | ||||||||
Cooperatieve Rabobank UA | 396 | 414,156 | ||||||||
Credit Suisse Group Funding Guernsey Ltd. | 478 | 488,023 | ||||||||
Goldman Sachs Group, Inc. (The) | 810 | 807,469 | ||||||||
JPMorgan Chase & Co. | 55 | 59,492 |
AB BOND INFLATION STRATEGY • | 19 |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Mitsubishi UFJ Financial Group, Inc. | U.S.$ | 813 | $ | 834,153 | ||||||
Mizuho Financial Group Cayman 3 Ltd. | 816 | 856,775 | ||||||||
Morgan Stanley | 456 | 518,033 | ||||||||
Murray Street Investment Trust I | 52 | 53,414 | ||||||||
PNC Bank NA | 940 | 995,240 | ||||||||
Rabobank Capital Funding Trust III | 375 | 375,937 | ||||||||
Santander Bank NA | 890 | 881,220 | ||||||||
Santander Issuances SAU | 400 | 397,460 | ||||||||
Santander UK PLC | 505 | 524,871 | ||||||||
Standard Chartered PLC | 400 | 374,000 | ||||||||
UBS AG/Stamford CT | 465 | 535,331 | ||||||||
UBS Group Funding Jersey Ltd. | 453 | 464,551 | ||||||||
|
| |||||||||
11,211,012 | ||||||||||
|
| |||||||||
Brokerage – 0.3% | ||||||||||
Nomura Holdings, Inc. | 809 | 811,632 | ||||||||
|
| |||||||||
Insurance – 1.2% | ||||||||||
American International Group, Inc. | 625 | 686,022 | ||||||||
Coventry Health Care, Inc. | 415 | 469,555 | ||||||||
Hartford Financial Services Group, Inc. (The) | 535 | 602,320 | ||||||||
5.50%, 3/30/20 | 24 | 26,781 | ||||||||
6.10%, 10/01/41 | 165 | 196,614 | ||||||||
Lincoln National Corp. | 175 | 208,585 | ||||||||
MetLife, Inc. | 90 | 106,238 | ||||||||
7.717%, 2/15/19 | 180 | 208,489 | ||||||||
Series C | 600 | 584,220 |
20 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Nationwide Financial Services, Inc. | U.S.$ | 360 | $ | 396,565 | ||||||
Nationwide Mutual Insurance Co. | 125 | 184,599 | ||||||||
Prudential Financial, Inc. | 275 | 286,624 | ||||||||
|
| |||||||||
3,956,612 | ||||||||||
|
| |||||||||
REITS – 0.6% | ||||||||||
Host Hotels & Resorts LP | 175 | 190,056 | ||||||||
Trust F/1401 | 825 | 855,938 | ||||||||
Welltower, Inc. | 890 | 986,636 | ||||||||
|
| |||||||||
2,032,630 | ||||||||||
|
| |||||||||
18,011,886 | ||||||||||
|
| |||||||||
Utility – 0.9% | ||||||||||
Electric – 0.7% | ||||||||||
Berkshire Hathaway Energy Co. | 340 | 440,748 | ||||||||
CMS Energy Corp. | 144 | 162,462 | ||||||||
Constellation Energy Group, Inc. | 91 | 101,795 | ||||||||
Entergy Corp. | 607 | 646,910 | ||||||||
Exelon Corp. | 570 | 581,686 | ||||||||
Exelon Generation Co. LLC | 416 | 438,406 | ||||||||
|
| |||||||||
2,372,007 | ||||||||||
|
| |||||||||
Natural Gas – 0.2% | ||||||||||
NiSource Finance Corp. | 75 | 84,572 | ||||||||
Talent Yield Investments Ltd. | 480 | 515,661 | ||||||||
|
| |||||||||
600,233 | ||||||||||
|
| |||||||||
2,972,240 | ||||||||||
|
| |||||||||
Total Corporates – Investment Grade | 61,228,103 | |||||||||
|
| |||||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES – 10.4% | ||||||||||
Non-Agency Fixed Rate CMBS – 8.4% | ||||||||||
Banc of America Commercial Mortgage Trust | 1,694 | 1,763,722 | ||||||||
Series 2007-5, Class AM | 258 | 265,798 |
AB BOND INFLATION STRATEGY • | 21 |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Bear Stearns Commercial Mortgage Securities Trust | U.S.$ | 571 | $ | 569,296 | ||||||
BHMS Mortgage Trust | 1,070 | 1,113,288 | ||||||||
CGRBS Commercial Mortgage Trust | 885 | 929,418 | ||||||||
Citigroup Commercial Mortgage Trust | 486 | 460,591 | ||||||||
Series 2013-GC11, Class D | 420 | 375,837 | ||||||||
Series 2015-GC27, Class A5 | 707 | 727,305 | ||||||||
COBALT CMBS Commercial Mortgage Trust | 442 | 459,715 | ||||||||
Commercial Mortgage Trust | 633 | 643,455 | ||||||||
Series 2007-GG9, Class A4 | 559 | 568,258 | ||||||||
Series 2007-GG9, Class AM | 598 | 609,648 | ||||||||
Series 2013-SFS, Class A1 | 340 | 334,058 | ||||||||
Credit Suisse Commercial Mortgage Trust | 463 | 469,407 | ||||||||
CSAIL Commercial Mortgage Trust | 631 | 676,699 | ||||||||
DBUBS Mortgage Trust | 368 | 379,852 | ||||||||
GS Mortgage Securities Corp. II | 768 | 784,104 | ||||||||
GS Mortgage Securities Trust | 539 | 553,734 | ||||||||
Series 2013-G1, Class A1 | 604 | 594,025 | ||||||||
Series 2014-GC18, Class D | 581 | 494,924 |
22 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
JP Morgan Chase Commercial Mortgage Securities Trust | U.S.$ | 251 | $ | 251,160 | ||||||
Series 2006-CB15, Class A4 | 223 | 222,598 | ||||||||
Series 2006-LDP9, Class AM | 370 | 368,555 | ||||||||
Series 2007-CB19, Class AM | 295 | 301,922 | ||||||||
Series 2007-LD12, Class AM | 245 | 255,747 | ||||||||
Series 2007-LDPX, Class A1A | 1,663 | 1,698,029 | ||||||||
Series 2007-LDPX, Class A3 | 392 | 400,388 | ||||||||
Series 2010-C2, Class A1 | 11 | 11,004 | ||||||||
Series 2011-C5, Class D | 266 | 270,921 | ||||||||
JPMBB Commercial Mortgage Securities Trust | 670 | 722,043 | ||||||||
Series 2015-C32, Class C | 545 | 505,295 | ||||||||
LB-UBS Commercial Mortgage Trust | 288 | 286,533 | ||||||||
Series 2007-C1, Class A4 | 1,032 | 1,048,698 | ||||||||
Series 2007-C1, Class AM | 290 | 294,225 | ||||||||
LSTAR Commercial Mortgage Trust | 569 | 571,471 | ||||||||
Series 2015-3, Class A2 | 698 | 690,541 | ||||||||
Merrill Lynch Mortgage Trust | 353 | 354,251 | ||||||||
Series 2006-C2, Class AJ | 334 | 332,254 | ||||||||
ML-CFC Commercial Mortgage Trust | 949 | 962,254 | ||||||||
Series 2007-9, Class A4 | 120 | 124,084 |
AB BOND INFLATION STRATEGY • | 23 |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
UBS-Barclays Commercial Mortgage Trust | U.S.$ | 277 | $ | 288,039 | ||||||
Series 2012-C4, Class A5 | 2,309 | 2,369,626 | ||||||||
UBS-Citigroup Commercial Mortgage Trust | 229 | 248,397 | ||||||||
Wachovia Bank Commercial Mortgage Trust | 219 | 218,280 | ||||||||
WF-RBS Commercial Mortgage Trust | 327 | 305,387 | ||||||||
Series 2013-C14, Class A5 | 862 | 910,050 | ||||||||
Series 2014-C20, Class A2 | 648 | 671,362 | ||||||||
|
| |||||||||
27,456,248 | ||||||||||
|
| |||||||||
Non-Agency Floating Rate CMBS – 2.0% | ||||||||||
Carefree Portfolio Trust | 489 | 487,816 | ||||||||
Commercial Mortgage Trust | 775 | 775,439 | ||||||||
Series 2014-SAVA, Class A | 361 | 356,456 | ||||||||
H/2 Asset Funding NRE | 646 | 640,789 | ||||||||
JP Morgan Chase Commercial Mortgage Securities Trust | 1,068 | 1,055,270 | ||||||||
Series 2015-SGP, Class A | 853 | 846,758 | ||||||||
Morgan Stanley Capital I Trust | 241 | 240,258 | ||||||||
Series 2015-XLF2, Class SNMA | 241 | 242,227 |
24 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Resource Capital Corp., Ltd. | U.S.$ | 325 | $ | 318,896 | ||||||
Starwood Retail Property Trust | 1,084 | 1,070,800 | ||||||||
Wells Fargo Commercial Mortgage Trust | 537 | 517,634 | ||||||||
|
| |||||||||
6,552,343 | ||||||||||
|
| |||||||||
Total Commercial Mortgage-Backed Securities | 34,008,591 | |||||||||
|
| |||||||||
ASSET-BACKED SECURITIES – 9.3% |
| |||||||||
Autos - Fixed Rate – 4.6% |
| |||||||||
Ally Auto Receivables Trust | 341 | 341,909 | ||||||||
Ally Master Owner Trust | 707 | 707,560 | ||||||||
AmeriCredit Automobile Receivables Trust | 117 | 116,493 | ||||||||
Series 2013-4, Class A3 | 69 | 68,609 | ||||||||
ARI Fleet Lease Trust | 140 | 139,649 | ||||||||
Avis Budget Rental Car Funding AESOP LLC | 420 | 420,300 | ||||||||
Series 2013-2A, Class A | 289 | 294,862 | ||||||||
Bank of The West Auto Trust | 706 | 706,454 | ||||||||
California Republic Auto Receivables Trust | 850 | 850,543 | ||||||||
Series 2015-2, Class A3 | 530 | 530,520 | ||||||||
Capital Auto Receivables Asset Trust | 200 | 200,069 |
AB BOND INFLATION STRATEGY • | 25 |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Chrysler Capital Auto Receivables Trust | U.S.$ | 857 | $ | 865,013 | ||||||
CPS Auto Receivables Trust | 284 | 282,673 | ||||||||
Series 2014-B, Class A | 204 | 203,078 | ||||||||
Drive Auto Receivables Trust | 21 | 21,292 | ||||||||
Series 2015-CA, Class A2A | 58 | 57,696 | ||||||||
Series 2015-DA, Class A2A | 235 | 234,849 | ||||||||
Series 2016-AA, Class A2A | 95 | 95,056 | ||||||||
Enterprise Fleet Financing LLC | 151 | 150,893 | ||||||||
Series 2015-1, Class A2 | 595 | 593,910 | ||||||||
Exeter Automobile Receivables Trust | 6 | 6,234 | ||||||||
Series 2014-2A, Class A | 45 | 45,030 | ||||||||
Series 2016-1A, Class D | 250 | 247,898 | ||||||||
Flagship Credit Auto Trust | 3 | 2,711 | ||||||||
Series 2016-2, Class D | 325 | 324,933 | ||||||||
Ford Credit Auto Owner Trust | 225 | 224,185 | ||||||||
Series 2014-2, Class A | 728 | 738,232 | ||||||||
GM Financial Automobile Leasing Trust | 447 | 447,412 | ||||||||
Series 2015-2, Class A3 | 798 | 800,862 | ||||||||
GMF Floorplan Owner Revolving Trust | 599 | 597,181 | ||||||||
Harley-Davidson Motorcycle Trust | 415 | 415,048 |
26 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Hertz Vehicle Financing II LP | U.S.$ | 508 | $ | 508,361 | ||||||
Hertz Vehicle Financing LLC | 368 | 357,739 | ||||||||
Series 2016-1A, Class A | 322 | 322,029 | ||||||||
Hyundai Auto Lease Securitization Trust | 313 | 312,988 | ||||||||
Series 2015-B, Class A3 | 557 | 557,454 | ||||||||
Hyundai Auto Receivables Trust | 165 | 165,477 | ||||||||
Mercedes Benz Auto Lease Trust | 318 | 318,065 | ||||||||
Nissan Auto Lease Trust | 587 | 588,080 | ||||||||
Santander Drive Auto Receivables Trust | 304 | 304,028 | ||||||||
Series 2015-4, Class A2A | 232 | 231,555 | ||||||||
TCF Auto Receivables Owner Trust | 427 | 426,852 | ||||||||
Westlake Automobile Receivables Trust | 242 | 242,214 | ||||||||
|
| |||||||||
15,065,996 | ||||||||||
|
| |||||||||
Credit Cards - Fixed Rate – 2.1% | ||||||||||
American Express Credit Account Master Trust | 474 | 474,884 | ||||||||
Barclays Dryrock Issuance Trust | 523 | 535,812 | ||||||||
Series 2015-2, Class A | 728 | 731,427 | ||||||||
Capital One Multi-Asset Execution Trust | 692 | 696,737 |
AB BOND INFLATION STRATEGY • | 27 |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Chase Issuance Trust | U.S.$ | 825 | $ | 825,595 | ||||||
Discover Card Execution Note Trust | 718 | 727,452 | ||||||||
Synchrony Credit Card Master Note Trust | 1,084 | 1,096,248 | ||||||||
Series 2016-1, Class A | 209 | 210,479 | ||||||||
World Financial Network Credit Card Master Trust | 370 | 372,081 | ||||||||
Series 2013-A, Class A | 373 | 374,008 | ||||||||
Series 2015-B, Class A | 551 | 562,185 | ||||||||
|
| |||||||||
6,606,908 | ||||||||||
|
| |||||||||
Autos - Floating Rate – 1.1% |
| |||||||||
BMW Floorplan Master Owner Trust | 1,037 | 1,037,000 | ||||||||
Ford Credit Floorplan Master Owner Trust A | 692 | 685,937 | ||||||||
GE Dealer Floorplan Master Note Trust | 534 | 532,691 | ||||||||
Series 2015-1, Class A | 620 | 618,443 | ||||||||
Hertz Fleet Lease Funding LP | 463 | 463,427 | ||||||||
Volkswagen Credit Auto Master Trust | 330 | 325,549 | ||||||||
|
| |||||||||
3,663,047 | ||||||||||
|
| |||||||||
Other ABS - Fixed Rate – 0.8% | ||||||||||
CIT Equipment Collateral | 349 | 348,708 |
28 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Citi Held For Asset Issuance | U.S.$ | 409 | $ | 410,507 | ||||||
CNH Equipment Trust | 493 | 494,955 | ||||||||
Dell Equipment Finance Trust | 247 | 246,174 | ||||||||
Series 2015-2, Class A2A | 286 | 285,622 | ||||||||
SBA Tower Trust | 851 | 847,809 | ||||||||
|
| |||||||||
2,633,775 | ||||||||||
|
| |||||||||
Credit Cards - Floating Rate – 0.7% | ||||||||||
Cabela’s Credit Card Master Note Trust | 600 | 599,085 | ||||||||
Discover Card Execution Note Trust | 501 | 501,826 | ||||||||
First National Master Note Trust | 794 | 794,694 | ||||||||
World Financial Network Credit Card Master Trust | 403 | 401,856 | ||||||||
|
| |||||||||
2,297,461 | ||||||||||
|
| |||||||||
Total Asset-Backed Securities | 30,267,187 | |||||||||
|
| |||||||||
COLLATERALIZED MORTGAGE OBLIGATIONS – 5.1% | ||||||||||
Risk Share Floating Rate – 4.7% | ||||||||||
Bellemeade Re Ltd. | 307 | 302,984 | ||||||||
Series 2016-1A, Class M2B | 272 | 271,519 |
AB BOND INFLATION STRATEGY • | 29 |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Federal Home Loan Mortgage Corp. | U.S.$ | 1,030 | $ | 1,042,311 | ||||||
Series 2014-DN3, Class M3 | 1,055 | 1,061,245 | ||||||||
Series 2014-HQ3, Class M3 | 323 | 330,539 | ||||||||
Series 2015-DNA1, Class M3 | 260 | 257,421 | ||||||||
Series 2015-DNA2, Class M2 | 1,046 | 1,053,336 | ||||||||
Series 2015-DNA3, Class M3 | 281 | 283,393 | ||||||||
Series 2015-HQ1, Class M2 | 410 | 411,863 | ||||||||
Series 2015-HQA1, Class M2 | 770 | 776,492 | ||||||||
Series 2015-HQA2, Class M2 | 294 | 297,879 | ||||||||
Series 2015-HQA2, Class M3 | 276 | 275,909 | ||||||||
Series 2016-DNA1, Class M3 | 324 | 338,994 | ||||||||
Series 2016-HQA1, Class M3 | 310 | 331,499 | ||||||||
Federal National Mortgage Association Connecticut Avenue Securities | 224 | 223,732 | ||||||||
Series 2014-C04, Class 1M2 | 528 | 542,458 |
30 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Series 2014-C04, Class 2M2 | U.S.$ | 195 | $ | 201,267 | ||||||
Series 2015-C01, Class 1M2 | 450 | 457,791 | ||||||||
Series 2015-C01, Class 2M2 | 639 | 648,608 | ||||||||
Series 2015-C02, Class 1M2 | 571 | 567,083 | ||||||||
Series 2015-C02, Class 2M2 | 445 | 444,914 | ||||||||
Series 2015-C03, Class 1M1 | 323 | 322,304 | ||||||||
Series 2015-C03, Class 1M2 | 691 | 710,445 | ||||||||
Series 2015-C03, Class 2M2 | 679 | 686,834 | ||||||||
Series 2015-C04, Class 1M2 | 204 | 213,617 | ||||||||
Series 2015-C04, Class 2M2 | 620 | 641,787 | ||||||||
Series 2016-C01, Class 1M2 | 432 | 474,454 | ||||||||
Series 2016-C01, Class 2M2 | 446 | 491,349 | ||||||||
Series 2016-C02, Class 1M2 | 505 | 539,915 | ||||||||
Series 2016-C03, Class 1M2 | 86 | 88,658 | ||||||||
Series 2016-C03, Class 2M2 | 414 | 430,347 |
AB BOND INFLATION STRATEGY • | 31 |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Wells Fargo Credit Risk Transfer Securities Trust | U.S.$ | 222 | $ | 222,492 | ||||||
Series 2015-WF1, Class 2M1 | 282 | 281,947 | ||||||||
|
| |||||||||
15,225,386 | ||||||||||
|
| |||||||||
Agency Floating Rate – 0.4% | ||||||||||
Federal Home Loan Mortgage Corp. REMICs | 1,837 | 385,262 | ||||||||
Federal National Mortgage Association REMICs | 2,460 | 484,600 | ||||||||
Series 2016-19, Class SA | 2,249 | 386,638 | ||||||||
|
| |||||||||
1,256,500 | ||||||||||
|
| |||||||||
Total Collateralized Mortgage Obligations | 16,481,886 | |||||||||
|
| |||||||||
CORPORATES – NON-INVESTMENT GRADE – 3.4% | ||||||||||
Industrial – 1.9% | ||||||||||
Basic – 0.1% | ||||||||||
Freeport-McMoran Oil & Gas LLC/FCX Oil & Gas, Inc. | 124 | 117,180 | ||||||||
Novelis, Inc. | 90 | 91,688 | ||||||||
|
| |||||||||
208,868 | ||||||||||
|
| |||||||||
Capital Goods – 0.2% | ||||||||||
Reynolds Group Issuer, Inc./Reynolds Group Issuer LLC/Reynolds Group Issuer Lu | 330 | 342,375 | ||||||||
Sealed Air Corp. | 331 | 349,619 | ||||||||
|
| |||||||||
691,994 | ||||||||||
|
| |||||||||
Communications - Media – 0.1% | ||||||||||
CSC Holdings LLC | 146 | 162,060 | ||||||||
|
|
32 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Communications - Telecommunications – 0.5% | ||||||||||
Numericable-SFR SA | EUR | 231 | $ | 274,492 | ||||||
Sprint Capital Corp. | U.S.$ | 1,000 | 915,000 | |||||||
Wind Acquisition Finance SA | 340 | 324,530 | ||||||||
|
| |||||||||
1,514,022 | ||||||||||
|
| |||||||||
Consumer Cyclical - Automotive – 0.0% | ||||||||||
Dana Holding Corp. | 147 | 148,470 | ||||||||
|
| |||||||||
Consumer Cyclical - Other – 0.3% | ||||||||||
International Game Technology PLC | 360 | 366,372 | ||||||||
KB Home | 345 | 346,725 | ||||||||
MCE Finance Ltd. | 405 | 390,825 | ||||||||
|
| |||||||||
1,103,922 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 0.1% | ||||||||||
Valeant Pharmaceuticals International, Inc. | 385 | 321,621 | ||||||||
|
| |||||||||
Energy – 0.5% | ||||||||||
Cenovus Energy, Inc. | 33 | 29,602 | ||||||||
5.70%, 10/15/19 | 159 | 164,865 | ||||||||
DCP Midstream LLC | 405 | 368,550 | ||||||||
Diamond Offshore Drilling, Inc. | 350 | 253,292 | ||||||||
ONEOK, Inc. | 463 | 407,440 | ||||||||
SM Energy Co. | 41 | 37,515 | ||||||||
Transocean, Inc. | 370 | 305,020 | ||||||||
|
| |||||||||
1,566,284 | ||||||||||
|
| |||||||||
Technology – 0.1% | ||||||||||
Advanced Micro Devices, Inc. | 280 | 235,900 | ||||||||
|
| |||||||||
5,953,141 | ||||||||||
|
|
AB BOND INFLATION STRATEGY • | 33 |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Financial Institutions – 1.2% | ||||||||||
Banking – 1.0% | ||||||||||
Bank of America Corp. | U.S.$ | 233 | $ | 245,232 | ||||||
Barclays Bank PLC | 137 | 157,235 | ||||||||
7.75%, 4/10/23 | 372 | 395,157 | ||||||||
Credit Agricole SA | 260 | 269,811 | ||||||||
HBOS Capital Funding LP | EUR | 951 | 1,088,942 | |||||||
Intesa Sanpaolo SpA | U.S.$ | 689 | 648,452 | |||||||
Royal Bank of Scotland Group PLC | 100 | 93,450 | ||||||||
Royal Bank of Scotland PLC (The) | 29 | 30,665 | ||||||||
Societe Generale SA | 115 | 116,150 | ||||||||
UniCredit Luxembourg Finance SA | 325 | 337,569 | ||||||||
|
| |||||||||
3,382,663 | ||||||||||
|
| |||||||||
Finance – 0.2% | ||||||||||
AerCap Aviation Solutions BV | 200 | 207,500 | ||||||||
International Lease Finance Corp. | 294 | 315,315 | ||||||||
Navient Corp. | 54 | 53,190 | ||||||||
|
| |||||||||
576,005 | ||||||||||
|
| |||||||||
3,958,668 | ||||||||||
|
| |||||||||
Utility – 0.2% | ||||||||||
Electric – 0.2% | ||||||||||
AES Corp./VA | 377 | 432,608 | ||||||||
NRG Energy, Inc. | 287 | 279,825 | ||||||||
|
| |||||||||
712,433 | ||||||||||
|
| |||||||||
Non Corporate Sectors – 0.1% | ||||||||||
Agencies - Not Government Guaranteed – 0.1% | ||||||||||
NOVA Chemicals Corp. | 391 | 394,910 | ||||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | 11,019,152 | |||||||||
|
|
34 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
Principal (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
EMERGING MARKETS – TREASURIES – 0.8% | ||||||||||
Brazil – 0.8% | ||||||||||
Brazil Notas do Tesouro Nacional | BRL | 10,530 | $ | 2,778,817 | ||||||
|
| |||||||||
GOVERNMENTS – SOVEREIGN AGENCIES – 0.6% | ||||||||||
Brazil – 0.2% | ||||||||||
Petrobras Global Finance BV | U.S.$ | 693 | 635,827 | |||||||
|
| |||||||||
Colombia – 0.1% | ||||||||||
Ecopetrol SA | 292 | 238,710 | ||||||||
|
| |||||||||
Israel – 0.2% | ||||||||||
Israel Electric Corp. Ltd. | 620 | 662,625 | ||||||||
|
| |||||||||
United Kingdom – 0.1% | ||||||||||
Royal Bank of Scotland Group PLC | 345 | 321,713 | ||||||||
|
| |||||||||
Total Governments – Sovereign Agencies | 1,858,875 | |||||||||
|
| |||||||||
QUASI-SOVEREIGNS – 0.5% | ||||||||||
Quasi-Sovereign Bonds – 0.5% | ||||||||||
Chile – 0.3% | ||||||||||
Corp Nacional del Cobre de Chile | 575 | 600,635 | ||||||||
Empresa de Transporte de Pasajeros Metro SA | 358 | 378,186 | ||||||||
|
| |||||||||
978,821 | ||||||||||
|
| |||||||||
Mexico – 0.1% | ||||||||||
Petroleos Mexicanos | 256 | 258,304 | ||||||||
|
| |||||||||
South Korea – 0.1% | ||||||||||
Korea National Oil Corp. | 450 | 457,186 | ||||||||
|
| |||||||||
Total Quasi-Sovereigns | 1,694,311 | |||||||||
|
|
AB BOND INFLATION STRATEGY • | 35 |
Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
|
|
| ||||||||
COMMON STOCKS – 0.1% | ||||||||||
Financials – 0.1% | ||||||||||
Insurance – 0.1% | ||||||||||
Mt Logan Re Ltd. (Preference Shares)(i)(j)(k) | 500 | $ | 505,856 | |||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
GOVERNMENTS – SOVEREIGN BONDS – 0.1% | ||||||||||
Mexico – 0.1% | ||||||||||
Mexico Government International Bond | U.S.$ | 168 | 187,740 | |||||||
|
| |||||||||
EMERGING MARKETS – CORPORATE BONDS – 0.1% | ||||||||||
Industrial – 0.1% | ||||||||||
Capital Goods – 0.1% | ||||||||||
Odebrecht Finance Ltd. | 426 | 144,840 | ||||||||
|
| |||||||||
Consumer Non-Cyclical – 0.0% | ||||||||||
Virgolino de Oliveira Finance SA | 655 | 23,580 | ||||||||
|
| |||||||||
Total Emerging Markets – Corporate Bonds | 168,420 | |||||||||
|
| |||||||||
Shares | ||||||||||
PREFERRED STOCKS – 0.0% | ||||||||||
Financial Institutions – 0.0% | ||||||||||
Insurance – 0.0% | ||||||||||
Allstate Corp. (The) | 2,100 | 54,705 | ||||||||
|
| |||||||||
SHORT-TERM INVESTMENTS – 0.9% | ||||||||||
Investment Companies – 0.9% | ||||||||||
AB Fixed Income Shares, Inc. – Government STIF Portfolio, 0.36%(m)(n) | 2,802,118 | 2,802,118 | ||||||||
|
| |||||||||
Total Investments – 137.0% | 446,133,169 | |||||||||
Other assets less liabilities – (37.0)% | (120,513,853 | ) | ||||||||
|
| |||||||||
Net Assets – 100.0% | $ | 325,619,316 | ||||||||
|
|
36 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at April 30, 2016 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Purchased Contracts |
| |||||||||||||||||||
10 Yr Canadian Bond Futures | 31 | June 2016 | $ | 3,505,991 | $ | 3,438,240 | $ | (67,751 | ) | |||||||||||
U.S. T-Note 5 Yr (CBT) Futures | 50 | June 2016 | 6,025,465 | 6,045,703 | 20,238 | |||||||||||||||
U.S. Ultra Bond (CBT) Futures | 3 | June 2016 | 521,802 | 514,031 | (7,771 | ) | ||||||||||||||
Sold Contracts |
| |||||||||||||||||||
Euro-BOBL Futures | 82 | June 2016 | 12,351,190 | 12,286,047 | 65,143 | |||||||||||||||
U.S. T-Note 10 Yr (CBT) Futures | 39 | June 2016 | 5,086,157 | 5,072,437 | 13,720 | |||||||||||||||
|
| |||||||||||||||||||
$ | 23,579 | |||||||||||||||||||
|
|
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 | 1,083 | EUR | 958 | 5/13/16 | $ | 13,529 | |||||||||||||
Deutsche Bank AG | MYR | 5,124 | USD | 1,314 | 7/15/16 | 8,091 | ||||||||||||||
Goldman Sachs Bank USA | USD | 1,369 | EUR | 1,214 | 5/13/16 | 21,423 | ||||||||||||||
Goldman Sachs Bank USA | CAD | 2,099 | USD | 1,596 | 6/23/16 | (76,562 | ) | |||||||||||||
Goldman Sachs Bank USA | BRL | 5,150 | USD | 1,120 | 1/04/17 | (273,428 | ) | |||||||||||||
HSBC Bank USA | USD | 808 | INR | 54,421 | 7/15/16 | 1,346 | ||||||||||||||
JPMorgan Chase Bank | BRL | 5,045 | USD | 1,462 | 5/03/16 | (4,910 | ) | |||||||||||||
JPMorgan Chase Bank | USD | 1,426 | BRL | 5,045 | 5/03/16 | 40,543 | ||||||||||||||
JPMorgan Chase Bank | GBP | 1,430 | USD | 2,046 | 5/12/16 | (43,854 | ) | |||||||||||||
JPMorgan Chase Bank | EUR | 1,337 | USD | 1,484 | 5/13/16 | (46,781 | ) | |||||||||||||
JPMorgan Chase Bank | BRL | 5,045 | USD | 1,414 | 6/02/16 | (38,500 | ) | |||||||||||||
JPMorgan Chase Bank | USD | 1,655 | MXN | 29,277 | 6/17/16 | 38,851 | ||||||||||||||
Morgan Stanley Capital Services, Inc. | BRL | 533 | USD | 150 | 5/03/16 | (4,925 | ) | |||||||||||||
Morgan Stanley Capital Services, Inc. | USD | 154 | BRL | 533 | 5/03/16 | 518 | ||||||||||||||
Morgan Stanley Capital Services, Inc. | EUR | 741 | USD | 818 | 5/13/16 | (30,963 | ) | |||||||||||||
Standard Chartered Bank | BRL | 4,513 | USD | 1,241 | 5/03/16 | (71,035 | ) | |||||||||||||
Standard Chartered Bank | USD | 1,308 | BRL | 4,513 | 5/03/16 | 4,392 | ||||||||||||||
Standard Chartered Bank | TWD | 83,246 | USD | 2,556 | 5/20/16 | (20,505 | ) | |||||||||||||
State Street Bank & Trust Co. | EUR | 2,178 | USD | 2,368 | 5/13/16 | (126,869 | ) | |||||||||||||
State Street Bank & Trust Co. | SGD | 3,660 | USD | 2,703 | 7/15/16 | (14,836 | ) | |||||||||||||
|
| |||||||||||||||||||
$ | (624,475 | ) | ||||||||||||||||||
|
|
AB BOND INFLATION STRATEGY • | 37 |
Portfolio of Investments
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note D)
Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Buy Contracts |
| |||||||||||||||||||
Morgan Stanley & Co., LLC/(INTRCONX) | ||||||||||||||||||||
CDX-NAHY Series 21, 5 Year Index, 12/20/18* | (5.00 | )% | 2.79 | % | $ | 3,955 | $ | (242,470 | ) | $ | (94,511 | ) | ||||||||
CDX-NAHY Series 21, 5 Year Index, 12/20/18* | (5.00 | ) | 2.79 | 3,168 | (194,212 | ) | (126,973 | ) | ||||||||||||
CDX-NAIG Series 23, 5 Year Index, 12/20/19* | (1.00 | ) | 0.80 | 18,250 | (149,530 | ) | 62,517 | |||||||||||||
|
|
|
| |||||||||||||||||
$ | (586,212 | ) | $ | (158,967 | ) | |||||||||||||||
|
|
|
|
* | 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) | AUD | 22,680 | 3/11/17 | 2.140% | 3 Month BBSW | $ | (2,504 | ) | ||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 23,060 | 5/18/17 | 0.811% | 3 Month LIBOR | (62,698 | ) | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 19,500 | 6/09/17 | 2.218% | 3 Month BBSW | (21,990 | ) | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | 14,040 | 10/30/17 | 1.915% | 3 Month BBSW | 17,959 | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 13,790 | 4/27/18 | 2.213% | 3 Month BBSW | (38,467 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | CAD | 31,330 | 4/28/18 | 1.010% | 3 Month CDOR | 7,281 | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | NZD | 13,640 | 4/28/18 | 2.250% | 3 Month BKBM | 801 | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 6,980 | 10/31/19 | 3 Month LIBOR | 1.747% | 161,668 | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | GBP | 5,640 | 6/05/20 | 6 Month LIBOR | 1.651% | 228,954 |
38 | • AB BOND INFLATION STRATEGY |
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) | $ | 6,420 | 8/11/20 | 3 Month LIBOR | 1.712% | $ | 161,692 | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | 8,020 | 4/27/21 | 3 Month LIBOR | 1.341% | 37,121 | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 2,610 | 1/14/24 | 2.980% | 3 Month LIBOR | (304,590 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 2,300 | 2/14/24 | 2.889% | 3 Month LIBOR | (244,976 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 3,280 | 4/28/24 | 2.817% | 3 Month LIBOR | (320,835 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 4,670 | 5/06/24 | 2.736% | 3 Month LIBOR | (482,730 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 1,890 | 5/29/24 | 3 Month LIBOR | 2.628% | 176,301 | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 3,330 | 7/02/24 | 2.632% | 3 Month LIBOR | (306,467 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 2,370 | 7/10/24 | 2.674% | 3 Month LIBOR | (225,538 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 3,450 | 3/11/25 | 6 Month BBSW | 2.973% | 79,809 | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | �� | NZD | 3,560 | 6/09/25 | 3 Month BKBM | 4.068% | 258,042 | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 2,110 | 6/09/25 | 6 Month BBSW | 3.384% | 108,319 | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 1,160 | 6/09/25 | 2.488% | 3 Month LIBOR | (95,968 | ) | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | 3,830 | 8/04/25 | 2.293% | 3 Month LIBOR | (233,569 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 1,490 | 11/10/35 | 2.631% | 3 Month LIBOR | (152,660 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | GBP | 520 | 6/05/45 | 2.396% | 6 Month LIBOR | (116,855 | ) | |||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 490 | 8/06/45 | 2.692% | 3 Month LIBOR | (57,992 | ) | |||||||||
Morgan Stanley & Co., LLC/(LCH Group) | NZD | 30,550 | 6/09/17 | 3.368% | 3 Month BKBM | (446,918 | ) | |||||||||
|
| |||||||||||||||
$ | (1,876,810 | ) | ||||||||||||||
|
|
AB BOND INFLATION STRATEGY • | 39 |
Portfolio of Investments
CREDIT DEFAULT SWAPS (see Note D)
Swap Counterparty & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | 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 | )% | 7.88 | % | $ | 280 | $ | 19,441 | $ | 14,439 | $ | 5,002 | ||||||||||||
Sprint Communications, Inc., 8.375%, 8/15/17, 6/20/19* | (5.00 | ) | 10.04 | 466 | 57,539 | (17,950 | ) | 75,489 | ||||||||||||||||
Sprint Communications, Inc., 8.375%, 8/15/17, 6/20/19* | (5.00 | ) | 10.04 | 534 | 65,935 | (21,328 | ) | 87,263 | ||||||||||||||||
Sale Contracts | ||||||||||||||||||||||||
Bank of America, NA |
| |||||||||||||||||||||||
CDX-NAIG Series 19, 5 Year Index, 12/20/17* | 1.00 | 0.35 | 3,200 | 37,895 | 1,001 | 36,894 | ||||||||||||||||||
Credit Suisse International |
| |||||||||||||||||||||||
Kohl’s Corp., 6.25% 12/15/17, 6/20/19* | 1.00 | 1.05 | 123 | (60 | ) | (1,045 | ) | 985 | ||||||||||||||||
Kohl’s Corp., 6.25% 12/15/17, 6/20/19* | 1.00 | 1.05 | 49 | (23 | ) | (418 | ) | 395 | ||||||||||||||||
Kohl’s Corp., 6.25% 12/15/17, 6/20/19* | 1.00 | 1.05 | 50 | (25 | ) | (422 | ) | 397 | ||||||||||||||||
Kohl’s Corp., 6.25% 12/15/17, 6/20/19* | 1.00 | 1.05 | 72 | (34 | ) | (545 | ) | 511 | ||||||||||||||||
Deutsche Bank AG |
| |||||||||||||||||||||||
Anadarko Petroleum Corp., 5.95% 9/15/16, 9/20/17* | 1.00 | 0.94 | 440 | (141 | ) | (4,291 | ) | 4,150 | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 180,527 | $ | (30,559 | ) | $ | 211,086 | ||||||||||||||||||
|
|
|
|
|
|
* | Termination date |
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 | $ | 2,570 | 7/15/19 | 1.370% | CPI# | $ | 13,640 | |||||||||
Barclays Bank PLC | 20,750 | 7/15/20 | 1.527% | CPI# | 63,072 | |||||||||||
Barclays Bank PLC | 6,950 | 1/15/21 | 1.490% | CPI# | 21,827 | |||||||||||
Deutsche Bank AG | 3,460 | 7/15/18 | 1.440% | CPI# | 3,210 | |||||||||||
JPMorgan Chase Bank, NA | 8,710 | 1/15/20 | 1.795% | CPI# | (69,482 | ) | ||||||||||
|
| |||||||||||||||
$ | 32,267 | |||||||||||||||
|
|
# | Variable interest rate based on the rate of inflation as determined by the Consumer Price Index (CPI). |
40 | • AB BOND INFLATION STRATEGY |
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) | |||||||||||
Morgan Stanley Capital Services LLC | $ | 1,100 | 2/21/42 | 2.813% | 3 Month LIBOR | $ | (152,237 | ) | ||||||||
Morgan Stanley Capital Services LLC | 830 | 3/06/42 | 2.804% | 3 Month LIBOR | (112,683 | ) | ||||||||||
|
| |||||||||||||||
$ | (264,920 | ) | ||||||||||||||
|
|
REVERSE REPURCHASE AGREEMENTS (see Note D)
Broker | Interest Rate | Maturity | U.S. $ Value at April 30, 2016 | |||||||||
HSBC Bank USA | 0.36 | % | 2/02/18 | $ | 6,112,090 | |||||||
HSBC Bank USA | 0.36 | % | 3/14/18 | 2,464,006 | ||||||||
HSBC Bank USA | 0.56 | % | 7/19/16 | 10,257,110 | ||||||||
HSBC Bank USA | 0.56 | % | 7/20/16 | 36,303,388 | ||||||||
HSBC Bank USA | 0.58 | % | 7/11/16 | 21,750,881 | ||||||||
HSBC Bank USA | 0.64 | % | 7/18/16 | 20,205,169 | ||||||||
JPMorgan Chase Bank | 0.54 | % | 7/18/16 | 15,943,108 | ||||||||
JPMorgan Chase Bank | 0.59 | % | 7/14/16 | 14,097,109 | ||||||||
|
| |||||||||||
$ | 127,132,861 | |||||||||||
|
|
(a) | Position, or a portion thereof, has been segregated to collateralize reverse repurchase agreements. |
(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 April 30, 2016, the aggregate market value of these securities amounted to $46,596,235 or 14.3% of net assets. |
(c) | Securities are perpetual and, thus, do not have a predetermined maturity date. The date shown, if applicable, reflects the next call date. |
(d) | Floating Rate Security. Stated interest rate was in effect at April 30, 2016. |
(e) | Variable rate coupon, rate shown as of April 30, 2016. |
(f) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities, which represent 0.19% of net assets as of April 30, 2016, are considered illiquid and restricted. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Bellemeade Re Ltd. Series 2015-1A, Class M1 | 7/27/15 | $ | 306,733 | $ | 302,984 | 0.09 | % | |||||||||
Virgolino de Oliveira Finance SA | 1/27/14 | 363,153 | 23,580 | 0.01 | % | |||||||||||
Wells Fargo Credit Risk Transfer Securities Trust Series 2015-WF1, Class 2M1 | 9/28/15 | 281,881 | 281,947 | 0.09 | % |
(g) | Fair valued by the Adviser. |
(h) | IO – Interest Only |
(i) | Effective prepayment date of April 2017. |
(j) | The security is subject to a 12 month lock-up period, after which semi-annual redemptions are permitted. |
AB BOND INFLATION STRATEGY • | 41 |
Portfolio of Investments
(k) | 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 | $ | 505,856 | 0.16 | % |
(l) | Security is in default and is non-income producing. |
(m) | 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. |
(n) | 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
MXN – Mexican Peso
MYR – Malaysian Ringgit
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)
BOBL – Bundesobligationen
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
INTRCONX – Inter-Continental Exchange
LCH – London Clearing House
LIBOR – London Interbank Offered Rates
REIT – Real Estate Investment Trust
REMICs – Real Estate Mortgage Investment Conduits
TIPS – Treasury Inflation Protected Security
See notes to financial statements.
42 | • AB BOND INFLATION STRATEGY |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
April 30, 2016 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Investments in securities, at value (cost $437,812,009) | $ | 443,331,051 | ||
Affiliated issuers (cost $2,802,118) | 2,802,118 | |||
Cash | 27,272 | |||
Cash collateral due from broker | 1,295,930 | |||
Foreign currencies, at value (cost $29,255) | 32,036 | |||
Receivable for investment securities sold | 22,375,355 | |||
Interest and dividends receivable | 1,411,907 | |||
Receivable for capital stock sold | 263,176 | |||
Unrealized appreciation on credit default swaps | 211,086 | |||
Unrealized appreciation on forward currency exchange contracts | 128,693 | |||
Unrealized appreciation on inflation swaps | 101,749 | |||
Receivable for variation margin on exchange-traded derivatives | 22,115 | |||
Upfront premium paid on credit default swaps | 15,440 | |||
Receivable for newly entered centrally cleared interest rate swaps | 11,899 | |||
|
| |||
Total assets | 472,029,827 | |||
|
| |||
Liabilities | ||||
Payable for reverse repurchase agreements | 127,132,861 | |||
Payable for investment securities purchased | 17,599,904 | |||
Unrealized depreciation on forward currency exchange contracts | 753,168 | |||
Unrealized depreciation on interest rate swaps | 264,920 | |||
Payable for capital stock redeemed | 245,833 | |||
Unrealized depreciation on inflation swaps | 69,482 | |||
Payable for variation margin on exchange-traded derivatives | 43,782 | |||
Upfront premium received on credit default swaps | 45,999 | |||
Advisory fee payable | 41,089 | |||
Distribution fee payable | 25,111 | |||
Administrative fee payable | 15,286 | |||
Transfer Agent fee payable | 13,848 | |||
Payable for terminated centrally cleared interest rate swaps | 11,090 | |||
Payable for newly entered centrally cleared interest rate swaps | 22,523 | |||
Accrued expenses | 125,615 | |||
|
| |||
Total liabilities | 146,410,511 | |||
|
| |||
Net Assets | $ | 325,619,316 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 304,332 | ||
Additional paid-in capital | 334,212,339 | |||
Undistributed net investment income | 297,868 | |||
Accumulated net realized loss on investment and foreign currency transactions | (12,054,078 | ) | ||
Net unrealized appreciation on investments and foreign currency denominated assets and liabilities | 2,858,855 | |||
|
| |||
$ | 325,619,316 | |||
|
|
See notes to financial statements.
AB BOND INFLATION STRATEGY • | 43 |
Statement of Assets & Liabilities
Net Asset Value Per Share—24 billion shares of capital stock authorized, $.01 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 12,116,336 | 1,124,542 | $ | 10.77 | * | ||||||
| ||||||||||||
C | $ | 2,534,411 | 239,639 | $ | 10.58 | |||||||
| ||||||||||||
Advisor | $ | 19,754,548 | 1,828,463 | $ | 10.80 | |||||||
| ||||||||||||
R | $ | 176,801 | 16,412 | $ | 10.77 | |||||||
| ||||||||||||
K | $ | 1,763,071 | 163,863 | $ | 10.76 | |||||||
| ||||||||||||
I | $ | 293,078 | 27,330 | $ | 10.72 | |||||||
| ||||||||||||
1 | $ | 235,595,693 | 22,041,158 | $ | 10.69 | |||||||
| ||||||||||||
2 | $ | 43,102,876 | 4,032,309 | $ | 10.69 | |||||||
| ||||||||||||
Z | $ | 10,282,502 | 959,449 | $ | 10.72 | |||||||
|
* | The maximum offering price per share for Class A shares was $11.25 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
Six Months Ended April 30, 2016 (unaudited)
Investment Income | ||||||||
Interest | $ | 1,472,763 | ||||||
Dividends | ||||||||
Unaffiliated issuers | 37,849 | |||||||
Affiliated issuers | 7,558 | |||||||
Other income | 405 | $ | 1,518,575 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 822,083 | |||||||
Distribution fee—Class A | 17,505 | |||||||
Distribution fee—Class C | 12,846 | |||||||
Distribution fee—Class R | 77 | |||||||
Distribution fee—Class K | 1,983 | |||||||
Distribution fee—Class 1 | 120,353 | |||||||
Transfer agency—Class A | 15,058 | |||||||
Transfer agency—Class C | 3,227 | |||||||
Transfer agency—Advisor Class | 22,008 | |||||||
Transfer agency—Class R | 40 | |||||||
Transfer agency—Class K | 1,587 | |||||||
Transfer agency—Class I | 167 | |||||||
Transfer agency—Class 1 | 16,931 | |||||||
Transfer agency—Class 2 | 3,164 | |||||||
Transfer agency—Class Z | 740 | |||||||
Registration fees | 101,164 | |||||||
Custodian | 99,519 | |||||||
Audit and tax | 42,129 | |||||||
Printing | 32,571 | |||||||
Administrative | 23,672 | |||||||
Legal | 20,095 | |||||||
Directors’ fees | 9,746 | |||||||
Miscellaneous | 9,084 | |||||||
|
| |||||||
Total expenses before interest expense | 1,375,749 | |||||||
Interest expense | 300,288 | |||||||
|
| |||||||
Total expenses | 1,676,037 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (400,902 | ) | ||||||
|
| |||||||
Net expenses | 1,275,135 | |||||||
|
| |||||||
Net investment income | 243,440 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (957,593 | ) | ||||||
Futures | (664,789 | ) | ||||||
Options written | 9,888 | |||||||
Swaps | (75,327 | ) | ||||||
Foreign currency transactions | 449,089 | |||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | 14,196,354 | |||||||
Futures | 209,965 | |||||||
Options written | (6,744 | ) | ||||||
Swaps | (88,324 | ) | ||||||
Foreign currency denominated assets and liabilities | (724,743 | ) | ||||||
|
| |||||||
Net gain on investment and foreign currency transactions | 12,347,776 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 12,591,216 | ||||||
|
|
See notes to financial statements.
AB BOND INFLATION STRATEGY • | 45 |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 243,440 | $ | 3,460,793 | ||||
Net realized loss on investment transactions and foreign currency transactions | (1,238,732 | ) | (2,331,606 | ) | ||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | 13,586,508 | (8,188,466 | ) | |||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | 12,591,216 | (7,059,279 | ) | |||||
Dividends to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (90,401 | ) | (135,111 | ) | ||||
Class C | (15,123 | ) | (18,189 | ) | ||||
Advisor Class | (134,000 | ) | (203,846 | ) | ||||
Class R | (141 | ) | (1,105 | ) | ||||
Class K | (10,836 | ) | (20,282 | ) | ||||
Class I | (2,019 | ) | (7,362 | ) | ||||
Class 1 | (1,875,559 | ) | (3,672,680 | ) | ||||
Class 2 | (365,877 | ) | (556,237 | ) | ||||
Class Z(a) | (56,405 | ) | (14,356 | ) | ||||
Capital Stock Transactions | ||||||||
Net decrease | (19,124,328 | ) | (28,377,535 | ) | ||||
|
|
|
| |||||
Total decrease | (9,083,473 | ) | (40,065,982 | ) | ||||
Net Assets | ||||||||
Beginning of period | 334,702,789 | 374,768,771 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $297,868 and $2,604,789, respectively) | $ | 325,619,316 | $ | 334,702,789 | ||||
|
|
|
|
(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 Six Months Ended April 30, 2016 (unaudited)
Cash flows from operating activities | ||||||||
Net increase in net assets from operations | $ | 12,591,216 | ||||||
Reconciliation of Net Increase in Net Assets from Operations to Net Decrease in Cash from Operating Activities: | ||||||||
Increase in interest and dividends receivable | $ | (141,908 | ) | |||||
Increase in receivable for investments sold | (22,155,485 | ) | ||||||
Net accretion of bond discount and amortization of bond premium | 450,787 | |||||||
Inflation index adjustment | 1,403,276 | |||||||
Increase in payable for investments purchased | 17,431,499 | |||||||
Decrease in accrued expenses | (74,095 | ) | ||||||
Increase in cash collateral due from broker | (75,475 | ) | ||||||
Purchases of long-term investments | (102,121,426 | ) | ||||||
Purchases of short-term investments | (96,972,931 | ) | ||||||
Proceeds from disposition of long-term investments | 95,945,738 | |||||||
Proceeds from disposition of short-term investments | 105,295,969 | |||||||
Payments from options written, net | (187 | ) | ||||||
Payments on swaps, net | (46,517 | ) | ||||||
Payments for exchange-traded derivatives settlements | (1,012,133 | ) | ||||||
Net realized loss on investment transactions and foreign currency transactions | 1,238,732 | |||||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | (13,586,508 | ) | ||||||
|
| |||||||
Total adjustments | (14,420,664 | ) | ||||||
|
| |||||||
Net decrease in cash from operating activities | $ | (1,829,448 | ) | |||||
|
| |||||||
Financing Activities: | ||||||||
Redemptions of capital stock, net | (20,606,274 | ) | ||||||
Decrease in due to custodian | (94,834 | ) | ||||||
Cash dividends paid (net of dividend reinvestments)* | (412,197 | ) | ||||||
Increase in reverse repurchase agreements | 13,757,172 | |||||||
|
| |||||||
Net decrease in cash from financing activities | (7,356,133 | ) | ||||||
Effect of exchange rate on cash | 539,052 | |||||||
|
| |||||||
Net increase in cash | (8,646,529 | ) | ||||||
Net change in cash | ||||||||
Cash at beginning of period | 8,705,837 | |||||||
|
| |||||||
Cash at end of period | $ | 59,308 | ||||||
|
| |||||||
* Reinvestment of dividends | $ | 2,138,164 | ||||||
Supplemental disclosure of cash flow information: | ||||||||
Interest expense paid during the period | $ | 284,111 |
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 period.
See notes to financial statements.
AB BOND INFLATION STRATEGY • | 47 |
Statement of Cash Flows
NOTES TO FINANCIAL STATEMENTS
April 30, 2016 (unaudited)
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. The Fund, which is a Maryland corporation, operates as a series company comprised of ten 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, the AB High Yield Portfolio and the AB Income Fund. 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. The AB Income Fund commenced operations on April 21, 2016. This report relates only to the AB Bond Inflation Strategy Portfolio (the “Strategy”). 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 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
48 | • AB BOND INFLATION STRATEGY |
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 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.
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 BOND INFLATION STRATEGY • | 49 |
Notes to Financial Statements
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. To account for this, the Strategy 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 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 April 30, 2016:
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
| |||||||||||||||
Inflation-Linked Securities | $ | – 0 | – | $ | 283,077,408 | $ | – 0 | – | $ | 283,077,408 | ||||||
Corporates – Investment Grade | – 0 | – | 61,228,103 | – 0 | – | 61,228,103 | ||||||||||
Commercial Mortgage-Backed Securities | – 0 | – | 25,920,036 | 8,088,555 | 34,008,591 | |||||||||||
Asset-Backed Securities | – 0 | – | 29,008,871 | 1,258,316 | 30,267,187 |
AB BOND INFLATION STRATEGY • | 51 |
Notes to Financial Statements
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Collateralized Mortgage Obligations | $ | – 0 | – | $ | 16,481,886 | $ | – 0 | – | $ | 16,481,886 | ||||||
Corporates – Non-Investment Grade | – 0 | – | 11,019,152 | – 0 | – | 11,019,152 | ||||||||||
Emerging Markets – Treasuries | – 0 | – | 2,778,817 | – 0 | – | 2,778,817 | ||||||||||
Governments – Sovereign Agencies | – 0 | – | 1,858,875 | – 0 | – | 1,858,875 | ||||||||||
Quasi-Sovereigns | – 0 | – | 1,694,311 | – 0 | – | 1,694,311 | ||||||||||
Common Stocks | – 0 | – | – 0 | – | 505,856 | 505,856 | ||||||||||
Governments – Sovereign Bonds | – 0 | – | 187,740 | – 0 | – | 187,740 | ||||||||||
Emerging Markets – Corporate Bonds | – 0 | – | 168,420 | – 0 | – | 168,420 | ||||||||||
Preferred Stocks | 54,705 | – 0 | – | – 0 | – | 54,705 | ||||||||||
Short-Term Investments | 2,802,118 | – 0 | – | – 0 | – | 2,802,118 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 2,856,823 | 433,423,619 | 9,852,727 | 446,133,169 | ||||||||||||
Other Financial Instruments(a): | ||||||||||||||||
Assets: | ||||||||||||||||
Futures | 99,101 | – 0 | – | – 0 | – | 99,101 | (b) | |||||||||
Forward Currency Exchange Contracts | – 0 | – | 128,693 | – 0 | – | 128,693 | ||||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | 62,517 | – 0 | – | 62,517 | (b) | |||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | 1,237,947 | – 0 | – | 1,237,947 | (b) | |||||||||
Credit Default Swaps | – 0 | – | 211,086 | – 0 | – | 211,086 | ||||||||||
Inflation (CPI) Swaps | – 0 | – | 101,749 | – 0 | – | 101,749 | ||||||||||
Liabilities: | ||||||||||||||||
Futures | (75,522 | ) | – 0 | – | – 0 | – | (75,522 | )(b) | ||||||||
Forward Currency Exchange Contracts | – 0 | – | (753,168 | ) | – 0 | – | (753,168 | ) | ||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | (221,484 | ) | – 0 | – | (221,484 | )(b) | ||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | (3,114,757 | ) | – 0 | – | (3,114,757 | )(b) | ||||||||
Inflation (CPI) Swaps | – 0 | – | (69,482 | ) | – 0 | – | (69,482 | ) | ||||||||
Interest Rate Swaps | – 0 | – | (264,920 | ) | – 0 | – | (264,920 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total(c) | $ | 2,880,402 | $ | 430,741,800 | $ | 9,852,727 | $ | 443,474,929 | ||||||||
|
|
|
|
|
|
|
|
(a) | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
(b) | 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. |
(c) | There were no transfers between Level 1 and Level 2 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.
52 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value.
Commercial Mortgage-Backed Securities | Asset-Backed Securities | Collateralized Mortgage Obligations | ||||||||||
Balance as of 10/31/15 | $ | 7,333,784 | $ | 3,725,747 | $ | 9,306,859 | ||||||
Accrued discounts/(premiums) | (8,105 | ) | 4 | – 0 | – | |||||||
Realized gain (loss) | (78,339 | ) | 26 | – 0 | – | |||||||
Change in unrealized appreciation/depreciation | (73,220 | ) | (443 | ) | – 0 | – | ||||||
Purchases/Payups | 1,977,214 | 432,572 | – 0 | – | ||||||||
Sales/Paydowns | (1,062,779 | ) | (201,030 | ) | – 0 | – | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | – 0 | – | (2,698,560 | ) | (9,306,859 | ) | ||||||
|
|
|
|
|
| |||||||
Balance as of 4/30/16 | $ | 8,088,555 | $ | 1,258,316 | $ | – 0 | – | |||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from Investments held as of 4/30/16(a) | $ | (101,460 | ) | $ | (492 | ) | $ | – 0 | – | |||
|
|
|
|
|
| |||||||
Common Stocks | Total | |||||||||||
Balance as of 10/31/15 | $ | 530,735 | $ | 20,897,125 | ||||||||
Accrued discounts/(premiums) | – 0 | – | (8,101 | ) | ||||||||
Realized gain (loss) | – 0 | – | (78,313 | ) | ||||||||
Change in unrealized appreciation/depreciation | (24,879 | ) | (98,542 | ) | ||||||||
Purchases/Payups | – 0 | – | 2,409,786 | |||||||||
Sales/Paydowns | – 0 | – | (1,263,809 | ) | ||||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | ||||||||
Transfers out of Level 3 | – 0 | – | (12,005,419 | ) | ||||||||
|
|
|
| |||||||||
Balance as of 4/30/16 | $ | 505,856 | $ | 9,852,727 | (b) | |||||||
|
|
|
| |||||||||
Net change in unrealized appreciation/depreciation from Investments held as of 4/30/16(a) | $ | (24,879 | ) | $ | (126,831 | ) | ||||||
|
|
|
|
(a) | 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. |
(b) | An amount of $12,005,419 was transferred out of Level 3 into Level 2 due to increase in observability of inputs during the reporting period. |
As of April 30, 2016, all Level 3 securities were priced i) at net asset value, or ii) 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
AB BOND INFLATION STRATEGY • | 53 |
Notes to Financial Statements
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 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.
54 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
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 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
AB BOND INFLATION STRATEGY • | 55 |
Notes to Financial Statements
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 ..75%, 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 January 29, 2016, the Expense Cap was .80% of the daily average net assets for the Class A. This fee waiver and/or expense reimbursement agreement will remain in effect until January 29, 2017 and then may be extended for additional one-year terms. For the six months ended April 30, 2016, such reimbursement amounted to $400,902.
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 six months ended April 30, 2016, the reimbursement for such services amounted to $23,672.
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 $25,631 for the six months ended April 30, 2016.
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 $101 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 six months ended April 30, 2016.
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 currently available for direct purchase by members of the public. The Government STIF Portfolio currently 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 six months ended April 30, 2016 is as follows:
Market Value October 31, 2015 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value April 30, 2016 (000) | Dividend Income (000) | ||||||||||||
$ 2,524 | $ | 96,973 | $ | 96,695 | $ | 2,802 | $ | 8 |
56 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
Brokerage commissions paid on investment transactions for the six months ended April 30, 2016 amounted to $2,454, 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. Effective January 29, 2016, 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 amounts of $235,314, $16,061, $17,420 and $1,521,623 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.
NOTE D
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the six months ended April 30, 2016 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 22,954,188 | $ | 20,604,970 | ||||
U.S. government securities | 79,167,238 | 67,798,338 |
AB BOND INFLATION STRATEGY • | 57 |
Notes to Financial Statements
The cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation (excluding futures, foreign currency and swap transactions) are as follows:
Gross unrealized appreciation | $ | 9,194,252 | ||
Gross unrealized depreciation | (3,675,210 | ) | ||
|
| |||
Net unrealized appreciation | $ | 5,519,042 | ||
|
|
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 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.
58 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
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 six months ended April 30, 2016, 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 six months ended April 30, 2016, 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 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
AB BOND INFLATION STRATEGY • | 59 |
Notes to Financial Statements
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 six months ended April 30, 2016, the Strategy held written options for hedging and non-hedging purposes.
For the six months ended April 30, 2016, the Strategy had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 10/31/15 | 508,218,000 | $ | 10,075 | |||||
Options written | 281,394,000 | 12,553 | ||||||
Options assigned | (281,394,000 | ) | (12,553 | ) | ||||
Options expired | (508,218,000 | ) | (10,075 | ) | ||||
Options bought back | – 0 | – | – 0 | – | ||||
Options exercised | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Options written outstanding as of 04/30/16 | – 0 | – | $ | – 0 | – | |||
|
|
|
|
• | 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
60 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
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.
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
AB BOND INFLATION STRATEGY • | 61 |
Notes to Financial Statements
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 six months ended April 30, 2016, 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 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 six months ended April 30, 2016, the Strategy held inflation (CPI) swaps for hedging and non-hedging purposes.
62 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
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 April 30, 2016, 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.
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
AB BOND INFLATION STRATEGY • | 63 |
Notes to Financial Statements
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 six months ended April 30, 2016, the Strategy held credit default swaps for hedging and non-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 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.
64 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
At April 30, 2016, 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 | $ | 1,337,048 | * | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 3,190,279 | * | ||||
Credit contracts | Receivable/Payable for variation margin on exchange-traded derivatives | 62,517 | * | Receivable/Payable for variation margin on exchange-traded derivatives | 221,484 | * | ||||||
Foreign exchange contracts | Unrealized appreciation on forward currency exchange contracts |
| 128,693 |
| Unrealized depreciation on forward currency exchange contracts |
| 753,168 |
| ||||
Interest rate contracts | Unrealized depreciation on interest rate swaps |
| 264,920 |
| ||||||||
Interest rate contracts | Unrealized appreciation on inflation swaps |
| 101,749 |
| Unrealized depreciation on inflation swaps |
| 69,482 |
| ||||
Credit contracts | Unrealized appreciation on credit default swaps | 211,086 | ||||||||||
|
|
|
| |||||||||
Total | $ | 1,841,093 | $ | 4,499,333 | ||||||||
|
|
|
|
* | 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. |
Derivative Type | Location of Gain or (Loss) on Within Statement of | 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 | $ | (664,789 | ) | $ | 209,965 |
AB BOND INFLATION STRATEGY • | 65 |
Notes to Financial Statements
Derivative Type | Location of Gain or (Loss) on Within Statement of | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Foreign exchange contracts | Net realized gain (loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation of foreign currency denominated assets and liabilities | $ | (67,447 | ) | $ | (814,706 | ) | |||
Foreign exchange contracts | Net realized gain (loss) on options written; Net change in unrealized appreciation/depreciation of options written |
| 9,888 |
|
| (6,744 | ) | |||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 133,798 | (272,973 | ) | ||||||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (209,125 | ) | 184,649 | ||||||
|
|
|
| |||||||
Total | $ | (797,675 | ) | $ | (699,809 | ) | ||||
|
|
|
|
The following table represents the average monthly volume of the Strategy’s derivative transactions during the six months ended April 30, 2016:
Futures: | ||||
Average original value of buy contracts | $ | 13,225,911 | ||
Average original value of sale contracts | $ | 22,850,573 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 8,177,429 | ||
Average principal amount of sale contracts | $ | 26,529,775 | ||
Interest Rate Swaps: | ||||
Average notional amount | $ | 1,930,000 | ||
Inflation Swaps: | ||||
Average notional amount | $ | 60,227,143 | ||
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 177,894,141 | ||
Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 1,280,000 | ||
Average notional amount of sale contracts | $ | 3,934,000 | ||
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 25,373,200 |
66 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
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 April 30, 2016:
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., Inc./Morgan Stanley & Co., LLC** | $ | 22,115 | $ | (22,115 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 22,115 | $ | (22,115 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Bank of America, NA | $ | 37,895 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 37,895 | |||||||
Barclays Bank PLC | 98,539 | – 0 | – | – 0 | – | – 0 | – | 98,539 | ||||||||||||
BNP Paribas SA | 13,529 | – 0 | – | – 0 | – | – 0 | – | 13,529 | ||||||||||||
Citibank, NA | 142,915 | – 0 | – | – 0 | – | – 0 | – | 142,915 | ||||||||||||
Deutsche Bank AG | 11,301 | (141 | ) | – 0 | – | – 0 | – | 11,160 | ||||||||||||
Goldman Sachs Bank USA | 21,423 | (21,423 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
HSBC Bank USA | 1,346 | – 0 | – | – 0 | – | – 0 | – | 1,346 | ||||||||||||
JPMorgan Chase Bank/JPMorgan Chase Bank, NA | 79,394 | (79,394 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Morgan Stanley Capital Services LLC/Morgan Stanley Capital Services, Inc. | 518 | (518 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Standard Chartered Bank | 4,392 | (4,392 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 411,252 | $ | (105,868 | ) | $ | – 0 | – | $ | – 0 | – | $ | 305,384 | ^ | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
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.** | $ | 3,657 | $ | – 0 | – | $ | (3,657 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
Morgan Stanley & Co., Inc./Morgan Stanley & Co., LLC** | 40,125 | (22,115 | ) | (18,010 | ) | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 43,782 | $ | (22,115 | ) | $ | (21,667 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
|
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 | |||||||||||||||
OTC Derivatives: | ||||||||||||||||||||
Credit Suisse International | $ | 142 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 142 | |||||||
Deutsche Bank AG | 141 | (141 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Goldman Sachs Bank USA | 349,990 | (21,423 | ) | – 0 | – | – 0 | – | 328,567 | ||||||||||||
JPMorgan Chase Bank/JPMorgan Chase Bank, NA | 203,527 | (79,394 | ) | – 0 | – | – 0 | – | 124,133 | ||||||||||||
Morgan Stanley Capital Services LLC/Morgan Stanley Capital Services, Inc. | 300,808 | (518 | ) | – 0 | – | – 0 | – | 300,290 | ||||||||||||
Standard Chartered Bank | 91,540 | (4,392 | ) | – 0 | – | – 0 | – | 87,148 | ||||||||||||
State Street Bank & Trust Co. | 141,705 | – 0 | – | – 0 | – | – 0 | – | 141,705 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 1,087,853 | $ | (105,868 | ) | $ | – 0 | – | $ | – 0 | – | $ | 981,985 | ^ | ||||||
|
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|
|
|
|
|
|
|
|
* | The actual collateral received/pledged is more than the amount reported due to over-collateralization. |
** | Cash and securities have been posted for initial margin requirements for exchange-traded derivatives outstanding at April 30, 2016. |
^ | 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 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).
68 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
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 six months ended April 30, 2016, 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, and as such the return of such excess collateral may be delayed or denied. For the six months ended April 30, 2016, the average amount of reverse repurchase agreements outstanding was $85,176,253 and the daily weighted average interest rate was .69%. At April 30, 2016, the Strategy had reverse repurchase agreements outstanding in the amount of $127,132,861 as reported on the statement of assets and liabilities.
AB BOND INFLATION STRATEGY • | 69 |
Notes to Financial Statements
The following table presents the Strategy’s RVP liabilities by counterparty net of the related collateral pledged by the Strategy as of April 30, 2016:
Counterparty | RVP Liabilities Subject to a MRA | Securities collateral pledged†* | Net Amount of RVP Liabilities | |||||||||
HSBC Bank USA | $ | 97,092,644 | $ | (97,092,644 | ) | $ | – 0 | – | ||||
JP Morgan Chase | 30,040,217 | (30,040,217 | ) | – 0 | – | |||||||
|
|
|
|
|
| |||||||
Total | $ | 127,132,861 | $ | (127,132,861 | ) | $ | – 0 | – | ||||
|
|
|
|
|
|
† | 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 | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | Six Months Ended April 30, 2016 (unaudited) | Year Ended 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 80,992 | 169,441 | $ | 839,569 | $ | 1,801,811 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 7,838 | 11,466 | 80,808 | 120,842 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (272,855 | ) | (344,463 | ) | (2,832,769 | ) | (3,652,268 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (184,025 | ) | (163,556 | ) | $ | (1,912,392 | ) | $ | (1,729,615 | ) | ||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 10,646 | 44,035 | $ | 110,699 | $ | 461,102 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,214 | 1,497 | 12,327 | 15,586 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (32,956 | ) | (122,764 | ) | (339,406 | ) | (1,282,056 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (21,096 | ) | (77,232 | ) | $ | (216,380 | ) | $ | (805,368 | ) | ||||||||||
| ||||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 328,142 | 513,914 | $ | 3,426,734 | $ | 5,473,679 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 12,068 | 17,717 | 124,665 | 186,880 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (265,641 | ) | (273,750 | ) | (2,762,415 | ) | (2,917,777 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 74,569 | 257,881 | $ | 788,984 | $ | 2,742,782 | ||||||||||||||
|
70 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
Shares | Amount | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | Six Months Ended April 30, 2016 (unaudited) | Year Ended 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Class R | ||||||||||||||||||||
Shares sold | 14,461 | 2,736 | $ | 154,514 | $ | 29,226 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 14 | 104 | 141 | 1,105 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | – 0 | –(a) | (22,219 | ) | (2 | ) | (237,039 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 14,475 | (19,379 | ) | $ | 154,653 | $ | (206,708 | ) | ||||||||||||
| ||||||||||||||||||||
Class K | ||||||||||||||||||||
Shares sold | 23,979 | 42,242 | $ | 251,648 | $ | 449,842 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,052 | 1,925 | 10,836 | 20,281 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (16,191 | ) | (95,208 | ) | (167,740 | ) | (1,009,773 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 8,840 | (51,041 | ) | $ | 94,744 | $ | (539,650 | ) | ||||||||||||
| ||||||||||||||||||||
Class I | ||||||||||||||||||||
Shares sold | 2,780 | 28,559 | $ | 28,637 | $ | 302,454 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 197 | 688 | 2,019 | 7,241 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (1,182 | ) | (82,025 | ) | (12,445 | ) | (865,824 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 1,795 | (52,778 | ) | $ | 18,211 | $ | (556,129 | ) | ||||||||||||
| ||||||||||||||||||||
Class 1 | ||||||||||||||||||||
Shares sold | 1,471,788 | 3,177,028 | $ | 15,208,461 | $ | 33,474,332 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 149,869 | 276,081 | 1,533,156 | 2,888,583 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (4,052,484 | ) | (5,915,647 | ) | (41,849,331 | ) | (62,348,456 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (2,430,827 | ) | (2,462,538 | ) | $ | (25,107,714 | ) | $ | (25,985,541 | ) | ||||||||||
| ||||||||||||||||||||
Class 2 | ||||||||||||||||||||
Shares sold | 1,255,647 | 1,143,181 | $ | 12,973,160 | $ | 12,002,916 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 31,096 | 43,283 | 317,807 | 452,514 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (1,204,585 | ) | (1,654,114 | ) | (12,411,112 | ) | (17,603,900 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 82,158 | (467,650 | ) | $ | 879,855 | $ | (5,148,470 | ) | ||||||||||||
|
AB BOND INFLATION STRATEGY • | 71 |
Notes to Financial Statements
Shares | Amount | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | Six Months Ended April 30, 2016 (unaudited) | Year Ended 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Class Z(b) | ||||||||||||||||||||
Shares sold | 670,385 | 407,576 | $ | 6,999,691 | $ | 4,264,298 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 5,503 | 1,367 | 56,405 | 14,242 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (84,669 | ) | (40,713 | ) | (880,385 | ) | (427,376 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 591,219 | 368,230 | $ | 6,175,711 | $ | 3,851,164 | ||||||||||||||
|
(a) | Amount is less than one share. |
(b) | 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 value of the Strategy’s assets can decline as can the value of the Strategy’s distributions. The 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—The Strategy may enter into derivative transactions such as forwards, options, futures and swaps. Derivatives may be illiquid, difficult to
72 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
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.
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 Strategy 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 Strategy’s investments. The Strategy 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 Strategy, such as forwards, futures, options and swaps, may also result in a form of leverage. Leverage may result in higher returns to the Strategy than if the Strategy 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 six months ended April 30, 2016.
NOTE H
Distributions to Shareholders
The tax character of distributions to be paid for the year ending October 31, 2016 will be determined at the end of the current fiscal year. 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 | $ | 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.
74 | • AB BOND INFLATION STRATEGY |
Notes to Financial Statements
NOTE I
New Accounting Pronouncement
In May 2015, the Financial Accounting Standards Board issued an Accounting Standards Update, ASU 2015-07 (the “ASU”) 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 requirement to make certain disclosures for investments that are eligible to be measured at fair value using the net asset value per share practical expedient but do not utilize that practical expedient. 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
The Government STIF Portfolio, prior to June 1, 2016, was offered as a cash management option to mutual funds and other institutional accounts of the Adviser, and was not available for direct purchase by members of the public. Prior to June 1, 2016, the Government STIF Portfolio paid no investment management fees but did bear its own expenses. As of June 1, 2016, the Government STIF Portfolio, which was renamed “AB Government Money Market Portfolio” (the “Government Money Market Portfolio”), will have a contractual investment management fee rate of .20% and will continue to bear its own expenses. In connection with the investment by the Strategy in the Government Money Market Portfolio, the Adviser will waive its investment management fee from the Strategy in an amount equal to Government Money Market Portfolio’s effective management fee.
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 other 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 | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.44 | $ 10.77 | $ 10.81 | $ 11.36 | $ 10.81 | $ 10.53 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income (loss)(a)(b) | (.00 | )(c) | .08 | .17 | .09 | .13 | .38 | |||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .40 | (.31 | ) | (.04 | ) | (.57 | ) | .56 | .21 | |||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .40 | (.23 | ) | .13 | (.48 | ) | .69 | .59 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.07 | ) | (.10 | ) | (.17 | ) | (.07 | ) | (.14 | ) | (.31 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.07 | ) | (.10 | ) | (.17 | ) | (.07 | ) | (.14 | ) | (.31 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.77 | $ 10.44 | $ 10.77 | $ 10.81 | $ 11.36 | $ 10.81 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 3.87 | % | (2.18 | )% | 1.16 | % | (4.23 | )% | 6.41 | % | 5.75 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $12,116 | $13,660 | $15,860 | $23,358 | $17,627 | $9,732 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .96 | %^ | .88 | % | .81 | % | .80 | % | .81 | % | .78 | % | ||||||||||||
Expenses, before waivers/reimbursements(e) | 1.40 | %^ | 1.36 | % | 1.15 | % | 1.18 | % | 1.25 | % | 1.87 | % | ||||||||||||
Net investment income (loss)(b) | (.06 | )%^ | .75 | % | 1.57 | % | .80 | % | 1.20 | % | 3.59 | % | ||||||||||||
Portfolio turnover rate** | 20 | % | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on pages 84-85.
76 | • AB BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.27 | $ 10.64 | $ 10.71 | $ 11.28 | $ 10.78 | $ 10.50 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income (loss)(a)(b) | (.04 | ) | .00 | (c) | .07 | .00 | (c) | .04 | .30 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .41 | (.31 | ) | (.01 | ) | (.56 | ) | .56 | .22 | |||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .37 | (.31 | ) | .06 | (.56 | ) | .60 | .52 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.06 | ) | (.06 | ) | (.13 | ) | (.01 | ) | (.10 | ) | (.24 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.06 | ) | (.06 | ) | (.13 | ) | (.01 | ) | (.10 | ) | (.24 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.58 | $ 10.27 | $ 10.64 | $ 10.71 | $ 11.28 | $ 10.78 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 3.62 | % | (2.93 | )% | .50 | % | (4.98 | )% | 5.61 | % | 5.03 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $2,534 | $2,679 | $3,596 | $5,845 | $7,991 | $6,782 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | 1.68 | %^ | 1.58 | % | 1.51 | % | 1.51 | % | 1.51 | % | 1.49 | % | ||||||||||||
Expenses, before waivers/reimbursements(e) | 2.14 | %^ | 2.07 | % | 1.86 | % | 1.86 | % | 1.96 | % | 2.84 | % | ||||||||||||
Net investment income (loss)(b) | (.77 | )%^ | .06 | % | .70 | % | .01 | % | .39 | % | 2.82 | % | ||||||||||||
Portfolio turnover rate** | 20 | % | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on pages 84-85.
AB BOND INFLATION STRATEGY • | 77 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.46 | $ 10.79 | $ 10.82 | $ 11.39 | $ 10.83 | $ 10.55 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .01 | .13 | .19 | .06 | .16 | .39 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .41 | (.33 | ) | (.03 | ) | (.52 | ) | .56 | .24 | |||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .42 | (.20 | ) | .16 | (.46 | ) | .72 | .63 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.08 | ) | (.13 | ) | (.19 | ) | (.11 | ) | (.16 | ) | (.35 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.08 | ) | (.13 | ) | (.19 | ) | (.11 | ) | (.16 | ) | (.35 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.80 | $ 10.46 | $ 10.79 | $ 10.82 | $ 11.39 | $ 10.83 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 4.01 | % | (1.90 | )% | 1.50 | % | (4.06 | )% | 6.69 | % | 6.07 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $19,755 | $18,343 | $16,144 | $7,969 | $5,499 | $2,325 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .68 | %^ | .58 | % | .52 | % | .51 | % | .51 | % | .49 | % | ||||||||||||
Expenses, before waivers/reimbursements(e) | 1.13 | %^ | 1.06 | % | .86 | % | .87 | % | .95 | % | 1.80 | % | ||||||||||||
Net investment income(b) | .27 | %^ | 1.23 | % | 1.77 | % | .54 | % | 1.52 | % | 3.70 | % | ||||||||||||
Portfolio turnover rate** | 20 | % | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on pages 84-85.
78 | • AB BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class R | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.44 | $ 10.78 | $ 10.81 | $ 11.34 | $ 10.79 | $ 10.50 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income (loss)(a)(b) | .02 | (.08 | ) | .14 | .06 | .11 | .43 | |||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .38 | (.19 | ) | (.02 | ) | (.57 | ) | .55 | .15 | |||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .40 | (.27 | ) | .12 | (.51 | ) | .66 | .58 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.07 | ) | (.07 | ) | (.15 | ) | (.02 | ) | (.11 | ) | (.29 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.07 | ) | (.07 | ) | (.15 | ) | (.02 | ) | (.11 | ) | (.29 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.77 | $ 10.44 | $ 10.78 | $ 10.81 | $ 11.34 | $ 10.79 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 3.86 | % | (2.49 | )% | 1.10 | % | (4.51 | )% | 6.18 | % | 5.59 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $177 | $20 | $230 | $209 | $539 | $488 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | 1.18 | %^ | 1.06 | % | 1.01 | % | 1.01 | % | 1.01 | % | .98 | % | ||||||||||||
Expenses, before waivers/reimbursements(e) | 1.77 | %^ | 1.50 | % | 1.40 | % | 1.44 | % | 1.60 | % | 2.16 | % | ||||||||||||
Net investment income (loss)(b) | .39 | %^ | (.68 | )% | 1.26 | % | .49 | % | .98 | % | 4.16 | % | ||||||||||||
Portfolio turnover rate** | 20 | % | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on pages 84-85.
AB BOND INFLATION STRATEGY • | 79 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class K | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.42 | $ 10.77 | $ 10.80 | $ 11.35 | $ 10.79 | $ 10.50 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .00 | (c) | .07 | .17 | .09 | .13 | .28 | |||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .41 | (.31 | ) | (.03 | ) | (.57 | ) | .57 | .31 | |||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .41 | (.24 | ) | .14 | (.48 | ) | .70 | .59 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.07 | ) | (.11 | ) | (.17 | ) | (.07 | ) | (.14 | ) | (.30 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.07 | ) | (.11 | ) | (.17 | ) | (.07 | ) | (.14 | ) | (.30 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.76 | $ 10.42 | $ 10.77 | $ 10.80 | $ 11.35 | $ 10.79 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 3.99 | % | (2.24 | )% | 1.31 | % | (4.26 | )% | 6.51 | % | 5.75 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $1,763 | $1,616 | $2,219 | $1,981 | $2,007 | $566 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .93 | %^ | .83 | % | .76 | % | .76 | % | .77 | % | .75 | % | ||||||||||||
Expenses, before waivers/reimbursements(e) | 1.34 | %^ | 1.17 | % | 1.07 | % | 1.12 | % | 1.27 | % | 2.39 | % | ||||||||||||
Net investment income(b) | .03 | %^ | .70 | % | 1.57 | % | .80 | % | 1.19 | % | 2.76 | % | ||||||||||||
Portfolio turnover rate** | 20 | % | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on pages 84-85.
80 | • AB BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class I | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.38 | $ 10.73 | $ 10.77 | $ 11.33 | $ 10.78 | $ 10.51 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income (loss)(a)(b) | .01 | (.06 | ) | .22 | .10 | .18 | .27 | |||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .41 | (.14 | ) | (.06 | ) | (.55 | ) | .53 | .36 | |||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .42 | (.20 | ) | .16 | (.45 | ) | .71 | .63 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.08 | ) | (.15 | ) | (.20 | ) | (.11 | ) | (.16 | ) | (.36 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.08 | ) | (.15 | ) | (.20 | ) | (.11 | ) | (.16 | ) | (.36 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.72 | $ 10.38 | $ 10.73 | $ 10.77 | $ 11.33 | $ 10.78 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 4.06 | % | (1.88 | )% | 1.52 | % | (4.00 | )% | 6.65 | % | 6.11 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $293 | $265 | $841 | $2,631 | $267 | $76 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .68 | %^ | .57 | % | .51 | % | .50 | % | .52 | % | .50 | % | ||||||||||||
Expenses, before waivers/reimbursements(e) | 1.01 | %^ | .76 | % | .69 | % | .83 | % | .95 | % | 1.91 | % | ||||||||||||
Net investment income (loss)(b) | .28 | %^ | (.50 | )% | 2.06 | % | 1.10 | % | 1.54 | % | 3.67 | % | ||||||||||||
Portfolio turnover rate** | 20 | % | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on pages 84-85.
AB BOND INFLATION STRATEGY • | 81 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class 1 | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.35 | $ 10.71 | $ 10.76 | $ 11.33 | $ 10.78 | $ 10.51 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .01 | .10 | .19 | .12 | .16 | .34 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .41 | (.32 | ) | (.04 | ) | (.58 | ) | .55 | .28 | |||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .42 | (.22 | ) | .15 | (.46 | ) | .71 | .62 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.08 | ) | (.14 | ) | (.20 | ) | (.11 | ) | (.16 | ) | (.35 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.08 | ) | (.14 | ) | (.20 | ) | (.11 | ) | (.16 | ) | (.35 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.69 | $ 10.35 | $ 10.71 | $ 10.76 | $ 11.33 | $ 10.78 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 4.07 | % | (2.04 | )% | 1.38 | % | (4.08 | )% | 6.63 | % | 6.01 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $235,596 | $253,402 | $288,565 | $315,187 | $193,864 | $105,201 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .78 | %^ | .68 | % | .61 | % | .60 | % | .61 | % | .58 | % | ||||||||||||
Expenses, before waivers/reimbursements(e) | 1.00 | %^ | .87 | % | .77 | % | .81 | % | .96 | % | 1.20 | % | ||||||||||||
Net investment income(b) | .14 | %^ | .98 | % | 1.75 | % | 1.05 | % | 1.41 | % | 3.24 | % | ||||||||||||
Portfolio turnover rate** | 20 | % | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on pages 84-85.
82 | • AB BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class 2 | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.35 | $ 10.71 | $ 10.75 | $ 11.33 | $ 10.77 | $ 10.51 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .01 | .11 | .20 | .12 | .14 | .39 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .41 | (.32 | ) | (.03 | ) | (.58 | ) | .59 | .23 | |||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .42 | (.21 | ) | .17 | (.46 | ) | .73 | .62 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.08 | ) | (.15 | ) | (.21 | ) | (.12 | ) | (.17 | ) | (.36 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | – 0 | – | (.00 | )(c) | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.08 | ) | (.15 | ) | (.21 | ) | (.12 | ) | (.17 | ) | (.36 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.69 | $ 10.35 | $ 10.71 | $ 10.75 | $ 11.33 | $ 10.77 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 4.09 | % | (1.95 | )% | 1.55 | % | (4.06 | )% | 6.80 | % | 6.01 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $43,103 | $40,897 | $47,314 | $46,554 | $47,200 | $16,550 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .68 | %^ | .58 | % | .51 | % | .51 | % | .51 | % | .49 | % | ||||||||||||
Expenses, before waivers/reimbursements(e) | .90 | %^ | .77 | % | .67 | % | .71 | % | .86 | % | 1.84 | % | ||||||||||||
Net investment income(b) | .24 | %^ | 1.09 | % | 1.87 | % | 1.05 | % | 1.36 | % | 3.73 | % | ||||||||||||
Portfolio turnover rate**. | 20 | % | 51 | % | 77 | % | 93 | % | 32 | % | 38 | % |
See footnote summary on pages 84-85.
AB BOND INFLATION STRATEGY • | 83 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class Z | ||||||||
Six Months (unaudited) | December 11, 2015 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 10.38 | $ 10.62 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(a)(b) | .02 | .19 | ||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .40 | (.28 | ) | |||||
|
| |||||||
Net increase (decrease) in net asset value from operations | .42 | (.09 | ) | |||||
|
| |||||||
Less: Dividends | ||||||||
Dividends from net investment income | (.08 | ) | (.15 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 10.72 | $ 10.38 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | 4.08 | % | (.86 | )% | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $10,282 | $3,821 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements(e) | .68 | %^ | .61 | %^ | ||||
Expenses, before waivers/reimbursements(e) | .92 | %^ | .84 | %^ | ||||
Net investment income(b) | .38 | %^ | 2.09 | %^ | ||||
Portfolio turnover rate** | 20 | % | 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. |
84 | • AB BOND INFLATION STRATEGY |
Financial Highlights
(e) | The expense ratios presented below exclude interest expense: |
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Class A | ||||||||||||||||||||||||
Net of waivers/reimbursements | .78 | %^ | .80 | % | .79 | % | .75 | % | .75 | % | .75 | % | ||||||||||||
Before waivers/reimbursements | 1.22 | %^ | 1.28 | % | 1.13 | % | 1.12 | % | 1.18 | % | 1.83 | % | ||||||||||||
Class C | ||||||||||||||||||||||||
Net of waivers/reimbursements | 1.50 | %^ | 1.50 | % | 1.48 | % | 1.45 | % | 1.45 | % | 1.45 | % | ||||||||||||
Before waivers/reimbursements | 1.96 | %^ | 1.99 | % | 1.84 | % | 1.81 | % | 1.90 | % | 2.80 | % | ||||||||||||
Advisor Class | ||||||||||||||||||||||||
Net of waivers/reimbursements | .50 | %^ | .50 | % | .49 | % | .45 | % | .45 | % | .45 | % | ||||||||||||
Before waivers/reimbursements | .95 | %^ | .98 | % | .84 | % | .82 | % | .89 | % | 1.76 | % | ||||||||||||
Class R | ||||||||||||||||||||||||
Net of waivers/reimbursements | 1.00 | %^ | 1.00 | % | .99 | % | .95 | % | .95 | % | .95 | % | ||||||||||||
Before waivers/reimbursements | 1.59 | %^ | 1.44 | % | 1.38 | % | 1.39 | % | 1.54 | % | 2.13 | % | ||||||||||||
Class K | ||||||||||||||||||||||||
Net of waivers/reimbursements | .75 | %^ | .75 | % | .74 | % | .70 | % | .70 | % | .70 | % | ||||||||||||
Before waivers/reimbursements | 1.16 | %^ | 1.09 | % | 1.05 | % | 1.06 | % | 1.21 | % | 2.34 | % | ||||||||||||
Class I | ||||||||||||||||||||||||
Net of waivers/reimbursements | .50 | %^ | .50 | % | .49 | % | .45 | % | .45 | % | .45 | % | ||||||||||||
Before waivers/reimbursements | .83 | %^ | .69 | % | .67 | % | .78 | % | .89 | % | 1.86 | % | ||||||||||||
Class 1 | ||||||||||||||||||||||||
Net of waivers/reimbursements | .60 | %^ | .60 | % | .59 | % | .55 | % | .55 | % | .55 | % | ||||||||||||
Before waivers/reimbursements | .82 | %^ | .79 | % | .74 | % | .76 | % | .89 | % | 1.18 | % | ||||||||||||
Class 2 | ||||||||||||||||||||||||
Net of waivers/reimbursements | .50 | %^ | .50 | % | .49 | % | .45 | % | .45 | % | .45 | % | ||||||||||||
Before waivers/reimbursements | .72 | %^ | .69 | % | .64 | % | .66 | % | .80 | % | 1.80 | % | ||||||||||||
Class Z(g) | ||||||||||||||||||||||||
Net of waivers/reimbursements | .50 | %^ | .50 | % | ||||||||||||||||||||
Before waivers/reimbursements | .74 | %^ | .73 | % |
(f) | Commencement of distribution. |
(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
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 Michael S. Canter(2), Vice President Paul J. DeNoon(2), Vice President Shawn E. Keegan(2) , Vice President Greg J. Wilensky(2) , Vice President | Emilie D. Wrapp, Secretary Joseph J. Mantineo, Treasurer and Chief Financial Officer Phyllis J. Clarke, Controller Vincent S. Noto, Chief Compliance Officer |
Custodian and Accounting Agent State Street Bank and Trust Company 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. Michael S. Canter, Mr. Paul J. DeNoon, Mr. Shawn E. Keegan 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. |
86 | • AB BOND INFLATION STRATEGY |
Board of Directors
Information Regarding the Review and Approval of the Portfolio’s Investment Advisory Contract
The disinterested directors (the “directors”) of AB Bond Fund, Inc. (the “Fund”) unanimously approved the continuance of the Fund’s Investment Advisory Contract (the “Advisory Agreement”) with the Adviser in respect of AB Bond Inflation Strategy (the “Portfolio”) at a meeting held on November 3-5, 2015.
Prior to approval of the continuance of the Advisory Agreement in respect of the Portfolio, the directors had requested from the Adviser, and received and evaluated, extensive materials. They reviewed the proposed continuance of the Advisory Agreement with the Adviser and with experienced counsel who are independent of the Adviser, who advised on the relevant legal standards. The directors also reviewed an independent evaluation prepared by the Fund’s Senior Officer (who is also the Fund’s Independent Compliance Officer) of the reasonableness of the advisory fee, in which the Senior Officer concluded that the contractual fee for the Portfolio was reasonable. The directors also discussed the proposed continuance in private sessions with counsel and the Fund’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services provided by the Adviser to the Portfolio gained from their experience as directors or trustees of most of the registered investment companies advised by the Adviser, their overall confidence in the Adviser’s integrity and competence they have gained from that experience, the Adviser’s initiative in identifying and raising potential issues with the directors and its responsiveness, frankness and attention to concerns raised by the directors in the past, including the Adviser’s willingness to consider and implement organizational and operational changes designed to improve investment results and the services provided to the AB Funds. The directors noted that they have four regular meetings each year, at each of which they receive presentations from the Adviser on the investment results of the Portfolio and review extensive materials and information presented by the Adviser.
The directors also considered all other factors they believed relevant, including the specific matters discussed below. In their deliberations, the directors did not identify any particular information that was all-important or controlling, and different directors may have attributed different weights to the various factors. The directors determined that the selection of the Adviser to manage the Portfolio and the overall arrangements between the Portfolio and the Adviser, as provided in the Advisory Agreement, including the advisory fee, were fair and reasonable in light of the services performed, expenses incurred and such other matters as the directors considered relevant in the exercise of their business judgment. The material factors and conclusions that formed the basis for the directors’ determinations included the following:
Nature, Extent and Quality of Services Provided
The directors considered the scope and quality of services provided by the Adviser under the Advisory Agreement, including the quality of the investment
AB BOND INFLATION STRATEGY • | 87 |
research capabilities of the Adviser and the other resources it has dedicated to performing services for the Portfolio. They noted the professional experience and qualifications of the Portfolio’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Portfolio will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Portfolio by employees of the Adviser or its affiliates. Requests for these reimbursements are made on a quarterly basis and subject to approval by the directors. Reimbursements, to the extent requested and paid, result in a higher rate of total compensation from the Portfolio to the Adviser than the fee rate stated in the Portfolio’s Advisory Agreement. The directors noted that the methodology used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Fund’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Portfolio’s other service providers, also was considered. The directors concluded that, overall, they were satisfied with the nature, extent and quality of services provided to the Portfolio under the Advisory Agreement.
Costs of Services Provided and Profitability
The directors reviewed a schedule of the revenues, expenses and related notes indicating the profitability of the Portfolio to the Adviser for calendar years 2013 and 2014 that had been prepared with an expense allocation methodology arrived at in consultation with an independent consultant retained by the Fund’s Senior Officer. The directors noted the assumptions and methods of allocation used by the Adviser in preparing fund-specific profitability data and understood that there are a number of potentially acceptable allocation methodologies for information of this type. The directors noted that the profitability information reflected all revenues and expenses of the Adviser’s relationship with the Portfolio, including those relating to its subsidiaries that provide transfer agency and distribution services to the Portfolio. The directors recognized that it is difficult to make comparisons of the profitability of the Advisory Agreement with the profitability of advisory contracts for unaffiliated funds because comparative information is not generally publicly available and is affected by numerous factors. The directors focused on the profitability of the Adviser’s relationship with the Portfolio before taxes and distribution expenses. The directors noted that the Adviser’s relationship with the Portfolio was not profitable to it in 2013. The directors were satisfied that the Adviser’s level of profitability from its relationship with the Portfolio in 2014 was not unreasonable.
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their relationships with the Portfolio, including, but not limited to, benefits relating to 12b-1 fees and sales charges received by the Fund’s principal underwriter (which is a wholly owned subsidiary of the Adviser) in respect of certain classes of the Portfolio’s shares and transfer agency fees paid by the Portfolio to a
88 | • AB BOND INFLATION STRATEGY |
wholly owned subsidiary of the Adviser. The directors recognized that the Adviser’s profitability would be somewhat lower without these benefits. The directors understood that the Adviser also might derive reputational and other benefits from its association with the Portfolio.
Investment Results
In addition to the information reviewed by the directors in connection with the meeting, the directors receive detailed performance information for the Portfolio at each regular Board meeting during the year. At the November 2015 meeting, the directors reviewed information prepared by Broadridge showing the performance of the Class A Shares of the Portfolio as compared with that of a group of similar funds selected by Broadridge (the “Performance Group”) and as compared with that of a broad array of funds selected by Broadridge (the “Performance Universe”), and information prepared by the Adviser showing performance of the Class A Shares as compared with the Barclays 1-10 Year Treasury Inflation Protected Securities (TIPS) Index (the “Index”), in each case for the 1-, 3- and 5-year periods ended July 31, 2015 and (in the case of comparisons with the Index) the period since inception (January 2010 inception). The directors noted that the Portfolio was in the 3rd quintile of the Performance Group and 4th quintile of the Performance Universe for the 1-year period, in the 1st quintile of the Performance Group and the Performance Universe for the 3-year period, and in the 4th quintile of the Performance Group and the Performance Universe for the 5-year period. The Portfolio lagged the Index in the 1- and 5-year periods and outperformed it in the 3-year period and the period since inception. Based on their review, the directors concluded that the Portfolio’s performance was acceptable.
Advisory Fees and Other Expenses
The directors considered the advisory fee rate paid by the Portfolio to the Adviser and information prepared by Broadridge concerning advisory fee rates paid by other funds in the same Broadridge category as the Portfolio at a common asset level. The directors recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The directors noted that, at the Portfolio’s current size, its contractual effective advisory fee rate of 50 basis points was higher than the Expense Group median and that the administrative expense reimbursement was 1.2 basis points in the Portfolio’s latest fiscal year.
The directors also considered the Adviser’s fee schedule for non-fund clients pursuing a similar investment style. For this purpose, they reviewed the relevant advisory fee information from the Adviser’s Form ADV and the evaluation from the Fund’s Senior Officer. The directors noted that the institutional fee schedule and the Portfolio’s fee schedule started at the same rate and that the institutional fee schedule had breakpoints at lower asset levels. The application of the institutional fee schedule to the Portfolio’s net assets would result in a fee rate lower
AB BOND INFLATION STRATEGY • | 89 |
than the rate at the same asset level provided in the Portfolio’s Advisory Agreement. The directors noted that the Adviser may, in some cases, agree to fee rates with large institutional clients that are lower than those reviewed by the directors and that they had previously discussed with the Adviser its policies in respect of such arrangements. The directors also reviewed information that indicated that the Portfolio’s fee rate is higher than the sub-advisory fee rate earned by the Adviser for sub-advising a registered investment company with a similar investment style.
The Adviser reviewed with the directors the significantly greater scope of the services it provides to the Portfolio relative to institutional clients and sub-advised funds. The Adviser also noted that because mutual funds are constantly issuing and redeeming shares, they are more difficult to manage than an institutional account, where the assets tend to be relatively stable. In light of the substantial differences in services rendered by the Adviser to institutional clients as compared to funds such as the Portfolio, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors also considered the total expense ratio of the Class A shares of the Portfolio in comparison to the fees and expenses of funds within two comparison groups created by Broadridge: an Expense Group and an Expense Universe. Broadridge described an Expense Group as a representative sample of funds similar to the Portfolio and an Expense Universe as a broader group than the Expense Group, consisting of all funds in the investment classification/objective with a similar load type as the Portfolio. The Class A expense ratio of the Portfolio was based on the Portfolio’s latest fiscal year and the information included the pro forma expense ratio to reflect a reduction in the 12b-1 fee effective February 1, 2016. The pro forma expense ratio of the Portfolio reflected fee waivers and/or expense reimbursements as a result of an undertaking by the Adviser. The directors noted that it was likely that the expense ratios of some of the other funds in the Portfolio’s Broadridge category also were lowered by waivers or reimbursements by those funds’ investment advisers, which in some cases might be voluntary or temporary. The directors view the expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Portfolio by others.
The directors noted that the Portfolio’s pro forma total expense ratio, giving effect to a cap by the Adviser, was lower than the Expense Group and the Expense Universe medians. The directors concluded that the Portfolio’s pro forma expense ratio was satisfactory.
Economies of Scale
The directors noted that the advisory fee schedule for the Portfolio contains breakpoints that reduce the fee rates on assets above specified levels. The directors took into consideration prior presentations by an independent
90 | • AB BOND INFLATION STRATEGY |
consultant on economies of scale in the mutual fund industry and for the AB Funds, and by the Adviser concerning certain of its views on economies of scale. The directors also had requested and received from the Adviser certain updates on economies of scale at the May 2015 meetings. The directors believe that economies of scale may be realized (if at all) by the Adviser across a variety of products and services, and not only in respect of a single fund. The directors noted that there is no established methodology for setting breakpoints that give effect to fund-specific services provided by a fund’s adviser and to the economies of scale that an adviser may realize in its overall mutual fund business or those components of it which directly or indirectly affect a fund’s operations. The directors observed that in the mutual fund industry as a whole, as well as among funds similar to the Portfolio, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. The directors also noted that the advisory agreements for many funds do not have breakpoints at all. Having taken these factors into account, the directors concluded that the Portfolio’s shareholders would benefit from a sharing of economies of scale in the event the Portfolio’s net assets exceed a breakpoint in the future.
AB BOND INFLATION STRATEGY • | 91 |
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
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.” |
92 | • AB BOND INFLATION STRATEGY |
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 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 • | 93 |
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 competitive and assets are acquired one account at a time. In addition, managing
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. |
94 | • AB BOND INFLATION STRATEGY |
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 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 • | 95 |
Strategy | Sub-advised Fund | Sub-advised Fund Fee Schedule | Sub-Advised Management | 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 advisers15,16 Broadridge’s analysis included the comparison of the
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. |
96 | • AB BOND INFLATION STRATEGY |
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”) 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 EG Median (%) | Broadridge EG Rank | Broadridge EU Median (%) | Broadridge EU 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 • | 97 |
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. |
98 | • 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 • | 99 |
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. |
100 | • 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 (%) | 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 • | 101 |
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
International Strategic Core 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
Income Fund
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 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 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.
102 | • AB BOND INFLATION STRATEGY |
AB Family of Funds
NOTES
AB BOND INFLATION STRATEGY • | 103 |
NOTES
104 | • AB BOND INFLATION STRATEGY |
NOTES
AB BOND INFLATION STRATEGY • | 105 |
NOTES
106 | • AB BOND INFLATION STRATEGY |
NOTES
AB BOND INFLATION 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-0152-0416
APR 04.30.16
SEMI-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.
June 24, 2016
Semi-Annual Report
This report provides management’s discussion of fund performance for AB Credit Long/Short Portfolio (the “Fund”) for the semi-annual reporting period ended April 30, 2016.
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 lesser extent in securities denominated in foreign currencies. Fluctuations in
AB CREDIT LONG/SHORT PORTFOLIO • | 1 |
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 contracts, 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 6 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 April 30, 2016.
For both periods, all share classes of the Fund outperformed the benchmark, before sales charges. For the six-month period, the primary contributors to performance included outright long credit positions and capital structure relative value trades, whereby the Fund owns one instrument in an issuer’s capital structure and sells short another instrument in the same issuer’s capital structure. In particular, US high-yield longs and capital structure trades in commodity-related credits were the primary drivers of performance. The primary detractors from performance were outright credit shorts and interest rate hedges. The Fund’s Senior Investment Management Team (the “Team”) has continued to maintain relatively little net interest rate exposure in the Fund and has utilized interest rate hedges to achieve this goal, primarily in US Treasury and German bund futures.
For the 12-month period, the primary contributors to performance included capital structure relative value trades. In particular, capital structure trades in commodity-related credits were the primary drivers of performance. The primary detractors from performance
2 | • AB CREDIT LONG/SHORT PORTFOLIO |
were interest rate hedges. The Team has continued to maintain relatively little net interest rate exposure in the Fund and has utilized interest rate hedges to achieve this goal, primarily in US Treasury and German bund futures. Currency positioning contributed in the six-month and 12-month periods; yield-curve positioning had an immaterial impact during both periods.
During both periods, the Fund utilized currency forwards to hedge currency exposure as well as to manage active currency risk. Purchased and written equity options were also used to hedge market exposure and for investment purposes. Total return swaps were used to hedge and take active risk. Credit default swaps, both single name and index, were used to hedge credit risk as well as to take active credit risk. Treasury futures were used for both hedging and investment purposes. Interest rate swaps were used for hedging purposes, specifically to manage duration.
Market Review and Investment Strategy
There was significant volatility in global credit markets during both periods. Over the 12-month period, global credit markets delivered negative excess returns, with particular volatility in US
high yield. At the same time, six-month returns were positive. Commodity-related sectors were subject to significant volatility, with notable selloffs and rallies occurring in both the energy, metals and mining sectors across both investment grade and high yield. In addition, emerging-markets credit, both sovereign and corporate, experienced considerable commodity-related volatility.
The Fund employed a variety of relative-value focused strategies intended to take advantage of dislocations that emerged across the global credit market, with a particular focus on capital structure relative value trades. In light of the significant market volatility, the Fund’s outright directional positioning was kept relatively contained during the majority of the six-month period.
On June 23, 2016, the UK voted to leave the European Union (“EU”) in a popular referendum. At this moment in time, the UK remains a member of the EU and the rules and regulations remain unchanged, as do all the protections in place. Exactly how the UK’s role in the EU will change will become clear over time. The Adviser continues to monitor the heightened market volatility.
AB CREDIT LONG/SHORT PORTFOLIO • | 3 |
DISCLOSURES AND RISKS
Benchmark Disclosure
The Bank of America Merrill Lynch® 3-Month US Treasury Bill Index is unmanaged and 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.
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 as the recent period of historically low rates is beginning to end and rates have begun rising. 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 and accrued interest. 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.
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 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.
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
(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)
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, and because these investments may be 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 decline.
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.
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.
AB CREDIT LONG/SHORT PORTFOLIO • | 5 |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE FUND VS. ITS BENCHMARK PERIODS ENDED APRIL 30, 2016 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB Credit Long/Short Portfolio* | ||||||||||
Class A | 3.29% | 2.97% | ||||||||
| ||||||||||
Class C | 2.90% | 2.17% | ||||||||
| ||||||||||
Advisor Class† | 3.38% | 3.17% | ||||||||
| ||||||||||
BofA ML 3-Month US Treasury Bill Index | 0.14% | 0.15% | ||||||||
| ||||||||||
* 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 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. | ||||||||||
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
(Historical Performance continued on next page)
6 | • AB CREDIT LONG/SHORT PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF APRIL 30, 2016 (unaudited) | ||||||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | SEC Yields* | ||||||||||
Class A Shares | -4.01 | % | ||||||||||
1 Year | 2.97 | % | -1.42 | % | ||||||||
Since Inception† | 1.55 | % | -0.63 | % | ||||||||
Class C Shares | -4.90 | % | ||||||||||
1 Year | 2.17 | % | 1.17 | % | ||||||||
Since Inception† | 0.77 | % | 0.77 | % | ||||||||
Advisor Class Shares‡ | -3.95 | % | ||||||||||
1 Year | 3.17 | % | 3.17 | % | ||||||||
Since Inception† | 1.77 | % | 1.77 | % | ||||||||
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END MARCH 31, 2016 (unaudited) | ||||||||||||
SEC Returns (reflects applicable sales charges) | ||||||||||||
Class A Shares | ||||||||||||
1 Year | -2.71 | % | ||||||||||
Since Inception† | -1.80 | % | ||||||||||
Class C Shares | ||||||||||||
1 Year | -0.15 | % | ||||||||||
Since Inception† | -0.27 | % | ||||||||||
Advisor Class Shares‡ | ||||||||||||
1 Year | 1.86 | % | ||||||||||
Since Inception† | 0.73 | % |
The Fund’s prospectus fee table shows the Fund’s total annual operating expense ratios as 7.28%, 8.08% and 6.91% 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, taxes, 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 31, 2017 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 April 30, 2016. |
† | 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. |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
AB CREDIT LONG/SHORT PORTFOLIO • | 7 |
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 November 1, 2015 | Ending Account Value April 30, 2016 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,032.90 | $ | 32.55 | 6.44 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 992.84 | $ | 31.91 | 6.44 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,029.00 | $ | 36.37 | 7.21 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 989.01 | $ | 35.66 | 7.21 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,033.80 | $ | 31.35 | 6.20 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 994.03 | $ | 30.74 | 6.20 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
8 | • AB CREDIT LONG/SHORT PORTFOLIO |
Expense Example
PORTFOLIO SUMMARY
April 30, 2016 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $21.7
SECURITY TYPE BREAKDOWN*
Long | Short | |||||||
Bank Loans | 1.8 | % | — | % | ||||
Collateralized Mortgage Obligations | 1.2 | — | ||||||
Common Stocks | 2.5 | — | ||||||
Corporates – Investment Grade | 12.1 | -10.6 | ||||||
Corporates – Non-Investment Grade | 31.8 | -53.5 | ||||||
Emerging Markets – Corporate Bonds | 1.3 | -1.3 | ||||||
Emerging Markets – Sovereigns | 0.9 | -0.7 | ||||||
Emerging Markets – Treasuries | 1.3 | — | ||||||
Governments – Sovereign Agencies | 2.7 | -1.0 | ||||||
Investment Companies | 3.4 | — | ||||||
Options Purchased – Calls | 0.1 | — | ||||||
Options Purchased – Puts | 0.2 | — | ||||||
Preferred Stocks | 0.2 | — | ||||||
Quasi-Sovereigns | 0.9 | -0.6 |
NET COUNTRY EXPOSURE (TOP THREE)*
Long | ||||
Brazil | 3.4 | % | ||
Canada | 2.4 | |||
France | 1.1 |
Short | ||||
Luxembourg | -4.0 | % | ||
Netherlands | -3.7 | |||
Spain | -2.2 |
TEN LARGEST HOLDINGS*
Long | ||||
Company | ||||
Teck Resources Ltd. | 2.6 | % | ||
Vale Overseas Ltd. | 2.0 | |||
BlackRock Debt Strategies Fund, Inc. | 2.0 | |||
Lloyds Banking Group PLC | 1.9 | |||
ArcelorMittal | 1.9 | |||
Windstream Services LLC | 1.8 | |||
Petrobras Global Finance BV | 1.8 | |||
Hewlett Packard Enterprise Co. | 1.8 | |||
Neiman Marcus Group, Inc. (The) | 1.8 | |||
Chesapeake Energy Corp. | 1.7 |
Short | ||||
Company | ||||
NXP BV/NXP Funding LLC | -3.9 | % | ||
INEOS Group Holdings SA | -3.7 | |||
Jaguar Land Rover Automotive PLC | -2.9 | |||
Lear Corp. | -2.9 | |||
First Data Corp. | -2.8 | |||
Ashland, Inc. | -2.8 | |||
Berry Plastics Corp. | -2.7 | |||
HCA, Inc. | -2.4 | |||
TDC A/S | -2.3 | |||
Spectrum Brands, Inc. | -2.0 |
* | 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 • | 9 |
Portfolio Summary and Ten Largest Holdings
PORTFOLIO OF INVESTMENTS
April 30, 2016 (unaudited)
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
CORPORATES – NON-INVESTMENT GRADE – 31.8% | ||||||||||
Industrial – 28.0% | ||||||||||
Basic – 5.5% | ||||||||||
ArcelorMittal | U.S.$ | 400 | $ | 410,000 | ||||||
Freeport-McMoRan, Inc. | 200 | 167,000 | ||||||||
Magnetation LLC/Mag Finance Corp. | 35 | 1,750 | ||||||||
Peabody Energy Corp. | 25 | 2,877 | ||||||||
Teck Resources Ltd. | 795 | 564,450 | ||||||||
6.25%, 7/15/41 | 24 | 18,120 | ||||||||
Thompson Creek Metals Co., Inc. | 57 | 22,515 | ||||||||
|
| |||||||||
1,186,712 | ||||||||||
|
| |||||||||
Capital Goods – 0.4% | ||||||||||
Bombardier, Inc. | 107 | 95,765 | ||||||||
|
| |||||||||
Communications - Media – 2.0% | ||||||||||
Cequel Communications Holdings I LLC/Cequel Capital Corp. | 62 | 58,435 | ||||||||
CSC Holdings LLC | 60 | 54,600 | ||||||||
DISH DBS Corp. | 66 | 61,941 | ||||||||
iHeartCommunications, Inc. | 104 | 61,360 | ||||||||
9.00%, 12/15/19-9/15/22 | 142 | 103,163 | ||||||||
Univision Communications, Inc. | 88 | 87,010 | ||||||||
|
| |||||||||
426,509 | ||||||||||
|
| |||||||||
Communications - Telecommunications – 3.8% | ||||||||||
Frontier Communications Corp. | 146 | 147,460 | ||||||||
Numericable-SFR SA | 200 | 203,000 | ||||||||
Sprint Capital Corp. | 80 | 63,600 | ||||||||
Windstream Services LLC | 523 | 398,787 | ||||||||
|
| |||||||||
812,847 | ||||||||||
|
|
10 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Cyclical - Automotive – 0.4% | ||||||||||
Meritor, Inc. | U.S.$ | 45 | $ | 53,606 | ||||||
Navistar International Corp. | 41 | 29,315 | ||||||||
|
| |||||||||
82,921 | ||||||||||
|
| |||||||||
Consumer Cyclical - Other – 1.4% | ||||||||||
MDC Holdings, Inc. | 5 | 4,850 | ||||||||
6.00%, 1/15/43 | 125 | 95,625 | ||||||||
PulteGroup, Inc. | 140 | 135,800 | ||||||||
6.375%, 5/15/33 | 51 | 51,765 | ||||||||
7.875%, 6/15/32 | 19 | 21,280 | ||||||||
|
| |||||||||
309,320 | ||||||||||
|
| |||||||||
Consumer Cyclical - Retailers – 0.6% | ||||||||||
Cash America International, Inc. | 120 | 120,900 | ||||||||
|
| |||||||||
Consumer Non-Cyclical – 3.2% | ||||||||||
BI-LO LLC/BI-LO Finance Corp. | 119 | 89,250 | ||||||||
CHS/Community Health Systems, Inc. | 129 | 116,745 | ||||||||
HCA, Inc. | 326 | 339,040 | ||||||||
Sun Products Corp. (The) | 48 | 45,240 | ||||||||
Valeant Pharmaceuticals International, Inc. | 125 | 104,423 | ||||||||
|
| |||||||||
694,698 | ||||||||||
|
| |||||||||
Energy – 7.1% | ||||||||||
Berry Petroleum Co. LLC | 125 | 31,875 | ||||||||
Cenovus Energy, Inc. | 135 | 104,535 | ||||||||
CHC Helicopter SA | 172 | 76,495 | ||||||||
9.375%, 6/01/21 | 65 | 4,225 | ||||||||
Chesapeake Energy Corp. | 400 | 258,000 | ||||||||
6.625%, 8/15/20 | 600 | 367,500 | ||||||||
Cobalt International Energy, Inc. | 64 | 32,200 | ||||||||
Denbury Resources, Inc. | 17 | 9,988 |
AB CREDIT LONG/SHORT PORTFOLIO • | 11 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
EP Energy LLC/Everest Acquisition Finance, Inc. | U.S.$ | 14 | $ | 8,050 | ||||||
9.375%, 5/01/20 | 86 | 56,062 | ||||||||
Global Partners LP/GLP Finance Corp. | 200 | 164,000 | ||||||||
Halcon Resources Corp. | 13 | 4,160 | ||||||||
Hilcorp Energy I LP/Hilcorp Finance Co. | 24 | 22,620 | ||||||||
Noble Holding International Ltd. | 200 | 144,000 | ||||||||
Tervita Corp. | 184 | 34,500 | ||||||||
Transocean, Inc. | 300 | 183,750 | ||||||||
Whiting Petroleum Corp. | 48 | 36,240 | ||||||||
|
| |||||||||
1,538,200 | ||||||||||
|
| |||||||||
Other Industrial – 1.6% | ||||||||||
General Cable Corp. | 85 | 56,206 | ||||||||
Laureate Education, Inc. | 331 | 299,555 | ||||||||
|
| |||||||||
355,761 | ||||||||||
|
| |||||||||
Services – 1.4% | ||||||||||
Prime Security Services Borrower LLC/Prime Finance, Inc. | 300 | 311,250 | ||||||||
|
| |||||||||
Technology – 0.4% | ||||||||||
Avaya, Inc. | 105 | 66,938 | ||||||||
10.50%, 3/01/21(c) | 74 | 15,910 | ||||||||
SunEdison, Inc. | 102 | 3,570 | ||||||||
|
| |||||||||
86,418 | ||||||||||
|
| |||||||||
Transportation - Services – 0.2% | ||||||||||
XPO CNW, Inc. | 75 | 53,250 | ||||||||
|
| |||||||||
6,074,551 | ||||||||||
|
| |||||||||
Financial Institutions – 3.7% | ||||||||||
Banking – 1.7% | ||||||||||
Barclays Bank PLC | 73 | 83,782 | ||||||||
Danske Bank A/S | GBP | 56 | 82,520 |
12 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Royal Bank of Scotland Group PLC | U.S.$ | 100 | $ | 93,450 | ||||||
Royal Bank of Scotland PLC (The) | 24 | 25,378 | ||||||||
UBS Preferred Funding Trust V | 94 | 94,122 | ||||||||
|
| |||||||||
379,252 | ||||||||||
|
| |||||||||
Finance – 0.8% | ||||||||||
Enova International, Inc. | 96 | 72,000 | ||||||||
TMX Finance LLC/TitleMax Finance Corp. | 129 | 100,620 | ||||||||
|
| |||||||||
172,620 | ||||||||||
|
| |||||||||
Other Finance – 1.2% | ||||||||||
CNG Holdings, Inc. | 33 | 14,685 | ||||||||
International Personal Finance PLC | EUR | 200 | 208,399 | |||||||
iPayment, Inc. | U.S.$ | 1 | 1,151 | |||||||
Series AI | 11 | 11,771 | ||||||||
Speedy Group Holdings Corp. | 55 | 22,000 | ||||||||
|
| |||||||||
258,006 | ||||||||||
|
| |||||||||
809,878 | ||||||||||
|
| |||||||||
Utility – 0.1% | ||||||||||
Electric – 0.1% | ||||||||||
Calpine Corp. | 22 | 23,485 | ||||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | 6,907,914 | |||||||||
|
| |||||||||
CORPORATES – INVESTMENT GRADE – 12.1% | ||||||||||
Industrial – 7.4% | ||||||||||
Basic – 2.0% | ||||||||||
Vale Overseas Ltd. | 500 | 438,750 | ||||||||
|
| |||||||||
Communications - Media – 1.0% | ||||||||||
CCO Safari II LLC | 205 | 221,000 | ||||||||
|
| |||||||||
Energy – 0.7% | ||||||||||
Devon Energy Corp. | 77 | 66,259 | ||||||||
5.60%, 7/15/41 | 39 | 34,377 |
AB CREDIT LONG/SHORT PORTFOLIO • | 13 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Marathon Oil Corp. | U.S.$ | 11 | $ | 10,249 | ||||||
5.20%, 6/01/45 | 22 | 18,642 | ||||||||
6.60%, 10/01/37 | 28 | 26,824 | ||||||||
|
| |||||||||
156,351 | ||||||||||
|
| |||||||||
Services – 0.8% | ||||||||||
Amazon.com, Inc. | 135 | 157,721 | ||||||||
|
| |||||||||
Technology – 2.9% | ||||||||||
Hewlett Packard Enterprise Co. | 390 | 388,832 | ||||||||
HP, Inc. | 100 | 94,099 | ||||||||
Seagate HDD Cayman | 200 | 140,605 | ||||||||
|
| |||||||||
623,536 | ||||||||||
|
| |||||||||
1,597,358 | ||||||||||
|
| |||||||||
Financial Institutions – 4.7% | ||||||||||
Banking – 4.7% | ||||||||||
Bank of America Corp. | 200 | 204,414 | ||||||||
BPCE SA | 200 | 212,675 | ||||||||
Citigroup, Inc. | 200 | 204,718 | ||||||||
Lloyds Banking Group PLC | 409 | 410,070 | ||||||||
|
| |||||||||
1,031,877 | ||||||||||
|
| |||||||||
Total Corporates – Investment Grade | 2,629,235 | |||||||||
|
| |||||||||
Shares | ||||||||||
INVESTMENT COMPANIES – 3.4% | ||||||||||
Funds and Investment Trusts – 3.4% | ||||||||||
BlackRock Debt Strategies Fund, Inc. | 122,300 | 429,273 | ||||||||
Wells Fargo Income Opportunities Fund | 39,092 | �� | 303,354 | |||||||
|
| |||||||||
Total Investment Companies | 732,627 | |||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
GOVERNMENTS – SOVEREIGN AGENCIES – 2.7% | ||||||||||
Brazil – 1.8% | ||||||||||
Petrobras Global Finance BV | U.S.$ | 500 | 391,100 | |||||||
|
|
14 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
United Kingdom – 0.9% | ||||||||||
Royal Bank of Scotland Group PLC | U.S.$ | 205 | $ | 191,162 | ||||||
|
| |||||||||
Total Governments – Sovereign Agencies | 582,262 | |||||||||
|
| |||||||||
Shares | ||||||||||
COMMON STOCKS – 2.5% | ||||||||||
Consumer Discretionary – 1.2% | ||||||||||
Automobiles – 0.2% | ||||||||||
General Motors Co. | 1,700 | 54,060 | ||||||||
|
| |||||||||
Hotels, Restaurants & Leisure – 0.4% | ||||||||||
eDreams ODIGEO SA(j) | 5,380 | 14,692 | ||||||||
Eldorado Resorts, Inc.(j) | 2,665 | 34,938 | ||||||||
International Game Technology PLC | 1,678 | 29,097 | ||||||||
|
| |||||||||
78,727 | ||||||||||
|
| |||||||||
Household Durables – 0.3% | ||||||||||
Hovnanian Enterprises, Inc. – Class A(j) | 2,224 | 3,714 | ||||||||
MDC Holdings, Inc. | 1,466 | 36,078 | ||||||||
Taylor Morrison Home Corp. – Class A(j) | 1,700 | 24,480 | ||||||||
|
| |||||||||
64,272 | ||||||||||
|
| |||||||||
Media – 0.3% | ||||||||||
Clear Channel Outdoor Holdings, Inc. – Class A | 4,650 | 23,761 | ||||||||
DISH Network Corp. – Class A(j) | 400 | 19,716 | ||||||||
Townsquare Media, Inc. – Class A(j) | 2,620 | 27,877 | ||||||||
|
| |||||||||
71,354 | ||||||||||
|
| |||||||||
268,413 | ||||||||||
|
| |||||||||
Energy – 0.2% | ||||||||||
Oil, Gas & Consumable Fuels – 0.2% | ||||||||||
Chesapeake Energy Corp.(j) | 2,168 | 14,894 | ||||||||
EP Energy Corp. – Class A(j) | 2,714 | 13,326 | ||||||||
Triangle Petroleum Corp.(j) | 3,670 | 1,647 | ||||||||
Whiting Petroleum Corp.(j) | 1,266 | 15,192 | ||||||||
|
| |||||||||
45,059 | ||||||||||
|
| |||||||||
Financials – 0.1% | ||||||||||
Consumer Finance – 0.1% | ||||||||||
Enova International, Inc.(j) | 1,000 | 8,810 | ||||||||
|
| |||||||||
Diversified Financial Services – 0.0% | ||||||||||
iPayment, Inc.(j)(k)(l) | 714 | 2,355 | ||||||||
|
| |||||||||
11,165 | ||||||||||
|
| |||||||||
Health Care – 0.1% | ||||||||||
Health Care Providers & Services – 0.1% | ||||||||||
Community Health Systems, Inc.(j) | 1,288 | 24,575 | ||||||||
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 15 |
Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
Industrials – 0.4% | ||||||||||
Building Products – 0.2% | ||||||||||
Nortek, Inc.(j) | 751 | $ | 35,417 | |||||||
|
| |||||||||
Machinery – 0.2% | ||||||||||
Navistar International Corp.(j) | 2,673 | 40,336 | ||||||||
|
| |||||||||
Trading Companies & Distributors – 0.0% | ||||||||||
Emeco Holdings Ltd.(j) | 92,500 | 2,110 | ||||||||
|
| |||||||||
77,863 | ||||||||||
|
| |||||||||
Information Technology – 0.2% | ||||||||||
Technology Hardware, Storage & | ||||||||||
EMC Corp./MA | 1,459 | 38,095 | ||||||||
|
| |||||||||
Materials – 0.1% | ||||||||||
Chemicals – 0.1% | ||||||||||
LyondellBasell Industries NV – Class A | 230 | 19,014 | ||||||||
|
| |||||||||
Telecommunication Services – 0.1% | ||||||||||
Diversified Telecommunication Services – 0.1% | ||||||||||
Koninklijke KPN NV | 6,700 | 26,329 | ||||||||
|
| |||||||||
Utilities – 0.1% | ||||||||||
Independent Power and Renewable Electricity Producers – 0.1% | ||||||||||
Dynegy, Inc.(j) | 1,496 | 26,374 | ||||||||
|
| |||||||||
Total Common Stocks | 536,887 | |||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
BANK LOANS – 1.8% | ||||||||||
Industrial – 1.8% | ||||||||||
Basic – 0.1% | ||||||||||
Magnetation LLC | U.S.$ | 40 | 16,006 | |||||||
|
| |||||||||
Consumer Cyclical - Retailers – 1.7% | ||||||||||
Neiman Marcus Group, Inc. (The) | 399 | 379,653 | ||||||||
|
| |||||||||
Total Bank Loans | 395,659 | |||||||||
|
| |||||||||
16 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
EMERGING MARKETS – CORPORATE BONDS – 1.3% | ||||||||||
Industrial – 1.3% | ||||||||||
Capital Goods – 1.3% | ||||||||||
Odebrecht Finance Ltd. | U.S.$ | 800 | $ | 293,000 | ||||||
|
| |||||||||
EMERGING MARKETS – TREASURIES – 1.3% | ||||||||||
Brazil – 1.3% | ||||||||||
Brazil Notas do Tesouro Nacional | BRL | 340 | 281,544 | |||||||
|
| |||||||||
COLLATERALIZED MORTGAGE OBLIGATIONS – 1.2% | ||||||||||
Non-Agency Fixed Rate – 1.2% | ||||||||||
Alternative Loan Trust | U.S.$ | 77 | 67,853 | |||||||
CHL Mortgage Pass-Through Trust | 78 | 70,072 | ||||||||
GSR Mortgage Loan Trust | 38 | 32,637 | ||||||||
Morgan Stanley Mortgage Loan Trust | 84 | 57,012 | ||||||||
Wells Fargo Mortgage Backed Securities Trust | 29 | 28,938 | ||||||||
|
| |||||||||
Total Collateralized Mortgage Obligations | 256,512 | |||||||||
|
| |||||||||
QUASI-SOVEREIGNS – 0.9% | ||||||||||
Quasi-Sovereign Bonds – 0.9% | ||||||||||
Venezuela – 0.9% | ||||||||||
Petroleos de Venezuela SA | 500 | 199,950 | ||||||||
|
| |||||||||
EMERGING MARKETS – SOVEREIGNS – 0.9% | ||||||||||
Venezuela – 0.9% | ||||||||||
Venezuela Government International Bond | 450 | 191,812 | ||||||||
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 17 |
Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
PREFERRED STOCKS – 0.2% | ||||||||||
Industrial – 0.2% | ||||||||||
Energy – 0.2% | ||||||||||
Halcon Resources Corp. | 150 | $ | 5,145 | |||||||
Sanchez Energy Corp. | 1,550 | 32,395 | ||||||||
|
| |||||||||
Total Preferred Stocks | 37,540 | |||||||||
|
| |||||||||
Contracts | ||||||||||
OPTIONS PURCHASED – PUTS – 0.2% | ||||||||||
Options on Funds and Investment Trusts – 0.1% | ||||||||||
Boardwalk Real Estate Investment Trust | 1,500 | 289 | ||||||||
SPDR S&P 500 ETF Trust | 69 | 1,656 | ||||||||
SPDR S&P 500 ETF Trust | 25 | 4,187 | ||||||||
SPDR S&P 500 ETF Trust | 7 | 515 | ||||||||
SPDR S&P 500 ETF Trust | 69 | 17,008 | ||||||||
|
| |||||||||
23,655 | ||||||||||
|
| |||||||||
Options on Equities – 0.1% | ||||||||||
Seagate Technology PLC | 42 | 10,017 | ||||||||
Tesla Motors, Inc. | 6 | 1,380 | ||||||||
|
| |||||||||
11,397 | ||||||||||
|
| |||||||||
Total Options Purchased – Puts | 35,052 | |||||||||
|
| |||||||||
OPTIONS PURCHASED – CALLS – 0.1% | ||||||||||
Options on Funds and Investment | ||||||||||
SPDR S&P Oil & Gas Exploration | 70 | 11,270 | ||||||||
|
|
18 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Company | Contracts | U.S. $ Value | ||||||||
| ||||||||||
Options on Equities – 0.0% | ||||||||||
Valeant Pharmaceuticals International, Inc. | 30 | $ | 436 | |||||||
|
| |||||||||
Total Options Purchased – Calls | 11,706 | |||||||||
|
| |||||||||
Shares | ||||||||||
WARRANTS – 0.0% | ||||||||||
iPayment Holdings, Inc., | 13,856 | 7,344 | ||||||||
|
| |||||||||
SHORT-TERM INVESTMENTS – 34.8% | ||||||||||
Investment Companies – 13.1% | ||||||||||
AB Fixed Income Shares, Inc. – | 2,853,363 | 2,853,363 | ||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
U.S. TREASURY BILLS – 21.7% | ||||||||||
U.S. Treasury Bill | U.S.$ | 2,700 | 2,699,014 | |||||||
Zero Coupon, 6/16/16(q) | 2,000 | 1,999,169 | ||||||||
|
| |||||||||
Total U.S. Treasury Bills | 4,698,183 | |||||||||
|
| |||||||||
Total Short-Term Investments | 7,551,546 | |||||||||
|
| |||||||||
Total Investments Before Securities | 20,650,590 | |||||||||
|
| |||||||||
SECURITIES SOLD SHORT – (67.7)% | ||||||||||
CORPORATES – NON-INVESTMENT | ||||||||||
Financial Institutions – (4.8)% | ||||||||||
Banking – (1.1)% | ||||||||||
Bankia SA | EUR | (200 | ) | (244,951 | ) | |||||
|
| |||||||||
Finance – (1.8)% | ||||||||||
Provident Funding Associates LP/PFG Finance Corp. | U.S.$ | (400 | ) | (379,000 | ) | |||||
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 19 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Other Finance – (1.9)% | ||||||||||
International Personal Finance PLC | EUR | (400 | ) | $ | (416,798 | ) | ||||
|
| |||||||||
(1,040,749 | ) | |||||||||
|
| |||||||||
Industrial – (47.2)% | ||||||||||
Basic – (10.8)% | ||||||||||
ArcelorMittal | (300 | ) | (337,432 | ) | ||||||
Ashland, Inc. | U.S.$ | (600 | ) | (603,450 | ) | |||||
Eagle Spinco, Inc. | (200 | ) | (199,000 | ) | ||||||
INEOS Group Holdings SA | (800 | ) | (812,000 | ) | ||||||
Lundin Mining Corp. | (200 | ) | (202,000 | ) | ||||||
Platform Specialty Products Corp. | (200 | ) | (176,000 | ) | ||||||
|
| |||||||||
(2,329,882 | ) | |||||||||
|
| |||||||||
Capital Goods – (4.3)% | ||||||||||
Berry Plastics Corp. | (564 | ) | (581,978 | ) | ||||||
CNH Industrial Finance Europe SA | EUR | (300 | ) | (352,824 | ) | |||||
|
| |||||||||
(934,802 | ) | |||||||||
|
| |||||||||
Communications - Media – (2.9)% | ||||||||||
Lamar Media Corp. | U.S.$ | (400 | ) | (416,000 | ) | |||||
5.875%, 2/01/22 | (200 | ) | (209,500 | ) | ||||||
|
| |||||||||
(625,500 | ) | |||||||||
|
| |||||||||
Consumer Cyclical - Automotive – (7.8)% | ||||||||||
American Axle & Manufacturing, Inc. | (400 | ) | (423,000 | ) | ||||||
Jaguar Land Rover Automotive PLC | (600 | ) | (633,000 | ) | ||||||
Lear Corp. | (595 | ) | (632,188 | ) | ||||||
|
| |||||||||
(1,688,188 | ) | |||||||||
|
| |||||||||
Consumer Cyclical - Other – (1.9)% | ||||||||||
Scientific Games International, Inc. | (400 | ) | (407,750 | ) | ||||||
|
|
20 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Cyclical - Retailers – (2.4)% | ||||||||||
Neiman Marcus Group Ltd. LLC | U.S.$ | (400 | ) | $ | (348,000 | ) | ||||
Rent-A-Center, Inc./TX | (200 | ) | (177,500 | ) | ||||||
|
| |||||||||
(525,500 | ) | |||||||||
|
| |||||||||
Consumer Non-Cyclical – (6.7)% | ||||||||||
ACCO Brands Corp. | (200 | ) | (212,000 | ) | ||||||
HCA, Inc. | (497 | ) | (522,782 | ) | ||||||
Spectrum Brands, Inc. | (400 | ) | (424,260 | ) | ||||||
Tops Holding LLC/Tops Markets II Corp. | (200 | ) | (179,000 | ) | ||||||
Unilabs Subholding AB | EUR | (100 | ) | (118,484 | ) | |||||
|
| |||||||||
(1,456,526 | ) | |||||||||
|
| |||||||||
Energy – (0.8)% | ||||||||||
Cenovus Energy, Inc. | U.S.$ | (200 | ) | (180,350 | ) | |||||
|
| |||||||||
Services – (1.0)% | ||||||||||
Realogy Group LLC/Realogy Co-Issuer Corp. | (200 | ) | (207,500 | ) | ||||||
|
| |||||||||
Technology – (8.6)% | ||||||||||
First Data Corp. | (600 | ) | (616,500 | ) | ||||||
MSCI, Inc. | (400 | ) | (418,000 | ) | ||||||
NXP BV/NXP Funding LLC | (800 | ) | (838,000 | ) | ||||||
|
| |||||||||
(1,872,500 | ) | |||||||||
|
| |||||||||
(10,228,498 | ) | |||||||||
|
| |||||||||
Utility – (1.5)% | ||||||||||
Calpine Corp. | (189 | ) | (199,631 | ) | ||||||
Enel SpA | EUR | (100 | ) | (124,618 | ) | |||||
|
| |||||||||
(324,249 | ) | |||||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | (11,593,496 | ) | ||||||||
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 21 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
CORPORATES – INVESTMENT | ||||||||||
Financial Institutions – (3.3)% | ||||||||||
Banking – (1.7)% | ||||||||||
BNP Paribas SA | EUR | (150 | ) | $ | (176,282 | ) | ||||
Intesa Sanpaolo SpA | (150 | ) | (202,931 | ) | ||||||
|
| |||||||||
(379,213 | ) | |||||||||
|
| |||||||||
Insurance – (1.6)% | ||||||||||
Chubb Corp. (The) | U.S.$ | (400 | ) | (344,000 | ) | |||||
|
| |||||||||
(723,213 | ) | |||||||||
|
| |||||||||
Industrial – (7.3)% | ||||||||||
Basic – (1.8)% | ||||||||||
Vale SA | (500 | ) | (395,000 | ) | ||||||
|
| |||||||||
Communications - | ||||||||||
TDC A/S | GBP | (300 | ) | (493,314 | ) | |||||
|
| |||||||||
Energy – (1.2)% | ||||||||||
Repsol International Finance BV | EUR | (200 | ) | (255,777 | ) | |||||
|
| |||||||||
Services – (1.0)% | ||||||||||
Amazon.com, Inc. | U.S.$ | (200 | ) | (220,366 | ) | |||||
|
| |||||||||
Technology – (1.0)% | ||||||||||
HP, Inc. | (200 | ) | (213,564 | ) | ||||||
|
| |||||||||
(1,578,021 | ) | |||||||||
|
| |||||||||
Total Corporates – Investment Grade | (2,301,234 | ) | ||||||||
|
| |||||||||
EMERGING MARKETS – CORPORATE BONDS – (1.3)% | ||||||||||
Industrial – (1.3)% | ||||||||||
Capital Goods – (1.3)% | ||||||||||
Odebrecht Finance Ltd. | (800 | ) | (272,000 | ) |
22 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
GOVERNMENTS – SOVEREIGN AGENCIES – (1.0)% | ||||||||||
Colombia – (1.0)% | ||||||||||
Ecopetrol SA | U.S.$ | (200 | ) | $ | (222,800 | ) | ||||
|
| |||||||||
EMERGING MARKETS – SOVEREIGNS – (0.7)% | ||||||||||
Venezuela – (0.7)% | ||||||||||
Venezuela Government International Bond | (400 | ) | (154,000 | ) | ||||||
|
| |||||||||
QUASI-SOVEREIGNS – (0.6)% | ||||||||||
Venezuela – (0.6)% | ||||||||||
Petroleos de Venezuela SA | (400 | ) | (135,960 | ) | ||||||
|
| |||||||||
Total Securities Sold Short | (14,679,490 | ) | ||||||||
|
| |||||||||
Total Investments – 27.5% | 5,971,100 | |||||||||
Other assets less liabilities – 72.5% | 15,711,298 | |||||||||
|
| |||||||||
Net Assets – 100.0% | $ | 21,682,398 | ||||||||
|
|
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at April 30, 2016 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Purchased Contracts |
| |||||||||||||||||||
Euro STOXX 50 Futures | 12 | June 2016 | $ | 407,342 | $ | 409,058 | $ | 1,716 | ||||||||||||
U.S. T-Note 10 Yr (CBT) Futures | 1 | June 2016 | 130,416 | 130,063 | (353 | ) | ||||||||||||||
Sold Contracts | ||||||||||||||||||||
Euro-Bund Futures | 8 | June 2016 | 1,499,318 | 1,482,886 | 16,432 | |||||||||||||||
S&P 500 Emini Futures | 4 | June 2016 | 402,406 | 411,820 | (9,414 | ) | ||||||||||||||
U.S. Long Bond (CBT) Futures | 3 | June 2016 | 495,984 | 489,938 | 6,046 | |||||||||||||||
|
| |||||||||||||||||||
$ | 14,427 | |||||||||||||||||||
|
|
AB CREDIT LONG/SHORT PORTFOLIO • | 23 |
Portfolio of Investments
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note D)
Counterparty | Contracts to Deliver (000) | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
Barclays Bank PLC | KRW | 253,714 | USD | 220 | 7/15/16 | $ | (2,448 | ) | ||||||||||||||||
Credit Suisse International | EUR | 488 | USD | 542 | 5/13/16 | (15,751 | ) | |||||||||||||||||
Goldman Sachs Bank USA | USD | 371 | GBP | 261 | 5/12/16 | 10,027 | ||||||||||||||||||
Goldman Sachs Bank USA | TWD | 6,987 | USD | 214 | 5/20/16 | (2,794 | ) | |||||||||||||||||
JPMorgan Chase Bank | BRL | 687 | USD | 199 | 5/03/16 | (669 | ) | |||||||||||||||||
JPMorgan Chase Bank | USD | 194 | BRL | 687 | 5/03/16 | 5,522 | ||||||||||||||||||
JPMorgan Chase Bank | BRL | 687 | USD | 193 | 6/02/16 | (5,244 | ) | |||||||||||||||||
Royal Bank of Scotland PLC | USD | 116 | RUB | 8,066 | 6/16/16 | 7,052 | ||||||||||||||||||
Royal Bank of Scotland PLC | CNY | 1,369 | USD | 210 | 7/15/16 | (793 | ) | |||||||||||||||||
Standard Chartered Bank | BRL | 687 | USD | 189 | 5/03/16 | (10,818 | ) | |||||||||||||||||
Standard Chartered Bank | USD | 199 | BRL | 687 | 5/03/16 | 669 | ||||||||||||||||||
State Street Bank & Trust Co. | USD | 23 | GBP | 16 | 5/12/16 | 571 | ||||||||||||||||||
State Street Bank & Trust Co. | EUR | 28 | USD | 31 | 5/13/16 | (530 | ) | |||||||||||||||||
State Street Bank & Trust Co. | USD | 2,399 | EUR | 2,201 | 5/13/16 | 121,567 | ||||||||||||||||||
State Street Bank & Trust Co. | DKK | 123 | USD | 19 | 6/15/16 | (90 | ) | |||||||||||||||||
State Street Bank & Trust Co. | USD | 216 | NOK | 1,796 | 6/15/16 | 6,723 | ||||||||||||||||||
State Street Bank & Trust Co. | USD | 217 | SEK | 1,762 | 6/15/16 | 2,365 | ||||||||||||||||||
State Street Bank & Trust Co. | USD | 217 | MXN | 3,844 | 6/17/16 | 4,990 | ||||||||||||||||||
State Street Bank & Trust Co. | CAD | 142 | USD | 109 | 6/23/16 | (4,656 | ) | |||||||||||||||||
State Street Bank & Trust Co. | SGD | 296 | USD | 220 | 7/15/16 | (312 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
$ | 115,381 | |||||||||||||||||||||||
|
|
CALL OPTIONS WRITTEN (see Note D)
Description | Contracts | Exercise Price | Expiration Month | Premiums Received | U.S. $ Value | |||||||||||||||
SPDR S&P Oil & Gas Exploration(m) | 70 | $ | 41.00 | June 2016 | $ | 417 | $ | (3,360 | ) | |||||||||||
Valeant Pharmaceuticals International, Inc.(m) | 30 | 85.00 | June 2016 | 1,007 | (210 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||
$ | 1,424 | $ | (3,570 | ) | ||||||||||||||||
|
|
|
|
PUT OPTIONS WRITTEN (see Note D)
Description | Contracts | Exercise Price | Expiration Month | Premiums Received | U.S. $ Value | |||||||||||||||
Seagate Technology PLC(m) | 42 | $ | 17.00 | July 2016 | $ | 292 | $ | (2,079 | ) | |||||||||||
SPDR S&P 500 ETF Trust(m) | 69 | 185.00 | May 2016 | 1,653 | (897 | ) | ||||||||||||||
SPDR S&P 500 ETF Trust(m) | 76 | 188.00 | May 2016 | 1,832 | (1,368 | ) | ||||||||||||||
SPDR S&P 500 ETF Trust(m) | 25 | 185.00 | June 2016 | 1,449 | (1,800 | ) | ||||||||||||||
Tesla Motors, Inc.(m) | 6 | 130.00 | June 2016 | 1,038 | (243 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||
$ | 6,264 | $ | (6,387 | ) | ||||||||||||||||
|
|
|
|
24 | • AB CREDIT LONG/SHORT PORTFOLIO |
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 | |||||||||||||||||||
Call – CDX-NAHY Series 26, | Citibank, NA | Sell | 104.00 | % | Jun, 2016 | $ | 525 | $ | 1,916 | $ | (1,377 | ) | ||||||||||||||
Put – CDX-NAHY Series 26, | Barclays Bank PLC | Sell | 99.00 | May, 2016 | 2,070 | 3,726 | (1,686 | ) | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||
$ | 5,642 | $ | (3,063 | ) | ||||||||||||||||||||||
|
|
|
|
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note D)
Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Buy Contracts | ||||||||||||||||||||
Morgan Stanley & Co. LLC/(INTRCONX) | ||||||||||||||||||||
CDX-NAHY Series 23, | (5.00 | )% | 3.08 | % | $ | 660 | $ | (46,236 | ) | $ | (4,417 | ) | ||||||||
CDX-NAHY Series 26, | (5.00 | ) | 4.35 | 420 | (14,373 | ) | (8,350 | ) | ||||||||||||
CDX-NAHY Series 26, | (5.00 | ) | 4.35 | 210 | (7,187 | ) | (165 | ) | ||||||||||||
CDX-NAIG Series 23, | (1.00 | ) | 0.80 | 2,500 | (20,483 | ) | 14,007 | |||||||||||||
iTraxx-XOVER Series 23, | (5.00 | ) | 3.09 | EUR | 175 | (15,585 | ) | (3,983 | ) | |||||||||||
iTraxx-XOVER Series 23, | (5.00 | ) | 3.09 | 701 | (62,337 | ) | (11,482 | ) | ||||||||||||
Sale Contracts | ||||||||||||||||||||
Morgan Stanley & Co. LLC/(CME) | ||||||||||||||||||||
CDX-NAHY Series 23, | 5.00 | 3.08 | $ | 495 | 34,678 | 5,697 | ||||||||||||||
Morgan Stanley & Co. LLC/(INTRCONX) | ||||||||||||||||||||
CDX-NAHY Series 23, | 5.00 | 3.08 | 165 | 11,559 | 4,317 | |||||||||||||||
iTraxx-XOVER Series 23, | 5.00 | 3.09 | EUR | 818 | 72,719 | 2,781 | ||||||||||||||
iTraxx-XOVER Series 23, | 5.00 | 3.09 | 175 | 15,585 | 2,147 | |||||||||||||||
Norske Skogindustrier ASA, | 5.00 | 40.73 | 2 | (1,321 | ) | (1,321 | ) | |||||||||||||
|
|
|
| |||||||||||||||||
$ | (32,981 | ) | $ | (769 | ) | |||||||||||||||
|
|
|
|
* | Termination date |
AB CREDIT LONG/SHORT PORTFOLIO • | 25 |
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 | $ | (7,007 | ) |
CREDIT DEFAULT SWAPS (see Note D)
Swap Counterparty & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Upfront Premiums Paid (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||
Buy Contracts |
| |||||||||||||||||||||||
Bank of America, NA | ||||||||||||||||||||||||
Repsol, S.A., | (1.00 | )% | 1.95 | % | EUR | 200 | $ | 10,478 | $ | 19,182 | $ | (8,704 | ) | |||||||||||
Barclays Bank PLC | ||||||||||||||||||||||||
Republic of Indonesia, | (1.00 | ) | 1.88 | 600 | 24,526 | 29,632 | (5,106 | ) | ||||||||||||||||
Windstream Services, LLC, | (5.00 | ) | 7.36 | $ | 400 | 36,193 | 48,178 | (11,985 | ) | |||||||||||||||
Citibank, NA | ||||||||||||||||||||||||
Alcoa Inc., | (1.00 | ) | 3.18 | 200 | 20,106 | 27,776 | (7,670 | ) | ||||||||||||||||
Dell Inc., | (1.00 | ) | 5.33 | 200 | 37,531 | 37,135 | 396 | |||||||||||||||||
Federative Republic of Brazil, | (1.00 | ) | 3.32 | 400 | 42,815 | 48,984 | (6,169 | ) | ||||||||||||||||
J. C. Penney Co., Inc., | (5.00 | ) | 0.75 | 100 | (1,208 | ) | 290 | (1,498 | ) | |||||||||||||||
Quest Diagnostics Inc., | (1.00 | ) | 0.52 | 500 | (11,262 | ) | (1,748 | ) | (9,514 | ) | ||||||||||||||
Renault, | (1.00 | ) | 0.71 | EUR | 160 | (2,003 | ) | – 0 | – | (2,003 | ) | |||||||||||||
Republic of Colombia, | (1.00 | ) | 2.17 | $ | 600 | 32,908 | 30,973 | 1,935 | ||||||||||||||||
Republic of South Africa, | (1.00 | ) | 2.80 | 600 | 50,182 | 57,158 | (6,976 | ) |
26 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Swap Counterparty & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Upfront Premiums Paid (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||
Republic of Turkey, | (1.00 | )% | 2.37 | % | $ | 600 | $ | 38,498 | $ | 43,243 | $ | (4,745 | ) | |||||||||||
Russian Federation, | (1.00 | ) | 2.43 | 400 | 26,755 | 34,025 | (7,270 | ) | ||||||||||||||||
Transocean, Inc., | (5.00 | ) | 9.94 | 1,000 | 157,850 | 88,708 | 69,142 | |||||||||||||||||
Credit Suisse International | ||||||||||||||||||||||||
BellSouth Corporation, | (1.00 | ) | 0.51 | 1,000 | (17,322 | ) | (16,602 | ) | (720 | ) | ||||||||||||||
ConAgra Foods, Inc., | (1.00 | ) | 0.62 | 600 | (11,926 | ) | (4,886 | ) | (7,040 | ) | ||||||||||||||
Western Union Co. (The), | (1.00 | ) | 0.26 | 600 | (6,542 | ) | (3,692 | ) | (2,850 | ) | ||||||||||||||
Deutsche Bank AG | ||||||||||||||||||||||||
Lloyds Bank PLC, | (1.00 | ) | 0.79 | EUR | 470 | (4,631 | ) | (9,165 | ) | 4,534 | ||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||||
Amkor Technology, Inc., | (5.00 | ) | 4.20 | $ | 100 | (4,215 | ) | (5,157 | ) | 942 | ||||||||||||||
Boyd Gaming Corp., | (5.00 | ) | 3.21 | 200 | (18,020 | ) | (16,885 | ) | (1,135 | ) | ||||||||||||||
Chesapeake Energy Corporation, | (5.00 | ) | 17.89 | 900 | 369,420 | 473,398 | (103,978 | ) | ||||||||||||||||
iHeartCommunications, Inc., | (5.00 | ) | 40.48 | 49 | 9,565 | 11,060 | (1,495 | ) | ||||||||||||||||
Teck Resources Ltd., 3.150%, 1/15/17, 6/20/21* | (5.00 | ) | 6.35 | 600 | 30,180 | 120,368 | (90,188 | ) | ||||||||||||||||
Teck Resources Ltd., 3.150%, 1/15/17, 6/20/18* | (1.00 | ) | 4.08 | 250 | 15,437 | 4,318 | 11,119 | |||||||||||||||||
Transocean Inc., 7.375%, 4/15/18, 6/20/21* | (5.00 | ) | 9.99 | 320 | 58,746 | 100,576 | (41,830 | ) |
AB CREDIT LONG/SHORT PORTFOLIO • | 27 |
Portfolio of Investments
Swap Counterparty & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Upfront Premiums Paid (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||
YUM! Brands, Inc., 6.250%, 3/15/18, 6/20/21* | (1.00 | ) % | 2.43 | % | $ | 200 | $ | 13,857 | $ | 14,090 | $ | (233 | ) | |||||||||||
JPMorgan Chase Bank, NA | ||||||||||||||||||||||||
Kohl’s Corp., | (1.00 | ) | 0.25 | 400 | (3,930 | ) | (1,975 | ) | (1,955 | ) | ||||||||||||||
Morgan Stanley Capital Services LLC | ||||||||||||||||||||||||
British Telecommunications PLC, | (1.00 | ) | 0.78 | EUR | 960 | (11,888 | ) | (9,653 | ) | (2,235 | ) | |||||||||||||
Koninklijke KPN N.V., 7.50%, 2/04/19, 12/20/20* | (1.00 | ) | 0.66 | 350 | (6,523 | ) | (524 | ) | (5,999 | ) | ||||||||||||||
Noble Corp., | (1.00 | ) | 8.23 | $ | 150 | 41,189 | 49,404 | (8,215 | ) | |||||||||||||||
Sale Contracts | ||||||||||||||||||||||||
Bank of America, NA | ||||||||||||||||||||||||
Genworth Holdings, Inc., | 5.00 | 7.90 | 20 | (1,806 | ) | 731 | (2,537 | ) | ||||||||||||||||
Barclays Bank PLC | ||||||||||||||||||||||||
Assured Guaranty Municipal Corp., 6/20/20* | 5.00 | 2.50 | 20 | 2,052 | 1,305 | 747 | ||||||||||||||||||
iHeartCommunications, Inc., | 5.00 | 50.05 | 35 | (26,068 | ) | (25,679 | ) | (389 | ) | |||||||||||||||
Citibank, NA | ||||||||||||||||||||||||
Nabors Industries, Inc., | 1.00 | 3.41 | 20 | (1,791 | ) | (1,984 | ) | 193 | ||||||||||||||||
Safeway, Inc., 7.250%, 2/01/31, 6/20/20* | 1.00 | 1.82 | 20 | (622 | ) | (1,446 | ) | 824 | ||||||||||||||||
Staples, Inc., | 1.00 | 1.75 | 20 | (574 | ) | (705 | ) | 131 | ||||||||||||||||
Transocean, Inc., 7.375%, 4/15/18, 6/20/20* | 1.00 | 9.94 | 1,200 | (354,414 | ) | (249,111 | ) | (105,303 | ) | |||||||||||||||
Unitymedia GmbH, 6.125%, 1/15/25, 6/20/20* | 5.00 | 1.95 | EUR | 90 | 13,202 | 13,691 | (489 | ) |
28 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Swap Counterparty & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Upfront Premiums Paid (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||
Weatherford International LLC, | 1.00 | % | 5.06 | % | $ | 20 | $ | (2,912 | ) | $ | (1,537 | ) | $ | (1,375 | ) | |||||||||
Credit Suisse International | ||||||||||||||||||||||||
AT&T, Inc., | 1.00 | 0.57 | 1,000 | 14,881 | 19,271 | (4,390 | ) | |||||||||||||||||
Avon Products, Inc., | 1.00 | 8.34 | 20 | (5,057 | ) | (3,064 | ) | (1,993 | ) | |||||||||||||||
Freeport-McMoran Inc., | 1.00 | 4.74 | 20 | (2,727 | ) | (1,256 | ) | (1,471 | ) | |||||||||||||||
Teck Resources Ltd., | 1.00 | 5.97 | 20 | (3,527 | ) | (1,335 | ) | (2,192 | ) | |||||||||||||||
Transocean Inc., | 1.00 | 9.94 | 20 | (5,907 | ) | (3,740 | ) | (2,167 | ) | |||||||||||||||
Western Union Co. (The), | 1.00 | 0.81 | 400 | 2,583 | (3,772 | ) | 6,355 | |||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||||
CMBX.NA.BB.6, 5/11/63* | 5.00 | 6.82 | 252 | (22,907 | ) | (43,115 | ) | 20,208 | ||||||||||||||||
iHeartCommunications, Inc., | 5.00 | 50.05 | 75 | (55,871 | ) | (60,375 | ) | 4,504 | ||||||||||||||||
Teck Resources Ltd., | 1.00 | 5.97 | 200 | (35,275 | ) | (16,887 | ) | (18,388 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 430,026 | $ | 789,203 | $ | (359,177 | ) | ||||||||||||||||||
|
|
|
|
|
|
* | Termination date |
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 |
| |||||||||||||||||||
Citibank, NA | ||||||||||||||||||||
iBoxx $ Liquid High Yield Index | 333,000 | LIBOR | $ | 333 | 6/20/16 | $ | 12,679 | |||||||||||||
iBoxx $ Liquid High Yield Index | 334,000 | LIBOR | 334 | 6/20/16 | 11,784 | |||||||||||||||
iBoxx $ Liquid High Yield Index | 482,000 | LIBOR | 482 | 6/20/16 | 9,925 | |||||||||||||||
iBoxx $ Liquid High Yield Index | 218,000 | LIBOR | 218 | 6/20/16 | 7,242 | |||||||||||||||
iBoxx $ Liquid High Yield Index | 192,000 | LIBOR | 192 | 6/20/16 | 6,269 |
AB CREDIT LONG/SHORT PORTFOLIO • | 29 |
Portfolio of Investments
Counterparty & Referenced Obligation | # of Shares or Units | Rate Paid/ Received | Notional Amount (000) | Maturity Date | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
iBoxx $ Liquid High Yield Index | 167,000 | LIBOR | $ | 167 | 6/20/16 | $ | 6,276 | |||||||||||||
iBoxx $ Liquid High Yield Index | 167,000 | LIBOR | 167 | 6/20/16 | 6,142 | |||||||||||||||
iBoxx $ Liquid High Yield Index | 200,000 | LIBOR | 200 | 6/20/16 | 4,164 | |||||||||||||||
iBoxx $ Liquid High Yield Index | 134,000 | LIBOR | 134 | 6/20/16 | 3,119 | |||||||||||||||
JPMorgan Chase Bank, NA | ||||||||||||||||||||
iBoxx $ Liquid High Yield Index | 213,000 | LIBOR | 213 | 6/20/16 | 4,434 | |||||||||||||||
|
| |||||||||||||||||||
$ | 72,034 | |||||||||||||||||||
|
|
(a) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security, which represents 0.01% of net assets as of April 30, 2016, 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 | $ | 1,750 | 0.01 | % |
(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 are considered liquid and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At April 30, 2016, the aggregate market value of these securities amounted to ($4,573,917) or (21.1%) of net assets. |
(d) | Convertible security. |
(e) | Variable rate coupon, rate shown as of April 30, 2016. |
(f) | 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 April 30, 2016. |
(g) | Floating Rate Security. Stated interest rate was in effect at April 30, 2016. |
(h) | Coupon rate adjusts periodically based upon a predetermined schedule. Stated interest rate in effect at April 30, 2016. |
(i) | Securities are perpetual and, thus, do not have a predetermined maturity date. The date shown, if applicable, reflects the next call date. |
(j) | Non-income producing security. |
(k) | Fair valued by the Adviser. |
(l) | Illiquid security. |
(m) | One contract relates to 100 shares. |
(n) | One contract relates to 1 share. |
(o) | 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. |
(p) | Investment in affiliated money market mutual fund. The rate shown represents the 7-day yield as of period end. |
(q) | Position, or a portion thereof, has been segregated to collateralize OTC derivatives outstanding. |
30 | • AB CREDIT LONG/SHORT PORTFOLIO |
Portfolio of Investments
Currency Abbreviations:
BRL – Brazilian Real CAD – Canadian Dollar CNY – Chinese Yuan Renminbi DKK – Danish Krone EUR – Euro GBP – Great British Pound KRW – South Korean Won MXN – Mexican Peso NOK – Norwegian Krone RUB – Russian Ruble SEK – Swedish Krona SGD – Singapore Dollar TWD – New Taiwan Dollar 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
SPDR – Standard & Poor’s Depository Receipt
See notes to financial statements.
AB CREDIT LONG/SHORT PORTFOLIO • | 31 |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
April 30, 2016 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $18,154,498) | $ | 17,797,227 | ||
Affiliated issuers (cost $2,853,363) | 2,853,363 | |||
Cash | 15,586,675 | |||
Cash collateral due from broker | 441,893 | |||
Foreign currencies, at value (cost $-388) | 326 | |||
Upfront premium paid on credit default swaps | 1,273,496 | |||
Receivable for investment securities sold | 347,350 | |||
Interest and dividends receivable | 248,533 | |||
Unrealized appreciation on forward currency exchange contracts | 159,486 | |||
Unrealized appreciation on credit default swaps | 121,030 | |||
Unrealized appreciation on total return swaps | 72,034 | |||
Receivable due from Adviser | 16,785 | |||
Receivable for variation margin on exchange-traded derivatives | 1,180 | |||
|
| |||
Total assets | 38,919,378 | |||
|
| |||
Liabilities | ||||
Options written, at value (premiums received $7,688) | 9,957 | |||
Swaptions written, at value (premiums received $5,642) | 3,063 | |||
Payable for securities sold short, at value (proceeds received $14,976,356) | 14,679,490 | |||
Payable for investment securities purchased | 570,586 | |||
Cash collateral due to broker | 540,000 | |||
Upfront premium received on credit default swaps | 484,293 | |||
Unrealized depreciation on credit default swaps | 480,207 | |||
Interest expense payable | 259,884 | |||
Unrealized depreciation on forward currency exchange contracts | 44,105 | |||
Payable for variation margin on exchange-traded derivatives | 5,858 | |||
Transfer Agent fee payable | 3,094 | |||
Distribution fee payable | 158 | |||
Accrued expenses | 156,285 | |||
|
| |||
Total liabilities | 17,236,980 | |||
|
| |||
Net Assets | $ | 21,682,398 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 2,134 | ||
Additional paid-in capital | 21,285,431 | |||
Undistributed net investment income | 128,695 | |||
Accumulated net realized gain on investment | 492,437 | |||
Net unrealized depreciation on investments | (226,299 | ) | ||
|
| |||
$ | 21,682,398 | |||
|
|
See notes to financial statements.
32 | • AB CREDIT LONG/SHORT PORTFOLIO |
Statement of Assets & Liabilities
Net Asset Value Per Share—30 billion shares of capital stock authorized, $.001 par value
Shares | Net Asset | |||||||||||
Class | Net Assets | Outstanding | Value | |||||||||
| ||||||||||||
A | $ | 185,626 | 18,335 | $ | 10.12 | * | ||||||
| ||||||||||||
C | $ | 143,230 | 14,307 | $ | 10.01 | |||||||
| ||||||||||||
Advisor | $ | 21,353,542 | 2,101,404 | $ | 10.16 | |||||||
|
* | The maximum offering price per share for Class A shares was $10.57 which reflects a sales charge of 4.25%. |
See notes to financial statements.
AB CREDIT LONG/SHORT PORTFOLIO • | 33 |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Six Months Ended April 30, 2016 (unaudited)
Investment Income | ||||||||
Interest | $ | 663,493 | ||||||
Dividends | ||||||||
Unaffiliated issuers (net of foreign taxes withheld of $57) | 64,321 | |||||||
Affiliated issuers | 4,549 | $ | 732,363 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 94,581 | |||||||
Distribution fee—Class A | 221 | |||||||
Distribution fee—Class C | 551 | |||||||
Transfer agency—Class A | 81 | |||||||
Transfer agency—Class C | 56 | |||||||
Transfer agency—Advisor Class | 9,527 | |||||||
Custodian | 73,194 | |||||||
Audit and tax | 54,961 | |||||||
Registration fees | 28,948 | |||||||
Administrative | 26,490 | |||||||
Legal | 24,108 | |||||||
Printing | 17,407 | |||||||
Directors’ fees | 9,615 | |||||||
Miscellaneous | 14,459 | |||||||
|
| |||||||
Total operating expenses (see Note B) | 354,199 | |||||||
Interest expense | 474,132 | |||||||
Broker fee on securities sold short | 62,119 | |||||||
|
| |||||||
Total expenses | 890,450 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (237,828 | ) | ||||||
|
| |||||||
Net expenses | 652,622 | |||||||
|
| |||||||
Net investment income | 79,741 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (751,820 | ) | ||||||
Securities sold short | 1,000,426 | |||||||
Futures | (56,995 | ) | ||||||
Options written | 31,203 | |||||||
Swaptions written | 3,879 | |||||||
Swaps | 418,502 | |||||||
Foreign currency transactions | (46,459 | ) | ||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | 823,682 | |||||||
Securities sold short | (636,591 | ) | ||||||
Futures | (5,586 | ) | ||||||
Options written | (29,261 | ) | ||||||
Swaptions written | 1,777 | |||||||
Swaps | (254,172 | ) | ||||||
Foreign currency denominated assets and liabilities | 126,133 | |||||||
|
| |||||||
Net gain on investment and foreign currency transactions | 624,718 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 704,459 | ||||||
|
|
See notes to financial statements.
34 | • AB CREDIT LONG/SHORT PORTFOLIO |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 79,741 | $ | 252,434 | ||||
Net realized gain (loss) on investment transactions and foreign currency transactions | 598,736 | (214,225 | ) | |||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | 25,982 | (126,745 | ) | |||||
Contributions from Affiliates (see Note B) | – 0 | – | 1,338 | |||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | 704,459 | (87,198 | ) | |||||
Dividends and Distributions to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | – 0 | – | (1,069 | ) | ||||
Class C | – 0 | – | (363 | ) | ||||
Advisor Class | – 0 | – | (201,440 | ) | ||||
Net realized gain on investment transactions | ||||||||
Class A | (686 | ) | – 0 | – | ||||
Class C | (427 | ) | – 0 | – | ||||
Advisor Class | (88,969 | ) | – 0 | – | ||||
Capital Stock Transactions | ||||||||
Net increase (decrease) | (185,009 | ) | 522,726 | |||||
|
|
|
| |||||
Total increase | 429,368 | 232,656 | ||||||
Net Assets | ||||||||
Beginning of period | 21,253,030 | 21,020,374 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $128,695 and $48,954, respectively) | $ | 21,682,398 | $ | 21,253,030 | ||||
|
|
|
|
See notes to financial statements.
AB CREDIT LONG/SHORT PORTFOLIO • | 35 |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
April 30, 2016 (unaudited)
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. The Fund, which is a Maryland corporation, operates as a series company comprised of ten 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, the AB High Yield Portfolio and the AB Income Fund. 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. The AB Income Fund commenced operations on April 21, 2016. This report relates only to the AB Credit Long/Short Portfolio (the “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”).
36 | • 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
AB CREDIT LONG/SHORT PORTFOLIO • | 37 |
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. 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 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
38 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
(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.
The following table summarizes the valuation of the Portfolio’s investments by the above fair value hierarchy levels as of April 30, 2016:
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Corporates – Non-Investment Grade | $ | – 0 | – | $ | 6,783,444 | $ | 124,470 | $ | 6,907,914 | |||||||
Corporates – Investment Grade | – 0 | – | 2,629,235 | – 0 | – | 2,629,235 | ||||||||||
Investment Companies | 732,627 | – 0 | – | – 0 | – | 732,627 | ||||||||||
Governments – Sovereign Agencies | – 0 | – | 582,262 | – 0 | – | 582,262 | ||||||||||
Common Stocks | 493,511 | 41,021 | 2,355 | 536,887 | ||||||||||||
Bank Loans | – 0 | – | 379,653 | 16,006 | 395,659 | |||||||||||
Emerging Markets – Corporate Bonds | – 0 | – | 293,000 | – 0 | – | 293,000 | ||||||||||
Emerging Markets – Treasuries | – 0 | – | 281,544 | – 0 | – | 281,544 | ||||||||||
Collateralized Mortgage Obligations | – 0 | – | 256,512 | – 0 | – | 256,512 | ||||||||||
Quasi-Sovereigns | – 0 | – | 199,950 | – 0 | – | 199,950 | ||||||||||
Emerging Markets – Sovereigns | – 0 | – | 191,812 | – 0 | – | 191,812 | ||||||||||
Preferred Stocks | – 0 | – | 37,540 | – 0 | – | 37,540 | ||||||||||
Options Purchased – Puts | – 0 | – | 35,052 | – 0 | – | 35,052 | ||||||||||
Options Purchased – Calls | – 0 | – | 11,706 | – 0 | – | 11,706 | ||||||||||
Warrants | – 0 | – | – 0 | – | 7,344 | 7,344 | ||||||||||
Short-Term Investments: | ||||||||||||||||
Investment Companies | 2,853,363 | – 0 | – | – 0 | – | 2,853,363 | ||||||||||
U.S. Treasury Bills | – 0 | – | 4,698,183 | – 0 | – | 4,698,183 |
AB CREDIT LONG/SHORT PORTFOLIO • | 39 |
Notes to Financial Statements
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities: | ||||||||||||||||
Corporates – Non-Investment Grade | $ | – 0 | – | $ | (11,593,496 | ) | $ | – 0 | – | $ | (11,593,496 | ) | ||||
Corporates – Investment Grade | – 0 | – | (2,301,234 | ) | – 0 | – | (2,301,234 | ) | ||||||||
Emerging Markets – Corporate Bonds | – 0 | – | (272,000 | ) | – 0 | – | (272,000 | ) | ||||||||
Governments – Sovereign Agencies | – 0 | – | (222,800 | ) | – 0 | – | (222,800 | ) | ||||||||
Emerging Markets – Sovereigns | – 0 | – | (154,000 | ) | – 0 | – | (154,000 | ) | ||||||||
Quasi-Sovereigns | – 0 | – | (135,960 | ) | – 0 | – | (135,960 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 4,079,501 | 1,741,424 | 150,175 | 5,971,100 | ||||||||||||
Other Financial Instruments(a): | ||||||||||||||||
Assets: | ||||||||||||||||
Futures | 22,478 | 1,716 | – 0 | – | 24,194 | (b) | ||||||||||
Forward Currency Exchange Contracts | – 0 | – | 159,486 | – 0 | – | 159,486 | ||||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | 28,949 | – 0 | – | 28,949 | (b) | |||||||||
Credit Default Swaps | – 0 | – | 121,030 | – 0 | – | 121,030 | ||||||||||
Total Return Swaps | – 0 | – | 72,034 | – 0 | – | 72,034 | ||||||||||
Liabilities: | ||||||||||||||||
Futures | (9,767 | ) | – 0 | – | – 0 | – | (9,767 | )(b) | ||||||||
Forward Currency Exchange Contracts | – 0 | – | (44,105 | ) | – 0 | – | (44,105 | ) | ||||||||
Call Options Written | – 0 | – | (3,570 | ) | – 0 | – | (3,570 | ) | ||||||||
Put Options Written | – 0 | – | (6,387 | ) | – 0 | – | (6,387 | ) | ||||||||
Credit Default Swaptions Written | – 0 | – | (3,063 | ) | – 0 | – | (3,063 | ) | ||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | (29,718 | ) | – 0 | – | (29,718 | )(b) | ||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | (7,007 | ) | – 0 | – | (7,007 | )(b) | ||||||||
Credit Default Swaps | – 0 | – | (480,207 | ) | – 0 | – | (480,207 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total(c) | $ | 4,092,212 | $ | 1,550,582 | $ | 150,175 | $ | 5,792,969 | ||||||||
|
|
|
|
|
|
|
|
(a) | 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. |
(b) | 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. |
(c) | There were de minimis transfers under 1% of net assets 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.
40 | • AB CREDIT LONG/SHORT 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.
Corporates - Non- Investment Grade | Common Stocks | Bank Loans | ||||||||||
Balance as of 10/31/15 | $ | 120,900 | $ | 3,675 | $ | 133,325 | ||||||
Accrued discounts/(premiums) | (227 | ) | – 0 | – | 597 | |||||||
Realized gain (loss) | – 0 | – | – 0 | – | 122 | |||||||
Change in unrealized appreciation/depreciation | 99 | (1,320 | ) | (20,640 | ) | |||||||
Purchases/Payups | 3,698 | – 0 | – | 2,352 | ||||||||
Sales/Paydowns | – 0 | – | – 0 | – | (99,750 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
|
|
|
|
|
| |||||||
Balance as of 4/30/16 | $ | 124,470 | $ | 2,355 | $ | 16,006 | ||||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(a) | $ | 99 | $ | (1,320 | ) | $ | (20,471 | ) | ||||
|
|
|
|
|
| |||||||
Collateralized Mortgage Obligations | Warrants | Total | ||||||||||
Balance as of 10/31/15 | $ | 358,384 | $ | 13,856 | $ | 630,140 | ||||||
Accrued discounts/(premiums) | 4 | – 0 | – | 374 | ||||||||
Realized gain (loss) | 785 | – 0 | – | 907 | ||||||||
Change in unrealized appreciation/depreciation | (611 | ) | (6,512 | ) | (28,984 | ) | ||||||
Purchases/Payups | – 0 | – | – 0 | – | 6,050 | |||||||
Sales/Paydowns | (67,947 | ) | – 0 | – | (167,697 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | (290,615 | ) | – 0 | – | (290,615 | ) | ||||||
|
|
|
|
|
| |||||||
Balance as of 4/30/16 | $ | – 0 | – | $ | 7,344 | $ | 150,175 | (b) | ||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(a) | $ | – 0 | – | $ | (6,512 | ) | $ | (28,204 | ) | |||
|
|
|
|
|
|
(a) | 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. |
(b) | An amount of $290,615 was transferred out of Level 3 into Level 2 due to increase in observability of inputs during the reporting period. |
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the Portfolio. The Committee operates under pricing and valuation policies and procedures established by the Adviser and approved by the Board, including pricing policies which set forth the mechanisms and processes to be employed on a daily basis to implement these policies and procedures. In particular, the pricing policies describe how to determine market quotations for securities and other instruments. The Committee’s responsibilities include: 1) fair value and liquidity determinations (and oversight of any third parties to whom any responsibility for fair value and liquidity determinations is delegated), and 2) regular monitoring of the Adviser’s pricing and valuation policies and procedures and modification or enhancement of these policies and procedures (or recommendation of the modification of these policies and procedures) as the Committee believes appropriate.
AB CREDIT LONG/SHORT PORTFOLIO • | 41 |
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 applied to net investment income, net realized gains and net unrealized appreciation/depreciation as such income and/or gains are earned.
42 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
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.
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 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 above. The Expense Caps may not be terminated by the
AB CREDIT LONG/SHORT PORTFOLIO • | 43 |
Notes to Financial Statements
Adviser before January 31, 2017. For the six months ended April 30, 2016, such reimbursements/waivers amounted to $211,338.
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 six months ended April 30, 2016, the Adviser voluntarily agreed to waive such fees amounted to $26,490.
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 $9,070 for the six months ended April 30, 2016.
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 $– 0 – from the sale of Class A shares and received $– 0 – in contingent deferred sales charges imposed upon redemptions by shareholders of Class C shares for the six months ended April 30, 2016.
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 currently available for direct purchase by members of the public. The Government STIF Portfolio currently pays no investment management fees but does bear its own expenses. A summary of the Portfolio’s transactions in shares of the Government STIF Portfolio for the six months ended April 30, 2016 is as follows:
Market Value October 31, 2015 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value April 30, 2016 (000) | Dividend Income (000) | ||||||||||||
$ 2,653 | $ | 11,319 | $ | 11,119 | $ | 2,853 | $ | 5 |
Brokerage commissions paid on investment transactions for the six months ended April 30, 2016 amounted to $3,675, of which
$– 0 – and $– 0 –, respectively, was paid to Sanford C. Bernstein & Co. LLC and Sanford C. Bernstein Limited, affiliates of the Adviser.
44 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
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 $– 0 – 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 six months ended April 30, 2016, were as follows:
Purchases | Sales | Securities Sold Short | Covers on Securities Sold Short | |||||||||
$ 9,100,870 | $ | 13,167,557 | $ | 11,207,502 | $ | 7,896,082 |
During the six months ended April 30, 2016, there were no purchases or sales of U.S. Government Securities.
The cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation are as follows:
Gross Unrealized | Net Unrealized Appreciation/ (Depreciation) on Investments | Net Unrealized Appreciation/ (Depreciation) on Securities Sold Short | Net Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Appreciation on Investments | Depreciation on Investments | |||||||||||||||||
$ | 876,131 | $ | (1,233,402 | ) | $ | (357,271 | ) | $ | 296,866 | (a) | $ | (60,405 | ) |
(a) | Gross unrealized appreciation was $640,016 and gross unrealized depreciation was $(343,150), resulting in net unrealized appreciation of $296,866. |
AB CREDIT LONG/SHORT PORTFOLIO • | 45 |
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 six months ended April 30, 2016, the Portfolio held futures for hedging and non-hedging purposes.
46 | • 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 six months ended April 30, 2016, 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
AB CREDIT LONG/SHORT PORTFOLIO • | 47 |
Notes to Financial Statements
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.
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 six months ended April 30, 2016, the Portfolio held purchased options for hedging and non-hedging purposes. During the six months ended April 30, 2016, the Portfolio held written options for hedging and non-hedging purposes.
For the six months ended April 30, 2016, the Portfolio had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 10/31/15 | 212 | $ | 43,821 | |||||
Options written | 723 | 32,813 | ||||||
Options expired | (341 | ) | (48,653 | ) | ||||
Options bought back | (259 | ) | (15,736 | ) | ||||
Options exercised | (17 | ) | (4,557 | ) | ||||
|
|
|
| |||||
Options written outstanding as of 04/30/16 | 318 | $ | 7,688 | |||||
|
|
|
|
Notional Amount | Premiums Received | |||||||
Swaptions written outstanding as of 10/31/15 | 1,670,000 | $ | 1,197 | |||||
Swaptions written | 4,745,000 | 8,379 | ||||||
Swaptions expired | (3,270,000 | ) | (2,944 | ) | ||||
Swaptions bought back | (550,000 | ) | (990 | ) | ||||
Swaptions exercised | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Swaptions written outstanding as of 04/30/16 | 2,595,000 | $ | 5,642 | |||||
|
|
|
|
48 | • AB CREDIT LONG/SHORT PORTFOLIO |
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
AB CREDIT LONG/SHORT PORTFOLIO • | 49 |
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 inability of a counterparty to meet the terms of the contract. The credit/counterparty risk for centrally cleared swaps is generally less than non-centrally cleared swaps, since the clearinghouse, which is the issuer or counterparty to each centrally cleared swap, has robust risk mitigation standards, including the requirement to provide initial and variation margin. When the contract is closed, the Portfolio records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the time it was closed.
Interest Rate Swaps:
The Portfolio is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. Because the Portfolio holds fixed rate bonds, the value of these bonds may decrease if interest rates rise. To help hedge against this risk and to maintain its ability to generate income at prevailing market rates, the Portfolio may enter into interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional amount. The Portfolio may elect to pay a fixed rate and receive a floating rate, or, receive a fixed rate and pay a floating rate on a notional amount.
In addition, the Portfolio may also enter into interest rate swap transactions to preserve a return or spread on a particular investment or portion of its portfolio, or protecting against an increase in the price of securities the Portfolio anticipates purchasing at a later date. Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed rate payments) computed based on a contractually-based principal (or “notional”) amount. Interest rate swaps are entered into on a net basis (i.e., the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments).
During the six months ended April 30, 2016, the Portfolio held interest rate swaps for hedging purposes.
50 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
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 April 30, 2016, 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 $1,200,000.
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.
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
AB CREDIT LONG/SHORT PORTFOLIO • | 51 |
Notes to Financial Statements
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 six months ended April 30, 2016, 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 six months ended April 30, 2016, 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
52 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
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 April 30, 2016, the Portfolio had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of | Fair Value | Statement of | Fair Value | ||||||||
Interest rate contracts | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 22,478 | * | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 7,360 | * | ||||
Credit contracts | Receivable/Payable for variation margin on exchange-traded derivatives | 28,949 | * | Receivable/Payable for variation margin on exchange-traded derivatives | 29,718 | * | ||||||
Equity contracts | Receivable/Payable for variation margin on exchange-traded derivatives | 1,716 | * | Receivable/Payable for variation margin on exchange-traded derivatives | 9,414 | * | ||||||
Foreign exchange contracts | Unrealized appreciation on forward currency exchange contracts | | 159,486 | | Unrealized depreciation on forward currency exchange contracts | | 44,105 | | ||||
Equity contracts | Investments in securities, at value | 46,758 | ||||||||||
Interest rate contracts | Swaptions written, at value | | 3,063 | | ||||||||
Equity contracts | Options written, at value | 9,957 | ||||||||||
Credit contracts | Unrealized appreciation on credit default swaps | 121,030 | Unrealized depreciation on credit default swaps | 480,207 | ||||||||
Equity contracts | Unrealized appreciation on total return swaps | 72,034 | ||||||||||
|
|
|
| |||||||||
Total | $ | 452,451 | $ | 583,824 | ||||||||
|
|
|
|
* | 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 CREDIT LONG/SHORT PORTFOLIO • | 53 |
Notes to Financial Statements
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 | $ | (40,654 | ) | $ | 2,774 | ||||
Equity contracts | Net realized gain (loss) on futures; Net change in unrealized appreciation/depreciation of futures | (16,341 | ) | (8,360 | ) | |||||
Foreign exchange contracts | Net realized gain (loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation of foreign currency denominated assets and liabilities | 658 | 127,275 | |||||||
Credit contracts | Net realized gain (loss) on investment transactions; Net change in unrealized appreciation/depreciation of investments | (12,280 | ) | 4,611 | ||||||
Equity contracts | Net realized gain (loss) on investment transactions; Net change in unrealized appreciation/depreciation of investments | (71,524 | ) | 8,563 | ||||||
Interest rate contracts | Net realized gain (loss) on swaptions written; Net change in unrealized appreciation/depreciation of swaptions written | 3,879 | 1,777 | |||||||
Equity contracts | Net realized gain (loss) on options written; Net change in unrealized appreciation/depreciation of options written | 31,203 | (29,261 | ) |
54 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
Derivative Type | Location of Gain | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | $ | (1,850 | ) | $ | (662 | ) | |||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 305,160 | (321,034 | ) | ||||||
Equity contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 115,192 | 67,524 | |||||||
|
|
|
| |||||||
Total | $ | 313,443 | $ | (146,793 | ) | |||||
|
|
|
|
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the six months ended April 30, 2016:
Futures: | ||||
Average original value of buy contracts | $ | 684,659 | ||
Average original value of sale contracts | $ | 1,911,480 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 3,677,672 | ||
Average principal amount of sale contracts | $ | 1,252,565 | ||
Purchased Options: | ||||
Average monthly cost | $ | 47,621 | ||
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 250,000 | ||
Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 14,803,411 | ||
Average notional amount of sale contracts | $ | 3,974,534 | ||
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 5,607,139 | ||
Average notional amount of sale contracts | $ | 3,061,799 | ||
Total Return Swaps: | ||||
Average notional amount | $ | 2,927,714 | (a) |
(a) | Positions were open for eleven months during the period. |
For financial reporting purposes, the Portfolio does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the statement of assets and liabilities.
All derivatives held at period end were subject to netting arrangements. The following table presents the Portfolio’s derivative assets and liabilities by
AB CREDIT LONG/SHORT PORTFOLIO • | 55 |
Notes to Financial Statements
counterparty net of amounts available for offset under Master Agreements (“MA”) and net of the related collateral received/ pledged by the Portfolio as of April 30, 2016:
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/Morgan Stanley & Co., Inc.** | $ | 47,649 | $ | (15,815 | ) | $ | – 0 | – | $ | – 0 | – | $ | 31,834 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 47,649 | $ | (15,815 | ) | $ | – 0 | – | $ | – 0 | – | $ | 31,834 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Bank of America, NA | $ | 10,478 | $ | (1,806 | ) | $ | – 0 | – | $ | – 0 | – | $ | 8,672 | |||||||
Barclays Bank PLC | 62,771 | (30,202 | ) | (32,569 | ) | – 0 | – | – 0 | – | |||||||||||
Citibank, NA | 487,447 | (376,163 | ) | – 0 | – | – 0 | – | 111,284 | ||||||||||||
Credit Suisse International | 17,464 | (17,464 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Deutsche Bank AG | 289 | (289 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Goldman Sachs Bank USA/Goldman Sachs International | 507,232 | (139,082 | ) | (368,150 | ) | – 0 | – | – 0 | – | |||||||||||
JPMorgan Chase Bank/JPMorgan Chase Bank, NA | 9,956 | (9,452 | ) | – 0 | – | – 0 | – | 504 | ||||||||||||
Morgan Stanley Capital Services LLC | 41,189 | (18,411 | ) | – 0 | – | – 0 | – | 22,778 | ||||||||||||
Royal Bank of Scotland PLC | 7,052 | (793 | ) | – 0 | – | – 0 | – | 6,259 | ||||||||||||
Standard Chartered Bank | 669 | (669 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
State Street Bank & Trust Co. | 136,216 | (5,588 | ) | – 0 | – | – 0 | – | 130,628 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 1,280,763 | $ | (599,919 | ) | $ | (400,719 | ) | $ | – 0 | – | $ | 280,125 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
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/Morgan Stanley & Co., Inc.** | $ | 15,815 | $ | (15,815 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 15,815 | $ | (15,815 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Bank of America, NA | $ | 1,806 | $ | (1,806 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
Barclays Bank PLC | 30,202 | (30,202 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Citibank, NA | 376,163 | (376,163 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Credit Suisse International | 68,759 | (17,464 | ) | – 0 | – | – 0 | – | 51,295 | ||||||||||||
Deutsche Bank AG | 4,631 | (289 | ) | – 0 | – | – 0 | – | 4,342 |
56 | • AB CREDIT LONG/SHORT PORTFOLIO |
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 | |||||||||||||||
Goldman Sachs Bank USA/Goldman Sachs International | $ | 139,082 | $ | (139,082 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
JPMorgan Chase Bank/JPMorgan Chase Bank, NA | 9,843 | (9,452 | ) | – 0 | – | – 0 | – | 391 | ||||||||||||
Morgan Stanley Capital Services LLC | 18,411 | (18,411 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Royal Bank of Scotland PLC | 793 | (793 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Standard Chartered Bank | 10,818 | (669 | ) | – 0 | – | – 0 | – | 10,149 | ||||||||||||
State Street Bank & Trust Co. | 5,588 | (5,588 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 666,096 | $ | (599,919 | ) | $ | – 0 | – | $ | – 0 | – | $ | 66,177 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | The actual collateral received/pledged is more than the amount reported due to over-collateralization. |
** | Cash and securities have been posted for initial margin requirements for exchange-traded derivatives outstanding at April 30, 2016. |
^ | 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. 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
AB CREDIT LONG/SHORT PORTFOLIO • | 57 |
Notes to Financial Statements
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 | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 4,040 | 11,548 | $ | 39,008 | $ | 113,733 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 66 | 100 | 644 | 984 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (4,703 | ) | (1,128 | ) | (45,586 | ) | (11,052 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (597 | ) | 10,520 | $ | (5,934 | ) | $ | 103,665 | ||||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 5,388 | 5,701 | $ | 52,387 | $ | 56,054 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 40 | 31 | 385 | 308 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (1,312 | ) | – 0 | – | (12,650 | ) | – 0 | – | ||||||||||||
| ||||||||||||||||||||
Net increase | 4,116 | 5,732 | $ | 40,122 | $ | 56,362 | ||||||||||||||
| ||||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 1,174 | 120,616 | $ | 11,500 | $ | 1,189,631 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 540 | 1,369 | 5,253 | 13,427 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (24,338 | ) | (85,608 | ) | (235,950 | ) | (840,359 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (22,624 | ) | 36,377 | $ | (219,197 | ) | $ | 362,699 | ||||||||||||
|
58 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
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 or 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 Portfolio to reinvest the proceeds, possibly at a lower rate of return.
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. Fixedincome securities with longer durations have more risk and will decrease in price as interest rates rise. For example, a fixedincome 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 if the Portfolio invests a significant portion of its assets in 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.
AB CREDIT LONG/SHORT PORTFOLIO • | 59 |
Notes to Financial Statements
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—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 on 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 Portfolio 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 decline.
60 | • AB CREDIT LONG/SHORT PORTFOLIO |
Notes to Financial Statements
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 six months ended April 30, 2016.
NOTE H
Distributions to Shareholders
The tax character of distributions to be paid for the year ending October 31, 2016 will be determined at the end of the current fiscal year. 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. |
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.
AB CREDIT LONG/SHORT PORTFOLIO • | 61 |
Notes to Financial Statements
NOTE I
New Accounting Pronouncement
In May 2015, the Financial Accounting Standards Board issued an Accounting Standards Update, ASU 2015-07 (the “ASU”) 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 requirement to make certain disclosures for investments that are eligible to be measured at fair value using the net asset value per share practical expedient but do not utilize that practical expedient. 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
The Government STIF Portfolio, prior to June 1, 2016, was offered as a cash management option to mutual funds and other institutional accounts of the Adviser, and was not available for direct purchase by members of the public. Prior to June 1, 2016, the Government STIF Portfolio paid no investment management fees but did bear its own expenses. As of June 1, 2016, the Government STIF Portfolio, which was renamed “AB Government Money Market Portfolio” (the “Government Money Market Portfolio”), will have a contractual investment management fee rate of .20% and will continue to bear its own expenses. In connection with the investment by the Portfolio in the Government Money Market Portfolio, the Adviser will waive its investment management fee from the Portfolio in an amount equal to Government Money Market Portfolio’s effective management fee.
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 other material events that would require disclosure in the Portfolio’s financial statements through this date.
62 | • 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 | ||||||||||||
Six Months Ended April 30, 2016 | Year Ended October 31, 2015 | May 7, 2014(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 9.85 | $ 10.00 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .03 | .09 | .08 | |||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .28 | (.16 | ) | (.03 | ) | |||||||
Contributions from Affiliates | – 0 | – | .00 | (d) | – 0 | – | ||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .31 | (.07 | ) | .05 | ||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | – 0 | – | (.08 | ) | (.05 | ) | ||||||
Distributions from net realized gain on investment transactions | (.04 | ) | – 0 | – | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.04 | ) | (.08 | ) | (.05 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 10.12 | $ 9.85 | $ 10.00 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(e)(f) | 3.29 | % | (.65 | )% | .57 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $186 | $186 | $84 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements(g) | 6.44 | %^ | 5.02 | % | 3.56 | %^ | ||||||
Expenses, before waivers/reimbursements(g) | 8.70 | %^ | 7.28 | % | 4.29 | %^ | ||||||
Net investment income(c) | .52 | %^ | .88 | % | 1.79 | %^ | ||||||
Portfolio turnover rate | 62 | % | 163 | % | 69 | % | ||||||
Portfolio turnover rate (including securities sold short) | 57 | % | 147 | % | 102 | % |
See footnote summary on page 66.
AB CREDIT LONG/SHORT PORTFOLIO • | 63 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||
Six Months Ended April 30, 2016 | Year Ended October 31, 2015 | May 7, 2014(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 9.77 | $ 9.97 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income (loss)(b)(c) | (.02 | ) | .01 | .06 | ||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .30 | (.15 | ) | (.05 | ) | |||||||
Contributions from Affiliates | – 0 | – | .00 | (d) | – 0 | – | ||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .28 | (.14 | ) | .01 | ||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | – 0 | – | (.06 | ) | (.04 | ) | ||||||
Distributions from net realized gain on investment transactions | (.04 | ) | – 0 | – | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.04 | ) | (.06 | ) | (.04 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 10.01 | $ 9.77 | $ 9.97 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(e)(f) | 2.90 | % | (1.45 | )% | .21 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $143 | $100 | $44 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements(g) | 7.21 | %^ | 5.78 | % | 4.18 | %^ | ||||||
Expenses, before waivers/reimbursements(g) | 9.47 | %^ | 8.08 | % | 6.31 | %^ | ||||||
Net investment income (loss)(c) | (.31 | )%^ | .10 | % | 1.21 | %^ | ||||||
Portfolio turnover rate | 62 | % | 163 | % | 69 | % | ||||||
Portfolio turnover rate (including securities sold short) | 57 | % | 147 | % | 102 | % |
See footnote summary on page 66.
64 | • AB CREDIT LONG/SHORT PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||
Six Months Ended April 30, 2016 | Year Ended October 31, 2015 | May 7, 2014(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 9.87 | $ 10.01 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .04 | .12 | .10 | |||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .29 | (.17 | ) | (.04 | ) | |||||||
Contributions from Affiliates | – 0 | – | .00 | (d) | – 0 | – | ||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .33 | (.05 | ) | .06 | ||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | – 0 | – | (.09 | ) | (.05 | ) | ||||||
Distributions from net realized gain on investment transactions | (.04 | ) | – 0 | – | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.04 | ) | (.09 | ) | (.05 | ) | ||||||
|
| |||||||||||
$ 10.16 | $ 9.87 | $ 10.01 | ||||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(e)(f) | 3.38 | % | (.45 | )% | .70 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $21,353 | $20,967 | $20,892 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements(g) | 6.20 | %^ | 4.67 | % | 2.79 | %^ | ||||||
Expenses, before waivers/reimbursements(g) | 8.47 | %^ | 6.91 | % | 5.37 | %^ | ||||||
Net investment income(c) | .77 | %^ | 1.20 | % | 2.01 | %^ | ||||||
Portfolio turnover rate | 62 | % | 163 | % | 69 | % | ||||||
Portfolio turnover rate (including securities sold short) | 57 | % | 147 | % | 102 | % |
See footnote summary on page 66.
AB CREDIT LONG/SHORT PORTFOLIO • | 65 |
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. |
(f) | 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. |
(g) | The expense ratios presented below exclude expenses on securities sold short: |
Six Months Ended April 30, 2016 | Year Ended October 31, 2015 | May 7, 2014(a) to October 31, 2014 | ||||||||||
Class A | ||||||||||||
Net of waivers/reimbursements | 1.35 | %^ | 1.35 | % | 1.35 | %^ | ||||||
Before waivers/reimbursements | 3.61 | %^ | 3.61 | % | 2.08 | %^ | ||||||
Class C | ||||||||||||
Net of waivers/reimbursements | 2.10 | %^ | 2.10 | % | 2.10 | %^ | ||||||
Before waivers/reimbursements | 4.36 | %^ | 4.40 | % | 4.24 | %^ | ||||||
Advisor Class | ||||||||||||
Net of waivers/reimbursements | 1.10 | %^ | 1.10 | % | 1.10 | %^ | ||||||
Before waivers/reimbursements | 3.36 | %^ | 3.34 | % | 3.68 | %^ |
^ | Annualized. |
See notes to financial statements.
66 | • AB CREDIT LONG/SHORT PORTFOLIO |
Financial Highlights
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 • | 67 |
Board of Directors
Information Regarding the Review and Approval of the Portfolio’s Investment Advisory Contract
The disinterested directors (the “directors”) of AB Bond Fund, Inc. (the “Fund”) unanimously approved the continuance of the Fund’s Investment Advisory Contract (the “Advisory Agreement”) with the Adviser in respect of AB Credit Long/Short Portfolio (the “Portfolio”) at a meeting held on November 3-5, 2015.
Prior to approval of the continuance of the Advisory Agreement in respect of the Portfolio, the directors had requested from the Adviser, and received and evaluated, extensive materials. They reviewed the proposed continuance of the Advisory Agreement with the Adviser and with experienced counsel who are independent of the Adviser, who advised on the relevant legal standards. The directors also reviewed an independent evaluation prepared by the Fund’s Senior Officer (who is also the Fund’s Independent Compliance Officer) of the reasonableness of the advisory fee, in which the Senior Officer concluded that the contractual fee for the Portfolio was reasonable. The directors also discussed the proposed continuance in private sessions with counsel and the Fund’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services provided by the Adviser to the Portfolio gained from their experience as directors or trustees of most of the registered investment companies advised by the Adviser, their overall confidence in the Adviser’s integrity and competence they have gained from that experience, the Adviser’s initiative in identifying and raising potential issues with the directors and its responsiveness, frankness and attention to concerns raised by the directors in the past, including the Adviser’s willingness to consider and implement organizational and operational changes designed to improve investment results and the services provided to the AB Funds. The directors noted that they have four regular meetings each year, at each of which they receive presentations from the Adviser on the investment results of the Portfolio and review extensive materials and information presented by the Adviser.
The directors also considered all other factors they believed relevant, including the specific matters discussed below. In their deliberations, the directors did not identify any particular information that was all-important or controlling, and different directors may have attributed different weights to the various factors. The directors determined that the selection of the Adviser to manage the Portfolio, and the overall arrangements between the Portfolio and the Adviser, as provided in the Advisory Agreement, including the advisory fee, were fair and reasonable in light of the services performed, expenses incurred and such other matters as the directors considered relevant in the exercise of their business
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judgment. The material factors and conclusions that formed the basis for the directors’ determinations included the following:
Nature, Extent and Quality of Services Provided
The directors considered the scope and quality of services provided by the Adviser under the Advisory Agreement, including the quality of the investment research capabilities of the Adviser and the other resources it has dedicated to performing services for the Portfolio. They also noted the professional experience and qualifications of the Portfolio’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Portfolio will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Portfolio by employees of the Adviser or its affiliates. Requests for these reimbursements are made on a quarterly basis and subject to approval by the directors. Reimbursements, to the extent requested and paid, result in a higher rate of total compensation from the Portfolio to the Adviser than the fee rate stated in the Portfolio’s Advisory Agreement. The directors noted that the methodology used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Fund’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Portfolio’s other service providers, also was considered. The directors concluded that, overall, they were satisfied with the nature, extent and quality of services provided to the Portfolio under the Advisory Agreement.
Costs of Services Provided and Profitability
The directors reviewed a schedule of the revenues, expenses and related notes indicating the profitability of the Portfolio to the Adviser for the period ended December 31, 2014 that had been prepared with an expense limitation methodology arrived at in consultation with an independent consultant retained by the Fund’s Senior Officer. The directors noted the assumptions and methods of allocation used by the Adviser in preparing fund-specific profitability data and understood that there are a number of potentially acceptable allocation methodologies for information of this type. The directors noted that the profitability information reflected all revenues and expenses of the Adviser’s relationship with the Portfolio, including those relating to its subsidiaries that provide transfer agency and distribution services to the Portfolio. The directors recognized that it is difficult to make comparisons of the profitability of the Advisory Agreement with the profitability of advisory contracts for unaffiliated funds because comparative information is not generally publicly available and is affected by numerous factors. The directors focused on the profitability of the Adviser’s relationship with the Portfolio before taxes and distribution expenses. The directors noted that the Adviser’s relationship with the Portfolio was not profitable to it in 2014.
AB CREDIT LONG/SHORT PORTFOLIO • | 69 |
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their relationships with the Portfolio, including, but not limited to, benefits relating to 12b-1 fees and sales charges received by the Fund’s principal underwriter (which is a wholly owned subsidiary of the Adviser) in respect of certain classes of the Portfolio’s shares and transfer agency fees paid by the Portfolio to a wholly owned subsidiary of the Adviser. The directors recognized that the Portfolio’s unprofitability to the Adviser would be exacerbated without these benefits. The directors also understood that the Adviser also might derive reputational and other benefits from its association with the Portfolio.
Investment Results
In addition to the information reviewed by the directors in connection with the meeting, the directors receive detailed performance information for the Portfolio at each regular Board meeting during the year. At the November 2015 meeting, the directors reviewed information prepared by Broadridge showing the performance of the Class A Shares of the Portfolio as compared with that of a group of similar funds selected by Broadridge (the “Performance Group”) and as compared with that of a broad array of funds selected by Broadridge (the “Performance Universe”), and information prepared by the Adviser showing the performance of the Class A Shares as compared with the Bank of America Merrill Lynch 3 Month U.S. Treasury Bill Index (the “Index”), in each case for the 1-year period ended July 31, 2015 and (in the case of comparisons with the Index) the period since inception (May 2014 inception). The directors noted that the Portfolio was in the 3rd quintile of the Performance Group and the Performance Universe for the 1-year period. The Portfolio lagged the Index in the 1-year period and the period since inception. Based on their review, the directors concluded that the Portfolio’s performance was satisfactory.
Advisory Fees and Other Expenses
The directors considered the advisory fee rate paid by the Portfolio to the Adviser and information prepared by Broadridge concerning advisory fee rates paid by other funds in the same Broadridge category as the Portfolio at a common asset level. The directors recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The directors noted that, at the Portfolio’s current size, its contractual advisory fee rate of 90 basis points was lower than the Expense Group median. The directors noted that the expense reimbursement was 19 basis points in the Portfolio’s latest fiscal period, and that as a result the rate of total compensation received by the Adviser pursuant to the Advisory Agreement was more than the Expense Group median.
The directors also considered the Adviser’s fee schedule for non-fund clients pursuing a similar investment style. For this purpose, they reviewed the relevant advisory fee information from the Adviser’s Form ADV and the evaluation from
70 | • AB CREDIT LONG/SHORT PORTFOLIO |
the Fund’s Senior Officer. The directors noted that the institutional fee schedule started at a rate equal to the Portfolio’s flat rate but had breakpoints. The assets of the Portfolio were lower than the first breakpoint in the institutional fee schedule so application of that fee schedule to the Portfolio’s net assets would result in a fee rate the same as that under the Portfolio’s Advisory Agreement. The directors noted that the Adviser may, in some cases, agree to fee rates with large institutional clients that are lower than those reviewed by the directors and that they had previously discussed with the Adviser its policies in respect of such arrangements.
The Adviser reviewed with the directors the significantly greater scope of the services it provides to the Portfolio relative to institutional clients. The Adviser also noted that because mutual funds are constantly issuing and redeeming shares, they are more difficult to manage than an institutional account, where the assets tend to be relatively stable. In light of the substantial differences in services rendered by the Adviser to institutional clients as compared to funds such as the Portfolio, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors noted that the Portfolio invests in shares of exchange-traded funds (“ETFs”), subject to the restrictions and limitations of the Investment Company Act of 1940 as these may be varied as a result of exemptive orders issued by the SEC. The directors also noted that ETFs pay advisory fees pursuant to their advisory contracts, and that the Adviser had provided, and they had reviewed, information about the expense ratio of the relevant ETFs. The directors concluded, based on the Adviser’s explanation of how it uses ETFs when they are the most cost-effective way to obtain desired exposures for a fund or to temporarily “equitize” cash inflows pending purchases of underlying securities, that the advisory fee for the Portfolio would be paid for services that would be in addition to, rather than duplicative of, the services to be provided under the advisory contracts of the ETFs.
The directors also considered the total expense ratio of the Class A shares of the Portfolio in comparison to the fees and expenses of funds within two comparison groups created by Broadridge: an Expense Group and an Expense Universe. Broadridge described an Expense Group as a representative sample of funds similar to the Portfolio and an Expense Universe as a broader group than the Expense Group, consisting of all funds in the investment classification/objective with a similar load type as the Portfolio. The Class A expense ratio of the Portfolio was based on the Portfolio’s latest fiscal period and reflected fee waivers and/or expense reimbursements as a result of an expense limitation agreement between the Adviser and the Fund in respect of the Portfolio. The directors noted that it was likely that the expense ratios of some of the other funds in the Portfolio’s Broadridge category also were lowered by waivers or reimbursements by those funds’ investment advisers, which in some cases might be voluntary or
AB CREDIT LONG/SHORT PORTFOLIO • | 71 |
temporary. The directors view the expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Portfolio by others.
The directors noted that the Portfolio’s total expense ratio, reflecting a cap by the Adviser, was lower than the Expense Group median and higher than the Expense Universe median. The directors concluded that the Portfolio’s expense ratio was satisfactory.
Economies of Scale
The directors noted that the advisory fee schedule for the Portfolio does not contain breakpoints and that they had discussed their strong preference, and that of the Senior Officer, for breakpoints in advisory contracts with the Adviser. The directors took into consideration prior presentations by an independent consultant on economies of scale in the mutual fund industry and for the AB Funds, and by the Adviser concerning certain of its views on economies of scale. The directors also had requested and received from the Adviser certain updates on economies of scale at the May 2015 meetings. The directors believe that economies of scale may be realized (if at all) by the Adviser across a variety of products and services, and not only in respect of a single fund. The directors noted that there is no established methodology for setting breakpoints that give effect to the fund-specific services provided by a fund’s adviser and to the economies of scale that an adviser may realize in its overall mutual fund business or those components of it which directly or indirectly affect a fund’s operations. The directors observed that in the mutual fund industry as a whole, as well as among funds similar to the Portfolio, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. The directors also noted that the advisory agreements for many funds do not have breakpoints at all. The directors informed the Adviser that they would monitor the Portfolio’s assets (which were well below the level at which they would anticipate adding an initial breakpoint) and its profitability to the Adviser (currently unprofitable) and anticipated revisiting the question of breakpoints in the future if circumstances warranted doing so.
72 | • AB CREDIT LONG/SHORT PORTFOLIO |
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.” |
AB CREDIT LONG/SHORT PORTFOLIO • | 73 |
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 | ||
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 Expense Limitation 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%. |
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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 $300 million, it will negotiate a fee schedule. Discounts that are negotiated vary based upon each client relationship. |
AB CREDIT LONG/SHORT PORTFOLIO • | 75 |
Portfolio | Net Assets 09/30/15 ($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
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
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. |
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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.
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
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. |
AB CREDIT LONG/SHORT PORTFOLIO • | 77 |
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 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
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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.
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.
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. |
AB CREDIT LONG/SHORT PORTFOLIO • | 79 |
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 Inception (%) | 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. |
80 | • AB CREDIT LONG/SHORT PORTFOLIO |
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
AB CREDIT LONG/SHORT PORTFOLIO • | 81 |
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
International Strategic Core 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
Income Fund
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 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 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.
82 | • AB CREDIT LONG/SHORT PORTFOLIO |
AB Family of Funds
NOTES
AB CREDIT LONG/SHORT PORTFOLIO • | 83 |
NOTES
84 | • AB CREDIT LONG/SHORT PORTFOLIO |
AB CREDIT LONG/SHORT PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
CLS-0152-0416
APR 04.30.16
SEMI-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.
June 24, 2016
Semi-Annual Report
This report provides management’s discussion of fund performance for AB High Yield Portfolio (the “Fund”) for the semi-annual reporting period ended April 30, 2016.
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 or BB+ or lower by Standard & Poor’s Ratings Services 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 6 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 April 30, 2016.
All share classes of the Fund underperformed the benchmark for both periods, before sales charges. Sector positioning detracted in the six-month period, primarily due to an underweight in the basics sector, though an underweight in energy—a laggard due to a drop in commodity
AB HIGH YIELD PORTFOLIO • | 1 |
prices in the period—contributed to performance, relative to the benchmark. In the 12-month period, sector positioning contributed, as gains from an underweight in energy and overweight in banking more than offset losses from an underweight to consumer non-cyclicals. Yield-curve positioning detracted for both periods, mainly as a result of the Fund being underweight five-year maturities. Although security selection did not have a meaningful impact on performance in the 12-month period, it contributed in the six-month period due to selections in energy, basics and banking (which outweighed detrimental selections within telecommunications). Country and currency allocations did not significantly impact overall returns in either period.
During both periods, the Fund utilized currency forwards and currency options, both purchased and written, to hedge currency exposure as well as to manage active currency risk. Purchased and written equity options were also used to hedge market exposure. Credit default swaps, both single name and index, were used to hedge credit risk as well as to take active credit risk. Interest rate swaps and Treasury futures were used to manage duration, country exposure and yield-curve positioning. During the six-month period, the Fund held total return swaps for hedging and non-hedging purposes.
Market Review and Investment Strategy
Bond markets were volatile over the six- and 12-month periods ended April 30, 2016, as economic growth
trends and monetary policies in the world’s largest economies continued to diverge. Commodity prices declined through much of the 12-month period, with oil prices dipping below $26 per barrel in February, before beginning to stabilize in March and April—despite a breakdown in formal discussions about a potential production freeze. Government bond yields continued their volatility, and the yield on the US 10-Year Treasury ranged from about 1.6% to just below 2.5%, ultimately ending the period at 1.8%. The US dollar appreciated against many developed- and emerging-market currencies during much of the 12-month period, yet during the early part of 2016 the dollar reversed course and depreciated against many of these same currencies. The US Federal Reserve made its first official rate hike in nearly a decade in December, which investors generally accepted smoothly.
European markets declined in the second quarter of 2015 on fears of Greece’s departure from the European Union, but rebounded when stop-gap measures were reached with the country’s creditors in the third quarter to avoid an exit. Volatility was somewhat contained as the European Central Bank (“ECB”) maintained an easing bias through the period, though additional measures announced in December fell far short of investor expectations, putting pressure on markets in the region. However, the ECB surprised investors with aggressive expansion of its quantitative easing program in March. Other central banks cut rates, with some, including the Bank of Japan and the ECB, dipping into negative rate territory.
2 | • AB HIGH YIELD PORTFOLIO |
Economic activity in emerging-market economies continued to slow: Asia struggled with sluggish exports and weak domestic demand; Latin America continued to face weak growth and political upheaval in many parts of the region; and Eastern Europe’s growth picture was varied, as those countries tied to Western Europe fared better than those tied to commodities. Emerging-market sentiment was bolstered toward the end of the 12-month period. This was due to an uptick in oil prices, signs that China’s slowdown may be less pronounced than feared, encouraging political developments regarding Brazilian president Dilma Rousseff’s impeachment on corruption charges and Argentina’s progress on negotiations with its creditors that culminated in April with the country’s first new security issuance in 15 years.
Against this backdrop, fixed-income performance varied across regions and sectors during the 12-month period. Credit securities generally underperformed developed-market Treasuries; developed-market Treasuries also outperformed emerging-market
local-currency government bonds (despite the emerging-market rally in the last three months of the period). The positive performance of investment-grade securities generally outpaced negative returns from high-yield sectors, which saw a fairly wide divergence across sector returns. Commodity-linked sectors had the worst performance—suffering on negative oil price action—with energy down the most, followed by basic industries. Consumer-related sectors were almost universally positive (with the exception of pharmaceuticals), with restaurants, gaming and tobacco performing best. Financial institutions were also generally positive in the period.
On June 23, 2016, the UK voted to leave the European Union (“EU”) in a popular referendum. At this moment in time, the UK remains a member of the EU and the rules and regulations remain unchanged, as do all the protections in place. Exactly how the UK’s role in the EU will change will become clear over time. The Adviser continues to monitor the heightened market volatility.
AB HIGH YIELD PORTFOLIO • | 3 |
DISCLOSURES AND RISKS
Benchmark Disclosure
The Barclays US Corporate High Yield 2% Issuer Capped Index is unmanaged and 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 as the recent period of historically low rates is beginning to end and rates have begun rising. 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 and accrued interest. 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.
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 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.
(Disclosures, Risks and Note about Historical Performance continued on next page)
4 | • AB HIGH YIELD 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.
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, and because these investments may be 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 decline.
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.
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.
AB HIGH YIELD PORTFOLIO • | 5 |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE FUND VS. ITS BENCHMARK PERIODS ENDED APRIL 30, 2016 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB High Yield Portfolio | ||||||||||
Class A | 1.88% | -1.64% | ||||||||
| ||||||||||
Class C | 1.51% | -2.37% | ||||||||
| ||||||||||
Advisor Class* | 2.12% | -1.38% | ||||||||
| ||||||||||
Class R* | 1.76% | -1.88% | ||||||||
| ||||||||||
Class K* | 1.91% | -1.61% | ||||||||
| ||||||||||
Class I* | 2.02% | -1.39% | ||||||||
| ||||||||||
Class Z* | 2.01% | -1.39% | ||||||||
| ||||||||||
Barclays US Corporate HY 2% Issuer Capped Index | 2.38% | -1.08% | ||||||||
| ||||||||||
* 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 4-5.
(Historical Performance continued on next page)
6 | • AB HIGH YIELD PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF APRIL 30, 2016 (unaudited) | ||||||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | SEC Yields* | ||||||||||
Class A Shares | 0.16 | % | ||||||||||
1 Year | -1.64 | % | -5.79 | % | ||||||||
Since Inception† | -0.17 | % | -2.54 | % | ||||||||
Class C Shares | 0.74 | % | ||||||||||
1 Year | -2.37 | % | -3.30 | % | ||||||||
Since Inception† | -0.92 | % | -0.92 | % | ||||||||
Advisor Class Shares‡ | 1.76 | % | ||||||||||
1 Year | -1.38 | % | -1.38 | % | ||||||||
Since Inception† | 0.16 | % | 0.16 | % | ||||||||
Class R Shares‡ | 3.15 | % | ||||||||||
1 Year | -1.88 | % | -1.88 | % | ||||||||
Since Inception† | -0.41 | %�� | -0.41 | % | ||||||||
Class K Shares‡ | 3.43 | % | ||||||||||
1 Year | -1.61 | % | -1.61 | % | ||||||||
Since Inception† | -0.15 | % | -0.15 | % | ||||||||
Class I Shares‡ | 3.72 | % | ||||||||||
1 Year | -1.39 | % | -1.39 | % | ||||||||
Since Inception† | 0.09 | % | 0.09 | % | ||||||||
Class Z Shares‡ | 3.65 | % | ||||||||||
1 Year | -1.39 | % | -1.39 | % | ||||||||
Since Inception† | 0.09 | % | 0.09 | % |
The Fund’s prospectus fee table shows the Fund’s total annual operating expense ratios as 6.57%, 7.85%, 7.35%, 4.39%, 4.13%, 3.86% and 3.86% 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 31, 2017 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 April 30, 2016. |
† | 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. |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
(Historical Performance continued on next page)
AB HIGH YIELD PORTFOLIO • | 7 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END MARCH 31, 2016 (unaudited) | ||||
SEC Returns (reflects applicable sales charges) | ||||
Class A Shares | ||||
1 Year | -8.04 | % | ||
Since Inception† | -4.54 | % | ||
Class C Shares | ||||
1 Year | -5.59 | % | ||
Since Inception† | -2.85 | % | ||
Advisor Class Shares‡ | ||||
1 Year | -3.72 | % | ||
Since Inception† | -1.85 | % | ||
Class R Shares‡ | ||||
1 Year | -4.20 | % | ||
Since Inception† | -2.34 | % | ||
Class K Shares‡ | ||||
1 Year | -3.94 | % | ||
Since Inception† | -2.09 | % | ||
Class I Shares‡ | ||||
1 Year | -3.72 | % | ||
Since Inception† | -1.86 | % | ||
Class Z Shares‡ | ||||
1 Year | -3.72 | % | ||
Since Inception† | -1.85 | % |
† | 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. |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
8 | • AB HIGH YIELD PORTFOLIO |
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 November 1, 2015 | Ending Account Value April 30, 2016 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,018.80 | $ | 5.27 | 1.05 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.64 | $ | 5.27 | 1.05 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,015.10 | $ | 9.02 | 1.80 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,015.91 | $ | 9.02 | 1.80 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,021.20 | $ | 4.02 | 0.80 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.89 | $ | 4.02 | 0.80 | % | ||||||||
Class R | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,017.60 | $ | 6.52 | 1.30 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,018.40 | $ | 6.52 | 1.30 | % | ||||||||
Class K | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,019.10 | $ | 5.27 | 1.05 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.64 | $ | 5.27 | 1.05 | % | ||||||||
Class I | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,020.20 | $ | 4.02 | 0.80 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.89 | $ | 4.02 | 0.80 | % | ||||||||
Class Z | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,020.10 | $ | 4.02 | 0.80 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.89 | $ | 4.02 | 0.80 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
AB HIGH YIELD PORTFOLIO • | 9 |
Expense Example
PORTFOLIO SUMMARY
April 30, 2016 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $17.8
* | All data are as of April 30, 2016. 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 securities types: Emerging Markets – Sovereigns and Warrants. |
10 | • AB HIGH YIELD PORTFOLIO |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
April 30, 2016 (unaudited)
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
CORPORATES – NON-INVESTMENT GRADE – 69.2% | ||||||||||
Industrial – 57.4% | ||||||||||
Basic – 3.5% | ||||||||||
Aleris International, Inc. | U.S.$ | 9 | $ | 7,988 | ||||||
ArcelorMittal | 10 | 9,850 | ||||||||
6.125%, 6/01/18-6/01/25 | 130 | 133,191 | ||||||||
7.25%, 2/25/22 | 15 | 15,778 | ||||||||
8.00%, 10/15/39 | 2 | 1,860 | ||||||||
Cliffs Natural Resources, Inc. | 17 | 15,937 | ||||||||
Freeport-McMoRan, Inc. | 22 | 21,120 | ||||||||
3.875%, 3/15/23 | 116 | 97,150 | ||||||||
4.55%, 11/14/24 | 17 | 14,301 | ||||||||
5.40%, 11/14/34 | 10 | 7,649 | ||||||||
5.45%, 3/15/43 | 40 | 30,000 | ||||||||
Huntsman International LLC | 10 | 10,075 | ||||||||
Joseph T. Ryerson & Son, Inc. | 25 | 23,031 | ||||||||
Lundin Mining Corp. | 7 | 7,088 | ||||||||
Magnetation LLC/Mag Finance Corp. | 35 | 1,750 | ||||||||
Momentive Performance Materials, Inc. | 40 | 30,600 | ||||||||
8.875%, 10/15/20(d)(e)(f) | 40 | – 0 | – | |||||||
Novelis, Inc. | 30 | 30,975 | ||||||||
Peabody Energy Corp. | 82 | 8,241 | ||||||||
10.00%, 3/15/22(a)(b) | 30 | 3,453 | ||||||||
PQ Corp. | 12 | 12,375 | ||||||||
Smurfit Kappa Treasury Funding Ltd. | 15 | 17,775 | ||||||||
Steel Dynamics, Inc. | 15 | 15,337 | ||||||||
6.125%, 8/15/19 | 12 | 12,435 | ||||||||
Teck Resources Ltd. | 3 | 2,850 | ||||||||
3.75%, 2/01/23 | 10 | 7,700 | ||||||||
4.50%, 1/15/21 | 18 | 15,345 | ||||||||
5.20%, 3/01/42 | 14 | 10,041 | ||||||||
5.40%, 2/01/43 | 14 | 9,940 | ||||||||
6.25%, 7/15/41 | 8 | 6,040 |
AB HIGH YIELD PORTFOLIO • | 11 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Thompson Creek Metals Co., Inc. | U.S.$ | 20 | $ | 7,900 | ||||||
9.75%, 12/01/17 | 25 | 23,969 | ||||||||
WR Grace & Co.-Conn | 12 | 12,564 | ||||||||
|
| |||||||||
624,308 | ||||||||||
|
| |||||||||
Capital Goods – 5.5% | ||||||||||
American Builders & Contractors Supply Co., Inc. | 10 | 10,475 | ||||||||
Apex Tool Group LLC | 20 | 18,000 | ||||||||
Berry Plastics Corp. | 7 | 7,070 | ||||||||
5.50%, 5/15/22 | 4 | 4,128 | ||||||||
6.00%, 10/15/22(a) | 4 | 4,180 | ||||||||
Beverage Packaging Holdings Luxembourg II SA/Beverage Packaging Holdings II Issuer | 10 | 9,975 | ||||||||
Bombardier, Inc. | 18 | 15,309 | ||||||||
6.125%, 1/15/23(a) | 5 | 4,350 | ||||||||
7.50%, 3/15/25(a) | 93 | 83,235 | ||||||||
Clean Harbors, Inc. | 18 | 18,518 | ||||||||
CNH Industrial Capital LLC | 60 | 60,375 | ||||||||
EnPro Industries, Inc. | 16 | 16,680 | ||||||||
Gardner Denver, Inc. | 49 | 41,895 | ||||||||
GFL Environmental, Inc. | 5 | 5,075 | ||||||||
9.875%, 2/01/21(a) | 25 | 26,375 | ||||||||
KLX, Inc. | 40 | 40,250 | ||||||||
Masco Corp. | 30 | 34,650 | ||||||||
Owens-Illinois, Inc. | 25 | 27,437 | ||||||||
Pactiv LLC | 23 | 22,310 | ||||||||
Reynolds Group Issuer, Inc./Reynolds Group Issuer LLC/Reynolds Group Issuer Lu | 100 | 103,500 | ||||||||
9.00%, 4/15/19 | 100 | 101,500 | ||||||||
Sealed Air Corp. | 75 | 79,312 |
12 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
SPX FLOW, Inc. | U.S.$ | 75 | $ | 77,531 | ||||||
Standard Industries, Inc./NJ | 19 | 20,449 | ||||||||
TransDigm, Inc. | 30 | 30,366 | ||||||||
6.50%, 7/15/24 | 10 | 10,075 | ||||||||
United Rentals North America, Inc. | 64 | 63,646 | ||||||||
5.75%, 11/15/24 | 39 | 39,536 | ||||||||
|
| |||||||||
976,202 | ||||||||||
|
| |||||||||
Communications - Media – 8.5% | ||||||||||
CCO Holdings LLC/CCO Holdings Capital Corp. | 60 | 61,500 | ||||||||
5.375%, 5/01/25(a) | 42 | 42,997 | ||||||||
5.50%, 5/01/26(a) | 50 | 51,000 | ||||||||
5.75%, 1/15/24 | 3 | 3,146 | ||||||||
5.875%, 4/01/24-5/01/27(a) | 49 | 50,338 | ||||||||
Cequel Communications Holdings I LLC/Cequel Capital Corp. | 66 | 62,205 | ||||||||
Clear Channel Worldwide Holdings, Inc. | 50 | 50,250 | ||||||||
CSC Holdings LLC | 108 | 98,280 | ||||||||
7.625%, 7/15/18 | 24 | 25,980 | ||||||||
8.625%, 2/15/19 | 35 | 38,850 | ||||||||
DISH DBS Corp. | 30 | 30,225 | ||||||||
5.875%, 11/15/24 | 60 | 56,310 | ||||||||
6.75%, 6/01/21 | 55 | 56,662 | ||||||||
Hughes Satellite Systems Corp. | 50 | 55,625 | ||||||||
iHeartCommunications, Inc. | 70 | 41,300 | ||||||||
9.00%, 12/15/19-9/15/22 | 60 | 45,050 | ||||||||
Intelsat Jackson Holdings SA | 95 | 60,028 | ||||||||
8.00%, 2/15/24(a) | 13 | 13,455 | ||||||||
Intelsat Luxembourg SA | 30 | 9,900 | ||||||||
Mcgraw-Hill Global Ed | 18 | 18,000 | ||||||||
Mediacom Broadband LLC/Mediacom Broadband Corp. | 30 | 31,125 |
AB HIGH YIELD PORTFOLIO • | 13 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Nexstar Broadcasting, Inc. | U.S.$ | 17 | $ | 17,808 | ||||||
Nielsen Co. Luxembourg SARL (The) | 29 | 30,232 | ||||||||
Nielsen Finance LLC/Nielsen Finance Co. | 35 | 35,700 | ||||||||
Outfront Media Capital LLC/Outfront Media Capital Corp. | 10 | 10,400 | ||||||||
Radio One, Inc. | 20 | 18,175 | ||||||||
9.25%, 2/15/20(a) | 26 | 20,930 | ||||||||
RR Donnelley & Sons Co. | 30 | 31,800 | ||||||||
8.25%, 3/15/19 | 20 | 21,250 | ||||||||
Sinclair Television Group, Inc. | 20 | 20,750 | ||||||||
5.625%, 8/01/24(a) | 50 | 51,375 | ||||||||
Sirius XM Radio, Inc. | 33 | 34,818 | ||||||||
Starz LLC/Starz Finance Corp. | 55 | 56,031 | ||||||||
TEGNA, Inc. | 35 | 35,700 | ||||||||
5.50%, 9/15/24(a) | 3 | 3,098 | ||||||||
Time, Inc. | 50 | 47,634 | ||||||||
Townsquare Media, Inc. | 3 | 2,895 | ||||||||
Univision Communications, Inc. | 98 | 97,928 | ||||||||
6.75%, 9/15/22(a) | 22 | 23,320 | ||||||||
Videotron Ltd. | 25 | 25,938 | ||||||||
WideOpenWest Finance LLC/WideOpenWest Capital Corp. | 25 | 25,063 | ||||||||
|
| |||||||||
1,513,071 | ||||||||||
|
| |||||||||
Communications - Telecommunications – 7.0% | ||||||||||
CenturyLink, Inc. | 10 | 9,875 | ||||||||
Series U | 55 | 46,750 | ||||||||
Series W | 27 | 26,595 | ||||||||
CommScope Technologies Finance LLC | 23 | 23,575 |
14 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Communications Sales & Leasing, Inc./CSL Capital LLC | U.S.$ | 40 | $ | 39,900 | ||||||
8.25%, 10/15/23 | 31 | 29,373 | ||||||||
Embarq Corp. | 30 | 30,000 | ||||||||
Frontier Communications Corp. | 34 | 31,620 | ||||||||
7.125%, 3/15/19-1/15/23 | 43 | 41,455 | ||||||||
7.625%, 4/15/24 | 35 | 31,069 | ||||||||
7.875%, 1/15/27 | 10 | 8,200 | ||||||||
8.125%, 10/01/18 | 15 | 16,163 | ||||||||
9.00%, 8/15/31 | 10 | 8,588 | ||||||||
10.50%, 9/15/22(a) | 7 | 7,202 | ||||||||
11.00%, 9/15/25(a) | 94 | 94,940 | ||||||||
Level 3 Financing, Inc. | 24 | 24,360 | ||||||||
SBA Communications Corp. | 20 | 20,750 | ||||||||
Sprint Capital Corp. | 5 | 3,713 | ||||||||
8.75%, 3/15/32 | 34 | 27,030 | ||||||||
Sprint Communications, Inc. | 40 | 29,420 | ||||||||
9.00%, 11/15/18(a) | 85 | 89,887 | ||||||||
Sprint Corp. | 10 | 7,500 | ||||||||
7.25%, 9/15/21 | 30 | 24,225 | ||||||||
7.625%, 2/15/25 | 48 | 36,180 | ||||||||
7.875%, 9/15/23 | 85 | 66,300 | ||||||||
T-Mobile USA, Inc. | 50 | 52,125 | ||||||||
6.375%, 3/01/25 | 72 | 75,600 | ||||||||
6.50%, 1/15/26 | 19 | 20,140 | ||||||||
6.542%, 4/28/20 | 102 | 105,187 | ||||||||
Telecom Italia Capital SA | 110 | 112,200 | ||||||||
7.20%, 7/18/36 | 8 | 8,360 | ||||||||
WaveDivision Escrow LLC/WaveDivision Escrow Corp. | 10 | 10,175 | ||||||||
Windstream Services LLC | 21 | 16,013 | ||||||||
7.50%, 4/01/23 | 30 | 24,300 | ||||||||
Zayo Group LLC/Zayo Capital, Inc. | 35 | 35,962 | ||||||||
6.375%, 5/15/25 | 15 | 15,600 | ||||||||
|
| |||||||||
1,250,332 | ||||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 15 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Cyclical - Automotive – 1.3% | ||||||||||
Affinia Group, Inc. | U.S.$ | 30 | $ | 30,975 | ||||||
Commercial Vehicle Group, Inc. | 46 | 39,560 | ||||||||
Dana Holding Corp. | 29 | 29,653 | ||||||||
Gates Global LLC/Gates Global Co. | 21 | 18,270 | ||||||||
LKQ Corp. | 55 | 55,275 | ||||||||
Meritor, Inc. | 17 | 20,251 | ||||||||
Navistar International Corp. | 23 | 16,445 | ||||||||
Titan International, Inc. | 20 | 17,300 | ||||||||
|
| |||||||||
227,729 | ||||||||||
|
| |||||||||
Consumer Cyclical - | ||||||||||
AMC Entertainment, Inc. | 17 | 17,425 | ||||||||
ClubCorp Club Operations, Inc. | 8 | 7,880 | ||||||||
Regal Entertainment Group | 35 | 36,181 | ||||||||
Royal Caribbean Cruises Ltd. | 15 | 16,200 | ||||||||
|
| |||||||||
77,686 | ||||||||||
|
| |||||||||
Consumer Cyclical - Other – 3.8% | ||||||||||
Beazer Homes USA, Inc. | 20 | 18,550 | ||||||||
Boyd Gaming Corp. | 8 | 8,180 | ||||||||
Caesars Entertainment Operating Co., Inc. | 5 | 4,513 | ||||||||
Caesars Entertainment Resort Properties LLC/Caesars Entertainment Resort Prope | 20 | 19,650 | ||||||||
Caesars Growth Properties Holdings LLC/Caesars Growth Properties Finance, Inc. | 20 | 17,400 | ||||||||
CalAtlantic Group, Inc. | 20 | 22,100 | ||||||||
8.375%, 5/15/18 | 15 | 16,650 | ||||||||
Eldorado Resorts, Inc. | 16 | 16,680 |
16 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
GLP Capital LP/GLP Financing II, Inc. | U.S.$ | 3 | $ | 3,068 | ||||||
5.375%, 11/01/23 | 25 | 26,031 | ||||||||
International Game Technology | 80 | 88,100 | ||||||||
Isle of Capri Casinos, Inc. | 9 | 9,382 | ||||||||
K. Hovnanian Enterprises, Inc. | 28 | 19,600 | ||||||||
KB Home | 15 | 15,075 | ||||||||
7.00%, 12/15/21 | 10 | 10,200 | ||||||||
8.00%, 3/15/20 | 20 | 21,600 | ||||||||
MDC Holdings, Inc. | 8 | 7,760 | ||||||||
6.00%, 1/15/43 | 22 | 16,830 | ||||||||
Meritage Homes Corp. | 63 | 64,260 | ||||||||
7.00%, 4/01/22 | 4 | 4,290 | ||||||||
MGP Escrow Issuer LLC/MGP Escrow Co-Issuer, Inc. | 6 | 6,255 | ||||||||
NAI Entertainment Holdings/NAI Entertainment Holdings Finance Corp. | 25 | 25,375 | ||||||||
Pinnacle Entertainment, Inc. | 26 | 25,967 | ||||||||
PulteGroup, Inc. | 36 | 34,920 | ||||||||
6.375%, 5/15/33 | 10 | 10,150 | ||||||||
7.875%, 6/15/32 | 4 | 4,480 | ||||||||
Shea Homes LP/Shea Homes Funding Corp. | 4 | 4,030 | ||||||||
6.125%, 4/01/25(a) | 42 | 42,315 | ||||||||
Taylor Morrison Communities, Inc./Monarch Communities, Inc. | 50 | 48,750 | ||||||||
5.875%, 4/15/23(a) | 14 | 13,965 | ||||||||
Toll Brothers Finance Corp. | 10 | 10,350 | ||||||||
Wynn Las Vegas LLC/Wynn Las Vegas Capital | 22 | 22,381 | ||||||||
5.50%, 3/01/25(a) | 13 | 12,439 | ||||||||
|
| |||||||||
671,296 | ||||||||||
|
| |||||||||
Consumer Cyclical - Restaurants – 0.1% | ||||||||||
1011778 BC ULC/New Red Finance, Inc. | 22 | 22,715 | ||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 17 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Cyclical - Retailers – 2.9% | ||||||||||
American Tire Distributors, Inc. | U.S.$ | 29 | $ | 26,027 | ||||||
Argos Merger Sub, Inc. | 41 | 41,922 | ||||||||
Asbury Automotive Group, Inc. | 13 | 13,423 | ||||||||
Cash America International, Inc. | 67 | 67,502 | ||||||||
CST Brands, Inc. | 28 | 28,297 | ||||||||
Dollar Tree, Inc. | 28 | 29,898 | ||||||||
Group 1 Automotive, Inc. | 30 | 29,700 | ||||||||
L Brands, Inc. | 30 | 33,000 | ||||||||
8.50%, 6/15/19 | 50 | 59,000 | ||||||||
Levi Strauss & Co. | 19 | 19,238 | ||||||||
6.875%, 5/01/22 | 15 | 16,088 | ||||||||
Neiman Marcus Group Ltd. LLC | 16 | 13,280 | ||||||||
Party City Holdings, Inc. | 17 | 17,770 | ||||||||
Rite Aid Corp. | 52 | 55,413 | ||||||||
Sally Holdings LLC/Sally Capital, Inc. | 16 | 17,080 | ||||||||
Serta Simmons Bedding LLC | 15 | 15,750 | ||||||||
Sonic Automotive, Inc. | 15 | 14,925 | ||||||||
Wolverine World Wide, Inc. | 10 | 10,388 | ||||||||
|
| |||||||||
508,701 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 11.0% | ||||||||||
Acadia Healthcare Co., Inc. | 20 | 20,450 | ||||||||
6.50%, 3/01/24(a) | 4 | 4,220 | ||||||||
Air Medical Merger Sub Corp. | 46 | 44,160 | ||||||||
Alere, Inc. | 7 | 7,140 | ||||||||
Amsurg Corp. | 16 | 16,420 | ||||||||
Aramark Services, Inc. | 6 | 6,345 |
18 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
BI-LO LLC/BI-LO Finance Corp. | U.S.$ | 52 | $ | 39,000 | ||||||
9.25%, 2/15/19(a) | 20 | 19,350 | ||||||||
CHS/Community Health Systems, Inc. | 95 | 85,975 | ||||||||
Concordia Healthcare Corp. | 2 | 1,855 | ||||||||
9.50%, 10/21/22(a) | 15 | 15,216 | ||||||||
Constellation Brands, Inc. | 20 | 20,900 | ||||||||
7.25%, 5/15/17 | 40 | 42,150 | ||||||||
DaVita HealthCare Partners, Inc. | 48 | 48,000 | ||||||||
Endo Finance LLC | 120 | 117,600 | ||||||||
Envision Healthcare Corp. | 42 | 42,735 | ||||||||
First Quality Finance Co., Inc. | 52 | 49,530 | ||||||||
HCA, Inc. | 153 | 159,120 | ||||||||
5.375%, 2/01/25 | 49 | 50,102 | ||||||||
6.50%, 2/15/20 | 80 | 88,600 | ||||||||
Hill-Rom Holdings, Inc. | 6 | 6,218 | ||||||||
HRG Group, Inc. | 61 | 64,355 | ||||||||
IASIS Healthcare LLC/IASIS Capital Corp. | 28 | 26,740 | ||||||||
Kinetic Concepts, Inc./KCI USA, Inc. | 13 | 14,056 | ||||||||
10.50%, 11/01/18 | 50 | 50,532 | ||||||||
Mallinckrodt International Finance SA | 11 | 10,725 | ||||||||
Mallinckrodt International Finance SA/Mallinckrodt CB LLC | 23 | 21,563 | ||||||||
5.75%, 8/01/22(a) | 18 | 16,988 | ||||||||
Manitowoc Foodservice, Inc. | 5 | 5,525 | ||||||||
MEDNAX, Inc. | 8 | 8,280 | ||||||||
MPH Acquisition Holdings LLC | 10 | 10,442 | ||||||||
NBTY, Inc. | 27 | 27,607 |
AB HIGH YIELD PORTFOLIO • | 19 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Pinnacle Foods Finance LLC/Pinnacle Foods Finance Corp. | U.S.$ | 9 | $ | 9,518 | ||||||
Post Holdings, Inc. | 19 | 19,511 | ||||||||
7.375%, 2/15/22 | 37 | 38,989 | ||||||||
7.75%, 3/15/24(a) | 18 | 19,575 | ||||||||
8.00%, 7/15/25(a) | 4 | 4,435 | ||||||||
RSI Home Products, Inc. | 60 | 62,550 | ||||||||
Smithfield Foods, Inc. | 25 | 25,406 | ||||||||
5.875%, 8/01/21(a) | 30 | 31,275 | ||||||||
6.625%, 8/15/22 | 20 | 21,150 | ||||||||
Spectrum Brands, Inc. | 7 | 7,481 | ||||||||
6.375%, 11/15/20 | 30 | 31,658 | ||||||||
6.625%, 11/15/22 | 20 | 21,600 | ||||||||
Sun Products Corp. (The) | 43 | 40,527 | ||||||||
Tenet Healthcare Corp. | 25 | 25,312 | ||||||||
6.75%, 6/15/23 | 14 | 13,825 | ||||||||
6.875%, 11/15/31 | 72 | 59,040 | ||||||||
8.00%, 8/01/20 | 60 | 61,800 | ||||||||
8.125%, 4/01/22 | 32 | 33,200 | ||||||||
Valeant Pharmaceuticals International, Inc. | 30 | 25,500 | ||||||||
5.875%, 5/15/23(a) | 57 | 47,737 | ||||||||
6.125%, 4/15/25(a) | 212 | 176,490 | ||||||||
6.75%, 8/15/18(a) | 25 | 24,125 | ||||||||
Vizient, Inc. | 5 | 5,400 | ||||||||
|
| |||||||||
1,948,003 | ||||||||||
|
| |||||||||
Energy – 6.9% | ||||||||||
Antero Resources Corp. | 29 | 27,840 | ||||||||
Berry Petroleum Co. LLC | 65 | 16,575 | ||||||||
BreitBurn Energy Partners LP/BreitBurn Finance Corp. | 19 | 1,330 | ||||||||
California Resources Corp. | 5 | 2,150 | ||||||||
5.50%, 9/15/21 | 23 | 9,430 | ||||||||
6.00%, 11/15/24 | 6 | 2,498 | ||||||||
8.00%, 12/15/22(a) | 25 | 17,187 | ||||||||
Carrizo Oil & Gas, Inc. | 9 | 9,045 |
20 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Cenovus Energy, Inc. | U.S.$ | 6 | $ | 5,382 | ||||||
3.80%, 9/15/23 | 3 | 2,705 | ||||||||
4.45%, 9/15/42 | 26 | 20,133 | ||||||||
6.75%, 11/15/39 | 2 | 1,942 | ||||||||
Chaparral Energy, Inc. | 21 | 6,300 | ||||||||
CHC Helicopter SA | 41 | 18,022 | ||||||||
9.375%, 6/01/21 | 65 | 4,225 | ||||||||
Chesapeake Energy Corp. | 30 | 19,350 | ||||||||
6.125%, 2/15/21 | 13 | 7,703 | ||||||||
6.875%, 11/15/20 | 35 | 21,350 | ||||||||
7.25%, 12/15/18 | 6 | 4,530 | ||||||||
8.00%, 12/15/22(a) | 5 | 3,400 | ||||||||
Cobalt International Energy, Inc. | 24 | 12,075 | ||||||||
Concho Resources, Inc. | 18 | 18,135 | ||||||||
Continental Resources, Inc./OK | 2 | 1,705 | ||||||||
4.50%, 4/15/23 | 11 | 9,824 | ||||||||
4.90%, 6/01/44 | 26 | 20,930 | ||||||||
5.00%, 9/15/22 | 19 | 17,741 | ||||||||
DCP Midstream Operating LP | 4 | 3,530 | ||||||||
5.60%, 4/01/44 | 16 | 12,880 | ||||||||
Denbury Resources, Inc. | 9 | 5,288 | ||||||||
5.50%, 5/01/22 | 15 | 9,638 | ||||||||
Diamond Offshore Drilling, Inc. | 15 | 10,855 | ||||||||
Energy Transfer Equity LP | 61 | 57,035 | ||||||||
7.50%, 10/15/20 | 16 | 16,120 | ||||||||
Energy XXI Gulf Coast, Inc. | 35 | 1,575 | ||||||||
7.75%, 6/15/19(b) | 10 | 400 | ||||||||
Ensco PLC | 47 | 34,251 | ||||||||
EP Energy LLC/Everest Acquisition Finance, Inc. | 8 | 4,600 | ||||||||
7.75%, 9/01/22 | 20 | 11,600 | ||||||||
9.375%, 5/01/20 | 32 | 20,860 | ||||||||
Global Partners LP/GLP Finance Corp. | 40 | 32,800 | ||||||||
7.00%, 6/15/23 | 7 | 5,884 |
AB HIGH YIELD PORTFOLIO • | 21 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Gulfport Energy Corp. | U.S.$ | 10 | $ | 9,700 | ||||||
Halcon Resources Corp. | 5 | 4,150 | ||||||||
13.00%, 2/15/22(a) | 5 | 1,600 | ||||||||
Hilcorp Energy I LP/Hilcorp Finance Co. | 11 | 10,368 | ||||||||
Hornbeck Offshore Services, Inc. | 30 | 19,425 | ||||||||
Laredo Petroleum, Inc. | 11 | 10,780 | ||||||||
Linn Energy LLC/Linn Energy Finance Corp. | 52 | 5,330 | ||||||||
Midstates Petroleum Co., Inc./Midstates Petroleum Co. LLC | 20 | 300 | ||||||||
Murphy Oil Corp. | 14 | 11,570 | ||||||||
Newfield Exploration Co. | 13 | 12,870 | ||||||||
Noble Holding International Ltd. | 15 | 12,338 | ||||||||
7.95%, 4/01/45 | 18 | 12,960 | ||||||||
Oasis Petroleum, Inc. | 3 | 2,745 | ||||||||
6.875%, 3/15/22-1/15/23 | 23 | 20,553 | ||||||||
Paragon Offshore PLC | 60 | 15,900 | ||||||||
PHI, Inc. | 54 | 49,782 | ||||||||
QEP Resources, Inc. | 7 | 6,580 | ||||||||
5.375%, 10/01/22 | 26 | 24,635 | ||||||||
6.875%, 3/01/21 | 2 | 1,980 | ||||||||
Range Resources Corp. | 29 | 26,861 | ||||||||
Rowan Cos., Inc. | 24 | 16,380 | ||||||||
Sabine Oil & Gas Corp. | 20 | 100 | ||||||||
Sabine Pass Liquefaction LLC | 39 | 38,025 | ||||||||
5.75%, 5/15/24 | 100 | 96,750 | ||||||||
SandRidge Energy, Inc. | 15 | 919 | ||||||||
SM Energy Co. | 25 | 20,812 | ||||||||
5.625%, 6/01/25 | 10 | 8,400 |
22 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Southern Star Central Corp. | U.S.$ | 20 | $ | 19,050 | ||||||
Targa Resources Partners LP/Targa Resources Partners Finance Corp. | 38 | 35,031 | ||||||||
Tervita Corp. | 40 | 34,500 | ||||||||
10.875%, 2/15/18(a) | 93 | 17,437 | ||||||||
Transocean, Inc. | 12 | 8,280 | ||||||||
6.50%, 11/15/20 | 3 | 2,473 | ||||||||
6.80%, 3/15/38 | 67 | 41,037 | ||||||||
Vantage Drilling International | 30 | – 0 | – ^ | |||||||
W&T Offshore, Inc. | 15 | 2,400 | ||||||||
Weatherford International Ltd./Bermuda | 7 | 5,180 | ||||||||
6.50%, 8/01/36 | 19 | 14,678 | ||||||||
7.00%, 3/15/38 | 20 | 15,700 | ||||||||
Whiting Petroleum Corp. | 17 | 12,835 | ||||||||
5.00%, 3/15/19 | 7 | 6,195 | ||||||||
5.75%, 3/15/21 | 17 | 14,153 | ||||||||
6.25%, 4/01/23 | 8 | 6,660 | ||||||||
Series D | 15 | 17,156 | ||||||||
WPX Energy, Inc. | 22 | 18,524 | ||||||||
6.00%, 1/15/22 | 6 | 5,400 | ||||||||
8.25%, 8/01/23 | 3 | 2,820 | ||||||||
|
| |||||||||
1,230,145 | ||||||||||
|
| |||||||||
Other Industrial – 0.9% | ||||||||||
General Cable Corp. | 17 | 11,241 | ||||||||
5.75%, 10/01/22 | 20 | 17,950 | ||||||||
Laureate Education, Inc. | 63 | 57,015 | ||||||||
Modular Space Corp. | 17 | 8,755 | ||||||||
New Enterprise Stone & Lime Co., Inc. | 30 | 27,000 | ||||||||
12.00%, 3/15/18(i) | 23 | 23,494 | ||||||||
Safway Group Holding LLC/Safway Finance Corp. | 17 | 17,000 | ||||||||
|
| |||||||||
162,455 | ||||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 23 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Services – 1.1% | ||||||||||
ADT Corp. (The) | U.S.$ | 16 | $ | 14,680 | ||||||
4.125%, 6/15/23 | 57 | 53,010 | ||||||||
APX Group, Inc. | 8 | 8,000 | ||||||||
8.75%, 12/01/20 | 10 | 9,375 | ||||||||
IHS, Inc. | 30 | 31,350 | ||||||||
Mobile Mini, Inc. | 20 | 20,800 | ||||||||
Prime Security Services Borrower LLC/Prime Finance, Inc. | 57 | 59,138 | ||||||||
|
| |||||||||
196,353 | ||||||||||
|
| |||||||||
Technology – 3.4% | ||||||||||
Alcatel-Lucent USA, Inc. | 29 | 31,030 | ||||||||
Avaya, Inc. | 63 | 40,162 | ||||||||
10.50%, 3/01/21(a) | 23 | 5,060 | ||||||||
Blackboard, Inc. | 10 | 8,000 | ||||||||
BMC Software Finance, Inc. | 45 | 33,300 | ||||||||
BMC Software, Inc. | 2 | 1,780 | ||||||||
CDW LLC/CDW Finance Corp. | 13 | 13,314 | ||||||||
5.50%, 12/01/24 | 49 | 51,572 | ||||||||
Ceridian HCM Holding, Inc. | 12 | 12,000 | ||||||||
Dell, Inc. | 35 | 36,575 | ||||||||
6.50%, 4/15/38 | 32 | 25,440 | ||||||||
Energizer Holdings, Inc. | 22 | 22,002 | ||||||||
Ensemble S Merger Sub, Inc. | 14 | 13,895 | ||||||||
First Data Corp. | 56 | 56,560 | ||||||||
7.00%, 12/01/23(a) | 24 | 24,660 | ||||||||
Infor Software Parent LLC/Infor Software Parent, Inc. | 20 | 16,850 | ||||||||
Infor US, Inc. | 38 | 35,074 |
24 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Micron Technology, Inc. | U.S.$ | 49 | $ | 39,690 | ||||||
Nokia Oyj | 15 | 16,013 | ||||||||
6.625%, 5/15/39 | 9 | 9,675 | ||||||||
Open Text Corp. | 7 | 7,175 | ||||||||
Sabre GLBL, Inc. | 4 | 4,050 | ||||||||
5.375%, 4/15/23(a) | 9 | 9,158 | ||||||||
Sanmina Corp. | 25 | 25,562 | ||||||||
Sensata Technologies BV | 50 | 50,375 | ||||||||
Western Digital Corp. | 23 | 22,368 | ||||||||
|
| |||||||||
611,340 | ||||||||||
|
| |||||||||
Transportation - Airlines – 0.3% | ||||||||||
Air Canada | 15 | 15,694 | ||||||||
8.75%, 4/01/20(a) | 25 | 26,937 | ||||||||
|
| |||||||||
42,631 | ||||||||||
|
| |||||||||
Transportation - Services – 0.8% | ||||||||||
Avis Budget Car Rental LLC/Avis Budget Finance, Inc. | 40 | 36,700 | ||||||||
Hertz Corp. (The) | 65 | 66,008 | ||||||||
XPO CNW, Inc. | 23 | 16,330 | ||||||||
7.25%, 1/15/18 | 10 | 10,150 | ||||||||
XPO Logistics, Inc. | 13 | 12,660 | ||||||||
|
| |||||||||
141,848 | ||||||||||
|
| |||||||||
10,204,815 | ||||||||||
|
| |||||||||
Financial Institutions – 9.0% | ||||||||||
Banking – 4.3% | ||||||||||
Ally Financial, Inc. | 85 | 86,594 | ||||||||
8.00%, 12/31/18-11/01/31 | 86 | 101,180 | ||||||||
Bank of America Corp. | 9 | 8,972 | ||||||||
Series X | 50 | 50,187 | ||||||||
Series Z | 11 | 11,577 |
AB HIGH YIELD PORTFOLIO • | 25 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Barclays Bank PLC | U.S.$ | 30 | $ | 34,431 | ||||||
BBVA International Preferred SAU | EUR | 50 | 54,874 | |||||||
Citigroup, Inc. | U.S.$ | 46 | 45,425 | |||||||
Credit Agricole SA | GBP | 50 | 77,879 | |||||||
HT1 Funding GmbH | EUR | 40 | 46,146 | |||||||
Lloyds Bank PLC | 50 | 59,118 | ||||||||
Lloyds Banking Group PLC | U.S.$ | 35 | 37,975 | |||||||
RBS Capital Trust C | EUR | 35 | 37,944 | |||||||
Royal Bank of Scotland Group PLC | U.S.$ | 100 | 93,450 | |||||||
Zions Bancorporation | 10 | 10,038 | ||||||||
5.80%, 6/15/23(m) | 4 | 3,820 | ||||||||
|
| |||||||||
759,610 | ||||||||||
|
| |||||||||
Finance – 3.5% | ||||||||||
Artsonig Pty Ltd. | 25 | 2,528 | ||||||||
CIT Group, Inc. | 20 | 20,100 | ||||||||
5.25%, 3/15/18 | 95 | 97,969 | ||||||||
5.50%, 2/15/19(a) | 30 | 31,425 | ||||||||
Creditcorp | 20 | 10,400 | ||||||||
Enova International, Inc. | 40 | 30,000 | ||||||||
International Lease Finance Corp. | 90 | 106,312 | ||||||||
8.75%, 3/15/17 | 20 | 21,060 | ||||||||
8.875%, 9/01/17 | 40 | 43,050 | ||||||||
Navient Corp. | 20 | 20,375 | ||||||||
4.875%, 6/17/19 | 50 | 47,900 | ||||||||
5.00%, 10/26/20 | 30 | 28,650 | ||||||||
5.875%, 3/25/21 | 2 | 1,890 | ||||||||
7.25%, 1/25/22 | 35 | 34,475 | ||||||||
8.00%, 3/25/20 | 80 | 84,000 |
26 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
TMX Finance LLC/TitleMax Finance Corp. | U.S.$ | 60 | $ | 46,800 | ||||||
|
| |||||||||
626,934 | ||||||||||
|
| |||||||||
Insurance – 0.9% | ||||||||||
American Equity Investment Life Holding Co. | 30 | 30,677 | ||||||||
Genworth Holdings, Inc. | 30 | 21,600 | ||||||||
HUB International Ltd. | 26 | 25,480 | ||||||||
Liberty Mutual Group, Inc. | 48 | 52,440 | ||||||||
Wayne Merger Sub LLC | 28 | 27,860 | ||||||||
|
| |||||||||
158,057 | ||||||||||
|
| |||||||||
Other Finance – 0.2% | ||||||||||
CNG Holdings, Inc. | 13 | 5,785 | ||||||||
iPayment, Inc. | 6 | 6,331 | ||||||||
Series AI | 9 | 9,563 | ||||||||
Speedy Cash Intermediate Holdings Corp. | 6 | 4,080 | ||||||||
Speedy Group Holdings Corp. | 30 | 12,000 | ||||||||
|
| |||||||||
37,759 | ||||||||||
|
| |||||||||
REITS – 0.1% | ||||||||||
FelCor Lodging LP | 15 | 15,488 | ||||||||
|
| |||||||||
1,597,848 | ||||||||||
|
| |||||||||
Utility – 2.8% | ||||||||||
Electric – 2.8% | ||||||||||
AES Corp./VA | 20 | 19,700 | ||||||||
7.375%, 7/01/21 | 74 | 84,915 | ||||||||
Calpine Corp. | 15 | 15,150 | ||||||||
5.75%, 1/15/25 | 52 | 52,520 | ||||||||
7.875%, 1/15/23(a) | 12 | 12,810 | ||||||||
DPL, Inc. | 20 | 20,550 | ||||||||
Dynegy, Inc. | 26 | 23,530 | ||||||||
6.75%, 11/01/19 | 12 | 12,102 | ||||||||
7.375%, 11/01/22 | 35 | 34,572 |
AB HIGH YIELD PORTFOLIO • | 27 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
FirstEnergy Corp. | U.S.$ | 20 | $ | 20,213 | ||||||
Series B | 29 | 30,340 | ||||||||
Series C | 20 | 24,306 | ||||||||
GenOn Energy, Inc. | 29 | 25,085 | ||||||||
NRG Energy, Inc. | 6 | 5,882 | ||||||||
7.875%, 5/15/21 | 40 | 41,584 | ||||||||
Series WI | 44 | 42,900 | ||||||||
Talen Energy Supply LLC | 23 | 17,940 | ||||||||
6.50%, 5/01/18-6/01/25 | 20 | 19,126 | ||||||||
|
| |||||||||
503,225 | ||||||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | 12,305,888 | |||||||||
|
| |||||||||
CORPORATES – INVESTMENT | ||||||||||
Financial Institutions – 3.2% | ||||||||||
Banking – 1.0% | ||||||||||
JPMorgan Chase & Co. | 35 | 34,037 | ||||||||
Series R | 12 | 12,271 | ||||||||
Series S | 7 | 7,683 | ||||||||
Series V | 8 | 7,701 | ||||||||
Nationwide Building Society | GBP | 40 | 58,329 | |||||||
Wells Fargo & Co. | U.S.$ | 55 | 56,375 | |||||||
|
| |||||||||
176,396 | ||||||||||
|
| |||||||||
Brokerage – 0.2% | ||||||||||
E*TRADE Financial Corp. | 15 | 15,923 | ||||||||
GFI Group, Inc. | 19 | 19,950 | ||||||||
|
| |||||||||
35,873 | ||||||||||
|
|
28 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Insurance – 1.2% | ||||||||||
MetLife, Inc. | U.S.$ | 41 | $ | 39,922 | ||||||
Mitsui Sumitomo Insurance Co., Ltd. | 50 | 59,658 | ||||||||
Nationwide Mutual Insurance Co. | 20 | 29,536 | ||||||||
Progressive Corp. (The) | 25 | 23,597 | ||||||||
Prudential Financial, Inc. | 40 | 41,691 | ||||||||
XLIT Ltd. | 12 | 11,734 | ||||||||
Series E | 9 | 6,300 | ||||||||
|
| |||||||||
212,438 | ||||||||||
|
| |||||||||
REITS – 0.8% | ||||||||||
DDR Corp. | 40 | 48,256 | ||||||||
EPR Properties | 55 | 63,809 | ||||||||
Senior Housing Properties Trust | 30 | 33,149 | ||||||||
|
| |||||||||
145,214 | ||||||||||
|
| |||||||||
569,921 | ||||||||||
|
| |||||||||
Industrial – 1.8% | ||||||||||
Basic – 0.1% | ||||||||||
Glencore Finance Canada Ltd. | 6 | 5,010 | ||||||||
Glencore Funding LLC | 3 | 2,904 | ||||||||
4.00%, 4/16/25(a) | 6 | 5,220 | ||||||||
4.625%, 4/29/24(a) | 6 | 5,415 | ||||||||
|
| |||||||||
18,549 | ||||||||||
|
| |||||||||
Capital Goods – 0.1% | ||||||||||
General Electric Co. | 14 | 14,542 | ||||||||
|
| |||||||||
Communications - Media – 0.1% | ||||||||||
CCO Safari II LLC | 20 | 21,561 | ||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 29 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Communications - Telecommunications – 0.1% | ||||||||||
Qwest Corp. | U.S.$ | 15 | $ | 16,203 | ||||||
|
| |||||||||
Consumer Non-Cyclical – 0.1% | ||||||||||
Forest Laboratories LLC | 10 | 11,032 | ||||||||
|
| |||||||||
Energy – 0.9% | ||||||||||
Devon Energy Corp. | 13 | 11,187 | ||||||||
5.60%, 7/15/41 | 7 | 6,170 | ||||||||
7.95%, 4/15/32 | 6 | 6,462 | ||||||||
Devon Financing Co. LLC | 5 | 5,353 | ||||||||
Enterprise Products Operating LLC | 14 | 11,660 | ||||||||
Kinder Morgan, Inc./DE | 19 | 17,702 | ||||||||
Marathon Oil Corp. | ||||||||||
2.70%, 6/01/20 | 6 | 5,590 | ||||||||
5.20%, 6/01/45 | 9 | 7,626 | ||||||||
6.60%, 10/01/37 | 12 | 11,496 | ||||||||
Regency Energy Partners LP/Regency Energy Finance Corp. | ||||||||||
4.50%, 11/01/23 | 5 | 4,663 | ||||||||
5.00%, 10/01/22 | 18 | 17,657 | ||||||||
5.50%, 4/15/23 | 12 | 11,344 | ||||||||
Williams Partners LP | ||||||||||
3.35%, 8/15/22 | 26 | 22,670 | ||||||||
5.10%, 9/15/45 | 25 | 20,398 | ||||||||
|
| |||||||||
159,978 | ||||||||||
|
| |||||||||
Technology – 0.4% | ||||||||||
Hewlett Packard Enterprise Co. | 25 | 24,925 | ||||||||
Micron Technology, Inc. | 12 | 12,420 | ||||||||
Seagate HDD Cayman | 17 | 13,083 | ||||||||
4.875%, 6/01/27(a) | 5 | 3,515 | ||||||||
Western Digital Corp. | 24 | 24,225 | ||||||||
|
| |||||||||
78,168 | ||||||||||
|
| |||||||||
320,033 | ||||||||||
|
|
30 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Utility – 0.1% |
| |||||||||
Electric – 0.1% |
| |||||||||
PPL Capital Funding, Inc. | U.S.$ | 20 | $ | 15,475 | ||||||
|
| |||||||||
Total Corporates – Investment Grade | 905,429 | |||||||||
|
| |||||||||
BANK LOANS – 2.7% | ||||||||||
Industrial – 2.7% | ||||||||||
Basic – 0.5% | ||||||||||
FMG Resources (August 2006) Pty LTD | 50 | 46,905 | ||||||||
Ineos US Finance LLC | 25 | 24,567 | ||||||||
Magnetation LLC | 40 | 16,006 | ||||||||
|
| |||||||||
87,478 | ||||||||||
|
| |||||||||
Consumer Cyclical - | ||||||||||
NCL Corporation Ltd. (aka Norwegian Cruise Lines) | 4 | 3,834 | ||||||||
Seaworld Parks & Entertainment, Inc. | 20 | 19,869 | ||||||||
|
| |||||||||
23,703 | ||||||||||
|
| |||||||||
Consumer Cyclical - Other – 0.3% | ||||||||||
Beazer Homes USA, Inc. | 10 | 9,900 | ||||||||
La Quinta Intermediate Holdings L.L.C. | 20 | 19,651 | ||||||||
Scientific Games International, Inc. | 20 | 19,616 | ||||||||
|
| |||||||||
49,167 | ||||||||||
|
| |||||||||
Consumer Cyclical - Retailers – 0.5% | ||||||||||
J.C. Penney Corporation, Inc. | 35 | 34,891 |
AB HIGH YIELD PORTFOLIO • | 31 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Petco Animal Supplies, Inc. | U.S.$ | 50 | $ | 50,152 | ||||||
|
| |||||||||
85,043 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 0.6% |
| |||||||||
Acadia Healthcare Company, Inc. | 7 | 6,951 | ||||||||
Air Medical Group Holdings, Inc. | 13 | 13,040 | ||||||||
DJO Finance LLC | 20 | 19,376 | ||||||||
Grifols Worldwide Operations Limited | 10 | 9,831 | ||||||||
Immucor, Inc. (fka IVD Acquisition Corporation) | 18 | 17,056 | ||||||||
Mallinckrodt International Finance S.A. | 25 | 24,521 | ||||||||
Ortho-Clinical Diagnostics Holdings Luxembourg S.À R.L. | 9 | 8,873 | ||||||||
Vizient, Inc. | 8 | 7,566 | ||||||||
|
| |||||||||
107,214 | ||||||||||
|
| |||||||||
Other Industrial – 0.2% | ||||||||||
Manitowoc Foodservice, Inc. | 2 | 1,979 | ||||||||
Sedgwick Claims Management Services, Inc. | 20 | 19,550 | ||||||||
Travelport Finance (Luxembourg) S.Ã r.l. | 23 | 23,155 | ||||||||
|
| |||||||||
44,684 | ||||||||||
|
| |||||||||
Technology – 0.5% | ||||||||||
Avago Technologies Cayman Holdings Ltd. | 20 | 20,004 |
32 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Company | Principal Amount (000) | U.S. $ Value | ||||||||
| ||||||||||
BMC Software Finance Inc. | U.S.$ | 32 | $ | 27,317 | ||||||
Solera, LLC (Solera Finance, Inc.) | 40 | 40,150 | ||||||||
|
| |||||||||
87,471 | ||||||||||
|
| |||||||||
Total Bank Loans | 484,760 | |||||||||
|
| |||||||||
GOVERNMENTS – TREASURIES – 2.5% | ||||||||||
United States – 2.5% | ||||||||||
U.S. Treasury Notes | 440 | 449,195 | ||||||||
|
| |||||||||
Shares | ||||||||||
COMMON STOCKS – 1.8% | ||||||||||
Consumer Discretionary – 1.0% | ||||||||||
Automobiles – 0.1% | ||||||||||
General Motors Co. | 760 | 24,168 | ||||||||
|
| |||||||||
Hotels, Restaurants & Leisure – 0.4% | ||||||||||
eDreams ODIGEO SA(f) | 5,140 | 14,036 | ||||||||
Eldorado Resorts, Inc.(f) | 1,332 | 17,463 | ||||||||
International Game Technology PLC | 1,000 | 17,340 | ||||||||
Las Vegas Sands Corp. | 450 | 20,317 | ||||||||
|
| |||||||||
69,156 | ||||||||||
|
| |||||||||
Household Durables – 0.2% | ||||||||||
Hovnanian Enterprises, Inc. – Class A(f) | 1,894 | 3,163 | ||||||||
MDC Holdings, Inc. | 637 | 15,677 | ||||||||
Taylor Morrison Home Corp. – Class A(f) | 800 | 11,520 | ||||||||
|
| |||||||||
30,360 | ||||||||||
|
| |||||||||
Internet & Catalog Retail – 0.1% | ||||||||||
Travelport Worldwide Ltd. | 1,430 | 19,949 | ||||||||
|
| |||||||||
Media – 0.2% | ||||||||||
Clear Channel Outdoor Holdings, Inc. – Class A | 2,000 | 10,220 | ||||||||
DISH Network Corp. – Class A(f) | 150 | 7,393 | ||||||||
Townsquare Media, Inc. – Class A(f) | 1,300 | 13,832 | ||||||||
|
| |||||||||
31,445 | ||||||||||
|
| |||||||||
175,078 | ||||||||||
|
| |||||||||
Energy – 0.2% | ||||||||||
Energy Equipment & Services – 0.0% | ||||||||||
Vantage Drilling International(f)(j) | 54 | 5,130 | ||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 33 |
Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
Oil, Gas & Consumable Fuels – 0.2% | ||||||||||
Chesapeake Energy Corp. | 1,459 | $ | 10,023 | |||||||
EP Energy Corp. – Class A(f) | 2,616 | 12,844 | ||||||||
Triangle Petroleum Corp.(f) | 1,385 | 622 | ||||||||
|
| |||||||||
23,489 | ||||||||||
|
| |||||||||
28,619 | ||||||||||
|
| |||||||||
Financials – 0.0% | ||||||||||
Diversified Financial Services – 0.0% | ||||||||||
iPayment, Inc.(d)(f)(j) | 579 | 1,911 | ||||||||
|
| |||||||||
Health Care – 0.1% | ||||||||||
Health Care Providers & Services – 0.1% | ||||||||||
Community Health Systems, Inc.(f) | 540 | 10,303 | ||||||||
LifePoint Health, Inc.(f) | 260 | 17,566 | ||||||||
|
| |||||||||
27,869 | ||||||||||
|
| |||||||||
Industrials – 0.2% | ||||||||||
Building Products – 0.1% | ||||||||||
Nortek, Inc.(f) | 359 | 16,930 | ||||||||
|
| |||||||||
Machinery – 0.1% | ||||||||||
Navistar International Corp.(f) | 1,377 | 20,779 | ||||||||
|
| |||||||||
Trading Companies & Distributors – 0.0% | ||||||||||
Emeco Holdings Ltd.(f) | 55,000 | 1,255 | ||||||||
|
| |||||||||
38,964 | ||||||||||
|
| |||||||||
Information Technology – 0.1% | ||||||||||
Technology Hardware, Storage & | ||||||||||
EMC Corp./MA | 710 | 18,538 | ||||||||
|
| |||||||||
Materials – 0.1% | ||||||||||
Chemicals – 0.1% | ||||||||||
LyondellBasell Industries NV – Class A | 110 | 9,094 | ||||||||
|
| |||||||||
Metals & Mining – 0.0% | ||||||||||
ArcelorMittal (New York) | 1,524 | 8,580 | ||||||||
|
| |||||||||
17,674 | ||||||||||
|
| |||||||||
Utilities – 0.1% | ||||||||||
Independent Power and Renewable Electricity Producers – 0.1% | ||||||||||
Dynegy, Inc.(f) | 768 | 13,540 | ||||||||
|
| |||||||||
Total Common Stocks | 322,193 | |||||||||
|
|
34 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Company | Principal Amount (000) | U.S. $ Value | ||||||||
| ||||||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES – 1.2% | ||||||||||
Non-Agency Fixed Rate CMBS – 1.2% | ||||||||||
Citigroup Commercial Mortgage Trust | U.S.$ | 50 | $ | 41,824 | ||||||
GS Mortgage Securities Trust | 100 | 85,170 | ||||||||
JPMBB Commercial Mortgage Securities Trust | 100 | 84,774 | ||||||||
|
| |||||||||
Total Commercial Mortgage-Backed Securities | 211,768 | |||||||||
|
| |||||||||
COLLATERALIZED MORTGAGE OBLIGATIONS – 1.0% | ||||||||||
Risk Share Floating Rate – 0.9% | ||||||||||
Federal Home Loan Mortgage Corp. Structured Agency Credit Risk Debt Notes | 50 | 58,103 | ||||||||
Series 2013-DN2, Class M2 | 50 | 50,779 | ||||||||
Federal National Mortgage Association Connecticut Avenue Securities | 50 | 53,229 | ||||||||
|
| |||||||||
162,111 | ||||||||||
|
| |||||||||
Non-Agency Fixed Rate – 0.1% | ||||||||||
Alternative Loan Trust | 27 | 22,431 | ||||||||
|
| |||||||||
Total Collateralized Mortgage Obligations | 184,542 | |||||||||
|
| |||||||||
Shares | ||||||||||
PREFERRED STOCKS – 0.5% | ||||||||||
Financial Institutions – 0.4% | ||||||||||
Banking – 0.4% | ||||||||||
GMAC Capital Trust I | 925 | 23,190 |
AB HIGH YIELD PORTFOLIO • | 35 |
Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
US Bancorp | 2,000 | $ | 59,120 | |||||||
|
| |||||||||
82,310 | ||||||||||
|
| |||||||||
Industrial – 0.1% | ||||||||||
Consumer Cyclical - Other – 0.0% | ||||||||||
Hovnanian Enterprises, Inc. | 325 | 871 | ||||||||
|
| |||||||||
Energy – 0.1% | ||||||||||
Halcon Resources Corp. | 35 | 1,201 | ||||||||
Sanchez Energy Corp. | 550 | 11,467 | ||||||||
SandRidge Energy, Inc. | 200 | 540 | ||||||||
|
| |||||||||
13,208 | ||||||||||
|
| |||||||||
14,079 | ||||||||||
|
| |||||||||
Total Preferred Stocks | 96,389 | |||||||||
|
| |||||||||
INVESTMENT COMPANIES – 0.3% | ||||||||||
Funds and Investment Trusts – 0.3% | ||||||||||
iShares Russell 2000 ETF | 434 | 48,764 | ||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
GOVERNMENTS – SOVEREIGN | ||||||||||
Brazil – 0.2% | ||||||||||
Petrobras Global Finance BV | U.S.$ | 45 | 35,199 | |||||||
|
| |||||||||
Colombia – 0.1% | ||||||||||
Ecopetrol SA | 10 | 8,175 | ||||||||
|
| |||||||||
Total Governments – Sovereign Agencies | 43,374 | |||||||||
|
| |||||||||
EMERGING MARKETS – | ||||||||||
Brazil – 0.1% | ||||||||||
Brazil Notas do Tesouro Nacional | BRL | 30 | 24,682 | |||||||
|
|
36 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
Company | Contracts | U.S. $ Value | ||||||||
| ||||||||||
OPTIONS PURCHASED – PUTS – 0.1% | ||||||||||
Options on Funds and Investment | ||||||||||
Boardwalk Real Estate Investment Trust | 1,300 | $ | 250 | |||||||
SPDR S&P 500 ETF Trust | 58 | 1,392 | ||||||||
SPDR S&P 500 ETF Trust | 64 | 4,704 | ||||||||
SPDR S&P 500 ETF Trust | 21 | 3,518 | ||||||||
|
| |||||||||
Total Options Purchased – Puts | 9,864 | |||||||||
|
| |||||||||
OPTIONS PURCHASED – CALLS – 0.1% | ||||||||||
Options on Funds and Investment Trusts – 0.1% | ||||||||||
SPDR S&P Oil & Gas Exploration & Production ETF | 59 | 9,499 | ||||||||
|
| |||||||||
Options on Equities – 0.0% | ||||||||||
Valeant Pharmaceuticals International, Inc. | 12 | 174 | ||||||||
|
| |||||||||
Total Options Purchased – Calls | 9,673 | |||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
EMERGING MARKETS – SOVEREIGNS – 0.1% | ||||||||||
Venezuela – 0.1% | ||||||||||
Venezuela Government International Bond | U.S.$ | 20 | 8,525 | |||||||
|
| |||||||||
Shares | ||||||||||
WARRANTS – 0.0% | ||||||||||
iPayment Holdings, Inc., | 11,721 | 6,212 | ||||||||
|
|
AB HIGH YIELD PORTFOLIO • | 37 |
Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
SHORT-TERM INVESTMENTS – 12.2% | ||||||||||
Investment Companies – 11.3% | ||||||||||
AB Fixed-Income Shares, Inc. – | 2,015,648 | $ | 2,015,648 | |||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
Time Deposits – 0.9% | ||||||||||
BBH Grand Cayman | EUR | – 0 | –^ | 157 | ||||||
(0.37)%, 5/02/16 | JPY | – 0 | –^ | – 0 | –† | |||||
0.05%, 5/02/16 | CAD | – 0 | –^ | 1 | ||||||
0.08%, 5/03/16 | GBP | – 0 | –^ | 1 | ||||||
0.955%, 5/02/16 | AUD | – 0 | –^ | – 0 | –† | |||||
6.75%, 5/03/16 | ZAR | 2 | 113 | |||||||
Sumitomo, Tokyo | U.S.$ | 150 | 150,474 | |||||||
|
| |||||||||
Total Time Deposits | 150,746 | |||||||||
|
| |||||||||
Total Short-Term Investments | 2,166,394 | |||||||||
|
| |||||||||
Total Investments – 97.2% | 17,277,652 | |||||||||
Other assets less liabilities – 2.8% | 504,385 | |||||||||
|
| |||||||||
Net Assets – 100.0% | $ | 17,782,037 | ||||||||
|
|
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at April 30, 2016 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Purchased Contracts |
| |||||||||||||||||||
Euro STOXX 50 Index Futures | 3 | June 2016 | $ | 100,890 | $ | 102,427 | $ | 1,537 | ||||||||||||
U.S. T-Note 10 Yr (CBT) Futures | 6 | June 2016 | 782,484 | 780,375 | (2,109 | ) | ||||||||||||||
Sold Contracts | ||||||||||||||||||||
Russell 2000 Mini Futures | 1 | June 2016 | 106,240 | 112,760 | (6,520 | ) | ||||||||||||||
S&P 500 E-Mini Futures | 4 | June 2016 | 402,412 | 411,820 | (9,408 | ) | ||||||||||||||
|
| |||||||||||||||||||
$ | (16,500 | ) | ||||||||||||||||||
|
|
38 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note D)
Counterparty | Contracts to Deliver (000) | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||
Brown Brothers Harriman & Co. | GBP | 156 | USD | 222 | 5/12/16 | $ | (6,880 | ) | ||||||||||||
Brown Brothers Harriman & Co. | USD | 6 | GBP | 4 | 5/12/16 | 200 | ||||||||||||||
Brown Brothers Harriman & Co. | EUR | 573 | USD | 626 | 5/13/16 | (31,062 | ) | |||||||||||||
Brown Brothers Harriman & Co. | USD | 313 | EUR | 278 | 5/13/16 | 5,251 | ||||||||||||||
Brown Brothers Harriman & Co. | JPY | 5,363 | USD | 48 | 5/20/16 | (2,349 | ) | |||||||||||||
Brown Brothers Harriman & Co. | USD | 48 | JPY | 5,359 | 5/20/16 | 2,237 | ||||||||||||||
Brown Brothers Harriman & Co. | USD | 83 | NOK | 694 | 6/15/16 | 2,698 | ||||||||||||||
Brown Brothers Harriman & Co. | USD | 42 | SEK | 341 | 6/15/16 | 449 | ||||||||||||||
Brown Brothers Harriman & Co. | USD | 84 | MXN | 1,482 | 6/17/16 | 1,357 | ||||||||||||||
Brown Brothers Harriman & Co. | CAD | 111 | USD | 85 | 6/23/16 | (3,709 | ) | |||||||||||||
Brown Brothers Harriman & Co. | SGD | 114 | USD | 85 | 7/15/16 | (107 | ) | |||||||||||||
Goldman Sachs Bank USA | TWD | 3,042 | USD | 93 | 5/20/16 | (1,052 | ) | |||||||||||||
JPMorgan Chase Bank | BRL | 30 | USD | 9 | 5/03/16 | (244 | ) | |||||||||||||
JPMorgan Chase Bank | USD | 9 | BRL | 30 | 5/03/16 | 30 | ||||||||||||||
JPMorgan Chase Bank | USD | 9 | BRL | 30 | 6/02/16 | 229 | ||||||||||||||
Royal Bank of Scotland PLC | USD | 42 | PEN | 142 | 5/13/16 | 1,011 | ||||||||||||||
Royal Bank of Scotland PLC | USD | 45 | RUB | 3,096 | 6/16/16 | 2,682 | ||||||||||||||
Royal Bank of Scotland PLC | CNY | 529 | USD | 81 | 7/15/16 | (165 | ) | |||||||||||||
Standard Chartered Bank | BRL | 30 | USD | 9 | 5/03/16 | (29 | ) | |||||||||||||
Standard Chartered Bank | USD | 8 | BRL | 30 | 5/03/16 | 477 | ||||||||||||||
Standard Chartered Bank | KRW | 98,024 | USD | 85 | 7/15/16 | (366 | ) | |||||||||||||
|
| |||||||||||||||||||
$ | (29,342 | ) | ||||||||||||||||||
|
|
CALL OPTIONS WRITTEN (see Note D)
Description | Contracts | Exercise Price | Expiration Month | Premiums Received | U.S. $ Value | |||||||||||||||
SPDR S&P Oil & Gas Exploration & Production ETF(o) | 59 | $ | 41.00 | June 2016 | $ | 352 | $ | (2,832 | ) | |||||||||||
Valeant Pharmaceuticals International, Inc.(o) | 12 | 85.00 | June 2016 | 403 | (84 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||
$ | 755 | $ | (2,916 | ) | ||||||||||||||||
|
|
|
|
PUT OPTIONS WRITTEN (see Note D)
Description | Contracts | Exercise Price | Expiration Month | Premiums Received | U.S. $ Value | |||||||||||||||
SPDR S&P 500 ETF Trust(o) | 58 | $ | 185.00 | May 2016 | $ | 1,390 | $ | (754 | ) | |||||||||||
SPDR S&P 500 ETF Trust(o) | 64 | 188.00 | May 2016 | 1,537 | (1,152 | ) | ||||||||||||||
SPDR S&P 500 ETF Trust(o) | 21 | 185.00 | June 2016 | 1,217 | (1,512 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||
$ | 4,144 | $ | (3,418 | ) | ||||||||||||||||
|
|
|
|
CREDIT DEFAULT SWAPTIONS WRITTEN (see Note D)
Description | Counterparty | Buy/Sell Protection | Strike Rate | Expiration Date | Notional Amount (000) | Premiums Received | Market Value | |||||||||||||||||||||
Call – CDX-NAHY | | Citibank, NA | | Sell | 104.00 | % | 6/15/16 | $ | 445 | $ | 1,624 | $ | (1,167 | ) |
AB HIGH YIELD PORTFOLIO • | 39 |
Portfolio of Investments
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note D)
Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Buy Contracts |
| |||||||||||||||||||
Citigroup Global Markets, Inc./(INTRCONX) | ||||||||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | (5.00 | )% | 4.29 | % | $ | 170 | $ | (5,791 | ) | $ | (3,100 | ) | ||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | (5.00 | ) | 4.29 | 170 | (5,791 | ) | (3,694 | ) | ||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | (5.00 | ) | 4.29 | 560 | (19,075 | ) | (21,813 | ) | ||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | (5.00 | ) | 4.35 | 250 | (8,555 | ) | (5 | ) | ||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | (5.00 | ) | 4.35 | 48 | (1,643 | ) | (954 | ) | ||||||||||||
iTraxx Europe Crossover Series 23, 5 Year Index, 6/20/20* | (5.00 | ) | 3.09 | EUR | 156 | (13,841 | ) | 744 | ||||||||||||
Norske Skogindustrier ASA, 7.000%, 6/26/17, 6/20/20* | (5.00 | ) | 40.73 | 2 | 1,761 | 1,749 | ||||||||||||||
Sale Contracts | ||||||||||||||||||||
Citigroup Global Markets, Inc./(INTRCONX) | ||||||||||||||||||||
CDX-NAHY Series 24, 5 Year Index, 6/20/20* | 5.00 | 3.63 | $ | 344 | 19,327 | 5,210 | ||||||||||||||
CDX-NAHY Series 24, 5 Year Index, 6/20/20* | 5.00 | 3.63 | 143 | 8,020 | 2,148 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 48 | 1,635 | 698 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 162 | 5,518 | 5,791 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 112 | 3,815 | 4,243 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 112 | 3,815 | 3,964 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 112 | 3,815 | 1,166 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 90 | 3,066 | 3,483 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 164 | 5,587 | 7,151 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 60 | 2,044 | 1,714 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 13 | 442 | 317 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 17 | 579 | 427 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 10 | 341 | 242 | |||||||||||||||
|
|
|
| |||||||||||||||||
$ | 5,069 | $ | 9,481 | |||||||||||||||||
|
|
|
|
* | Termination date |
40 | • AB HIGH YIELD 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) | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | $ | 300 | 1/15/26 | 1.978% | 3 Month LIBOR | $ | (9,881 | ) | ||||||||
Citigroup Global Markets, Inc./(CME Group) | 170 | 2/16/26 | 1.625% | 3 Month LIBOR | 625 | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | 150 | 3/31/26 | 1.693% | 3 Month LIBOR | (113 | ) | ||||||||||
Citigroup Global Markets, Inc./(CME Group) | 100 | 5/03/26 | 1.770% | 3 Month LIBOR | (637 | ) | ||||||||||
|
| |||||||||||||||
$ | (10,006 | ) | ||||||||||||||
|
|
CREDIT DEFAULT SWAPS (see Note D)
Swap Counterparty & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Upfront Premiums Paid (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
Buy Contracts | ||||||||||||||||||||||||||
Credit Suisse International | ||||||||||||||||||||||||||
Western Union Co., | (1.00 | )% | 0.26 | % | $ | 60 | $ | (654 | ) | $ | (370 | ) | $ | (284 | ) | |||||||||||
Goldman Sachs International | ||||||||||||||||||||||||||
British Telecommunications PLC, | (1.00 | ) | 0.70 | EUR | 170 | (2,645 | ) | (3,802 | ) | 1,157 | ||||||||||||||||
Sale Contracts | ||||||||||||||||||||||||||
Barclays Bank PLC | ||||||||||||||||||||||||||
Altice Finco S.A., | 5.00 | 4.00 | 40 | 2,089 | 1,661 | 428 | ||||||||||||||||||||
Unitymedia GmbH, | 5.00 | 2.13 | 70 | 10,602 | 10,672 | (70 | ) | |||||||||||||||||||
Citibank, NA | ||||||||||||||||||||||||||
Advanced Micro Devices, Inc., | 5.00 | 9.12 | $ | 20 | (2,645 | ) | (4,281 | ) | 1,636 | |||||||||||||||||
Credit Suisse International | ||||||||||||||||||||||||||
Altice Finco S.A., | 5.00 | 4.00 | EUR | 100 | 5,221 | 4,123 | 1,098 | |||||||||||||||||||
Numericable-SFR Sas, | 5.00 | 3.43 | 80 | 6,499 | 6,472 | 27 |
AB HIGH YIELD PORTFOLIO • | 41 |
Portfolio of Investments
Swap Counterparty & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Upfront Premiums Paid (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||||
Western Union Co., | 1.00 | % | 0.81 | % | $ | 40 | $ | 257 | $ | (378 | ) | $ | 635 | |||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||||||||
iHeartCommunications, Inc., | 5.00 | 50.05 | 15 | (11,172 | ) | (11,498 | ) | 326 | ||||||||||||||||||||
K. Hovnanian Enterprises, Inc., | 5.00 | 14.80 | 10 | (2,998 | ) | (2,355 | ) | (643 | ) | |||||||||||||||||||
Wind Acquisition Finance S.A., | 5.00 | 5.15 | EU | R | 30 | (63 | ) | 2,991 | (3,054 | ) | ||||||||||||||||||
JPMorgan Chase | ||||||||||||||||||||||||||||
Virgin Media Finance PLC, | 5.00 | 2.17 | 60 | 6,734 | 5,078 | 1,656 | ||||||||||||||||||||||
Wind Acquisition Finance S.A., | 5.00 | 4.25 | 70 | 2,182 | 4,275 | (2,093 | ) | |||||||||||||||||||||
Morgan Stanley & Co. International PLC | ||||||||||||||||||||||||||||
AK Steel Corp., | 5.00 | 8.77 | $ | 30 | (2,850 | ) | 246 | (3,096 | ) | |||||||||||||||||||
MGM Resorts International, | 5.00 | 1.33 | 40 | 5,013 | 2,925 | 2,088 | ||||||||||||||||||||||
U.S. Steel Corp., | 5.00 | 5.62 | 20 | (356 | ) | 770 | (1,126 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
$ | 15,214 | $ | 16,529 | $ | (1,315 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
* | Termination date |
42 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
TOTAL RETURN SWAPS (see Note D)
Counterparty & Referenced Obligation | # of Shares or Units | Rate Paid/ Received | Notional | Maturity Date | Unrealized Appreciation/ (Depreciation) | |||||||||||||||||||
Receive Total Return on Reference Obligation |
| |||||||||||||||||||||||
Citibank, NA | ||||||||||||||||||||||||
iBoxx USD Liquid High Yield Index | 2,449 | LIBOR | USD | 560 | 6/20/16 | $ | 13,221 | |||||||||||||||||
iBoxx USD Liquid High Yield Index | 799 | LIBOR | 181 | 6/20/16 | 6,013 | |||||||||||||||||||
iBoxx USD Liquid High Yield Index | 702 | LIBOR | 159 | 6/20/16 | 5,192 | |||||||||||||||||||
iBoxx USD Liquid High Yield Index | 199 | LIBOR | 45 | 6/20/16 | 1,693 | |||||||||||||||||||
iBoxx USD Liquid High Yield Index | 195 | LIBOR | 44 | 6/20/16 | 1,564 | |||||||||||||||||||
iBoxx USD Liquid High Yield Index | 283 | LIBOR | 65 | 6/20/16 | 1,339 | |||||||||||||||||||
iBoxx USD Liquid High Yield Index | 1,543 | LIBOR | 360 | 6/20/16 | 991 | |||||||||||||||||||
iBoxx USD Liquid High Yield Index | 98 | LIBOR | 22 | 6/20/16 | 833 | |||||||||||||||||||
iBoxx USD Liquid High Yield Index | 97 | LIBOR | 22 | 6/20/16 | 815 | |||||||||||||||||||
iBoxx USD Liquid High Yield Index | 118 | LIBOR | 27 | 6/20/16 | 562 | |||||||||||||||||||
iBoxx USD Liquid High Yield Index | 74 | LIBOR | 17 | 6/20/16 | 396 | |||||||||||||||||||
JPMorgan Chase Bank, NA iBoxx USD Liquid High Yield Index | 122 | LIBOR | 28 | 6/20/16 | 583 | |||||||||||||||||||
|
| |||||||||||||||||||||||
$ | 33,202 | |||||||||||||||||||||||
|
|
^ | 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 April 30, 2016, the aggregate market value of these securities amounted to $4,223,782 or 23.8% 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 0.01% of net assets as of April 30, 2016, 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 | $ | 1,750 | 0.01 | % |
(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 | % |
(f) | Non-income producing security. |
(g) | Convertible security. |
(h) | Variable rate coupon, rate shown as of April 30, 2016. |
(i) | 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 April 30, 2016. |
(j) | Illiquid security. |
(k) | Floating Rate Security. Stated interest rate was in effect at April 30, 2016. |
(l) | Coupon rate adjusts periodically based upon a predetermined schedule. Stated interest rate in effect at April 30, 2016. |
AB HIGH YIELD PORTFOLIO • | 43 |
Portfolio of Investments
(m) | Securities are perpetual and, thus, do not have a predetermined maturity date. The date shown, if applicable, reflects the next call date. |
(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
CNY – Chinese Yuan Renminbi
EUR – Euro
GBP – Great British Pound
JPY – Japanese Yen
KRW – South Korean Won
MXN – Mexican Peso
NOK – Norwegian Krone
PEN – Peruvian Sol
RUB – Russian Ruble
SEK – Swedish Krona
SGD – Singapore Dollar
TWD – New Taiwan Dollar
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
CME – Chicago Mercantile Exchange
ETF – Exchange Traded Fund
EURIBOR – Euro Interbank Offered Rate
INTRCONX – Inter-Continental Exchange
LIBOR – London Interbank Offered Rates
REIT – Real Estate Investment Trust
SPDR – Standard & Poor’s Depository Receipt
See notes to financial statements.
44 | • AB HIGH YIELD PORTFOLIO |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
April 30, 2016 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $16,079,040) | $ | 15,262,004 | ||
Affiliated issuers (cost $2,015,648) | 2,015,648 | |||
Foreign currencies, at value (cost $882) | 915 | |||
Dividends and interest receivable | 258,264 | |||
Cash collateral due from broker | 277,025 | |||
Receivable for investment securities sold | 226,072 | |||
Upfront premiums paid on credit default swaps | 39,213 | |||
Unrealized appreciation of total return swaps | 33,202 | |||
Receivable from Adviser | 26,817 | |||
Unrealized appreciation on forward currency exchange contracts | 16,621 | |||
Unrealized appreciation on credit default swaps | 9,051 | |||
Receivable for capital stock sold | 5,700 | |||
Receivable for variation margin on exchange-traded derivatives | 2,099 | |||
|
| |||
Total assets | 18,172,631 | |||
|
| |||
Liabilities | ||||
Payable for investment securities purchased | 132,200 | |||
Dividends payable | 59,987 | |||
Audit and tax fee payable | 53,517 | |||
Unrealized depreciation on forward currency exchange contracts | 45,963 | |||
Custody fee payable | 36,613 | |||
Upfront premiums received on credit default swaps | 22,684 | |||
Unrealized depreciation on credit default swaps | 10,366 | |||
Options written, at value (premiums received $4,899) | 6,334 | |||
Transfer Agent fee payable | 2,662 | |||
Swaptions written, at value (premiums received of $1,624) | 1,167 | |||
Payable for variation margin on exchange-traded derivatives | 1,046 | |||
Due to Custodian | 353 | |||
Distribution fee payable | 277 | |||
Payable for capital stock redeemed | 75 | |||
Accrued expenses and other liabilities | 17,350 | |||
|
| |||
Total liabilities | 390,594 | |||
|
| |||
Net Assets | $ | 17,782,037 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 1,953 | ||
Additional paid-in capital | 19,674,601 | |||
Distributions in excess of net investment income | (68,286 | ) | ||
Accumulated net realized loss on investment and foreign currency transactions | (994,313 | ) | ||
Net unrealized depreciation on investments and foreign currency denominated assets and liabilities | (831,918 | ) | ||
|
| |||
$ | 17,782,037 | |||
|
|
See notes to financial statements.
AB HIGH YIELD PORTFOLIO • | 45 |
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 | $ | 743,620 | 81,708 | $ | 9.10 | * | ||||||
| ||||||||||||
C | $ | 175,535 | 19,285 | $ | 9.10 | |||||||
| ||||||||||||
Advisor | $ | 535,716 | 58,836 | $ | 9.11 | |||||||
| ||||||||||||
R | $ | 9,106 | 1,000.200 | $ | 9.10 | |||||||
| ||||||||||||
K | $ | 9,106 | 1,000.200 | $ | 9.10 | |||||||
| ||||||||||||
I | $ | 16,299,848 | 1,790,331 | $ | 9.10 | |||||||
| ||||||||||||
Z | $ | 9,106 | 1,000.200 | $ | 9.10 | |||||||
|
* | The maximum offering price per share for Class A shares was $9.50, which reflects a sales charge of 4.25%. |
See notes to financial statements.
46 | • AB HIGH YIELD PORTFOLIO |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Six Months Ended April 30, 2016 (unaudited)
Investment Income | ||||||||
Interest (net of foreign taxes withheld of $59) | $ | 496,933 | ||||||
Dividends | ||||||||
Unaffiliated issuers (net of foreign taxes withheld of $26) | 15,896 | |||||||
Affiliated issuers | 2,255 | |||||||
Other income | 65 | $ | 515,149 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 52,872 | |||||||
Distribution fee—Class A | 1,813 | |||||||
Distribution fee—Class C | 709 | |||||||
Distribution fee—Class R | 22 | |||||||
Distribution fee—Class K | 11 | |||||||
Transfer agency—Class A | 5,765 | |||||||
Transfer agency—Class C | 892 | |||||||
Transfer agency—Advisor Class | 2,188 | |||||||
Transfer agency—Class R | 3 | |||||||
Transfer agency—Class K | 2 | |||||||
Transfer agency—Class I | 1,565 | |||||||
Transfer agency—Class Z | 1 | |||||||
Audit and tax | 56,229 | |||||||
Custodian | 49,054 | |||||||
Registration fees | 46,743 | |||||||
Administrative | 27,557 | |||||||
Legal | 19,204 | |||||||
Directors’ fees | 10,485 | |||||||
Printing | 8,707 | |||||||
Miscellaneous | 13,362 | |||||||
|
| |||||||
Total expenses | 297,184 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (224,118 | ) | ||||||
|
| |||||||
Net expenses | 73,066 | |||||||
|
| |||||||
Net investment income | 442,083 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (494,657 | ) | ||||||
Swaps | (67,672 | ) | ||||||
Futures | 34,488 | |||||||
Options written | 951 | |||||||
Swaptions written | 3,036 | |||||||
Foreign currency transactions | (3,604 | ) | ||||||
Net change in unrealized appreciation/depreciation on: | ||||||||
Investments | 317,663 | |||||||
Swaps | (29,408 | ) | ||||||
Futures | (7,550 | ) | ||||||
Options written | (4,882 | ) | ||||||
Swaptions written | 139 | |||||||
Foreign currency denominated assets and liabilities | (24,598 | ) | ||||||
|
| |||||||
Net loss on investment and foreign currency transactions | (276,094 | ) | ||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 165,989 | ||||||
|
|
See notes to financial statements.
AB HIGH YIELD PORTFOLIO • | 47 |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 442,083 | $ | 788,959 | ||||
Net realized loss on investment and foreign currency transactions | (527,458 | ) | (341,795 | ) | ||||
Net change in unrealized appreciation/depreciation on investments and foreign currency denominated assets and liabilities | 251,364 | (815,603 | ) | |||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | 165,989 | (368,439 | ) | |||||
Dividends and Distributions to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (59,459 | ) | (21,264 | ) | ||||
Class C | (4,091 | ) | (3,905 | ) | ||||
Advisor Class | (12,085 | ) | (7,335 | ) | ||||
Class R | (289 | ) | (422 | ) | ||||
Class K | (299 | ) | (446 | ) | ||||
Class I | (556,156 | ) | (844,746 | ) | ||||
Class Z | (310 | ) | (470 | ) | ||||
Net realized gain on investment and foreign currency transactions | ||||||||
Class A | – 0 | – | (52 | ) | ||||
Class C | – 0 | – | (122 | ) | ||||
Advisor Class | – 0 | – | (191 | ) | ||||
Class R | – 0 | – | (14 | ) | ||||
Class K | – 0 | – | (14 | ) | ||||
Class I | – 0 | – | (24,706 | ) | ||||
Class Z | – 0 | – | (14 | ) | ||||
Capital Stock Transactions | ||||||||
Net increase (decrease) | (1,434,635 | ) | 992,821 | |||||
|
|
|
| |||||
Total decrease | (1,901,335 | ) | (279,319 | ) | ||||
Net Assets | ||||||||
Beginning of period | 19,683,372 | 19,962,691 | ||||||
|
|
|
| |||||
End of period (including distributions in excess of net investment income of $(68,286) and undistributed net investment income of $122,320, respectively) | $ | 17,782,037 | $ | 19,683,372 | ||||
|
|
|
|
See notes to financial statements.
48 | • AB HIGH YIELD PORTFOLIO |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
April 30, 2016 (unaudited)
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 10 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, AB High Yield Portfolio and AB Income Fund. 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 April 30, 2016, 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
AB HIGH YIELD PORTFOLIO • | 49 |
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 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
50 | • AB HIGH YIELD PORTFOLIO |
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 Fund 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.
AB HIGH YIELD PORTFOLIO • | 51 |
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
52 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
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.
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. Certain 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 April 30, 2016:
Investments in Securities | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Corporates – Non-Investment Grade | $ | – 0 | – | $ | 12,238,385 | $ | 67,503 | ^ | $ | 12,305,888 | ||||||
Corporates – Investment Grade | – 0 | – | 905,429 | – 0 | – | 905,429 | ||||||||||
Bank Loans | – 0 | – | 456,875 | 27,885 | 484,760 | |||||||||||
Governments – Treasuries | – 0 | – | 449,195 | – 0 | – | 449,195 | ||||||||||
Common Stocks | 301,116 | 19,166 | 1,911 | 322,193 | ||||||||||||
Commercial Mortgage-Backed Securities | – 0 | – | – 0 | – | 211,768 | 211,768 | ||||||||||
Collateralized Mortgage Obligations | – 0 | – | 184,542 | – 0 | – | 184,542 | ||||||||||
Preferred Stocks | 83,181 | 13,208 | – 0 | – | 96,389 | |||||||||||
Investment Companies | 48,764 | – 0 | – | – 0 | – | 48,764 | ||||||||||
Governments – Sovereign Agencies | – 0 | – | 43,374 | – 0 | – | 43,374 | ||||||||||
Emerging Markets – Treasuries | – 0 | – | 24,682 | – 0 | – | 24,682 | ||||||||||
Options Purchased – Puts | – 0 | – | 9,864 | – 0 | – | 9,864 | ||||||||||
Options Purchased – Calls | – 0 | – | 9,673 | – 0 | – | 9,673 | ||||||||||
Emerging Markets – Sovereigns | – 0 | – | 8,525 | – 0 | – | 8,525 | ||||||||||
Warrants | – 0 | – | – 0 | – | 6,212 | 6,212 | ||||||||||
Short-Term Investments: | ||||||||||||||||
Investment Companies | 2,015,648 | – 0 | – | – 0 | – | 2,015,648 | ||||||||||
Time Deposits | – 0 | – | 150,746 | – 0 | – | 150,746 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 2,448,709 | 14,513,664 | 315,279 | 17,277,652 | ||||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets | ||||||||||||||||
Futures | – 0 | – | 1,537 | – 0 | – | 1,537 | † | |||||||||
Forward Currency Exchange Contracts | – 0 | – | 16,621 | – 0 | – | 16,621 | ||||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | 39,047 | – 0 | – | 39,047 | † | |||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | 625 | – 0 | – | 625 | † | |||||||||
Credit Default Swaps | – 0 | – | 9,051 | – 0 | – | 9,051 | ||||||||||
Total Return Swaps | – 0 | – | 33,202 | – 0 | – | 33,202 |
AB HIGH YIELD PORTFOLIO • | 53 |
Notes to Financial Statements
Investments in Securities | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities | ||||||||||||||||
Futures | $ | (18,037 | ) | $ | – 0 | – | $ | – 0 | – | $ | (18,037 | )† | ||||
Forward Currency Exchange Contracts | – 0 | – | (45,963 | ) | – 0 | – | (45,963 | ) | ||||||||
Call Options Written | – 0 | – | (2,916 | ) | – 0 | – | (2,916 | ) | ||||||||
Put Options Written | – 0 | – | (3,418 | ) | – 0 | – | (3,418 | ) | ||||||||
Credit Default Swaptions Written | – 0 | – | (1,167 | ) | – 0 | – | (1,167 | ) | ||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | (29,566 | ) | – 0 | – | (29,566 | )† | ||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | (10,631 | ) | – 0 | – | (10,631 | )† | ||||||||
Credit Default Swaps | – 0 | – | (10,366 | ) | – 0 | – | (10,366 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total** | $ | 2,430,672 | $ | 14,509,720 | $ | 315,279 | $ | 17,255,671 | ||||||||
|
|
|
|
|
|
|
|
^ | 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 statements of assets and liabilities. This amount reflects cumulative appreciation/depreciation on exchange-traded derivatives as reported in the portfolio of investments. |
** | There were de minimis 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# | Bank Loans | Common Stocks | Commercial Mortgage- Backed Securities | |||||||||||||
Balance as of 10/31/15 | $ | 182,978 | $ | 396,027 | $ | 2,982 | $ | 225,864 | ||||||||
Accrued discounts/ (premiums) | (1,121 | ) | (219 | ) | – 0 | – | 115 | |||||||||
Realized gain (loss) | (25,133 | ) | (5,501 | ) | – 0 | – | – 0 | – | ||||||||
Change in unrealized appreciation/depreciation | 22,619 | (14,619 | ) | (1,071 | ) | (14,211 | ) | |||||||||
Purchases | – 0 | – | 42,630 | – 0 | – | – 0 | – | |||||||||
Sales | (111,840 | ) | (272,086 | ) | – 0 | – | – 0 | – | ||||||||
Transfers into level 3 | – 0 | – | – 0 | – | – 0 | – | – 0 | – | ||||||||
Transfers out of level 3 | – 0 | – | (118,347 | ) | – 0 | – | – 0 | – | ||||||||
|
|
|
|
|
|
|
| |||||||||
Balance as of 4/30/16 | $ | 67,503 | $ | 27,885 | $ | 1,911 | $ | 211,768 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16** | $ | 188 | $ | (19,668 | ) | $ | (1,071 | ) | $ | (14,211 | ) | |||||
|
|
|
|
|
|
|
|
54 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
Collateralized Mortgage Obligations | Warrants | Total | ||||||||||||
Balance as of 10/31/15 | $ | 185,028 | $ | 11,721 | $ | 1,004,600 | ||||||||
Accrued discounts/(premiums) | – 0 | – | – 0 | – | (1,225 | ) | ||||||||
Realized gain (loss) | – 0 | – | – 0 | – | (30,634 | ) | ||||||||
Change in unrealized appreciation/ depreciation | – 0 | – | (5,509 | ) | (12,791 | ) | ||||||||
Purchases | – 0 | – | – 0 | – | 42,630 | |||||||||
Sales | – 0 | – | – 0 | – | (383,926 | ) | ||||||||
Transfers into level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||||
Transfers out of level 3 | (185,028 | ) | – 0 | – | (303,375 | ) | ||||||||
|
|
|
|
|
| |||||||||
Balance as of 4/30/16 | $ | – 0 | – | $ | 6,212 | $ | 315,279 | + | ||||||
|
|
|
|
|
| |||||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16** | $ | – 0 | – | $ | (5,509 | ) | $ | (40,271 | ) | |||||
|
|
|
|
|
|
# | 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. |
+ | An amount of $303,375 was transferred out of Level 3 into Level 2 due to increase in observability of inputs during the reporting period. |
The following presents information about significant unobservable inputs related to the Portfolio’s Level 3 investments at April 30, 2016. 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 4/30/2016 | Valuation Technique | Unobservable Input | Range / Weighted Average | |||||||
Bank Loans | $ | 16,006 | Market Approach | EBITDA* Projection | $28mm-$70mm / N/A | |||||
EBITDA* Multiple | 6x / N/A | |||||||||
Scrap Value | $110mm / N/A | |||||||||
Common Stocks | $ | 1,911 | Market Approach | EBITDA* Projection | $94mm / N/A | |||||
EBITDA* Multiples | 8.5X / N/A | |||||||||
Warrants | $ | 6,212 | Option Pricing Model | Exercise Price | $6.64 / N/A | |||||
Expiration Date | June, 2019 / N/A | |||||||||
EV Volatility % | 50% / 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
AB HIGH YIELD PORTFOLIO • | 55 |
Notes to Financial Statements
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, 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.
56 | • AB HIGH YIELD PORTFOLIO |
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).
AB HIGH YIELD PORTFOLIO • | 57 |
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 31, 2017. For the period ended April 30, 2016, such waiver/reimbursement amounted to $196,561.
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 period ended April 30, 2016, the Adviser voluntarily agreed to waive such fees in the amount of $27,557.
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 $8,985 for the period ended April 30, 2016.
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 $272 from the sale of Class A shares and received $0 in contingent deferred sales charges imposed upon redemptions by shareholders of Class C shares for the period ended April 30, 2016.
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 currently available for direct purchase by members of the public. The Government STIF Portfolio currently pays no
58 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
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 period ended April 30, 2016 is as follows:
Market Value October 31, 2015 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value April 30, 2016 (000) | Dividend Income (000) | ||||||||||||||
$ | 1,992 | $ | 4,053 | $ | 4,029 | $ | 2,016 | $ | 2 |
Brokerage commissions paid on investment transactions for the period ended April 30, 2016 amounted to $2,427, none of which was paid to Sanford C. Bernstein & Co. LLC or 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, .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 $1,188 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 six months ended April 30, 2016 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 2,963,238 | $ | 4,853,589 | ||||
U.S. government securities | – 0 | – | 161,200 |
AB HIGH YIELD PORTFOLIO • | 59 |
Notes to Financial Statements
The cost of investments for federal income tax purposes was substantially the same as cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation (excluding foreign currency contracts, written options, swaps and futures contracts) are as follows:
Gross unrealized appreciation | $ | 403,724 | ||
Gross unrealized depreciation | (1,220,760 | ) | ||
|
| |||
Net unrealized depreciation | $ | (817,036 | ) | |
|
|
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 six months ended April 30, 2016, 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
60 | • AB HIGH YIELD PORTFOLIO |
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 six months ended April 30, 2016, the Portfolio held futures 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
AB HIGH YIELD PORTFOLIO • | 61 |
Notes to Financial Statements
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.
At April 30, 2016, the maximum payments for written put options amounted to $2,664,700. 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 six months ended April 30, 2016, the Portfolio held purchased options for hedging and non-hedging purposes.
During the six months ended April 30, 2016, the Portfolio held written options for hedging and non-hedging purposes.
62 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
For the six months ended April 30, 2016, the Portfolio had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 10/31/15 | 164 | $ | 8,803 | |||||
Options written | 501 | 16,094 | ||||||
Options expired | (244 | ) | (8,688 | ) | ||||
Options bought back | (207 | ) | (11,310 | ) | ||||
Options exercised | – 0 | – | – 0 | – | ||||
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|
| |||||
Options written outstanding as of 4/30/16 | 214 | $ | 4,899 | |||||
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|
For the six months ended April 30, 2016, the Portfolio had the following transactions in written swaptions:
Notional Amount | Premiums Received | |||||||
Swaptions written outstanding as of 10/31/15 | $ | 660,000 | $ | 594 | ||||
Swaptions written | 2,445,000 | 4,119 | ||||||
Swaptions expired | (2,140,000 | ) | (2,153 | ) | ||||
Swaptions bought back | (520,000 | ) | (936 | ) | ||||
Swaptions exercised | – 0 | – | – 0 | – | ||||
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|
| |||||
Swaptions written outstanding as of 4/30/16 | $ | 445,000 | $ | 1,624 | ||||
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• | 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
AB HIGH YIELD PORTFOLIO • | 63 |
Notes to Financial Statements
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 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
64 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
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 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 April 30, 2016, 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 $940,000.
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
AB HIGH YIELD PORTFOLIO • | 65 |
Notes to Financial Statements
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 six months ended April 30, 2016, the Portfolio held credit default swaps for hedging and non-hedging purposes.
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 six months ended April 30, 2016, 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 six months ended April 30, 2016, the Portfolio held total return swaps for hedging and non-hedging purposes.
66 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
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 HIGH YIELD PORTFOLIO • | 67 |
Notes to Financial Statements
At April 30, 2016, the Portfolio had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of | Fair Value | Statement of | Fair Value | ||||||||
Interest rate contracts | Receivable for variation margin on exchange-traded derivatives | $ | 625 | * | Payable for variation margin on exchange-traded derivatives | $ | 12,740 | * | ||||
Interest rate contracts | Unrealized appreciation on total return swaps |
| 33,202 |
| ||||||||
Foreign exchange contracts | Unrealized appreciation on forward currency exchange contracts |
| 16,621 |
| Unrealized depreciation on forward currency exchange contracts |
| 45,963 |
| ||||
Credit contracts | Unrealized appreciation on credit default swaps | 9,051 | Unrealized depreciation on credit default swaps | 10,366 | ||||||||
Credit contracts | Receivable for variation margin on exchange-traded derivatives | 39,047 | * | Payable for variation margin on exchange-traded derivatives | 29,566 | * | ||||||
Credit contracts | Swaptions written, at value | 1,167 | ||||||||||
Equity contracts | Receivable for variation margin on exchange-traded derivatives | 1,537 | * | Payable for variation margin on exchange-traded derivatives | 15,928 | * | ||||||
Equity contracts | Investment in securities, at value | 19,537 | Options written, at value | 6,334 | ||||||||
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| |||||||||
Total | $ | 119,620 | $ | 122,064 | ||||||||
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|
|
* | 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. |
68 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
Derivative Type | Location of | 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 | $ | (103,245 | ) | $ | 5,276 | ||||
Interest rate contracts | Net realized gain/(loss) on futures; Net change in unrealized appreciation/ depreciation on futures | 24,418 | (242 | ) | ||||||
Interest rate contracts | Net realized gain/(loss) on investment transactions; Net change in unrealized appreciation/depreciation on investment transactions | (3,441 | ) | 3,237 | ||||||
Interest rate contracts | Net realized gain/(loss) on options written; Net change in unrealized appreciation/depreciation on options written | 1,725 | (2,647 | ) | ||||||
Foreign exchange contracts | Net realized gain/(loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation on foreign currency denominated assets and liabilities | (350 | ) | (25,315 | ) | |||||
Credit contracts | Net realized gain/(loss) on investment transactions; Net change in unrealized appreciation/depreciation on investment transactions | (8,963 | ) | 1,495 | ||||||
Credit contracts | Net realized gain/(loss) on swaps; Net change in unrealized appreciation/ depreciation on swaps | 35,573 | (34,684 | ) |
AB HIGH YIELD PORTFOLIO • | 69 |
Notes to Financial Statements
Derivative Type | Location of | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Credit Contracts | Net realized gain/(loss) on swaptions written; Net change in unrealized appreciation/depreciation on swaptions written | $ | 3,036 | $ | 139 | |||||
Equity contracts | Net realized gain/(loss) on futures; Net change in unrealized appreciation/depreciation on futures | 10,070 | (7,308 | ) | ||||||
Equity contracts | Net realized gain/(loss) on investment transactions; Net change in unrealized appreciation/depreciation on investment transactions | (3,709 | ) | 11,765 | ||||||
Equity contracts | Net realized gain/(loss) on options written; Net change in unrealized appreciation/depreciation on options written | (774 | ) | (2,235 | ) | |||||
|
|
|
| |||||||
Total | $ | (45,660 | ) | $ | (50,519 | ) | ||||
|
|
|
|
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the six months ended April 30, 2016:
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 640,456 | ||
Average notional amount of sale contracts | $ | 1,456,376 | ||
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 527,500 | (a) | |
Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 246,928 | ||
Average notional amount of sale contracts | $ | 691,810 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 361,308 | ||
Average principal amount of sale contracts | $ | 1,055,136 | ||
Futures: | ||||
Average original value of buy contracts | $ | 689,063 | ||
Average original value of sale contracts | $ | 282,371 | ||
70 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
Total Return Swaps: | ||||
Average notional amount | $ | 2,517,200 | (a) | |
Purchased Options: | ||||
Average monthly cost | $ | 15,092 |
(a) | Positions were open for four months during the period. |
For financial reporting purposes, the Portfolio does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the statement of assets and liabilities.
All derivatives held at period end were subject to netting arrangements. The following 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 April 30, 2016:
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: | ||||||||||||||||||||
Morgan Stanley & Co., LLC* | $ | 21,386 | $ | (6,334 | ) | $ | – 0 | – | $ | – 0 | – | $ | 15,052 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 21,386 | $ | (6,334 | ) | $ | – 0 | – | $ | – 0 | – | $ | 15,052 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Barclays Bank PLC | $ | 12,691 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 12,691 | |||||||
Brown Brothers Harriman & Co. | 12,192 | (12,192 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Citibank, N.A. | 32,619 | (3,812 | ) | – 0 | – | – 0 | – | 28,807 | ||||||||||||
Credit Suisse International | 11,977 | (654 | ) | – 0 | – | – 0 | – | 11,323 | ||||||||||||
Deutsche Bank AG | 250 | – 0 | – | – 0 | – | – 0 | – | 250 | ||||||||||||
JPMorgan Chase Bank, NA | 9,758 | (244 | ) | – 0 | – | – 0 | – | 9,514 | ||||||||||||
Morgan Stanley & Co. International PLC | 5,013 | (3,206 | ) | – 0 | – | – 0 | – | 1,807 | ||||||||||||
Royal Bank of Scotland PLC | 3,693 | (165 | ) | – 0 | – | – 0 | – | 3,528 | ||||||||||||
Standard Chartered Bank | 477 | (395 | ) | – 0 | – | – 0 | – | 82 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 88,670 | $ | (20,668 | ) | $ | – 0 | – | $ | – 0 | – | $ | 68,002 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
AB HIGH YIELD PORTFOLIO • | 71 |
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 | |||||||||||||||
Exchange-Traded Derivatives: | ||||||||||||||||||||
Citigroup Global Markets, Inc* | $ | 1,047 | $ | – 0 | – | $ | (1,047 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
Morgan Stanley & Co., LLC* | 6,334 | (6,334 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 7,381 | $ | (6,334 | ) | $ | (1,047 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Brown Brothers Harriman & Co. | 44,107 | (12,192 | ) | – 0 | – | – 0 | – | 31,915 | ||||||||||||
Citibank, N.A. | 3,812 | (3,812 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Credit Suisse International | 654 | (654 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Goldman Sachs Bank USA / Goldman Sachs International | 17,930 | – 0 | – | – 0 | – | – 0 | – | 17,930 | ||||||||||||
JPMorgan Chase Bank, NA | 244 | (244 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Morgan Stanley & Co. International PLC | 3,206 | (3,206 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Royal Bank of Scotland PLC | 165 | (165 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Standard Chartered Bank | 395 | (395 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 70,513 | $ | (20,668 | ) | $ | – 0 | – | $ | – 0 | – | $ | 49,845 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | Cash has been posted for initial margin requirements on exchange-traded derivatives outstanding at April 30, 2016. |
** | 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. |
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
72 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
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 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 April 30, 2016, the Portfolio had no unfunded loan commitments or bridge loan commitments outstanding.
During the six months ended April 30, 2016, the Portfolio received no commitment fees or additional funding fees.
AB HIGH YIELD PORTFOLIO • | 73 |
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 | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 65,484 | 292,676 | $ | 579,373 | $ | 2,741,466 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 5,493 | 2,211 | 48,282 | 20,519 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (286,116 | ) | (979 | ) | (2,398,082 | ) | (9,038 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (215,139 | ) | 293,908 | $ | (1,770,427 | ) | $ | 2,752,947 | ||||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 9,108 | 14,010 | $ | 78,136 | $ | 135,980 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 316 | 334 | 2,763 | 3,193 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (3,034 | ) | (2,449 | ) | (26,257 | ) | (23,449 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 6,390 | 11,895 | $ | 54,642 | $ | 115,724 | ||||||||||||||
| ||||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 37,251 | 12,660 | $ | 328,110 | $ | 117,525 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,278 | 694 | 11,202 | 6,625 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (6,838 | ) | – 0 | – | (58,162 | ) | – 0 | – | ||||||||||||
| ||||||||||||||||||||
Net increase | 31,691 | 13,354 | $ | 281,150 | $ | 124,150 | ||||||||||||||
| ||||||||||||||||||||
Class I | ||||||||||||||||||||
Shares sold | – 0 | – | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||||||
| ||||||||||||||||||||
Shares redeemed | – 0 | – | (203,669 | ) | – 0 | – | (2,000,000 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | – 0 | – | (203,669 | ) | $ | – 0 | – | $ | (2,000,000 | ) | ||||||||||
|
Class R, Class K and Class Z did not have any transactions in capital shares for the six months ended April 31, 2016 and the year ended October 31, 2015, respectively.
At April 30, 2016, the Adviser owns approximately 92% of the Portfolio’s outstanding shares.
74 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
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 perception of the junk bond market generally and less secondary market liquidity.
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 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
AB HIGH YIELD PORTFOLIO • | 75 |
Notes to Financial Statements
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.
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.
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 decline.
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.
76 | • AB HIGH YIELD PORTFOLIO |
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 six months ended April 30, 2016.
NOTE H
Distributions to Shareholders
The tax character of distributions paid for the year ending October 31, 2016 will be determined at the end of the current fiscal year.
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 | ||||
|
|
|
|
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.
AB HIGH YIELD PORTFOLIO • | 77 |
Notes to Financial Statements
NOTE I
New Accounting Pronouncement
In May 2015, the Financial Accounting Standards Board issued an Accounting Standards Update, ASU 2015-07 (the “ASU”), 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 requirement to make certain disclosures for investments that are eligible to be measured at fair value using the net asset value per share practical expedient but not to utilize that practical expedient. 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
The Government STIF Portfolio, prior to June 1, 2016, was offered as a cash management option to mutual funds and other institutional accounts of the Adviser, and was not available for direct purchase by members of the public. Prior to June 1, 2016, the Government STIF Portfolio paid no investment management fees but did bear its own expenses. As of June 1, 2016, the Government STIF Portfolio, which was renamed “AB Government Money Market Portfolio” (the “Government Money Market Portfolio”), will have a contractual investment management fee rate of .20% and will continue to bear its own expenses. In connection with the investment by the Fund in the Government Money Market Portfolio, the Adviser will waive its investment management fee from the Fund in an amount equal to Government Money Market Portfolio’s effective management fee.
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 other material events that would require disclosure in the Portfolio’s financial statements through this date.
78 | • AB HIGH YIELD PORTFOLIO |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 9.24 | $ 9.91 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .21 | .38 | .10 | |||||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.05 | ) | (.59 | ) | (.10 | ) | ||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .16 | (.21 | ) | .00 | ||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | (.30 | ) | (.45 | ) | (.09 | ) | ||||||
Distributions from net realized gain on investment and foreign currency transactions | – 0 | – | (.01 | ) | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.30 | ) | (.46 | ) | (.09 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 9.10 | $ 9.24 | $ 9.91 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 1.88 | % | (2.19 | )% | 0.04 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $744 | $2,742 | $29 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | 1.05 | %(e) | 1.05 | % | 1.05 | %(e) | ||||||
Expenses, before waivers/reimbursements | 4.15 | %(e) | 6.57 | % | 49.84 | %(e) | ||||||
Net investment income(c) | 4.70 | %(e) | 4.11 | % | 3.41 | %(e) | ||||||
Portfolio turnover rate | 19 | % | 56 | % | 5 | % |
See footnote summary on page 85.
AB HIGH YIELD PORTFOLIO • | 79 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 9.24 | $ 9.91 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .18 | .32 | .07 | |||||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.05 | ) | (.61 | ) | (.09 | ) | ||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .13 | (.29 | ) | (.02 | ) | |||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | (.27 | ) | (.37 | ) | (.07 | ) | ||||||
Distributions from net realized gain on investment and foreign currency transactions | – 0 | – | (.01 | ) | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.27 | ) | (.38 | ) | (.07 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 9.10 | $ 9.24 | $ 9.91 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 1.51 | % | (2.95 | )% | (0.18 | )% | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $176 | $119 | $10 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | 1.80 | %(e) | 1.80 | % | 1.80 | %(e) | ||||||
Expenses, before waivers/reimbursements | 5.52 | %(e) | 7.85 | % | 56.89 | %(e) | ||||||
Net investment income(c) | 4.09 | %(e) | 3.36 | % | 2.28 | %(e) | ||||||
Portfolio turnover rate | 19 | % | 56 | % | 5 | % |
See footnote summary on page 85.
80 | • AB HIGH YIELD PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 9.24 | $ 9.91 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .22 | .42 | .10 | |||||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.04 | ) | (.61 | ) | (.09 | ) | ||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .18 | (.19 | ) | .01 | ||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | (.31 | ) | (.47 | ) | (.10 | ) | ||||||
Distributions from net realized gain on investment and foreign currency transactions | – 0 | – | (.01 | ) | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.31 | ) | (.48 | ) | (.10 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 9.11 | $ 9.24 | $ 9.91 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 2.12 | % | (1.94 | )% | 0.14 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $536 | $251 | $137 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | .80 | %(e) | .80 | % | .80 | %(e) | ||||||
Expenses, before waivers/reimbursements | 4.47 | %(e) | 7.35 | % | 33.51 | %(e) | ||||||
Net investment income(c) | 4.97 | %(e) | 4.38 | % | 3.26 | %(e) | ||||||
Portfolio turnover rate | 19 | % | 56 | % | 5 | % |
See footnote summary on page 85.
AB HIGH YIELD PORTFOLIO • | 81 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class R | ||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 9.24 | $ 9.91 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .20 | .37 | .08 | |||||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.05 | ) | (.60 | ) | (.08 | ) | ||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .15 | (.23 | ) | .00 | ||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | (.29 | ) | (.43 | ) | (.09 | ) | ||||||
Distributions from net realized gain on investment and foreign currency transactions | – 0 | – | (.01 | ) | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.29 | ) | (.44 | ) | (.09 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 9.10 | $ 9.24 | $ 9.91 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 1.76 | % | (2.42 | )% | (0.03 | )% | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $9 | $9 | $10 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | 1.30 | %(e) | 1.30 | % | 1.30 | %(e) | ||||||
Expenses, before waivers/reimbursements | 3.79 | %(e) | 4.39 | % | 4.84 | %(e) | ||||||
Net investment income(c) | 4.55 | %(e) | 3.90 | % | 2.78 | %(e) | ||||||
Portfolio turnover rate | 19 | % | 56 | % | 5 | % |
See footnote summary on page 85.
82 | • AB HIGH YIELD PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class K | ||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 9.24 | $ 9.91 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .21 | .40 | .09 | |||||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.05 | ) | (.61 | ) | (.09 | ) | ||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .16 | (.21 | ) | .00 | ||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | (.30 | ) | (.45 | ) | (.09 | ) | ||||||
Distributions from net realized gain on investment and foreign currency transactions | – 0 | – | (.01 | ) | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.30 | ) | (.46 | ) | (.09 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 9.10 | $ 9.24 | $ 9.91 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 1.91 | % | (2.17 | )% | 0.05 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $9 | $9 | $10 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | 1.05 | %(e) | 1.05 | % | 1.05 | %(e) | ||||||
Expenses, before waivers/reimbursements | 3.53 | %(e) | 4.13 | % | 4.56 | %(e) | ||||||
Net investment income(c) | 4.80 | %(e) | 4.15 | % | 3.03 | %(e) | ||||||
Portfolio turnover rate | 19 | % | 56 | % | 5 | % |
See footnote summary on page 85.
AB HIGH YIELD PORTFOLIO • | 83 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class I | ||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 9.24 | $ 9.91 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .22 | .42 | .10 | |||||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.05 | ) | (.61 | ) | (.09 | ) | ||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .17 | (.19 | ) | .01 | ||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | (.31 | ) | (.47 | ) | (.10 | ) | ||||||
Distributions from net realized gain on investment and foreign currency transactions | – 0 | – | (.01 | ) | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.31 | ) | (.48 | ) | (.10 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 9.10 | $ 9.24 | $ 9.91 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 2.02 | % | (1.94 | )% | 0.12 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $16,300 | $16,544 | $19,757 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | .80 | %(e) | .80 | % | .80 | %(e) | ||||||
Expenses, before waivers/reimbursements | 3.26 | %(e) | 3.86 | % | 4.27 | %(e) | ||||||
Net investment income(c) | 5.06 | %(e) | 4.39 | % | 3.29 | %(e) | ||||||
Portfolio turnover rate | 19 | % | 56 | % | 5 | % |
See footnote summary on page 85.
84 | • AB HIGH YIELD PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class Z | ||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | July 15, 2014(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 9.24 | $ 9.91 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .22 | .42 | .10 | |||||||||
Net realized and unrealized loss on investment and foreign currency transactions | (.05 | ) | (.61 | ) | (.09 | ) | ||||||
|
| |||||||||||
Net increase (decrease) in net asset value from operations | .17 | (.19 | ) | .01 | ||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | (.31 | ) | (.47 | ) | (.10 | ) | ||||||
Distributions from net realized gain on investment and foreign currency transactions | – 0 | – | (.01 | ) | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.31 | ) | (.48 | ) | (.10 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 9.10 | $ 9.24 | $ 9.91 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 2.01 | % | (1.93 | )% | 0.12 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $9 | $9 | $10 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | .80 | %(e) | .80 | % | .80 | %(e) | ||||||
Expenses, before waivers/reimbursements | 3.25 | %(e) | 3.86 | % | 4.30 | %(e) | ||||||
Net investment income(c) | 5.05 | %(e) | 4.40 | % | 3.28 | %(e) | ||||||
Portfolio turnover rate | 19 | % | 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 • | 85 |
Financial Highlights
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. |
86 | • AB HIGH YIELD PORTFOLIO |
Board of Directors
Information Regarding the Review and Approval of the Portfolio’s Investment Advisory Contract
The disinterested directors (the “directors”) of AB Bond Fund, Inc. (the “Fund”) unanimously approved the continuance of the Fund’s Investment Advisory Contract (the “Advisory Agreement”) with the Adviser in respect of AB High Yield Portfolio (the “Portfolio”) at a meeting held on November 3-5, 2015.
Prior to approval of the continuance of the Advisory Agreement in respect of the Portfolio, the directors had requested from the Adviser, and received and evaluated, extensive materials. They reviewed the proposed continuance of the Advisory Agreement with the Adviser and with experienced counsel who are independent of the Adviser, who advised on the relevant legal standards. The directors also reviewed an independent evaluation prepared by the Fund’s Senior Officer (who is also the Fund’s Independent Compliance Officer) of the reasonableness of the advisory fee, in which the Senior Officer concluded that the contractual fee for the Portfolio was reasonable. The directors also discussed the proposed continuance in private sessions with counsel and the Fund’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services provided by the Adviser to the Portfolio gained from their experience as directors or trustees of most of the registered investment companies advised by the Adviser, their overall confidence in the Adviser’s integrity and competence they have gained from that experience, the Adviser’s initiative in identifying and raising potential issues with the directors and its responsiveness, frankness and attention to concerns raised by the directors in the past, including the Adviser’s willingness to consider and implement organizational and operational changes designed to improve investment results and the services provided to the AB Funds. The directors noted that they have four regular meetings each year, at each of which they receive presentations from the Adviser on the investment results of the Portfolio and review extensive materials and information presented by the Adviser.
The directors also considered all other factors they believed relevant, including the specific matters discussed below. In their deliberations, the directors did not identify any particular information that was all-important or controlling, and different directors may have attributed different weights to the various factors. The directors determined that the selection of the Adviser to manage the Portfolio, and the overall arrangements between the Portfolio and the Adviser, as provided in the Advisory Agreement, including the advisory fee, were fair and reasonable in light of the services performed, expenses incurred and such other matters as the directors considered relevant in the exercise of their business judgment. The material factors and conclusions that formed the basis for the directors’ determinations included the following:
Nature, Extent and Quality of Services Provided
The directors considered the scope and quality of services provided by the Adviser under the Advisory Agreement, including the quality of the investment
AB HIGH YIELD PORTFOLIO • | 87 |
research capabilities of the Adviser and the other resources it has dedicated to performing services for the Portfolio. They also noted the professional experience and qualifications of the Portfolio’s portfolio management team and other members of the investment team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Portfolio will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Portfolio by employees of the Adviser or its affiliates. Requests for these reimbursements are made on a quarterly basis and subject to approval by the directors. Reimbursements, to the extent requested and paid, result in a higher rate of total compensation from the Portfolio to the Adviser than the fee rate stated in the Portfolio’s Advisory Agreement. The directors noted that the methodology used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Fund’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Portfolio’s other service providers, also was considered. The directors concluded that, overall, they were satisfied with the nature, extent and quality of services provided to the Portfolio under the Advisory Agreement.
Costs of Services Provided and Profitability
The directors reviewed a schedule of the revenues, expenses and related notes indicating the profitability of the Portfolio to the Adviser for the period ended December 31, 2014 that had been prepared with an expense limitation methodology arrived at in consultation with an independent consultant retained by the Fund’s Senior Officer. The directors noted the assumptions and methods of allocation used by the Adviser in preparing fund-specific profitability data and understood that there are a number of potentially acceptable allocation methodologies for information of this type. The directors noted that the profitability information reflected all revenues and expenses of the Adviser’s relationship with the Portfolio, including those relating to its subsidiaries that provide transfer agency and distribution services to the Portfolio. The directors recognized that it is difficult to make comparisons of the profitability of the Advisory Agreement with the profitability of advisory contracts for unaffiliated funds because comparative information is not generally publicly available and is affected by numerous factors. The directors focused on the profitability of the Adviser’s relationship with the Portfolio before taxes and distribution expenses. The directors noted that the Adviser’s relationship with the Portfolio was not profitable to it in 2014.
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their relationships with the Portfolio, including, but not limited to, benefits relating to 12b-1 fees and sales charges received by the Fund’s principal underwriter (which is a wholly owned subsidiary of the Adviser) in respect of certain classes of the Portfolio’s shares and transfer agency fees paid by the Portfolio to a
88 | • AB HIGH YIELD PORTFOLIO |
wholly owned subsidiary of the Adviser. The directors recognized that the Portfolio’s unprofitability to the Adviser would be exacerbated without these benefits. The directors also understood that the Adviser also might derive reputational and other benefits from its association with the Portfolio.
Investment Results
In addition to the information reviewed by the directors in connection with the meeting, the directors receive detailed performance information for the Portfolio at each regular Board meeting during the year. At the November 2015 meeting, the directors reviewed information prepared by Broadridge showing the performance of the Class A Shares of the Portfolio as compared with that of a group of similar funds selected by Broadridge (the “Performance Group”) and as compared with that of a broad array of funds selected by Broadridge (the “Performance Universe”), and information prepared by the Adviser showing the performance of the Class A Shares as compared with the Barclays U.S. High Yield Index (2% Issuer Cap) (the “Index”), in each case for the 1-year period ended July 31, 2015 and (in the case of comparisons with the Index) the period since inception (July 2014 inception). The directors noted that the Portfolio was in the 2nd quintile of the Performance Group and 3rd quintile of the Performance Universe for the 1-year period. The Portfolio lagged the Index in the 1-year period and outperformed the Index in the period since inception. Based on their review, the directors concluded that the Portfolio’s performance was satisfactory.
Advisory Fees and Other Expenses
The directors considered the advisory fee rate paid by the Portfolio to the Adviser and information prepared by Broadridge concerning advisory fee rates paid by other funds in the same Broadridge category as the Portfolio at a common asset level. The directors recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The directors noted that, at the Portfolio’s current size, its contractual effective advisory fee rate of 60 basis points was lower than the Expense Group median. The directors noted that the expense reimbursement was 10 basis points in the Portfolio’s latest fiscal period, and that as a result the rate of total compensation received by the Adviser pursuant to the Advisory Agreement was more than the Expense Group median.
The directors also considered the advisory fees the Adviser charges non-fund clients pursuing a similar investment style. For this purpose, they reviewed the relevant advisory fee information from the Adviser’s Form ADV and the evaluation from the Fund’s Senior Officer. The directors noted that the institutional fee schedule and the Portfolio’s fee schedule started at different rates and that the institutional fee schedule had breakpoints at lower asset levels. The application of the institutional fee schedule to the Portfolio’s net assets would result in a fee rate lower than the rate at the same asset level provided in the Portfolio’s
AB HIGH YIELD PORTFOLIO • | 89 |
Advisory Agreement. The directors noted that the Adviser may, in some cases, agree to fee rates with large institutional clients that are lower than those on the schedule reviewed by the directors and that they had previously discussed with the Adviser its policies in respect of such arrangements.
The Adviser reviewed with the directors the significantly greater scope of the services it provides to the AB Funds relative to institutional clients. The Adviser also noted that because mutual funds are constantly issuing and redeeming shares, they are more difficult to manage than an institutional account, where the assets tend to be relatively stable. In light of the substantial differences in services rendered by the Adviser to institutional clients as compared to funds such as the Portfolio, as well as the difference in fee structure, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors noted that the Portfolio invests in shares of exchange-traded funds (“ETFs”), subject to the restrictions and limitations of the Investment Company Act of 1940 as these may be varied as a result of exemptive orders issued by the SEC. The directors also noted that ETFs pay advisory fees pursuant to their advisory contracts, and that the Adviser had provided, and they had reviewed, information about the expense ratios of the relevant ETFs. The directors concluded, based on the Adviser’s explanation of how it uses ETFs when they are the most cost-effective way to obtain desired exposures for a fund or to temporarily “equitize” cash inflows pending purchases of underlying securities, that the advisory fee for the Portfolio would be paid for services that would be in addition to, rather than duplicative of, the services to be provided under the advisory contracts of the ETFs.
The directors also considered the total expense ratio of the Class A shares of the Portfolio in comparison to the fees and expenses of funds within two comparison groups created by Broadridge: an Expense Group and an Expense Universe. Broadridge described an Expense Group as a representative sample of funds similar to the Portfolio and an Expense Universe as a broader group than the Expense Group, consisting of all funds in the investment classification/objective with a similar load type as the Portfolio. The Class A expense ratio of the Portfolio was based on the Portfolio’s latest fiscal period and reflected fee waivers and/or expense reimbursements as a result of an expense limitation agreement between the Adviser and the Fund in respect of the Portfolio. The directors noted that it was likely that the expense ratios of some of the other funds in the Portfolio’s Broadridge category also were lowered by waivers or reimbursements by those funds’ investment advisers, which in some cases might be voluntary or temporary. The directors view the expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Portfolio by others.
90 | • AB HIGH YIELD PORTFOLIO |
The directors noted that the Portfolio’s total expense ratio, reflecting a cap by the Adviser, was lower than the Expense Group median and the same as the Expense Universe median. The directors concluded that the Portfolio’s expense ratio was satisfactory.
Economies of Scale
The directors noted that the advisory fee schedule for the Portfolio contains breakpoints that reduce the fee rates on assets above specified levels. The directors took into consideration prior presentations by an independent consultant on economies of scale in the mutual fund industry and for the AB Funds, and by the Adviser concerning certain of its views on economies of scale. The directors also had requested and received from the Adviser certain updates on economies of scale at the May 2015 meetings. The directors believe that economies of scale may be realized (if at all) by the Adviser across a variety of products and services, and not only in respect of a single fund. The directors noted that there is no established methodology for setting breakpoints that give effect to the fund-specific services provided by a fund’s adviser and to the economies of scale that an adviser may realize in its overall mutual fund business or those components of it which directly or indirectly affect a fund’s operations. The directors observed that in the mutual fund industry as a whole, as well as among funds similar to the Portfolio, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. The directors also noted that the advisory agreements for many funds do not have breakpoints at all. Having taken these factors into account, the directors concluded that the Portfolio’s shareholders would benefit from a sharing of economies of scale in the event the Portfolio’s net assets exceed a breakpoint in the future.
AB HIGH YIELD PORTFOLIO • | 91 |
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),
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. |
92 | • AB HIGH YIELD PORTFOLIO |
“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 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. |
AB HIGH YIELD PORTFOLIO • | 93 |
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 Undertaking | 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 either direction, particularly, if a fund is in net redemption
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%. |
94 | • AB HIGH YIELD PORTFOLIO |
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. |
AB HIGH YIELD PORTFOLIO • | 95 |
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 entails the consideration of several fund criteria, including fund type, Lipper
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. |
96 | • AB HIGH YIELD PORTFOLIO |
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 EG Median (%) | Broadridge EG 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.
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.
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. |
AB HIGH YIELD PORTFOLIO • | 97 |
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.
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
98 | • AB HIGH YIELD PORTFOLIO |
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 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.
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. |
AB HIGH YIELD PORTFOLIO • | 99 |
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 |
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
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. |
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. |
100 | • 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
International Strategic Core 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
Income Fund
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 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 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.
AB HIGH YIELD PORTFOLIO • | 101 |
AB Family of Funds
NOTES
102 | • AB HIGH YIELD PORTFOLIO |
NOTES
AB HIGH YIELD PORTFOLIO • | 103 |
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-0152-0416
APR 04.30.16
SEMI-ANNUAL REPORT
AB INCOME FUND
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.
June 24, 2016
Semi-Annual Report
This report provides management’s discussion of fund performance for AB Income Fund (the “Fund”) for the semi-annual reporting period ended April 30, 2016.
The Fund is newly organized. The Fund acquired the assets and liabilities of AllianceBernstein Income Fund, Inc., a closed-end fund (the “Predecessor Fund”), on April 22, 2016 (the “Reorganization”). AllianceBernstein L.P. (the “Adviser”) was the investment adviser for the Predecessor Fund, and the day-to-day management of, and investment decisions for, the Fund and the Predecessor Fund are made by the same portfolio managers. The Fund has the same investment objective as the Predecessor Fund and similar investment strategies and policies except as noted. Like the Predecessor Fund, the Fund has a principal investment strategy to normally invest at least 80% of its net assets in income-producing securities. The Fund differs from the Predecessor Fund in that the Fund has a non-fundamental policy of normally investing at least 65% of its total assets in securities of US and foreign governments, and repurchase agreements relating to US government securities, while the Predecessor Fund had a fundamental policy of investing at least 65% of its total assets in securities of the US government, and repurchase agreements relating thereto. The Fund invests at least 65% of its total assets in securities denominated in US dollars. In addition, the Fund has higher expenses (including transfer agency and shareholder servic-
ing fees), and a different advisory fee arrangement than the Predecessor Fund. The Fund is expected to be managed with somewhat less leverage and somewhat higher cash balances than the Predecessor Fund due to differences between an open-end fund and a closed-end fund.
Investment Objectives and Policies
The investment objective of the Fund is to seek high current income consistent with preservation of capital. The Fund pursues its objective by investing, under normal circumstances, at least 80% of its net assets in income-producing securities. The Fund also normally invests at least 65% of its total assets in securities of US and foreign governments, their agencies or instrumentalities and repurchase agreements relating to US government securities.
The Fund normally invests at least 65% of its total assets in US dollar- denominated securities. The Fund may also invest up to 35% of its total assets in non-government fixed-income securities, including corporate debt securities, non-government mortgage-backed and other asset-backed securities, certificates of deposit and commercial paper. The Fund may invest up to 35% of its net assets in below investment-grade securities (commonly known as “junk bonds”). The Fund may invest no more than 25% of its total assets in securities of issuers in any one country other than the US. The Fund’s investments in foreign securities may include investments in securities of emerging-market countries or of issuers in emerging markets.
AB INCOME FUND • | 1 |
The Adviser selects securities for purchase or sale based on its assessment of the securities’ risks and return characteristics as well as the securities’ impact on the overall risks and return characteristics of the Fund. In making this assessment, the Adviser takes into account various factors, including the credit quality and sensitivity to interest rates of the securities under consideration and of the Fund’s other holdings. The Fund may invest in fixed-income securities with any maturity or duration.
The Fund expects to utilize derivatives, such as options, futures contracts, forwards and swaps to a significant extent. 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. 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 also enter into transactions such as reverse repurchase agreements that are similar to borrowings for investment purposes. The Fund’s use of derivatives and these borrowing transactions may create aggregate exposure that is substantially in excess of its net assets, effectively leveraging the Fund.
Investment Results
The table on page 8 provides performance data for the Fund and its benchmark, the Barclays US Aggregate Bond Index, for the four-, six- and 12-month periods ended April 30, 2016.
The inception date for Class A and C shares was April 21, 2016; due to limited performance history, there is no discussion of comparison to the benchmark for these class shares.
The Fund’s Advisor Class shares underperformed the benchmark, before sales charges, in the six- and 12-month periods, but outperformed in the four-month period. Security selection detracted from relative returns in all three periods, primarily due to bond selections within investment-grade corporates and commercial mortgage-backed securities. Although high-yield corporate selections contributed positively to performance in the four-month period, they were a detractor in both the six- and 12-month periods. Sector allocation contributed in the four-month period, though it weighed on performance in the six-month period, and it did not have a meaningful impact on overall returns during the 12-month period. An overweight in Treasuries and an underweight to investment-grade corporates detracted in the four- and six-month periods, while an exposure to agency risk-sharing transactions contributed to performance. The Fund’s exposure to non-agency mortgages contributed in the six-month period, while an exposure to high-yield corporates and underweight position in agency mortgages contributed in the four-month period. In the four-month period, currency decisions detracted from performance, as losses from underweights in the Canadian dollar and Singapore dollar more than offset gains from an overweight in the Russian ruble. In the six- and 12-month
2 | • AB INCOME FUND |
periods, currency selection contributed to performance; underweights in the Australian dollar, South Korean won and New Zealand dollar helped returns in the 12-month period, as did an overweight in the Russian ruble (a position that also contributed in the six-month period). An underweight position in the Canadian dollar detracted in all three periods, while an underweight in the Singapore dollar also detracted in the six-month timeframe. Country allocation contributed to performance in the four-month period, helped most by a beneficial exposure to Brazil, but did not significantly impact performance during either the six- or 12-month periods.
During the four-, six- and 12-month periods, the Fund utilized derivatives including Treasury futures and interest rate swaps to manage the overall duration positioning of the Fund, which detracted from relative performance for all three periods. Credit default swaps were utilized for investment purposes. The Fund utilized currency forwards to manage active currency positions as well as for hedging purposes. Purchased and written options were used for hedging and non-hedging purposes.
Market Review and Investment Strategy
Bond markets were volatile over the four-, six- and 12-month periods ended April 30, 2016, as economic growth trends and monetary policies in the world’s largest economies continued to diverge. Commodity prices declined through much of the 12-month period, with oil prices dipping
below $26 per barrel in February, before beginning to stabilize in March and April—despite a breakdown in formal discussions about a potential production freeze. Government bond yields continued their volatility, and the yield on the US 10-Year Treasury ranged from about 1.6% to just below 2.5%, ultimately ending the period at 1.8%. The US dollar appreciated against many developed- and emerging-market currencies during much of the 12-month period, yet during the early part of 2016 the dollar reversed course and depreciated against many of these same currencies. The US Federal Reserve made its first official rate hike in nearly a decade in December, which investors generally accepted smoothly.
European markets declined in the second quarter of 2015 on fears of Greece’s departure from the European Union, but rebounded when stop-gap measures were reached with the country’s creditors in the third quarter to avoid an exit. Volatility was somewhat contained as the European Central Bank (“ECB”) maintained an easing bias through the period, though additional measures announced in December fell far short of investor expectations, putting pressure on markets in the region. However, the ECB surprised investors with aggressive expansion of its quantitative easing program in March. Other central banks cut rates, with some, including the Bank of Japan and the ECB, dipping into negative rate territory.
Economic activity in emerging-market economies continued to slow: Asia
AB INCOME FUND • | 3 |
struggled with sluggish exports and weak domestic demand; Latin America continued to face weak growth and political upheaval in many parts of the region; and Eastern Europe’s growth picture was varied, as those countries tied to Western Europe fared better than those tied to commodities. Emerging-market sentiment was bolstered toward the end of the 12-month period. This was due to an uptick in oil prices, signs that China’s slowdown may be less pronounced than feared, encouraging political developments regarding Brazilian president Dilma Rousseff’s impeachment on corruption charges and Argentina’s progress on negotiations with its creditors that culminated in April with the country’s first new security issuance in 15 years.
Against this backdrop, fixed-income performance varied across regions and sectors during the 12-month period. Credit securities generally underperformed developed-market
Treasuries; developed-market Treasuries also outperformed emerging-market local-currency government bonds (despite the emerging-market rally in the last three months of the period). The positive performance of investment-grade securities generally outpaced negative returns from high-yield sectors, which saw a fairly wide divergence across sector returns. Commodity-linked sectors had the worst performance—suffering on negative oil price action—with energy down the most, followed by basic industries.
On June 23, 2016, the UK voted to leave the European Union (“EU”) in a popular referendum. At this moment in time, the UK remains a member of the EU and the rules and regulations remain unchanged, as do all the protections in place. Exactly how the UK’s role in the EU will change will become clear over time. The Adviser continues to monitor the heightened market volatility.
4 | • AB INCOME FUND |
DISCLOSURES AND RISKS
Benchmark Disclosure
The Barclays US Aggregate Bond Index is unmanaged and 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. The Index is not leveraged, whereas the Fund utilizes leverage. 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 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 (often referred to as “junk bonds”) 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 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.
Interest Rate Risk: Changes in interest rates will affect the value of investments in fixed-income securities. When interest rates rise, the value of existing investments in fixed-income securities tends to fall and this decrease in value may not be offset by higher income from new investments. The Fund may be subject to a heightened risk of rising rates as the current period of historically low interest rates ends. 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 the 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.
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.
(Disclosures, Risks and Note about Historical Performance continued on next page)
AB INCOME FUND • | 5 |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
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.
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.
Currency Risk: Fluctuations in currency exchange rates may negatively affect the value of the Fund’s investments or reduce its returns.
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 decline.
Mortgage-Backed and/or Other Asset-Backed Securities Risk: Investments in mortgage-backed and other asset-backed securities are subject to certain additional risks. The value of these securities may be particularly sensitive to changes in interest rates. These risks include “extension risk”, which is the risk that, in periods of rising interest rates, issuers may delay the payment of principal, and “prepayment risk”, which is the risk that in periods of falling interest rates, issuers may pay principal sooner than expected, exposing the Fund to a lower rate of return upon reinvestment of principal. Mortgage-backed securities offered by non-governmental issuers and other asset-backed securities may be subject to other risks, such as higher rates of default in the mortgages or assets backing the securities or risks associated with the nature and servicing of mortgages or assets backing the securities.
Derivatives Risk: Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Fund, and may be subject to counterparty risk to a greater degree than more traditional investments.
Management Risk: The Fund is subject to management risk because it is an actively managed investment fund. The Adviser will apply its investment techniques and risk analyses in making investment decisions, but there is no guarantee that its techniques will produce the intended results.
These risks are fully discussed in the Fund’s prospectus. As with all investments, you may lose money by investing in the Fund.
An Important Note About Historical Performance
The 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.
6 | • AB INCOME FUND |
Disclosures and Risks
(Disclosures, Risks and Note about Historical Performance continued on next page)
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.
The information shown on the following pages for Advisor Class shares reflects the historical performance of the Predecessor Fund based on its NAV. The performance information shown on the following pages is for the Predecessor Fund and may not be representative of performance of the Fund. The Predecessor Fund’s performance would have been lower than that shown had it operated as an open-end fund under the Fund’s current investment strategies and policies and expense levels.
AB INCOME FUND • | 7 |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE FUND VS. ITS BENCHMARK PERIODS ENDED APRIL 30, 2016 (unaudited) | NAV Returns | |||||||||||||
4 Months | 6 Months | 12 Months | ||||||||||||
AB Income Fund | ||||||||||||||
Class A | 0.46%* | — | — | |||||||||||
| ||||||||||||||
Class C | 0.44%* | — | — | |||||||||||
| ||||||||||||||
Advisor Class† | 3.63% | 2.07% | 1.37% | |||||||||||
| ||||||||||||||
Barclays US Aggregate Bond Index | 3.43% | 2.82% | 2.72% | |||||||||||
| ||||||||||||||
* Inception date: 4/21/2016.
† 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, or through other limited or special arrangements approved by the Adviser, such as purchases by shareholders of the Fund’s Predecessor Fund. | ||||||||||||||
See Disclosures, Risks and Note about Historical Performance on pages 5-7.
(Historical Performance continued on next page)
8 | • AB INCOME FUND |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF APRIL 30, 2016 (unaudited) | ||||||||
NAV Returns | SEC Returns (reflects applicable sales charges)* | |||||||
Class A Shares | ||||||||
Since Inception† | 0.46 | % | -3.76 | % | ||||
Class C Shares | ||||||||
Since Inception† | 0.44 | % | -0.56 | % | ||||
Advisor Class Shares^ | ||||||||
1 Year | 1.37 | % | 0.61 | % | ||||
5 Years | 5.57 | % | 5.41 | % | ||||
10 Years | 7.57 | % | 7.49 | % |
The Fund’s current prospectus fee table shows the Fund’s total annual operating expense ratios as 1.21%, 1.98% and 0.96% 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 expenses associated with securities sold short, acquired fund fees and expenses other than the advisory fees of any AB mutual funds in which the Fund may invest, interest expense, taxes, extraordinary expenses and brokerage commissions and other transaction costs to 0.88%, 1.63% and 0.63% for Class A, Class C and Advisor Class shares, respectively. These waivers/reimbursements may not be terminated before April 22, 2018. 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.
* | The Fund imposes a 0.75% redemption fee on redemption and exchanges of Advisor Class shares. This fee is retained by the Fund and is included in the Financial Statements as a component of additional paid-in capital. This fee is effective from April 25, 2016 until July 22, 2016. |
† | Inception date: 4/21/2016. |
^ | Advisor Class shares are offered at NAV to eligible investors; their SEC returns include a redemption fee as noted above. 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, or through other limited or special arrangements approved by the Adviser, such as purchases by shareholders of the Fund’s Predecessor Fund. |
See Disclosures, Risks and Note about Historical Performance on pages 5-7.
(Historical Performance continued on next page)
AB INCOME FUND • | 9 |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END MARCH 31, 2016 (unaudited) | ||||
SEC Returns (reflects applicable sales charges) | ||||
Advisor Class Shares* | ||||
1 Year | 0.63 | % | ||
5 Years | 5.82 | % | ||
10 Years | 7.53 | % |
* | 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, or through other limited or special arrangements approved by the Adviser, such as purchases by shareholders of the Fund’s Predecessor Fund. |
See Disclosures, Risks and Note about Historical Performance on pages 5-7.
10 | • AB INCOME FUND |
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 January 1, 2016 | Ending Account Value April 30, 2016 | Expenses Paid During Period | Annualized Expense Ratio | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,004.60 | $ | 0.24 | *** | 0.88 | %*** | |||||||
Hypothetical** | $ | 1,000 | $ | 1,001.13 | $ | 0.24 | *** | 0.88 | %*** | |||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,004.40 | $ | 0.45 | *** | 1.63 | %*** | |||||||
Hypothetical** | $ | 1,000 | $ | 1,000.92 | $ | 0.45 | *** | 1.63 | %*** | |||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,036.30 | $ | 2.96 | * | 0.88 | %* | |||||||
Hypothetical** | $ | 1,000 | $ | 1,013.62 | $ | 2.93 | * | 0.88 | %* |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 121/366 (for the period January 1 to April 30, 2016). |
** | Assumes 5% annual return before expenses. |
*** | Actual expenses paid are based on the period from April 21, 2016 (inception date) and are equal to the Class’s annualized expense ratio, multiplied by 10/366 (to reflect the since inception period). |
AB INCOME FUND • | 11 |
Expense Example
PORTFOLIO SUMMARY
April 30, 2016 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $1,663.7
* | All data are as of April 30, 2016. 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” security type weightings represent 0.2% or less in the following types: Asset-Backed Securities, Bank Loans, Governments – Sovereign Agencies, Governments – Sovereign Bonds, Investment Companies, Mortgage Pass-Throughs, Preferred Stocks and Warrants. |
12 | • AB INCOME FUND |
Portfolio Summary
PORTFOLIO SUMMARY
April 30, 2016 (unaudited)
* | All data are as of April 30, 2016. The Fund’s country 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” country weightings represent 0.1% or less in the following countries: Barbados, Cayman Islands, Dominican Republic, Ghana, Italy, Ivory Coast, Jamaica, Norway, Peru, South Africa, Switzerland and Zambia. |
AB INCOME FUND • | 13 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
April 30, 2016 (unaudited)
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
GOVERNMENTS – TREASURIES – 115.0% | ||||||||||
United States – 115.0% | ||||||||||
U.S. Treasury Bonds | U.S.$ | 70,188 | $ | 76,990,200 | ||||||
5.375%, 2/15/31 | 1,961 | 2,790,289 | ||||||||
6.25%, 5/15/30(a) | 217,135 | 329,001,866 | ||||||||
6.375%, 8/15/27(a) | 223,224 | 324,581,536 | ||||||||
6.50%, 11/15/26(a) | 134,326 | 194,268,978 | ||||||||
7.125%, 2/15/23 | 10,600 | 14,412,693 | ||||||||
8.00%, 11/15/21 | 27,000 | 36,540,693 | ||||||||
8.75%, 8/15/20 | 39,500 | 51,977,971 | ||||||||
U.S. Treasury Notes | 67,000 | 66,992,161 | ||||||||
1.25%, 1/31/20-3/31/21 | 104,000 | 104,068,483 | ||||||||
1.75%, 9/30/22 | 35,000 | 35,442,960 | ||||||||
2.125%, 8/31/20(a)(b) | 150,000 | 155,724,600 | ||||||||
2.125%, 9/30/21 | 34,672 | 36,011,483 | ||||||||
2.375%, 12/31/20 | 23,080 | 24,237,600 | ||||||||
3.125%, 5/15/21 | 95,000 | 103,416,430 | ||||||||
3.50%, 5/15/20(b) | 27,608 | 30,148,792 | ||||||||
3.625%, 2/15/21(b)(c) | 295,000 | 327,069,745 | ||||||||
|
| |||||||||
Total Governments – Treasuries | 1,913,676,480 | |||||||||
|
| |||||||||
COLLATERALIZED MORTGAGE OBLIGATIONS – 6.5% | ||||||||||
Risk Share Floating Rate – 4.8% | ||||||||||
Bellemeade Re Ltd. | 3,165 | 3,126,612 | ||||||||
Series 2016-1A, Class M2A | 3,018 | 3,017,572 | ||||||||
Federal Home Loan Mortgage Corp. Structured Agency Credit Risk Debt Notes | 3,250 | 3,776,683 | ||||||||
Series 2013-DN2, Class M2 | 5,605 | 5,671,994 | ||||||||
Series 2014-DN1, Class M2 | 4,085 | 4,103,709 | ||||||||
Series 2014-DN1, Class M3 | 4,455 | 4,602,112 |
14 | • AB INCOME FUND |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Series 2014-DN2, Class M3 | U.S.$ | 4,170 | $ | 4,070,523 | ||||||
Series 2014-DN3, Class M3 | 5,065 | 5,094,980 | ||||||||
Series 2014-DN4, Class M3 | 700 | 721,202 | ||||||||
Series 2014-HQ2, Class M3 | 1,010 | 966,559 | ||||||||
Series 2015-DNA1, Class M3 | 505 | 499,992 | ||||||||
Series 2015-DNA2, Class B | 1,500 | 1,442,765 | ||||||||
Series 2015-DNA2, Class M2 | 4,856 | 4,890,803 | ||||||||
Series 2015-DNA3, Class M3 | 976 | 983,210 | ||||||||
Series 2015-HQA1, Class B | 1,590 | 1,338,027 | ||||||||
Series 2015-HQA1, Class M3 | 1,845 | 1,857,296 | ||||||||
Series 2015-HQA2, Class M3 | 666 | 666,146 | ||||||||
Series 2016-DNA1, Class M2 | 1,228 | 1,244,962 | ||||||||
Series 2016-HQA1, Class M3 | 1,776 | 1,896,880 | ||||||||
Federal National Mortgage Association Connecticut Avenue Securities | 1,606 | 1,636,143 | ||||||||
Series 2014-C04, Class 1M2 | 6,100 | 6,267,035 | ||||||||
Series 2015-C01, Class 1M2 | 4,520 | 4,598,257 |
AB INCOME FUND • | 15 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Series 2015-C02, Class 2M2 | U.S.$ | 916 | $ | 915,858 | ||||||
Series 2015-C03, Class 1M2 | 1,221 | 1,256,615 | ||||||||
Series 2015-C03, Class 2M2 | 2,720 | 2,750,167 | ||||||||
Series 2015-C04, Class 1M2 | 1,810 | 1,896,880 | ||||||||
Series 2015-C04, Class 2M2 | 2,007 | 2,078,867 | ||||||||
Series 2016-C02, Class 1M2 | 3,755 | 4,014,615 | ||||||||
JP Morgan Madison Avenue Securities Trust | 1,890 | 1,962,049 | ||||||||
JP Morgan Madison Avenue Securities Trust | 2,229 | 2,248,326 | ||||||||
|
| |||||||||
79,596,839 | ||||||||||
|
| |||||||||
Non-Agency Fixed Rate – 1.6% | ||||||||||
Alternative Loan Trust | 219 | 196,848 | ||||||||
Series 2006-19CB, Class A24 | 140 | 127,739 | ||||||||
Series 2006-24CB, Class A15 | 2,121 | 1,775,354 | ||||||||
Series 2006-41CB, Class 2A13 | 1,766 | 1,453,457 | ||||||||
Series 2007-13, Class A2 | 2,575 | 2,154,594 | ||||||||
BCAP LLC Trust | 788 | 658,211 | ||||||||
BNPP Mortgage Securities LLC Trust | 1,219 | 980,487 | ||||||||
Citigroup Mortgage Loan Trust | 3,784 | 3,469,229 |
16 | • AB INCOME FUND |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Series 2007-AR4, Class 1A1A | U.S.$ | 544 | $ | 483,159 | ||||||
Series 2010-3, Class 2A2 | 718 | 623,268 | ||||||||
Countrywide Home Loan Mortgage Pass-Through Trust | 1,360 | 1,241,203 | ||||||||
Series 2007-3, Class A30 | 1,438 | 1,282,224 | ||||||||
Series 2007-HY4, Class 1A1 | 802 | 716,782 | ||||||||
Credit Suisse Mortgage Trust | 168 | 123,268 | ||||||||
Series 2010-13R, Class 1A2 | 60 | 56,315 | ||||||||
Series 2010-9R, Class 1A5 | 938 | 915,211 | ||||||||
CSMC Mortgage-Backed Trust | 1,284 | 1,099,391 | ||||||||
First Horizon Alternative Mortgage | 2,120 | 1,628,946 | ||||||||
Morgan Stanley Mortgage Loan Trust | 891 | 799,300 | ||||||||
Series 2007-10XS, Class A2 | 1,116 | 760,163 | ||||||||
Nomura Resecuritization Trust | 1,866 | 1,646,433 | ||||||||
Wells Fargo Mortgage Backed Securities Trust | 3,813 | 3,413,786 | ||||||||
Series 2007-AR8, Class A1 | 1,511 | 1,334,294 | ||||||||
|
| |||||||||
26,939,662 | ||||||||||
|
| |||||||||
Agency Fixed Rate – 0.1% | ||||||||||
Federal National Mortgage Association REMICs | 12,359 | 1,262,882 | ||||||||
|
|
AB INCOME FUND • | 17 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Non-Agency Floating Rate – 0.0% | ||||||||||
First Horizon Alternative Mortgage Securities Trust | U.S.$ | 819 | $ | 366,108 | ||||||
Lehman XS Trust | 1,006 | 297,719 | ||||||||
|
| |||||||||
663,827 | ||||||||||
|
| |||||||||
Total Collateralized Mortgage Obligations | 108,463,210 | |||||||||
|
| |||||||||
CORPORATES – NON-INVESTMENT GRADE – 5.7% | ||||||||||
Industrial – 4.5% | ||||||||||
Basic – 0.2% | ||||||||||
ArcelorMittal | 1,846 | 1,716,780 | ||||||||
Cliffs Natural Resources, Inc. | 879 | 824,062 | ||||||||
Magnetation LLC/Mag Finance Corp. | 1,407 | 70,350 | ||||||||
Novelis, Inc. | 417 | 430,553 | ||||||||
|
| |||||||||
3,041,745 | ||||||||||
|
| |||||||||
Capital Goods – 0.2% | ||||||||||
Apex Tool Group LLC | 975 | 877,500 | ||||||||
Bombardier, Inc. | 1,720 | 1,599,600 | ||||||||
Sealed Air Corp. | 746 | 788,895 | ||||||||
|
| |||||||||
3,265,995 | ||||||||||
|
| |||||||||
Communications - Media – 0.8% | ||||||||||
CCO Holdings LLC/CCO Holdings Capital Corp. | 1,039 | 1,072,768 | ||||||||
5.50%, 5/01/26(h) | 1,722 | 1,756,440 | ||||||||
DISH DBS Corp. | 3,303 | 3,099,865 | ||||||||
Intelsat Jackson Holdings SA | 2,111 | 1,731,020 | ||||||||
Unitymedia GmbH | 1,379 | 1,420,370 | ||||||||
Univision Communications, Inc. | 1,645 | 1,657,338 |
18 | • AB INCOME FUND |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Virgin Media Finance PLC | U.S.$ | 2,246 | $ | 1,954,020 | ||||||
|
| |||||||||
12,691,821 | ||||||||||
|
| |||||||||
Communications - Telecommunications – 0.6% | ||||||||||
Altice Luxembourg SA | 1,342 | 1,338,645 | ||||||||
Columbus International, Inc. | 1,932 | 2,052,171 | ||||||||
Frontier Communications Corp. | 1,500 | 1,395,000 | ||||||||
Numericable-SFR SA | 766 | 741,105 | ||||||||
Sable International Finance Ltd. | 657 | 674,246 | ||||||||
Sprint Corp. | 1,315 | 991,181 | ||||||||
T-Mobile USA, Inc. | 1,452 | 1,539,120 | ||||||||
Windstream Services LLC | 1,000 | 810,000 | ||||||||
7.75%, 10/01/21 | 1,070 | 906,825 | ||||||||
|
| |||||||||
10,448,293 | ||||||||||
|
| |||||||||
Consumer Cyclical - Automotive – 0.4% | ||||||||||
Exide Technologies | 2,341 | 1,673,834 | ||||||||
11.00%, 4/30/20(j)(n) | 5,354 | 4,417,158 | ||||||||
|
| |||||||||
6,090,992 | ||||||||||
|
| |||||||||
Consumer Cyclical - Other – 0.2% | ||||||||||
International Game Technology PLC | 1,923 | 1,947,037 | ||||||||
Shea Homes LP/Shea Homes Funding Corp. | 697 | 702,228 | ||||||||
Taylor Morrison Communities, Inc./Monarch Communities, Inc. | 1,008 | 1,001,700 | ||||||||
|
| |||||||||
3,650,965 | ||||||||||
|
| |||||||||
Consumer Cyclical - Retailers – 0.1% | ||||||||||
American Tire Distributors, Inc. | 1,312 | 1,177,520 | ||||||||
Argos Merger Sub, Inc. | 519 | 530,678 | ||||||||
Neiman Marcus Group Ltd. LLC | 852 | 707,160 | ||||||||
|
| |||||||||
2,415,358 | ||||||||||
|
|
AB INCOME FUND • | 19 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Consumer Non-Cyclical – 0.6% | ||||||||||
BI-LO LLC/BI-LO Finance Corp. | U.S.$ | 780 | $ | 585,000 | ||||||
CHS/Community Health Systems, Inc. | 1,646 | 1,489,630 | ||||||||
Endo Ltd./Endo Finance LLC/Endo Finco, Inc. | 1,734 | 1,695,896 | ||||||||
IASIS Healthcare LLC/IASIS Capital Corp. | 2,256 | 2,154,480 | ||||||||
Mallinckrodt International Finance SA/Mallinckrodt CB LLC | 653 | 589,333 | ||||||||
Post Holdings, Inc. | 705 | 742,894 | ||||||||
Valeant Pharmaceuticals International, Inc. | EUR | 1,800 | 1,638,567 | |||||||
6.125%, 4/15/25(h) | U.S.$ | 2,277 | 1,902,160 | |||||||
|
| |||||||||
10,797,960 | ||||||||||
|
| |||||||||
Energy – 1.0% | ||||||||||
Berry Petroleum Co. LLC | 3,107 | 792,285 | ||||||||
BreitBurn Energy Partners LP/BreitBurn Finance Corp. | 1,374 | 96,180 | ||||||||
Denbury Resources, Inc. | 332 | 195,050 | ||||||||
5.50%, 5/01/22 | 2,118 | 1,360,815 | ||||||||
Energy Transfer Equity LP | 1,104 | 1,032,240 | ||||||||
Golden Energy Offshore Services AS | NOK | 14,977 | 502,205 | |||||||
Paragon Offshore PLC | U.S.$ | 849 | 231,353 | |||||||
7.25%, 8/15/24(h)(k) | 3,230 | 855,950 | ||||||||
Sabine Pass Liquefaction LLC | 3,535 | 3,446,625 | ||||||||
SandRidge Energy, Inc. | 1,259 | 77,114 | ||||||||
SM Energy Co. | 946 | 794,640 | ||||||||
6.50%, 1/01/23 | 731 | 668,865 | ||||||||
Tervita Corp. | 1,327 | 1,144,537 | ||||||||
Vantage Drilling International | 3,068 | – 0 | –^ | |||||||
10.00%, 12/31/20(m) | 168 | 164,640 |
20 | • AB INCOME FUND |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Whiting Petroleum Corp. | U.S.$ | 165 | $ | 146,025 | ||||||
5.75%, 3/15/21 | 1,940 | 1,615,050 | ||||||||
6.25%, 4/01/23 | 2,779 | 2,313,517 | ||||||||
WPX Energy, Inc. | 1,154 | 971,668 | ||||||||
8.25%, 8/01/23 | 250 | 235,000 | ||||||||
|
| |||||||||
16,643,759 | ||||||||||
|
| |||||||||
Other Industrial – 0.1% | ||||||||||
Safway Group Holding LLC/Safway Finance Corp. | 1,650 | 1,650,000 | ||||||||
|
| |||||||||
Technology – 0.2% | ||||||||||
Avaya, Inc. | 1,245 | 793,687 | ||||||||
Energizer Holdings, Inc. | 936 | 936,103 | ||||||||
Infor Software Parent LLC/Infor Software Parent, Inc. | 1,638 | 1,380,015 | ||||||||
|
| |||||||||
3,109,805 | ||||||||||
|
| |||||||||
Transportation - Services – 0.1% | ||||||||||
XPO CNW, Inc. | 2,134 | 1,515,140 | ||||||||
XPO Logistics, Inc. | 144 | 140,227 | ||||||||
|
| |||||||||
1,655,367 | ||||||||||
|
| |||||||||
75,462,060 | ||||||||||
|
| |||||||||
Financial Institutions – 1.0% | ||||||||||
Banking – 0.8% | ||||||||||
Barclays Bank PLC | 656 | 752,891 | ||||||||
7.625%,11/21/22 | 654 | 712,860 | ||||||||
Citigroup, Inc. | 2,055 | 2,029,313 | ||||||||
Series P | 1,850 | 1,792,280 | ||||||||
Credit Agricole SA | 549 | 527,040 | ||||||||
Credit Suisse Group AG | 2,066 | 2,050,505 | ||||||||
Intesa Sanpaolo SpA | 1,462 | 1,375,961 | ||||||||
Royal Bank of Scotland Group PLC | 2,200 | 2,055,900 |
AB INCOME FUND • | 21 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Royal Bank of Scotland PLC (The) | U.S.$ | 596 | $ | 630,215 | ||||||
Societe Generale SA | 1,821 | 1,802,790 | ||||||||
|
| |||||||||
13,729,755 | ||||||||||
|
| |||||||||
Finance – 0.1% | ||||||||||
Creditcorp | 2,000 | 1,040,000 | ||||||||
|
| |||||||||
Other Finance – 0.1% | ||||||||||
iPayment, Inc. | 88 | 90,934 | ||||||||
Series AI | 1,763 | 1,820,749 | ||||||||
|
| |||||||||
1,911,683 | ||||||||||
|
| |||||||||
16,681,438 | ||||||||||
|
| |||||||||
Utility – 0.2% | ||||||||||
Electric – 0.2% | ||||||||||
Dynegy, Inc. | 1,445 | 1,427,342 | ||||||||
GenOn Energy, Inc. | 1,047 | 811,425 | ||||||||
Talen Energy Supply LLC | 965 | 752,700 | ||||||||
|
| |||||||||
2,991,467 | ||||||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | 95,134,965 | |||||||||
|
| |||||||||
CORPORATES – INVESTMENT GRADE – 3.7% | ||||||||||
Financial Institutions – 1.8% | ||||||||||
Banking – 0.5% | ||||||||||
Commerzbank AG | 3,610 | 4,237,599 | ||||||||
JPMorgan Chase & Co. | 2,998 | 3,290,305 | ||||||||
Standard Chartered PLC | 300 | 280,500 | ||||||||
|
| |||||||||
7,808,404 | ||||||||||
|
| |||||||||
Insurance – 1.3% | ||||||||||
AIG Life Holdings, Inc. | 509 | 631,160 | ||||||||
American International Group, Inc. | 2,525 | 3,175,187 | ||||||||
Fairfax Financial Holdings Ltd. | 5,000 | 5,918,245 |
22 | • AB INCOME FUND |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Great-West Life & Annuity Insurance Capital LP II | U.S.$ | 2,707 | $ | 2,402,462 | ||||||
MetLife, Inc. | 3,345 | 3,564,432 | ||||||||
Series C | 1,610 | 1,567,657 | ||||||||
Pacific Life Insurance Co. | 1,500 | 2,159,945 | ||||||||
Transatlantic Holdings, Inc. | 2,122 | 2,824,741 | ||||||||
|
| |||||||||
22,243,829 | ||||||||||
|
| |||||||||
30,052,233 | ||||||||||
|
| |||||||||
Industrial – 1.7% | ||||||||||
Basic – 0.2% | ||||||||||
Braskem Finance Ltd. | 1,204 | 1,182,930 | ||||||||
GTL Trade Finance, Inc. | 2,711 | 2,409,537 | ||||||||
7.25%, 4/16/44(h) | 274 | 232,215 | ||||||||
Minsur SA | 285 | 275,647 | ||||||||
|
| |||||||||
4,100,329 | ||||||||||
|
| |||||||||
Capital Goods – 0.1% | ||||||||||
General Electric Co. | 1,166 | 1,211,183 | ||||||||
|
| |||||||||
Communications - Telecommunications – 0.5% | ||||||||||
Qwest Corp. | 1,275 | 1,258,795 | ||||||||
Verizon Communications, Inc. | 6,159 | 6,250,110 | ||||||||
|
| |||||||||
7,508,905 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 0.3% | ||||||||||
Kraft Heinz Foods Co. | 2,700 | 2,778,456 | ||||||||
3.50%, 7/15/22(h) | 2,294 | 2,420,863 | ||||||||
|
| |||||||||
5,199,319 | ||||||||||
|
| |||||||||
Energy – 0.3% | ||||||||||
Devon Energy Corp. | 927 | 797,693 | ||||||||
5.60%, 7/15/41 | 471 | 415,171 | ||||||||
7.95%, 4/15/32 | 410 | 441,544 | ||||||||
Devon Financing Co. LLC | 270 | 289,069 |
AB INCOME FUND • | 23 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Husky Energy, Inc. | U.S.$ | 350 | $ | 390,651 | ||||||
Kinder Morgan, Inc./DE | 1,468 | 1,367,708 | ||||||||
Series G | 1,367 | 1,472,620 | ||||||||
|
| |||||||||
5,174,456 | ||||||||||
|
| |||||||||
Technology – 0.2% | ||||||||||
Hewlett Packard Enterprise Co. | 3,670 | 3,659,016 | ||||||||
|
| |||||||||
Transportation - Airlines – 0.1% | ||||||||||
Delta Air Lines Pass-Through Trust | 1,225 | 1,411,660 | ||||||||
|
| |||||||||
28,264,868 | ||||||||||
|
| |||||||||
Utility – 0.2% | ||||||||||
Electric – 0.2% | ||||||||||
ComEd Financing III | 3,462 | 3,645,385 | ||||||||
|
| |||||||||
Total Corporates – Investment Grade | 61,962,486 | |||||||||
|
| |||||||||
AGENCIES – 3.4% | ||||||||||
Agency Debentures – 3.4% | ||||||||||
Federal Home Loan Banks | 8,695 | 11,931,775 | ||||||||
Federal Home Loan Mortgage Corp. | 15,000 | 21,829,545 | ||||||||
Residual Funding Corp. Principal Strip | 25,000 | 23,448,175 | ||||||||
|
| |||||||||
Total Agencies | 57,209,495 | |||||||||
|
| |||||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES – 3.4% | ||||||||||
Non-Agency Fixed Rate CMBS – 3.1% | ||||||||||
Banc of America Commercial Mortgage Trust | 1,517 | 1,508,600 | ||||||||
Citigroup Commercial Mortgage Trust | 6,525 | 5,896,507 | ||||||||
Commercial Mortgage Trust | 3,219 | 2,811,344 |
24 | • AB INCOME FUND |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Series 2014-LC17, Class D | U.S.$ | 3,549 | $ | 2,701,192 | ||||||
Series 2014-UBS5, Class D | 1,041 | 743,026 | ||||||||
Series 2015-DC1, Class D | 2,730 | 2,079,992 | ||||||||
Csail Commercial Mortgage Trust | 4,091 | 3,076,905 | ||||||||
GS Mortgage Securities Trust | 2,652 | 2,605,931 | ||||||||
Series 2013-GC13, Class D | 9,440 | 8,113,135 | ||||||||
JP Morgan Chase Commercial Mortgage Securities Trust | 1,863 | 1,759,654 | ||||||||
JPMBB Commercial Mortgage Securities Trust | 1,300 | 1,205,511 | ||||||||
LB-UBS Commercial Mortgage Trust | 1,750 | 1,746,586 | ||||||||
ML-CFC Commercial Mortgage Trust | 5,536 | 5,504,618 | ||||||||
Morgan Stanley Bank of America Merrill Lynch Trust | 1,194 | 868,606 | ||||||||
Wells Fargo Commercial Mortgage Trust | 3,781 | 2,724,172 | ||||||||
Series 2015-LC20, Class D | 4,000 | 2,985,775 | ||||||||
WF-RBS Commercial Mortgage Trust | 4,000 | 3,859,418 | ||||||||
Series 2014-C23, Class D | 2,699 | 2,094,197 | ||||||||
|
| |||||||||
52,285,169 | ||||||||||
|
| |||||||||
Non-Agency Floating Rate CMBS – 0.3% | ||||||||||
Great Wolf Trust | 4,138 | 4,096,549 |
AB INCOME FUND • | 25 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Indus Eclipse PLC | GBP | 6 | $ | 8,462 | ||||||
|
| |||||||||
4,105,011 | ||||||||||
|
| |||||||||
Agency CMBS – 0.0% | ||||||||||
Government National Mortgage Association | U.S.$ | 464 | 335 | |||||||
|
| |||||||||
Total Commercial Mortgage-Backed Securities | 56,390,515 | |||||||||
|
| |||||||||
WHOLE LOAN TRUSTS – 1.6% | ||||||||||
Performing Asset – 1.6% | ||||||||||
Alpha Credit Debt Fund LLC | 1,234 | 1,233,656 | ||||||||
16.00%, 1/01/21(d)(m) | MXN | 32,620 | 1,895,999 | |||||||
AlphaCredit Capital, SA de CV | 13,060 | 759,084 | ||||||||
Cara Aircraft Leasing 28548, Inc. | U.S.$ | 220 | 219,563 | |||||||
Cara Aircraft Leasing 28563, Inc. | 372 | 372,386 | ||||||||
Cara Aircraft Leasing 28868, Inc. | 255 | 254,678 | ||||||||
Deutsche Bank Mexico SA | MXN | 45,309 | 1,876,387 | |||||||
8.00%, 10/31/34(d)(m) | 28,336 | 1,173,470 | ||||||||
Flexpath Wh I LLC | U.S.$ | 1,311 | 1,280,235 | |||||||
Recife Funding Ltd. | 2,884 | 3,093,092 | ||||||||
Sheridan Auto Loan Holdings I LLC | 3,031 | 2,980,438 | ||||||||
Sheridan Consumer Finance Trust | 11,270 | 10,663,000 | ||||||||
|
| |||||||||
Total Whole Loan Trusts | 25,801,988 | |||||||||
|
| |||||||||
Shares | ||||||||||
COMMON STOCKS – 1.3% | ||||||||||
Financials – 1.2% | ||||||||||
Diversified Financial Services – 0.0% | ||||||||||
iPayment, Inc.(d)(m)(o) | 110,385 | 364,270 | ||||||||
|
|
26 | • AB INCOME FUND |
Portfolio of Investments
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
Insurance – 1.2% | ||||||||||
Mt Logan Re Ltd. (Preference Shares)(n)(o)(r)(s) | 4,476 | $ | 4,528,422 | |||||||
Mt Logan Re Ltd. (Preference Shares)(n)(o)(s)(t) | 15,000 | 15,037,437 | ||||||||
|
| |||||||||
19,565,859 | ||||||||||
|
| |||||||||
19,930,129 | ||||||||||
|
| |||||||||
Consumer Discretionary – 0.1% | ||||||||||
Auto Components – 0.0% | ||||||||||
Exide Technologies(d)(n)(o) | 45,970 | 150,322 | ||||||||
|
| |||||||||
Media – 0.1% | ||||||||||
Ion Media Networks, Inc. – Class A(d)(m)(o) | 2,512 | 1,063,983 | ||||||||
|
| |||||||||
1,214,305 | ||||||||||
|
| |||||||||
Energy – 0.0% | ||||||||||
Energy Equipment & Services – 0.0% | ||||||||||
Vantage Drilling International(m)(o) | 5,303 | 503,785 | ||||||||
|
| |||||||||
Total Common Stocks | 21,648,219 | |||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
EMERGING MARKETS – SOVEREIGNS – 1.0% | ||||||||||
Angola – 0.1% | ||||||||||
Angolan Government International Bond | U.S.$ | 2,615 | 2,562,700 | |||||||
|
| |||||||||
Argentina – 0.3% | ||||||||||
Argentine Republic Government International Bond | 1,518 | 1,580,693 | ||||||||
6.875%, 4/22/21(h) | 1,730 | 1,787,090 | ||||||||
7.50%, 4/22/26(h) | 870 | 889,575 | ||||||||
|
| |||||||||
4,257,358 | ||||||||||
|
| |||||||||
Dominican Republic – 0.1% | ||||||||||
Dominican Republic International Bond | 1,873 | 1,985,380 | ||||||||
|
| |||||||||
Ghana – 0.1% | ||||||||||
Ghana Government International Bond | 1,406 | 1,381,395 | ||||||||
|
| |||||||||
Ivory Coast – 0.1% | ||||||||||
Ivory Coast Government International Bond | 2,440 | 2,318,488 | ||||||||
|
|
AB INCOME FUND • | 27 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Kenya – 0.2% | ||||||||||
Kenya Government International Bond | U.S.$ | 2,715 | $ | 2,682,311 | ||||||
|
| |||||||||
Zambia – 0.1% | ||||||||||
Zambia Government International Bond | 1,553 | 1,281,536 | ||||||||
|
| |||||||||
Total Emerging Markets – Sovereigns | 16,469,168 | |||||||||
|
| |||||||||
EMERGING MARKETS – CORPORATE BONDS – 0.8% | ||||||||||
Industrial – 0.8% | ||||||||||
Basic – 0.1% | ||||||||||
Elementia SAB de CV | 1,039 | 1,028,610 | ||||||||
|
| |||||||||
Capital Goods – 0.3% | ||||||||||
Cemex SAB de CV | 1,176 | 1,252,440 | ||||||||
Odebrecht Finance Ltd. | 6,760 | 2,501,200 | ||||||||
5.25%, 6/27/29(h) | 2,103 | 715,020 | ||||||||
Servicios Corporativos Javer SAPI de CV | 884 | 919,360 | ||||||||
|
| |||||||||
5,388,020 | ||||||||||
|
| |||||||||
Communications - Telecommunications – 0.1% | ||||||||||
Digicel Ltd. | 700 | 640,500 | ||||||||
6.75%, 3/01/23(h) | 385 | 347,222 | ||||||||
|
| |||||||||
987,722 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 0.2% | ||||||||||
Cosan Luxembourg SA | 1,361 | 1,231,705 | ||||||||
9.50%, 3/14/18(h) | BRL | 3,117 | 757,216 | |||||||
Marfrig Overseas Ltd. | U.S.$ | 2,151 | 2,204,775 | |||||||
Tonon Luxembourg SA | 2,354 | 329,610 | ||||||||
Virgolino de Oliveira Finance SA | 4,738 | 170,568 | ||||||||
10.875%, 1/13/20(f)(k) | 750 | 150,000 | ||||||||
11.75%, 2/09/22(f)(k) | 1,690 | 60,840 | ||||||||
|
| |||||||||
4,904,714 | ||||||||||
|
| |||||||||
Transportation - Airlines – 0.1% | ||||||||||
TAM Capital 3, Inc. | 1,503 | 1,373,366 | ||||||||
|
| |||||||||
Total Emerging Markets – Corporate Bonds | 13,682,432 | |||||||||
|
|
28 | • AB INCOME FUND |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
QUASI-SOVEREIGNS – 0.8% | ||||||||||
Quasi-Sovereign Bonds – 0.8% | ||||||||||
Indonesia – 0.4% | ||||||||||
Majapahit Holding BV | U.S.$ | 6,188 | $ | 7,502,950 | ||||||
|
| |||||||||
Mexico – 0.3% | ||||||||||
Petroleos Mexicanos | 4,900 | 4,890,200 | ||||||||
|
| |||||||||
South Africa – 0.1% | ||||||||||
Eskom Holdings SOC Ltd. | 1,070 | 1,008,036 | ||||||||
|
| |||||||||
Total Quasi-Sovereigns | 13,401,186 | |||||||||
|
| |||||||||
EMERGING MARKETS – TREASURIES – 0.5% | ||||||||||
Brazil – 0.5% | ||||||||||
Brazil Notas do Tesouro Nacional | BRL | 32,570 | 8,180,396 | |||||||
|
| |||||||||
LOCAL GOVERNMENTS – MUNICIPAL BONDS – 0.4% | ||||||||||
United States – 0.4% | ||||||||||
State of Illinois | U.S.$ | 3,330 | 3,688,541 | |||||||
Texas Transportation Commission State Highway Fund | 2,560 | 3,129,139 | ||||||||
|
| |||||||||
Total Local Governments – Municipal Bonds | 6,817,680 | |||||||||
|
| |||||||||
ASSET-BACKED SECURITIES – 0.3% | ||||||||||
Autos - Fixed Rate – 0.2% | ||||||||||
Exeter Automobile Receivables Trust | 1,220 | 1,209,742 | ||||||||
Hertz Vehicle Financing LLC | 2,169 | 2,108,523 | ||||||||
|
| |||||||||
3,318,265 | ||||||||||
|
|
AB INCOME FUND • | 29 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Other ABS - Fixed Rate – 0.1% | ||||||||||
Atlas 2014-1 Limited | U.S.$ | 1,688 | $ | 1,653,848 | ||||||
|
| |||||||||
1,653,848 | ||||||||||
|
| |||||||||
Total Asset-Backed Securities | 4,972,113 | |||||||||
|
| |||||||||
GOVERNMENTS – SOVEREIGN AGENCIES – 0.3% | ||||||||||
Brazil – 0.3% | ||||||||||
Petrobras Global Finance BV | 5,000 | 4,443,750 | ||||||||
|
| |||||||||
Shares | ||||||||||
PREFERRED STOCKS – 0.2% | ||||||||||
Financial Institutions – 0.2% | ||||||||||
REITS – 0.2% | ||||||||||
Digital Realty Trust, Inc. | 100,000 | 2,615,000 | ||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
GOVERNMENTS – SOVEREIGN BONDS – 0.1% | ||||||||||
Indonesia – 0.1% | ||||||||||
Indonesia Government International Bond | U.S.$ | 801 | 1,113,191 | |||||||
|
| |||||||||
Shares | ||||||||||
INVESTMENT COMPANIES – 0.1% | ||||||||||
Funds and Investment Trusts – 0.1% | ||||||||||
OCL Opportunities Fund II(d)(m)# (cost $899,963) | 6,916 | 1,106,616 | ||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
BANK LOANS – 0.0% | ||||||||||
Industrial – 0.0% | ||||||||||
Basic – 0.0% | ||||||||||
Magnetation LLC | U.S.$ | 1,652 | 662,265 | |||||||
|
|
30 | • AB INCOME FUND |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
| ||||||||||
Other Industrial – 0.0% | ||||||||||
Unifrax Holding Co. | EUR | 6 | $ | 6,715 | ||||||
|
| |||||||||
Total Bank Loans | 668,980 | |||||||||
|
| |||||||||
MORTGAGE PASS-THROUGHS – 0.0% | ||||||||||
Agency Fixed Rate 30-Year – 0.0% | ||||||||||
Federal National Mortgage Association | U.S.$ | 23 | 28,144 | |||||||
Series 1998 | 17 | 20,158 | ||||||||
|
| |||||||||
Total Mortgage Pass-Throughs | 48,302 | |||||||||
|
| |||||||||
WARRANTS – 0.0% | ||||||||||
Flexpath Capital, Inc.(o) | 17,195 | – 0 | – | |||||||
|
| |||||||||
Shares | ||||||||||
SHORT-TERM INVESTMENTS – 3.6% | ||||||||||
Investment Companies – 3.6% | ||||||||||
AB Fixed Income Shares, Inc. – | 60,319,931 | 60,319,931 | ||||||||
|
| |||||||||
Total Investments – 148.7% | 2,474,126,103 | |||||||||
Other assets less liabilities – (48.7)% | (810,455,673 | ) | ||||||||
|
| |||||||||
Net Assets – 100.0% | $ | 1,663,670,430 | ||||||||
|
|
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at April 30, 2016 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Sold Contracts | ||||||||||||||||||||
U.S. T-Note | 2,637 | June 2016 | $ | 343,900,750 | $ | 342,974,812 | $ | 925,938 | ||||||||||||
U.S. Long Bond (CBT) Futures | 1,994 | June 2016 | 329,663,737 | 325,645,125 | 4,018,612 | |||||||||||||||
Euro-BOBL Futures | 429 | June 2016 | 64,277,004 | 64,617,834 | 340,830 | |||||||||||||||
|
| |||||||||||||||||||
$ | 5,285,380 | |||||||||||||||||||
|
|
AB INCOME FUND • | 31 |
Portfolio of Investments
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note D)
Counterparty | Contracts to Deliver(000) | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||
Barclays Capital | MYR | 16,126 | USD | 4,146 | 7/15/16 | $ | 36,095 | |||||||||||||
Barclays Capital | USD | 12,900 | INR | 869,016 | 7/15/16 | 20,976 | ||||||||||||||
BNP Paribas SA | GBP | 1,032 | USD | 1,465 | 5/12/16 | (43,379 | ) | |||||||||||||
BNP Paribas SA | AUD | 26,810 | USD | 20,019 | 6/10/16 | (334,327 | ) | |||||||||||||
BNP Paribas SA | USD | 278 | ARS | 4,842 | 1/26/17 | 10,380 | ||||||||||||||
BNP Paribas SA | USD | 278 | ARS | 4,870 | 1/31/17 | 11,152 | ||||||||||||||
BNP Paribas SA | USD | 278 | ARS | 4,898 | 2/03/17 | 12,274 | ||||||||||||||
BNP Paribas SA | USD | 1,120 | ARS | 19,737 | 2/13/17 | 46,505 | ||||||||||||||
BNP Paribas SA | USD | 845 | ARS | 14,969 | 2/16/17 | 38,635 | ||||||||||||||
BNP Paribas SA | USD | 563 | ARS | 10,026 | 2/17/17 | 28,298 | ||||||||||||||
BNP Paribas SA | USD | 1,690 | ARS | 30,416 | 2/21/17 | 102,053 | ||||||||||||||
BNP Paribas SA | USD | 282 | ARS | 5,126 | 2/23/17 | 20,093 | ||||||||||||||
BNP Paribas SA | USD | 537 | ARS | 9,826 | 2/24/17 | 41,246 | ||||||||||||||
BNP Paribas SA | USD | 841 | ARS | 15,645 | 2/27/17 | 78,396 | ||||||||||||||
BNP Paribas SA | USD | 441 | ARS | 8,276 | 2/28/17 | 44,839 | ||||||||||||||
BNP Paribas SA | USD | 441 | ARS | 8,386 | 3/01/17 | 51,132 | ||||||||||||||
BNP Paribas SA | USD | 486 | ARS | 9,473 | 3/02/17 | 70,332 | ||||||||||||||
Citibank, NA | EUR | 10,682 | USD | 11,605 | 5/13/16 | (630,105 | ) | |||||||||||||
Citibank, NA | USD | 8,682 | EUR | 7,647 | 5/13/16 | 76,921 | ||||||||||||||
Citibank, NA | USD | 4,147 | TRY | 11,935 | 5/25/16 | 91,744 | ||||||||||||||
Citibank, NA | USD | 3,276 | RUB | 219,834 | 6/16/16 | 80,465 | ||||||||||||||
Credit Suisse International | GBP | 11,988 | USD | 17,166 | 5/12/16 | (351,482 | ) | |||||||||||||
Credit Suisse International | EUR | 16,176 | USD | 17,982 | 5/13/16 | (545,777 | ) | |||||||||||||
Credit Suisse International | SEK | 146,098 | EUR | 15,771 | 5/13/16 | (135,199 | ) | |||||||||||||
Credit Suisse International | USD | 59,190 | CAD | 74,176 | 6/23/16 | (71,275 | ) | |||||||||||||
Deutsche Bank AG | USD | 2,905 | TWD | 93,698 | 5/20/16 | (4,496 | ) | |||||||||||||
Deutsche Bank AG | USD | 18,008 | SEK | 145,877 | 6/15/16 | 185,320 | ||||||||||||||
Deutsche Bank AG | MYR | 67,758 | USD | 17,374 | 7/15/16 | 106,996 | ||||||||||||||
Deutsche Bank AG | USD | 9,668 | SGD | 12,994 | 7/15/16 | (19,812 | ) | |||||||||||||
Goldman Sachs Bank USA | BRL | 32,305 | USD | 9,028 | 5/03/16 | (365,304 | ) | |||||||||||||
Goldman Sachs Bank USA | USD | 9,196 | BRL | 32,305 | 5/03/16 | 196,480 | ||||||||||||||
Goldman Sachs Bank USA | USD | 7,389 | BRL | 26,007 | 6/02/16 | 98,313 | ||||||||||||||
Goldman Sachs Bank USA | TWD | 125,389 | USD | 3,794 | 6/21/16 | (87,408 | ) | |||||||||||||
Goldman Sachs Bank USA | CAD | 81,280 | USD | 61,816 | 6/23/16 | (2,965,196 | ) | |||||||||||||
HSBC Bank USA | USD | 17,211 | JPY | 1,946,390 | 5/20/16 | 1,087,915 | ||||||||||||||
HSBC Bank USA | USD | 12,901 | TRY | 37,554 | 5/25/16 | 437,688 | ||||||||||||||
HSBC Bank USA | USD | 4,037 | MXN | 70,898 | 6/17/16 | 65,928 | ||||||||||||||
HSBC Bank USA | USD | 4,356 | CAD | 5,496 | 6/23/16 | 24,751 | ||||||||||||||
JPMorgan Chase Bank | USD | 17,326 | AUD | 22,702 | 6/10/16 | (91,016 | ) | |||||||||||||
JPMorgan Chase Bank | USD | 11,836 | MXN | 209,326 | 6/17/16 | 277,781 | ||||||||||||||
Morgan Stanley & Co., Inc. | USD | 21,483 | MYR | 83,418 | 6/10/16 | (205,252 | ) | |||||||||||||
Royal Bank of Scotland PLC | USD | 13,460 | RUB | 935,474 | 6/16/16 | 823,551 | ||||||||||||||
Standard Chartered Bank | BRL | 6,199 | USD | 1,792 | 5/03/16 | (10,632 | ) | |||||||||||||
Standard Chartered Bank | USD | 1,726 | BRL | 6,199 | 5/03/16 | 75,940 | ||||||||||||||
Standard Chartered Bank | TWD | 595,170 | USD | 18,277 | 5/20/16 | (146,600 | ) | |||||||||||||
Standard Chartered Bank | USD | 416 | BRL | 1,465 | 6/02/16 | 5,750 | ||||||||||||||
Standard Chartered Bank | TWD | 1,003,089 | USD | 30,429 | 6/21/16 | (618,411 | ) | |||||||||||||
Standard Chartered Bank | SGD | 37,393 | USD | 27,636 | 7/15/16 | (127,837 | ) | |||||||||||||
State Street Bank & Trust Co. | USD | 260 | EUR | 231 | 5/13/16 | 5,225 | ||||||||||||||
State Street Bank & Trust Co. | JPY | 1,945,921 | USD | 17,478 | 5/20/16 | (815,786 | ) | |||||||||||||
State Street Bank & Trust Co. | NOK | 2,985 | USD | 360 | 6/15/16 | (11,177 | ) | |||||||||||||
State Street Bank & Trust Co. | USD | 9,668 | SGD | 12,994 | 7/15/16 | (19,862 | ) | |||||||||||||
|
| |||||||||||||||||||
$ | (3,347,159 | ) | ||||||||||||||||||
|
|
32 | • AB INCOME FUND |
Portfolio of Investments
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note D)
Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Sale Contracts | ||||||||||||||||||||
Citigroup Global Markets, Inc./(INTRCONX) | ||||||||||||||||||||
CDX-NAHY Series 21, 5 Year Index, 12/20/18* | 5.00 | % | 2.79 | % | $ | 12,323 | $ | 755,426 | $ | 231,689 | ||||||||||
CDX-NAHY Series 24, 5 Year Index, 6/20/20* | 5.00 | 3.63 | 716 | 40,268 | 10,809 | |||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 5,075 | 172,870 | 91,086 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 5,933 | 203,026 | 106,875 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 230 | 7,871 | 3,765 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 2,652 | 90,751 | 33,532 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 383 | 13,106 | 7,087 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 1,914 | 65,496 | 33,145 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 306 | 10,471 | 3,526 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 574 | 19,642 | 8,036 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 765 | 26,178 | 13,398 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 765 | 26,179 | 11,088 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 765 | 26,213 | 6,932 | |||||||||||||||
CDX-NAHY Series 26, 5 Year Index, 6/20/21* | 5.00 | 4.35 | 383 | 13,106 | 2,820 | |||||||||||||||
Morgan Stanley & Co. LLC/(INTRCONX) | ||||||||||||||||||||
CDX-NAHY Series 25, 5 Year Index, 12/20/20* | 5.00 | 4.29 | 1,555 | 52,968 | 16,211 | |||||||||||||||
|
|
|
| |||||||||||||||||
$ | 1,523,571 | $ | 579,999 | |||||||||||||||||
|
|
|
|
* | 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) | |||||||||||||
Citigroup Global Markets, Inc./(CME Group) | CAD | 91,930 | 3/10/17 | 0.973% | 3 Month CDOR | $ | 8,878 | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | AUD | 115,610 | 3/11/17 | 2.140% | 3 Month BBSW | (12,763 | ) |
AB INCOME FUND • | 33 |
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) | |||||||||||||
Citigroup Global Markets, Inc./(CME Group) | $ | 149,400 | 6/05/17 | 1.054% | 3 Month CDOR | $ | (140,946 | ) | ||||||||||
Citigroup Global Markets, Inc./(CME Group) | AUD | 208,120 | 6/09/17 | 2.200% | 3 Month BBSW | (200,225 | ) | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | NZD | 157,680 | 6/09/17 | 3.368% | 3 Month BKBM | (2,306,709 | ) | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | GBP | 17,170 | 6/05/20 | 6 Month LIBOR | 1.651% | 697,012 | ||||||||||||
Citigroup Global Markets, Inc./(CME Group) | 12,260 | 6/05/20 | 6 Month LIBOR | 1.644% | 492,517 | |||||||||||||
Citigroup Global Markets, Inc./(CME Group) | $ | 42,130 | 2/10/25 | 2.034% | 3 Month LIBOR | (1,630,107 | ) | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | CAD | 11,800 | 3/10/25 | 3 Month CDOR | 2.019% | 361,498 | ||||||||||||
Citigroup Global Markets, Inc./(CME Group) | AUD | 18,170 | 3/11/25 | 6 Month BBSW | 2.973% | 420,325 | ||||||||||||
Citigroup Global Markets, Inc./(CME Group) | CAD | 19,810 | 6/05/25 | 3 Month CDOR | 2.281% | 1,000,589 | ||||||||||||
Citigroup Global Markets, Inc./(CME Group) | AUD | 27,550 | 6/09/25 | 6 Month BBSW | 3.384% | 1,414,312 | ||||||||||||
Citigroup Global Markets, Inc./(CME Group) | NZD | 18,390 | 6/09/25 | 3 Month BKBM | 4.068% | 1,332,939 | ||||||||||||
Citigroup Global Markets, Inc./(CME Group) | 18,390 | 6/09/25 | 3 Month BKBM | 4.068% | 1,332,977 | |||||||||||||
Citigroup Global Markets, Inc./(CME Group) | $ | 8,010 | 6/09/25 | 2.489% | 3 Month LIBOR | (663,761 | ) | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | 6,010 | 6/09/25 | 2.491% | 3 Month LIBOR | (499,117 | ) | ||||||||||||
Citigroup Global Markets, Inc./(CME Group) | NZD | 19,500 | 7/31/25 | 3.700% | 3 Month BKBM | (975,597 | ) | |||||||||||
Citigroup Global Markets, Inc./(CME Group) | 7,940 | 7/31/25 | 3 Month LIBOR | 2.365% | 551,220 | |||||||||||||
Citigroup Global Markets, Inc./(CME Group) | GBP | 2,720 | 6/05/45 | 2.394% | 6 Month LIBOR | (609,332 | ) |
34 | • AB INCOME FUND |
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) | |||||||||||||
Citigroup Global Markets, Inc./(LCH Clearnet) | GBP | 12,000 | 3/03/19 | 6 Month LIBOR | 1.921% | $ | 516,006 | |||||||||||
Citigroup Global Markets, Inc./(LCH Clearnet) | $ | 47,150 | 3/25/24 | 2.887% | 3 Month LIBOR | (4,922,522 | ) | |||||||||||
Citigroup Global Markets, Inc./(LCH Clearnet) | 46,860 | 4/02/24 | 2.851% | 3 Month LIBOR | (4,751,295 | ) | ||||||||||||
|
| |||||||||||||||||
$ | (8,584,101 | ) | ||||||||||||||||
|
|
CREDIT DEFAULT SWAPS (see Note D)
Swap Counterparty & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Upfront Premiums Paid (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||
Sale Contracts | ||||||||||||||||||||||||
Barclays Bank PLC | ||||||||||||||||||||||||
CDX-CMBX.NA., | 5.00 | % | 6.82 | % | $ | 5,000 | $ | (454,514 | ) | $ | (135,325 | ) | $ | (319,189 | ) | |||||||||
Credit Suisse International | ||||||||||||||||||||||||
CDX-CMBX.NA., | 3.00 | 4.06 | 660 | (37,907 | ) | (9,403 | ) | (28,504 | ) | |||||||||||||||
CDX-CMBX.NA., | 5.00 | 6.82 | 4,000 | (363,611 | ) | 50,618 | (414,229 | ) | ||||||||||||||||
Kohl’s Corp., | 1.00 | 1.05 | 591 | (287 | ) | (5,008 | ) | 4,721 | ||||||||||||||||
Kohl’s Corp., | 1.00 | 1.05 | 238 | (116 | ) | (2,019 | ) | 1,903 | ||||||||||||||||
Kohl’s Corp., | 1.00 | 1.05 | 241 | (117 | ) | (2,041 | ) | 1,924 | ||||||||||||||||
Kohl’s Corp., | 1.00 | 1.05 | 347 | (168 | ) | (2,636 | ) | 2,468 | ||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||||
CDX-CMBX.NA., | 3.00 | 4.06 | 2,000 | (114,871 | ) | (28,489 | ) | (86,382 | ) | |||||||||||||||
CDX-CMBX.NA., | 3.00 | 4.06 | 4,400 | (252,717 | ) | (52,311 | ) | (200,406 | ) | |||||||||||||||
CDX-CMBX.NA., | 3.00 | 4.06 | 2,000 | (114,871 | ) | (28,489 | ) | (86,382 | ) | |||||||||||||||
CDX-CMBX.NA., | 5.00 | 6.82 | 5,000 | (454,514 | ) | (135,325 | ) | (319,189 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | (1,793,693 | ) | $ | (350,428 | ) | $ | (1,443,265 | ) | ||||||||||||||||
|
|
|
|
|
|
* | Termination date |
AB INCOME FUND • | 35 |
Portfolio of Investments
REVERSE REPURCHASE AGREEMENTS (see Note D)
Broker | Interest Rate | Maturity | U.S. $ Value at April 30, 2016 | |||||||||||||||
Credit Suisse Securities (USA) LLC+ | (0.50 | )%* | — | $ | 943,337 | |||||||||||||
HSBC Bank USA | 0.35 | % | 4/13/18 | 99,058,573 | ||||||||||||||
HSBC Bank USA | 0.35 | % | 4/19/18 | 101,911,945 | ||||||||||||||
HSBC Bank USA | 0.35 | % | 4/20/18 | 157,654,679 | ||||||||||||||
HSBC Bank USA | 0.35 | % | 4/27/18 | 53,520,786 | ||||||||||||||
JP Morgan Chase Bank | 0.35 | % | 4/05/18 | 46,372,220 | ||||||||||||||
JP Morgan Chase Bank | 0.35 | % | 4/09/18 | 49,307,795 | ||||||||||||||
JP Morgan Chase Bank | 0.35 | % | 4/18/18 | 51,758,291 | ||||||||||||||
JP Morgan Chase Bank | 0.35 | % | 4/26/18 | 254,712,994 | ||||||||||||||
|
| |||||||||||||||||
$ | 815,240,620 | |||||||||||||||||
|
|
+ | The reverse repurchase agreement matures on demand. Interest rate resets daily and the rate shown is the rate in effect on April 30, 2016. |
* | Interest payment due from counterparty. |
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:
Remaining Contracted Maturity of the Agreements
Reverse Repurchase Agreements
Overnight and Continuous | Up to 30 Days | 31-90 Days | Greater than 90 Days | Total | ||||||||||||||||
Governments – Treasuries | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 814,297,283 | $ | 814,297,283 | |||||||
Quasi-Sovereigns | $ | 943,337 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 943,337 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 943,337 | $ | – 0 | – | $ | – 0 | – | $ | 814,297,283 | $ | 815,240,620 | ||||||||
|
|
|
|
|
|
|
|
|
|
^ | Less than $0.50. |
(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) | Position, or a portion thereof, has been segregated to collateralize margin requirements for open futures contracts. |
(d) | Fair valued by the Adviser. |
(e) | Floating Rate Security. Stated interest rate was in effect at April 30, 2016. |
(f) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities, which represent 0.36% of net assets as of April 30, 2016, are considered illiquid and restricted. |
36 | • AB INCOME FUND |
Portfolio of Investments
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Bellemeade Re Ltd. Series 2015-1A, Class M1 | 7/27/15 | $ | 3,165,308 | $ | 3,126,612 | 0.19 | % | |||||||||
Golden Energy Offshore Services AS | 5/14/14 - 12/04/15 | 1,674,187 | 502,205 | 0.03 | % | |||||||||||
JP Morgan Madison Avenue Securities Trust Series 2014-CH1, Class M2 | 11/06/15 | 1,862,635 | 1,962,049 | 0.12 | % | |||||||||||
Magnetation LLC/Mag Finance Corp. | 2/19/15 | 861,788 | 70,350 | 0.00 | % | |||||||||||
Virgolino de Oliveira Finance SA | 6/13/13 - 1/27/14 | 3,510,949 | 170,568 | 0.01 | % | |||||||||||
Virgolino de Oliveira Finance SA | 6/09/14 | 745,965 | 150,000 | 0.01 | % | |||||||||||
Virgolino de Oliveira Finance SA | 1/29/14 - 2/03/14 | 916,308 | 60,840 | 0.00 | % |
(g) | When-Issued or delayed delivery security. |
(h) | 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 April 30, 2016, the aggregate market value of these securities amounted to $159,426,944 or 9.6% of net assets. |
(i) | IO – Interest Only |
(j) | 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 April 30, 2016. |
(k) | Security is in default and is non-income producing. |
(l) | Convertible security. |
(m) | Illiquid security. |
(n) | Restricted and illiquid security. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Exide Technologies Series AI | 4/30/15 - 12/01/15 | $ | 4,997,214 | $ | 4,417,158 | 0.27 | % | |||||||||
Exide Technologies | 4/30/15 | 87,194 | 150,322 | 0.01 | % | |||||||||||
Mt Logan Re Ltd. | 4/01/15 | 15,000,000 | 15,037,437 | 0.90 | % | |||||||||||
Mt Logan Re Ltd. | 12/30/14 | 4,476,000 | 4,528,422 | 0.27 | % |
(o) | Non-income producing security. |
(p) | Securities are perpetual and, thus, do not have a predetermined maturity date. The date shown, if applicable, reflects the next call date. |
AB INCOME FUND • | 37 |
Portfolio of Investments
(q) | Variable rate coupon, rate shown as of April 30, 2016. |
(r) | Effective prepayment date of April 2017. |
(s) | The security is subject to a 12 month lock-up period, after which semi-annual redemptions are permitted. |
(t) | Effective prepayment date of December 2016. |
(u) | 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. |
(v) | Investment in affiliated money market mutual fund. The rate shown represents the 7-day yield as of period end. |
# | The company invests on a global basis in multiple asset classes including (but not limited to) private equity debt securities, property-related assets and private equity securities including warrants and preferred stock. |
Currency Abbreviations:
ARS – Argentine Peso
AUD – Australian Dollar
BRL – Brazilian Real
CAD – Canadian Dollar
EUR – Euro
GBP – Great British Pound
INR – Indian Rupee
JPY – Japanese Yen
MXN – Mexican Peso
MYR – Malaysian Ringgit
NOK – Norwegian Krone
NZD – New Zealand Dollar
RUB – Russian Ruble
SEK – Swedish Krona
SGD – Singapore Dollar
TRY – Turkish Lira
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)
BOBL – Bundesobligationen
CBT – Chicago Board of Trade
CDOR – Canadian Dealer Offered Rate
CDX-CMBX.NA – North American Commercial Mortgage-Backed Index
CDX-NAHY – North American High Yield Credit Default Swap Index
CMBS – Commercial Mortgage-Backed Securities
CME – Chicago Mercantile Exchange
EURIBOR – Euro Interbank Offered Rate
INTRCONX – Inter-Continental Exchange
LCH – London Clearing House
LIBOR – London Interbank Offered Rates
NIBOR – Norwegian Interbank Offered Rate
REIT – Real Estate Investment Trust
REMICs – Real Estate Mortgage Investment Conduits
See notes to financial statements.
38 | • AB INCOME FUND |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
April 30, 2016 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $2,335,750,611) | $ | 2,413,806,172 | ||
Affiliated issuers (cost $60,319,931) | 60,319,931 | |||
Cash | 56,386,934 | |||
Cash collateral due from broker | 7,672,375 | |||
Foreign currencies, at value (cost $230,279) | 124,655 | |||
Interest and dividends receivable | 27,499,379 | |||
Unrealized appreciation on forward currency exchange contracts | 4,253,174 | |||
Receivable for capital stock sold | 73,168 | |||
Upfront premium paid on credit default swaps | 50,618 | |||
Unrealized appreciation on credit default swaps | 11,016 | |||
|
| |||
Total assets | 2,570,197,422 | |||
|
| |||
Liabilities | ||||
Payable for reverse repurchase agreements | 815,240,620 | |||
Payable for investment securities purchased | 70,578,745 | |||
Payable for capital stock repurchased | 7,741,735 | |||
Unrealized depreciation on forward currency exchange contracts | 7,600,333 | |||
Payable for variation margin on exchange-traded derivatives | 1,656,941 | |||
Unrealized depreciation on credit default swaps | 1,454,281 | |||
Advisory fee payable | 893,469 | |||
Upfront premium received on credit default swaps | 401,046 | |||
Dividends payable | 332,533 | |||
Transfer Agent fee payable | 43,940 | |||
Administrative fee payable | 19,949 | |||
Distribution fee payable | 4 | |||
Accrued expenses | 563,396 | |||
|
| |||
Total liabilities | 906,526,992 | |||
|
| |||
Net Assets | $ | 1,663,670,430 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 207,410 | ||
Additional paid-in capital | 1,717,629,796 | |||
Distributions in excess of net investment income | (3,833,668 | ) | ||
Accumulated net realized loss on investment | (121,004,443 | ) | ||
Net unrealized appreciation on investments | 70,671,335 | |||
|
| |||
$ | 1,663,670,430 | |||
|
|
Net Asset Value Per Share—30 billion shares of capital stock authorized, $.001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 29,314 | 3,657 | $ | 8.02 | * | ||||||
| ||||||||||||
C | $ | 10,034 | 1,251.81 | $ | 8.02 | |||||||
| ||||||||||||
Advisor | $ | 1,663,631,082 | 207,405,081 | $ | 8.02 | |||||||
|
* | The maximum offering price per share for Class A shares was $8.38 which reflects a sales charge of 4.25%. |
See notes to financial statements.
AB INCOME FUND • | 39 |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
For the Period January 1, 2016 to April 30, 2016(a) (unaudited) | Year Ended December 31, 2015 | |||||||
Investment Income | ||||||||
Interest (net of foreign taxes withheld of $3,142) | $ | 28,882,886 | $ | 96,143,365 | ||||
Dividends | ||||||||
Unaffiliated issuers | 1,575,485 | 331,360 | ||||||
Affiliated issuers | 158,104 | 72,367 | ||||||
Other income | – 0 | – | 60,717 | |||||
|
|
|
| |||||
Total income | 30,616,475 | 96,607,809 | ||||||
|
|
|
| |||||
Expenses | ||||||||
Advisory fee (see Note B) | 2,904,584 | 8,908,641 | ||||||
Distribution fee—Class C | 3 | – 0 | – | |||||
Transfer agency—Advisor Class | 69,224 | 116,242 | ||||||
Printing | 104,384 | 883,747 | ||||||
Custodian | 86,897 | 276,061 | ||||||
Registration fees | 72,346 | 217,039 | ||||||
Audit and tax | 44,746 | 152,148 | ||||||
Legal | 36,478 | 279,305 | ||||||
Administrative | 20,638 | 63,721 | ||||||
Directors’ fees | 6,567 | 21,161 | ||||||
Miscellaneous | 45,991 | 156,482 | ||||||
|
|
|
| |||||
Total expenses before interest expense | 3,391,858 | 11,074,547 | ||||||
Interest expense | 1,658,428 | 2,622,406 | ||||||
|
|
|
| |||||
Total expenses | 5,050,286 | 13,696,953 | ||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (40,091 | ) | – 0 | – | ||||
|
|
|
| |||||
Net expenses | 5,010,195 | 13,696,953 | ||||||
|
|
|
| |||||
Net investment income | 25,606,280 | 82,910,856 | ||||||
|
|
|
| |||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (18,329,965 | ) | 44,482,755 | |||||
Futures | (41,847,988 | ) | (22,468,647 | ) | ||||
Options written | 751,864 | 647,736 | ||||||
Swaptions written | – 0 | – | 169,290 | |||||
Swaps | 561,108 | (12,387,670 | ) | |||||
Foreign currency transactions | (2,050,504 | ) | 14,125,240 | |||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | 103,110,785 | (134,192,070 | ) | |||||
Futures | 4,186,660 | 18,118,579 | ||||||
Options written | – 0 | – | (44,134 | ) | ||||
Swaps | (3,125,576 | ) | 4,438,126 | |||||
Foreign currency denominated assets and liabilities | (8,224,192 | ) | 2,371,013 | |||||
|
|
|
| |||||
Net gain on investment and foreign currency transactions | 35,032,192 | (84,739,782 | ) | |||||
|
|
|
| |||||
Net Increase in Net Assets from Operations | $ | 60,638,472 | $ | (1,828,926 | ) | |||
|
|
|
|
(a) | AllianceBernstein Income Fund’s (the “Predecessor Fund”) fiscal year end was December 31 and the Fund’s fiscal year end is October 31. |
See notes to financial statements.
40 | • AB INCOME FUND |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
For the Period January 1, 2016 to April 30, 2016(a) (unaudited) | Year Ended December 31, 2015 | Year Ended December 31, 2014 | ||||||||||
Increase (Decrease) in Net Assets from Operations | ||||||||||||
Net investment income | $ | 25,606,280 | $ | 82,910,856 | $ | 100,504,848 | ||||||
Net realized gain (loss) on investment transactions and foreign currency transactions | (60,915,485 | ) | 24,568,704 | (14,555,797 | ) | |||||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | 95,947,677 | (109,308,486 | ) | 60,564,273 | ||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in net assets from operations | 60,638,472 | (1,828,926 | ) | 146,513,324 | ||||||||
Dividends and Distributions to Shareholders from | ||||||||||||
Net investment income | ||||||||||||
Class A | (16 | ) | – 0 | – | – 0 | – | ||||||
Class C | (7 | ) | – 0 | – | – 0 | – | ||||||
Advisor Class | (26,143,252 | ) | (101,719,576 | ) | (107,988,728 | ) | ||||||
Net realized gain on investment transactions | ||||||||||||
Advisor Class | – 0 | – | (9,712,602 | ) | – 0 | – | ||||||
Capital Stock Transactions | ||||||||||||
Net decrease | (66,781,046 | ) | – 0 | – | – 0 | – | ||||||
Common Stock (see Note E) | ||||||||||||
Repurchase of Shares (12,172,242 and 14,903,847 shares, respectively) | – 0 | – | (92,499,158 | ) | (112,501,549 | ) | ||||||
|
|
|
|
|
| |||||||
Total decrease | (32,285,849 | ) | (205,760,262 | ) | (73,976,953 | ) | ||||||
Net Assets | ||||||||||||
Beginning of period | 1,695,956,279 | 1,901,716,541 | 1,975,693,494 | |||||||||
|
|
|
|
|
| |||||||
End of period (including distributions in excess of net investment income of ($3,833,668) and ($3,296,673) and undistributed net investment income of $1,417,504, respectively) | $ | 1,663,670,430 | $ | 1,695,956,279 | $ | 1,901,716,541 | ||||||
|
|
|
|
|
|
(a) | The Predecessor Fund’s fiscal year end was December 31 and the Fund’s fiscal year end is October 31. |
See notes to financial statements.
AB INCOME FUND • | 41 |
Statement of Changes in Net Assets
STATEMENT OF CASH FLOWS
For the Period January 1, 2016 to April 30, 2016(a) (unaudited)
Cash flows from operating activities | ||||||||
Net increase in net assets from operations | $ | 60,638,472 | ||||||
Reconciliation of net increase in net assets from operations to net increase in cash from operating activities: | ||||||||
Decrease in interest and dividends receivable | $ | 960,528 | ||||||
Decrease in receivable for investments sold | 215,838 | |||||||
Net accretion of bond discount and amortization of bond premium | 7,161,767 | |||||||
Increase in payable for investments purchased | 70,411,164 | |||||||
Decrease in accrued expenses | (163,144 | ) | ||||||
Decrease in cash collateral due from broker | 396,572 | |||||||
Purchases of long-term investments | (185,575,818 | ) | ||||||
Purchases of short-term investments | (340,754,687 | ) | ||||||
Proceeds from disposition of long-term investments | 386,198,074 | |||||||
Proceeds from disposition of short-term investments | 358,680,680 | |||||||
Proceeds from options written, net | 731,155 | |||||||
Payments on swaps, net | (2,346,110 | ) | ||||||
Payments for exchange-traded derivatives settlements | (39,617,623 | ) | ||||||
Net realized loss on investment transactions and foreign currency transactions | 60,915,485 | |||||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | (95,947,677 | ) | ||||||
|
| |||||||
Total adjustments | 221,266,204 | |||||||
|
| |||||||
Net increase in cash from operating activities | $ | 281,904,676 | ||||||
|
| |||||||
Cash flows from financing activities: | ||||||||
Repurchase of Shares | (60,109,547 | ) | ||||||
Cash dividends paid (net of dividend reinvestments)* | (54,180,833 | ) | ||||||
Decrease in reverse repurchase agreements | (121,072,990 | ) | ||||||
|
| |||||||
Net decrease in cash from financing activities | (235,363,370 | ) | ||||||
Effect of exchange rate on cash | (1,747,552 | ) | ||||||
|
| |||||||
Net increase in cash | 44,793,754 | |||||||
Net change in cash | ||||||||
Cash at beginning of period | 11,717,835 | |||||||
|
| |||||||
Cash at end of period | $ | 56,511,589 | ||||||
|
| |||||||
* Reinvestment of dividends | $ | 997,068 | ||||||
Supplemental disclosure of cash flow information: | ||||||||
Interest expense paid during the period | $ | 2,199,948 |
(a) | AllianceBernstein Income Fund’s (the “Predecessor Fund”) fiscal year end was December 31 and the Fund’s fiscal year end is October 31. |
In accordance with U.S. GAAP, the Fund has included a Statement of Cash Flows as a result of its significant investments in reverse repurchase agreements throughout the period.
See notes to financial statements.
42 | • AB INCOME FUND |
Statement of Cash Flows
NOTES TO FINANCIAL STATEMENTS
April 30, 2016 (unaudited)
NOTE A
Significant Accounting Policies
AB Bond Fund, Inc. (the “Company”) is registered under the Investment Company Act of 1940 as an open-end management investment company. The Company, which is a Maryland corporation, operates as a series company comprised of ten portfolios currently in operation. Each portfolio is considered to be a separate entity for financial reporting and tax purposes. This report relates only to the AB Income Fund, Inc. (the “Fund”), a diversified portfolio. The Fund acquired the assets and liabilities of the AllianceBernstein Income Fund, Inc., a closed-end fund (the “Predecessor Fund”) on April 22, 2016 (the “Reorganization”). The Reorganization was approved by the Predecessor Fund’s Board of Directors and shareholders pursuant to an Agreement and Plan of Acquisition and Dissolution (the “Reorganization Agreement”), see Note I for additional information. The Predecessor Fund was the accounting survivor in the Reorganization and as such, the financial statements and the Advisor Class shares financial highlights reflect the financial information of the Predecessor Fund through April 21, 2016. The Fund 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 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 Fund.
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 Company’s Board of Directors (the “Board”).
AB INCOME FUND • | 43 |
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 Fund may use fair value pricing for securities primarily traded in non-U.S. markets because most foreign markets close well before the Fund values its securities at 4:00 p.m., Eastern Time. The earlier close of these foreign markets gives rise to the possibility that
44 | • AB INCOME FUND |
Notes to Financial Statements
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 Fund 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 Fund 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 Fund. Unobservable inputs reflect the Fund’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 Fund’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
AB INCOME FUND • | 45 |
Notes to Financial Statements
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.
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. Certain 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.
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.
46 | • AB INCOME FUND |
Notes to Financial Statements
The following table summarizes the valuation of the Fund’s investments by the above fair value hierarchy levels as of April 30, 2016:
Investments in | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Governments – Treasuries | $ | – 0 | – | $ | 1,913,676,480 | $ | – 0 | – | $ | 1,913,676,480 | ||||||
Collateralized Mortgage Obligations | – 0 | – | 108,463,210 | – 0 | – | 108,463,210 | ||||||||||
Corporates – Non-Investment Grade | – 0 | – | 88,377,128 | 6,757,837 | 95,134,965 | |||||||||||
Corporates – Investment Grade | – 0 | – | 61,962,486 | – 0 | – | 61,962,486 | ||||||||||
Agencies | – 0 | – | 57,209,495 | – 0 | – | 57,209,495 | ||||||||||
Commercial Mortgage-Backed Securities | – 0 | – | 4,096,884 | 52,293,631 | 56,390,515 | |||||||||||
Whole Loan Trusts | – 0 | – | – 0 | – | 25,801,988 | 25,801,988 | ||||||||||
Common Stocks: | ||||||||||||||||
Consumer Discretionary | – 0 | – | – 0 | – | 1,214,305 | 1,214,305 | ||||||||||
Energy | – 0 | – | 503,785 | – 0 | – | 503,785 | ||||||||||
Financials | – 0 | – | – 0 | – | 19,930,129 | 19,930,129 | ||||||||||
Emerging Markets – Sovereigns | – 0 | – | 16,469,168 | – 0 | – | 16,469,168 | ||||||||||
Emerging Markets – Corporate Bonds | – 0 | – | 13,352,822 | 329,610 | 13,682,432 | |||||||||||
Quasi-Sovereigns | – 0 | – | 13,401,186 | – 0 | – | 13,401,186 | ||||||||||
Emerging Markets – Treasuries | – 0 | – | 8,180,396 | – 0 | – | 8,180,396 | ||||||||||
Local Governments – Municipal Bonds | – 0 | – | 6,817,680 | – 0 | – | 6,817,680 | ||||||||||
Asset-Backed Securities | – 0 | – | 3,318,265 | 1,653,848 | 4,972,113 | |||||||||||
Governments – Sovereign Agencies | – 0 | – | 4,443,750 | – 0 | – | 4,443,750 | ||||||||||
Preferred Stocks | 2,615,000 | – 0 | – | – 0 | – | 2,615,000 | ||||||||||
Governments – Sovereign Bonds | – 0 | – | 1,113,191 | – 0 | – | 1,113,191 | ||||||||||
Bank Loans | – 0 | – | 6,715 | 662,265 | 668,980 | |||||||||||
Mortgage Pass-Throughs | – 0 | – | 48,302 | – 0 | – | 48,302 | ||||||||||
Warrants | – 0 | – | – 0 | – | – 0 | –(a) | – 0 | – | ||||||||
Short-Term Investments | 60,319,931 | – 0 | – | – 0 | – | 60,319,931 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 62,934,931 | 2,301,440,943 | 108,643,613 | 2,473,019,487 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other Financial Instruments(b) : | ||||||||||||||||
Assets: | ||||||||||||||||
Futures | 5,285,380 | – 0 | – | – 0 | – | 5,285,380 | (c) | |||||||||
Forward Currency Exchange Contracts | – 0 | – | 4,253,174 | – 0 | – | 4,253,174 | ||||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | 579,999 | – 0 | – | 579,999 | (c) | |||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | 8,128,273 | – 0 | – | 8,128,273 | (c) | |||||||||
Credit Default Swaps | – 0 | – | 11,016 | – 0 | – | 11,016 |
AB INCOME FUND • | 47 |
Notes to Financial Statements
Investments in | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities: | ||||||||||||||||
Forward Currency Exchange Contracts | $ | – 0 | – | $ | (7,600,333 | ) | $ | – 0 | – | $ | (7,600,333 | ) | ||||
Centrally Cleared Interest Rate Swaps | – 0 | – | (16,712,374 | ) | – 0 | – | (16,712,374 | )(c) | ||||||||
Credit Default Swaps | – 0 | – | (1,454,281 | ) | – 0 | – | (1,454,281 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total(d) | $ | 68,220,311 | $ | 2,288,646,417 | $ | 108,643,613 | $ | 2,465,510,341 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Investments valued at NAV(e) | 1,106,616 | |||||||||||||||
|
| |||||||||||||||
Total Investments | $ | 2,466,616,957 | ||||||||||||||
|
|
(a) | The Fund held securities with zero market value at period end. |
(b) | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
(c) | 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. |
(d) | There were no transfers between Level 1 and Level 2 during the reporting period. |
(e) | As of April 30, 2016, certain of the Fund’s investments were fair valued using net asset value (“NAV”) per share and have been excluded from the fair value hierarchy. |
The Fund 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.
Collateralized Mortgage Obligations | Corporates - Non-Investment Grade | Commercial Mortgage- Backed Securities | ||||||||||
Balance as of 12/31/15 | $ | 97,375,665 | $ | 7,013,931 | $ | 60,751,150 | ||||||
Accrued discounts/(premiums) | 631 | 109,463 | 50,546 | |||||||||
Realized gain (loss) | (164,089 | ) | (27 | ) | (738,445 | ) | ||||||
Change in unrealized appreciation/depreciation | 115,145 | (360,430 | ) | (446,896 | ) | |||||||
Purchases | – 0 | – | 162,481 | – 0 | – | |||||||
Sales | (465,895 | ) | (167,581 | ) | (7,322,724 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | (96,861,457 | ) | – 0 | – | – 0 | – | ||||||
|
|
|
|
|
| |||||||
Balance as of 4/30/16 | $ | – 0 | – | $ | 6,757,837 | $ | 52,293,631 | |||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(d) | $ | – 0 | – | $ | (360,430 | ) | $ | (1,191,517 | ) | |||
|
|
|
|
|
|
48 | • AB INCOME FUND |
Notes to Financial Statements
Whole Loan Trusts | Common Stocks | Emerging Markets - Corporate Bonds | ||||||||||
Balance as of 12/31/15 | $ | 26,950,760 | $ | 22,554,552 | $ | – 0 | – | |||||
Accrued discounts/(premiums) | 18,274 | – 0 | – | (718 | ) | |||||||
Realized gain (loss) | (334,301 | ) | – 0 | – | – 0 | – | ||||||
Change in unrealized appreciation/depreciation | (321,426 | ) | (1,410,118 | ) | 94,892 | |||||||
Purchases | 2,597,268 | – 0 | – | – 0 | – | |||||||
Sales | (3,108,587 | ) | – 0 | – | – 0 | – | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | 235,436 | |||||||
Transfers out of Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
|
|
|
|
|
| |||||||
Balance as of 4/30/16 | $ | 25,801,988 | $ | 21,144,434 | $ | 329,610 | ||||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(d) | $ | (319,572 | ) | $ | (1,410,118 | ) | $ | 94,892 | ||||
|
|
|
|
|
| |||||||
Asset-Backed Securities | Investment Companies | Bank Loans | ||||||||||
Balance as of 12/31/15 | $ | 1,744,238 | $ | 1,050,272 | $ | 4,226,990 | ||||||
Accrued discounts/(premiums) | – 0 | – | – 0 | – | 12,997 | |||||||
Realized gain (loss) | – 0 | – | – 0 | – | (171,888 | ) | ||||||
Change in unrealized appreciation/depreciation | (7,190 | ) | – 0 | – | (202,702 | ) | ||||||
Purchases | – 0 | – | – 0 | – | 48,622 | |||||||
Sales | (83,200 | ) | – 0 | – | (2,447,480 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | – 0 | – | (1,050,272 | ) | (804,274 | ) | ||||||
|
|
|
|
|
| |||||||
Balance as of 4/30/16 | $ | 1,653,848 | $ | – 0 | – | $ | 662,265 | |||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(d) | $ | (7,190 | ) | $ | – 0 | – | $ | (480,850 | ) | |||
|
|
|
|
|
|
AB INCOME FUND • | 49 |
Notes to Financial Statements
Warrants(a) | Total | |||||||
Balance as of 12/31/15 | $ | – 0 | – | $ | 221,667,558 | |||
Accrued discounts/(premiums) | – 0 | – | 191,193 | |||||
Realized gain (loss) | – 0 | – | (1,408,750 | ) | ||||
Change in unrealized appreciation/depreciation | – 0 | – | (2,538,725 | ) | ||||
Purchases | – 0 | – | 2,808,371 | |||||
Sales | – 0 | – | (13,595,467 | ) | ||||
Transfers in to Level 3 | – 0 | – | 235,436 | (b) | ||||
Transfers out of Level 3 | – 0 | – | (98,716,003 | )(c) | ||||
|
|
|
| |||||
Balance as of 4/30/16 | $ | – 0 | – | $ | 108,643,613 | |||
|
|
|
| |||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(d) | $ | – 0 | – | $ | (3,674,785 | ) | ||
|
|
|
|
(a) | The Fund held securities with zero market value at period end. |
(b) | There were de minimis transfers under 1% of net assets from Level 2 to Level 3 during the reporting period. |
(c) | An amount of $97,665,731 was transferred out of Level 3 into Level 2 due to increase in observability of inputs during the reporting period and there were de minimis transfers under 1% of net assets from Level 3 to Investments Valued at NAV. |
(d) | 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. |
50 | • AB INCOME FUND |
Notes to Financial Statements
The following presents information about significant unobservable inputs related to the Fund’s Level 3 investments at April 30, 2016. 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 4/30/16 | Valuation Technique | Unobservable Input | Range/ Weighted Average | |||||||
Corporates – Non-Investment Grade | $ | 1,673,834 |
| Discounted Cashflow | Clean Debt Value
Convertible | 51.9% – 77.3% / 11.4% – 2.3% / | ||||
Whole Loan Trusts | 1,233,656 | Recovery Analysis | Deliquency Rate | <4% / NA | ||||||
1,895,999 | Recovery Analysis | Deliquency Rate | <4% / NA | |||||||
759,084 | Recovery Analysis | Deliquency Rate Collateralization | <5% / NA >1.1X / NA | |||||||
219,563 | Recovery Analysis | Appraisal Value | $3,376,000 / NA | |||||||
372,386 | Recovery Analysis | Appraisal Value | $4,560,000 / NA | |||||||
254,678 | Recovery Analysis | Appraisal Value | $3,200,000 / NA | |||||||
1,876,387 | Projected Cashflow | Level Yield | 13.45% / NA | |||||||
1,173,470 | Projected Cashflow | Level Yield | 13.45% / NA | |||||||
1,280,235 | Projected Cashflow | Level Yield | 92.95% / NA | |||||||
3,093,092 | Market- Approach | Underlying NAV of the collateral | $107.26 / NA | |||||||
1,030,908 | Recovery Analysis | Cumulative Loss | 15.00% / NA | |||||||
1,949,530 | Recovery Analysis | Cumulative Loss | 17.00% / NA | |||||||
10,663,000 | Projected Cashflow | Level Yield | 13.11% / NA | |||||||
Common Stocks | 150,322 | Option Pricing Model | Enterprise Value | $519.2mil – $603.2Mil / NA | ||||||
Exercise Price | $730.4mil – $830.5mil / NA | |||||||||
Years to Expiration | 2.5yr – 4.5yr / NA | |||||||||
EV Volatility % | 22.6% – 26.5% / NA | |||||||||
Risk Free Rate | 1.09% – 1.55% / NA | |||||||||
1,063,983 | Market- Approach | EBITDA* Projection EBITDA* | $194.0MM / NA 7.9X – 9.9X / | |||||||
Bank Loans | 662,265 | Market- Approach | EBITDA* EBITDA* Multiple Scrap Value | $28mil – $70mil 6X $110mil |
* | Earnings before Interest, Taxes, Depreciation and Amortization. |
AB INCOME FUND • | 51 |
Notes to Financial Statements
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the Fund. 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,
52 | • AB INCOME FUND |
Notes to Financial Statements
interest and foreign withholding taxes recorded on the Fund’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 Fund’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 Fund 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 Fund’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 Fund’s financial statements.
5. Investment Income and Investment Transactions
Dividend income is recorded on the ex-dividend date or as soon as the Fund 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 Fund amortizes premiums and accretes discounts as adjustments to interest income.
6. Class Allocations
All income earned and expenses incurred by the Fund are borne on a prorata basis by each outstanding class of shares, based on the proportionate interest in the Fund represented by the net assets of such class, except for class specific expenses which are allocated to the respective class. Expenses of the Company 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.
AB INCOME FUND • | 53 |
Notes to Financial Statements
8. Repurchase Agreements
It is the Fund’s policy that its custodian or designated subcustodian take control of securities as collateral under repurchase agreements and to determine on a daily basis that the value of such securities are sufficient to cover the value of the repurchase agreements. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of collateral by the Fund may be delayed or limited.
9. Redemption Fees
The Fund imposes a .75% fee on redemption and exchanges of Advisor Class shares. This fee is retained by the Fund and is included in the financial statements as a component of additional paid-in capital. The fee is effective until July 22, 2016.
10. Change of Fiscal Year End
The Predecessor Fund’s fiscal year end was December 31 and the Fund’s fiscal year end is October 31. Accordingly, the statement of operations, statement of changes in net assets, statement of cash flows and the Advisor Class shares financial highlights reflect the four months from January 1, 2016 to April 30, 2016. The financial highlights for Class A and Class C shares reflect the period from April 21, 2016 (inception date) to April 30, 2016.
NOTE B
Advisory Fee and Other Transactions with Affiliates
Under the terms of the investment advisory agreement, the Fund pays the Adviser an advisory fee at an annual rate of .60% of the first $2.5 billion of the Fund’s average daily net assets, .55% of the excess over $2.5 billion up to $5 billion and .50% in excess of $5 billion, of the Fund’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 (excluding expenses associated with securities sold short, acquired fund fees and expenses other than the advisory fees of any AB Mutual Funds in which the Fund may invest, interest expense, taxes, extraordinary expenses, and brokerage commissions and other transaction costs), on an annual basis (the “Expense Caps”) to .88%, 1.63% and .63% of daily average net assets for Class A, Class C, and Advisor Class shares, respectively. Any fees waived and expenses borne by the Adviser through October 31, 2016 are subject to repayment by the Fund until October 31, 2019 provided that no reimbursement payment will be made that would cause the Fund’s total annual fund 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 April 22, 2018. The Predecessor Fund did not have an Expense Cap. For the period ended April 30, 2016, such reimbursements/waivers amounted to $40,091. Prior to April 21, 2016, the Predecessor Fund paid the Adviser a monthly advisory fee in an amount equal to the sum of 1/12th of .30 of 1% of the Predecessor Fund’s average weekly net assets up to $250 million, 1/12th of .25 of 1% of the Predecessor Fund’s average weekly net
54 | • AB INCOME FUND |
Notes to Financial Statements
assets in excess of $250 million, and 4.75% of the Predecessor Fund’s daily gross income (i.e., income other than gains from the sale of securities and foreign currency transactions or gains realized from options, futures and swaps, less interest on money borrowed by the Predecessor Fund) accrued by the Predecessor Fund during the month. However, such monthly advisory fee shall not exceed in the aggregate 1/12th of .80% of the Predecessor Fund’s average weekly net assets during the month (approximately .80% on an annual basis).
Pursuant to the investment advisory agreement, the Fund may reimburse the Adviser for certain legal and accounting services provided to the Fund by the Adviser. For the period ended April 30, 2016, the reimbursement for such services amounted to $20,638.
The Fund 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 Fund. ABIS may make payments to intermediaries that provide omnibus account services, sub-accounting services and/or networking services. Prior to the Reorganization Computershare Trust Company, N.A. was the Transfer Agent. For the period ended April 30, 2016, there was no reimbursement paid to ABIS.
AllianceBernstein Investments, Inc. (the “Distributor”), a wholly-owned subsidiary of the Adviser, serves as the distributor of the Fund’s shares. The Distributor has advised the Fund that it has retained front-end sales charges of $41 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 period ended April 30, 2016.
The Fund 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 currently available for direct purchase by members of the public. The Government STIF Portfolio currently pays no investment management fees but does bear its own expenses. A summary of the Fund’s transactions in shares of the Government STIF Portfolio for the period ended April 30, 2016 is as follows:
Market Value December 31, 2015 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value April 30, 2016 (000) | Dividend Income (000) | ||||||||||||
$ 78,338 | $ | 340,663 | $ | 358,681 | $ | 60,320 | $ | 158 |
Brokerage commissions paid on investment transactions for the period ended April 30, 2016 amounted to $18,683, of which $0 and $0, respectively, was paid to Sanford C. Bernstein & Co. LLC and Sanford C. Bernstein Limited, affiliates of the Adviser.
AB INCOME FUND • | 55 |
Notes to Financial Statements
NOTE C
Distribution Services Agreement
The Fund has adopted a Distribution Services Agreement (the “Agreement”) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Agreement, the Fund pay distribution and servicing fees to the Distributor at an annual rate of up to .25% of the Fund’s average daily net assets attributable to Class A shares and 1% of the Fund’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 Fund’s operations, the Distributor has incurred expenses in excess of the distribution costs reimbursed by the Fund in the amount of $0 for Class C shares. While such costs may be recovered from the Fund 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 Fund’s shares.
NOTE D
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the period ended April 30, 2016 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 33,096,540 | $ | 275,604,800 | ||||
U.S. government securities | 152,430,656 | 93,715,844 |
The cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation (excluding futures, foreign currency, written options and swap transactions) are as follows:
Gross unrealized appreciation | $ | 124,538,297 | ||
Gross unrealized depreciation | (46,482,736 | ) | ||
|
| |||
Net unrealized appreciation | $ | 78,055,561 | ||
|
|
1. Derivative Financial Instruments
The Fund 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.
56 | • AB INCOME FUND |
Notes to Financial Statements
The principal types of derivatives utilized by the Fund, as well as the methods in which they may be used are:
• | Futures |
The Fund 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 Fund 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 Fund 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 Fund enters into futures, the Fund 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 Fund 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 Fund 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 Fund 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 Fund 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 Fund 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 period ended April 30, 2016, the Fund held futures for hedging purposes.
• | Forward Currency Exchange Contracts |
The Fund 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
AB INCOME FUND • | 57 |
Notes to Financial Statements
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 Fund. 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 period ended April 30, 2016, the Fund held forward currency exchange contracts for hedging and non-hedging purposes.
• | Option Transactions |
For hedging and investment purposes, the Fund 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 Fund 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 Fund pays a premium whether or not the option is exercised. Additionally, the Fund 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 Fund writes an option, the premium received by the Fund 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 Fund 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
58 | • AB INCOME FUND |
Notes to Financial Statements
received is added to the proceeds from the sale of the underlying security or currency in determining whether the Fund 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 Fund. In writing an option, the Fund 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 Fund could result in the Fund selling or buying a security or currency at a price different from the current market value.
During the period ended April 30, 2016, the Fund held purchased options for hedging and non-hedging purposes. During the period ended April 30, 2016, the Fund held written options for hedging and non-hedging purposes.
For the period ended April 30, 2016, the Fund had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 12/31/15 | – 0 | – | $ | – 0 | – | |||
Options written | 5,010,742,936 | 1,162,857 | ||||||
Options assigned | (17,176,000 | ) | (25,764 | ) | ||||
Options expired | (4,869,670,936 | ) | (705,391 | ) | ||||
Options bought back | (123,896,000 | ) | (431,702 | ) | ||||
Options exercised | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Options written outstanding as of 4/30/16 | – 0 | – | $ | – 0 | – | |||
|
|
|
|
• | Swaps |
The Fund may enter into swaps to hedge its exposure to interest rates, credit risk, or currencies. The Fund 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 Fund in accordance with the terms of the respective swaps to provide value and recourse to the Fund 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 Fund, and/or the termination value at the end of the contract. Therefore, the Fund considers the creditworthiness of each counterparty to a swap in evaluating potential counterparty risk. This risk is mitigated by
AB INCOME FUND • | 59 |
Notes to Financial Statements
having a netting arrangement between the Fund and the counterparty and by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty. Additionally, risks may arise from unanticipated movements in interest rates or in the value of the underlying securities. The Fund accrues for the interim payments on swaps on a daily basis, with the net amount recorded within unrealized appreciation/depreciation of swaps on the statement of assets and liabilities, where applicable. Once the interim payments are settled in cash, the net amount is recorded as realized gain/(loss) on swaps on the statement of operations, in addition to any realized gain/(loss) recorded upon the termination of swaps. Upfront premiums paid or received are recognized as cost or proceeds on the statement of assets and liabilities and are amortized on a straight line basis over the life of the contract. Amortized upfront premiums are included in net realized gain/(loss) from swaps on the statement of operations. Fluctuations in the value of swaps are recorded as a component of net change in unrealized appreciation/depreciation of swaps on the statement of operations.
Certain standardized swaps, including certain interest rate swaps and credit default swaps, are (or soon will be) subject to mandatory central clearing. Cleared swaps are transacted through futures commission merchants (“FCMs”) that are members of central clearinghouses, with the clearinghouse serving as central counterparty, similar to transactions in futures contracts. Centralized clearing will be required for additional categories of swaps on a phased-in basis based on requirements published by the Securities and Exchange Commission and Commodity Futures Trading Commission.
At the time the Fund enters into a centrally cleared swap, the Fund 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 Fund 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 Fund 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 Fund 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.
60 | • AB INCOME FUND |
Notes to Financial Statements
Interest Rate Swaps:
The Fund is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. Because the Fund 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 Fund may enter into interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional amount. The Fund 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 Fund 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 Fund anticipates purchasing at a later date. Interest rate swaps involve the exchange by a Fund 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 Fund receiving or paying, as the case may be, only the net amount of the two payments).
During the period ended April 30, 2016, the Fund held interest rate swaps for hedging and non-hedging purposes.
Credit Default Swaps:
The Fund 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 Fund, or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. The Fund 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 Fund receives/(pays) fixed payments from/(to) the respective counterparty, calculated at the agreed upon rate applied to the notional amount. If the Fund is a buyer/(seller) of protection and a credit event occurs, as defined under the terms of the swap, the Fund 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
AB INCOME FUND • | 61 |
Notes to Financial Statements
received from settlement of buy protection credit default swaps entered into by the Fund for the same reference obligation with the same counterparty. As of April 30, 2016, the Fund did not have Buy Contracts outstanding with respect to the same referenced obligation and counterparty as certain Sale Contracts outstanding.
Credit default swaps may involve greater risks than if a Fund 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 Fund is a buyer of protection and no credit event occurs, it will lose the payments it made to its counterparty. If the Fund is a seller of protection and a credit event occurs, the value of the referenced obligation received by the Fund 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 Fund.
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 period ended April 30, 2016, the Fund held credit default swaps for non-hedging purposes.
The Fund 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 Fund 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
62 | • AB INCOME FUND |
Notes to Financial Statements
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 Fund 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 Fund’s net liability, held by the defaulting party, may be delayed or denied.
The Fund’s Master Agreements may contain provisions for early termination of OTC derivative transactions in the event the net assets of the Fund decline below specific levels (“net asset contingent features”). If these levels are triggered, the Fund’s counterparty has the right to terminate such transaction and require the Fund 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 April 30, 2016, the Fund had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative | Statement of | Fair Value | Statement of | Fair Value | ||||||||
Interest rate contracts | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 13,413,653 | * | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 16,712,374 | * | ||||
Credit contracts | Receivable/Payable for variation margin on exchange-traded derivatives | | 579,999 | * | Receivable/Payable for variation margin on exchange-traded derivatives | |||||||
Foreign exchange contracts | Unrealized appreciation on forward currency exchange contracts | | 4,253,174 | | Unrealized depreciation on forward currency exchange contracts | | 7,600,333 | | ||||
Credit contracts | Unrealized appreciation on credit default swaps | | 11,016 | | Unrealized depreciation on credit default swaps | | 1,454,281 | | ||||
|
|
|
| |||||||||
Total | $ | 18,257,842 | $ | 25,766,988 | ||||||||
|
|
|
|
* | 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 INCOME FUND • | 63 |
Notes to Financial Statements
Derivative Type | Location of | 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 | $ | (41,847,988 | ) | $ | 4,186,660 | ||||
Foreign exchange contracts | Net realized gain (loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation of foreign currency denominated assets and liabilities | 5,750,914 | (8,527,144 | ) | ||||||
Foreign exchange contracts | Net realized gain (loss) on options written; Net change in unrealized appreciation/depreciation of options written | 751,864 | – 0 | – | ||||||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (718,903 | ) | (2,707,118 | ) | |||||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 1,280,011 | (418,458 | ) | ||||||
|
|
|
| |||||||
Total | $ | (34,784,102 | ) | $ | (7,466,060 | ) | ||||
|
|
|
|
The following table represents the average monthly volume of the Fund’s derivative transactions during the period ended April 30, 2016:
Futures: | ||||
Average original value of sale contracts | $ | 777,524,622 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 186,025,798 | ||
Average principal amount of sale contracts | $ | 281,481,092 | ||
Purchased Options: | ||||
Average monthly cost | $ | 91,630 | (a) | |
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 839,836,306 | ||
Credit Default Swaps: | ||||
Average notional amount of sale contracts | $ | 29,816,000 | ||
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 4,476,097 | (b) | |
Average notional amount of sale contracts | $ | 36,984,722 |
(a) | Positions were open for one month during the period. |
(b) | Positions were open for two months during the period. |
64 | • AB INCOME FUND |
Notes to Financial Statements
For financial reporting purposes, the Fund 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 Fund’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 Fund as of April 30, 2016:
Counterparty | Derivative Assets Subject to a MA | Derivative Available for Offset | Cash Collateral Received | Security Collateral Received | Net Amount of Derivatives Assets | |||||||||||||||
OTC Derivatives: | ||||||||||||||||||||
Barclays Capital/Barclays Bank PLC | $ | 57,071 | $ | (57,071 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
BNP Paribas SA | 555,335 | (377,706 | ) | – 0 | – | – 0 | – | 177,629 | ||||||||||||
Citibank, NA | 249,130 | (249,130 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Deutsche Bank AG | 292,316 | (24,308 | ) | – 0 | – | – 0 | – | 268,008 | ||||||||||||
Goldman Sachs Bank USA/Goldman Sachs International | 294,793 | (294,793 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
HSBC Bank USA | 1,616,282 | – 0 | – | – 0 | – | (1,194,699 | ) | 421,583 | ||||||||||||
JPMorgan Chase Bank | 277,781 | (91,016 | ) | – 0 | – | – 0 | – | 186,765 | ||||||||||||
Royal Bank of Scotland PLC | 823,551 | – 0 | – | – 0 | – | – 0 | – | 823,551 | ||||||||||||
Standard Chartered Bank | 81,690 | (81,690 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
State Street Bank & Trust Co. | 5,225 | (5,225 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 4,253,174 | $ | (1,180,939 | ) | $ | – 0 | – | $ | (1,194,699 | ) | $ | 1,877,536 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
AB INCOME FUND • | 65 |
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.** | $ | 351,225 | $ | – 0 | – | $ | (351,225 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
Morgan Stanley & Co. LLC/Morgan Stanley & Co., Inc.** | 1,305,716 | – 0 | – | (104,595 | ) | (1,201,121 | ) | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 1,656,941 | $ | – 0 | – | $ | (455,820 | ) | $ | (1,201,121 | ) | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Barclays Capital/Barclays Bank PLC | $ | 454,514 | $ | (57,071 | ) | $ | – 0 | – | $ | (375,440 | ) | $ | 22,003 | |||||||
BNP Paribas SA | 377,706 | (377,706 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Citibank, NA | 630,105 | (249,130 | ) | – 0 | – | – 0 | – | 380,975 | ||||||||||||
Credit Suisse International | 1,505,939 | – 0 | – | – 0 | – | (537,060 | ) | 968,879 | ||||||||||||
Deutsche Bank AG | 24,308 | (24,308 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Goldman Sachs Bank USA/Goldman Sachs International | 4,354,881 | (294,793 | ) | – 0 | – | (812,986 | ) | 3,247,102 | ||||||||||||
JPMorgan Chase Bank | 91,016 | (91,016 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Morgan Stanley & Co., Inc. | 205,252 | – 0 | – | – 0 | – | – 0 | – | 205,252 | ||||||||||||
Standard Chartered Bank | 903,480 | (81,690 | ) | – 0 | – | – 0 | – | 821,790 | ||||||||||||
State Street Bank & Trust Co. | 846,825 | (5,225 | ) | – 0 | – | – 0 | – | 841,600 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 9,394,026 | $ | (1,180,939 | ) | $ | – 0 | – | $ | (1,725,486 | ) | $ | 6,487,601 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | The actual collateral received/pledged is more than the amount reported due to over-collateralization. |
** | Cash and securities have been posted for initial margin requirements for exchange-traded derivatives outstanding at April 30, 2016. |
^ | 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. |
66 | • AB INCOME FUND |
Notes to Financial Statements
2. Currency Transactions
The Fund may invest in non-U.S. dollar securities on a currency hedged or unhedged basis. The Fund may seek investment opportunities by taking long or short positions in currencies through the use of currency-related derivatives, including forward currency exchange contracts, futures and options on futures, swaps, and other options. The Fund may enter into transactions for investment opportunities when it anticipates that a foreign currency will appreciate or depreciate in value but securities denominated in that currency are not held by the Fund and do not present attractive investment opportunities. Such transactions may also be used when the Adviser believes that it may be more efficient than a direct investment in a foreign currency-denominated security. The Fund may also conduct currency exchange contracts on a spot basis (i.e., for cash at the spot rate prevailing in the currency exchange market for buying or selling currencies).
3. TBA and Dollar Rolls
The Fund 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 Fund may enter into dollar rolls. Dollar rolls involve sales by the Fund of securities for delivery in the current month and the Fund’s simultaneously contracting to repurchase substantially similar (same type and coupon) securities on a specified future date. During the roll period, the Fund forgoes principal and interest paid on the securities. The Fund 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 Fund is obligated to repurchase under the agreement may decline below the repurchase price. Dollar rolls are speculative techniques. During the period ended April 30, 2016, the Fund had no transactions in dollar rolls.
4. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase transactions (“RVP”) in accordance with the terms of a Master Repurchase Agreement (“MRA”), under which the Fund sells securities and agrees to repurchase them at a mutually agreed upon date and price. At the time the Fund enters into a reverse repurchase agreement,
AB INCOME FUND • | 67 |
Notes to Financial Statements
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 Fund 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 Fund in the event of a default. In the event of a default by a MRA counterparty, the Fund 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 period ended April 30, 2016, the average amount of reverse repurchase agreements outstanding was $1,398,218,094 and the daily weighted average interest rate was 0.34%. At April 30, 2016, the Fund had reverse repurchase agreements outstanding in the amount of $815,240,620 as reported on the statement of assets and liabilities.
The following table presents the Fund’s RVP liabilities by counterparty net of the related collateral pledged by the Fund as of April 30, 2016:
Counterparty | RVP Liabilities Subject to a MRA | Securities Collateral Pledged†* | Net Amount of RVP Liabilities | |||||||||
Credit Suisse Securities (USA) LLC | $ | 943,337 | $ | (943,337 | ) | $ | – 0 | – | ||||
HSBC Bank USA | 412,145,983 | (412,145,983 | ) | – 0 | – | |||||||
JP Morgan Chase Bank | 402,151,300 | (402,151,300 | ) | – 0 | – | |||||||
|
|
|
|
|
| |||||||
Total | $ | 815,240,620 | $ | (815,240,620 | ) | $ | – 0 | – | ||||
|
|
|
|
|
|
† | Including accrued interest. |
* | The actual collateral pledged may be more than the amount reported due to overcollateralization. |
5. Loan Participations and Assignments
The Fund 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 term of the loan as specified in the loan agreement. When investing in Participations, the Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. In addition, when investing in Participations, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender and only upon receipt of payments by the Lender from the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the Lender. When the Fund purchases Assignments from Lenders, it will typically acquire direct rights against the borrower on the loan. These loans may include
68 | • AB INCOME FUND |
Notes to Financial Statements
participations in “bridge loans”, which are loans taken out by borrowers for a short period (typically less than period) pending arrangement of more permanent financing through, for example, the issuance of bonds, frequently high-yield bonds issued for the purpose of acquisitions. The Fund may also participate in unfunded loan commitments, which are contractual obligations for investing in future Participations, may receive a commitment fee based on the amount of the commitment. Under these arrangements, the Fund may receive a fixed rate commitment fee and, if and to the extent the borrower borrows under the facility, the Fund may receive an additional funding fee.
Unfunded loan commitments and funded loans are marked to market daily.
During the period ended April 30, 2016, the Fund had no commitments outstanding and received no commitment fees or additional funding fees.
NOTE E
Common Stock
During the years ended December 31, 2015 and December 31, 2014 the Predecessor Fund did not issue any shares in connection with the Fund’s dividend reinvestment plan.
On June 25, 2014, the Predecessor Fund announced a share repurchase program for the Predecessor Fund’s discretionary repurchase of up to 15% of its then outstanding shares of common stock (valued at up to approximately $306 million as of June 24, 2014 based on Predecessor Fund total net assets of approximately $2.04 billion) in open market transactions over a one-year period. This share repurchase program was intended to benefit long-term Predecessor Fund stockholders by the repurchase of Predecessor Fund shares at a discount to their net asset value. During the year ended December 31, 2015 and the year ended December 31, 2014 the Predecessor Fund repurchased 12,172,242 and 14,903,847 shares, respectively, at an average discount of 10.45% and 10.09%, respectively, from net asset value. The share repurchase program expired on June 25, 2015.
AB INCOME FUND • | 69 |
Notes to Financial Statements
NOTE F
Capital Stock
Each class consists of 3,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||
January 1, 2016 to April 30, 2016(a) (unaudited) | January 1, 2016 to April 30, 2016(a) (unaudited) | |||||||||||
|
| |||||||||||
Class A(b) | ||||||||||||
Shares sold | 3,656 | $ | 29,162 | |||||||||
| ||||||||||||
Shares issued in reinvestment of dividends and distributions | 1 | 7 | ||||||||||
| ||||||||||||
Net increase | 3,657 | $ | 29,169 | |||||||||
| ||||||||||||
Class C(b) |
| |||||||||||
Shares sold | 1,252 | $ | 10,002 | |||||||||
| ||||||||||||
Net increase | 1,252 | $ | 10,002 | |||||||||
| ||||||||||||
Advisor Class |
| |||||||||||
Shares sold | 14,524 | $ | 629,694 | |||||||||
| ||||||||||||
Shares issued in reinvestment of dividends and distributions | 124,322 | 997,061 | ||||||||||
| ||||||||||||
Shares redeemed | (8,569,373 | ) | (68,446,972 | ) | ||||||||
| ||||||||||||
Net decrease | (8,430,527 | ) | $ | (66,820,217 | ) | |||||||
|
(a) | The Predecessor Fund’s fiscal year end was December 31 and the Fund’s fiscal year end is October 31. |
(b) | Inception date of April 21, 2016. |
NOTE G
Risks Involved in Investing in the Fund
Interest Rate Risk and Credit Risk—Interest rate risk is the risk that changes in interest rates will affect the value of the Fund’s investments in fixed-income debt securities such as bonds or notes. Increases in interest rates may cause the value of the Fund’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 (often referred to as “junk bonds”) 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 corporate developments, negative perceptions of the junk bond market
70 | • AB INCOME FUND |
Notes to Financial Statements
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.
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 real value of the Fund’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.
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.
Currency Risk—Fluctuations in currency exchange rates may negatively affect the value of the Fund’s investments or reduce its returns.
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
AB INCOME FUND • | 71 |
Notes to Financial Statements
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 decline.
Mortgage-Backed and/or Other Asset-Backed Securities Risk—Investments in mortgage-backed and other asset-backed securities are subject to certain additional risks. The value of these securities may be particularly sensitive to changes in interest rates. These risks include “extension risk”, which is the risk that, in periods of rising interest rates, issuers may delay the payment of principal, and “prepayment risk”, which is the risk that in periods of falling interest rates, issuers may pay principal sooner than expected, exposing the Fund to a lower rate of return upon reinvestment of principal. Mortgage-backed securities offered by non-governmental issuers and other asset-backed securities may be subject to other risks, such as higher rates of default in the mortgages or assets backing the securities or risks associated with the nature and servicing of mortgages or assets backing the securities.
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 in the statement of assets and liabilities.
Indemnification Risk—In the ordinary course of business, the Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these indemnification provisions and expects the risk of loss thereunder to be remote. Therefore, the Fund has not accrued any liability in connection with these indemnification provisions.
NOTE H
Distributions to Shareholders
The tax character of distributions to be paid for the year ending October 31, 2016 will be determined at the end of the current fiscal year. The tax character of distributions paid during the fiscal years ended December 31, 2015 and December 31, 2014 were as follows:
2015 | 2014 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 107,568,721 | $ | 107,988,728 | ||||
Net long-term capital gains | 3,863,457 | – 0 | – | |||||
|
|
|
| |||||
Total taxable distributions paid | $ | 111,432,178 | $ | 107,988,728 | ||||
|
|
|
|
72 | • AB INCOME FUND |
Notes to Financial Statements
As of December 31, 2015, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 3,104,336 | ||
Accumulated capital and other losses | (58,811,757 | )(a) | ||
Unrealized appreciation/(depreciation) | (31,209,241 | )(b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | (86,916,662 | )(c) | |
|
|
(a) | As of December 31, 2015, the Predecessor Fund’s cumulative deferred loss on straddles was $49,588,327. At December 31, 2015, the Predecessor Fund had a net post-October long-term capital loss deferral of $9,223,430 which is deemed to arise on January 1, 2016. |
(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 partnership investments, the realization for tax purposes of gains/losses on certain derivative instruments, and the tax treatment of passive foreign investment companies (PFICs). |
(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 for an indefinite period, and such losses will retain their character as either short-term or long-term capital losses. As of December 31, 2015, the Predecessor Fund did not have any capital loss carryforwards.
NOTE I
Acquisition and Reorganization
At a meeting held on August 6, 2015 the Board, on behalf of the Fund, and the Board of Directors of the Predecessor Fund, approved the Reorganization Agreement providing for the tax-free acquisition by the Fund of the assets and liabilities of the Predecessor Fund, and the Predecessor Fund shareholders approved the Reorganization Agreement at a Special Meeting of Shareholders held on March 1, 2016. The acquisition was completed on April 22, 2016. Pursuant to the Reorganization Agreement, the assets and liabilities of the Predecessor Fund’s shares were transferred in exchange for the Fund’s Advisor Class shares, in a tax-free exchange as follows:
Shares outstanding before the Reorganization | Shares outstanding immediately after the Reorganization | Aggregate net assets before the Reorganization | Aggregate net assets immediately after the Reorganization | |||||||||||||
Predecessor Fund* | 215,833,695 | – 0 | – | $ | 1,725,148,833 | + | $ | – 0 | – | |||||||
The Fund | – 0 | – | 215,833,695 | $ | – 0 | – | $ | 1,725,148,833 |
* | Represents the accounting survivor. |
+ | Includes unrealized appreciation of $66,340,404. |
AB INCOME FUND • | 73 |
Notes to Financial Statements
NOTE J
New Accounting Pronouncement
In May 2015, the Financial Accounting Standards Board issued an Accounting Standards Update, ASU 2015-07 (the “ASU”) 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 requirement to make certain disclosures for investments that are eligible to be measured at fair value using the net asset value per share practical expedient but do not utilize that practical expedient. 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 K
Subsequent Events
The Government STIF Portfolio, prior to June 1, 2016, was offered as a cash management option to mutual funds and other institutional accounts of the Adviser, and was not available for direct purchase by members of the public. Prior to June 1, 2016, the Government STIF Portfolio paid no investment management fees but did bear its own expenses. As of June 1, 2016, the Government STIF Portfolio, which was renamed “AB Government Money Market Portfolio” (the “Government Money Market Portfolio”), will have a contractual investment management fee rate of .20% and will continue to bear its own expenses. In connection with the investment by the Fund in the Government Money Market Portfolio, the Adviser will waive its investment management fee from the Fund in an amount equal to Government Money Market Portfolio’s effective management fee.
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 other material events that would require disclosure in the Fund’s financial statements through this date.
74 | • AB INCOME FUND |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||
April 21, 2016(a) to April 30, 2016 (unaudited) | ||||
Net asset value, beginning of period | $ 7.99 | |||
|
| |||
Income From Investment Operations | ||||
Net investment income(b) | .01 | |||
Net realized and unrealized gain on investment and foreign currency transactions | .02 | |||
|
| |||
Net increase in net asset value from operations | .03 | |||
|
| |||
Less: Dividends | ||||
Dividends from net investment income(c) | (.00 | ) | ||
|
| |||
Net asset value, end of period | $ 8.02 | |||
|
| |||
Total Return | ||||
Total investment return based on net asset value(d) | .46 | % | ||
Ratios/Supplemental Data | ||||
Net assets, end of period (000’s omitted) | $29 | |||
Ratio to average net assets of: | ||||
Expenses(e)^ | .88 | % | ||
Net investment income^ | 3.01 | % | ||
Portfolio turnover rate | 8 | % |
See footnote summary on page 78.
AB INCOME FUND • | 75 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||
April 21, 2016(a) to April 30, 2016 (unaudited) | ||||
Net asset value, beginning of period | $ 7.99 | |||
|
| |||
Income From Investment Operations | ||||
Net investment income(b) | .01 | |||
Net realized and unrealized gain on investment and foreign currency transactions | .02 | |||
|
| |||
Net increase in net asset value from operations | .03 | |||
|
| |||
Less: Dividends and Distributions | ||||
Dividends from net investment income(c) | (.00 | ) | ||
|
| |||
Net asset value, end of period | $ 8.02 | |||
|
| |||
Total Return | ||||
Total investment return based on net asset value(d) | .44 | % | ||
Ratios/Supplemental Data | ||||
Net assets, end of period (000’s omitted) | $10 | |||
Ratio to average net assets of: | ||||
Expenses(e)^ | 1.63 | % | ||
Net investment income^ | 2.33 | % | ||
Portfolio turnover rate | 8 | % |
See footnote summary on page 78.
76 | • AB INCOME FUND |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||||||||||||||
January 1, 2016(f) (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 7.86 | $ 8.34 | $ 8.13 | $ 8.89 | $ 8.93 | $ 8.75 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(b) | .12 | (g) | .38 | .42 | .40 | .40 | .44 | |||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .32 | (.41 | ) | .19 | (.71 | ) | .57 | .31 | ||||||||||||||||
Contributions from affiliates | – 0 | – | – 0 | – | – 0 | – | – 0 | – | .00 | (c) | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .44 | (.03 | ) | .61 | (.31 | ) | .97 | .75 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.28 | ) | (.46 | ) | (.45 | ) | (.41 | ) | (.48 | ) | (.57 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | (.05 | ) | – 0 | – | (.04 | ) | (.53 | ) | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.28 | ) | (.51 | ) | (.45 | ) | (.45 | ) | (1.01 | ) | (.57 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption fee | .00 | (c) | – 0 | – | – 0 | – | – 0 | – | – 0 | – | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Anti-Dilutive Effect of Share Repurchase Program | – 0 | – | .06 | .05 | – 0 | – | – 0 | – | – 0 | – | ||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 8.02 | $ 7.86 | $ 8.34 | $ 8.13 | $ 8.89 | $ 8.93 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Market value, end of period | N/A | $ 7.67 | $ 7.47 | $ 7.13 | $ 8.10 | $ 8.07 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Discount, end of period | N/A | (2.42 | )% | (10.43 | )% | (12.30 | )% | (8.89 | )% | (9.63 | )% | |||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on: | ||||||||||||||||||||||||
Market value | N/A | 9.71 | %(h) | 11.28 | %(h) | (6.50 | )%(h) | 13.08 | %(h) | 9.36 | %(h) | |||||||||||||
Net asset value | 3.63 | %(d) | .70 | %(h) | 8.96 | %(h) | (2.86 | )%(h) | 12.15 | %(h) | 9.67 | %(h) | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000,000’s omitted) | $1,664 | $1,696 | $1,902 | $1,976 | $2,159 | $2,168 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements(e) | .88 | %^ | .75 | % | .67 | % | .63 | % | .64 | % | .64 | % | ||||||||||||
Expenses, before waivers/reimbursements(e) | .89 | %^ | .75 | % | .67 | % | .63 | % | .64 | % | .64 | % | ||||||||||||
Net investment income | 4.51 | %(g)^ | 4.57 | % | 5.02 | % | 4.74 | % | 4.34 | % | 5.00 | % | ||||||||||||
Portfolio turnover rate | 8 | % | 34 | % | 32 | % | 107 | % | 58 | % | 67 | % |
See footnote summary on page 78.
AB INCOME FUND • | 77 |
Financial Highlights
(a) | Inception date. |
(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 fund distributions or the redemption of fund shares. Total investment return calculated for a period of less than one year is not annualized. |
(e) | The expense ratios, excluding interest expense are: |
January 1, 2016(f) (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Class A | ||||||||||||||||||||||||
Expenses | .67 | %^ | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||
Class C | ||||||||||||||||||||||||
Expenses | 1.26 | %^ | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||
Advisor Class | ||||||||||||||||||||||||
Net of waivers | .59 | %^ | .61 | % | .61 | % | .57 | % | .55 | % | .58 | % | ||||||||||||
Before waivers | .60 | %^ | .61 | % | .61 | % | .57 | % | .55 | % | .58 | % |
(f) | The Predecessor Fund’s fiscal year end was December 31 and the Fund’s fiscal year end is October 31. |
(g) | Net of fees and expenses waived by the Adviser. |
(h) | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for purposes of this calculation, to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. Total investment return calculated for a period of less than one year is not annualized. |
^ | Annualized. |
See notes to financial statements.
78 | • AB INCOME FUND |
Financial Highlights
BOARD OF DIRECTORS
Marshall C. Turner, Jr.(1) , Chairman John H. Dobkin(1) Michael J. Downey(1) | Nancy P. Jacklin(1) Robert M. Keith, President and Chief Executive Officer | |
William H. Foulk, Jr.(1) D. James Guzy(1) | 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 Gershon M. Distenfeld(2), Douglas J. Peebles(2), Vice President | Matthew S. Sheridan(2), Vice President Emilie D. Wrapp, Secretary Joseph J. Mantineo, Treasurer and Chief Financial Officer Phyllis J. Clarke, Controller |
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 a team of investment professionals consisting of Messrs. DeNoon, Distenfeld, Peebles and Sheridan. |
AB INCOME FUND • | 79 |
Board of Directors
Information Regarding the Review and Approval of the Portfolio’s Advisory Agreement
The disinterested directors (the “directors”) of AB Bond Fund, Inc. (the “Fund”) unanimously approved the Fund’s Advisory Agreement with the Adviser in respect of AB Income Fund (the “Portfolio”) for an initial two-year period at a meeting held on August 4-5, 2015.
Prior to approval of the Advisory Agreement in respect of the Portfolio, the directors had requested from the Adviser, and received and evaluated, extensive materials. They reviewed the proposed Advisory Agreement with the Adviser and with experienced counsel who are independent of the Adviser, who advised on the relevant legal standards. The directors also reviewed an independent evaluation prepared by the Fund’s Senior Officer (who is also the Fund’s Independent Compliance Officer) of the reasonableness of the proposed advisory fee in the Advisory Agreement. The directors also discussed the proposed approval in private sessions with counsel and the Fund’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services to be provided by the Adviser to the Portfolio gained from their experience as directors or trustees of most of the registered investment companies advised by the Adviser, including the Fund, their overall confidence in the Adviser’s integrity and competence they have gained from that experience, the Adviser’s initiative in identifying and raising potential issues with the directors and its responsiveness, frankness and attention to concerns raised by the directors in the past, including the Adviser’s willingness to consider and implement organizational and operational changes designed to improve investment results and the services provided to the AB Funds. The directors noted that they have four regular meetings each year, at each of which they receive presentations from the Adviser on the investment results of the AB Funds and review extensive materials and information presented by the Adviser.
The directors also considered all other factors they believed relevant, including the specific matters discussed below. In their deliberations, the directors did not identify any particular information that was all-important or controlling, and different directors may have attributed different weights to the various factors. The directors determined that the selection of the Adviser to manage the Portfolio and the overall arrangements between the Portfolio and the Adviser, as provided in the Advisory Agreement, including the proposed advisory fee, were fair and reasonable in light of the services to be performed, expenses to be incurred and such other matters as the directors considered relevant in the exercise of their business judgment. The material factors and conclusions that formed the basis for the directors’ determinations included the following:
Nature, Extent and Quality of Services to be Provided
The directors considered the scope and quality of services to be provided by the Adviser under the Advisory Agreement, including the quality of the investment
80 | • AB INCOME FUND |
research capabilities of the Adviser and the other resources it has dedicated to performing services for the AB Funds. They also noted the professional experience and qualifications of the Portfolio’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Portfolio will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services provided to the Portfolio by employees of the Adviser or its affiliates. Requests for these reimbursements will be subject to the directors’ approval on a quarterly basis and, to the extent requested and paid, result in a higher rate of total compensation from the Portfolio to the Adviser than the fee rate stated in the Advisory Agreement. The directors noted that the methodology used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Fund’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Portfolio’s other service providers, also was considered. The directors concluded that, overall, they were satisfied with the nature, extent and quality of services to be provided to the Portfolio under the Advisory Agreement.
Costs of Services to be Provided and Profitability
Because the Portfolio had not yet commenced operations, the directors were unable to consider historical information about the profitability of the Portfolio. However, the Adviser agreed to provide the directors with profitability information in connection with future proposed continuances of the Advisory Agreement. They also considered the costs to be borne by the Adviser in providing services to the Portfolio and that the Portfolio was unlikely to be profitable to the Adviser unless it achieves a material level of net assets.
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their proposed relationships with the Portfolio, including, but not limited, to benefits relating to soft dollar arrangements (whereby the Adviser receives brokerage and research services from brokers that execute transactions for certain clients, including the Portfolio); 12b-1 fees and sales charges to be received by the Fund’s principal underwriter (which is a wholly owned subsidiary of the Adviser) in respect of certain classes of the Portfolio’s shares; transfer agency fees to be paid by the Portfolio to a wholly owned subsidiary of the Adviser; and brokerage commissions to be paid by the Portfolio to brokers affiliated with the Adviser. The directors recognized that the Adviser’s future profitability would be somewhat lower without these benefits. The directors also understood that the Adviser also might derive reputational and other benefits from its association with the Portfolio.
Investment Results
Since the Portfolio had not yet commenced operations, no performance or other historical information for the Portfolio was available from the Adviser. However,
AB INCOME FUND • | 81 |
it was proposed that the Portfolio would receive the assets of AllianceBernstein Income Fund, Inc. (“ABIF”) in exchange for Advisor Class shares of the Portfolio and the assumption by the Portfolio of all of the liabilities of ABIF. Shareholders of ABIF would receive Advisor Class shares of the Portfolio in connection with the reorganization. The portfolio management team of ABIF would continue to manage the assets of the Portfolio. The Adviser provided the directors with the performance returns of ABIF. The directors noted the significant differences between ABIF and the Portfolio, in particular that ABIF utilized leverage to seek incremental return for its common stockholders, which the Portfolio, as an open-end fund, could not do. Based on this information, together with the Adviser’s written and oral presentations regarding the management of the Portfolio and their general knowledge and confidence in the Adviser’s expertise in managing mutual funds, the directors concluded that they were satisfied that the Adviser was capable of providing high quality portfolio management services to the Portfolio.
Advisory Fees and Other Expenses
The directors considered the proposed advisory fee rate payable by the Portfolio and information prepared by Lipper concerning advisory fee rates paid by other funds in the same Lipper category as the Portfolio at a hypothetical common asset level of $1.0 billion. The directors recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds.
The information reviewed by the directors showed that, at the Portfolio’s hypothetical size of $1.0 billion, its proposed contractual effective advisory fee rate of 60 basis points was higher than the Lipper expense group median of 56.9 basis points. The directors discussed with the Adviser, consistent with a recommendation of the Senior Officer, the reasons for ABIF’s and the Portfolio’s different fee structure and level of the advisory fee. The Adviser informed the directors that because the Portfolio is an open-end fund, instituting a similar income-based fee for the Portfolio would present a marketing impediment for a number of the Adviser’s distributing partners. The Adviser also informed the directors that the Portfolio’s asset-based fee is typical for open-end funds. The Adviser informed the directors that the Portfolio’s advisory fee rate is higher than the advisory fee rate of ABIF because the current historically low interest rate environment results in the income-based component of the fee rate being unusually low. The Adviser explained that the Portfolio’s ordinary fee rate is lower than the fee rate paid by ABIF in most prior periods.
The directors recognized that the Adviser’s total compensation from the Portfolio pursuant to the Advisory Agreement would be increased by amounts paid pursuant to the expense reimbursement provision in the Advisory Agreement, and that the impact of such expense reimbursement would depend on the size of the Portfolio and the extent to which the Adviser requests reimbursements pursuant to this provision.
82 | • AB INCOME FUND |
The Adviser informed the directors that there were no institutional products managed by it that have a substantially similar investment style.
The directors noted that the Portfolio may invest in shares of exchange-traded funds (“ETFs”), subject to restrictions and limitations of the Investment Company Act of 1940 as these may be waived as a result of exemptive orders issued by the SEC. The directors also noted that ETFs pay advisory fees pursuant to their advisory contracts. The directors concluded, based on the Adviser’s explanation of how it may use ETFs when they are the most cost-effective way to obtain desired exposures or to “equitize” cash inflows pending purchases of underlying securities, that the proposed advisory fee for the Portfolio would be paid for services that would be in addition to, rather than duplicative of, the services provided under the advisory contracts of the ETFs in which the Portfolio may in the future invest.
The directors considered the anticipated total expense ratio of the Class A shares of the Portfolio assuming $1.0 billion in assets under management in comparison to the fees and expenses of funds within two comparison groups created by Lipper: an Expense Group and an Expense Universe. Lipper described an Expense Group as a representative sample of funds similar to the Portfolio and an Expense Universe as a broader group than the Expense Group, consisting of all funds in the investment classification/objective with a similar load type as the Portfolio.
The directors also considered the proposed expense limitation agreement between the Adviser and the Fund for a two-year period beginning with the Portfolio’s commencement of operations. Under the proposed expense limitation agreement the Adviser would agree to waive its fees and/or reimburse expenses of the Portfolio to the extent that total expenses exceed 0.88% for Class A shares and 0.63% for Advisor Class shares. The anticipated expense ratios for the Portfolio reflected fee waivers and/or expense reimbursement as a result of the proposed expense limitation agreement. The directors noted that it was likely that the expense ratios of some of the other funds in the Portfolio’s Lipper category also were lowered by waivers or reimbursements by those funds’ investment advisers, which in some cases might be voluntary or temporary. The directors view the expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Portfolio by others.
The directors requested that the Adviser set the expense limitation at a lower level than the 0.90% initially proposed. The Adviser proposed a limit of 0.88% instead, and the directors considered that level acceptable. Following a recommendation of the Senior Officer, the directors discussed with the Adviser their concern that, after the two year term of the expense limitation agreement, the Portfolio’s expense ratio would increase. In response, the Adviser also agreed to review the gross expense ratio of the Portfolio with the directors in advance of the expiration of the two year term of its expense limitation agreement.
AB INCOME FUND • | 83 |
The information reviewed by the directors showed that the Portfolio’s anticipated Class A expense ratio of 88 basis points, giving effect to the proposed expense limitation agreement, was close to the Expense Group median of 86.7 basis points and the Expense Universe median of 87.4 basis points. The information also showed that the Portfolio’s anticipated Advisor Class expense ratio of 63 basis points, giving effect to the proposed expense limitation agreement, was comparable to, but higher than, ABIF’s current expense ratio of 55 basis points. The directors concluded that, under the particular circumstances of the Portfolio, the anticipated expense ratios of the Class A shares and the Advisor Class shares, taking into account the two year expense limitation, were acceptable.
Economies of Scale
The directors noted that the proposed advisory fee schedule for the Portfolio contains breakpoints that reduce the fee rates on assets above specified levels. The directors took into consideration prior presentations by an independent consultant on economies of scale in the mutual fund industry and for the AB Funds, and by the Adviser concerning certain of its views on economies of scale. The directors also had requested and received from the Adviser certain updates on economies of scale at the May 2015 meetings. The directors believe that economies of scale may be realized (if at all) by the Adviser across a variety of products and services, and not only in respect of a single fund. The directors noted that there is no established methodology for setting breakpoints that give effect to the fund-specific services provided by a fund’s adviser and to the economies of scale that an adviser may realize in its overall mutual fund business or those components of it which directly or indirectly affect a fund’s operations. The directors observed that in the mutual fund industry as a whole, as well as among funds similar to the Portfolio, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. The directors also noted that the advisory agreements for many funds do not have breakpoints at all. Having taken these factors into account, the directors concluded that the Portfolio’s shareholders would benefit from a sharing of economies of scale in the event the Portfolio’s net assets exceed a breakpoint.
84 | • AB INCOME 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 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 initial approval of the Investment Advisory Agreement.
The Adviser proposed the reorganization of AB Income Fund, Inc. (“ABIF”), the existing closed-end investment company managed by the Adviser, and the establishment of the Portfolio as a “shell” fund to receive the assets of ABIF into the Portfolio. For various reasons, the Adviser is seeking to effectively convert ABIF into an open-end fund. The Adviser seeks an agreement and plan of acquisition and liquidation for the transfer of ABIF’s assets and liabilities into the Portfolio in exchange for shares of the Portfolio.
The Portfolio’s investment objective is high current income consistent with preservation of capital. The Portfolio will invest at least 80% of its net assets in income-producing securities. The Portfolio will, under normal circumstances, invest at least 65% of its total assets in securities of U.S. and foreign governments, their agencies and instrumentalities, and repurchase agreements pertaining to U.S. government securities. Furthermore, the Portfolio will be limited to investing at least 65% of its net assets denominated in U.S. dollars; no more than 35% of the Portfolio’s net assets will be invested in below investment-grade securities; and no more than 25% of the Portfolio’s total assets will be invested in securities of issuers in any one country other than the U.S.
The Adviser will select securities for purchase or sale based on its assessment of the securities’ individual risk and returns characteristics and overall impact to the
1 | The Senior Officer’s fee evaluation was completed on July 23, 2015 and discussed with the Board of Directors on August 4-5, 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. |
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Portfolio’s risk and return characteristics. In making this assessment, the Adviser will take 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’s non-fundamental investment policies will restrict the Portfolio from margin purchases and investing in oil, gas and mineral exploration programs.
The Adviser expects to use a variety of derivatives, including options, swaps, forwards and futures, in its management of the Portfolio. In addition, the Adviser does not plan to leverage the Portfolio through conventional borrowings, but may utilize reverse repurchase agreements and similar instruments. The use of derivatives and reverse repurchase agreements is expected to create gross exposure for the Portfolio that will at times be substantially in excess of the Portfolio’s net assets, effectively leveraging the Portfolio.
The Portfolio’s benchmark will be the Barclays U.S. Aggregate Bond Index. The Adviser expects Lipper and Morningstar to place the Portfolio in their respective Core Plus Bond and Intermediate Term Bond categories, respectively.
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 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
86 | • AB INCOME FUND |
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.
Portfolio | Advisory Fee Schedule Based on Average Daily Net Assets | |
Income Portfolio4 | 0.60% on the first $2.5 billion 0.55% on the next $2.5 billion 0.50% on the balance |
In addition to paying the advisory fee, the Investment Advisory Agreement provides for the Adviser to be reimbursed for providing administrative and accounting services.
The Portfolio‘s Expense Limitation Agreement calls for the Adviser to establish expense caps, set forth below, for a two year period after the Portfolio commences operations. The Expense Limitation Agreement also provides a mechanism for reimbursing the Adviser for its expense cap subsidies. Under the Expense Limitation Agreement, the Adviser may be able to recoup all or a portion of the amounts waived or reimbursed until the end of three fiscal years after the fiscal period in which the amounts were waived or reimbursed to the extent that the reimbursements do not cause the expense ratios of the Portfolio’s share classes to exceed the expense caps. The Adviser’s ability to recoup expenses will terminate with the agreements. The Adviser does not expect the Portfolio to outgrow its expense cap.
3 | Jones v. Harris at 1427. |
4 | The proposed advisory fee schedule for the Portfolio is identical to that of recently established fixed income funds: AB Bond Fund, Inc. – Limited Duration High Income Portfolio and AB Bond Fund, Inc. – High Yield Portfolio. The proposed advisory fee schedule for the Portfolio has a higher effective fee rate than the advisory fee schedule of the NYAG related 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. |
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Portfolio | Expense Cap Pursuant to Expense Limitation Undertaking | Estimated Gross Expense Ratio5 | Fiscal Year End | |||||||||
Income Portfolio6 | Class A | 0.90 | % | 1.10 | % | October | ||||||
Class C | 1.65 | % | 1.87 | % | ||||||||
Class R | 1.15 | % | 1.51 | % | ||||||||
Class K | 0.90 | % | 1.20 | % | ||||||||
Class I | 0.65 | % | 0.87 | % | ||||||||
Advisor | 0.65 | % | 0.85 | % | ||||||||
Class Z | 0.65 | % | 0.77 | % |
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 to be 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 will be more costly than those for institutional assets due to the greater complexities and time required for investment companies, although the Adviser will be reimbursed for providing some of these services. Also, retail mutual funds managed by the Adviser are widely held; servicing the Portfolio’s investors will be 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 may be more difficult than managing 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. Finally, in recent years, investment advisers have been sued by institutional clients and have suffered reputational
5 | The Portfolio’s estimated gross expense ratios is based on an initial estimate of the Portfolio’s net assets at $1 billion. |
6 | Shareholders of ABIF who choose to “open-end” their shares to ABIF would receive Advisor Class shares. During ABIF’s most recently completed fiscal year, its total expense ratio was 0.61% excluding interest expense. |
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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.7 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.
Set forth in the table below is ABIF’s investment advisory fee schedule. The advisory fee has two components: (i) a base fee based on the closed-end fund’s average weekly net assets; and (ii) a fee based on the fund’s daily gross income. The Adviser and/or its affiliates are also compensated for administrative and shareholder inquiry services provided to ABIF:
AB Fund | Fee Schedule8 | |
ABIF | Advisory Fee:
0.30% on the first $250 million 0.25% on the balance plus 4.75% of daily gross income | |
ABIF’s advisory fee shall not exceed 0.80% of the fund’s average weekly net assets. | ||
Administration Fee:
At cost reimbursement | ||
Shareholder Inquiry Agency Fee:
At cost reimbursement |
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.
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 | ABIF’s base fee is calculated based on ABIF’s average weekly net assets. |
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II. | MANAGEMENT FEES CHARGED BY OTHER MUTUAL FUND COMPANIES FOR LIKE SERVICES. |
Lipper, Inc. (“Lipper”), 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.9 Lipper’s analysis included the comparison of the Portfolio’s contractual management fee, estimated at an initial asset level of $1 billion, to the median of the Portfolio’s Lipper Expense Group (“EG”)10 and the Portfolio’s contractual management fee ranking.11
Lipper describes an EG as a representative sample of comparable funds. Lipper’s standard methodology for screening funds to be included in an EG entails the consideration of several fund criteria, including fund type, investment classification/objective, load type and similar 12b-1/non-12b-1 service fees, asset (size) comparability, expense components, operating structure, and expense attributes and attributes. An EG will typically consist of seven to twenty funds.
Portfolio | Contractual Management Fee (%)12 | Lipper Exp. Median (%) | Rank | |||||||||
Income Portfolio | 0.600 | 0.569 | 9/12 |
Lipper also compared the Portfolio’s projected total expense ratio to the medians of the Portfolio’s EG and Lipper Expense Universe (“EU”). The EU is a broader group compared to the EG, consisting of all funds that have the same investment classification/objective and load type as the subject Portfolio.13
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 | Lipper does not consider average account size when constructing EGs. Funds with relatively small average account sizes tend to have higher transfer agent expense ratio 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. |
11 | The contractual management fee is calculated by Lipper using the Portfolio’s contractual management fee rate at a 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. Lipper’s total expense ratio information is based on the most recent annual report except as otherwise noted. A ranking of “1” would mean that Fund had the lowest effective fee rate in the Lipper peer group. |
12 | 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. |
13 | Except for asset (size) comparability, Lipper uses the same criteria for selecting an EG peer when selecting an EU peer. Unlike the EG, the EU allows for the same adviser to be represented by more than just one fund. |
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Portfolio | Expense Ratio (%)14 | Lipper Exp. Group Median (%) | Lipper Group Rank | Lipper Exp. Median (%) | Lipper Rank | |||||||||||||||
Income Portfolio | 0.900 | 0.867 | 8/12 | 0.874 | 17/28 |
Based on this analysis, the Portfolio has a higher contractual management fee than the EG median. In addition, the Portfolio’s total expense ratio is higher than both EG and EU medians.
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.
IV. | PROFIT MARGINS OF THE ADVISER AND ITS AFFILIATES FOR SUPPLYING SUCH SERVICES. |
The Portfolio has not yet commenced operations. Therefore, there is no historic profitability data with respect to the Adviser’s investment services to the Portfolio.
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”).
AB 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
14 | Projected total expense ratio information, based on an initial net asset estimate of $1 billion, pertains to the Portfolio’s Class A shares. |
AB INCOME FUND • | 91 |
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 AB 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.
V. | POSSIBLE ECONOMIES OF SCALE |
The Adviser has indicated that economies of scale are being shared with shareholders of the registered investment companies it manages 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 have 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.
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
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. |
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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 FUND |
With assets under management of approximately $485 billion as of June 30, 2015, the Adviser has the investment experience to manage and provide non-investment services (described in Section I) to the Portfolio.
Since the Portfolio has not yet commenced operations, the Portfolio has no performance history. Performance information for ABIF, set forth below, was discussed with the Directors at the August 4-5, 2015 meetings.
Periods Ended May 31, 2015 at NAV | ||||||||||||||||
1 Year (%) | 3 Year (%) | 5 Year (%) | 10 Year (%) | |||||||||||||
ABIF | 5.78 | 5.52 | 7.37 | 8.03 | ||||||||||||
Lipper Corporate BBB-Rated Debt Funds (Leveraged) Average / # Funds | 2.50 | 4.93 | 6.86 | 6.12 | ||||||||||||
Lipper Core Plus Bond Average / # Funds18 | 2.37 | 3.41 | 4.74 | 4.86 | ||||||||||||
Barclays U.S. Aggregate Bond Index18 | 3.03 | 2.21 | 3.90 | 4.61 | ||||||||||||
Inception Date: August 28, 1987 |
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. |
18 | Unlike ABIF, funds in the Lipper category, Core Plus Bond, are not leveraged. The Barclays U.S. Aggregate Bond Index is also not leveraged. ABIF’s ability to utilize leverage may give the closed-end fund an advantage in terms of performance in comparison to funds that are not leveraged. |
AB INCOME FUND • | 93 |
CONCLUSION:
Based on the factors discussed above, the Senior Officer’s recommended that the Directors consider asking the Adviser to extend the two-year expense cap period for the Portfolio and to explain why it did not propose to implement ABIF’s advisory schedule, which has two components: a base fee and a fee based on the closed-end fund’s daily gross income. Such fee structure would compensate the Adviser more directly proportionate to the level of income earned by the Portfolio. This conclusion in respect of the Portfolio is based on an evaluation of all of these factors and no single factor was dispositive.
Dated: August 28, 2015
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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
International Strategic Core 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
Income Fund
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 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 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.
AB INCOME FUND • | 95 |
AB Family of Funds
NOTES
96 | • AB INCOME FUND |
NOTES
AB INCOME FUND • | 97 |
NOTES
98 | • AB INCOME FUND |
NOTES
AB INCOME FUND • | 99 |
NOTES
100 | • AB INCOME FUND |
AB INCOME FUND
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
IF-0152-0416
APR 04.30.16
SEMI-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.
June 24, 2016
Semi-Annual Report
This report provides management’s discussion of fund performance for AB Intermediate Bond Portfolio (the “Portfolio”) for the semi-annual reporting period ended April 30, 2016.
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 10 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 contracts, forwards or swaps.
Investment Results
The table on page 6 shows the Portfolio’s performance compared with its benchmark, the Barclays US Aggregate Bond Index, for the six- and 12-month periods ended April 30, 2016.
All share classes underperformed the benchmark for both periods, before sales charges. During both periods, short relative duration detracted from relative performance due to falling yields, as did an underweight positioning along the long end of the yield curve (particularly in 20-year maturities). Although security selection did not have a meaningful impact on returns in the six-month period, selections within conventional 30-year agency mortgage-backed securities and capital goods issuers detracted in the 12-month period. Sector
AB INTERMEDIATE BOND PORTFOLIO • | 1 |
positioning contributed in both periods, specifically a beneficial exposure to collateralized mortgage obligations. Currency selection did not materially affect relative performance in the six-month period. However, during the 12-month period it had a positive impact due to several modest contributors across the Portfolio’s currency positions, including an underweight in the Australian dollar and an overweight in the Japanese yen.
The Portfolio utilized derivatives including Treasury futures and interest rate swaps (including inflation swaps) to manage duration, inflation, country and yield-curve positioning for both periods. Credit default swaps were utilized for hedging and investment purposes, which had an immaterial impact on absolute performance during both periods; currency forwards and options were utilized for both hedging and investment purposes to manage the Portfolio’s overall currency exposure.
Market Review and Investment Strategy
Bond markets were volatile over the six- and 12-month periods ended April 30, 2016, as economic growth trends and monetary policies in the world’s largest economies continued to diverge. Commodity prices declined through much of the 12-month period, with oil prices dipping below $26 per barrel in February, before beginning to stabilize in March and April—despite a breakdown in formal discussions about a potential production freeze. Government bond yields continued their volatility, and the yield on the US 10-Year Treasury ranged from about 1.6% to
just below 2.5%, ultimately ending the period at 1.8%. The US dollar appreciated against many developed- and emerging-market currencies during much of the 12-month period, yet during the early part of 2016 the dollar reversed course and depreciated against many of these same currencies. The US Federal Reserve made its first official rate hike in nearly a decade in December, which investors generally accepted smoothly.
European markets declined in the second quarter of 2015 on fears of Greece’s departure from the European Union, but rebounded when stop-gap measures were reached with the country’s creditors in the third quarter to avoid an exit. Volatility was somewhat contained as the European Central Bank (“ECB”) maintained an easing bias through the period, though additional measures announced in December fell far short of investor expectations, putting pressure on markets in the region. However, the ECB surprised investors with aggressive expansion of its quantitative easing program in March. Other central banks cut rates, with some, including the Bank of Japan and ECB, dipping into negative rate territory.
Economic activity in emerging-market economies continued to slow: Asia struggled with sluggish exports and weak domestic demand; Latin America continued to face weak growth and political upheaval in many parts of the region; and Eastern Europe’s growth picture was varied, as those countries tied to Western Europe fared better than those tied to commodities.
2 | • AB INTERMEDIATE BOND PORTFOLIO |
Emerging-market sentiment was bolstered toward the end of the 12-month period. This was due to an uptick in oil prices, signs that China’s slowdown may be less pronounced than feared, encouraging political developments regarding Brazilian president Dilma Rousseff’s impeachment on corruption charges and Argentina’s progress on negotiations with its creditors that culminated in April with the country’s first new security issuance in 15 years.
Against this backdrop, fixed-income performance varied across regions and sectors during the 12-month period. Credit securities generally underperformed developed-market Treasuries; developed-market Treasuries also outperformed emerging-market local-currency government bonds (despite the emerging-market rally in
the last three months of the period). The positive performance of investment-grade securities generally outpaced negative returns from high-yield sectors, which saw a fairly wide divergence across sector returns. Commodity-linked sectors had the worst performance—suffering on negative oil price action—with energy down the most, followed by basic industries.
On June 23, 2016, the UK voted to leave the European Union (“EU”) in a popular referendum. At this moment in time, the UK remains a member of the EU and the rules and regulations remain unchanged, as do all the protections in place. Exactly how the UK’s role in the EU will change will become clear over time. The Adviser continues to monitor the heightened market volatility.
AB INTERMEDIATE BOND PORTFOLIO • | 3 |
DISCLOSURES AND RISKS
Benchmark Disclosure
The Barclays US Aggregate Bond Index is unmanaged and 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 greater risk of rising interest rates as the recent period of historically low rates is beginning to end and rates have begun rising. 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 and accrued interest. 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.
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 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, and because these investments may be subject to increased economic, political, regulatory or other uncertainties.
(Disclosures, Risks and Note about Historical Performance continued on next page)
4 | • AB INTERMEDIATE BOND PORTFOLIO |
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 effect 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 Portfolio 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 decline.
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.
AB INTERMEDIATE BOND PORTFOLIO • | 5 |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE PORTFOLIO VS. ITS BENCHMARK PERIODS ENDED APRIL 30, 2016 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB Intermediate Bond Portfolio | ||||||||||
Class A | 2.45% | 1.87% | ||||||||
| ||||||||||
Class B* | 2.07% | 1.11% | ||||||||
| ||||||||||
Class C | 2.08% | 1.12% | ||||||||
| ||||||||||
Advisor Class† | 2.58% | 2.13% | ||||||||
| ||||||||||
Class R† | 2.33% | 1.62% | ||||||||
| ||||||||||
Class K† | 2.45% | 1.87% | ||||||||
| ||||||||||
Class I† | 2.58% | 2.12% | ||||||||
| ||||||||||
Class Z† | 2.57% | 2.12% | ||||||||
| ||||||||||
Barclays US Aggregate Bond Index | 2.82% | 2.72% | ||||||||
| ||||||||||
* 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 4-5.
(Historical Performance continued on next page)
6 | • AB INTERMEDIATE BOND PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF APRIL 30, 2016 (unaudited) | ||||||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | SEC Yields* | ||||||||||
Class A Shares | 1.80 | % | ||||||||||
1 Year | 1.87 | % | -2.46 | % | ||||||||
5 Years | 3.53 | % | 2.64 | % | ||||||||
10 Years | 4.87 | % | 4.42 | % | ||||||||
Class B Shares | 0.99 | % | ||||||||||
1 Year | 1.11 | % | -1.84 | % | ||||||||
5 Years | 2.81 | % | 2.81 | % | ||||||||
10 Years(a) | 4.49 | % | 4.49 | % | ||||||||
Class C Shares | 1.13 | % | ||||||||||
1 Year | 1.12 | % | 0.14 | % | ||||||||
5 Years | 2.81 | % | 2.81 | % | ||||||||
10 Years | 4.16 | % | 4.16 | % | ||||||||
Advisor Class Shares† | 2.13 | % | ||||||||||
1 Year | 2.13 | % | 2.13 | % | ||||||||
5 Years | 3.83 | % | 3.83 | % | ||||||||
10 Years | 5.18 | % | 5.18 | % | ||||||||
Class R Shares† | 1.52 | % | ||||||||||
1 Year | 1.62 | % | 1.62 | % | ||||||||
5 Years | 3.32 | % | 3.32 | % | ||||||||
10 Years | 4.67 | % | 4.67 | % | ||||||||
Class K Shares† | 1.82 | % | ||||||||||
1 Year | 1.87 | % | 1.87 | % | ||||||||
5 Years | 3.57 | % | 3.57 | % | ||||||||
10 Years | 4.93 | % | 4.93 | % | ||||||||
Class I Shares† | 2.14 | % | ||||||||||
1 Year | 2.12 | % | 2.12 | % | ||||||||
5 Years | 3.83 | % | 3.83 | % | ||||||||
10 Years | 5.19 | % | 5.19 | % | ||||||||
Class Z Shares† | 2.24 | % | ||||||||||
1 Year | 2.12 | % | 2.12 | % | ||||||||
Since Inception‡ | 3.45 | % | 3.45 | % |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
(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 1.03%, 1.80%, 1.78%, 0.77%, 1.38%, 1.08%, 0.75% and 0.71% 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 31, 2017 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 April 30, 2016. |
(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 4-5.
(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 MARCH 31, 2016 (unaudited) | ||||
SEC Returns (reflects applicable sales charges) | ||||
Class A Shares | ||||
1 Year | -3.45 | % | ||
5 Years | 2.77 | % | ||
10 Years | 4.32 | % | ||
Class B Shares | ||||
1 Year | -2.94 | % | ||
5 Years | 2.95 | % | ||
10 Years(a) | 4.40 | % | ||
Class C Shares | ||||
1 Year | -0.90 | % | ||
5 Years | 2.95 | % | ||
10 Years | 4.07 | % | ||
Advisor Class Shares† | ||||
1 Year | 0.98 | % | ||
5 Years | 3.97 | % | ||
10 Years | 5.09 | % | ||
Class R Shares† | ||||
1 Year | 0.57 | % | ||
5 Years | 3.46 | % | ||
10 Years | 4.58 | % | ||
Class K Shares† | ||||
1 Year | 0.82 | % | ||
5 Years | 3.73 | % | ||
10 Years | 4.84 | % | ||
Class I Shares† | ||||
1 Year | 0.98 | % | ||
5 Years | 3.97 | % | ||
10 Years | 5.10 | % | ||
Class Z Shares† | ||||
1 Year | 0.99 | % | ||
Since Inception‡ | 3.20 | % |
(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 4-5.
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 November 1, 2015 | Ending Account Value April 30, 2016 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,024.50 | $ | 4.28 | 0.85 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.64 | $ | 4.27 | 0.85 | % | ||||||||
Class B | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,020.70 | $ | 8.04 | 1.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,016.91 | $ | 8.02 | 1.60 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,020.80 | $ | 8.04 | 1.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,016.91 | $ | 8.02 | 1.60 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,025.80 | $ | 3.02 | 0.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.88 | $ | 3.02 | 0.60 | % | ||||||||
Class R | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,023.30 | $ | 5.53 | 1.10 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,019.39 | $ | 5.52 | 1.10 | % | ||||||||
Class K | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,024.50 | $ | 4.28 | 0.85 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.64 | $ | 4.27 | 0.85 | % | ||||||||
Class I | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,025.80 | $ | 3.02 | 0.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.88 | $ | 3.02 | 0.60 | % | ||||||||
Class Z | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,025.70 | $ | 3.02 | 0.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.88 | $ | 3.02 | 0.60 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
10 | • AB INTERMEDIATE BOND PORTFOLIO |
Expense Example
PORTFOLIO SUMMARY
April 30, 2016 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $343.3
TOP TEN SECTORS (including derivatives)*
Governments – Treasuries(a) | 29.2 | % | ||
Corporates – Investment Grade(b) | 25.3 | |||
Mortgage Pass-Throughs | 17.6 | |||
Asset-Backed Securities | 13.6 | |||
Commercial Mortgage-Backed Securities | 12.2 | |||
Collateralized Mortgage Obligations | 7.3 | |||
Corporates – Non Investment Grade(b) | 5.6 | |||
Inflation-Linked Securities | 4.4 | |||
Emerging Markets – Treasuries | 0.8 | |||
Interest Rate Swaps(c) | -34.4 |
SECTOR BREAKDOWN (excluding derivatives)**
Corporates – Investment Grade | 23.3 | % | ||
Mortgage Pass-Throughs | 16.6 | |||
Governments – Treasuries | 14.1 | |||
Asset-Backed Securities | 12.8 | |||
Commercial Mortgage-Backed Securities | 11.5 | |||
Collateralized Mortgage Obligations | 6.8 | |||
Corporates – Non-Investment Grade | 5.6 | |||
Inflation-Linked Securities | 4.1 |
Emerging Markets – Treasuries | 0.8 | % | ||
Governments – Sovereign Agencies | 0.5 | |||
Quasi-Sovereigns | 0.4 | |||
Local Governments – Municipal Bonds | 0.4 | |||
Common Stocks | 0.3 | |||
Short-Term | 2.5 | |||
Other | 0.3 | |||
|
| |||
100.0 | % | |||
|
|
* | All data are as of April 30, 2016. 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) | 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 April 30, 2016. 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, Governments – Sovereign Bonds and Preferred Stocks. |
AB INTERMEDIATE BOND PORTFOLIO • | 11 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
April 30, 2016 (unaudited)
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
CORPORATES – INVESTMENT GRADE – 24.8% | ||||||||||
Industrial – 16.5% | ||||||||||
Basic – 0.9% | ||||||||||
Barrick Gold Corp. | U.S.$ | 66 | $ | 68,151 | ||||||
Eastman Chemical Co. | 290 | 300,531 | ||||||||
Glencore Funding LLC | 516 | 464,090 | ||||||||
International Paper Co. | 172 | 191,332 | ||||||||
LyondellBasell Industries NV | 766 | 893,351 | ||||||||
Minsur SA | 335 | 324,006 | ||||||||
Mosaic Co. (The) | 244 | 262,300 | ||||||||
Sociedad Quimica y Minera de Chile SA | 562 | 528,280 | ||||||||
Vale Overseas Ltd. | 180 | 161,550 | ||||||||
|
| |||||||||
3,193,591 | ||||||||||
|
| |||||||||
Capital Goods – 0.2% | ||||||||||
General Electric Co. | 187 | 194,246 | ||||||||
Owens Corning | 55 | 56,029 | ||||||||
Yamana Gold, Inc. | 339 | 311,809 | ||||||||
|
| |||||||||
562,084 | ||||||||||
|
| |||||||||
Communications - Media – 2.6% | ||||||||||
21st Century Fox America, Inc. | 902 | 1,106,807 | ||||||||
6.55%, 3/15/33 | 142 | 169,468 | ||||||||
CBS Corp. | 290 | 299,234 | ||||||||
5.75%, 4/15/20 | 710 | 810,047 | ||||||||
CCO Safari II LLC | 740 | 797,755 | ||||||||
Cox Communications, Inc. | 233 | 219,401 | ||||||||
Discovery Communications LLC | 467 | 454,372 | ||||||||
NBCUniversal Enterprise, Inc. | 604 | 625,140 |
12 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
S&P Global, Inc. | U.S.$ | 584 | $ | 646,792 | ||||||
TCI Communications, Inc. | 670 | 945,462 | ||||||||
Time Warner Cable, Inc. | 230 | 215,463 | ||||||||
5.00%, 2/01/20 | 740 | 807,491 | ||||||||
Time Warner, Inc. | 518 | 539,575 | ||||||||
4.70%, 1/15/21 | 600 | 665,764 | ||||||||
7.625%, 4/15/31 | 154 | 202,594 | ||||||||
Viacom, Inc. | 338 | 338,220 | ||||||||
5.625%, 9/15/19 | 240 | 264,414 | ||||||||
|
| |||||||||
9,107,999 | ||||||||||
|
| |||||||||
Communications - Telecommunications – 2.2% | ||||||||||
American Tower Corp. | 1,185 | 1,296,958 | ||||||||
AT&T, Inc. | 1,275 | 1,296,085 | ||||||||
3.80%, 3/15/22 | 252 | 266,917 | ||||||||
4.45%, 4/01/24 | 1,210 | 1,318,280 | ||||||||
4.60%, 2/15/21 | 565 | 618,885 | ||||||||
Rogers Communications, Inc. | CAD | 130 | 112,877 | |||||||
Telefonica Emisiones SAU | U.S.$ | 520 | 591,281 | |||||||
Verizon Communications, Inc. | 1,105 | 1,151,913 | ||||||||
3.85%, 11/01/42 | 515 | 470,295 | ||||||||
4.862%, 8/21/46 | 413 | 442,616 | ||||||||
|
| |||||||||
7,566,107 | ||||||||||
|
| |||||||||
Consumer Cyclical - Automotive – 1.0% | ||||||||||
Ford Motor Credit Co. LLC | 603 | 615,380 | ||||||||
5.875%, 8/02/21 | 1,291 | 1,490,305 | ||||||||
General Motors Co. | 340 | 350,832 | ||||||||
General Motors Financial Co., Inc. | 560 | 573,848 | ||||||||
3.25%, 5/15/18 | 43 | 43,991 | ||||||||
4.00%, 1/15/25 | 106 | 106,850 | ||||||||
4.30%, 7/13/25 | 135 | 139,118 | ||||||||
|
| |||||||||
3,320,324 | ||||||||||
|
| |||||||||
Consumer Cyclical - Retailers – 0.7% | ||||||||||
CVS Health Corp. | 665 | 717,815 |
AB INTERMEDIATE BOND PORTFOLIO • | 13 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Kohl’s Corp. | U.S.$ | 839 | $ | 828,375 | ||||||
Walgreens Boots Alliance, Inc. | 885 | 923,533 | ||||||||
|
| |||||||||
2,469,723 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 4.3% | ||||||||||
AbbVie, Inc. | 1,057 | 1,107,546 | ||||||||
Actavis Funding SCS | 1,025 | 1,052,336 | ||||||||
3.85%, 6/15/24 | 238 | 244,478 | ||||||||
Agilent Technologies, Inc. | 217 | 239,130 | ||||||||
Altria Group, Inc. | 885 | 917,287 | ||||||||
AstraZeneca PLC | 235 | 314,630 | ||||||||
Baxalta, Inc. | 335 | 361,666 | ||||||||
Bayer US Finance LLC | 321 | 341,258 | ||||||||
Becton Dickinson and Co. | 388 | 413,034 | ||||||||
Biogen, Inc. | 683 | 734,330 | ||||||||
Bunge Ltd. Finance Corp. | 6 | 6,974 | ||||||||
Celgene Corp. | 1,310 | 1,380,118 | ||||||||
Gilead Sciences, Inc. | 678 | 724,428 | ||||||||
Grupo Bimbo SAB de CV | 538 | 548,762 | ||||||||
Kraft Heinz Foods Co. | 335 | 344,734 | ||||||||
3.50%, 7/15/22(a) | 430 | 453,780 | ||||||||
Laboratory Corp. of America Holdings | 265 | 270,109 | ||||||||
Medtronic, Inc. | 890 | 954,600 | ||||||||
Newell Brands, Inc. | 1,996 | 2,067,365 | ||||||||
3.85%, 4/01/23 | 256 | 267,678 | ||||||||
Perrigo Finance Unlimited Co. | 217 | 221,149 | ||||||||
3.90%, 12/15/24 | 360 | 365,200 | ||||||||
Reynolds American, Inc. | 202 | 247,951 |
14 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Thermo Fisher Scientific, Inc. | U.S.$ | 383 | $ | 412,138 | ||||||
Tyson Foods, Inc. | 164 | 168,353 | ||||||||
3.95%, 8/15/24 | 541 | 584,084 | ||||||||
|
| |||||||||
14,743,118 | ||||||||||
|
| |||||||||
Energy – 3.3% | ||||||||||
Encana Corp. | 415 | 379,725 | ||||||||
Energy Transfer Partners LP | 411 | 434,869 | ||||||||
7.50%, 7/01/38 | 237 | 247,308 | ||||||||
EnLink Midstream Partners LP | 562 | 422,396 | ||||||||
Enterprise Products Operating LLC | 735 | 747,583 | ||||||||
5.20%, 9/01/20 | 235 | 258,524 | ||||||||
Halliburton Co. | 825 | 845,146 | ||||||||
Husky Energy, Inc. | 100 | 111,615 | ||||||||
Kinder Morgan Energy Partners LP | 1,460 | 1,441,922 | ||||||||
4.15%, 3/01/22 | 849 | 836,781 | ||||||||
Noble Energy, Inc. | 463 | 460,336 | ||||||||
8.25%, 3/01/19 | 1,232 | 1,378,422 | ||||||||
Plains All American Pipeline LP/PAA Finance Corp. | 594 | 532,642 | ||||||||
Regency Energy Partners LP/Regency Energy Finance Corp. | 135 | 125,896 | ||||||||
5.75%, 9/01/20 | 420 | 434,150 | ||||||||
Schlumberger Holdings Corp. | 845 | 880,340 | ||||||||
TransCanada PipeLines Ltd. | 831 | 571,312 | ||||||||
Valero Energy Corp. | 770 | 858,127 | ||||||||
Williams Partners LP | 403 | 379,400 | ||||||||
|
| |||||||||
11,346,494 | ||||||||||
|
| |||||||||
Other Industrial – 0.1% | ||||||||||
Hutchison Whampoa International 14 Ltd. | 340 | 339,934 | ||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 15 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Services – 0.1% | ||||||||||
eBay, Inc. | U.S.$ | 232 | $ | 242,590 | ||||||
|
| |||||||||
Technology – 1.1% | ||||||||||
Fidelity National Information Services, Inc. | 221 | 223,947 | ||||||||
5.00%, 10/15/25 | 3 | 3,312 | ||||||||
Hewlett Packard Enterprise Co. | 825 | 856,267 | ||||||||
HP, Inc. | 266 | 284,040 | ||||||||
KLA-Tencor Corp. | 614 | 641,062 | ||||||||
Micron Technology, Inc. | 224 | 231,840 | ||||||||
Motorola Solutions, Inc. | 400 | 381,742 | ||||||||
7.50%, 5/15/25 | 228 | 268,267 | ||||||||
Seagate HDD Cayman | 336 | 255,893 | ||||||||
Total System Services, Inc. | 344 | 344,170 | ||||||||
3.75%, 6/01/23 | 350 | 347,039 | ||||||||
|
| |||||||||
3,837,579 | ||||||||||
|
| |||||||||
56,729,543 | ||||||||||
|
| |||||||||
Financial Institutions – 7.1% | ||||||||||
Banking – 4.6% | ||||||||||
Bank of America Corp. | 1,053 | 1,071,305 | ||||||||
Barclays Bank PLC | EUR | 333 | 453,726 | |||||||
Barclays PLC | U.S.$ | 389 | 373,327 | |||||||
BPCE SA | 230 | 244,576 | ||||||||
Compass Bank | 1,339 | 1,411,899 | ||||||||
Cooperatieve Rabobank UA | 1,373 | 1,435,949 | ||||||||
Countrywide Financial Corp. | 62 | 62,101 | ||||||||
Credit Suisse Group Funding Guernsey Ltd. | 570 | 581,952 | ||||||||
Goldman Sachs Group, Inc. (The) | 254 | 261,039 | ||||||||
3.85%, 7/08/24 | 905 | 941,738 |
16 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Series D | U.S.$ | 2,585 | $ | 2,944,349 | ||||||
Mitsubishi UFJ Financial Group, Inc. | 234 | 245,875 | ||||||||
Mizuho Financial Group Cayman 3 Ltd. | 812 | 852,575 | ||||||||
Morgan Stanley | 478 | 532,028 | ||||||||
Series G | 590 | 660,131 | ||||||||
Murray Street Investment Trust I | 125 | 128,398 | ||||||||
Rabobank Capital Funding Trust III | 430 | 431,075 | ||||||||
Santander Issuances SAU | 1,000 | 993,651 | ||||||||
Santander UK PLC | 500 | 519,675 | ||||||||
Standard Chartered PLC | 400 | 374,000 | ||||||||
UBS AG/Stamford CT | 620 | 713,775 | ||||||||
UBS Group Funding Jersey Ltd. | 436 | 447,118 | ||||||||
|
| |||||||||
15,680,262 | ||||||||||
|
| |||||||||
Finance – 0.2% | ||||||||||
Aviation Capital Group Corp. | 552 | 625,500 | ||||||||
|
| |||||||||
Insurance – 1.9% | ||||||||||
American International Group, Inc. | 940 | 1,182,050 | ||||||||
Guardian Life Insurance Co. of America (The) | 542 | 682,888 | ||||||||
Hartford Financial Services Group, Inc. (The) | 726 | 810,111 | ||||||||
Lincoln National Corp. | 361 | 430,280 | ||||||||
MetLife Capital Trust IV | 699 | 819,228 | ||||||||
Nationwide Mutual Insurance Co. | 246 | 363,291 | ||||||||
Prudential Financial, Inc. | 746 | 777,533 | ||||||||
Swiss Reinsurance Co. via ELM BV | EUR | 850 | 975,757 | |||||||
ZFS Finance USA Trust V | U.S.$ | 538 | 539,345 | |||||||
|
| |||||||||
6,580,483 | ||||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 17 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
REITS – 0.4% | ||||||||||
Host Hotels & Resorts LP | U.S.$ | 545 | $ | 591,889 | ||||||
Trust F/1401 | 830 | 861,125 | ||||||||
|
| |||||||||
1,453,014 | ||||||||||
|
| |||||||||
24,339,259 | ||||||||||
|
| |||||||||
Utility – 1.2% | ||||||||||
Electric – 0.8% | ||||||||||
CMS Energy Corp. | 440 | 496,413 | ||||||||
Constellation Energy Group, Inc. | 260 | 290,843 | ||||||||
Entergy Corp. | 582 | 620,266 | ||||||||
Exelon Corp. | 320 | 362,570 | ||||||||
Exelon Generation Co. LLC | 337 | 355,151 | ||||||||
TECO Finance, Inc. | 380 | 412,446 | ||||||||
|
| |||||||||
2,537,689 | ||||||||||
|
| |||||||||
Natural Gas – 0.4% | ||||||||||
Talent Yield Investments Ltd. | 1,365 | 1,466,411 | ||||||||
|
| |||||||||
4,004,100 | ||||||||||
|
| |||||||||
Total Corporates – Investment Grade | 85,072,902 | |||||||||
|
| |||||||||
MORTGAGE PASS-THROUGHS – 17.6% | ||||||||||
Agency ARMs – 0.0% | ||||||||||
Federal Home Loan Mortgage Corp. Gold | 64 | 67,644 | ||||||||
|
| |||||||||
Agency Fixed Rate 15-Year – 2.3% | ||||||||||
Federal National Mortgage Association | 4,852 | 4,985,809 | ||||||||
3.50%, 10/01/25-1/12/30 | 2,706 | 2,868,362 | ||||||||
|
| |||||||||
7,854,171 | ||||||||||
|
| |||||||||
Agency Fixed Rate 30-Year – 15.3% | ||||||||||
Federal Home Loan Mortgage Corp. Gold | 350 | 396,147 |
18 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Series 2007 | U.S.$ | 46 | $ | 52,519 | ||||||
4.00%, 1/01/45 | 3,221 | 3,512,484 | ||||||||
4.00%, 5/01/46, TBA | 1,975 | 2,109,007 | ||||||||
Federal National Mortgage Association | 1,710 | 1,753,418 | ||||||||
3.50%, 5/01/42-10/01/45 | 14,100 | 14,948,998 | ||||||||
4.00%, 10/01/44-9/01/45 | 7,245 | 7,851,352 | ||||||||
Series AS6516 | 3,373 | 3,612,993 | ||||||||
Series 2007 | 622 | 702,069 | ||||||||
Series 2005 | 144 | 162,283 | ||||||||
Series 2004 | 193 | 218,476 | ||||||||
Series 2003 | 340 | 383,260 | ||||||||
5.50%, 1/01/35 | 919 | 1,038,745 | ||||||||
4.50%, 5/25/46, TBA | 6,312 | 6,873,176 | ||||||||
Government National Mortgage Association | 1,544 | 1,601,024 | ||||||||
3.50%, 5/01/46, TBA | 6,960 | 7,352,587 | ||||||||
Series 1999 | 41 | 44,554 | ||||||||
Series 1990 | – 0 | –^ | 27 | |||||||
|
| |||||||||
52,613,119 | ||||||||||
|
| |||||||||
Total Mortgage Pass-Throughs | 60,534,934 | |||||||||
|
| |||||||||
GOVERNMENTS – TREASURIES – 15.0% | ||||||||||
Canada – 1.0% | ||||||||||
Canadian Government Bond | CAD | 4,005 | 3,417,641 | |||||||
|
| |||||||||
United Kingdom – 0.7% | ||||||||||
United Kingdom Gilt | GBP | 1,461 | 2,439,433 | |||||||
|
| |||||||||
United States – 13.3% | ||||||||||
U.S. Treasury Bonds | ||||||||||
2.50%, 2/15/45 | U.S.$ | 1,151 | 1,112,071 | |||||||
2.875%, 8/15/45 | 800 | 834,718 | ||||||||
3.00%, 5/15/45 | 322 | 344,502 | ||||||||
3.125%, 8/15/44 | 10,677 | 11,711,422 | ||||||||
4.375%, 2/15/38 | 960 | 1,286,625 | ||||||||
U.S. Treasury Notes | 7,192 | 7,181,346 |
AB INTERMEDIATE BOND PORTFOLIO • | 19 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
1.375%, 3/31/20-4/30/20 | U.S.$ | 4,908 | $ | 4,951,363 | ||||||
1.50%, 5/31/19-11/30/19 | 2,941 | 2,987,567 | ||||||||
1.625%, 8/31/19-2/15/26 | 5,218 | 5,208,917 | ||||||||
1.75%, 9/30/19-5/15/22 | 6,149 | 6,293,338 | ||||||||
2.25%, 11/15/24-11/15/25 | 3,576 | 3,713,934 | ||||||||
|
| |||||||||
45,625,803 | ||||||||||
|
| |||||||||
Total Governments – Treasuries | 51,482,877 | |||||||||
|
| |||||||||
ASSET-BACKED SECURITIES – 13.6% | ||||||||||
Autos - Fixed Rate – 8.4% | ||||||||||
Ally Auto Receivables Trust | 824 | 826,197 | ||||||||
Ally Master Owner Trust | 1,409 | 1,406,855 | ||||||||
Series 2015-3, Class A | 1,226 | 1,226,972 | ||||||||
AmeriCredit Automobile Receivables Trust | 159 | 158,598 | ||||||||
Series 2013-4, Class A3 | 82 | 82,075 | ||||||||
ARI Fleet Lease Trust | 119 | 119,336 | ||||||||
Avis Budget Rental Car Funding AESOP LLC | 1,005 | 1,005,717 | ||||||||
Series 2016-1A, Class A | 418 | 419,272 | ||||||||
Bank of The West Auto Trust | 1,182 | 1,182,759 | ||||||||
California Republic Auto Receivables Trust | 546 | 546,349 | ||||||||
Series 2015-2, Class A3 | 542 | 542,531 | ||||||||
Capital Auto Receivables Asset Trust | 220 | 220,076 | ||||||||
CarMax Auto Owner Trust | 497 | 498,550 | ||||||||
Chrysler Capital Auto Receivables Trust | 822 | 829,686 |
20 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Chrysler Capital Auto Receivables Trust 2016-A | U.S.$ | 913 | $ | 912,191 | ||||||
CPS Auto Receivables Trust | 242 | 240,529 | ||||||||
Series 2014-B, Class A | 174 | 172,572 | ||||||||
Drive Auto Receivables Trust | 36 | 35,761 | ||||||||
Series 2015-CA, Class A2A | 55 | 55,376 | ||||||||
Series 2015-DA, Class A2A | 227 | 227,482 | ||||||||
Series 2016-AA, Class A2A | 394 | 394,232 | ||||||||
Enterprise Fleet Financing LLC | 152 | 151,602 | ||||||||
Series 2015-1, Class A2 | 1,000 | 998,099 | ||||||||
Exeter Automobile Receivables Trust | 6 | 6,290 | ||||||||
Series 2014-2A, Class A | 38 | 37,613 | ||||||||
Series 2016-1A, Class D | 270 | 267,730 | ||||||||
Fifth Third Auto Trust | 721 | 721,645 | ||||||||
Flagship Credit Auto Trust | 4 | 3,854 | ||||||||
Series 2016-2, Class D | 350 | 349,927 | ||||||||
Ford Credit Auto Lease Trust | 481 | 481,533 | ||||||||
Ford Credit Auto Owner Trust | 34 | 33,639 | ||||||||
Series 2012-D, Class B | 440 | 438,407 | ||||||||
Series 2014-2, Class A | 322 | 326,526 | ||||||||
Ford Credit Floorplan Master Owner Trust | 993 | 992,356 |
AB INTERMEDIATE BOND PORTFOLIO • | 21 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Series 2015-2, Class A1 | U.S.$ | 906 | $ | 910,716 | ||||||
Series 2016-1, Class A1 | 682 | 682,057 | ||||||||
GM Financial Automobile Leasing Trust | 763 | 763,983 | ||||||||
Series 2015-2, Class A3 | 1,080 | 1,083,874 | ||||||||
Series 2015-3, Class A3 | 1,155 | 1,159,363 | ||||||||
GMF Floorplan Owner Revolving Trust | 575 | 573,262 | ||||||||
Harley-Davidson Motorcycle Trust | 494 | 493,684 | ||||||||
Hertz Vehicle Financing LLC | 2,370 | 2,355,112 | ||||||||
Series 2016-1A, Class A | 678 | 678,061 | ||||||||
Hyundai Auto Lease Securitization Trust | 526 | 526,073 | ||||||||
Series 2015-B, Class A3 | 539 | 539,439 | ||||||||
Mercedes Benz Auto Lease Trust | 622 | 622,127 | ||||||||
Nissan Auto Lease Trust | 1,001 | 1,002,842 | ||||||||
Santander Drive Auto Receivables Trust | 293 | 292,393 | ||||||||
Series 2015-4,Class A2A | 379 | 378,783 | ||||||||
TCF Auto Receivables Owner Trust | 413 | 412,517 | ||||||||
Westlake Automobile Receivables Trust | 472 | 471,725 | ||||||||
|
| |||||||||
28,858,348 | ||||||||||
|
| |||||||||
Credit Cards - Fixed Rate – 2.3% | ||||||||||
American Express Credit Account Master Trust | 400 | 400,746 |
22 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Barclays Dryrock Issuance Trust | U.S.$ | 1,119 | $ | 1,146,412 | ||||||
Series 2015-2, Class A | 703 | 706,309 | ||||||||
Series 2015-4, Class A | 630 | 632,957 | ||||||||
Discover Card Execution Note Trust | 1,101 | 1,115,494 | ||||||||
Synchrony Credit Card Master Note Trust | 1,050 | 1,061,864 | ||||||||
Series 2015-3, Class A | 859 | 860,180 | ||||||||
Series 2016-1, Class A | 544 | 547,848 | ||||||||
World Financial Network Credit Card Master Trust | 890 | 895,007 | ||||||||
Series 2013-A, Class A | 570 | 571,541 | ||||||||
|
| |||||||||
7,938,358 | ||||||||||
|
| |||||||||
Autos - Floating Rate – 1.2% | ||||||||||
BMW Floorplan Master Owner Trust | 997 | 997,000 | ||||||||
GE Dealer Floorplan Master Note Trust | 537 | 535,684 | ||||||||
Series 2015-1, Class A | 1,073 | 1,070,306 | ||||||||
Hertz Fleet Lease Funding LP | 413 | 413,024 | ||||||||
Navistar Financial Dealer Note Master Trust | 719 | 716,659 | ||||||||
Volkswagen Credit Auto Master Trust | 340 | 335,414 | ||||||||
|
| |||||||||
4,068,087 | ||||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 23 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Other ABS - Fixed Rate – 0.9% | ||||||||||
Ascentium Equipment Receivables LLC | U.S.$ | 323 | $ | 322,497 | ||||||
Series 2016-1A, Class A2 | 265 | 264,820 | ||||||||
CIT Equipment Collateral | 280 | 280,692 | ||||||||
Series 2014-VT1, Class A2 | 336 | 336,513 | ||||||||
CNH Equipment Trust | 616 | 618,443 | ||||||||
Dell Equipment Finance Trust | 388 | 386,702 | ||||||||
Series 2015-2, Class A2A | 278 | 277,633 | ||||||||
SBA Tower Trust | 688 | 685,420 | ||||||||
|
| |||||||||
3,172,720 | ||||||||||
|
| |||||||||
Credit Cards - Floating Rate – 0.8% | ||||||||||
Discover Card Execution Note Trust | 964 | 965,590 | ||||||||
First National Master Note Trust | 882 | 882,771 | ||||||||
World Financial Network Credit Card Master Trust | 681 | 679,067 | ||||||||
|
| |||||||||
2,527,428 | ||||||||||
|
| |||||||||
Home Equity Loans - Fixed Rate – 0.0% | ||||||||||
Credit-Based Asset Servicing and Securitization LLC | 92 | 92,834 | ||||||||
Nationstar NIM Ltd. | 18 | – 0 | – | |||||||
|
| |||||||||
92,834 | ||||||||||
|
|
24 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Home Equity Loans - Floating Rate – 0.0% | ||||||||||
Asset Backed Funding Certificates Trust | U.S.$ | 44 | $ | 41,990 | ||||||
|
| |||||||||
Total Asset-Backed Securities | 46,699,765 | |||||||||
|
| |||||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES – 12.2% | ||||||||||
Non-Agency Fixed Rate CMBS – 10.4% | ||||||||||
Banc of America Commercial Mortgage Trust | 1,677 | 1,745,257 | ||||||||
Series 2007-5, Class AM | 411 | 423,736 | ||||||||
Bear Stearns Commercial Mortgage Securities Trust | 538 | 537,086 | ||||||||
BHMS Mortgage Trust | 890 | 926,005 | ||||||||
CGRBS Commercial Mortgage Trust | 1,305 | 1,370,497 | ||||||||
Citigroup Commercial Mortgage Trust | 522 | 494,773 | ||||||||
Series 2013-GC17, Class D | 565 | 510,579 | ||||||||
Series 2015-GC27, Class A5 | 698 | 717,193 | ||||||||
COBALT CMBS Commercial Mortgage Trust | 594 | 617,740 | ||||||||
Commercial Mortgage Trust | 1,061 | 1,078,262 | ||||||||
Series 2007-GG9, Class A4 | 1,873 | 1,904,602 | ||||||||
Series 2007-GG9, Class AM | 829 | 844,881 | ||||||||
Series 2013-SFS, Class A1 | 490 | 481,183 | ||||||||
Credit Suisse Commercial Mortgage Trust | 437 | 443,411 |
AB INTERMEDIATE BOND PORTFOLIO • | 25 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
CSAIL Commercial Mortgage Trust | U.S.$ | 914 | $ | 979,011 | ||||||
DBUBS Mortgage Trust | 363 | 374,896 | ||||||||
GS Mortgage Securities Corp. II | 1,243 | 1,269,070 | ||||||||
GS Mortgage Securities Trust | 520 | 533,545 | ||||||||
Series 2013-G1, Class A2 | 766 | 784,013 | ||||||||
JP Morgan Chase Commercial Mortgage Securities Trust | 275 | 274,587 | ||||||||
Series 2006-CB15, Class A4 | 1,035 | 1,033,334 | ||||||||
Series 2006-LDP9, Class AM | 356 | 354,598 | ||||||||
Series 2007-CB19, Class AM | 470 | 481,028 | ||||||||
Series 2007-LD12, Class A4 | 1,580 | 1,628,029 | ||||||||
Series 2007-LD12, Class AM | 795 | 828,893 | ||||||||
Series 2007-LDPX, Class A1A | 1,999 | 2,041,287 | ||||||||
Series 2010-C2, Class A1 | 32 | 32,153 | ||||||||
Series 2011-C5, Class D | 262 | 267,052 | ||||||||
Series 2012-C6, Class E | 389 | 378,546 | ||||||||
JPMBB Commercial Mortgage Securities Trust Series 2015-C31, Class A3 | 964 | 1,038,880 | ||||||||
Series 2015-C32, Class C | 540 | 500,287 | ||||||||
LB-UBS Commercial Mortgage Trust | 285 | 282,997 | ||||||||
LSTAR Commercial Mortgage Trust | 473 | 475,223 | ||||||||
Series 2015-3, Class A2 | 674 | 666,797 |
26 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Merrill Lynch Mortgage Trust | U.S.$ | 470 | $ | 470,792 | ||||||
Series 2006-C2, Class AJ | 359 | 356,932 | ||||||||
ML-CFC Commercial Mortgage Trust | 1,261 | 1,278,331 | ||||||||
Series 2006-4, Class AJ | 201 | 200,271 | ||||||||
Series 2007-9, Class A4 | 2,814 | 2,918,463 | ||||||||
Prudential Securities Secured Financing Corp. | 1,193 | 85 | ||||||||
UBS-Barclays Commercial Mortgage Trust | 552 | 574,258 | ||||||||
Series 2012-C4, Class A5 | 1,098 | 1,127,133 | ||||||||
UBS-Citigroup Commercial Mortgage Trust | 227 | 246,228 | ||||||||
Wachovia Bank Commercial Mortgage Trust | 211 | 210,316 | ||||||||
WF-RBS Commercial Mortgage Trust | 323 | 301,560 | ||||||||
Series 2013-C14, Class A5 | 1,142 | 1,205,084 | ||||||||
Series 2014-C20, Class A2 | 546 | 564,955 | ||||||||
|
| |||||||||
35,773,839 | ||||||||||
|
| |||||||||
Non-Agency Floating Rate CMBS – 1.8% | ||||||||||
Carefree Portfolio Trust | 490 | 488,814 | ||||||||
Commercial Mortgage Trust | 647 | 648,182 | ||||||||
Series 2014-SAVA, Class A | 304 | 300,456 | ||||||||
H/2 Asset Funding NRE | 623 | 618,759 |
AB INTERMEDIATE BOND PORTFOLIO • | 27 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
JP Morgan Chase Commercial Mortgage Securities Trust | U.S.$ | 902 | $ | 891,249 | ||||||
Series 2015-SGP, Class A | 825 | 818,963 | ||||||||
Morgan Stanley Capital I Trust | 229 | 227,461 | ||||||||
Series 2015-XLF2, Class SNMA | 229 | 229,325 | ||||||||
Resource Capital Corp., Ltd. | 277 | 271,574 | ||||||||
Starwood Retail Property Trust | 1,179 | 1,164,538 | ||||||||
Wells Fargo Commercial Mortgage Trust | 516 | 497,580 | ||||||||
|
| |||||||||
6,156,901 | ||||||||||
|
| |||||||||
Agency CMBS – 0.0% | ||||||||||
Government National Mortgage Association | 1,656 | 3,566 | ||||||||
|
| |||||||||
Total Commercial Mortgage-Backed Securities | 41,934,306 | |||||||||
|
| |||||||||
COLLATERALIZED MORTGAGE OBLIGATIONS – 7.3% | ||||||||||
Risk Share Floating Rate – 4.7% | ||||||||||
Bellemeade Re Ltd. | 295 | 291,470 | ||||||||
Series 2016-1A, Class M2B | 288 | 288,308 | ||||||||
Federal Home Loan Mortgage Corp. Structured Agency Credit Risk Debt Notes | 1,040 | 1,052,431 |
28 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Series 2014-DN3, Class M3 | U.S.$ | 870 | $ | 875,149 | ||||||
Series 2014-DN4, Class M3 | 300 | 309,086 | ||||||||
Series 2014-HQ3, Class M3 | 820 | 839,138 | ||||||||
Series 2015-DNA1, Class M3 | 265 | 262,372 | ||||||||
Series 2015-DNA2, Class M2 | 1,017 | 1,024,421 | ||||||||
Series 2015-DNA3, Class M3 | 280 | 281,897 | ||||||||
Series 2015-HQ1, Class M2 | 400 | 401,818 | ||||||||
Series 2015-HQA1, Class M2 | 735 | 741,197 | ||||||||
Series 2015-HQA2, Class M2 | 289 | 292,288 | ||||||||
Series 2015-HQA2, Class M3 | 275 | 275,193 | ||||||||
Series 2016-DNA1, Class M3 | 330 | 345,119 | ||||||||
Series 2016-HQA1, Class M3 | 328 | 350,220 | ||||||||
Federal National Mortgage Association Connecticut Avenue Securities | 187 | 186,443 | ||||||||
Series 2014-C04, Class 1M2 | 511 | 524,993 | ||||||||
Series 2014-C04, Class 2M2 | 195 | 201,267 | ||||||||
Series 2015-C01, Class 1M2 | 355 | 361,146 |
AB INTERMEDIATE BOND PORTFOLIO • | 29 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Series 2015-C01, Class 2M2 | U.S.$ | 689 | $ | 699,055 | ||||||
Series 2015-C02, Class 1M2 | 617 | 612,767 | ||||||||
Series 2015-C02, Class 2M2 | 430 | 429,917 | ||||||||
Series 2015-C03, Class 1M1 | 348 | 347,688 | ||||||||
Series 2015-C03, Class 1M2 | 704 | 724,335 | ||||||||
Series 2015-C03, Class 2M2 | 675 | 682,790 | ||||||||
Series 2015-C04, Class 1M2 | 198 | 207,108 | ||||||||
Series 2015-C04, Class 2M2 | 631 | 653,485 | ||||||||
Series 2016-C01, Class 1M2 | 457 | 501,115 | ||||||||
Series 2016-C01, Class 2M2 | 478 | 525,949 | ||||||||
Series 2016-C02, Class 1M2 | 539 | 576,266 | ||||||||
Series 2016-C03, Class 1M2 | 91 | 93,813 | ||||||||
Series 2016-C03, Class 2M2 | 446 | 463,611 | ||||||||
JP Morgan Madison Avenue Securities Trust | 106 | 109,944 | ||||||||
Wells Fargo Credit Risk Transfer Securities Trust | 394 | 388,685 | ||||||||
Series 2015-WF1, Class 2M2 | 105 | 102,730 | ||||||||
|
| |||||||||
16,023,214 | ||||||||||
|
|
30 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Non-Agency Fixed Rate – 1.5% | ||||||||||
Alternative Loan Trust | U.S.$ | 282 | $ | 252,570 | ||||||
Series 2006-23CB, Class 1A7 | 164 | 157,356 | ||||||||
Series 2006-24CB, Class A16 | 462 | 387,104 | ||||||||
Series 2006-28CB, Class A14 | 312 | 260,202 | ||||||||
Series 2006-J1, Class 1A13 | 284 | 251,524 | ||||||||
Citigroup Mortgage Loan Trust, Inc. | 551 | 512,280 | ||||||||
Countrywide Home Loan Mortgage Pass-Through Trust | 352 | 314,105 | ||||||||
Series 2006-13, Class 1A19 | 127 | 113,256 | ||||||||
Series 2007-HYB2, Class 3A1 | 644 | 574,891 | ||||||||
Credit Suisse Mortgage Trust | 386 | 319,650 | ||||||||
First Horizon Alternative Mortgage Securities Trust | 489 | 382,395 | ||||||||
JP Morgan Alternative Loan Trust | 913 | 755,088 | ||||||||
RBSSP Resecuritization Trust | 540 | 460,260 | ||||||||
Structured Asset Securities Corp. Mortgage Pass-Through Certificates | 553 | 483,233 | ||||||||
|
| |||||||||
5,223,914 | ||||||||||
|
| |||||||||
Non-Agency Floating Rate – 0.6% | ||||||||||
Deutsche Alt-A Securities Mortgage Loan Trust | 922 | 552,718 | ||||||||
HomeBanc Mortgage Trust | 398 | 335,572 |
AB INTERMEDIATE BOND PORTFOLIO • | 31 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Impac Secured Assets CMN Owner Trust | U.S.$ | 482 | $ | 339,407 | ||||||
RBSSP Resecuritization Trust | 472 | 395,144 | ||||||||
Residential Accredit Loans, Inc. Trust | 604 | 316,509 | ||||||||
Residential Accredit Loans, Inc., Trust | 871 | 200,219 | ||||||||
|
| |||||||||
2,139,569 | ||||||||||
|
| |||||||||
Agency Floating Rate – 0.5% | ||||||||||
Federal National Mortgage Association REMICs | 2,467 | 504,215 | ||||||||
Series 2015-66, Class AS | 2,569 | 506,064 | ||||||||
Series 2016-19, Class SA | 2,644 | 454,372 | ||||||||
|
| |||||||||
1,464,651 | ||||||||||
|
| |||||||||
Agency Fixed Rate – 0.0% | ||||||||||
Federal National Mortgage Association Grantor Trust | 65 | 55,674 | ||||||||
|
| |||||||||
55,674 | ||||||||||
|
| |||||||||
Total Collateralized Mortgage Obligations | 24,907,022 | |||||||||
|
| |||||||||
CORPORATES – NON-INVESTMENT GRADE – 5.9% | ||||||||||
Industrial – 3.5% | ||||||||||
Basic – 0.3% | ||||||||||
Axalta Coating Systems US Holdings, Inc./Axalta Coating Systems Dutch Holding B | 700 | 740,250 | ||||||||
Freeport-McMoran Oil & Gas LLC/FCX Oil & Gas, Inc. | 119 | 112,455 |
32 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Novelis, Inc. | U.S.$ | 75 | $ | 76,406 | ||||||
|
| |||||||||
929,111 | ||||||||||
|
| |||||||||
Capital Goods – 0.2% | ||||||||||
Rexam PLC | EUR | 360 | 415,681 | |||||||
Reynolds Group Issuer, Inc./Reynolds Group Issuer LLC/Reynolds Group Issuer Lu | U.S.$ | 330 | 342,375 | |||||||
|
| |||||||||
758,056 | ||||||||||
|
| |||||||||
Communications - Media – 0.6% | ||||||||||
Arqiva Broadcast Finance PLC | GBP | 300 | 473,325 | |||||||
CCO Holdings LLC/CCO Holdings Capital Corp. | U.S.$ | 352 | 359,040 | |||||||
CSC Holdings LLC | 118 | 130,980 | ||||||||
Quebecor Media, Inc. | 391 | 404,685 | ||||||||
Unitymedia Hessen GmbH & Co. KG/Unitymedia NRW GmbH | 750 | 777,188 | ||||||||
|
| |||||||||
2,145,218 | ||||||||||
|
| |||||||||
Communications - Telecommunications – 0.7% | ||||||||||
Numericable-SFR SA | EUR | 222 | 263,797 | |||||||
Sprint Capital Corp. | U.S.$ | 970 | 887,550 | |||||||
Wind Acquisition Finance SA | 700 | 703,500 | ||||||||
Windstream Services LLC | 750 | 571,875 | ||||||||
|
| |||||||||
2,426,722 | ||||||||||
|
| |||||||||
Consumer Cyclical - Other – 0.2% | ||||||||||
International Game Technology PLC | 360 | 366,372 | ||||||||
KB Home | 286 | 287,430 | ||||||||
MCE Finance Ltd. | 235 | 226,775 | ||||||||
|
| |||||||||
880,577 | ||||||||||
|
| |||||||||
Consumer Cyclical - Retailers – 0.2% | ||||||||||
Cash America International, Inc. | 295 | 297,212 |
AB INTERMEDIATE BOND PORTFOLIO • | 33 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
CST Brands, Inc. | U.S.$ | 470 | $ | 474,987 | ||||||
|
| |||||||||
772,199 | ||||||||||
|
| |||||||||
Consumer Non-Cyclical – 0.3% | ||||||||||
First Quality Finance Co., Inc. | 475 | 452,437 | ||||||||
Valeant Pharmaceuticals International, Inc. | 375 | 313,268 | ||||||||
Voyage Care Bondco PLC | GBP | 320 | 459,620 | |||||||
|
| |||||||||
1,225,325 | ||||||||||
|
| |||||||||
Energy – 0.7% | ||||||||||
Cenovus Energy, Inc. | U.S.$ | 42 | 37,675 | |||||||
5.70%, 10/15/19 | 169 | 175,234 | ||||||||
Diamond Offshore Drilling, Inc. | 292 | 211,318 | ||||||||
Global Partners LP/GLP Finance Corp. | 361 | 296,020 | ||||||||
ONEOK, Inc. | 877 | 771,760 | ||||||||
SM Energy Co. | 35 | 32,025 | ||||||||
Targa Resources Partners LP/Targa Resources Partners Finance Corp. | 440 | 444,400 | ||||||||
Transocean, Inc. | 355 | 292,655 | ||||||||
|
| |||||||||
2,261,087 | ||||||||||
|
| |||||||||
Other Industrial – 0.2% | ||||||||||
General Cable Corp. | 655 | 587,862 | ||||||||
|
| |||||||||
Technology – 0.1% | ||||||||||
Advanced Micro Devices, Inc. | 270 | 227,475 | ||||||||
|
| |||||||||
12,213,632 | ||||||||||
|
| |||||||||
Financial Institutions – 1.9% | ||||||||||
Banking – 1.7% | ||||||||||
Bank of America Corp. | 213 | 224,183 | ||||||||
Barclays Bank PLC | 129 | 148,053 | ||||||||
7.625%, 11/21/22 | 400 | 436,000 | ||||||||
7.75%, 4/10/23 | 402 | 427,024 | ||||||||
Credit Agricole SA | 235 | 243,868 |
34 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
Credit Suisse Group AG | U.S.$ | 363 | $ | 360,278 | ||||||
HBOS Capital Funding LP | EUR | 910 | 1,041,995 | |||||||
Intesa Sanpaolo SpA | U.S.$ | 569 | 535,514 | |||||||
Lloyds Banking Group PLC | 402 | 398,583 | ||||||||
Royal Bank of Scotland Group PLC | 1,100 | 1,027,950 | ||||||||
Royal Bank of Scotland PLC (The) | 290 | 306,648 | ||||||||
Societe Generale SA | 130 | 131,300 | ||||||||
UniCredit Luxembourg Finance SA | 563 | 584,773 | ||||||||
|
| |||||||||
5,866,169 | ||||||||||
|
| |||||||||
Finance – 0.2% | ||||||||||
AerCap Aviation Solutions BV | 320 | 332,000 | ||||||||
International Lease Finance Corp. | 245 | 262,762 | ||||||||
Navient Corp. | 99 | 97,515 | ||||||||
|
| |||||||||
692,277 | ||||||||||
|
| |||||||||
6,558,446 | ||||||||||
|
| |||||||||
Utility – 0.4% | ||||||||||
Electric – 0.4% | ||||||||||
AES Corp./VA | 580 | 665,550 | ||||||||
NRG Energy, Inc. | 595 | 618,562 | ||||||||
|
| |||||||||
1,284,112 | ||||||||||
|
| |||||||||
Non Corporate Sectors – 0.1% | ||||||||||
Agencies - Not Government | ||||||||||
NOVA Chemicals Corp. | 331 | 334,310 | ||||||||
|
| |||||||||
Total Corporates – Non-Investment Grade | 20,390,500 | |||||||||
|
| |||||||||
INFLATION-LINKED SECURITIES – 4.4% | ||||||||||
United States – 4.4% | ||||||||||
U.S. Treasury Inflation Index | 10,938 | 11,172,864 |
AB INTERMEDIATE BOND PORTFOLIO • | 35 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
0.375%, 7/15/25 (TIPS) | U.S.$ | 3,668 | $ | 3,767,220 | ||||||
|
| |||||||||
Total Inflation-Linked Securities | 14,940,084 | |||||||||
|
| |||||||||
EMERGING MARKETS – | ||||||||||
Brazil – 0.8% | ||||||||||
Brazil Notas do Tesouro Nacional | BRL | 10,690 | 2,807,784 | |||||||
|
| |||||||||
GOVERNMENTS – SOVEREIGN | ||||||||||
Brazil – 0.2% | ||||||||||
Petrobras Global Finance BV | U.S.$ | 672 | 616,560 | |||||||
|
| |||||||||
Colombia – 0.1% | ||||||||||
Ecopetrol SA | 245 | 200,288 | ||||||||
|
| |||||||||
Israel – 0.2% | ||||||||||
Israel Electric Corp. Ltd. | 580 | 619,875 | ||||||||
|
| |||||||||
United Kingdom – 0.1% | ||||||||||
Royal Bank of Scotland Group PLC | 500 | 466,250 | ||||||||
|
| |||||||||
Total Governments – Sovereign Agencies | 1,902,973 | |||||||||
|
| |||||||||
QUASI-SOVEREIGNS – 0.4% | ||||||||||
Quasi-Sovereign Bonds – 0.4% | ||||||||||
Chile – 0.3% | ||||||||||
Corp Nacional del Cobre de Chile | 554 | 578,699 | ||||||||
Empresa de Transporte de Pasajeros Metro SA | 358 | 378,185 | ||||||||
|
| |||||||||
956,884 | ||||||||||
|
| |||||||||
Mexico – 0.1% | ||||||||||
Petroleos Mexicanos | 591 | 575,053 | ||||||||
|
| |||||||||
Total Quasi-Sovereigns | 1,531,937 | |||||||||
|
|
36 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
LOCAL GOVERNMENTS – MUNICIPAL BONDS – 0.4% | ||||||||||
United States – 0.4% | ||||||||||
State of California | U.S.$ | 970 | $ | 1,498,679 | ||||||
|
| |||||||||
Shares | ||||||||||
COMMON STOCKS – 0.4% | ||||||||||
Financials – 0.4% | ||||||||||
Insurance – 0.4% | ||||||||||
Mt Logan Re Ltd. (Preference Shares)(h)(i)(j)(k) | 700 | 708,198 | ||||||||
Mt Logan Re Ltd. (Preference Shares)(i)(j)(k)(l) | 500 | 505,856 | ||||||||
|
| |||||||||
Total Common Stocks | 1,214,054 | |||||||||
|
| |||||||||
PREFERRED STOCKS – 0.2% | ||||||||||
Financial Institutions – 0.2% | ||||||||||
Insurance – 0.2% | ||||||||||
Allstate Corp. (The) | 25,975 | 676,649 | ||||||||
|
| |||||||||
Principal Amount (000) | ||||||||||
GOVERNMENTS – SOVEREIGN | ||||||||||
Mexico – 0.1% | ||||||||||
Mexico Government International Bond | U.S.$ | 208 | 232,440 | |||||||
|
| |||||||||
EMERGING MARKETS – CORPORATE BONDS – 0.1% | ||||||||||
Industrial – 0.1% | ||||||||||
Capital Goods – 0.1% | ||||||||||
Odebrecht Finance Ltd. | 541 | 183,940 | ||||||||
|
| |||||||||
Consumer Non-Cyclical – 0.0% | ||||||||||
Virgolino de Oliveira Finance SA | 660 | 23,760 | ||||||||
|
| |||||||||
Total Emerging Markets – Corporate Bonds | 207,700 | |||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 37 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||||
|
|
| ||||||||
SHORT-TERM INVESTMENTS – 2.5% | ||||||||||
Investment Companies – 1.5% | ||||||||||
AB Fixed Income Shares, Inc. – | U.S.$ | 5,296,741 | $ | 5,296,741 | ||||||
|
| |||||||||
Certificates of Deposit – 1.0% |
| |||||||||
Wells Fargo Bank, NA | 3,537 | 3,537,000 | ||||||||
|
| |||||||||
Total Short-Term Investments | 8,833,741 | |||||||||
|
| |||||||||
Total Investments – 106.3% | 364,868,347 | |||||||||
Other assets less liabilities – (6.3)% | (21,538,733 | ) | ||||||||
|
| |||||||||
Net Assets – 100.0% | $ | 343,329,614 | ||||||||
|
|
FUTURES (see Note D)
Type | Number of Contracts | Expiration Month | Original Value | Value at April 30, 2016 | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Purchased Contracts |
| |||||||||||||||||||
U.S. T-Note 5 Yr (CBT) Futures | 530 | June 2016 | $ | 64,029,790 | $ | 64,084,454 | $ | 54,664 | ||||||||||||
U.S. Ultra Bond | 53 | June 2016 | 9,168,451 | 9,081,219 | (87,232 | ) | ||||||||||||||
Sold Contracts |
| |||||||||||||||||||
Euro-BOBL Futures | 80 | June 2016 | 12,049,943 | 11,986,388 | 63,555 | |||||||||||||||
U.S. T-Note 2 Yr (CBT) Futures | 49 | June 2016 | 10,717,162 | 10,712,625 | 4,537 | |||||||||||||||
U.S. T-Note 10 Yr (CBT) Futures | 16 | June 2016 | 2,072,224 | 2,081,000 | (8,776 | ) | ||||||||||||||
|
| |||||||||||||||||||
$ | 26,748 | |||||||||||||||||||
|
|
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note D)
Counterparty | Contracts to Deliver (000) | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||
Barclays Bank PLC | USD | 869 | INR | 58,542 | 7/15/16 | $ | 1,126 | |||||||||||||
BNP Paribas SA | GBP | 2,493 | USD | 3,538 | 5/12/16 | (104,739 | ) | |||||||||||||
BNP Paribas SA | USD | 1,170 | EUR | 1,035 | 5/13/16 | 14,617 | ||||||||||||||
Deutsche Bank AG | MYR | 5,512 | USD | 1,413 | 7/15/16 | 8,704 | ||||||||||||||
Goldman Sachs Bank USA | USD | 1,479 | EUR | 1,311 | 5/13/16 | 23,147 | ||||||||||||||
Goldman Sachs Bank USA | CAD | 6,568 | USD | 4,995 | 6/23/16 | (239,614 | ) |
38 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
Counterparty | Contracts to Deliver (000) | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||
Goldman Sachs Bank USA | BRL | 4,862 | USD | 1,057 | 1/04/17 | $ | (258,098 | ) | ||||||||||||
JPMorgan Chase Bank | BRL | 5,415 | USD | 1,569 | 5/03/16 | (5,270 | ) | |||||||||||||
JPMorgan Chase Bank | USD | 1,531 | BRL | 5,415 | 5/03/16 | 43,515 | ||||||||||||||
JPMorgan Chase Bank | GBP | 1,275 | USD | 1,824 | 5/12/16 | (39,101 | ) | |||||||||||||
JPMorgan Chase Bank | EUR | 1,446 | USD | 1,605 | 5/13/16 | (50,595 | ) | |||||||||||||
JPMorgan Chase Bank | BRL | 5,415 | USD | 1,518 | 6/02/16 | (41,322 | ) | |||||||||||||
JPMorgan Chase Bank | USD | 1,781 | MXN | 31,493 | 6/17/16 | 41,792 | ||||||||||||||
Morgan Stanley & Co., Inc. | BRL | 570 | USD | 161 | 5/03/16 | (5,274 | ) | |||||||||||||
Morgan Stanley & Co., Inc. | USD | 165 | BRL | 570 | 5/03/16 | 555 | ||||||||||||||
Royal Bank of Canada | EUR | 814 | USD | 898 | 5/13/16 | (33,869 | ) | |||||||||||||
Standard Chartered Bank | BRL | 4,845 | USD | 1,332 | 5/03/16 | (76,263 | ) | |||||||||||||
Standard Chartered Bank | USD | 1,404 | BRL | 4,845 | 5/03/16 | 4,715 | ||||||||||||||
Standard Chartered Bank | TWD | 80,662 | USD | 2,477 | 5/20/16 | (19,868 | ) | |||||||||||||
Standard Chartered Bank | SGD | 3,580 | USD | 2,646 | 7/15/16 | (12,238 | ) | |||||||||||||
State Street Bank & Trust Co. | EUR | 2,770 | USD | 3,012 | 5/13/16 | (161,354 | ) | |||||||||||||
|
| |||||||||||||||||||
$ | (909,434 | ) | ||||||||||||||||||
|
|
CENTRALLY CLEARED INTEREST RATE SWAPS (see Note D)
Rate Type | ||||||||||||||||||
Clearing Broker/ (Exchange) | Notional Amount (000) | Termination Date | Payments by the Fund | Payments by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 21,860 | 3/11/17 | 2.140% | 3 Month BBSW | $ | (2,413 | ) | ||||||||||
Morgan Stanley & Co., LLC/(CME Group) | NZD | 29,530 | 6/09/17 | 3.366% | 3 Month BKBM | (431,541 | ) | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 18,850 | 6/09/17 | 2.218% | 3 Month BBSW | (21,257 | ) | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 13,670 | 10/30/17 | 1.915% | 3 Month BBSW | 17,485 | ||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 11,980 | 4/27/18 | 2.213% | 3 Month BBSW | (33,418 | ) | ||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | CAD | 31,990 | 4/28/18 | 1.010% | 3 Month CDOR | 7,435 | ||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | NZD | 14,810 | 4/28/18 | 2.250% | 3 Month BKBM | 870 | ||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | GBP | 2,999 | 6/05/20 | 6 Month LIBOR | 1.651% | 121,744 | ||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 2,630 | 1/14/24 | 2.980% | 3 Month LIBOR | (306,924 | ) | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | 2,300 | 2/14/24 | 2.889% | 3 Month LIBOR | (244,976 | ) | ||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 3,330 | 3/11/25 | 6 Month BBSW | 2.973% | 77,033 | ||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | NZD | 3,440 | 6/09/25 | 3 Month BKBM | 4.068% | 249,344 | ||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | AUD | 2,040 | 6/09/25 | 6 Month BBSW | 3.384% | 104,726 | ||||||||||||
Morgan Stanley & Co., LLC/(CME Group) | $ | 3,600 | 11/10/25 | 2.256% | 3 Month LIBOR | (225,178 | ) | |||||||||||
Morgan Stanley & Co., LLC/(CME Group) | GBP | 510 | 6/05/45 | 2.396% | 6 Month LIBOR | (114,608 | ) | |||||||||||
|
| |||||||||||||||||
$ | (801,678 | ) | ||||||||||||||||
|
|
AB INTERMEDIATE BOND PORTFOLIO • | 39 |
Portfolio of Investments
CREDIT DEFAULT SWAPS (see Note D)
Swap Counterparty & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Upfront Premiums Paid (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||
Buy Contracts | ||||||||||||||||||||||||
Citibank, NA | ||||||||||||||||||||||||
Advanced Micro Devices, Inc., | (5.00 | )% | 7.88 | % | $ | 271 | $ | 18,816 | $ | 13,975 | $ | 4,841 | ||||||||||||
Sprint Communications, Inc., | (5.00 | ) | 10.04 | 452 | 55,811 | (17,410 | ) | 73,221 | ||||||||||||||||
Sprint Communications, Inc., | (5.00 | ) | 10.04 | 518 | 63,960 | (20,689 | ) | 84,649 | ||||||||||||||||
Sale Contracts | ||||||||||||||||||||||||
Credit Suisse International | ||||||||||||||||||||||||
Anadarko Petroleum Corp., | 1.00 | 0.94 | 1,360 | (435 | ) | (13,263 | ) | 12,828 | ||||||||||||||||
Kohl’s Corp., | 1.00 | 1.05 | 42 | (21 | ) | (354 | ) | 333 | ||||||||||||||||
Kohl’s Corp., | 1.00 | 1.05 | 42 | (21 | ) | (355 | ) | 334 | ||||||||||||||||
Kohl’s Corp., | 1.00 | 1.05 | 61 | (30 | ) | (465 | ) | 435 | ||||||||||||||||
Kohl’s Corp., | 1.00 | 1.05 | 103 | (50 | ) | (876 | ) | 826 | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 138,030 | $ | (39,437 | ) | $ | 177,467 | ||||||||||||||||||
|
|
|
|
|
|
* | Termination date |
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 | $ | 5,590 | 1/30/17 | 1.059 | % | 3 Month LIBOR | $ | (28,787 | ) | |||||||||||
JPMorgan Chase | 6,230 | 2/07/22 | 2.043% | 3 Month LIBOR | (267,922 | ) | ||||||||||||||
|
| |||||||||||||||||||
$ | (296,709 | ) | ||||||||||||||||||
|
|
40 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
^ | 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 April 30, 2016, the aggregate market value of these securities amounted to $64,599,156 or 18.8% of net assets. |
(b) | Securities are perpetual and, thus, do not have a predetermined maturity date. The date shown, if applicable, reflects the next call date. |
(c) | Variable rate coupon, rate shown as of April 30, 2016. |
(d) | Floating Rate Security. Stated interest rate was in effect at April 30, 2016. |
(e) | Fair valued by the Adviser. |
(f) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities, which represent 0.26% of net assets as of April 30, 2016, are considered illiquid and restricted. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Bellemeade Re Ltd. | 7/27/15 | $ | 295,077 | $ | 291,470 | 0.08 | % | |||||||||
JP Morgan Madison Avenue Securities Trust | 11/06/15 | 104,373 | 109,944 | 0.03 | % | |||||||||||
Nationstar NIM Ltd. | 4/04/07 | 17,607 | – 0 | – | 0.00 | % | ||||||||||
Prudential Securities Secured Financing Corp. | 11/02/07 | 12 | 85 | 0.00 | % | |||||||||||
Virgolino de Oliveira Finance SA | 1/24/14-1/27/14 | 365,927 | 23,760 | 0.01 | % | |||||||||||
Wells Fargo Credit Risk Transfer Securities Trust | 9/28/15 | 393,624 | 388,685 | 0.11 | % | |||||||||||
Wells Fargo Credit Risk Transfer Securities Trust | 9/28/15 | 104,860 | 102,730 | 0.03 | % |
(g) | IO – Interest Only |
(h) | Effective prepayment date of December 2016. |
(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. | 1/02/14 | $ | 700,000 | $ | 708,198 | 0.21 | % | |||||||||
Mt Logan Re Ltd. | 12/30/14 | 500,000 | 505,856 | 0.15 | % |
(k) | Non-income producing security. |
(l) | Effective prepayment date of April 2017. |
(m) | Security is in default and is non-income producing. |
AB INTERMEDIATE BOND PORTFOLIO • | 41 |
Portfolio of Investments
(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. |
(o) | 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
MXN – Mexican Peso
MYR – Malaysian Ringgit
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)
BOBL – Bundesobligationen
CBT – Chicago Board of Trade
CDOR – Canadian Dealer Offered Rate
CMBS – Commercial Mortgage-Backed Securities
CME – Chicago Mercantile Exchange
LIBOR – London Interbank Offered Rates
REIT – Real Estate Investment Trust
REMICs – Real Estate Mortgage Investment Conduits
TBA – To Be Announced
TIPS – Treasury Inflation Protected Security
See notes to financial statements.
42 | • AB INTERMEDIATE BOND PORTFOLIO |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
April 30, 2016 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $359,655,951) | $ | 359,571,606 | ||
Affiliated issuers (cost $5,296,741) | 5,296,741 | |||
Cash collateral due from broker | 1,354,018 | |||
Foreign currencies, at value (cost $21,794) | 21,784 | |||
Interest and dividends receivable | 2,165,545 | |||
Receivable for investment securities sold | 2,105,890 | |||
Receivable for capital stock sold | 1,270,541 | |||
Unrealized appreciation on credit default swaps | 177,467 | |||
Unrealized appreciation on forward currency exchange contracts | 138,171 | |||
Receivable for variation margin on exchange-traded derivatives | 118,425 | |||
Upfront premium paid on credit default swaps | 13,975 | |||
Receivable for newly entered centrally cleared interest rate swaps | 11,501 | |||
|
| |||
Total assets | 372,245,664 | |||
|
| |||
Liabilities | ||||
Due to custodian | 8,288 | |||
Payable for investment securities purchased | 26,690,336 | |||
Unrealized depreciation on forward currency exchange contracts | 1,047,605 | |||
Unrealized depreciation on interest rate swaps | 296,709 | |||
Payable for capital stock redeemed | 224,973 | |||
Dividends payable | 142,043 | |||
Distribution fee payable | 90,933 | |||
Advisory fee payable | 84,611 | |||
Transfer Agent fee payable | 58,128 | |||
Upfront premium received on credit default swaps | 53,412 | |||
Payable for variation margin on exchange-traded derivatives | 32,146 | |||
Payable for terminated centrally cleared interest rate swaps | 10,719 | |||
Administrative fee payable | 10,417 | |||
Payable for newly entered centrally cleared interest rate swaps | 21,780 | |||
Accrued expenses | 143,950 | |||
|
| |||
Total liabilities | 28,916,050 | |||
|
| |||
Net Assets | $ | 343,329,614 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 30,941 | ||
Additional paid-in capital | 344,346,567 | |||
Undistributed net investment income | 22,015 | |||
Accumulated net realized gain on investment | 819,543 | |||
Net unrealized depreciation on investments | (1,889,452 | ) | ||
|
| |||
$ | 343,329,614 | |||
|
|
See notes to financial statements.
AB INTERMEDIATE BOND PORTFOLIO • | 43 |
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 | $ | 248,664,118 | 22,406,857 | $ | 11.10 | * | ||||||
| ||||||||||||
B | $ | 1,337,121 | 120,455 | $ | 11.10 | |||||||
| ||||||||||||
C | $ | 41,568,318 | 3,752,792 | $ | 11.08 | |||||||
| ||||||||||||
Advisor | $ | 40,174,141 | 3,618,445 | $ | 11.10 | |||||||
| ||||||||||||
R | $ | 2,722,948 | 245,391 | $ | 11.10 | |||||||
| ||||||||||||
K | $ | 4,878,131 | 439,219 | $ | 11.11 | |||||||
| ||||||||||||
I | $ | 442,661 | 39,845 | $ | 11.11 | |||||||
| ||||||||||||
Z | $ | 3,542,176 | 318,436 | $ | 11.12 | |||||||
|
* | The maximum offering price per share for Class A shares was $11.59 which reflects a sales charge of 4.25%. |
See notes to financial statements.
44 | • AB INTERMEDIATE BOND PORTFOLIO |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Six Months Ended April 30, 2016 (unaudited)
Investment Income | ||||||||
Interest | $ | 5,311,408 | ||||||
Dividends | ||||||||
Unaffiliated issuers | 104,186 | |||||||
Affiliated issuers | 29,057 | |||||||
Other income | 1,566 | $ | 5,446,217 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 765,326 | |||||||
Distribution fee—Class A | 310,453 | |||||||
Distribution fee—Class B | 7,299 | |||||||
Distribution fee—Class C | 203,563 | |||||||
Distribution fee—Class R | 6,793 | |||||||
Distribution fee—Class K | 5,305 | |||||||
Transfer agency—Class A | 184,729 | |||||||
Transfer agency—Class B | 1,783 | |||||||
Transfer agency—Class C | 32,289 | |||||||
Transfer agency—Advisor Class | 23,224 | |||||||
Transfer agency—Class R | 3,532 | |||||||
Transfer agency—Class K | 4,244 | |||||||
Transfer agency—Class I | 310 | |||||||
Transfer agency—Class Z | 1,072 | |||||||
Custodian | 104,828 | |||||||
Registration fees | 56,227 | |||||||
Audit and tax | 41,083 | |||||||
Printing | 34,101 | |||||||
Administrative | 23,604 | |||||||
Legal | 18,990 | |||||||
Directors’ fees | 9,608 | |||||||
Miscellaneous | 9,134 | |||||||
|
| |||||||
Total expenses | 1,847,497 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (293,369 | ) | ||||||
|
| |||||||
Net expenses | 1,554,128 | |||||||
|
| |||||||
Net investment income | 3,892,089 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (739,085 | ) | ||||||
Securities sold short | 20,484 | |||||||
Futures | 735,932 | |||||||
Options written | 9,632 | |||||||
Swaps | (216,655 | ) | ||||||
Foreign currency transactions | 710,353 | |||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | 4,469,377 | |||||||
Securities sold short | (6,146 | ) | ||||||
Futures | 466,834 | |||||||
Options written | (6,570 | ) | ||||||
Swaps | (66,010 | ) | ||||||
Foreign currency denominated assets and liabilities | (943,979 | ) | ||||||
|
| |||||||
Net gain on investment and foreign currency transactions | 4,434,167 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 8,326,256 | ||||||
|
|
See notes to financial statements.
AB INTERMEDIATE BOND PORTFOLIO • | 45 |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 3,892,089 | $ | 8,295,267 | ||||
Net realized gain on investment transactions and foreign currency transactions | 520,661 | 4,943,300 | ||||||
Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities | 3,913,506 | (8,274,910 | ) | |||||
|
|
|
| |||||
Net increase in net assets from operations | 8,326,256 | 4,963,657 | ||||||
Dividends to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (5,149,259 | ) | (8,137,847 | ) | ||||
Class B | (25,393 | ) | (55,129 | ) | ||||
Class C | (688,575 | ) | (987,523 | ) | ||||
Advisor Class | (657,208 | ) | (793,874 | ) | ||||
Class R | (54,133 | ) | (71,771 | ) | ||||
Class K | (84,746 | ) | (140,957 | ) | ||||
Class I | (11,279 | ) | (14,707 | ) | ||||
Class Z | (239,538 | ) | (24,900 | ) | ||||
Capital Stock Transactions | ||||||||
Net increase (decrease) | 11,403,291 | (17,247,645 | ) | |||||
|
|
|
| |||||
Total increase (decrease) | 12,819,416 | (22,510,696 | ) | |||||
Net Assets | ||||||||
Beginning of period | 330,510,198 | 353,020,894 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $22,015 and $3,040,057, respectively) | $ | 343,329,614 | $ | 330,510,198 | ||||
|
|
|
|
See notes to financial statements.
46 | • AB INTERMEDIATE BOND PORTFOLIO |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
April 30, 2016 (unaudited)
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. The Fund, which is a Maryland corporation, operates as a series company comprised of ten 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, the AB High Yield Portfolio and the AB Income Fund. 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. The AB Income Fund commenced operations on April 21, 2016. This report relates only to the AB Intermediate Bond Portfolio (the “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 statements and amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Fund is an investment company
AB INTERMEDIATE BOND PORTFOLIO • | 47 |
Notes to Financial Statements
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 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.
48 | • AB INTERMEDIATE BOND PORTFOLIO |
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 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 are then discounted to calculate fair
AB INTERMEDIATE BOND PORTFOLIO • | 49 |
Notes to Financial Statements
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.
50 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
The following table summarizes the valuation of the Portfolio’s investments by the above fair value hierarchy levels as of April 30, 2016:
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Corporates – Investment Grade | $ | – 0 | – | $ | 85,072,902 | $ | – 0 | – | $ | 85,072,902 | ||||||
Mortgage Pass-Throughs | – 0 | – | 60,534,934 | – 0 | – | 60,534,934 | ||||||||||
Governments – Treasuries | – 0 | – | 51,482,877 | – 0 | – | 51,482,877 | ||||||||||
Asset-Backed Securities | – 0 | – | 45,879,521 | 820,244 | (a) | 46,699,765 | ||||||||||
Commercial Mortgage-Backed Securities | – 0 | – | 32,042,008 | 9,892,298 | 41,934,306 | |||||||||||
Collateralized Mortgage Obligations | – 0 | – | 24,907,022 | – 0 | – | 24,907,022 | ||||||||||
Corporates – Non-Investment Grade | – 0 | – | 20,093,288 | 297,212 | 20,390,500 | |||||||||||
Inflation-Linked Securities | – 0 | – | 14,940,084 | – 0 | – | 14,940,084 | ||||||||||
Emerging Markets – Treasuries | – 0 | – | 2,807,784 | – 0 | – | 2,807,784 | ||||||||||
Governments – Sovereign Agencies | – 0 | – | 1,902,973 | – 0 | – | 1,902,973 | ||||||||||
Quasi-Sovereigns | – 0 | – | 1,531,937 | – 0 | – | 1,531,937 | ||||||||||
Local Governments – Municipal Bonds | – 0 | – | 1,498,679 | – 0 | – | 1,498,679 | ||||||||||
Common Stocks | – 0 | – | – 0 | – | 1,214,054 | 1,214,054 | ||||||||||
Preferred Stocks | 676,649 | – 0 | – | – 0 | – | 676,649 | ||||||||||
Governments – Sovereign Bonds | – 0 | – | 232,440 | – 0 | – | 232,440 | ||||||||||
Emerging Markets – Corporate Bonds | – 0 | – | 207,700 | – 0 | – | 207,700 | ||||||||||
Short-Term Investments: | ||||||||||||||||
Investment Companies | 5,296,741 | – 0 | – | – 0 | – | 5,296,741 | ||||||||||
Certificates of Deposit | – 0 | – | 3,537,000 | – 0 | – | 3,537,000 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 5,973,390 | 346,671,149 | 12,223,808 | 364,868,347 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other Financial Instruments(b): | ||||||||||||||||
Assets: | ||||||||||||||||
Futures | 122,756 | – 0 | – | – 0 | – | 122,756 | (c) | |||||||||
Forward Currency Exchange Contracts | – 0 | – | 138,171 | – 0 | – | 138,171 | ||||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | 578,637 | – 0 | – | 578,637 | (c) | |||||||||
Credit Default Swaps | – 0 | – | 177,467 | – 0 | – | 177,467 | ||||||||||
Liabilities: | ||||||||||||||||
Futures | (96,008 | ) | – 0 | – | – 0 | – | (96,008 | )(c) | ||||||||
Forward Currency Exchange Contracts | – 0 | – | (1,047,605 | ) | – 0 | – | (1,047,605 | ) | ||||||||
Centrally Cleared Interest Rate Swaps | – 0 | – | (1,380,315 | ) | – 0 | – | (1,380,315 | )(c) | ||||||||
Interest Rate Swaps | – 0 | – | (296,709 | ) | – 0 | – | (296,709 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total(d) | $ | 6,000,138 | $ | 344,840,795 | $ | 12,223,808 | $ | 363,064,741 | ||||||||
|
|
|
|
|
|
|
|
(a) | The Portfolio held securities with zero market value at period end. |
(b) | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
(c) | 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. |
(d) | There were no transfers between Level 1 and Level 2 during the reporting period. |
AB INTERMEDIATE BOND PORTFOLIO • | 51 |
Notes to Financial Statements
The Portfolio recognizes all transfers between levels of the fair value hierarchy assuming the financial instruments were transferred at the beginning of the reporting period.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value.
Asset-Backed Securities(a) | Commercial Mortgage-Backed Securities | Collateralized Mortgage Obligations | ||||||||||
Balance as of 10/31/15 | $ | 5,462,170 | $ | 9,612,483 | $ | 19,646,091 | ||||||
Accrued discounts/(premiums) | 1,592 | (5,730 | ) | 2,477 | ||||||||
Realized gain (loss) | (35,063 | ) | (64,638 | ) | (386,192 | ) | ||||||
Change in unrealized appreciation/depreciation | 29,531 | (105,953 | ) | 204,327 | ||||||||
Purchases/Payups | – 0 | – | 2,111,414 | – 0 | – | |||||||
Sales/Paydowns | (763,531 | ) | (1,655,278 | ) | (1,970,689 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | (3,874,455 | ) | – 0 | – | (17,496,014 | ) | ||||||
|
|
|
|
|
| |||||||
Balance as of 4/30/16 | $ | 820,244 | $ | 9,892,298 | $ | – 0 | – | |||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(b) | $ | (2,237 | ) | $ | (129,507 | ) | $ | – 0 | – | |||
|
|
|
|
|
| |||||||
Corporates - Non-Investment Grade | Common Stocks | Total | ||||||||||
Balance as of 10/31/15 | $ | 297,212 | $ | 1,273,763 | $ | 36,291,719 | ||||||
Accrued discounts/(premiums) | 849 | – 0 | – | (812 | ) | |||||||
Realized gain (loss) | – 0 | – | – 0 | – | (485,893 | ) | ||||||
Change in unrealized appreciation/depreciation | (849 | ) | (59,709 | ) | 67,347 | |||||||
Purchases/Payups | – 0 | – | – 0 | – | 2,111,414 | |||||||
Sales/Paydowns | – 0 | – | – 0 | – | (4,389,498 | ) | ||||||
Transfers in to Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | – 0 | – | – 0 | – | (21,370,469 | ) | ||||||
|
|
|
|
|
| |||||||
Balance as of 4/30/16 | $ | 297,212 | $ | 1,214,054 | $ | 12,223,808 | (c) | |||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(b) | $ | (849 | ) | $ | (59,709 | ) | $ | (192,302 | ) | |||
|
|
|
|
|
|
(a) | The Portfolio held securities with zero market value at period end. |
(b) | 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. |
(c) | An amount of $21,370,469 was transferred out of Level 3 into Level 2 due to increase in observability of inputs during the reporting period. |
52 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
The following presents information about significant unobservable inputs related to the Portfolio’s Level 3 investments at April 30, 2016. Securities priced by third party vendors are excluded from the following table.
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at 4/30/16 | Valuation Technique | Unobservable | Range/ Weighted Average | |||||||
Asset-Backed Securities | $ | – 0 | – | Qualitative Assessment | $0.00 / N/A |
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
AB INTERMEDIATE BOND PORTFOLIO • | 53 |
Notes to Financial Statements
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 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
54 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
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.
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 June 1, 2015 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 .85%, 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. Prior to June 1, 2015, the Expense Cap was .90% of the daily average net assets for Class A. This waiver extends through January 31, 2017 and then may be extended by the Adviser for additional one year terms. For the six months ended April 30, 2016, such reimbursements/waivers amounted to $293,369.
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 six months ended April 30, 2016, the reimbursement for such services amounted to $23,604.
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 $105,761 for the six months ended April 30, 2016.
AllianceBernstein Investments, Inc. (the “Distributor”), a wholly-owned subsidiary of the Adviser, serves as the distributor of the Portfolio’s shares. The Distributor
AB INTERMEDIATE BOND PORTFOLIO • | 55 |
Notes to Financial Statements
has advised the Portfolio that it has retained front-end sales charges of $4,343 from the sale of Class A shares and received $1,315, $533 and $380 in contingent deferred sales charges imposed upon redemptions by shareholders of Class A, Class B and Class C shares, respectively, for the six months ended April 30, 2016.
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 currently available for direct purchase by members of the public. The Government STIF Portfolio currently pays no investment management fees but does bear its own expenses. A summary of the Portfolio’s transactions in shares of the Government STIF Portfolio for the six months ended April 30, 2016 is as follows:
Market Value October 31, 2015 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value April 30, 2016 (000) | Dividend Income (000) | ||||||||||||
$ 6,763 | $ | 68,051 | $ | 69,517 | $ | 5,297 | $ | 29 |
Brokerage commissions paid on investment transactions for the six months ended April 30, 2016 amounted to $4,695, 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, $1,137,049, $127,664 and $52,286 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
56 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
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 six months ended April 30, 2016 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding U.S. government securities) | $ | 38,956,306 | $ | 27,418,885 | ||||
U.S. government securities | 156,336,473 | 129,441,814 |
The cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation (excluding futures, foreign currency and swap transactions) are as follows:
Gross unrealized appreciation | $ | 6,199,394 | ||
Gross unrealized depreciation | (6,283,739 | ) | ||
|
| |||
Net unrealized depreciation | $ | (84,345 | ) | |
|
|
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”.
AB INTERMEDIATE BOND PORTFOLIO • | 57 |
Notes to Financial Statements
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 six months ended April 30, 2016, 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.
58 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
During the six months ended April 30, 2016, 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.
During the six months ended April 30, 2016, the Portfolio held written options for hedging and non-hedging purposes.
AB INTERMEDIATE BOND PORTFOLIO • | 59 |
Notes to Financial Statements
For the six months ended April 30, 2016, the Portfolio had the following transactions in written options:
Number of Contracts | Premiums Received | |||||||
Options written outstanding as of 10/31/15 | 495,095 | $ | 9,815 | |||||
Options written | 292,974,000 | 13,070 | ||||||
Options assigned | (292,974,000 | ) | (13,070 | ) | ||||
Options expired | (495,095 | ) | (9,815 | ) | ||||
Options bought back | – 0 | – | – 0 | – | ||||
Options exercised | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Options written outstanding as of 04/30/16 | – 0 | – | $ | – 0 | – | |||
|
|
|
|
• | 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
60 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
paid or received are recognized as cost or proceeds on the statement of assets and liabilities and are amortized on a straight line basis over the life of the contract. Amortized upfront premiums are included in net realized gain/(loss) from swaps on the statement of operations. Fluctuations in the value of swaps are recorded as a component of net change in unrealized appreciation/depreciation of swaps on the statement of operations.
Certain standardized swaps, including certain interest rate swaps and credit default swaps, are (or soon will be) subject to mandatory central clearing. Cleared swaps are transacted through futures commission merchants (“FCMs”) that are members of central clearinghouses, with the clearinghouse serving as central counterparty, similar to transactions in futures contracts. Centralized clearing will be required for additional categories of swaps on a phased-in basis based on requirements published by the Securities and Exchange Commission and Commodity Futures Trading Commission.
At the time the Portfolio enters into a centrally cleared swap, the Portfolio deposits and maintains as collateral an initial margin with the broker, as required by the clearinghouse on which the transaction is effected. Such amount is shown as cash collateral due from broker on the statement of assets and liabilities. Pursuant to the contract, the Portfolio agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as variation margin and are recorded by the Portfolio as unrealized gains or losses. Risks may arise from the potential of a counterparty to meet the terms of the contract. The credit/counterparty risk for centrally cleared swaps is generally less than non-centrally cleared swaps, since the clearinghouse, which is the issuer or counterparty to each centrally cleared swap, has robust risk mitigation standards, including the requirement to provide initial and variation margin. When the contract is closed, the Portfolio records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the time it was closed.
Interest Rate Swaps:
The Portfolio is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. Because the Portfolio holds fixed rate bonds, the value of these bonds may decrease if interest rates rise. To help hedge against this risk and to maintain its ability to generate income at prevailing market rates, the Portfolio may enter into interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional amount. The Portfolio may elect to pay a fixed rate and receive a floating rate, or, receive a fixed rate and pay a floating rate on a notional amount.
AB INTERMEDIATE BOND PORTFOLIO • | 61 |
Notes to Financial Statements
In addition, the Portfolio may also enter into interest rate swap transactions to preserve a return or spread on a particular investment or portion of its portfolio, or protecting against an increase in the price of securities the Portfolio anticipates purchasing at a later date. Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed rate payments) computed based on a contractually-based principal (or “notional”) amount. Interest rate swaps are entered into on a net basis (i.e., the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments).
During the six months ended April 30, 2016, 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 a Portfolio against an unexpected change in the rate of inflation measured by an inflation index since the value of these agreements is expected to increase if unexpected inflation increases.
During the six months ended April 30, 2016, the Portfolio held inflation (CPI) swaps for hedging and non-hedging purposes.
Credit Default Swaps:
The Portfolio may enter into credit default swaps, including to manage its exposure to the market or certain sectors of the market, to reduce its risk exposure to defaults by corporate and sovereign issuers held by the Portfolio, or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. The Portfolio may purchase credit protection (“Buy Contract”) or provide credit protection (“Sale Contract”) on the referenced obligation of the credit default swap. During the term of the swap, the Portfolio receives/(pays) fixed payments from/(to) the respective counterparty, calculated at the agreed 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 April 30, 2016, the Portfolio did not have Buy Contracts outstanding with respect to the same referenced obligation and same 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.
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.
During the six months ended April 30, 2016, the Portfolio held credit default 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.
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’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 April 30, 2016, the Portfolio had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of | Fair Value | Statement of | Fair Value | ||||||||
Interest rate contracts | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 701,393 | * | Receivable/Payable for variation margin on exchange-traded derivatives | $ | 1,476,323 | * | ||||
Foreign exchange contracts | Unrealized appreciation on forward currency exchange contracts | | 138,171 | | Unrealized depreciation on forward currency exchange contracts | | 1,047,605 | | ||||
Interest rate contracts | Unrealized depreciation on interest rate swaps | | 296,709 | | ||||||||
Credit contracts | Unrealized appreciation on credit default swaps | 177,467 | ||||||||||
|
|
|
| |||||||||
Total | $ | 1,017,031 | $ | 2,820,637 | ||||||||
|
|
|
|
* | 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. |
64 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
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 | $ | 735,932 | $ | 466,834 | |||||
Foreign exchange contracts | Net realized gain (loss) on foreign currency transactions; Net change in unrealized appreciation/depreciation of foreign currency denominated assets and liabilities | (60,828 | ) | (983,999 | ) | |||||
Foreign exchange contracts | Net realized gain (loss) on options written; Net change in unrealized appreciation/depreciation of options written | 9,632 | (6,570 | ) | ||||||
Interest rate contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (125,777 | ) | (163,481 | ) | |||||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | (90,878 | ) | 97,471 | ||||||
|
|
|
| |||||||
Total | $ | 468,081 | $ | (589,745 | ) | |||||
|
|
|
|
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the six months ended April 30, 2016:
Futures: | ||||
Average original value of buy contracts | $ | 73,028,826 | ||
Average original value of sale contracts | $ | 16,381,731 | ||
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 8,166,457 | ||
Average principal amount of sale contracts | $ | 32,527,706 | ||
Interest Rate Swaps: | ||||
Average notional amount | $ | 11,820,000 | ||
Inflation Swaps: | ||||
Average notional amount | $ | 5,210,000 | (a) | |
Centrally Cleared Interest Rate Swaps: | ||||
Average notional amount | $ | 105,483,019 | ||
AB INTERMEDIATE BOND PORTFOLIO • | 65 |
Notes to Financial Statements
Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 1,241,000 | ||
Average notional amount of sale contracts | $ | 1,608,000 | ||
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of buy contracts | $ | 1,746,000 | (a) | |
(a) | Positions were open for four months during the period. |
For financial reporting purposes, the Portfolio does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the statement of assets and liabilities.
All derivatives held at period end were subject to netting arrangements. The following table presents the Portfolio’s derivative assets and liabilities by counterparty net of amounts available for offset under Master Agreements (“MA”) and net of the related collateral received/ pledged by the Portfolio as of April 30, 2016:
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* | $ | 118,425 | $ | (32,146 | ) | $ | – 0 | – | $ | – 0 | – | $ | 86,279 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 118,425 | $ | (32,146 | ) | $ | – 0 | – | $ | – 0 | – | $ | 86,279 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Barclays Bank PLC | $ | 1,126 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 1,126 | |||||||
BNP Paribas SA | 14,617 | (14,617 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Citibank, NA | 138,587 | – 0 | – | – 0 | – | – 0 | – | 138,587 | ||||||||||||
Deutsche Bank AG | 8,704 | – 0 | – | – 0 | – | – 0 | – | 8,704 | ||||||||||||
Goldman Sachs Bank USA | 23,147 | (23,147 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
JPMorgan Chase Bank/JPMorgan Chase Bank, NA | 85,307 | (85,307 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Morgan Stanley & Co., Inc. | 555 | (555 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Standard Chartered Bank | 4,715 | (4,715 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 276,758 | $ | (128,341 | ) | $ | – 0 | – | $ | – 0 | – | $ | 148,417 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
66 | • AB INTERMEDIATE BOND PORTFOLIO |
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* | $ | 32,146 | $ | (32,146 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 32,146 | $ | (32,146 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
BNP Paribas SA | $ | 104,739 | $ | (14,617 | ) | $ | – 0 | – | $ | – 0 | – | $ | 90,122 | |||||||
Credit Suisse International | 557 | – 0 | – | – 0 | – | – 0 | – | 557 | ||||||||||||
Goldman Sachs Bank USA | 497,712 | (23,147 | ) | – 0 | – | – 0 | – | 474,565 | ||||||||||||
JPMorgan Chase Bank/JPMorgan Chase Bank, NA | 432,997 | (85,307 | ) | – 0 | – | – 0 | – | 347,690 | ||||||||||||
Morgan Stanley & Co., Inc. | 5,274 | (555 | ) | – 0 | – | – 0 | – | 4,719 | ||||||||||||
Royal Bank of Canada | 33,869 | – 0 | – | – 0 | – | – 0 | – | 33,869 | ||||||||||||
Standard Chartered Bank | 108,369 | (4,715 | ) | – 0 | – | – 0 | – | 103,654 | ||||||||||||
State Street Bank & Trust Co. | 161,354 | – 0 | – | – 0 | – | – 0 | – | 161,354 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 1,344,871 | $ | (128,341 | ) | $ | – 0 | – | $ | – 0 | – | $ | 1,216,530 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | Cash and securities have been posted for initial margin requirements for exchange-traded derivatives outstanding at April 30, 2016. |
^ | 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).
AB INTERMEDIATE BOND PORTFOLIO • | 67 |
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 six months ended April 30, 2016, the Portfolio earned drop income of $168,157 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 upon date and price. At the time the Portfolio enters into a reverse repurchase
68 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
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 six months ended April 30, 2016, 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 | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | Six Months Ended April 30, 2016 (unaudited) | Year Ended 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 1,132,166 | 1,280,374 | $ | 12,370,505 | $ | 14,319,956 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 327,573 | 530,134 | 3,580,382 | 5,929,136 | ||||||||||||||||
| ||||||||||||||||||||
Shares converted from Class B | 26,857 | 123,507 | 293,682 | 1,384,960 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (1,954,475 | ) | (3,441,024 | ) | (21,414,360 | ) | (38,513,706 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (467,879 | ) | (1,507,009 | ) | $ | (5,169,791 | ) | $ | (16,879,654 | ) | ||||||||||
| ||||||||||||||||||||
Class B | ||||||||||||||||||||
Shares sold | 5,406 | 29,802 | $ | 59,120 | $ | 334,102 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 2,006 | 4,566 | 21,910 | 51,110 | ||||||||||||||||
| ||||||||||||||||||||
Shares converted to Class A | (26,852 | ) | (123,462 | ) | (293,682 | ) | (1,384,960 | ) | ||||||||||||
| ||||||||||||||||||||
Shares redeemed | (13,101 | ) | (26,313 | ) | (143,868 | ) | (293,711 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (32,541 | ) | (115,407 | ) | $ | (356,520 | ) | $ | (1,293,459 | ) | ||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 394,382 | 452,832 | $ | 4,297,281 | $ | 5,052,767 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 43,265 | 68,581 | 471,808 | 765,443 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (392,844 | ) | (619,884 | ) | (4,287,262 | ) | (6,918,148 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 44,803 | (98,471 | ) | $ | 481,827 | $ | (1,099,938 | ) | ||||||||||||
|
AB INTERMEDIATE BOND PORTFOLIO • | 69 |
Notes to Financial Statements
Shares | Amount | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | Six Months Ended April 30, 2016 (unaudited) | Year Ended 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 2,173,953 | 1,211,759 | $ | 23,764,874 | $ | 13,604,515 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 40,078 | 42,501 | 438,672 | 475,348 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (647,618 | ) | (1,546,249 | ) | (7,047,935 | ) | (17,411,766 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 1,566,413 | (291,989 | ) | $ | 17,155,611 | $ | (3,331,903 | ) | ||||||||||||
| ||||||||||||||||||||
Class R | ||||||||||||||||||||
Shares sold | 20,759 | 80,356 | $ | 227,982 | $ | 897,105 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 4,699 | 6,409 | 51,339 | 71,629 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (45,623 | ) | (31,961 | ) | (497,925 | ) | (358,491 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (20,165 | ) | 54,804 | $ | (218,604 | ) | $ | 610,243 | ||||||||||||
| ||||||||||||||||||||
Class K | ||||||||||||||||||||
Shares sold | 111,140 | 128,694 | $ | 1,216,551 | $ | 1,445,071 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 7,722 | 12,526 | 84,493 | 140,230 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (33,989 | ) | (188,432 | ) | (372,820 | ) | (2,103,890 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | 84,873 | (47,212 | ) | $ | 928,224 | $ | (518,589 | ) | ||||||||||||
| ||||||||||||||||||||
Class I | ||||||||||||||||||||
Shares sold | 2,311 | 70,818 | $ | 25,375 | $ | 799,450 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 1,001 | 1,250 | 10,948 | 13,996 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (9,634 | ) | (35,363 | ) | (106,534 | ) | (398,713 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (6,322 | ) | 36,705 | $ | (70,211 | ) | $ | 414,733 | ||||||||||||
| ||||||||||||||||||||
Class Z | ||||||||||||||||||||
Shares sold | 924,199 | 529,910 | $ | 10,185,284 | $ | 5,886,008 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends | 20,636 | 2,243 | 225,857 | 24,944 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (1,064,102 | ) | (95,347 | ) | (11,758,386 | ) | (1,060,030 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase (decrease) | (119,267 | ) | 436,806 | $ | (1,347,245 | ) | $ | 4,850,922 | ||||||||||||
|
70 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
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.
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.
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, and because these investments may be subject to increased economic, political, regulatory or other uncertainties.
AB INTERMEDIATE BOND PORTFOLIO • | 71 |
Notes to Financial Statements
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—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 decline.
72 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
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 six months ended April 30, 2016.
NOTE H
Distributions to Shareholders
The tax character of distributions to be paid for the year ending October 31, 2016 will be determined at the end of the current fiscal year. 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 | $ | 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. |
AB INTERMEDIATE BOND PORTFOLIO • | 73 |
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.
NOTE I
New Accounting Pronouncement
In May 2015, the Financial Accounting Standards Board issued an Accounting Standards Update, ASU 2015-07 (the “ASU”) 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 requirement to make certain disclosures for investments that are eligible to be measured at fair value using the net asset value per share practical expedient but do not utilize that practical expedient. 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
The Government STIF Portfolio, prior to June 1, 2016, was offered as a cash management option to mutual funds and other institutional accounts of the Adviser, and was not available for direct purchase by members of the public. Prior to June 1, 2016, the Government STIF Portfolio paid no investment management fees but did bear its own expenses. As of June 1, 2016, the Government STIF Portfolio, which was renamed “AB Government Money Market Portfolio” (the “Government Money Market Portfolio”), will have a contractual investment management fee rate of .20% and will continue to bear its own expenses. In connection with the investment by the Portfolio in the Government Money Market Portfolio, the Adviser will waive its investment management fee from the Portfolio in an amount equal to Government Money Market Portfolio’s effective management fee.
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 other material events that would require disclosure in the Portfolio’s financial statements through this date.
74 | • AB INTERMEDIATE BOND PORTFOLIO |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.40 | $ 11.04 | $ 10.98 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .13 | .28 | .35 | .26 | .26 | .37 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .14 | (.12 | ) | .23 | (.35 | ) | .41 | # | .07 | |||||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .27 | .16 | .58 | (.09 | ) | .68 | .44 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.23 | ) | (.34 | ) | (.34 | ) | (.31 | ) | (.32 | ) | (.38 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 11.10 | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.40 | $ 11.04 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(c) | 2.45 | % | 1.45 | % | 5.34 | %* | (.81 | )%† | 6.27 | % | 4.11 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $248,664 | $252,965 | $273,962 | $301,764 | $370,672 | $381,577 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | .85 | %^ | .88 | % | .90 | % | .89 | % | .85 | % | .85 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.02 | %^ | 1.06 | % | 1.06 | % | 1.02 | % | .99 | % | 1.00 | % | ||||||||||||
Net investment income(b) | 2.35 | %^ | 2.51 | % | 3.15 | % | 2.32 | % | 2.29 | % | 3.42 | % | ||||||||||||
Portfolio turnover rate** | 47 | % | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 82.
AB INTERMEDIATE BOND PORTFOLIO • | 75 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class B | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.41 | $ 11.05 | $ 10.98 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .09 | .20 | .28 | .18 | .18 | .30 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .14 | (.12 | ) | .22 | (.36 | ) | .42 | # | .08 | |||||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .23 | .08 | .50 | (.18 | ) | .61 | .38 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.19 | ) | (.26 | ) | (.26 | ) | (.23 | ) | (.25 | ) | (.31 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 11.10 | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.41 | $ 11.05 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(c) | 2.07 | % | .72 | % | 4.61 | %* | (1.59 | )%† | 5.56 | % | 3.50 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $1,337 | $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 | % | 1.60 | % | 1.58 | % | 1.55 | % | 1.55 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.87 | %^ | 1.80 | % | 1.78 | % | 1.74 | % | 1.74 | % | 1.75 | % | ||||||||||||
Net investment income(b) | 1.60 | %^ | 1.77 | % | 2.48 | % | 1.59 | % | 1.59 | % | 2.73 | % | ||||||||||||
Portfolio turnover rate** | 47 | % | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 82.
76 | • AB INTERMEDIATE BOND PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 11.04 | $ 11.22 | $ 10.98 | $ 11.38 | $ 11.02 | $ 10.96 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .09 | .20 | .27 | .18 | .18 | .29 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .14 | (.12 | ) | .23 | (.35 | ) | .41 | # | .07 | |||||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .23 | .08 | .50 | (.17 | ) | .60 | .36 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.19 | ) | (.26 | ) | (.26 | ) | (.23 | ) | (.24 | ) | (.30 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 11.08 | $ 11.04 | $ 11.22 | $ 10.98 | $ 11.38 | $ 11.02 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(c) | 2.08 | % | .73 | % | 4.63 | %* | (1.51 | )%† | 5.55 | % | 3.40 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $41,569 | $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 | % | 1.60 | % | 1.59 | % | 1.55 | % | 1.55 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.78 | %^ | 1.78 | % | 1.77 | % | 1.73 | % | 1.70 | % | 1.71 | % | ||||||||||||
Net investment income(b) | 1.61 | %^ | 1.79 | % | 2.46 | % | 1.62 | % | 1.60 | % | 2.72 | % | ||||||||||||
Portfolio turnover rate** | 47 | % | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 82.
AB INTERMEDIATE BOND PORTFOLIO • | 77 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.41 | $ 11.05 | $ 10.99 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .14 | .31 | .39 | .29 | .29 | .40 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .14 | (.12 | ) | .22 | (.36 | ) | .41 | # | .07 | |||||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .28 | .19 | .61 | (.07 | ) | .71 | .47 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.24 | ) | (.37 | ) | (.37 | ) | (.34 | ) | (.35 | ) | (.41 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 11.10 | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.41 | $ 11.05 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(c) | 2.58 | % | 1.73 | % | 5.65 | %* | (.61 | )%† | 6.59 | % | 4.43 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $40,174 | $22,705 | $26,352 | $73,445 | $94,584 | $88,402 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | .60 | %^ | .60 | % | .60 | % | .59 | % | .55 | % | .55 | % | ||||||||||||
Expenses, before waivers/reimbursements | .77 | %^ | .77 | % | .75 | % | .72 | % | .69 | % | .70 | % | ||||||||||||
Net investment income(b) | 2.58 | %^ | 2.78 | % | 3.51 | % | 2.60 | % | 2.59 | % | 3.70 | % | ||||||||||||
Portfolio turnover rate** | 47 | % | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 82.
78 | • AB INTERMEDIATE BOND PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class R | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.40 | $ 11.04 | $ 10.98 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .12 | .26 | .33 | .24 | .23 | .34 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .13 | (.12 | ) | .23 | (.36 | ) | .42 | # | .08 | |||||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .25 | (.14 | ) | .56 | (.12 | ) | .66 | .42 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.21 | ) | (.32 | ) | (.32 | ) | (.28 | ) | (.30 | ) | (.36 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 11.10 | $ 11.06 | $ 11.24 | $ 11.00 | $ 11.40 | $ 11.04 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(c) | 2.33 | % | 1.23 | % | 5.13 | %* | (1.01 | )%† | 6.05 | % | 3.91 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $2,723 | $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 | % | 1.10 | % | 1.09 | % | 1.05 | % | 1.05 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.39 | %^ | 1.38 | % | 1.36 | % | 1.31 | % | 1.29 | % | 1.31 | % | ||||||||||||
Net investment income(b) | 2.11 | %^ | 2.29 | % | 2.94 | % | 2.13 | % | 2.07 | % | 3.16 | % | ||||||||||||
Portfolio turnover rate** | 47 | % | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 82.
AB INTERMEDIATE BOND PORTFOLIO • | 79 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class K | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 11.07 | $ 11.24 | $ 11.01 | $ 11.41 | $ 11.05 | $ 10.99 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .13 | .28 | .35 | .27 | .26 | .38 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .14 | (.10 | ) | .22 | (.36 | ) | .42 | # | .07 | |||||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .27 | .18 | .57 | (.09 | ) | .69 | .45 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.23 | ) | (.35 | ) | (.34 | ) | (.31 | ) | (.33 | ) | (.39 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 11.11 | $ 11.07 | $ 11.24 | $ 11.01 | $ 11.41 | $ 11.05 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(c) | 2.45 | % | 1.57 | % | 5.30 | %* | (.76 | )%† | 6.32 | % | 4.17 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $4,878 | $3,922 | $4,515 | $3,459 | $3,823 | $2,869 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | .85 | %^ | .85 | % | .85 | % | .84 | % | .80 | % | .80 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.07 | %^ | 1.08 | % | 1.03 | % | .93 | % | .99 | % | 1.01 | % | ||||||||||||
Net investment income(b) | 2.34 | %^ | 2.53 | % | 3.17 | % | 2.38 | % | 2.34 | % | 3.49 | % | ||||||||||||
Portfolio turnover rate** | 47 | % | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 82.
80 | • AB INTERMEDIATE BOND PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class I | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 11.07 | $ 11.25 | $ 11.01 | $ 11.42 | $ 11.06 | $ 11.00 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .14 | .31 | .36 | .18 | .29 | .42 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .14 | (.12 | ) | .25 | (.25 | ) | .41 | # | .05 | |||||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | – 0 | – | .01 | # | – 0 | – | ||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .28 | .19 | .61 | (.07 | ) | .71 | .47 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.24 | ) | (.37 | ) | (.37 | ) | (.34 | ) | (.35 | ) | (.41 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 11.11 | $ 11.07 | $ 11.25 | $ 11.01 | $ 11.42 | $ 11.06 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(c) | 2.58 | % | 1.73 | % | 5.65 | %* | (.62 | )%† | 6.58 | % | 4.42 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $443 | $511 | $107 | $14 | $814 | $715 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | .60 | %^ | .60 | % | .60 | % | .56 | % | .55 | % | .55 | % | ||||||||||||
Expenses, before waivers/reimbursements | .74 | %^ | .75 | % | .75 | % | .67 | % | .66 | % | .68 | % | ||||||||||||
Net investment income(b) | 2.59 | %^ | 2.74 | % | 3.22 | % | 2.46 | % | 2.59 | % | 3.76 | % | ||||||||||||
Portfolio turnover rate** | 47 | % | 198 | % | 221 | % | 189 | % | 110 | % | 115 | % |
See footnote summary on page 82.
AB INTERMEDIATE BOND PORTFOLIO • | 81 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class Z | ||||||||||||
Six Months (unaudited) | Year Ended October 31, 2015 | April 28, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 11.08 | $ 11.26 | $ 11.15 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(a)(b) | .14 | .32 | .19 | |||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | .14 | (.13 | ) | .10 | ||||||||
|
| |||||||||||
Net increase in net asset value from operations | .28 | .19 | .29 | |||||||||
|
| |||||||||||
Less: Dividends | ||||||||||||
Dividends from net investment income | (.24 | ) | (.37 | ) | (.18 | ) | ||||||
|
| |||||||||||
Total dividends and distributions | (.24 | ) | (.37 | ) | (.18 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 11.12 | $ 11.08 | $ 11.26 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(c) | 2.57 | % | 1.72 | % | 2.61 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $3,542 | $4,851 | $10 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | .60 | %^ | .60 | % | .60 | %^ | ||||||
Expenses, before waivers/reimbursements | .64 | %^ | .71 | % | .66 | %^ | ||||||
Net investment income(b) | 2.61 | %^ | 2.91 | % | 3.29 | %^ | ||||||
Portfolio turnover rate** | 47 | % | 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.
82 | • AB INTERMEDIATE BOND PORTFOLIO |
Financial Highlights
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 Douglas J. Peebles(2) , Vice President | Greg J. Wilensky(2), Vice President Michael S. Canter(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. |
AB INTERMEDIATE BOND PORTFOLIO • | 83 |
Board of Directors
Information Regarding the Review and Approval of the Portfolio’s Investment Advisory Contract
The disinterested directors (the “directors”) of AB Bond Fund, Inc. (the “Fund”) unanimously approved the continuance of the Fund’s Investment Advisory Contract (the “Advisory Agreement”) with the Adviser in respect of AB Intermediate Bond Portfolio (the “Portfolio”) at a meeting held on November 3-5, 2015.
Prior to approval of the continuance of the Advisory Agreement in respect of the Portfolio, the directors had requested from the Adviser, and received and evaluated, extensive materials. They reviewed the proposed continuance of the Advisory Agreement with the Adviser and with experienced counsel who are independent of the Adviser, who advised on the relevant legal standards. The directors also reviewed an independent evaluation prepared by the Fund’s Senior Officer (who is also the Fund’s Independent Compliance Officer) of the reasonableness of the advisory fee, in which the Senior Officer concluded that the contractual fee for the Portfolio was reasonable. The directors also discussed the proposed continuance in private sessions with counsel and the Fund’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services provided by the Adviser to the Portfolio gained from their experience as directors or trustees of most of the registered investment companies advised by the Adviser, their overall confidence in the Adviser’s integrity and competence they have gained from that experience, the Adviser’s initiative in identifying and raising potential issues with the directors and its responsiveness, frankness and attention to concerns raised by the directors in the past, including the Adviser’s willingness to consider and implement organizational and operational changes designed to improve investment results and the services provided to the AB Funds. The directors noted that they have four regular meetings each year, at each of which they receive presentations from the Adviser on the investment results of the Portfolio and review extensive materials and information presented by the Adviser.
The directors also considered all other factors they believed relevant, including the specific matters discussed below. In their deliberations, the directors did not identify any particular information that was all-important or controlling, and different directors may have attributed different weights to the various factors. The directors determined that the selection of the Adviser to manage the Portfolio and the overall arrangements between the Portfolio and the Adviser, as provided in the Advisory Agreement, including the advisory fee, were fair and reasonable in light of the services performed, expenses incurred and such other matters as the directors considered relevant in the exercise of their business judgment. The material factors and conclusions that formed the basis for the directors’ determinations included the following:
Nature, Extent and Quality of Services Provided
The directors considered the scope and quality of services provided by the Adviser under the Advisory Agreement, including the quality of the investment
84 | • AB INTERMEDIATE BOND PORTFOLIO |
research capabilities of the Adviser and the other resources it has dedicated to performing services for the Portfolio. They noted the professional experience and qualifications of the Portfolio’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Portfolio will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Portfolio by employees of the Adviser or its affiliates. Requests for these reimbursements are made on a quarterly basis and subject to approval by the directors. Reimbursements, to the extent requested and paid, result in a higher rate of total compensation from the Portfolio to the Adviser than the fee rate stated in the Portfolio’s Advisory Agreement. The directors noted that the methodology used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Fund’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Portfolio’s other service providers, also was considered. The directors concluded that, overall, they were satisfied with the nature, extent and quality of services provided to the Portfolio under the Advisory Agreement.
Costs of Services Provided and Profitability
The directors reviewed a schedule of the revenues, expenses and related notes indicating the profitability of the Portfolio to the Adviser for calendar years 2013 and 2014 that had been prepared with an expense allocation methodology arrived at in consultation with an independent consultant retained by the Fund’s Senior Officer. The directors noted the assumptions and methods of allocation used by the Adviser in preparing fund-specific profitability data and understood that there are a number of potentially acceptable allocation methodologies for information of this type. The directors noted that the profitability information reflected all revenues and expenses of the Adviser’s relationship with the Portfolio, including those relating to its subsidiaries that provide transfer agency and distribution services to the Portfolio. The directors recognized that it is difficult to make comparisons of the profitability of the Advisory Agreement with the profitability of advisory contracts for unaffiliated funds because comparative information is not generally publicly available and is affected by numerous factors. The directors focused on the profitability of the Adviser’s relationship with the Portfolio before taxes and distribution expenses. The directors were satisfied that the Adviser’s level of profitability from its relationship with the Portfolio was not unreasonable.
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their relationships with the Portfolio, including, but not limited to, benefits relating to 12b-1 fees and sales charges received by the Fund’s principal underwriter (which is a wholly owned subsidiary of the Adviser) in respect of certain classes of the Portfolio’s shares and transfer agency fees paid by the Portfolio to a wholly owned subsidiary of the Adviser. The directors recognized that the
AB INTERMEDIATE BOND PORTFOLIO • | 85 |
Adviser’s profitability would be somewhat lower without these benefits. The directors understood that the Adviser also might derive reputational and other benefits from its association with the Portfolio.
Investment Results
In addition to the information reviewed by the directors in connection with the meeting, the directors receive detailed performance information for the Portfolio at each regular Board meeting during the year. At the November 2015 meeting, the directors reviewed information prepared by Broadridge showing the performance of the Class A Shares of the Portfolio as compared with that of a group of similar funds selected by Broadridge (the “Performance Group”) and as compared with that of a broad array of funds selected by Broadridge (the “Performance Universe”), and information prepared by the Adviser showing performance of the Class A Shares as compared with the Barclays U.S. Aggregate Bond Index (the “Index”), in each case for the 1-, 3-, 5- and 10-year periods ended July 31, 2015 and (in the case of comparisons with the Index) the period since inception (July 1999 inception). The directors noted that the Portfolio was in the 1st quintile of the Performance Group and 2nd quintile of the Performance Universe for the 1- and 5-year periods, in the 1st quintile of the Performance Group and the Performance Universe for the 3-year period, and in the 3rd quintile of the Performance Group and 2nd quintile of the Performance Universe for the 10-year period. It outperformed the Index in the 3- and 5-year periods and lagged it in all other periods. Based on their review, the directors concluded that the Portfolio’s performance was satisfactory.
Advisory Fees and Other Expenses
The directors considered the advisory fee rate paid by the Portfolio to the Adviser and information prepared by Broadridge concerning advisory fee rates paid by other funds in the same Broadridge category as the Portfolio at a common asset level. The directors recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The directors noted that, at the Portfolio’s current size, its contractual effective advisory fee rate of 45 basis points was lower than the Expense Group median. The directors noted that the administrative expense reimbursement was 1.5 basis points in the Portfolio’s latest fiscal year, and that as a result the rate of total compensation received by the Adviser pursuant to the Advisory Agreement was more than the Expense Group median.
The directors also considered the Adviser’s fee schedule for non-fund clients pursuing a similar investment style. For this purpose, they reviewed the relevant advisory fee information from the Adviser’s Form ADV and the evaluation from the Fund’s Senior Officer. The directors noted that the institutional fee schedule started at a rate higher than the Portfolio’s fee schedule and had breakpoints at lower asset levels. The application of the institutional fee schedule to the Portfolio’s net assets would result in a fee rate lower than the rate at the same asset
86 | • AB INTERMEDIATE BOND PORTFOLIO |
level provided in the Portfolio’s Advisory Agreement. The directors noted that the Adviser may, in some cases, agree to fee rates with large institutional clients that are lower than those reviewed by the directors and that they had previously discussed with the Adviser its policies in respect of such arrangements. The directors also reviewed information that indicated that the Portfolio’s fee rate is higher than the sub-advisory fee rate earned by the Adviser for sub-advising a registered investment company with a similar investment style. The directors also noted that the Adviser advises a portfolio of another AB Fund with a substantially similar investment style for the same fee schedule as the Portfolio.
The Adviser reviewed with the directors the significantly greater scope of the services it provides to the Portfolio relative to institutional clients and sub-advised funds. The Adviser also noted that because mutual funds are constantly issuing and redeeming shares, they are more difficult to manage than an institutional account, where the assets tend to be relatively stable. In light of the substantial differences in services rendered by the Adviser to institutional clients as compared to funds such as the Portfolio, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors also considered the total expense ratio of the Class A shares of the Portfolio in comparison to the fees and expenses of funds within two comparison groups created by Broadridge: an Expense Group and an Expense Universe. Broadridge described an Expense Group as a representative sample of funds similar to the Portfolio and an Expense Universe as a broader group than the Expense Group, consisting of all funds in the investment classification/objective with a similar load type as the Portfolio. The Class A expense ratio of the Portfolio was based on the Portfolio’s latest fiscal year and the information included the pro forma expense ratio to reflect a reduction in the 12b-1 fee effective June 1, 2015. The pro forma expense ratio of the Portfolio reflected fee waivers and/or expense reimbursements as a result of an undertaking by the Adviser. The directors noted that it was likely that the expense ratios of some of the other funds in the Portfolio’s Broadridge category also were lowered by waivers or reimbursements by those funds’ investment advisers, which in some cases might be voluntary or temporary. The directors view the expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Portfolio by others.
The directors noted that the Portfolio’s pro forma total expense ratio, giving effect to a cap by the Adviser, was lower than the Expense Group median and close to the Expense Universe median. The directors concluded that the Portfolio’s pro forma expense ratio was satisfactory.
Economies of Scale
The directors noted that the advisory fee schedule for the Portfolio contains breakpoints that reduce the fee rates on assets above specified levels. The directors took
AB INTERMEDIATE BOND PORTFOLIO • | 87 |
into consideration prior presentations by an independent consultant on economies of scale in the mutual fund industry and for the AB Funds, and by the Adviser concerning certain of its views on economies of scale. The directors also had requested and received from the Adviser certain updates on economies of scale at the May 2015 meetings. The directors believe that economies of scale may be realized (if at all) by the Adviser across a variety of products and services, and not only in respect of a single fund. The directors noted that there is no established methodology for setting breakpoints that give effect to fund-specific services provided by a fund’s adviser and to the economies of scale that an adviser may realize in its overall mutual fund business or those components of it which directly or indirectly affect a fund’s operations. The directors observed that in the mutual fund industry as a whole, as well as among funds similar to the Portfolio, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. The directors also noted that the advisory agreements for many funds do not have breakpoints at all. Having taken these factors into account, the directors concluded that the Portfolio’s shareholders would benefit from a sharing of economies of scale in the event the Portfolio’s net assets exceed a breakpoint in the future.
88 | • AB INTERMEDIATE BOND PORTFOLIO |
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
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. |
AB INTERMEDIATE BOND PORTFOLIO • | 89 |
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 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.
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
3 | Jones v. Harris at 1427. |
90 | • AB INTERMEDIATE BOND 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: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 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
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%. |
AB INTERMEDIATE BOND PORTFOLIO • | 91 |
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% |
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
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. |
92 | • AB INTERMEDIATE BOND PORTFOLIO |
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. |
AB INTERMEDIATE BOND PORTFOLIO • | 93 |
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 Fund Effective Fee | 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. |
94 | • AB INTERMEDIATE BOND PORTFOLIO |
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 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. |
AB INTERMEDIATE BOND PORTFOLIO • | 95 |
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).
96 | • AB INTERMEDIATE BOND PORTFOLIO |
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. |
AB INTERMEDIATE BOND PORTFOLIO • | 97 |
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 Return (%) | PG Median (%) | PU Median (%) | 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. |
98 | • AB INTERMEDIATE BOND PORTFOLIO |
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. |
AB INTERMEDIATE BOND PORTFOLIO • | 99 |
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
International Strategic Core 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
Income Fund
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 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 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.
100 | • AB INTERMEDIATE BOND PORTFOLIO |
AB Family of Funds
AB INTERMEDIATE BOND PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
IB-0152-0416
APR 04.30.16
SEMI-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.
June 24, 2016
Semi-Annual Report
This report provides management’s discussion of fund performance for AB Municipal Bond Inflation Strategy (the “Strategy”) for the semi-annual period ended April 30, 2016.
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 agencies 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 agencies (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 swaps. The Strategy may use other inflation-indexed instruments. Payments to the Strategy pursuant to swaps 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 contracts, forwards and swaps.
The Strategy may utilize leverage for investment purposes through the use of tender option bond transactions (“TOBs”). The Adviser will consider the impact of TOBs, swaps 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 6 shows the Strategy’s performance for the six- and 12-month periods ended April 30, 2016, compared to its benchmark, the Barclays 1-10 Year Treasury Inflation-Protected Securities (“TIPS”) Index and to the Lipper Intermediate
AB MUNICIPAL BOND INFLATION STRATEGY • | 1 |
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 investment policies and sales management fees and fund expenses.
All share classes of the Strategy underperformed the benchmark and the Lipper Average for the six-month period, before sales charges. For the 12-month period, all share classes outperformed the benchmark, but underperformed the Lipper Average, 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, underperformance relative to the benchmark was driven by the Strategy’s lower interest-rate risk. The Strategy’s overweight in credit (municipal bonds rated A or lower) contributed to performance as credit spreads narrowed. Over this period, the Strategy’s use of derivatives including inflation (“CPI”) swaps for hedging purposes detracted from relative performance as CPI swaps underperformed TIPS; the Strategy’s use of interest rate swaps for hedging purposes had no material impact on absolute performance.
Over the 12-month period, the Strategy’s municipal bond exposure added to performance as municipal bonds outperformed taxable bonds; the Strategy’s overweight in credit contributed to performance. During this period, CPI swaps benefited relative perform-
ance as CPI swaps outperformed TIPS. As with the six-month period, interest rate swaps were used for hedging purposes and had no material impact on performance.
Relative to the Lipper Average, the Strategy underperformed over both periods. During the 12-month period, the two primary drivers of underperformance were less interest-rate risk than the Lipper Average and the underperformance of inflation-hedged strategies versus nominal bond strategies, as inflation expectations declined. Over the six-month period, the Strategy’s inflation hedges modestly added to performance, while less interest-rate risk detracted from performance.
Market Review and Investment Strategy
Intermediate- and long-maturity bonds had strong returns over both periods as falling global commodity prices and slowing economic growth drove yields lower. Shorter-maturity bonds underperformed as the US Federal Reserve increased the Federal Funds rate above its zero target to 0.25% for the first time since 2008. Across fixed-income sectors, municipals had strong performance due primarily to a combination of continued investor demand and limited supply. The total volume of outstanding municipal bonds has declined since 2010, unlike the corporate and Treasury markets, which have seen an increase in issuance. In the opinion of the Fund’s Senior Investment Management Team (the “Team”), municipal credit continued to do well, as economic growth and tax receipts are correlated, which has caused tax revenues for state and local
2 | • AB MUNICIPAL BOND INFLATION STRATEGY |
governments to hit all-time highs. State and local governments have kept payrolls and expenditures in check as government employment is approximately 500,000 below the peak during the financial crisis. The Team continues to overweight credit and underweight the longest maturity bonds in the Strategy.
The Strategy 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 April 30, 2016, 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 were 7.68% and 0.00%, respectively.
On June 23, 2016, the UK voted to leave the European Union (“EU”) in a popular referendum. At this moment in time, the UK remains a member of the EU and the rules and regulations remain unchanged, as do all the protections in place. Exactly how the UK’s role in the EU will change will become clear over time. The Adviser continues to monitor the heightened market volatility.
AB MUNICIPAL BOND INFLATION STRATEGY • | 3 |
DISCLOSURES AND RISKS
Benchmark Disclosure
The Barclays 1-10 Year TIPS Index is unmanaged and 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.
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 is vulnerable to events adversely affecting that state, including economic, political and regulatory occurrences, court decisions, terrorism and catastrophic natural disasters. 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 Strategy may be subject to a heightened risk of rising interest rates as the current period of historically low rates is beginning to end and rates have begun rising. 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.
(Disclosures, Risks and Note about Historical Performance continued on next page)
4 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
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.
Leverage Risk: To the extent the Strategy uses leveraging techniques, such as TOBs, 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 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.
AB MUNICIPAL BOND INFLATION STRATEGY • | 5 |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE STRATEGY VS. ITS BENCHMARK PERIODS ENDED APRIL 30, 2016 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB Municipal Bond Inflation Strategy | ||||||||||
Class 1* | 2.87% | 2.65% | ||||||||
| ||||||||||
Class 2* | 2.82% | 2.65% | ||||||||
| ||||||||||
Class A | 2.77% | 2.44% | ||||||||
| ||||||||||
Class C | 2.38% | 1.66% | ||||||||
| ||||||||||
Advisor Class Shares† | 2.89% | 2.59% | ||||||||
| ||||||||||
Barclays 1-10 Year TIPS Index | 3.12% | 1.23% | ||||||||
| ||||||||||
Lipper Intermediate Municipal Debt Funds Average | 2.92% | 3.92% | ||||||||
| ||||||||||
* 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 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 Strategy. | ||||||||||
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
(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 APRIL 30, 2016 (unaudited) | ||||||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | SEC Yields* | ||||||||||
Class 1 Shares† | 0.87 | % | ||||||||||
1 Year | 2.65 | % | 2.65 | % | ||||||||
5 Years | 1.76 | % | 1.76 | % | ||||||||
Since Inception‡ | 2.14 | % | 2.14 | % | ||||||||
Class 2 Shares† | 0.97 | % | ||||||||||
1 Year | 2.65 | % | 2.65 | % | ||||||||
5 Years | 1.84 | % | 1.84 | % | ||||||||
Since Inception‡ | 2.24 | % | 2.24 | % | ||||||||
Class A Shares | 0.68 | % | ||||||||||
1 Year | 2.44 | % | -0.66 | % | ||||||||
5 Years | 1.56 | % | 0.93 | % | ||||||||
Since Inception‡ | 1.96 | % | 1.46 | % | ||||||||
Class C Shares | -0.03 | % | ||||||||||
1 Year | 1.66 | % | 0.66 | % | ||||||||
5 Years | 0.84 | % | 0.84 | % | ||||||||
Since Inception‡ | 1.24 | % | 1.24 | % | ||||||||
Advisor Class Shares^ | 0.95 | % | ||||||||||
1 Year | 2.59 | % | 2.59 | % | ||||||||
5 Years | 1.85 | % | 1.85 | % | ||||||||
Since Inception‡ | 2.24 | % | 2.24 | % |
The Strategy’s current prospectus fee table shows the Strategy’s total annual operating expense ratios as 0.67%, 0.57%, 0.87%, 1.61% and 0.61% 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, 2017 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 April 30, 2016. |
† | 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. |
^ | 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 Strategy. |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
(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 MARCH 31, 2016 (unaudited) | ||||
SEC Returns (reflects applicable sales charges) | ||||
Class 1 Shares* | ||||
1 Year | 2.02 | % | ||
5 Years | 1.95 | % | ||
Since Inception† | 2.04 | % | ||
Class 2 Shares* | ||||
1 Year | 2.13 | % | ||
5 Years | 2.04 | % | ||
Since Inception† | 2.14 | % | ||
Class A Shares | ||||
1 Year | -1.27 | % | ||
5 Years | 1.14 | % | ||
Since Inception† | 1.35 | % | ||
Class C Shares | ||||
1 Year | 0.05 | % | ||
5 Years | 1.02 | % | ||
Since Inception† | 1.13 | % | ||
Advisor Class Shares‡ | ||||
1 Year | 2.17 | % | ||
5 Years | 2.05 | % | ||
Since Inception† | 2.15 | % |
* | 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. |
‡ | 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 Strategy. |
See Disclosures, Risks and Note about Historical Performance on pages 4-5.
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 November 1, 2015 | Ending Account Value April 30, 2016 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,027.70 | $ | 3.78 | 0.75 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.13 | $ | 3.77 | 0.75 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,023.80 | $ | 7.55 | 1.50 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,017.40 | $ | 7.52 | 1.50 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,028.90 | $ | 2.52 | 0.50 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.38 | $ | 2.51 | 0.50 | % | ||||||||
Class 1 | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,028.70 | $ | 3.03 | 0.60 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.88 | $ | 3.02 | 0.60 | % | ||||||||
Class 2 | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,028.20 | $ | 2.52 | 0.50 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.38 | $ | 2.51 | 0.50 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 9 |
Fund Expenses
PORTFOLIO SUMMARY
April 30, 2016 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $727.0
* | All data are as of April 30, 2016. 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-creditworthy 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
April 30, 2016 (unaudited)
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
MUNICIPAL OBLIGATIONS – 101.6% | ||||||||
Long-Term Municipal Bonds – 101.6% | ||||||||
Alabama – 1.3% | ||||||||
Alabama Special Care Facilities | $ | 3,905 | $ | 4,651,245 | ||||
County of Jefferson AL Sewer Revenue | 1,825 | 1,956,199 | ||||||
Infirmary Health System Special Care Facilities Financing Authority of Mobile | 2,110 | 2,560,612 | ||||||
|
| |||||||
9,168,056 | ||||||||
|
| |||||||
Alaska – 0.1% | ||||||||
Alaska Industrial Development & Export Authority | 400 | 415,544 | ||||||
|
| |||||||
Arizona – 2.7% | ||||||||
Arizona State University COP | 8,345 | 9,861,526 | ||||||
City of Phoenix Civic Improvement Corp. | 3,330 | 3,953,709 | ||||||
County of Pima AZ Sewer System Revenue | 1,765 | 2,044,788 | ||||||
Salt River Project Agricultural Improvement & Power District | 3,140 | 3,762,819 | ||||||
|
| |||||||
19,622,842 | ||||||||
|
| |||||||
Arkansas – 0.0% | ||||||||
City of Fort Smith AR Sales & Use Tax Revenue | 25 | 25,067 | ||||||
|
| |||||||
California – 3.2% | ||||||||
San Francisco City & County Airport Comm-San Francisco International Airport | 450 | 505,760 |
AB MUNICIPAL BOND INFLATION STRATEGY • | 11 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
NATL Series 2006-32F | $ | 290 | $ | 315,871 | ||||
State of California | 275 | 280,110 | ||||||
Series 2011 | 5,000 | 5,862,750 | ||||||
Series 2012 | 9,305 | 10,885,082 | ||||||
Series 2014 | 4,250 | 5,306,826 | ||||||
|
| |||||||
23,156,399 | ||||||||
|
| |||||||
Colorado – 4.2% | ||||||||
City & County of Denver CO Airport System Revenue | 375 | 436,931 | ||||||
Series 2012A | 10,395 | 12,128,990 | ||||||
5.00%, 11/15/25 | 3,000 | 3,524,310 | ||||||
Denver City & County School District No. 1 | 4,730 | 5,934,258 | ||||||
Denver Urban Renewal Authority | 5,655 | 6,433,584 | ||||||
Plaza Metropolitan District No. 1 | 1,310 | 1,417,119 | ||||||
Regional Transportation District | 440 | 490,516 | ||||||
|
| |||||||
30,365,708 | ||||||||
|
| |||||||
Connecticut – 1.0% | ||||||||
State of Connecticut | 1,750 | 1,751,050 | ||||||
State of Connecticut | 4,360 | 5,397,375 | ||||||
|
| |||||||
7,148,425 | ||||||||
|
| |||||||
Florida – 12.4% | ||||||||
Citizens Property Insurance Corp. | 315 | 316,143 |
12 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Series 2012A | $ | 7,315 | $ | 8,763,297 | ||||
Series 2012A-1 | 3,165 | 3,176,489 | ||||||
City of Jacksonville FL | 1,720 | 1,996,593 | ||||||
City of Jacksonville FL | 10,190 | 12,285,931 | ||||||
City of Tampa FL Water & Wastewater System Revenue | 1,565 | 1,864,651 | ||||||
County of Miami-Dade FL | 18,500 | 22,653,862 | ||||||
County of Miami-Dade FL Spl Tax | 1,500 | 1,838,100 | ||||||
Florida Department of Environmental Protection | 3,775 | 4,380,095 | ||||||
Series 2013A | 1,765 | 1,775,219 | ||||||
5.00%, 7/01/18-7/01/19 | 3,905 | 4,330,118 | ||||||
Florida Municipal Power Agency | 2,890 | 3,390,548 | ||||||
Series 2015B | 1,500 | 1,842,000 | ||||||
Florida State Board of Education | 16,440 | 17,210,214 | ||||||
Series 2015B | 1,725 | 2,056,165 | ||||||
Martin County Industrial Development Authority | 1,900 | 1,939,520 | ||||||
State of Florida Lottery Revenue | 550 | 554,053 | ||||||
|
| |||||||
90,372,998 | ||||||||
|
|
AB MUNICIPAL BOND INFLATION STRATEGY • | 13 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Georgia – 1.0% | ||||||||
Cherokee County Board of Education | $ | 1,000 | $ | 1,165,240 | ||||
City of Atlanta Department of Aviation | 2,500 | 2,676,050 | ||||||
Municipal Electric Authority of Georgia | 3,045 | 3,563,137 | ||||||
|
| |||||||
7,404,427 | ||||||||
|
| |||||||
Illinois – 3.9% | ||||||||
Chicago O’Hare International Airport | 1,930 | 1,983,480 | ||||||
Series 2015B | 5,000 | 5,997,750 | ||||||
Chicago O’Hare International Airport | 2,500 | 2,919,200 | ||||||
5.50%, 1/01/25 | 2,250 | 2,637,472 | ||||||
Springfield Metropolitan Sanitation District | 2,170 | 2,461,236 | ||||||
State of Illinois | 1,040 | 1,131,614 | ||||||
Series 2010 | 500 | 528,040 | ||||||
Series 2013A | 4,030 | 4,439,166 | ||||||
Series 2014 | 4,180 | 4,525,895 | ||||||
State of Illinois | 1,450 | 1,518,049 | ||||||
|
| |||||||
28,141,902 | ||||||||
|
| |||||||
Indiana – 0.8% | ||||||||
Indiana Municipal Power Agency | 4,965 | 5,735,953 | ||||||
|
|
14 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Kentucky – 1.2% | ||||||||
Kentucky Municipal Power Agency | $ | 4,875 | $ | 5,789,558 | ||||
Kentucky Turnpike Authority | 2,275 | 2,715,076 | ||||||
|
| |||||||
8,504,634 | ||||||||
|
| |||||||
Louisiana – 1.5% | ||||||||
State of Louisiana Gasoline & Fuels Tax Revenue | 9,085 | 10,870,021 | ||||||
|
| |||||||
Maryland – 6.0% | ||||||||
State of Maryland | 10,165 | 11,895,490 | ||||||
5.00%, 8/01/21(a) | 26,600 | 31,959,634 | ||||||
|
| |||||||
43,855,124 | ||||||||
|
| |||||||
Massachusetts – 4.6% | ||||||||
Commonwealth of Massachusetts | 9,575 | 9,794,651 | ||||||
NATL Series 2000E | 4,525 | 4,072,215 | ||||||
Commonwealth of Massachusetts | 3,000 | 3,167,550 | ||||||
Massachusetts Bay Transportation Authority | 3,330 | 4,019,243 | ||||||
Massachusetts Clean Water Trust (The) | 3,240 | 3,471,595 | ||||||
Massachusetts School Building Authority | 2,475 | 3,022,173 | ||||||
Metropolitan Boston Transit Parking Corp. | 5,025 | 5,950,771 | ||||||
|
| |||||||
33,498,198 | ||||||||
|
|
AB MUNICIPAL BOND INFLATION STRATEGY • | 15 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Michigan – 2.4% | ||||||||
City of Detroit MI Sewage Disposal System Revenue | $ | 3,750 | $ | 4,346,550 | ||||
Michigan Finance Authority | 10,545 | 12,870,805 | ||||||
|
| |||||||
17,217,355 | ||||||||
|
| |||||||
Minnesota – 1.2% | ||||||||
Minnesota Higher Education Facilities Authority | 1,295 | 1,453,767 | ||||||
State of Minnesota | 6,715 | 7,357,626 | ||||||
|
| |||||||
8,811,393 | ||||||||
|
| |||||||
Mississippi – 0.4% | ||||||||
Mississippi Development Bank | 1,500 | 1,661,175 | ||||||
Series 2013A | 1,000 | 1,107,450 | ||||||
|
| |||||||
2,768,625 | ||||||||
|
| |||||||
Missouri – 0.2% | ||||||||
City of Springfield MO Public Utility Revenue | 1,390 | 1,484,812 | ||||||
|
| |||||||
Nevada – 1.5% | ||||||||
City of Reno NV | 1,000 | 1,108,290 | ||||||
Series 2013B | 2,210 | 2,457,100 | ||||||
County of Clark Department of Aviation | 775 | 884,720 | ||||||
Las Vegas Valley Water District | 1,500 | 1,732,485 | ||||||
Series 2015B | 4,250 | 4,973,010 | ||||||
|
| |||||||
11,155,605 | ||||||||
|
|
16 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
New Jersey – 3.3% | ||||||||
Morris-Union Jointure Commission COP | $ | 2,340 | $ | 2,421,198 | ||||
New Jersey Economic Development Authority | 460 | 491,220 | ||||||
New Jersey Economic Development Authority | 20 | 21,122 | ||||||
New Jersey Transportation Trust Fund Authority (New Jersey Transportation Trust Fund Authority State Lease) | 10,000 | 10,963,100 | ||||||
New Jersey Turnpike Authority | 1,800 | 2,201,580 | ||||||
Series 2014A | 4,785 | 5,860,524 | ||||||
Series 2014C | 1,590 | 1,944,729 | ||||||
|
| |||||||
23,903,473 | ||||||||
|
| |||||||
New York – 18.6% | ||||||||
City of New York NY | 4,250 | 5,041,860 | ||||||
Series 2014J | 6,100 | 7,263,819 | ||||||
AGM Series 2005K | 1,700 | 1,705,185 | ||||||
Metropolitan Transportation Authority | 9,065 | 10,992,691 | ||||||
Series 2012F | 3,635 | 4,400,967 | ||||||
Series 2013A | 2,300 | 2,795,857 | ||||||
Series 2013E | 8,510 | 10,520,998 | ||||||
New York City Industrial Development Agency | 4,135 | 4,141,823 |
AB MUNICIPAL BOND INFLATION STRATEGY • | 17 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
New York City Municipal Water Finance Authority | $ | 3,875 | $ | 4,592,650 | ||||
New York City Transitional Finance Authority Future Tax Secured Revenue | 6,830 | 8,345,987 | ||||||
New York State Dormitory Authority | 3,000 | 3,538,560 | ||||||
Series 2012A | 14,610 | 17,973,076 | ||||||
Series 2012B | 7,900 | 9,094,638 | ||||||
Series 2014A | 6,565 | 8,041,009 | ||||||
New York State Energy Research & Development Authority | 3,500 | 3,129,427 | ||||||
New York State Environmental Facilities Corp. | 3,000 | 3,571,980 | ||||||
New York State Thruway Authority | 17,025 | 20,180,073 | ||||||
Triborough Bridge & Tunnel Authority | 4,360 | 4,981,431 | ||||||
Series 2013B | 4,100 | 4,822,666 | ||||||
|
| |||||||
135,134,697 | ||||||||
|
| |||||||
North Carolina – 2.5% | ||||||||
North Carolina Eastern Municipal Power Agency | 6,700 | 7,906,670 | ||||||
State of North Carolina | 2,330 | 2,330,000 | ||||||
State of North Carolina | 6,710 | 8,239,545 | ||||||
|
| |||||||
18,476,215 | ||||||||
|
|
18 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Ohio – 0.5% | ||||||||
City of Cleveland OH Airport System Revenue | $ | 2,585 | $ | 3,002,363 | ||||
City of Cleveland OH COP | 700 | 742,861 | ||||||
|
| |||||||
3,745,224 | ||||||||
|
| |||||||
Oregon – 1.6% | ||||||||
Deschutes County Administrative School District No. 1 Bend-La Pine | 5,180 | 6,017,554 | ||||||
Tri-County Metropolitan Transportation District of Oregon | 4,605 | 5,449,741 | ||||||
|
| |||||||
11,467,295 | ||||||||
|
| |||||||
Pennsylvania – 5.3% | ||||||||
Allegheny County Sanitary Authority | 2,250 | 2,513,857 | ||||||
City of Philadelphia PA Water & Wastewater Revenue | 550 | 596,866 | ||||||
Commonwealth of Pennsylvania | 5,000 | 5,244,000 | ||||||
Montgomery County Industrial Development Authority/PA | 475 | 536,422 | ||||||
Moon Industrial Development Authority | 2,060 | 2,158,015 | ||||||
Pennsylvania Economic Development Financing Authority | 3,085 | 3,424,227 | ||||||
Series 2012B | 7,550 | 8,079,028 |
AB MUNICIPAL BOND INFLATION STRATEGY • | 19 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Pennsylvania Economic Development Financing Authority | $ | 3,055 | $ | 3,196,233 | ||||
Pennsylvania Industrial Development Authority | 1,840 | 1,853,009 | ||||||
5.00%, 7/01/16 | 3,160 | 3,182,183 | ||||||
School District of Philadelphia (The) | 1,800 | 1,979,928 | ||||||
State Public School Building Authority | 5,150 | 5,643,060 | ||||||
|
| |||||||
38,406,828 | ||||||||
|
| |||||||
Puerto Rico – 0.5% | ||||||||
Puerto Rico Electric Power Authority | 3,400 | 3,513,866 | ||||||
|
| |||||||
South Carolina – 0.4% | ||||||||
Renewable Water Resources | 2,570 | 3,062,309 | ||||||
|
| |||||||
Tennessee – 0.4% | ||||||||
Metropolitan Government of Nashville & Davidson County TN | 2,385 | 2,893,005 | ||||||
|
| |||||||
Texas – 7.1% | ||||||||
Austin Community College District Public Facility Corp. | 1,000 | 1,122,140 | ||||||
Birdville Independent School District | 3,825 | 4,624,808 | ||||||
Central Texas Regional Mobility Authority | 2,085 | 2,364,557 | ||||||
City of Corpus Christi TX Utility System Revenue | 5,675 | 6,692,414 | ||||||
City of Garland TX | 500 | 571,465 |
20 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
City of Houston TX Airport System Revenue | $ | 2,105 | $ | 2,347,286 | ||||
City of Houston TX Combined Utility System Revenue | 2,735 | 3,246,008 | ||||||
City of Lubbock TX | 1,740 | 1,929,851 | ||||||
Conroe Independent School District | 6,240 | 7,137,118 | ||||||
Harris County-Houston Sports Authority | 4,220 | 4,981,415 | ||||||
North Texas Tollway Authority | 3,625 | 4,359,316 | ||||||
Rockwall Independent School District | 3,280 | 3,653,231 | ||||||
San Antonio Independent School District/TX | 1,710 | 2,002,307 | ||||||
Spring Branch Independent School District | 3,485 | 4,100,625 | ||||||
Tarrant County Cultural Education Facilities Finance Corp. | 900 | 949,689 | ||||||
University of Texas System (The) | 1,070 | 1,227,953 | ||||||
|
| |||||||
51,310,183 | ||||||||
|
| |||||||
Virginia – 0.9% | ||||||||
Fairfax County Economic Development Authority | 2,000 | 2,310,020 | ||||||
5.00%, 4/01/26 (Pre-refunded/ETM) | 4,000 | 4,620,040 | ||||||
|
| |||||||
6,930,060 | ||||||||
|
| |||||||
Washington – 8.9% | ||||||||
Central Puget Sound Regional Transit Authority | 7,815 | 9,400,379 |
AB MUNICIPAL BOND INFLATION STRATEGY • | 21 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Chelan County Public Utility District No. 1 | $ | 3,305 | $ | 3,938,866 | ||||
City of Seattle WA | 9,770 | 11,004,342 | ||||||
City of Seattle WA Municipal Light & Power Revenue | 2,070 | 2,243,155 | ||||||
City of Tacoma WA Electric System Revenue | 4,000 | 4,519,365 | ||||||
Energy Northwest | 680 | 742,057 | ||||||
Series 2012A | 4,200 | 4,739,196 | ||||||
King County School District No. 414 Lake Washington | 3,735 | 3,831,139 | ||||||
Port of Seattle WA | 4,820 | 5,815,523 | ||||||
State of Washington | 710 | 810,657 | ||||||
Series 2015R | 13,325 | 16,753,522 | ||||||
Washington State Housing Finance Commission | 1,250 | 1,264,962 | ||||||
|
| |||||||
65,063,163 | ||||||||
|
| |||||||
Wisconsin – 2.0% | ||||||||
Wisconsin Department of Transportation | 12,000 | 14,833,815 | ||||||
|
| |||||||
Total Municipal Obligations | 738,463,221 | |||||||
|
| |||||||
CORPORATES – INVESTMENT GRADE – 3.3% | ||||||||
Financial Institutions – 3.3% | ||||||||
Banking – 3.3% | ||||||||
Bank of America Corp. | 2,585 | 2,619,691 |
22 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Capital One Bank USA NA | $ | 8,300 | $ | 8,293,675 | ||||
JPMorgan Chase & Co. | 8,885 | 8,911,691 | ||||||
Morgan Stanley | 4,030 | 4,147,394 | ||||||
|
| |||||||
Total Corporates – Investment Grade | 23,972,451 | |||||||
|
| |||||||
GOVERNMENTS – TREASURIES – 1.8% | ||||||||
United States – 1.8% | ||||||||
U.S. Treasury Notes | 6,200 | 6,195,641 | ||||||
1.625%, 11/30/20(a) | 6,632 | 6,747,543 | ||||||
|
| |||||||
Total Governments – Treasuries | 12,943,184 | |||||||
|
| |||||||
SHORT-TERM INVESTMENTS – 0.1% | ||||||||
U.S. Treasury Bills – 0.1% | ||||||||
U.S. Treasury Bill | 1,200 | 1,199,343 | ||||||
|
| |||||||
Total Investments – 106.8% | 776,578,199 | |||||||
Other assets less liabilities – (6.8)% | (49,562,026 | ) | ||||||
|
| |||||||
Net Assets – 100.0% | $ | 727,016,173 | ||||||
|
|
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# | $ | 52,686 | |||||||||
Barclays Bank PLC | 6,000 | 2/26/17 | 2.370% | CPI# | (393,458 | ) | ||||||||||
Barclays Bank PLC | 3,000 | 7/19/17 | 2.038% | CPI# | (95,191 | ) | ||||||||||
Barclays Bank PLC | 37,000 | 8/07/17 | 2.124% | CPI# | (1,366,610 | ) | ||||||||||
Barclays Bank PLC | 5,500 | 6/02/19 | 2.580% | CPI# | (546,071 | ) | ||||||||||
Barclays Bank PLC | 4,000 | 6/15/20 | 2.480% | CPI# | (389,759 | ) | ||||||||||
Barclays Bank PLC | 35,000 | 7/02/20 | 2.256% | CPI# | (2,169,238 | ) | ||||||||||
Barclays Bank PLC | 1,500 | 8/04/20 | 2.308% | CPI# | (108,147 | ) | ||||||||||
Barclays Bank PLC | 2,000 | 11/10/20 | 2.500% | CPI# | (182,459 | ) | ||||||||||
Barclays Bank PLC | 1,000 | 5/04/21 | 2.845% | CPI# | (148,007 | ) | ||||||||||
Barclays Bank PLC | 3,000 | 5/12/21 | 2.815% | CPI# | (435,276 | ) | ||||||||||
Barclays Bank PLC | 14,000 | 4/03/22 | 2.663% | CPI# | (1,862,568 | ) |
AB MUNICIPAL BOND INFLATION STRATEGY • | 23 |
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) | |||||||||||
Barclays Bank PLC | $ | 16,700 | 10/05/22 | 2.765% | CPI# | $ | (2,232,993 | ) | ||||||||
Barclays Bank PLC | 25,000 | 8/07/24 | 2.573% | CPI# | (2,657,196 | ) | ||||||||||
Barclays Bank PLC | 19,000 | 5/05/25 | 2.125% | CPI# | (636,207 | ) | ||||||||||
Barclays Bank PLC | 5,400 | 3/06/27 | 2.695% | CPI# | (900,226 | ) | ||||||||||
Citibank, NA | 10,000 | 5/04/16 | 2.710% | CPI# | (722,039 | ) | ||||||||||
Citibank, NA | 14,000 | 5/30/17 | 2.125% | CPI# | (731,119 | ) | ||||||||||
Citibank, NA | 11,500 | 6/21/17 | 2.153% | CPI# | (609,315 | ) | ||||||||||
Citibank, NA | 22,000 | 7/02/18 | 2.084% | CPI# | (912,548 | ) | ||||||||||
Citibank, NA | 15,600 | 12/14/20 | 1.548% | CPI# | 133,394 | |||||||||||
Citibank, NA | 9,000 | 6/29/22 | 2.398% | CPI# | (917,363 | ) | ||||||||||
Citibank, NA | 5,400 | 7/19/22 | 2.400% | CPI# | (535,746 | ) | ||||||||||
Citibank, NA | 4,000 | 8/10/22 | 2.550% | CPI# | (453,604 | ) | ||||||||||
Citibank, NA | 15,500 | 12/07/22 | 2.748% | CPI# | (2,142,157 | ) | ||||||||||
Citibank, NA | 47,000 | 5/24/23 | 2.533% | CPI# | (5,297,577 | ) | ||||||||||
Citibank, NA | 30,000 | 10/29/23 | 2.524% | CPI# | (3,059,485 | ) | ||||||||||
Citibank, NA | 15,800 | 2/08/28 | 2.940% | CPI# | (3,217,301 | ) | ||||||||||
Deutsche Bank AG | 7,600 | 7/15/20 | 1.265% | CPI# | 204,451 | |||||||||||
Deutsche Bank AG | 11,000 | 6/20/21 | 2.655% | CPI# | (1,420,953 | ) | ||||||||||
Deutsche Bank AG | 9,800 | 9/07/21 | 2.400% | CPI# | (955,931 | ) | ||||||||||
Deutsche Bank AG | 25,000 | 9/02/25 | 1.880% | CPI# | (159,852 | ) | ||||||||||
JPMorgan Chase Bank, NA | 1,000 | 7/29/20 | 2.305% | CPI# | (72,406 | ) | ||||||||||
JPMorgan Chase Bank, NA | 19,000 | 8/17/22 | 2.523% | CPI# | (2,075,823 | ) | ||||||||||
JPMorgan Chase Bank, NA | 1,400 | 6/30/26 | 2.890% | CPI# | (291,708 | ) | ||||||||||
JPMorgan Chase Bank, NA | 3,300 | 7/21/26 | 2.935% | CPI# | (718,779 | ) | ||||||||||
JPMorgan Chase Bank, NA | 2,400 | 10/03/26 | 2.485% | CPI# | (309,240 | ) | ||||||||||
JPMorgan Chase Bank, NA | 5,400 | 11/14/26 | 2.488% | CPI# | (702,840 | ) | ||||||||||
JPMorgan Chase Bank, NA | 4,850 | 12/23/26 | 2.483% | CPI# | (617,862 | ) | ||||||||||
JPMorgan Chase Bank, NA | 21,350 | 2/20/28 | 2.899% | CPI# | (4,179,456 | ) | ||||||||||
JPMorgan Chase Bank, NA | 12,000 | 3/26/28 | 2.880% | CPI# | (2,323,292 | ) | ||||||||||
Morgan Stanley Capital Services LLC | 50,000 | 4/16/18 | 2.395% | CPI# | (3,275,410 | ) | ||||||||||
Morgan Stanley Capital Services LLC | 2,000 | 10/14/20 | 2.370% | CPI# | (151,915 | ) | ||||||||||
Morgan Stanley Capital Services LLC | 13,000 | 5/23/21 | 2.680% | CPI# | (1,682,998 | ) | ||||||||||
Morgan Stanley Capital Services LLC | 10,000 | 4/16/23 | 2.690% | CPI# | (1,323,000 | ) | ||||||||||
Morgan Stanley Capital Services LLC | 5,000 | 8/15/26 | 2.885% | CPI# | (1,031,874 | ) | ||||||||||
|
| |||||||||||||||
$ | (53,624,468 | ) | ||||||||||||||
|
|
# | Variable interest rate based on the rate of inflation as determined by the Consumer Price Index (CPI). |
24 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Portfolio of Investments
INTEREST RATE SWAPS (see Note D)
Rate Type | ||||||||||||||||
Swap Counterparty | Notional Amount (000) | Termination Date | Payments Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
JPMorgan Chase Bank, NA | $ | 12,700 | 10/26/22 | 1.123% | SIFMA* | $ | (123,013 | ) |
* | 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 April 30, 2016, the aggregate market value of these securities amounted to $2,682,081 or 0.4% of net assets. |
(c) | Variable rate coupon, rate shown as of April 30, 2016. |
(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 April 30, 2016 and the aggregate market value of these securities amounted to $7,201,642 or 0.99% of net assets. |
(e) | Coupon rate adjusts periodically based upon a predetermined schedule. Stated interest rate in effect at April 30, 2016. |
(f) | When-Issued or delayed delivery security. |
As of April 30, 2016, 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 7.7% and 0.0%, respectively.
Glossary:
AGM – Assured Guaranty Municipal
AMBAC – Ambac Assurance Corporation
COP – Certificate of Participation
DOT – Department of Transportation
ETM – Escrowed to Maturity
NATL – National Interstate Corporation
SRF – State Revolving Fund
See notes to financial statements.
AB MUNICIPAL BOND INFLATION STRATEGY • | 25 |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
April 30, 2016 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $738,621,182) | $ | 776,578,199 | ||
Interest and dividends receivable | 9,799,230 | |||
Receivable for capital stock sold | 621,683 | |||
Unrealized appreciation on inflation swaps | 390,531 | |||
Receivable for investment securities sold | 105,000 | |||
|
| |||
Total assets | 787,494,643 | |||
|
| |||
Liabilities | ||||
Due to custodian | 1,992,519 | |||
Unrealized depreciation on inflation swaps | 54,014,999 | |||
Payable for investment securities purchased | 2,984,893 | |||
Payable for capital stock redeemed | 918,072 | |||
Advisory fee payable | 255,897 | |||
Unrealized depreciation on interest rate swaps | 123,013 | |||
Distribution fee payable | 47,669 | |||
Administrative fee payable | 17,152 | |||
Transfer Agent fee payable | 15,113 | |||
Accrued expenses | 109,143 | |||
|
| |||
Total liabilities | 60,478,470 | |||
|
| |||
Net Assets | $ | 727,016,173 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 70,606 | ||
Additional paid-in capital | 747,786,184 | |||
Undistributed net investment income | 243,613 | |||
Accumulated net realized loss on investment transactions | (5,293,766 | ) | ||
Net unrealized depreciation on investments | (15,790,464 | ) | ||
|
| |||
$ | 727,016,173 | |||
|
|
Net Asset Value Per Share—27 billion shares of capital stock authorized, $.001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 36,016,853 | 3,490,885 | $ | 10.32 | * | ||||||
| ||||||||||||
C | $ | 11,497,024 | 1,116,523 | $ | 10.30 | |||||||
| ||||||||||||
Advisor | $ | 164,288,730 | 15,915,743 | $ | 10.32 | |||||||
| ||||||||||||
1 | $ | 352,739,480 | 34,295,757 | $ | 10.29 | |||||||
| ||||||||||||
2 | $ | 162,474,086 | 15,786,841 | $ | 10.29 | |||||||
|
* | The maximum offering price per share for Class A shares was $10.64 which reflects a sales charge of 3.0%. |
See notes to financial statements.
26 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Six Months Ended April 30, 2016 (unaudited)
Investment Income | ||||||||
Interest | $ | 9,523,290 | ||||||
Dividends—Affiliated issuers | 4,198 | $ | 9,527,488 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 1,898,461 | |||||||
Distribution fee—Class A | 48,665 | |||||||
Distribution fee—Class C | 61,770 | |||||||
Distribution fee—Class 1 | 186,055 | |||||||
Transfer agency—Class A | 6,820 | |||||||
Transfer agency—Class C | 2,264 | |||||||
Transfer agency—Advisor Class | 29,161 | |||||||
Transfer agency—Class 1 | 8,071 | |||||||
Transfer agency—Class 2 | 3,684 | |||||||
Custodian | 89,243 | |||||||
Registration fees | 45,641 | |||||||
Audit and tax | 39,391 | |||||||
Administrative | 26,607 | |||||||
Printing | 24,011 | |||||||
Legal | 20,117 | |||||||
Directors’ fees | 10,238 | |||||||
Miscellaneous | 16,981 | |||||||
|
| |||||||
Total expenses | 2,517,180 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (319,038 | ) | ||||||
|
| |||||||
Net expenses | 2,198,142 | |||||||
|
| |||||||
Net investment income | 7,329,346 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | 968,895 | |||||||
Swaps | (1,623,772 | ) | ||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | 11,217,984 | |||||||
Swaps | 2,942,199 | |||||||
|
| |||||||
Net gain on investment transactions | 13,505,306 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 20,834,652 | ||||||
|
|
See notes to financial statements.
AB MUNICIPAL BOND INFLATION STRATEGY • | 27 |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 7,329,346 | $ | 13,923,366 | ||||
Net realized loss on investment transactions | (654,877 | ) | (1,449,266 | ) | ||||
Net change in unrealized appreciation/depreciation of investments | 14,160,183 | (26,751,917 | ) | |||||
|
|
|
| |||||
Net increase (decrease) in net assets from operations | 20,834,652 | (14,277,817 | ) | |||||
Dividends and Distributions to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (381,423 | ) | (729,938 | ) | ||||
Class C | (73,211 | ) | (119,694 | ) | ||||
Advisor Class | (1,835,288 | ) | (3,103,460 | ) | ||||
Class 1 | (3,995,561 | ) | (6,702,371 | ) | ||||
Class 2 | (1,891,928 | ) | (3,244,378 | ) | ||||
Capital Stock Transactions | ||||||||
Net decrease | (74,219,597 | ) | (43,450,132 | ) | ||||
|
|
|
| |||||
Total decrease | (61,562,356 | ) | (71,627,790 | ) | ||||
Net Assets | ||||||||
Beginning of period | 788,578,529 | 860,206,319 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $243,613 and $1,091,678, respectively) | $ | 727,016,173 | $ | 788,578,529 | ||||
|
|
|
|
See notes to financial statements.
28 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
April 30, 2016 (unaudited)
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. The Fund, which is a Maryland corporation, operates as a series company comprised of ten 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, the AB High Yield Portfolio and the AB Income Fund. 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. The AB Income Fund commenced operations on April 21, 2016. This report relates only to the AB Municipal Bond Inflation Strategy Portfolio (the “Strategy”). 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”).
AB MUNICIPAL BOND INFLATION STRATEGY • | 29 |
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
30 | • AB MUNICIPAL BOND INFLATION STRATEGY |
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. To account for this, the Strategy 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 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
AB MUNICIPAL BOND INFLATION STRATEGY • | 31 |
Notes to Financial Statements
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 April 30, 2016:
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Long-Term Municipal Bonds | $ | – 0 | – | $ | 728,453,660 | $ | 10,009,561 | $ | 738,463,221 | |||||||
Corporates – Investment Grade | – 0 | – | 23,972,451 | – 0 | – | 23,972,451 | ||||||||||
Governments – Treasuries | – 0 | – | 12,943,184 | – 0 | – | 12,943,184 | ||||||||||
Short-Term Investments | – 0 | – | 1,199,343 | – 0 | – | 1,199,343 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | – 0 | – | 766,568,638 | 10,009,561 | 776,578,199 | |||||||||||
Other Financial Instruments(a): | ||||||||||||||||
Assets: | ||||||||||||||||
Inflation (CPI) Swaps | – 0 | – | 390,531 | – 0 | – | 390,531 | ||||||||||
Liabilities: | ||||||||||||||||
Inflation (CPI) Swaps | – 0 | – | (54,014,999 | ) | – 0 | – | (54,014,999 | ) | ||||||||
Interest Rate Swaps | – 0 | – | (123,013 | ) | – 0 | – | (123,013 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total(b) | $ | – 0 | – | $ | 712,821,157 | $ | 10,009,561 | $ | 722,830,718 | |||||||
|
|
|
|
|
|
|
|
(a) | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
(b) | There were no transfers between Level 1 and Level 2 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 10/31/15 | $ | 11,790,811 | $ | 11,790,811 | ||||
Accrued discounts/(premiums) | (13,751 | ) | (13,751 | ) | ||||
Realized gain (loss) | – 0 | – | – 0 | – | ||||
Change in unrealized appreciation/depreciation | 77,334 | 77,334 | ||||||
Purchases | – 0 | – | – 0 | – | ||||
Sales | (2,390,000 | ) | (2,390,000 | ) |
32 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
Long-Term Municipal Bonds | Total | |||||||
Transfers in to Level 3 | $ | 545,167 | $ | 545,167 | ||||
Transfers out of Level 3 | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Balance as of 4/30/16 | $ | 10,009,561 | $ | 10,009,561 | (a) | |||
|
|
|
| |||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(b) | $ | 78,672 | $ | 78,672 | ||||
|
|
|
|
(a) | There were de minimis transfers under 1% of net assets during the reporting period. |
(b) | The unrealized appreciation/depreciation is included in the net change in unrealized appreciation/depreciation of investments in the accompanying statement of operations. |
As of April 30, 2016, 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).
AB MUNICIPAL BOND INFLATION STRATEGY • | 33 |
Notes to Financial Statements
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.
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
34 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
total operating expenses on an annual basis (the “Expense Caps”) to .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, 2017 and then may be extended by the Adviser for additional one-year terms. For the six months ended April 30, 2016, such reimbursement/waivers amounted to $319,038.
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 six months ended April 30, 2016, the reimbursement for such services amounted to $26,607.
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 $8,921 for the six months ended April 30, 2016.
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 $21 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 six months ended April 30, 2016.
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 currently available for direct purchase by members of the public. The Government STIF Portfolio currently 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 six months ended April 30, 2016 is as follows:
Market Value October 31, 2015 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value April 30, 2016 (000) | Dividend Income (000) | ||||||||||||||
$ | – 0 | – | $ | 74,853 | $ | 74,853 | $ | – 0 | – | $ | 4 |
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
AB MUNICIPAL BOND INFLATION STRATEGY • | 35 |
Notes to Financial Statements
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 $339,600 and $1,701,958 for Class C 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.
NOTE D
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the six months ended April 30, 2016 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 11,040,995 | $ | 74,787,671 | ||||
U.S. government securities | 19,184,239 | 12,501,589 |
The cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation (excluding swap transactions) are as follows:
Gross unrealized appreciation | $ | 38,567,152 | ||
Gross unrealized depreciation | (610,135 | ) | ||
|
| |||
Net unrealized appreciation | $ | 37,957,017 | ||
|
|
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.
36 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
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.
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.
AB MUNICIPAL BOND INFLATION STRATEGY • | 37 |
Notes to Financial Statements
During the six months ended April 30, 2016, 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.
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 six months ended April 30, 2016, 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
38 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
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 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 April 30, 2016, 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 | Unrealized depreciation on interest rate swaps | $ | 123,013 |
| ||||||||
Interest rate contracts | Unrealized appreciation on inflation swaps | $ | 390,531 |
| Unrealized depreciation on inflation swaps |
| 54,014,999 |
| ||||
|
|
|
| |||||||||
Total | $ | 390,531 | $ | 54,138,012 | ||||||||
|
|
|
|
Derivative Type | Location of Gain Within Statement of Operations | 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 | $ | (1,623,772 | ) | $ | 2,942,199 | ||||
|
|
|
| |||||||
Total | $ | (1,623,772 | ) | $ | 2,942,199 | |||||
|
|
|
|
The following table represents the average monthly volume of the Strategy’s derivative transactions during the six months ended April 30, 2016:
Interest Rate Swaps: | ||||
Average notional amount | $ | 25,900,000 | ||
Inflation Swaps: | ||||
Average notional amount | $ | 612,057,143 |
AB MUNICIPAL BOND INFLATION STRATEGY • | 39 |
Notes to Financial Statements
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 April 30, 2016:
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 | $ | 52,686 | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | $ | 52,686 | |||||||
Citibank, NA | 133,394 | (133,394 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
Deutsche Bank AG | 204,451 | (204,451 | ) | – 0 | – | – 0 | – | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 390,531 | $ | (337,845 | ) | $ | – 0 | – | $ | – 0 | – | $ | 52,686 | ^ | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Counterparty | Derivative Liabilities Subject to a MA | Derivative Available for Offset | Cash Collateral Pledged | Security Collateral Pledged* | Net Amount of Derivatives Liabilities | |||||||||||||||
OTC Derivatives: |
| |||||||||||||||||||
Barclays Bank PLC | $ | 14,123,406 | $ | – 0 | – | $ | – 0 | – | $ | (14,123,406 | ) | $ | – 0 | – | ||||||
Citibank, NA | 18,598,254 | (133,394 | ) | – 0 | – | (18,464,860 | ) | – 0 | – | |||||||||||
Deutsche Bank AG | 2,536,736 | (204,451 | ) | – 0 | – | (2,332,285 | ) | – 0 | – | |||||||||||
JPMorgan Chase Bank, NA | 11,414,419 | – 0 | – | – 0 | – | (11,414,419 | ) | – 0 | – | |||||||||||
Morgan Stanley Capital Services LLC | 7,465,197 | – 0 | – | – 0 | – | (7,465,197 | ) | – 0 | – | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 54,138,012 | $ | (337,845 | ) | $ | – 0 | – | $ | (53,800,167 | ) | $ | – 0 | –^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | 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. |
40 | • AB MUNICIPAL BOND INFLATION STRATEGY |
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 | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | Six Months Ended April 30, 2016 (unaudited) | Year Ended 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 204,574 | 574,262 | $ | 2,081,924 | $ | 5,854,217 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 25,862 | 50,831 | 262,277 | 519,144 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (794,877 | ) | (2,298,134 | ) | (8,088,504 | ) | (23,438,197 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (564,441 | ) | (1,673,041 | ) | $ | (5,744,303 | ) | $ | (17,064,836 | ) | ||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 26,047 | 72,666 | $ | 264,015 | $ | 748,781 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 5,212 | 9,189 | 52,779 | 93,690 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (214,594 | ) | (778,319 | ) | (2,183,172 | ) | (7,932,614 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (183,335 | ) | (696,464 | ) | $ | (1,866,378 | ) | $ | (7,090,143 | ) | ||||||||||
| ||||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 1,029,306 | 5,702,013 | $ | 10,478,611 | $ | 58,371,560 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 126,801 | 206,101 | 1,286,931 | 2,103,606 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (2,173,824 | ) | (6,633,298 | ) | (22,138,025 | ) | (67,756,331 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (1,017,717 | ) | (725,184 | ) | $ | (10,372,483 | ) | $ | (7,281,165 | ) | ||||||||||
| ||||||||||||||||||||
Class 1 | ||||||||||||||||||||
Shares sold | 1,939,127 | 6,726,352 | $ | 19,669,238 | $ | 68,580,370 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 309,831 | 508,639 | 3,132,409 | 5,176,475 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (6,174,641 | ) | (8,073,275 | ) | (62,622,184 | ) | (82,131,654 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (3,925,683 | ) | (838,284 | ) | $ | (39,820,537 | ) | $ | (8,374,809 | ) | ||||||||||
| ||||||||||||||||||||
Class 2 | ||||||||||||||||||||
Shares sold | 716,915 | 3,789,659 | $ | 7,259,872 | $ | 38,748,186 | ||||||||||||||
| ||||||||||||||||||||
127,633 | 221,546 | 1,291,532 | 2,255,832 | |||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (2,460,018 | ) | (4,381,725 | ) | (24,967,300 | ) | (44,643,197 | ) | ||||||||||||
| ||||||||||||||||||||
Net decrease | (1,615,470 | ) | (370,520 | ) | $ | (16,415,896 | ) | $ | (3,639,179 | ) | ||||||||||
|
AB MUNICIPAL BOND INFLATION STRATEGY • | 41 |
Notes to Financial Statements
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.
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.
The Strategy may invest in the municipal securities of Puerto Rico and other U.S. territories and their governmental agencies and municipalities, which are exempt from federal, state, and, where applicable, local income taxes. These municipal securities may have more risks than those of other U.S. issuers of municipal 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 Puerto Rico continues to face a very challenging economic and fiscal environment. Municipal securities issued by Puerto Rico issuers have extremely low credit ratings and are on “negative watch” by credit rating organizations. Some Puerto Rico issuers are in default on principal and interest payments. Puerto Rico announced recently that the Government Development Bank, which provides liquidity to Puerto Rico’s government agencies, would default on a $400 million debt payment. This default casts doubts on the ability of Puerto Rico and its government agencies to make future payments. If this and the general economic situation in Puerto Rico persist or worsen, the
42 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Notes to Financial Statements
volatility and credit quality of Puerto Rican municipal securities could be adversely affected, and the market for such securities may experience continued volatility. In addition, Puerto Rico’s difficulties have resulted in increased volatility in portions of the broader municipal securities market from time to time, and this may recur in the future.
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 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 Strategy 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 Strategy’s investments. The Strategy 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 Strategy, such as forwards, futures, options and swaps, may also result in a form of leverage. Leverage may result in higher returns to the Strategy than if the Strategy 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,
AB MUNICIPAL BOND INFLATION STRATEGY • | 43 |
Notes to Financial Statements
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.
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 six months ended April 30, 2016.
NOTE H
Distributions to Shareholders
The tax character of distributions to be paid for the year ending October 31, 2016 will be determined at the end of the current fiscal year. 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 | $ | 456,565 | $ | 483,823 | ||||
Long-term capital gains | – 0 | – | 22,282 | |||||
|
|
|
| |||||
Total taxable distributions | 456,565 | 506,105 | ||||||
Tax-exempt income | 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. |
44 | • AB MUNICIPAL BOND INFLATION STRATEGY |
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 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.
NOTE I
New Accounting Pronouncement
In May 2015, the Financial Accounting Standards Board issued an Accounting Standards Update, ASU 2015-07 (the “ASU”) 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 requirement to make certain disclosures for investments that are eligible to be measured at fair value using the net asset value per share practical expedient but do not utilize that practical expedient. 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
The Government STIF Portfolio, prior to June 1, 2016, was offered as a cash management option to mutual funds and other institutional accounts of the Adviser, and was not available for direct purchase by members of the public. Prior to June 1, 2016, the Government STIF Portfolio paid no investment management fees but did bear its own expenses. As of June 1, 2016, the Government STIF Portfolio, which was renamed “AB Government Money Market Portfolio” (the “Government Money Market Portfolio”), will have a contractual investment management fee rate of .20% and will continue to bear its own expenses. In connection with the investment by the Strategy in the Government Money Market Portfolio, the Adviser will waive its investment management fee from the Strategy in an amount equal to Government Money Market Portfolio’s effective management fee.
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 other material events that would require disclosure in the Strategy’s financial statements through this date.
AB MUNICIPAL BOND INFLATION STRATEGY • | 45 |
Notes to Financial Statements
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class A | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.14 | $ 10.48 | $ 10.35 | $ 10.80 | $ 10.32 | $ 10.09 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .09 | .15 | .13 | .12 | .14 | .16 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | .19 | (.34 | ) | .12 | (.44 | ) | .50 | .26 | ||||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .28 | (.19 | ) | .25 | (.32 | ) | .64 | .42 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.10 | ) | (.15 | ) | (.12 | ) | (.11 | ) | (.14 | ) | (.17 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | (.02 | ) | (.02 | ) | (.02 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.10 | ) | (.15 | ) | (.12 | ) | (.13 | ) | (.16 | ) | (.19 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.32 | $ 10.14 | $ 10.48 | $ 10.35 | $ 10.80 | $ 10.32 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 2.77 | % | (1.83 | )% | 2.44 | % | (2.98 | )% | 6.22 | % | 4.24 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $36,017 | $41,122 | $60,016 | $95,466 | $79,735 | $64,342 | ||||||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||||||
Expenses, net of waivers/reimbursements | .75 | %^ | .76 | % | .80 | % | .80 | % | .80 | % | .80 | % | ||||||||||||
Expenses, before waivers/reimbursements | .86 | %^ | .87 | % | .90 | % | .91 | % | .95 | % | 1.20 | % | ||||||||||||
Net investment income(a) | 1.76 | %^ | 1.49 | % | 1.24 | % | 1.10 | % | 1.34 | % | 1.57 | % | ||||||||||||
Portfolio turnover rate | 4 | % | 17 | % | 18 | % | 15 | % | 10 | % | 26 | % |
See footnote summary on page 51.
46 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.12 | $ 10.46 | $ 10.33 | $ 10.78 | $ 10.30 | $ 10.08 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .05 | .08 | .06 | .04 | .07 | .09 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | .19 | (.35 | ) | .12 | (.43 | ) | .50 | .25 | ||||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .24 | (.27 | ) | .18 | (.39 | ) | .57 | .34 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.06 | ) | (.07 | ) | (.05 | ) | (.04 | ) | (.07 | ) | (.10 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | (.02 | ) | (.02 | ) | (.02 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.06 | ) | (.07 | ) | (.05 | ) | (.06 | ) | (.09 | ) | (.12 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.30 | $ 10.12 | $ 10.46 | $ 10.33 | $ 10.78 | $ 10.30 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 2.38 | % | (2.56 | )% | 1.72 | % | (3.67 | )% | 5.51 | % | 3.45 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $11,497 | $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 | % | 1.50 | % | ||||||||||||
Expenses, before waivers/reimbursements | 1.61 | %^ | 1.61 | % | 1.60 | % | 1.61 | % | 1.65 | % | 1.91 | % | ||||||||||||
Net investment income(a) | 1.01 | %^ | .75 | % | .54 | % | .41 | % | .64 | % | .87 | % | ||||||||||||
Portfolio turnover rate | 4 | % | 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
Advisor Class | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.14 | $ 10.48 | $ 10.35 | $ 10.81 | $ 10.32 | $ 10.10 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .10 | .18 | .16 | .15 | .17 | .19 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | .19 | (.34 | ) | .12 | (.45 | ) | .51 | .25 | ||||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .29 | (.16 | ) | .28 | (.30 | ) | .68 | .44 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.11 | ) | (.18 | ) | (.15 | ) | (.14 | ) | (.17 | ) | (.20 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | (.02 | ) | (.02 | ) | (.02 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.11 | ) | (.18 | ) | (.15 | ) | (.16 | ) | (.19 | ) | (.22 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.32 | $ 10.14 | $ 10.48 | $ 10.35 | $ 10.81 | $ 10.32 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 2.89 | % | (1.56 | )% | 2.75 | % | (2.78 | )% | 6.64 | % | 4.44 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $164,289 | $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 | % | .50 | % | ||||||||||||
Expenses, before waivers/reimbursements | .61 | %^ | .61 | % | .60 | % | .61 | % | .65 | % | .88 | % | ||||||||||||
Net investment income(a) | 2.01 | %^ | 1.76 | % | 1.55 | % | 1.39 | % | 1.63 | % | 1.85 | % | ||||||||||||
Portfolio turnover rate | 4 | % | 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
Class 1 | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.11 | $ 10.45 | $ 10.33 | $ 10.78 | $ 10.30 | $ 10.08 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .10 | .17 | .15 | .14 | .16 | .17 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | .19 | (.34 | ) | .12 | (.43 | ) | .50 | .27 | ||||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .29 | (.17 | ) | .27 | (.29 | ) | .66 | .44 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends | ||||||||||||||||||||||||
Dividends from net investment income | (.11 | ) | (.17 | ) | (.15 | ) | (.14 | ) | (.16 | ) | (.20 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | (.02 | ) | (.02 | ) | (.02 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.11 | ) | (.17 | ) | (.15 | ) | (.16 | ) | (.18 | ) | (.22 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.29 | $ 10.11 | $ 10.45 | $ 10.33 | $ 10.78 | $ 10.30 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 2.87 | % | (1.62 | )% | 2.60 | % | (2.76 | )% | 6.45 | % | 4.40 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $352,739 | $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 | % | .60 | % | ||||||||||||
Expenses, before waivers/reimbursements | .68 | %^ | .67 | % | .66 | % | .67 | % | .74 | % | .92 | % | ||||||||||||
Net investment income(a) | 1.91 | %^ | 1.66 | % | 1.44 | % | 1.30 | % | 1.54 | % | 1.66 | % | ||||||||||||
Portfolio turnover rate | 4 | % | 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 2 | ||||||||||||||||||||||||
Six Months (unaudited) | Year Ended October 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, beginning of period | $ 10.12 | $ 10.46 | $ 10.33 | $ 10.79 | $ 10.31 | $ 10.08 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||||||
Net investment income(a)(b) | .10 | .18 | .16 | .15 | .17 | .17 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investment transactions | .18 | (.34 | ) | .13 | (.44 | ) | .50 | .28 | ||||||||||||||||
|
| |||||||||||||||||||||||
Net increase (decrease) in net asset value from operations | .28 | (.16 | ) | .29 | (.29 | ) | .67 | .45 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less: Dividends and Distributions | ||||||||||||||||||||||||
Dividends from net investment income | (.11 | ) | (.18 | ) | (.16 | ) | (.15 | ) | (.17 | ) | (.20 | ) | ||||||||||||
Distributions from net realized gain on investment transactions | – 0 | – | – 0 | – | (.00 | )(c) | (.02 | ) | (.02 | ) | (.02 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Total dividends and distributions | (.11 | ) | (.18 | ) | (.16 | ) | (.17 | ) | (.19 | ) | (.22 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ 10.29 | $ 10.12 | $ 10.46 | $ 10.33 | $ 10.79 | $ 10.31 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Return | ||||||||||||||||||||||||
Total investment return based on net asset value(d) | 2.82 | % | (1.52 | )% | 2.79 | % | (2.75 | )% | 6.54 | % | 4.54 | % | ||||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period (000’s omitted) | $162,474 | $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 | % | .50 | % | ||||||||||||
Expenses, before waivers | .58 | %^ | .57 | % | .56 | % | .57 | % | .64 | % | .85 | % | ||||||||||||
Net investment income(a) | 2.01 | %^ | 1.76 | % | 1.54 | % | 1.39 | % | 1.64 | % | 1.77 | % | ||||||||||||
Portfolio turnover rate | 4 | % | 17 | % | 18 | % | 15 | % | 10 | % | 26 | % |
See footnote summary on page 51.
50 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Financial Highlights
(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. |
^ | Annualized. |
See notes to financial statements.
AB MUNICIPAL BOND INFLATION STRATEGY • | 51 |
Financial Highlights
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, Robert (“Guy”) B. Davidson III(2), Vice President Matthew Norton(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. Robert “Guy” B. Davidson III, Matthew Norton and Terrance T. Hults are the investment professionals with the most significant responsibility for the day-to-day management of the Strategy’s portfolio. |
52 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Board of Directors
Information Regarding the Review and Approval of the Portfolio’s Investment Advisory Contract
The disinterested directors (the “directors”) of AB Bond Fund, Inc. (the “Fund”) unanimously approved the continuance of the Fund’s Investment Advisory Contract (the “Advisory Agreement”) with the Adviser in respect of AB Municipal Bond Inflation Strategy (the “Portfolio”) at a meeting held on November 3-5, 2015.
Prior to approval of the continuance of the Advisory Agreement in respect of the Portfolio, the directors had requested from the Adviser, and received and evaluated, extensive materials. They reviewed the continuance of the Advisory Agreement with the Adviser and with experienced counsel who are independent of the Adviser, who advised on the relevant legal standards. The directors also reviewed an independent evaluation prepared by the Fund’s Senior Officer (who is also the Fund’s Independent Compliance Officer) of the reasonableness of the advisory fee, in which the Senior Officer concluded that the contractual fee for the Portfolio was reasonable. The directors also discussed the proposed continuance in private sessions with counsel and the Fund’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services provided by the Adviser to the Portfolio gained from their experience as directors or trustees of most of the registered investment companies advised by the Adviser, their overall confidence in the Adviser’s integrity and competence they have gained from that experience, the Adviser’s initiative in identifying and raising potential issues with the directors and its responsiveness, frankness and attention to concerns raised by the directors in the past, including the Adviser’s willingness to consider and implement organizational and operational changes designed to improve investment results and the services provided to the AB Funds. The directors noted that they have four regular meetings each year, at each of which they receive presentations from the Adviser on the investment results of the Portfolio and review extensive materials and information presented by the Adviser.
The directors also considered all other factors they believed relevant, including the specific matters discussed below. In their deliberations, the directors did not identify any particular information that was all-important or controlling, and different directors may have attributed different weights to the various factors. The directors determined that the selection of the Adviser to manage the Portfolio and the overall arrangements between the Portfolio and the Adviser, as provided in the Advisory Agreement, including the advisory fee, were fair and reasonable in light of the services performed, expenses incurred and such other matters as the directors considered relevant in the exercise of their business
AB MUNICIPAL BOND INFLATION STRATEGY • | 53 |
judgment. The material factors and conclusions that formed the basis for the directors’ determinations included the following:
Nature, Extent and Quality of Services Provided
The directors considered the scope and quality of services provided by the Adviser under the Advisory Agreement, including the quality of the investment research capabilities of the Adviser and the other resources it has dedicated to performing services for the Portfolio. They noted the professional experience and qualifications of the Portfolio’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Portfolio will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Portfolio by employees of the Adviser or its affiliates. Requests for these reimbursements are made on a quarterly basis and subject to approval by the directors. Reimbursements, to the extent requested and paid, result in a higher rate of total compensation from the Portfolio to the Adviser than the fee rate stated in the Portfolio’s Advisory Agreement. The directors noted that the methodology used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Fund’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Portfolio’s other service providers, also was considered. The directors concluded that, overall, they were satisfied with the nature, extent and quality of services provided to the Portfolio under the Advisory Agreement.
Costs of Services Provided and Profitability
The directors reviewed a schedule of the revenues, expenses and related notes indicating the profitability of the Portfolio to the Adviser for calendar years 2013 and 2014 that had been prepared with an expense allocation methodology arrived at in consultation with an independent consultant retained by the Fund’s Senior Officer. The directors noted the assumptions and methods of allocation used by the Adviser in preparing fund-specific profitability data and understood that there are a number of potentially acceptable allocation methodologies for information of this type. The directors noted that the profitability information reflected all revenues and expenses of the Adviser’s relationship with the Portfolio, including those relating to its subsidiaries that provide transfer agency and distribution services to the Portfolio. The directors recognized that it is difficult to make comparisons of the profitability of the Advisory Agreement with the profitability of advisory contracts for unaffiliated funds because comparative information is not generally publicly available and is affected by numerous factors. The directors focused on the profitability of the Adviser’s relationship with the Portfolio before taxes and distribution expenses. The directors were satisfied that the Adviser’s level of profitability from its relationship with the Portfolio was not unreasonable.
54 | • AB MUNICIPAL BOND INFLATION STRATEGY |
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their relationships with the Portfolio, including, but not limited to, benefits relating to 12b-1 fees and sales charges received by the Fund’s principal underwriter (which is a wholly owned subsidiary of the Adviser) in respect of certain classes of the Portfolio’s shares and transfer agency fees paid by the Portfolio to a wholly owned subsidiary of the Adviser. The directors recognized that the Adviser’s profitability would be somewhat lower without these benefits. The directors understood that the Adviser also might derive reputational and other benefits from its association with the Portfolio.
Investment Results
In addition to the information reviewed by the directors in connection with the meeting, the directors receive detailed performance information for the Portfolio at each regular Board meeting during the year. At the November 2015 meeting, the directors reviewed information prepared by Broadridge showing the performance of the Class A Shares of the Portfolio as compared with that of a group of similar funds selected by Broadridge (the “Performance Group”) and as compared with that of a broad array of funds selected by Broadridge (the “Performance Universe”), and information prepared by the Adviser showing performance of the Class A Shares as compared with the Barclays 1-10 Year Treasury Inflation Protected Securities (TIPS) Index (the “Index”), in each case for the 1-, 3- and 5-year periods ended July 31, 2015 and (in the case of comparisons with the Index) the period since inception (January 2010 inception). The directors noted that the Portfolio was in the 5th quintile of the Performance Group and the Performance Universe in all periods. The Portfolio outperformed the Index in the 3-year period and lagged it in all other periods. Based on their review and their discussion with the Adviser of the reasons for the Portfolio’s performance, the directors retained confidence in the Adviser’s ability to manage the Portfolio’s assets.
Advisory Fees and Other Expenses
The directors considered the advisory fee rate paid by the Portfolio to the Adviser and information prepared by Broadridge concerning advisory fee rates paid by other funds in the same Broadridge category as the Portfolio at a common asset level. The directors recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The directors noted that, at the Portfolio’s current size, its contractual effective advisory fee rate of 50 basis points was lower than the Expense Group median. The directors noted that the administrative expense reimbursement was 0.7 basis points in the Portfolio’s latest fiscal year, and as a result the rate of compensation received by the Adviser from the Portfolio pursuant to the Advisory Agreement was essentially the same as the Expense Group median.
AB MUNICIPAL BOND INFLATION STRATEGY • | 55 |
The Adviser informed the directors that there were no institutional products managed by it that have a substantially similar investment style. The directors reviewed the relevant advisory fee information from the Adviser’s Form ADV and the evaluation from the Fund’s Senior Officer, and noted that the Adviser charged institutional clients lower fees for advising comparably sized institutional accounts using strategies that differ from those of the Portfolio but which invest in fixed income securities.
The Adviser reviewed with the directors the significantly greater scope of the services it provides to the Portfolio relative to institutional clients. The Adviser also noted that because mutual funds are constantly issuing and redeeming shares, they are more difficult to manage than an institutional account, where the assets tend to be relatively stable. In light of the substantial differences in services rendered by the Adviser to institutional clients as compared to funds such as the Portfolio, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors also considered the total expense ratio of the Class A shares of the Portfolio in comparison to the fees and expenses of funds within two comparison groups created by Broadridge: an Expense Group and an Expense Universe. Broadridge described an Expense Group as a representative sample of funds similar to the Portfolio and an Expense Universe as a broader group than the Expense Group, consisting of all funds in the investment classification/objective with a similar load type as the Portfolio. The Class A expense ratio of the Portfolio was based on the Portfolio’s latest fiscal year and the information included the pro forma expense ratio to reflect a reduction in the 12b-1 fee effective January 30, 2015. The pro forma expense ratio of the Portfolio reflected fee waivers and/or expense reimbursements as a result of an undertaking by the Adviser. The directors noted that it was likely that the expense ratios of some of the other funds in the Portfolio’s Broadridge category also were lowered by waivers or reimbursements by those funds’ investment advisers, which in some cases might be voluntary or temporary. The directors view the expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Portfolio by others.
The directors noted that the Portfolio’s pro forma total expense ratio, giving effect to a cap by the Adviser, was lower than the Expense Group median and close to the Expense Universe median. The directors concluded that the Portfolio’s pro forma expense ratio was satisfactory.
Economies of Scale
The directors noted that the advisory fee schedule for the Portfolio contains breakpoints that reduce the fee rates on assets above specified levels. The directors took into consideration prior presentations by an independent consultant on economies of scale in the mutual fund industry and for the AB Funds, and by
56 | • AB MUNICIPAL BOND INFLATION STRATEGY |
the Adviser concerning certain of its views on economies of scale. The directors also had requested and received from the Adviser certain updates on economies of scale at the May 2015 meetings. The directors believe that economies of scale may be realized (if at all) by the Adviser across a variety of products and services, and not only in respect of a single fund. The directors noted that there is no established methodology for setting breakpoints that give effect to fund-specific services provided by a fund’s adviser and to the economies of scale that an adviser may realize in its overall mutual fund business or those components of it which directly or indirectly affect a fund’s operations. The directors observed that in the mutual fund industry as a whole, as well as among funds similar to the Portfolio, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. The directors also noted that the advisory agreements for many funds do not have breakpoints at all. Having taken these factors into account, the directors concluded that the Portfolio’s shareholders would benefit from a sharing of economies of scale in the event the Portfolio’s net assets exceed a breakpoint in the future.
AB MUNICIPAL BOND INFLATION STRATEGY • | 57 |
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
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.” |
58 | • AB MUNICIPAL BOND INFLATION STRATEGY |
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 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
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. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 59 |
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) |
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.
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%. |
60 | • AB MUNICIPAL BOND INFLATION STRATEGY |
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 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
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. |
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. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 61 |
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 |
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.
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. |
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. |
62 | • AB MUNICIPAL BOND INFLATION STRATEGY |
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 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
AB MUNICIPAL BOND INFLATION STRATEGY • | 63 |
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 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
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. |
64 | • AB MUNICIPAL BOND INFLATION STRATEGY |
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, 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 |
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. |
AB MUNICIPAL BOND INFLATION STRATEGY • | 65 |
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 Inception | Annualized | Risk Period (Year) | ||||||||||||||||||||||||||
1 Year (%) | 3 Year (%) | 5 Year (%) | 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 |
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
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. |
66 | • 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
International Strategic Core 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
Income Fund
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 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 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.
AB MUNICIPAL BOND INFLATION STRATEGY • | 67 |
AB Family of Funds
NOTES
68 | • AB MUNICIPAL BOND INFLATION STRATEGY |
AB MUNICIPAL BOND INFLATION STRATEGY
1345 Avenue of the Americas
New York, NY 10105
800.221.5672
MBIS-0152-0416
APR 04.30.16
SEMI-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.
June 24, 2016
Semi-Annual Report
This report provides management’s discussion of fund performance for AB Tax-Aware Fixed Income Portfolio (the “Fund”) for the semi-annual reporting period ended April 30, 2016.
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 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 Fund, 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 contracts 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 6 shows the Fund’s performance compared to its benchmark, the Barclays Municipal Bond Index, for the six- and 12-month periods ended April 30, 2016.
For both periods, Class A and Advisor Class shares outperformed the benchmark, while Class C shares underperformed, before sales charges. Security selection in the transportation sector contributed to performance
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 1 |
versus the benchmark, while security selection in the industrial sector detracted from performance for both periods. For the 12-month period, security selection in the local general obligation and water sectors also detracted from performance. For both periods, an underweight in the pre-refunded sector and overweight in corporate investment-grade industrials contributed. Taxable holdings contributed for the 12-month period, and had no impact on performance for the six-month period.
The Fund used derivatives during both periods, which had no material impact on absolute performance. Interest rate swaps and inflation swaps were used for hedging purposes; credit default swaps were used for investment purposes.
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 values plummeted and the US dollar strengthened. Over both periods, municipal bonds have generally had positive returns and even mid-grade and high-yield municipals performed well, in sharp contrast to the investment-grade and high-yield corporate bond markets. A general scarcity of municipal credit issuance and an abundance of corporate-debt issuance partly explained 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 Fund’s Senior Investment Management Team has positioned the Fund to be modestly overweight credit (municipal bonds rated A and lower).
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 April 30, 2016, 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 were 6.13% and 0.00%, respectively.
On June 23, 2016, the UK voted to leave the European Union (“EU”) in a popular referendum. At this moment in time, the UK remains a member of the EU and the rules and regulations remain unchanged, as do all the protections in place. Exactly how the UK’s role in the EU will change will become clear over time. The Adviser continues to monitor the heightened market volatility.
2 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
DISCLOSURES AND RISKS
Benchmark Disclosure
The Barclays Municipal Bond Index is unmanaged and 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 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.
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 and accrued interest. 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 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. Some Puerto Rico issuers are in default on principal and interest payments. 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.
(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)
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 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. The Fund may be subject to a greater risk of rising interest rates as the recent period of historically low rates is beginning to end and rates have begun rising. 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 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. Municipal securities may have more liquidity risk than other fixed-income securities because they trade less frequently and the market for municipal securities is generally smaller than many other markets.
Leverage Risk: To the extent the Fund 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 Fund’s investments.
Derivatives Risk: Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Fund, and may be subject to counterparty risk to a greater degree than more traditional investments.
Management Risk: The Fund is subject to management risk because it is an actively managed investment fund. The Adviser will apply its investment techniques and risk analyses in making investment decisions, but there is no guarantee that its techniques will produce the intended results.
These 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
(Disclosures, Risks and Note about Historical Performance continued on next page)
4 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Disclosures and Risks
DISCLOSURES AND RISKS
(continued from previous page)
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 Fund’s quoted performance would be lower. SEC returns and the Fund’s 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.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 5 |
Disclosures and Risks
HISTORICAL PERFORMANCE
THE FUND VS. ITS BENCHMARK PERIODS ENDED APRIL 30, 2016 (unaudited) | NAV Returns | |||||||||
6 Months | 12 Months | |||||||||
AB Tax-Aware Fixed Income Portfolio | ||||||||||
Class A | 3.93% | 5.70% | ||||||||
| ||||||||||
Class C | 3.54% | 4.81% | ||||||||
| ||||||||||
Advisor Class* | 4.06% | 5.86% | ||||||||
| ||||||||||
Barclays Municipal Bond Index | 3.55% | 5.29% | ||||||||
| ||||||||||
* 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. | ||||||||||
See Disclosures, Risks and Note about Historical Performance on pages 3-5.
(Historical Performance continued on next page)
6 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Historical Performance
HISTORICAL PERFORMANCE
(continued from previous page)
AVERAGE ANNUAL RETURNS AS OF APRIL 30, 2016 (unaudited) | ||||||||
NAV Returns | SEC Returns (reflects applicable sales charges) | |||||||
Class A | ||||||||
1 Year | 5.70 | % | 2.48 | % | ||||
Since Inception* | 5.47 | % | 4.13 | % | ||||
Class C | ||||||||
1 Year | 4.81 | % | 3.81 | % | ||||
Since Inception* | 4.72 | % | 4.72 | % | ||||
Advisor Class† | ||||||||
1 Year | 5.86 | % | 5.86 | % | ||||
Since Inception* | 5.77 | % | 5.77 | % | ||||
SEC AVERAGE ANNUAL RETURNS AS OF THE MOST RECENT CALENDAR QUARTER-END MARCH 31, 2016 (unaudited) | ||||||||
SEC Returns (reflects applicable sales charges) | ||||||||
Class A | ||||||||
1 Year | 1.04 | % | ||||||
Since Inception* | 3.87 | % | ||||||
Class C | ||||||||
1 Year | 2.42 | % | ||||||
Since Inception* | 4.51 | % | ||||||
Advisor Class† | ||||||||
1 Year | 4.46 | % | ||||||
Since Inception* | 5.56 | % |
The Fund’s current prospectus fee table shows the Fund’s total annual operating expense ratios as 2.18%, 2.85%, and 1.92% 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 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 shares, respectively. These waivers/ reimbursements may not be terminated prior to January 31, 2017 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 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. |
See Disclosures, Risks and Note about Historical Performance on pages 3-5.
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 November 1, 2015 | Ending Account Value April 30, 2016 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Class A | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,039.30 | $ | 4.06 | 0.80 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.89 | $ | 4.02 | 0.80 | % | ||||||||
Class C | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,035.40 | $ | 7.84 | 1.55 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,017.16 | $ | 7.77 | 1.55 | % | ||||||||
Advisor Class | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,040.60 | $ | 2.79 | 0.55 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.13 | $ | 2.77 | 0.55 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
8 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Expense Example
PORTFOLIO SUMMARY
April 30, 2016 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $39.7
* | All data are as of April 30, 2016. 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. 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-creditworthy 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 17 different states, District of Columbia and Puerto Rico. |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 9 |
Portfolio Summary
PORTFOLIO OF INVESTMENTS
April 30, 2016 (unaudited)
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
MUNICIPAL OBLIGATIONS – 86.3% | ||||||||
Long-Term Municipal Bonds – 86.3% | ||||||||
Alabama – 0.3% | ||||||||
County of Jefferson AL Sewer Revenue | $ | 110 | $ | 128,787 | ||||
|
| |||||||
Arizona – 4.0% | ||||||||
Arizona Health Facilities Authority | 110 | 110,066 | ||||||
City of Peoria AZ | 1,000 | 1,239,460 | ||||||
Industrial Development Authority of the City of Phoenix (The) | 100 | 108,272 | ||||||
Salt Verde Financial Corp. | 100 | 124,319 | ||||||
|
| |||||||
1,582,117 | ||||||||
|
| |||||||
California – 1.2% | ||||||||
California Pollution Control Financing Authority | 250 | 274,815 | ||||||
Golden State Tobacco Securitization Corp. | 225 | 220,030 | ||||||
|
| |||||||
494,845 | ||||||||
|
| |||||||
Colorado – 2.8% | ||||||||
Colorado Health Facilities Authority | 170 | 192,923 | ||||||
Colorado Health Facilities Authority | 200 | 229,862 | ||||||
Denver City & County School District No 1 | 560 | 702,576 | ||||||
|
| |||||||
1,125,361 | ||||||||
|
|
10 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Connecticut – 3.4% | ||||||||
Connecticut State Health & Educational Facility Authority | $ | 100 | $ | 106,038 | ||||
State of Connecticut | 1,000 | 1,239,550 | ||||||
|
| |||||||
1,345,588 | ||||||||
|
| |||||||
District of Columbia – 0.3% | ||||||||
District of Columbia | 100 | 110,317 | ||||||
|
| |||||||
Florida – 9.5% | ||||||||
Bexley Community Development District | 100 | 98,974 | ||||||
Brevard County School District COP | 290 | 359,728 | ||||||
Capital Trust Agency, Inc. | 100 | 89,918 | ||||||
Citizens Property Insurance Corp. | 560 | 651,986 | ||||||
Collier County Industrial Development Authority | 100 | 118,280 | ||||||
County of Miami-Dade FL | 780 | 948,028 | ||||||
County of Miami-Dade FL Aviation Revenue | 265 | 311,484 | ||||||
County of Orange FL Tourist Development Tax Revenue | 435 | 519,794 | ||||||
Florida Development Finance Corp. | 100 | 100,547 |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 11 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Florida Development Finance Corp. | $ | 100 | $ | 106,769 | ||||
School District of Broward County/FL | 365 | 458,294 | ||||||
|
| |||||||
3,763,802 | ||||||||
|
| |||||||
Georgia – 0.9% | ||||||||
City of Atlanta Department of Aviation | 310 | 361,138 | ||||||
|
| |||||||
Hawaii – 1.4% | ||||||||
State of Hawaii | 460 | 574,310 | ||||||
|
| |||||||
Idaho – 0.3% | ||||||||
Idaho Health Facilities Authority | 100 | 111,233 | ||||||
|
| |||||||
Illinois – 7.3% | ||||||||
Chicago Board of Education | 40 | 32,497 | ||||||
Series 2016A | 100 | 94,474 | ||||||
Chicago O’Hare International Airport | 335 | 380,815 | ||||||
City of Chicago IL | 100 | 102,214 | ||||||
Illinois Finance Authority | 50 | 39,920 | ||||||
Illinois Finance Authority | 85 | 85,040 | ||||||
Series 2016C | 15 | 527 |
12 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Illinois Finance Authority | $ | 100 | $ | 103,339 | ||||
Illinois Finance Authority | 250 | 283,297 | ||||||
Illinois Municipal Electric Agency | 465 | 551,388 | ||||||
Metropolitan Pier & Exposition Authority | 600 | 653,472 | ||||||
State of Illinois | 100 | 106,052 | ||||||
Series 2013 | 270 | 307,030 | ||||||
Series 2014 | 130 | 139,184 | ||||||
|
| |||||||
2,879,249 | ||||||||
|
| |||||||
Indiana – 1.2% | ||||||||
Indiana Finance Authority | 160 | 177,170 | ||||||
Indiana Finance Authority | 190 | 207,098 | ||||||
Indiana Finance Authority | 100 | 109,487 | ||||||
|
| |||||||
493,755 | ||||||||
|
| |||||||
Kentucky – 0.2% | ||||||||
Kentucky Economic Development Finance Authority | 65 | 66,223 | ||||||
|
| |||||||
Louisiana – 0.7% | ||||||||
City of New Orleans LA Water Revenue | 100 | 115,348 |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 13 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Louisiana Public Facilities Authority | $ | 250 | $ | 150,000 | ||||
|
| |||||||
265,348 | ||||||||
|
| |||||||
Maine – 0.5% | ||||||||
Maine Health & Higher Educational Facilities Authority | 165 | 195,548 | ||||||
|
| |||||||
Maryland – 1.0% | ||||||||
University System of Maryland | 365 | 395,061 | ||||||
|
| |||||||
Massachusetts – 3.5% | ||||||||
Commonwealth of Massachusetts | 1,000 | 1,282,510 | ||||||
NATL Series 2000E | 125 | 112,492 | ||||||
|
| |||||||
1,395,002 | ||||||||
|
| |||||||
Michigan – 3.5% | ||||||||
City of Detroit MI Sewage Disposal System Revenue | 115 | 134,748 | ||||||
Michigan Finance Authority | 200 | 199,724 | ||||||
Michigan Finance Authority | 735 | 800,915 | ||||||
Michigan Finance Authority | 235 | 271,932 | ||||||
|
| |||||||
1,407,319 | ||||||||
|
| |||||||
Minnesota – 0.9% | ||||||||
City of Minneapolis MN | 200 | 233,846 |
14 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Housing & Redevelopment Authority of The City of St Paul Minnesota | $ | 100 | $ | 111,166 | ||||
|
| |||||||
345,012 | ||||||||
|
| |||||||
Missouri – 0.3% | ||||||||
Kansas City Industrial Development Authority | 100 | 101,759 | ||||||
|
| |||||||
Nebraska – 0.3% | ||||||||
Central Plains Energy Project | 100 | 109,868 | ||||||
|
| |||||||
Nevada – 3.2% | ||||||||
County of Clark NV | 1,000 | 1,256,310 | ||||||
|
| |||||||
New Hampshire – 0.3% | ||||||||
New Hampshire Health and Education Facilities Authority Act | 115 | 128,789 | ||||||
|
| |||||||
New Jersey – 3.4% | ||||||||
Burlington County Bridge Commission | 140 | 147,550 | ||||||
New Jersey Economic Development Authority | 30 | 34,249 | ||||||
New Jersey Economic Development Authority | 260 | 282,176 | ||||||
New Jersey Economic Development Authority | 85 | 94,577 |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 15 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
New Jersey Transportation Trust Fund Authority | $ | 240 | $ | 263,114 | ||||
New Jersey Turnpike Authority | 315 | 374,110 | ||||||
Tobacco Settlement Financing Corp./NJ | 185 | 174,647 | ||||||
|
| |||||||
1,370,423 | ||||||||
|
| |||||||
New York – 8.3% | ||||||||
City of New York NY | 340 | 404,869 | ||||||
Metropolitan Transportation Authority | 315 | 378,980 | ||||||
New York State Dormitory Authority | 425 | 520,553 | ||||||
New York State Energy Research & Development Authority | 200 | 177,436 | ||||||
New York State Thruway Authority | 365 | 438,569 | ||||||
New York State Urban Development Corp. | 1,000 | 1,255,320 | ||||||
Ulster County Industrial Development Agency | 120 | 122,611 | ||||||
|
| |||||||
3,298,338 | ||||||||
|
| |||||||
Ohio – 4.3% | ||||||||
Buckeye Tobacco Settlement Financing Authority | 170 | 163,773 | ||||||
City of Akron OH | 445 | 523,231 |
16 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
City of Columbus OH | $ | 225 | $ | 232,839 | ||||
Series 2014A | 110 | 130,318 | ||||||
County of Cuyahoga OH | 365 | 431,926 | ||||||
Dayton-Montgomery County Port Authority | 100 | 102,602 | ||||||
Ohio Air Quality Development Authority | 100 | 104,536 | ||||||
|
| |||||||
1,689,225 | ||||||||
|
| |||||||
Pennsylvania – 2.7% | ||||||||
Montour School District | 450 | 527,719 | ||||||
Moon Industrial Development Authority | 100 | 103,775 | ||||||
Pennsylvania Economic Development Financing Authority | 100 | 105,130 | ||||||
Pennsylvania Economic Development Financing Authority | 300 | 336,804 | ||||||
|
| |||||||
1,073,428 | ||||||||
|
| |||||||
Puerto Rico – 0.2% | ||||||||
Puerto Rico Industrial Tourist Educational Medical & Envirml Ctl Facs Fing Auth | 100 | 92,001 | ||||||
|
| |||||||
South Carolina – 0.8% | ||||||||
Spartanburg County School District No 1/SC | 250 | 302,037 | ||||||
|
|
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 17 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Tennessee – 0.6% | ||||||||
Metropolitan Government Nashville & Davidson County Health & Educational Facs Bd | $ | 215 | $ | 253,023 | ||||
|
| |||||||
Texas – 16.1% | ||||||||
Central Texas Regional Mobility Authority | 100 | 111,157 | ||||||
City of Houston TX | 260 | 306,431 | ||||||
Series 2015 | 160 | 188,573 | ||||||
Dallas Area Rapid Transit | 580 | 732,117 | ||||||
Dallas County Flood Control District No 1 | 100 | 106,914 | ||||||
Grand Parkway Transportation Corp. | 285 | 289,078 | ||||||
Love Field Airport Modernization Corp. | 500 | 586,575 | ||||||
New Hope Cultural Education Facilities Corp. | 100 | 102,063 | ||||||
North Texas Tollway Authority | 250 | 293,490 | ||||||
Tarrant County Cultural Education Facilities Finance Corp. | 100 | 102,347 | ||||||
Tarrant County Cultural Education Facilities Finance Corp. | 100 | 107,773 |
18 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Tarrant Regional Water District | $ | 325 | $ | 400,419 | ||||
Texas Transportation Commission State Highway Fund | 1,300 | 1,500,980 | ||||||
Travis County Cultural Education Facilities Finance Corp. | 160 | 164,437 | ||||||
Travis County Health Facilities Development Corp. | 55 | 62,076 | ||||||
Trinity River Authority Central Regional Wastewater System Revenue | 795 | 936,606 | ||||||
Trinity River Authority LLC | 335 | 393,668 | ||||||
|
| |||||||
6,384,704 | ||||||||
|
| |||||||
Virginia – 0.2% | ||||||||
Tobacco Settlement Financing Corp./VA | 100 | 87,501 | ||||||
|
| |||||||
Washington – 2.4% | ||||||||
City of Seattle WA | 125 | 130,481 | ||||||
Port of Seattle WA | 510 | 595,191 | ||||||
Washington State Housing Finance Commission | 100 | 108,237 | ||||||
Washington State Housing Finance Commission | 100 | 113,993 | ||||||
|
| |||||||
947,902 | ||||||||
|
|
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 19 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Wisconsin – 0.3% | ||||||||
Wisconsin Public Finance Authority | $ | 100 | $ | 102,700 | ||||
|
| |||||||
Total Municipal Obligations | 34,238,023 | |||||||
|
| |||||||
CORPORATES – INVESTMENT GRADE – 8.8% | ||||||||
Industrial – 4.9% | ||||||||
Basic – 0.3% | ||||||||
Glencore Funding LLC | 105 | 101,626 | ||||||
|
| |||||||
Capital Goods – 0.5% | ||||||||
John Deere Capital Corp. | 185 | 186,917 | ||||||
|
| |||||||
Communications - Media – 0.9% | ||||||||
Comcast Corp. | 165 | 180,305 | ||||||
Walt Disney Co. (The) | 180 | 182,171 | ||||||
|
| |||||||
362,476 | ||||||||
|
| |||||||
Communications - Telecommunications – 0.2% | ||||||||
Verizon Communications, Inc. | 85 | 89,508 | ||||||
|
| |||||||
Consumer Cyclical - Automotive – 0.3% | ||||||||
General Motors Financial Co., Inc. | 100 | 102,473 | ||||||
|
| |||||||
Consumer Cyclical - Other – 0.2% | ||||||||
Starwood Hotels & Resorts Worldwide, Inc. | 85 | 92,770 | ||||||
|
| |||||||
Consumer Cyclical - Restaurants – 0.2% | ||||||||
McDonald’s Corp. | 85 | 91,445 | ||||||
|
| |||||||
Consumer Cyclical - Retailers – 0.2% | ||||||||
Dollar General Corp. | 100 | 100,886 | ||||||
|
|
20 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Consumer Non-Cyclical – 1.3% | ||||||||
AbbVie, Inc. | $ | 100 | $ | 100,888 | ||||
Amgen, Inc. | 85 | 94,541 | ||||||
Celgene Corp. | 100 | 101,350 | ||||||
Gilead Sciences, Inc. | 185 | 188,222 | ||||||
Newell Brands, Inc. | 50 | 51,156 | ||||||
|
| |||||||
536,157 | ||||||||
|
| |||||||
Energy – 0.3% | ||||||||
Exxon Mobil Corp. | 100 | 101,376 | ||||||
|
| |||||||
Technology – 0.5% | ||||||||
International Business Machines Corp. | 200 | 202,534 | ||||||
|
| |||||||
1,968,168 | ||||||||
|
| |||||||
Financial Institutions – 3.2% | ||||||||
Banking – 3.2% | ||||||||
American Express Co. | 165 | 181,071 | ||||||
Bank of America Corp. | 165 | 184,851 | ||||||
BB&T Corp. | 185 | 187,262 | ||||||
JPMorgan Chase & Co. | 120 | 119,562 | ||||||
6.00%, 1/15/18 | 65 | 69,835 | ||||||
Morgan Stanley | 185 | 187,819 | ||||||
Regions Financial Corp. | 90 | 89,877 | ||||||
Wells Fargo Bank NA | 250 | 252,041 | ||||||
|
| |||||||
1,272,318 | ||||||||
|
| |||||||
Utility – 0.7% | ||||||||
Electric – 0.7% | ||||||||
National Rural Utilities Cooperative Finance Corp. | 185 | 186,452 | ||||||
Southern Power Co. | 80 | 80,533 | ||||||
|
| |||||||
266,985 | ||||||||
|
| |||||||
Total Corporates – Investment Grade | 3,507,471 | |||||||
|
|
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 21 |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
ASSET-BACKED SECURITIES – 2.1% | ||||||||
Autos - Fixed Rate – 1.4% | ||||||||
Ally Auto Receivables Trust | $ | 100 | $ | 99,633 | ||||
Ford Credit Floorplan Master Owner Trust A | 100 | 100,008 | ||||||
Hertz Vehicle Financing LLC | 100 | 100,009 | ||||||
Hyundai Auto Lease Securitization Trust | 63 | 63,230 | ||||||
Mercedes Benz Auto Lease Trust | 100 | 100,055 | ||||||
Volkswagen Auto Loan Enhanced Trust | 84 | 83,511 | ||||||
|
| |||||||
546,446 | ||||||||
|
| |||||||
Credit Cards - Fixed Rate – 0.5% | ||||||||
American Express Credit Account Master Trust | 100 | 100,471 | ||||||
Synchrony Credit Card Master Note Trust | 100 | 100,707 | ||||||
|
| |||||||
201,178 | ||||||||
|
| |||||||
Credit Cards - Floating Rate – 0.2% | ||||||||
Cabela’s Credit Card Master Note Trust | 100 | 99,876 | ||||||
|
| |||||||
Total Asset-Backed Securities | 847,500 | |||||||
|
| |||||||
COLLATERALIZED MORTGAGE | ||||||||
Risk Share Floating Rate – 0.4% | ||||||||
Federal National Mortgage Association Connecticut Avenue Securities | 60 | 60,238 | ||||||
Series 2014-C02, Class 1M1 | 62 | 61,339 |
22 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Principal Amount (000) | U.S. $ Value | |||||||
| ||||||||
Series 2014-C02, Class 2M1 | $ | 49 | $ | 48,316 | ||||
|
| |||||||
Total Collateralized Mortgage Obligations | 169,893 | |||||||
|
| |||||||
COMMERCIAL MORTGAGE-BACKED | ||||||||
Non-Agency Fixed Rate CMBS – 0.3% | ||||||||
Citigroup Commercial Mortgage Trust | 100 | 102,665 | ||||||
|
| |||||||
Total Investments – 97.9% | 38,865,552 | |||||||
Other assets less liabilities – 2.1% | 825,128 | |||||||
|
| |||||||
Net Assets – 100.0% | $ | 39,690,680 | ||||||
|
|
CENTRALLY CLEARED CREDIT DEFAULT SWAPS (see Note D)
Clearing Broker/(Exchange) & Referenced Obligation | Fixed Rate (Pay) Receive | Implied Credit Spread at April 30, 2016 | Notional Amount (000) | Market Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Sale Contracts | ||||||||||||||||||||
Morgan Stanley & Co., LLC/(INTRCONX) | ||||||||||||||||||||
CDX-NAHY Series 24, | 5.00 | % | 3.63 | % | $ | 297 | $ | 16,709 | $ | 11,962 |
* | Termination date |
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) | |||||||||||
Citibank, NA | $ | 400 | 12/14/20 | 1.548% | CPI# | $ | 3,420 | |||||||||
Deutsche Bank AG | 450 | 7/15/20 | 1.265% | CPI# | 12,106 | |||||||||||
|
| |||||||||||||||
$ | 15,526 | |||||||||||||||
|
|
# | Variable interest rate based on the rate of inflation as determined by the Consumer Price Index (CPI). |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 23 |
Portfolio of Investments
INTEREST RATE SWAPS (see Note D)
Rate Type | ||||||||||||||||
Swap Counterparty | Notional Amount (000) | Termination Date | Payments by the Fund | Payments received by the Fund | Unrealized Appreciation/ (Depreciation) | |||||||||||
Citibank, NA | $ | 500 | 10/20/22 | 1.140% | SIFMA* | $ | (5,475 | ) | ||||||||
Citibank, NA | 850 | 11/09/23 | 1.319% | SIFMA* | (17,741 | ) | ||||||||||
|
| |||||||||||||||
$ | (23,216 | ) | ||||||||||||||
|
|
* | 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 April 30, 2016, the aggregate market value of these securities amounted to $1,593,580 or 4.0% of net assets. |
(b) | Restricted and illiquid security. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
Capital Trust Agency, Inc. | 12/19/14 | $ | 95,265 | $ | 89,918 | 0.23 | % | |||||||||
Illinois Finance Authority | 12/18/13 | 48,091 | 39,920 | 0.10 | % | |||||||||||
Louisiana Public Facilities Authority | 7/31/14 | 250,000 | �� 150,000 | 0.38 | % |
(c) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities, which represent 0.26% of net assets as of April 30, 2016, are considered illiquid and restricted. |
Restricted Securities | Acquisition Date | Cost | Market Value | Percentage of Net Assets | ||||||||||||
City of Chicago IL | 5/27/15 | $ | 100,000 | $ | 102,214 | 0.26 | % |
(d) | Coupon rate adjusts periodically based upon a predetermined schedule. Stated interest rate in effect at April 30, 2016. |
(e) | Illiquid security. |
(f) | Security is in default and is non-income producing. |
(g) | An auction rate security whose interest rate resets at each auction date. Auctions are typically held every week or month. The rate shown is as of April 30, 2016 and the aggregate market value of these securities amounted to $289,928 or 0.73% of net assets. |
(h) | Floating Rate Security. Stated interest rate was in effect at April 30, 2016. |
As of April 30, 2016, 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 6.1% and 0.0%, respectively.
24 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Portfolio of Investments
Glossary: |
AGM | – Assured Guaranty Municipal |
CDX-NAHY | – North American High Yield Credit Default Swap Index |
CMBS | – Commercial Mortgage-Backed Securities |
COP | – Certificate of Participation |
ETM | – Escrowed to Maturity |
INTRCONX | – Inter-Continental Exchange |
LIBOR | – London Interbank Offered Rates |
NATL | – National Interstate Corporation |
XLCA | – XL Capital Assurance Inc. |
See notes to financial statements.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 25 |
Portfolio of Investments
STATEMENT OF ASSETS & LIABILITIES
April 30, 2016 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $37,099,608) | $ | 38,865,552 | ||
Cash collateral due from broker | 18,952 | |||
Receivable for investment securities sold | 618,111 | |||
Interest and dividends receivable | 442,985 | |||
Receivable for capital stock sold | 282,596 | |||
Unrealized appreciation on inflation swaps | 15,526 | |||
Receivable due from Adviser | 12,126 | |||
|
| |||
Total assets | 40,255,848 | |||
|
| |||
Liabilities | ||||
Due to custodian | 378,940 | |||
Payable for capital stock redeemed | 55,035 | |||
Unrealized depreciation on interest rate swaps | 23,216 | |||
Dividends payable | 21,896 | |||
Transfer Agent fee payable | 3,644 | |||
Distribution fee payable | 3,007 | |||
Payable for variation margin on exchange-traded derivatives | 196 | |||
Accrued expenses | 79,234 | |||
|
| |||
Total liabilities | 565,168 | |||
|
| |||
Net Assets | $ | 39,690,680 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 3,642 | ||
Additional paid-in capital | 37,832,060 | |||
Undistributed net investment income | 18,454 | |||
Accumulated net realized gain on investment transactions | 66,308 | |||
Net unrealized appreciation on investments | 1,770,216 | |||
|
| |||
$ | 39,690,680 | |||
|
|
Net Asset Value Per Share—18 billion shares of capital stock authorized, $.001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
A | $ | 5,912,182 | 542,565 | $ | 10.90 | * | ||||||
| ||||||||||||
C | $ | 1,847,538 | 169,508 | $ | 10.90 | |||||||
| ||||||||||||
Advisor | $ | 31,930,960 | 2,929,789 | $ | 10.90 | |||||||
|
* | The maximum offering price per share for Class A shares was $11.24 which reflects a sales charge of 3.0%. |
See notes to financial statements.
26 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Statement of Assets & Liabilities
STATEMENT OF OPERATIONS
Six Months Ended April 30, 2016 (unaudited)
Investment Income | ||||||||
Interest | $ | 516,582 | ||||||
Dividends—Affiliated issuers | 1,623 | $ | 518,205 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 93,402 | |||||||
Distribution fee—Class A | 7,991 | |||||||
Distribution fee—Class C | 8,502 | |||||||
Transfer agency—Class A | 2,236 | |||||||
Transfer agency—Class C | 603 | |||||||
Transfer agency—Advisor Class | 10,359 | |||||||
Custodian | 43,203 | |||||||
Administrative | 26,809 | |||||||
Audit and tax | 26,647 | |||||||
Registration fees | 25,662 | |||||||
Legal | 19,175 | |||||||
Directors’ fees | 11,266 | |||||||
Printing | 8,491 | |||||||
Miscellaneous | 4,663 | |||||||
|
| |||||||
Total expenses | 289,009 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (169,761 | ) | ||||||
|
| |||||||
Net expenses | 119,248 | |||||||
|
| |||||||
Net investment income | 398,957 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | 107,776 | |||||||
Swaps | (596 | ) | ||||||
Net change in unrealized appreciation/depreciation of: | ||||||||
Investments | 949,990 | |||||||
Swaps | 3,424 | |||||||
|
| |||||||
Net gain on investment transactions | 1,060,594 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 1,459,551 | ||||||
|
|
See notes to financial statements.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 27 |
Statement of Operations
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 398,957 | $ | 489,639 | ||||
Net realized gain (loss) on investment transactions | 107,180 | (36,858 | ) | |||||
Net change in unrealized appreciation/depreciation of investments | 953,414 | 228,333 | ||||||
|
|
|
| |||||
Net increase in net assets from operations | 1,459,551 | 681,114 | ||||||
Dividends and Distributions to Shareholders from | ||||||||
Net investment income | ||||||||
Class A | (62,110 | ) | (51,320 | ) | ||||
Class C | (10,209 | ) | (11,889 | ) | ||||
Advisor Class | (321,938 | ) | (426,246 | ) | ||||
Net realized gain on investment transactions | ||||||||
Class A | – 0 | – | (2,414 | ) | ||||
Class C | – 0 | – | (440 | ) | ||||
Advisor Class | – 0 | – | (19,264 | ) | ||||
Capital Stock Transactions | ||||||||
Net increase | 5,991,834 | 15,557,455 | ||||||
|
|
|
| |||||
Total increase | 7,057,128 | 15,726,996 | ||||||
Net Assets | ||||||||
Beginning of period | 32,633,552 | 16,906,556 | ||||||
|
|
|
| |||||
End of period (including undistributed net investment income of $18,454 and $13,754, respectively) | $ | 39,690,680 | $ | 32,633,552 | ||||
|
|
|
|
See notes to financial statements.
28 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Statement of Changes in Net Assets
NOTES TO FINANCIAL STATEMENTS
April 30, 2016 (unaudited)
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. The Fund, which is a Maryland corporation, operates as a series company comprised of ten 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, the AB High Yield Portfolio and the AB Income Fund. 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. The AB Income Fund commenced operations on April 21, 2016. This report relates only to the AB Tax-Aware Fixed Income Portfolio (the “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”).
In general, the market values of securities which are readily available and deemed reliable are determined as follows: securities listed on a national securities
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 29 |
Notes to Financial Statements
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 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
30 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
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 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
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 31 |
Notes to Financial Statements
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 Portfolio’s investments by the above fair value hierarchy levels as of April 30, 2016:
Investments in Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
| |||||||||||||||
Local Governments – Municipal Bonds | $ | – 0 | – | $ | 31,940,054 | $ | 2,297,969 | $ | 34,238,023 | |||||||
Corporates – Investment Grade | – 0 | – | 3,507,471 | – 0 | – | 3,507,471 | ||||||||||
Asset-Backed Securities | – 0 | – | 847,500 | – 0 | – | 847,500 | ||||||||||
Collateralized Mortgage Obligations | – 0 | – | 169,893 | – 0 | – | 169,893 | ||||||||||
Commercial Mortgage-Backed Securities | – 0 | – | 102,665 | – 0 | – | 102,665 | ||||||||||
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|
|
|
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|
| |||||||||
Total Investments in Securities | – 0 | – | 36,567,583 | 2,297,969 | 38,865,552 | |||||||||||
Other Financial Instruments(a): | ||||||||||||||||
Assets: | ||||||||||||||||
Centrally Cleared Credit Default Swaps | – 0 | – | 11,962 | – 0 | – | 11,962 | (b) | |||||||||
Inflation (CPI) Swaps | – 0 | – | 15,526 | – 0 | – | 15,526 | ||||||||||
Liabilities: | ||||||||||||||||
Interest Rate Swaps | – 0 | – | (23,216 | ) | – 0 | – | (23,216 | ) | ||||||||
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|
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|
|
| |||||||||
Total(c) | $ | – 0 | – | $ | 36,571,855 | $ | 2,297,969 | $ | 38,869,824 | |||||||
|
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|
(a) | Other financial instruments are derivative instruments, such as futures, forwards and swaps, which are valued at the unrealized appreciation/depreciation on the instrument. |
(b) | 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. |
(c) | 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.
32 | • 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 10/31/15 | $ | 1,840,984 | $ | 1,840,984 | ||||
Accrued discounts/(premiums) | (19 | ) | (19 | ) | ||||
Realized gain (loss) | – 0 | – | – 0 | – | ||||
Change in unrealized appreciation/depreciation | (47,903 | ) | (47,903 | ) | ||||
Purchases | 570,109 | 570,109 | ||||||
Sales | (65,202 | ) | (65,202 | ) | ||||
Transfers in to Level 3 | – 0 | – | – 0 | – | ||||
Transfers out of Level 3 | – 0 | – | – 0 | – | ||||
|
|
|
| |||||
Balance as of 4/30/16 | $ | 2,297,969 | $ | 2,297,969 | ||||
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| |||||
Net change in unrealized appreciation/depreciation from investments held as of 4/30/16(a) | $ | (52,774 | ) | $ | (52,774 | ) | ||
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(a) | 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 April 30, 2016, 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 • | 33 |
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 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 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
34 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
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.
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, 2017. For the six months ended April 30, 2016, such reimbursements/waivers amounted to $142,952.
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 six months ended April 30, 2016, the Adviser voluntarily agreed to waive such fees in the amount of $26,809.
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
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 35 |
Notes to Financial Statements
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 $8,590 for the six months ended April 30, 2016.
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 $0 from the sale of Class A shares and received $0 and $1,399 in contingent deferred sales charges imposed upon redemptions by shareholders of Class A and Class C shares, respectively, for the six months ended April 30, 2016.
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 currently available for direct purchase by members of the public. The Government STIF Portfolio currently pays no investment management fees but does bear its own expenses. A summary of the Portfolio’s transactions in shares of the Government STIF Portfolio for the six months ended April 30, 2016 is as follows:
Market Value October 31, 2015 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value April 30, 2016 (000) | Dividend Income (000) | ||||||||||||||
$ | 2,386 | $ | 13,536 | $ | 15,922 | $ | – 0 | – | $ | 2 |
Brokerage commissions paid on investment transactions for the six months ended April 30, 2016 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 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
36 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
amount of $11,246 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 six months ended April 30, 2016 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 12,741,811 | $ | 4,358,662 | ||||
U.S. government securities | 3,985,654 | 4,015,170 |
The cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation and unrealized depreciation are as follows:
Gross unrealized appreciation | $ | 1,908,255 | ||
Gross unrealized depreciation | (142,311 | ) | ||
|
| |||
Net unrealized appreciation | $ | 1,765,944 | ||
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1. Derivative Financial Instruments
The Portfolio may use derivatives in an effort to earn income and enhance returns, to replace more traditional direct investments, to obtain exposure to otherwise inaccessible markets (collectively, “investment purposes”), or to hedge or adjust the risk profile of its portfolio.
The principal types of derivatives utilized by the Portfolio, as well as the methods in which they may be used are:
• | Swaps |
The Portfolio may enter into swaps to hedge its exposure to interest rates 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 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.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 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 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 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
38 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
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 six months ended April 30, 2016, the Portfolio held interest rate swaps for hedging purposes.
Inflation (CPI) Swaps:
Inflation swaps are contracts in which one party agrees to pay the cumulative percentage increase in a price index (the Consumer Price Index with respect to CPI swaps) over the term of the swap (with some lag on the inflation index), and the other pays a compounded fixed rate. Inflation swaps may be used to protect the net asset value, or NAV, of a Portfolio against an unexpected change in the rate of inflation measured by an inflation index since the value of these agreements is expected to increase if unexpected inflation increases.
During the six months ended April 30, 2016, the Portfolio held inflation (CPI) swaps for hedging purposes.
Credit Default Swaps:
The Portfolio may enter into credit default swaps, including to manage its exposure to the market or certain sectors of the market, to reduce its risk exposure to defaults by corporate and sovereign issuers held by the Portfolio, or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. The Portfolio may purchase credit protection
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 39 |
Notes to Financial Statements
(“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 April 30, 2016, the Portfolio 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 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.
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 six months ended April 30, 2016, the Portfolio held credit default swaps for non-hedging purposes.
40 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
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.
At April 30, 2016, the Portfolio had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of | Fair Value | Statement of | Fair Value | ||||||||
Credit contracts | Receivable/payable for Variation margin on Exchange-traded derivatives | $ | 11,962 | * | ||||||||
Interest rate contracts | Unrealized depreciation on interest rate swaps | $ | 23,216 | |||||||||
Interest rate contracts | Unrealized appreciation on inflation swaps | 15,526 | ||||||||||
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Total | $ | 27,488 | $ | 23,216 | ||||||||
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* | 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 TAX-AWARE FIXED INCOME PORTFOLIO • | 41 |
Notes to Financial Statements
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 | $ | (13,472 | ) | $ | (8,538 | ) | |||
Credit contracts | Net realized gain (loss) on swaps; Net change in unrealized appreciation/depreciation of swaps | 12,876 | 11,962 | |||||||
|
|
|
| |||||||
Total | $ | (596 | ) | $ | 3,424 | |||||
|
|
|
|
The following table represents the average monthly volume of the Portfolio’s derivative transactions during the six months ended April 30, 2016:
Interest Rate Swaps: | ||||
Average notional amount | $ | 1,535,714 | ||
Inflation Swaps: | ||||
Average notional amount | $ | 692,857 | ||
Centrally Cleared Credit Default Swaps: | ||||
Average notional amount of sale contracts | $ | 445,500 | (a) |
(a) | Positions were open for four months during the period. |
For financial reporting purposes, the Portfolio does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the statement of assets and liabilities.
All derivatives held at period end were subject to netting arrangements. The following table presents the Portfolio’s derivative assets and liabilities by counterparty net of amounts available for offset under Master Agreements (“MA”) and net of the related collateral received/ pledged by the Portfolio as of April 30, 2016:
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 | $ | 3,420 | $ | (3,420 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
Deutsche Bank AG | 12,106 | – 0 | – | – 0 | – | – 0 | – | 12,106 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 15,526 | $ | (3,420 | ) | $ | – 0 | – | $ | – 0 | – | $ | 12,106 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
42 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
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** | $ | 196 | $ | – 0 | – | $ | (196 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 196 | $ | – 0 | – | $ | (196 | ) | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTC Derivatives: | ||||||||||||||||||||
Citibank, NA | $ | 23,216 | $ | (3,420 | ) | $ | – 0 | – | $ | – 0 | – | $ | 19,796 | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 23,216 | $ | (3,420 | ) | $ | – 0 | – | $ | – 0 | – | $ | 19,796 | ^ | ||||||
|
|
|
|
|
|
|
|
|
|
* | The actual collateral received/pledged is more than the amount reported due to over-collateralization. |
** | Cash and securities have been posted for initial margin requirements for exchange-traded derivatives outstanding at April 30, 2016. |
^ | Net amount represents the net receivable/(payable) that would be due from/to the counterparty in the event of default or termination. The net amount from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same counterparty. |
NOTE 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 | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | Six Months Ended (unaudited) | Year Ended 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Class A | ||||||||||||||||||||
Shares sold | 300,118 | 282,686 | $ | 3,209,872 | $ | 2,977,235 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 2,639 | 1,770 | 28,428 | 18,635 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (211,977 | ) | (18,562 | ) | (2,298,670 | ) | (194,825 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 90,780 | 265,894 | $ | 939,630 | $ | 2,801,045 | ||||||||||||||
| ||||||||||||||||||||
Class C | ||||||||||||||||||||
Shares sold | 74,745 | 142,063 | $ | 805,552 | $ | 1,504,726 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 665 | 840 | 7,160 | 8,846 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (49,233 | ) | (34,616 | ) | (531,402 | ) | (365,493 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 26,177 | 108,287 | $ | 281,310 | $ | 1,148,079 | ||||||||||||||
|
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 43 |
Notes to Financial Statements
Shares | Amount | |||||||||||||||||||
Six Months Ended April 30, 2016 (unaudited) | Year Ended October 31, 2015 | Six Months Ended (unaudited) | Year Ended 2015 | |||||||||||||||||
|
| |||||||||||||||||||
Advisor Class | ||||||||||||||||||||
Shares sold | 882,915 | 1,829,437 | $ | 9,495,918 | $ | 19,266,170 | ||||||||||||||
| ||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | 12,780 | 16,538 | 137,682 | 174,157 | ||||||||||||||||
| ||||||||||||||||||||
Shares redeemed | (452,741 | ) | (745,995 | ) | (4,862,706 | ) | (7,831,996 | ) | ||||||||||||
| ||||||||||||||||||||
Net increase | 442,954 | 1,099,980 | $ | 4,770,894 | $ | 11,608,331 | ||||||||||||||
|
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.
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, 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.
44 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
The Portfolio may invest in the municipal securities of Puerto Rico and other U.S. territories and their governmental agencies and municipalities, which are exempt from federal, state, and, where applicable, local income taxes. These municipal securities may have more risks than those of other U.S. issuers of municipal 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 Puerto Rico continues to face a very challenging economic and fiscal environment. Municipal securities issued by Puerto Rico issuers have extremely low credit ratings and are on “negative watch” by credit rating organizations. Some Puerto Rico issuers are in default on principal and interest payments. Puerto Rico announced recently that the Government Development Bank, which provides liquidity to Puerto Rico’s government agencies, would default on a $400 million debt payment. This default casts doubts on the ability of Puerto Rico and its government agencies to make future payments. If this and the general economic situation in Puerto Rico persist or worsen, the volatility and credit quality of Puerto Rican municipal securities could be adversely affected, and the market for such securities may experience continued volatility. In addition, Puerto Rico’s difficulties have resulted in increased volatility in portions of the broader municipal securities market from time to time, and this may recur in the future.
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 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
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 45 |
Notes to Financial Statements
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.
Leverage Risk—To the extent the Portfolio 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 Portfolio’s investments.
Derivatives Risk—The Portfolio may enter into derivative transactions such as forwards, options, futures and swaps. Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Portfolio, and subject to counterparty risk to a greater degree than more traditional investments. Derivatives may result in significant losses, including losses that are far greater than the value of the derivatives reflected on the statement of assets and liabilities.
Indemnification Risk—In the ordinary course of business, the Portfolio enters into contracts that contain a variety of indemnifications. The Portfolio’s maximum exposure under these arrangements is unknown. However, the Portfolio has not had prior claims or losses pursuant to these indemnification provisions and expects the risk of loss thereunder to be remote. Therefore, the Portfolio has not accrued any liability in connection with these indemnification provisions.
NOTE 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 six months ended April 30, 2016.
46 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Notes to Financial Statements
NOTE H
Distributions to Shareholders
The tax character of distributions to be paid for the year ending October 31, 2016 will be determined at the end of the current fiscal year. 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 the 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.
NOTE I
New Accounting Pronouncement
In May 2015, the Financial Accounting Standards Board issued an Accounting Standards Update, ASU 2015-07 (the “ASU”) 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 requirement to make certain disclosures for investments that are eligible to be measured at fair value using the net asset value per share practical expedient but do not utilize that practical expedient. 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.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 47 |
Notes to Financial Statements
NOTE J
Subsequent Event
The Government STIF Portfolio, prior to June 1, 2016, was offered as a cash management option to mutual funds and other institutional accounts of the Adviser, and was not available for direct purchase by members of the public. Prior to June 1, 2016, the Government STIF Portfolio paid no investment management fees but did bear its own expenses. As of June 1, 2016, the Government STIF Portfolio, which was renamed “AB Government Money Market Portfolio” (the “Government Money Market Portfolio”), will have a contractual investment management fee rate of .20% and will continue to bear its own expenses. In connection with the investment by the Portfolio in the Government Money Market Portfolio, the Adviser will waive its investment management fee from the Portfolio in an amount equal to Government Money Market Portfolio’s effective management fee.
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 other material events that would require disclosure in the Portfolio’s financial statements through this date.
48 | • 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 | ||||||||||||
Six Months April 30, 2016 | Year Ended October 31, 2015 | December 11, 2013(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 10.59 | $ 10.51 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .11 | .18 | .14 | |||||||||
Net realized and unrealized gain on investment transactions | .30 | .09 | .50 | |||||||||
|
| |||||||||||
Net increase in net asset value from operations | .41 | .27 | .64 | |||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | (.10 | ) | (.18 | ) | (.13 | ) | ||||||
Distributions from net realized gain on investment transactions | – 0 | – | (.01 | ) | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.10 | ) | (.19 | ) | (.13 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 10.90 | $ 10.59 | $ 10.51 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 3.93 | % | 2.64 | % | 6.44 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $5,912 | $4,783 | $1,954 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | .80 | %^ | .81 | % | .85 | %^ | ||||||
Expenses, before waivers/reimbursements | 1.70 | %^ | 2.19 | % | 3.59 | %^ | ||||||
Net investment income(c) | 1.97 | %^ | 1.75 | % | 1.57 | %^ | ||||||
Portfolio turnover rate | 23 | % | 35 | % | 42 | % |
See footnote summary on page 51.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 49 |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Class C | ||||||||||||
Six Months April 30, 2016 | Year Ended October 31, 2015 | December 11, 2013(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 10.59 | $ 10.52 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .07 | .10 | .07 | |||||||||
Net realized and unrealized gain on investment transactions | .30 | .09 | .52 | |||||||||
|
| |||||||||||
Net increase in net asset value from operations | .37 | .19 | .59 | |||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | (.06 | ) | (.11 | ) | (.07 | ) | ||||||
Distributions from net realized gain on investment transactions | – 0 | – | (.01 | ) | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.06 | ) | (.12 | ) | (.07 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 10.90 | $ 10.59 | $ 10.52 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 3.54 | % | 1.78 | % | 5.92 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $1,848 | $1,518 | $369 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | 1.55 | %^ | 1.55 | % | 1.55 | %^ | ||||||
Expenses, before waivers/reimbursements | 2.46 | %^ | 2.85 | % | 4.33 | %^ | ||||||
Net investment income(c) | 1.23 | %^ | .99 | % | .82 | %^ | ||||||
Portfolio turnover rate | 23 | % | 35 | % | 42 | % |
See footnote summary on page 51.
50 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Financial Highlights
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||
Six Months April 30, 2016 | Year Ended October 31, 2015 | December 11, 2013(a) to October 31, 2014 | ||||||||||
|
| |||||||||||
Net asset value, beginning of period | $ 10.59 | $ 10.52 | $ 10.00 | |||||||||
|
| |||||||||||
Income From Investment Operations | ||||||||||||
Net investment income(b)(c) | .12 | .21 | .16 | |||||||||
Net realized and unrealized gain on investment transactions | .31 | .08 | .52 | |||||||||
|
| |||||||||||
Net increase in net asset value from operations | .43 | .29 | .68 | |||||||||
|
| |||||||||||
Less: Dividends and Distributions | ||||||||||||
Dividends from net investment income | (.12 | ) | (.21 | ) | (.16 | ) | ||||||
Distributions from net realized gain on investment transactions | – 0 | – | (.01 | ) | – 0 | – | ||||||
|
| |||||||||||
Total dividends and distributions | (.12 | ) | (.22 | ) | (.16 | ) | ||||||
|
| |||||||||||
Net asset value, end of period | $ 10.90 | $ 10.59 | $ 10.52 | |||||||||
|
| |||||||||||
Total Return | ||||||||||||
Total investment return based on net asset value(d) | 4.06 | % | 2.81 | % | 6.84 | % | ||||||
Ratios/Supplemental Data | ||||||||||||
Net assets, end of period (000’s omitted) | $31,931 | $26,333 | $14,584 | |||||||||
Ratio to average net assets of: | ||||||||||||
Expenses, net of waivers/reimbursements | .55 | %^ | .55 | % | .55 | %^ | ||||||
Expenses, before waivers/reimbursements | 1.46 | %^ | 1.92 | % | 3.82 | %^ | ||||||
Net investment income(c) | 2.23 | %^ | 1.99 | % | 1.76 | %^ | ||||||
Portfolio turnover rate | 23 | % | 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 • | 51 |
Financial Highlights
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 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, Hults and Keegan are the investment professionals with the most significant responsibility for the day-to-day management of the Fund’s portfolio. |
52 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Board of Directors
Information Regarding the Review and Approval of the Portfolio’s Investment Advisory Contract
The disinterested directors (the “directors”) of AB Bond Fund, Inc. (the “Fund”) unanimously approved the continuance of the Fund’s Investment Advisory Contract (the “Advisory Agreement”) with the Adviser in respect of AB Tax-Aware Fixed Income Portfolio (the “Portfolio”) at a meeting held on November 3-5, 2015.
Prior to approval of the continuance of the Advisory Agreement in respect of the Portfolio, the directors had requested from the Adviser, and received and evaluated, extensive materials. They reviewed the proposed continuance of the Advisory Agreement with the Adviser and with experienced counsel who are independent of the Adviser, who advised on the relevant legal standards. The directors also reviewed an independent evaluation prepared by the Fund’s Senior Officer (who is also the Fund’s Independent Compliance Officer) of the reasonableness of the advisory fee, in which the Senior Officer concluded that the contractual fee for the Portfolio was reasonable. The directors also discussed the proposed continuance in private sessions with counsel and the Fund’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services provided by the Adviser to the Portfolio gained from their experience as directors or trustees of most of the registered investment companies advised by the Adviser, their overall confidence in the Adviser’s integrity and competence they have gained from that experience, the Adviser’s initiative in identifying and raising potential issues with the directors and its responsiveness, frankness and attention to concerns raised by the directors in the past, including the Adviser’s willingness to consider and implement organizational and operational changes designed to improve investment results and the services provided to the AB Funds. The directors noted that they have four regular meetings each year, at each of which they receive presentations from the Adviser on the investment results of the Portfolio and review extensive materials and information presented by the Adviser.
The directors also considered all other factors they believed relevant, including the specific matters discussed below. In their deliberations, the directors did not identify any particular information that was all-important or controlling, and different directors may have attributed different weights to the various factors. The directors determined that the selection of the Adviser to manage the Portfolio, and the overall arrangements between the Portfolio and the Adviser, as provided in the Advisory Agreement, including the advisory fee, were fair and reasonable in light of the services performed, expenses incurred and such other matters as the directors considered relevant in the exercise of their business
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 53 |
judgment. The material factors and conclusions that formed the basis for the directors’ determinations included the following:
Nature, Extent and Quality of Services Provided
The directors considered the scope and quality of services provided by the Adviser under the Advisory Agreement, including the quality of the investment research capabilities of the Adviser and the other resources it has dedicated to performing services for the Portfolio. They also noted the professional experience and qualifications of the Portfolio’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Portfolio will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Portfolio by employees of the Adviser or its affiliates. Requests for these reimbursements are made on a quarterly basis and subject to approval by the directors. Reimbursements, to the extent requested and paid, result in a higher rate of total compensation from the Portfolio to the Adviser than the fee rate stated in the Portfolio’s Advisory Agreement. The directors noted that the methodology used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Fund’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Portfolio’s other service providers, also was considered. The directors concluded that, overall, they were satisfied with the nature, extent and quality of services provided to the Portfolio under the Advisory Agreement.
Costs of Services Provided and Profitability
The directors reviewed a schedule of the revenues, expenses and related notes indicating the profitability of the Portfolio to the Adviser for the period ended December 31, 2013 and calendar year 2014 that had been prepared with an expense limitation methodology arrived at in consultation with an independent consultant retained by the Fund’s Senior Officer. The directors noted the assumptions and methods of allocation used by the Adviser in preparing fund-specific profitability data and understood that there are a number of potentially acceptable allocation methodologies for information of this type. The directors noted that the profitability information reflected all revenues and expenses of the Adviser’s relationship with the Portfolio, including those relating to its subsidiaries that provide transfer agency and distribution services to the Portfolio. The directors recognized that it is difficult to make comparisons of the profitability of the Advisory Agreement with the profitability of advisory contracts for unaffiliated funds because comparative information is not generally publicly available and is affected by numerous factors. The directors focused on the profitability of the Adviser’s relationship with the Portfolio before taxes and distribution expenses. The directors noted that the Adviser’s relationship with the Portfolio was not profitable to it in 2013 or 2014.
54 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their relationships with the Portfolio, including, but not limited to, benefits relating to 12b-1 fees and sales charges received by the Fund’s principal underwriter (which is a wholly owned subsidiary of the Adviser) in respect of certain classes of the Portfolio’s shares and transfer agency fees paid by the Portfolio to a wholly owned subsidiary of the Adviser. The directors recognized that the Portfolio’s unprofitability to the Adviser would be exacerbated without these benefits. The directors also understood that the Adviser also might derive reputational and other benefits from its association with the Portfolio.
Investment Results
In addition to the information reviewed by the directors in connection with the meeting, the directors receive detailed performance information for the Portfolio at each regular Board meeting during the year. At the November 2015 meeting, the directors reviewed information prepared by Broadridge showing the performance of the Class A Shares of the Portfolio as compared with that of a group of similar funds selected by Broadridge (the “Performance Group”) and as compared with that of a broad array of funds selected by Broadridge (the “Performance Universe”), and information prepared by the Adviser showing the performance of the Class A Shares as compared with the Barclays Municipal Bond Index (the “Index”), in each case for the 1-year period ended July 31, 2015 and (in the case of comparisons with the Index) the period since inception (December 2013 inception). The directors noted that the Portfolio was in the 4th quintile of the Performance Group and 5th quintile of the Performance Universe for the 1-year period. The Portfolio lagged the Index in the 1-year period and the period since inception. Based on their review, the directors concluded that the Portfolio’s performance was acceptable.
Advisory Fees and Other Expenses
The directors considered the advisory fee rate paid by the Portfolio to the Adviser and information prepared by Broadridge concerning advisory fee rates paid by other funds in the same Broadridge category as the Portfolio at a common asset level. The directors recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The directors noted that, in the Portfolio’s latest fiscal year, the administrative expense reimbursement of 43.4 basis points had been waived by the Adviser. The directors noted that, at the Portfolio’s current size, its contractual advisory fee rate of 50 basis points was lower than the Expense Group median.
The Adviser informed the directors that there were no institutional products managed by it that have an investment style substantially similar to that of the Portfolio. The directors reviewed the relevant fee information from the Adviser’s Form ADV and the evaluation from the Fund’s Senior Officer and noted that
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 55 |
the Adviser charged institutional clients lower fees for advising comparably sized accounts using strategies that differ from those of the Portfolio but which involved investments in municipal and taxable fixed income securities.
The Adviser reviewed with the directors the significantly greater scope of the services it provides to the Portfolio relative to institutional clients. The Adviser also noted that because mutual funds are constantly issuing and redeeming shares, they are more difficult to manage than an institutional account, where the assets tend to be relatively stable. In light of the substantial differences in services rendered by the Adviser to institutional clients as compared to funds such as the Portfolio, as well as the difference in fee structure, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors noted that the Portfolio may invest in shares of exchange-traded funds (“ETFs”), subject to the restrictions and limitations of the Investment Company Act of 1940 as these may be varied as a result of exemptive orders issued by the SEC. The directors also noted that ETFs pay advisory fees pursuant to their advisory contracts. The directors concluded, based on the Adviser’s explanation of how it may use ETFs when they are the most cost-effective way to obtain desired exposures for a fund or to temporarily “equitize” cash inflows pending purchases of underlying securities, that the advisory fee for the Portfolio would be paid for services that would be in addition to, rather than duplicative of, the services to be provided under the advisory contracts of the ETFs.
The directors also considered the total expense ratio of the Class A shares of the Portfolio in comparison to the fees and expenses of funds within two comparison groups created by Broadridge: an Expense Group and an Expense Universe. Broadridge described an Expense Group as a representative sample of funds similar to the Portfolio and an Expense Universe as a broader group than the Expense Group, consisting of all funds in the investment classification/objective with a similar load type as the Portfolio. The Class A expense ratio of the Portfolio was based on the Portfolio’s latest fiscal year and the information included the pro forma expense ratio to reflect a reduction in the 12b-1 fee effective January 30, 2015. The pro forma expense ratio of the Portfolio reflected fee waivers and/or expense reimbursements as a result of an undertaking by the Adviser. The directors noted that it was likely that the expense ratios of some of the other funds in the Portfolio’s Broadridge category also were lowered by waivers or reimbursements by those funds’ investment advisers, which in some cases might be voluntary or temporary. The directors view the expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Portfolio by others.
The directors noted that the Portfolio’s total pro forma expense ratio, giving effect to a cap by the Adviser, was lower than the Expense Group median and close to the Expense Universe median. The directors concluded that the Portfolio’s pro forma expense ratio was satisfactory.
56 | • AB TAX-AWARE FIXED INCOME PORTFOLIO |
Economies of Scale
The directors noted that the advisory fee schedule for the Portfolio does not contain breakpoints and that they had discussed their strong preference, and that of the Senior Officer, for breakpoints in advisory contracts with the Adviser. The directors took into consideration prior presentations by an independent consultant on economies of scale in the mutual fund industry and for the AB Funds, and by the Adviser concerning certain of its views on economies of scale. The directors also had requested and received from the Adviser certain updates on economies of scale at the May 2015 meetings. The directors believe that economies of scale may be realized (if at all) by the Adviser across a variety of products and services, and not only in respect of a single fund. The directors noted that there is no established methodology for setting breakpoints that give effect to the fund-specific services provided by a fund’s adviser and to the economies of scale that an adviser may realize in its overall mutual fund business or those components of it which directly or indirectly affect a fund’s operations. The directors observed that in the mutual fund industry as a whole, as well as among funds similar to the Portfolio, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. The directors also noted that the advisory agreements for many funds do not have breakpoints at all. The directors informed the Adviser that they would monitor the Portfolio’s assets (which were well below the level at which they would anticipate adding an initial breakpoint) and its profitability to the Adviser (currently unprofitable) and anticipated revisiting the question of breakpoints in the future if circumstances warranted doing so.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 57 |
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 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.” |
58 | • AB TAX-AWARE FIXED INCOME 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 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 • | 59 |
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.
Notwithstanding the Adviser’s view that managing an investment company is not comparable to managing other institutional accounts because the services
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%. |
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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
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
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 • | 61 |
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 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.
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. |
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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.
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.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 63 |
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, 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.
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. |
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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 |
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 |
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. |
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. |
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 65 |
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
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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
International Strategic Core 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
Income Fund
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 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 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.
AB TAX-AWARE FIXED INCOME PORTFOLIO • | 67 |
AB Family of Funds
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-0152-0416
ITEM 2. | CODE OF ETHICS. |
Not applicable when filing a semi-annual report to shareholders.
ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Not applicable when filing a semi-annual report to shareholders.
ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Not applicable when filing a semi-annual report to shareholders.
ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable to the registrant.
ITEM 6. | SCHEDULE OF INVESTMENTS. |
Please see Schedule of Investments contained in the Report to Shareholders included under Item 1 of this Form N-CSR.
ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable to the registrant.
ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable to the registrant.
ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not applicable to the registrant.
ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
There have been no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board of Directors since the Fund last provided disclosure in response to this item.
ITEM 11. | CONTROLS AND PROCEDURES. |
(a) The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940, as amended) are effective at the reasonable assurance level based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this document.
(b) There were no changes in the registrant’s internal controls over financial reporting that occurred during the second fiscal quarter of the period that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
ITEM 12. | EXHIBITS. |
The following exhibits are attached to this Form N-CSR:
EXHIBIT NO. | DESCRIPTION OF EXHIBIT | |
12 (b) (1) | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
12 (b) (2) | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
12 (c) | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant): AB Bond Fund, Inc.
By: | /s/ Robert M. Keith | |
Robert M. Keith | ||
President |
Date: June 27, 2016
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: June 27, 2016
By: | /s/ Joseph J. Mantineo | |
Joseph J. Mantineo | ||
Treasurer and Chief Financial Officer |
Date: June 27, 2016