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: 811-01716
AB CAP 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: December 31, 2018
Date of reporting period: June 30, 2018
ITEM 1. | REPORTS TO STOCKHOLDERS. |
JUN 06.30.18
SEMI-ANNUAL REPORT
AB FLEXFEETM CORE OPPORTUNITIES PORTFOLIO
A discussion of the Fund’s investment performance is not included in this report AllianceBernstein L.P. would like to thank you for your interest in the 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.abfunds.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.abfunds.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.abfunds.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.
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 advisory 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.
This 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 1/1/2018 | Ending Account Value 6/30/2018 | Expenses Paid During Period* | Annualized Expense Ratio* | Total Expenses Paid During Period+ | Total Annualized Expense Ratio+ | |||||||||||||||||||
Advisor Class | ||||||||||||||||||||||||
Actual | $ | 1,000 | $ | 1,026.20 | $ | 2.06 | 0.41 | % | $ | 2.21 | 0.44 | % | ||||||||||||
Hypothetical** | $ | 1,000 | $ | 1,022.76 | $ | 2.06 | 0.41 | % | $ | 2.21 | 0.44 | % |
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 1 |
EXPENSE EXAMPLE (continued)
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
+ | In connection with the Fund’s investments in affiliated/unaffiliated underlying portfolios, the Fund incurs no direct expenses, but bears proportionate shares of the fees and expenses (i.e., operating, administrative and investment advisory fees) of the affiliated/unaffiliated underlying portfolios. The Adviser has contractually agreed to waive its fees from the Fund in an amount equal to the Fund’s pro rata share of certain acquired fund fees and expenses of the affiliated underlying portfolios. The Fund’s total expenses are equal to the classes’ annualized expense ratio plus the Fund’s pro rata share of the weighted average expense ratio of the affiliated/unaffiliated underlying portfolios in which it invests, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
2 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
PORTFOLIO SUMMARY
June 30, 2018 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $1.1
TEN LARGEST HOLDINGS2
Company | U.S. $ Value | Percent of Net Assets | ||||||
Alphabet, Inc. – Class C | $ | 62,477 | 5.5 | % | ||||
Facebook, Inc. – Class A | 55,964 | 4.9 | ||||||
Walt Disney Co. (The) | 47,269 | 4.2 | ||||||
DR Horton, Inc. | 39,360 | 3.5 | ||||||
JPMorgan Chase & Co. | 38,554 | 3.4 | ||||||
Berkshire Hathaway, Inc. – Class B | 38,450 | 3.4 | ||||||
Biogen, Inc. | 37,441 | 3.3 | ||||||
Eli Lilly & Co. | 34,900 | 3.1 | ||||||
Raytheon Co. | 32,840 | 2.9 | ||||||
Walgreens Boots Alliance, Inc. | 29,528 | 2.6 | ||||||
$ | 416,783 | 36.8 | % |
1 | All data are as of June 30, 2018. The Fund’s sector breakdown is expressed as a percentage of total investments and may vary over time. |
2 | Long-term investments. |
Please note: The sector classifications presented herein are based on the Global Industry Classification Standard (GICS) which was developed by Morgan Stanley Capital International and Standard & Poor’s. The components are divided into sector, industry group, and industry sub-indices as classified by the GICS for each of the market capitalization indices in the broad market. These sector classifications are broadly defined. The “Portfolio of Investments” section of the report reflects more specific industry information and is consistent with the investment restrictions discussed in the Fund’s prospectus.
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 3 |
PORTFOLIO OF INVESTMENTS
June 30, 2018 (unaudited)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
COMMON STOCKS – 89.6% | ||||||||
Consumer Discretionary – 17.3% | ||||||||
Hotels, Restaurants & Leisure – 0.7% | ||||||||
Royal Caribbean Cruises Ltd. | 83 | $ | 8,599 | |||||
|
| |||||||
Household Durables – 4.4% | ||||||||
DR Horton, Inc. | 960 | 39,360 | ||||||
Garmin Ltd. | 170 | 10,370 | ||||||
|
| |||||||
49,730 | ||||||||
|
| |||||||
Internet & Direct Marketing Retail – 2.3% | ||||||||
Booking Holdings, Inc.(a) | 13 | 26,352 | ||||||
|
| |||||||
Media – 7.5% | ||||||||
Comcast Corp. – Class A | 574 | 18,833 | ||||||
Discovery, Inc. – Class A(a)(b) | 691 | 19,003 | ||||||
Walt Disney Co. (The) | 451 | 47,269 | ||||||
|
| |||||||
85,105 | ||||||||
|
| |||||||
Specialty Retail – 2.4% | ||||||||
Home Depot, Inc. (The) | 68 | 13,267 | ||||||
Ross Stores, Inc. | 77 | 6,525 | ||||||
Ulta Salon Cosmetics & Fragrance, Inc.(a) | 30 | 7,004 | ||||||
|
| |||||||
26,796 | ||||||||
|
| |||||||
196,582 | ||||||||
|
| |||||||
Information Technology – 16.1% | ||||||||
Communications Equipment – 0.6% | ||||||||
F5 Networks, Inc.(a) | 37 | 6,381 | ||||||
|
| |||||||
Internet Software & Services – 10.4% | ||||||||
Alphabet, Inc. – Class C(a) | 56 | 62,477 | ||||||
Facebook, Inc. – Class A(a) | 288 | 55,964 | ||||||
|
| |||||||
118,441 | ||||||||
|
| |||||||
IT Services – 2.6% | ||||||||
International Business Machines Corp. | 98 | 13,691 | ||||||
Visa, Inc. – Class A | 119 | 15,761 | ||||||
|
| |||||||
29,452 | ||||||||
|
| |||||||
Semiconductors & Semiconductor Equipment – 0.7% | ||||||||
Semtech Corp.(a) | 165 | 7,763 | ||||||
|
| |||||||
Technology Hardware, Storage & Peripherals – 1.8% | ||||||||
Apple, Inc. | 108 | 19,992 | ||||||
|
| |||||||
182,029 | ||||||||
|
| |||||||
Health Care – 15.6% | ||||||||
Biotechnology – 5.6% | ||||||||
Biogen, Inc.(a) | 129 | 37,441 | ||||||
Gilead Sciences, Inc. | 151 | 10,697 |
4 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Regeneron Pharmaceuticals, Inc.(a) | 45 | $ | 15,524 | |||||
|
| |||||||
63,662 | ||||||||
|
| |||||||
Health Care Providers & Services – 6.9% | ||||||||
Aetna, Inc. | 55 | 10,093 | ||||||
Anthem, Inc. | 66 | 15,710 | ||||||
Cigna Corp. | 143 | 24,303 | ||||||
UnitedHealth Group, Inc. | 115 | 28,214 | ||||||
|
| |||||||
78,320 | ||||||||
|
| |||||||
Pharmaceuticals – 3.1% | ||||||||
Eli Lilly & Co. | 409 | 34,900 | ||||||
|
| |||||||
176,882 | ||||||||
|
| |||||||
Financials – 14.6% | ||||||||
Banks – 3.4% | ||||||||
JPMorgan Chase & Co. | 370 | 38,554 | ||||||
|
| |||||||
Capital Markets – 2.4% | ||||||||
Northern Trust Corp. | 172 | 17,697 | ||||||
State Street Corp. | 105 | 9,774 | ||||||
|
| |||||||
27,471 | ||||||||
|
| |||||||
Diversified Financial Services – 3.4% | ||||||||
Berkshire Hathaway, Inc. – Class B(a) | 206 | 38,450 | ||||||
|
| |||||||
Insurance – 5.4% | ||||||||
Aflac, Inc. | 310 | 13,336 | ||||||
Allstate Corp. (The) | 174 | 15,881 | ||||||
Chubb Ltd. | 57 | 7,240 | ||||||
Reinsurance Group of America, Inc. – Class A | 184 | 24,561 | ||||||
|
| |||||||
61,018 | ||||||||
|
| |||||||
165,493 | ||||||||
|
| |||||||
Industrials – 10.4% | ||||||||
Aerospace & Defense – 3.6% | ||||||||
Hexcel Corp. | 118 | 7,833 | ||||||
Raytheon Co. | 170 | 32,840 | ||||||
|
| |||||||
40,673 | ||||||||
|
| |||||||
Airlines – 3.0% | ||||||||
Copa Holdings SA – Class A | 88 | 8,327 | ||||||
Southwest Airlines Co. | 512 | 26,050 | ||||||
|
| |||||||
34,377 | ||||||||
|
| |||||||
Building Products – 1.5% | ||||||||
Allegion PLC | 131 | 10,134 | ||||||
Trex Co., Inc.(a) | 105 | 6,572 | ||||||
|
| |||||||
16,706 | ||||||||
|
| |||||||
Commercial Services & Supplies – 0.7% | ||||||||
Copart, Inc.(a) | 135 | 7,636 | ||||||
|
|
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 5 |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Machinery – 0.9% | ||||||||
Crane Co. | 131 | $ | 10,497 | |||||
|
| |||||||
Road & Rail – 0.7% | ||||||||
Kansas City Southern | 71 | 7,523 | ||||||
|
| |||||||
117,412 | ||||||||
|
| |||||||
Consumer Staples – 6.3% | ||||||||
Food & Staples Retailing – 4.7% | ||||||||
Costco Wholesale Corp. | 31 | 6,478 | ||||||
Walgreens Boots Alliance, Inc. | 492 | 29,528 | ||||||
Walmart, Inc. | 202 | 17,301 | ||||||
|
| |||||||
53,307 | ||||||||
|
| |||||||
Tobacco – 1.6% | ||||||||
Philip Morris International, Inc. | 223 | 18,005 | ||||||
|
| |||||||
71,312 | ||||||||
|
| |||||||
Energy – 4.6% | ||||||||
Energy Equipment & Services – 2.9% | ||||||||
Core Laboratories NV | 35 | 4,417 | ||||||
Dril-Quip, Inc.(a) | 176 | 9,046 | ||||||
National Oilwell Varco, Inc. | 104 | 4,514 | ||||||
Oil States International, Inc.(a) | 177 | 5,682 | ||||||
TechnipFMC PLC | 313 | 9,935 | ||||||
|
| |||||||
33,594 | ||||||||
|
| |||||||
Oil, Gas & Consumable Fuels – 1.7% | ||||||||
Noble Energy, Inc. | 538 | 18,980 | ||||||
|
| |||||||
Telecommunication Services – 3.2% | ||||||||
Diversified Telecommunication Services – 3.2% | ||||||||
AT&T, Inc. | 564 | 18,110 | ||||||
Verizon Communications, Inc. | 367 | 18,464 | ||||||
|
| |||||||
36,574 | ||||||||
|
| |||||||
Real Estate – 1.5% | ||||||||
Real Estate Management & Development – 1.5% | ||||||||
CBRE Group, Inc. – Class A(a) | 359 | 17,139 | ||||||
|
| |||||||
Total Common Stocks | 1,015,997 | |||||||
|
| |||||||
SHORT-TERM INVESTMENTS – 10.6% | ||||||||
Investment Companies – 10.6% | ||||||||
AB Fixed Income Shares, Inc. – | 120,349 | 120,349 | ||||||
|
| |||||||
Total Investments Before Security Lending | 1,136,346 | |||||||
|
|
6 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
INVESTMENTS OF CASH COLLATERAL FOR SECURITIES LOANED – 1.8% | ||||||||
Investment Companies – 1.8% | ||||||||
AB Fixed Income Shares, Inc. – | 19,744 | $ | 19,744 | |||||
|
| |||||||
Total Investments – 102.0% | 1,156,090 | |||||||
Other assets less liabilities – (2.0)% | (22,170 | ) | ||||||
|
| |||||||
Net Assets – 100.0% | $ | 1,133,920 | ||||||
|
|
(a) | Non-income producing security. |
(b) | Represents entire or partial securities out on loan. See Note D for securities lending information. |
(c) | Affiliated investments. |
(d) | To obtain a copy of the fund’s shareholder report, please go to the Securities and Exchange Commission’s website at www.sec.gov, or call AB at (800) 227-4618. |
(e) | The rate shown represents the 7-day yield as of period end. |
See notes to financial statements.
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 7 |
STATEMENT OF ASSETS & LIABILITIES
June 30, 2018 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $954,029) | $ | 1,015,997 | (a) | |
Affiliated issuers (cost $140,093 – including investment of cash collateral for securities loaned of $19,744) | 140,093 | |||
Cash | 79 | |||
Receivable from Adviser | 69,524 | |||
Receivable for investment securities sold | 13,410 | |||
Unaffiliated dividends receivable | 544 | |||
Affiliated dividends receivable | 169 | |||
|
| |||
Total assets | 1,239,816 | |||
|
| |||
Liabilities | ||||
Audit and tax fee payable | 21,536 | |||
Payable for collateral received on securities loaned | 19,744 | |||
Custody fee payable | 16,031 | |||
Registration fee payable | 14,984 | |||
Payable for investment securities purchased | 13,231 | |||
Legal fee payable | 13,022 | |||
Directors’ fee payable | 1,962 | |||
Transfer Agent fee payable | 187 | |||
Accrued expenses and other liabilities | 5,199 | |||
|
| |||
Total liabilities | 105,896 | |||
|
| |||
Net Assets | $ | 1,133,920 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 10 | ||
Additional paid-in capital | 999,628 | |||
Undistributed net investment income | 5,462 | |||
Accumulated net realized gain on transactions | 66,852 | |||
Net unrealized appreciation on investments | 61,968 | |||
|
| |||
$ | 1,133,920 | |||
|
|
Net Asset Value Per Share—11 billion shares of capital stock authorized, $.0001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
Advisor | $ | 1,133,920 | 100,000 | $ | 11.34 | |||||||
|
(a) | Includes securities on loan with a value of 18,563 (See Note D). |
See notes to financial statements.
8 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2018 (unaudited)
Investment Income | ||||||||
Dividends | ||||||||
Unaffiliated issuers (net of foreign taxes withheld of $16) | $ | 5,697 | ||||||
Affiliated issuers | 1,164 | $ | 6,861 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 2,207 | |||||||
Transfer agency—Advisor Class | 571 | |||||||
Administrative | 43,347 | |||||||
Amortization of offering expenses | 33,389 | |||||||
Audit and tax | 28,258 | |||||||
Registration fees | 21,959 | |||||||
Custodian | 21,422 | |||||||
Directors’ fees | 14,322 | |||||||
Legal | 12,878 | |||||||
Printing | 6,298 | |||||||
Miscellaneous | 2,791 | |||||||
|
| |||||||
Total expenses | 187,442 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B and Note D) | (185,116 | ) | ||||||
|
| |||||||
Net expenses | 2,326 | |||||||
|
| |||||||
Net investment income | 4,535 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investments | ||||||||
Net realized gain on: | ||||||||
Investment transactions | 59,833 | |||||||
Net change in unrealized appreciation/depreciation on: | ||||||||
Investments | (35,885 | ) | ||||||
|
| |||||||
Net gain on investments | 23,948 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 28,483 | ||||||
|
|
See notes to financial statements.
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 9 |
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017(a) to December 31, 2017 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 4,535 | $ | 3,652 | ||||
Net realized gain on investment transactions | 59,833 | 14,969 | ||||||
Net change in unrealized appreciation/depreciation on investments | (35,885 | ) | 97,853 | |||||
|
|
|
| |||||
Net increase in net assets from operations | 28,483 | 116,474 | ||||||
Dividends and Distributions to Shareholders from | ||||||||
Net investment income | ||||||||
Advisor Class | – 0 | – | (3,090 | ) | ||||
Net realized gain on investment transactions | ||||||||
Advisor Class | – 0 | – | (7,950 | ) | ||||
Capital Stock Transactions | ||||||||
Net increase | – 0 | – | 1,000,003 | |||||
|
|
|
| |||||
Total increase | 28,483 | 1,105,437 | ||||||
Net Assets | ||||||||
Beginning of period | 1,105,437 | – 0 | – | |||||
|
|
|
| |||||
End of period (including undistributed net investment income of $5,462 and $927, respectively) | $ | 1,133,920 | $ | 1,105,437 | ||||
|
|
|
|
(a) | Commencement of operations. |
See notes to financial statements.
10 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS
June 30, 2018 (unaudited)
NOTE A
Significant Accounting Policies
AB Cap Fund, Inc. (the “Company”), which is a Maryland corporation, is registered under the Investment Company Act of 1940 as an open-end management investment company. The Company operates as a series company comprised of 28 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 FlexFee Core Opportunities Portfolio (the “Fund”), a diversified portfolio. The Fund commenced operations on June 28, 2017. The Fund has authorized issuance of Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I, Class Z, Class T, Class 1, and Class 2 shares. Class A, Class B, Class C, Class R, Class K, Class I, Class Z, Class T, Class 1, and Class 2 shares have not been issued. As of June 30, 2018, AllianceBernstein L.P. (the “Adviser”) was the sole shareholder of Advisor Class shares. Advisor Class shares are sold without an initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. All eleven 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 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
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 11 |
NOTES TO FINANCIAL STATEMENTS (continued)
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 “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. Open end mutual funds are valued at the closing net asset value per share, while exchange traded funds are valued at the closing market price per share.
Securities for which market quotations are not readily available (including restricted securities) or are deemed unreliable are valued at fair value as deemed appropriate by the Adviser. 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 significant events, including broad market moves, may have occurred in the interim and
12 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
may materially affect the value of those securities. To account for this, the Fund generally values 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) |
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.
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 13 |
NOTES TO FINANCIAL STATEMENTS (continued)
The following table summarizes the valuation of the Fund’s investments by the above fair value hierarchy levels as of June 30, 2018:
Investments in | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Common Stocks | $ | 1,015,997 | $ | – 0 | – | $ | – 0 | – | $ | 1,015,997 | ||||||
Short-Term Investments: | ||||||||||||||||
Investment Companies | 120,349 | – 0 | – | – 0 | – | 120,349 | ||||||||||
Investments of Cash Collateral for Securities Loaned in Affiliated Money Market Fund | 19,744 | – 0 | – | – 0 | – | 19,744 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 1,156,090 | – 0 | – | – 0 | – | 1,156,090 | ||||||||||
Other Financial Instruments*: | – 0 | – | – 0 | – | – 0 | – | – 0 | – | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total** | $ | 1,156,090 | $ | – 0 | – | $ | – 0 | – | $ | 1,156,090 | ||||||
|
|
|
|
|
|
|
|
^ | See Portfolio of Investments for sector classifications. |
* | 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 swaps with upfront premiums, options written and swaptions written which are valued at market value. |
** | There were no transfers between any levels during the reporting period. |
The Fund recognizes all transfers between levels of the fair value hierarchy assuming the financial instrument was transferred at the beginning of the reporting period.
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the 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 any 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
14 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
accuracy of prices including: 1) periodic vendor due diligence meetings, review of methodologies, new developments and process 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 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, 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 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 and 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.
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 15 |
NOTES TO FINANCIAL STATEMENTS (continued)
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 the current initial tax year, 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 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. Expense Allocations
Expenses of the Company are charged proportionately to each portfolio or based on other appropriate methods.
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 $68,085 were deferred and amortized on a straight line basis over a one year period starting from June 28, 2017 (commencement of operations).
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 .55% of the Fund’s average daily net assets (“Base Fee”). The advisory fee is increased or decreased from the Base Fee by a performance adjustment (“Performance Adjustment”) that depends on whether, and to what extent, the investment performance of the Advisor Class shares of the Fund (“Measuring Class”) exceeds, or is exceeded by, the performance of the S&P 500 Index (“Index”) plus 1.40% (“Index Hurdle”) over the Performance Period (as defined below). The Performance Adjustment is calculated and accrued daily, according to a schedule that adds or subtracts .00357% of the Fund’s average daily net assets for each .01% of absolute performance by which the performance of the Measuring Class exceeds or lags the Index
16 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
Hurdle for the period from the beginning of the Performance Period through the current business day. The maximum Performance Adjustment (positive or negative) will not exceed an annualized rate of +/- .50% (“Maximum Performance Adjustment”) of the Fund’s average daily net assets, which would occur when the performance of the Measuring Class exceeds, or is exceeded by, the Index Hurdle by 1.40% or more for the Performance Period. On a monthly basis, the Fund will pay the Adviser the minimum fee rate of .05% on an annualized basis (Base Fee minus the Maximum Performance Adjustment) applied to the average daily net assets for the month. At the end of the Performance Period, the Fund will pay to the Adviser the total advisory fee, less the amount of any minimum fees paid during the Performance Period and any waivers described below. The period over which performance is measured (“Performance Period”) is initially from the commencement of operations to December 31, 2018 and thereafter each 12-month period beginning on the first day in the month of January through December 31 of the same year. In addition, the Adviser has agreed to waive its advisory fee by limiting the Fund’s accrual of the advisory fee (Base Fee plus Performance Adjustment) on any day to the amount corresponding to the maximum fee rate multiplied by the Fund’s current net assets if such amount is less than the amount that would have been accrued based on the Fund’s average daily net assets for the Performance Period. For the reporting period ended June 30, 2018, the Fund accrued advisory fees of $2,207, as reflected in the statement of operations, at an annual effective rate (excluding the impact from any expense waivers in effect) of .36% of the Fund’s average net assets, which reflected a (.19)% Performance Adjustment of $(2,086).
The Adviser has agreed to waive its fees and bear certain expenses through April 30, 2019 to the extent necessary to limit total expenses (other than the advisory fee, 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 from exceeding .05% of average daily net assets. Any fees waived and expenses borne by the Adviser through December 31, 2018 are subject to repayment by the Fund until the end of the third fiscal year after the fiscal period in which the fees were waived or the expenses were borne; such waivers/expenses borne that are subject to repayment amount to $171,134 for the fiscal period ended December 31, 2017, and $141,607 for the six months ended June 30, 2018. In any case, no repayment will be made that would cause the Fund’s total annual expenses (subject to the exclusions set forth above) to exceed .05%.
Pursuant to the investment advisory agreement, the Fund may reimburse the Adviser for certain legal and accounting services provided to the Fund
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 17 |
NOTES TO FINANCIAL STATEMENTS (continued)
by the Adviser. For the six months ended June 30, 2018, the Adviser voluntarily agreed to waive such fees in the amount of $43,347.
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. The compensation retained by ABIS amounted to $374 for the six months ended June 30, 2018.
The Fund may invest in AB Government Money Market Portfolio (the “Government Money Market Portfolio”) which has a contractual annual advisory fee rate of .20% of the portfolio’s average daily net assets and bears its own expenses. In connection with the investment by the Fund in the Government Money Market Portfolio, the Adviser has contractually agreed to waive its investment advisory fee from the Fund in an amount equal to the Fund’s pro rata share of the effective advisory fee of Government Money Market Portfolio, as borne indirectly by the Fund as an acquired fund fee and expense. For the six months ended June 30, 2018, such waiver amounted to $161.
A summary of the Fund’s transactions in AB mutual funds for the six months ended June 30, 2018 is as follows:
Fund | Market Value 12/31/17 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value 06/30/18 (000) | Dividend Income (000) | |||||||||||||||
Government Money Market Portfolio | $ | 201 | $ | 189 | $ | 270 | $ | 120 | $ | 1 | ||||||||||
Government Money Market Portfolio* | – 0 | – | 32 | 12 | 20 | 0 | ** | |||||||||||||
|
|
|
| |||||||||||||||||
Total | $ | 140 | $ | 1 | ||||||||||||||||
|
|
|
|
* | Investment of cash collateral for securities lending transactions (see Note D). |
** | Amount is less than $500. |
Brokerage commissions paid on investment transactions for the six months ended June 30, 2018 amounted to $298, of which $0 and $0, respectively was paid to Sanford C. Bernstein & Co. LLC and Sanford C. Bernstein Limited, affiliates of the Adviser.
18 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE C
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the six months ended June 30, 2018, were as follows:
Purchases | Sales | |||||||
Investment securities (excluding U.S. government securities) | $ | 667,552 | $ | 557,407 | ||||
U.S. government securities | – 0 | – | – 0 | – |
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 are as follows:
Gross unrealized appreciation | $ | 82,997 | ||
Gross unrealized depreciation | (21,029 | ) | ||
|
| |||
Net unrealized appreciation | $ | 61,968 | ||
|
|
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.
The Fund did not engage in derivative transactions for the six months ended June 30, 2018.
2. Currency Transactions
The Fund may invest in non-U.S. Dollar-denominated 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).
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 19 |
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE D
Securities Lending
The Fund may enter into securities lending transactions. Under the Fund’s securities lending program, all loans of securities will be collateralized continually by cash. The Fund will be compensated for the loan from a portion of the net return from the income earned on cash collateral after a rebate is paid to the borrower (in some cases, this rebate may be a “negative rebate” or fee paid by the borrower to the Fund in connection with the loan), and payments are made for fees of the securities lending agent and for certain other administrative expenses. It is the policy of the Fund to receive collateral consisting of cash in an amount exceeding the value of the securities loaned. A Fund will have the right to call a loan and obtain the securities loaned at any time on notice to the borrower within the normal and customary settlement time for the securities. While the securities are on loan, the borrower is obligated to pay the Fund amounts equal to any income or other distributions from the securities. The Fund will not be able to exercise voting rights with respect to any securities during the existence of a loan, but will have the right to regain ownership of loaned securities in order to exercise voting or other ownership rights. The lending agent has agreed to indemnify the Fund in the case of default of any securities borrower. Collateral received and securities loaned are marked to market daily to ensure that the securities loaned are secured by collateral. The lending agent currently invests the cash collateral received in Government Money Market Portfolio, an eligible money market vehicle, in accordance with the investment restrictions of the Fund, and as approved by the Board. The collateral received on securities loaned is recorded as an asset as well as a corresponding liability in the statement of assets and liabilities. When the Fund lends securities, its investment performance will continue to reflect changes in the value of the securities loaned. At June 30, 2018, the Fund had securities on loan with a value of $18,563 and had received cash collateral which has been invested into Government Money Market Portfolio of $19,744. The Fund earned securities lending income of $0 and $3 from the borrowers and Government Money Market Portfolio, respectively, for the six months ended June 30, 2018; these amounts are reflected in the statement of operations. In connection with the cash collateral investment by the Fund in the Government Money Market Portfolio, the Adviser has agreed to waive a portion of the Fund’s share of the advisory fees of Government Money Market Portfolio, as borne indirectly by the Fund as an acquired fund fee and expense. For the six months ended June 30, 2018, such waiver amounted to $1. A principal risk of lending portfolio securities is that the borrower will fail to return the loaned securities upon termination of the loan and that the collateral will not be sufficient to replace the loaned securities.
20 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE E
Capital Stock
Each class consists of 1,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||||||||||||||
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017* to December 31, 2017 | Six Months Ended June 30, 2018 (unaudited) | June 28, 2017* to December 31, 2017 | |||||||||||||||||||||
|
| |||||||||||||||||||||||
Advisor Class | ||||||||||||||||||||||||
Shares sold | – 0 | – | 100,000 | $ | – 0 | – | $ | 1,000,003 | ||||||||||||||||
| ||||||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | – 0 | – | 0 | (a) | – 0 | – | 0 | (b) | ||||||||||||||||
| ||||||||||||||||||||||||
Net increase | – 0 | – | 100,000 | $ | – 0 | – | $ | 1,000,003 | ||||||||||||||||
|
* | Commencement of operations. |
(a) | less than 0.5 shares. |
(b) | less than $0.5. |
NOTE F
Risks Involved in Investing in the Fund
Capitalization Risk—Investments in small- and mid-capitalization companies may be more volatile than investments in large-capitalization companies. Investments in small- and mid-capitalization companies may have additional risks because these companies may have limited product lines, markets or financial resources.
Derivatives Risk—The Fund may enter into derivative transactions such as forwards, options, futures and swaps. Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Fund, and subject to counterparty risk to a greater degree than more traditional investments. Derivatives may result in significant losses, including losses that are far greater than the value of the derivatives reflected on the statement of assets and liabilities.
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.
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 21 |
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE G
Distributions to Shareholders
The tax character of distributions paid for the year ending December 31, 2018 will be determined at the end of the current fiscal year.
The tax character of distributions paid during the fiscal period ended December 31, 2017 was as follows:
2017 | ||||
Distributions paid from: | ||||
Ordinary income | $ | 11,040 | ||
|
| |||
Total taxable distributions paid | $ | 11,040 | ||
|
|
As of December 31, 2017, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 8,535 | ||
Unrealized appreciation/(depreciation) | 97,264 | (a) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | 105,799 | ||
|
|
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the tax deferral of losses on wash sales. |
For tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. Funds are permitted to carry forward capital losses for an indefinite period, and such losses will retain their character as either short-term or long-term capital losses. As of December 31, 2017, the Fund did not have any capital loss carryforwards.
NOTE H
Subsequent Events
Management has evaluated subsequent events for possible recognition or disclosure in the financial statements through the date the financial statements are issued. Management has determined that there are no material events that would require disclosure in the Fund’s financial statements through this date.
22 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
FINANCIAL HIGHLIGHTS
Selected Data For A Shares Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017(a) to December 31, 2017 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 11.05 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .05 | .04 | ||||||
Net realized and unrealized gain on investments | .24 | 1.12 | ||||||
|
| |||||||
Net increase in net asset value from operations | .29 | 1.16 | ||||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | – 0 | – | (.03 | ) | ||||
Distributions from net realized gain on investment transactions | – 0 | – | (.08 | ) | ||||
|
| |||||||
Total dividends and distributions | – 0 | – | (.11 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 11.34 | $ 11.05 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | 2.62 | % | 11.60 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $1,134 | $1,105 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements(e)(f)† | .41 | %(g) | .41 | % | ||||
Expenses, before waivers/reimbursements(e)(f)† | 33.36 | %(g) | 38.86 | % | ||||
Net investment income(c)(f) | .81 | % | .68 | % | ||||
Portfolio turnover rate | 58 | % | 53 | % | ||||
† Expense ratios exclude the estimated acquired fund fees of affiliated/unaffiliated underlying |
| |||||||
portfolios | .03 | % | .03 | %(h) |
(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 charge or contingent deferred sales charge is not reflected in the calculation of total investment return. Total investment 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 for a period of less than one year is not annualized. |
(e) | In connection with the Fund’s investments in affiliated underlying portfolios, the Fund incurs no direct expenses but bears proportionate shares of the acquired fund fees and expenses (i.e. operating, administrative and investment advisory fees) of the affiliated underlying portfolios. The Adviser has contractually agreed to waive its fees from the Fund in an amount equal to the Fund’s pro rata share of certain acquired fund fees and expenses, and for the six months ended June 30, 2018, and the period ended December 31, 2017, such waiver amounted to 0.03% (annualized) and 0.03% (annualized), respectively. |
(f) | Annualized. |
(g) | The advisory fee reflected in the Fund’s expense ratio may be higher or lower than the Base Fee plus Performance Adjustment due to the different time periods over which the fee is calculated (i.e., the financial reporting period vs. the Performance Period). |
(h) | Unaudited. |
See notes to financial statements.
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 23 |
BOARD OF DIRECTORS
Marshall C. Turner, Jr(1), Chairman
Michael J. Downey(1)
William H. Foulk, Jr.(1)
Nancy P. Jacklin(1)
Robert M. Keith, President and Chief Executive Officer
Carol C. McMullen(1)
Garry L. Moody(1)
Earl D. Weiner(1)
OFFICERS
Frank V. Caruso(2), Senior Vice President
John H. Fogarty(2), Vice President
Vinay Thapar(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 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) 221-6003 | 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 management of, and investment decisions for, the Fund’s portfolio are made by the Adviser’s Relative Value Investment Team. While the members of the team work jointly to determine the investment strategy, including security selection, for the Fund, Messrs. Caruso, Fogarty and Thapar, who are members of U.S. Growth Equities, are primarily responsible for the day-to-day management of the Fund. |
24 | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | abfunds.com |
Information Regarding the Review and Approval of Amendment to the Fund’s Advisory Agreement
At a meeting of the Board of Directors of AB Cap Fund, Inc. (the “Company”) held on August 1-2, 2017, the Adviser recommended an amendment to the Company’s current Advisory Agreement with the Adviser (the “Amended Agreement”) relating to a change in the daily fee computation methodology in respect of AB FlexFeeTM Core Opportunities Portfolio (the “Fund”). The amendment provided that, for purposes of calculating the incentive portion of the Adviser’s advisory fee, the Fund’s investment performance on each business day would be compared with the performance of its benchmark index on the same day (rather than on the prior business day).
The Adviser had provided the disinterested directors (the “directors”) with a memorandum explaining its analysis and the form of amendment prior to the meeting. After discussion with experienced counsel who are independent of the Adviser and with the Adviser, the directors concluded that the proposed amendment would result in a more precise calculation of the Adviser’s incentive fee and unanimously approved the Amended Agreement.
The directors approved the Fund’s current Advisory Agreement at a meeting held on January 31-February 1, 2017 (the “January/February Meeting”) and a discussion regarding the basis for the Board’s approval is set forth below.
Board’s Approval at the January/February 2017 Meeting
Information Regarding the Review and Approval of the Fund’s Advisory Agreement
The disinterested directors (the “directors”) of AB Cap Fund, Inc. (the “Company”) unanimously approved the Company’s Advisory Agreement with the Adviser in respect of AB FlexFeeTM Core Opportunities Portfolio (the “Fund”) for an initial two-year period at a meeting held on January 31-February 1, 2017 (the “Meeting”). (At the time of the approval of the Advisory Agreement, the Fund was known as AB Performance Fee Series—Core Opportunities Portfolio.)
Prior to approval of the Advisory Agreement, 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 Company’s Senior Officer (who is also the Company’s Independent Compliance Officer), who acted as their independent fee consultant, of the reasonableness of the proposed performance-based advisory fee (which consists of a base fee plus or minus a performance adjustment), in which the Senior Officer concluded
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 25 |
that the proposed contractual fee for the Fund was reasonable. The directors also discussed the proposed approval in private sessions with counsel and the Company’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services to be provided by the Adviser to the Fund 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 AB Funds and review extensive materials and information presented by the Adviser.
The directors also considered all factors they believed relevant, including the specific matters discussed below. During the course of their deliberations, the directors evaluated, among other things, the reasonableness of the proposed advisory fee. 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 Fund and the overall arrangements between the Fund 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 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 Fund’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Fund will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Fund 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 Fund to the Adviser than the fee rate stated in the Advisory Agreement.
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The directors noted that the methodology to be used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Company’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Fund’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 Fund under the Advisory Agreement.
Costs of Services to be Provided and Profitability
Because the Fund had not yet commenced operations, the directors were unable to consider historical information about the profitability of the Fund. 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 Fund and that the Fund was unlikely to be profitable to the Adviser unless it achieves a material level of net assets. The directors also noted that, due to the performance fee component of the advisory fee, profitability would tend to be higher with better performance relative to the Fund’s benchmark, which they considered to create an appropriate alignment of incentives.
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their proposed relationships with the Fund, including, but not limited to, benefits relating to 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 Fund’s shares; and transfer agency fees to be paid by the Fund to a wholly owned subsidiary of the Adviser. The directors recognized that the Adviser’s future 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 Fund.
Investment Results
Since the Fund had not yet commenced operations, no performance or other historical information for the Fund was available. The Adviser manages another AB Fund with a similar investment style, and, at the Meeting, the directors reviewed performance information for that AB Fund. Based on this information, together with the Adviser’s written and oral presentations regarding the management of the Fund 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 Fund management services to the Fund.
Advisory Fees and Other Expenses
The directors considered the proposed advisory fee rate payable by the Fund to the Adviser and information prepared by three analytical services
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 27 |
that are not affiliated with the Adviser (the “15(c) service providers”), concerning advisory fee rates paid by other funds in the same category as the Fund at a hypothetical common asset level of $250 million. 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 considered the Fund’s proposed contractual effective advisory fee rate against a peer group median.
The directors recognized that the Adviser’s total compensation from the Fund 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 Fund and the extent to which the Adviser requests reimbursements pursuant to this provision.
The directors also considered the Adviser’s fee schedule for institutional 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 Company’s Senior Officer and noted the differences between the Fund’s proposed fee schedule, on the one hand, and the institutional fee schedule and the schedule of fees charged to any offshore funds and any sub-advised funds, on the other. 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 compared the proposed advisory fee for the Fund with that for another AB Fund with a similar investment style.
The Adviser reviewed with the directors the significantly greater scope of the services it provides to the Fund relative to institutional, offshore fund and sub-advised fund clients. In light of the substantial differences in services rendered by the Adviser to institutional, offshore fund and sub-advised fund clients as compared to funds such as the Fund, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors noted that the Fund 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 or to “equitize” cash inflows pending purchases of underlying securities, that the proposed advisory fee would be for services in addition to, rather than duplicative of, the services provided under the advisory contracts of the ETFs in which the Fund may invest.
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The directors also considered the projected total expense ratio of the Advisor Class shares of the Fund in comparison to a peer group and a peer universe selected by each 15(c) service provider. The directors also considered the Adviser’s proposed expense cap for the “other expenses” of the Fund (expenses excluding the advisory fee, Rule 12b-1 fees, and certain other expenses typically excluded from the Adviser’s expense caps) for the period ending December 31, 2018. The directors noted that it was likely that the expense ratios of some of the other funds in the Fund’s 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 projected expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Fund by others. Based on their review, the directors concluded that the Fund’s projected expense ratio was acceptable.
Economies of Scale
The directors noted that the proposed advisory fee schedule for the Fund does not contain breakpoints and that they had previously discussed their strong preference 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 in advance of the 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 Fund, 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 Fund’s assets and its profitability to the Adviser and anticipated revisiting the question of breakpoints in the future if circumstances warranted doing so.
abfunds.com | AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO | 29 |
This page is not part of the Shareholder Report or the Financial Statements.
AB FAMILY OF FUNDS
US EQUITY
US CORE
Core Opportunities Fund
FlexFee™ US Thematic Portfolio
Select US Equity Portfolio
US GROWTH
Concentrated Growth Fund
Discovery Growth Fund
FlexFee™ Large Cap Growth Portfolio
Growth Fund
Large Cap Growth Fund
Small Cap Growth Portfolio
US VALUE
Discovery Value Fund
Equity Income Fund
Relative Value Fund
Small Cap Value Portfolio
Value Fund
INTERNATIONAL/ GLOBAL EQUITY
INTERNATIONAL/ GLOBAL CORE
All China Equity Portfolio
FlexFee™ International Strategic Core Portfolio
Global Core Equity Portfolio
International Portfolio
International Strategic Core Portfolio
Sustainable Global Thematic Fund
Tax-Managed International Portfolio
Tax-Managed Wealth Appreciation Strategy
Wealth Appreciation Strategy
INTERNATIONAL/ GLOBAL GROWTH
Concentrated International Growth Portfolio
FlexFee™ Emerging Markets Growth Portfolio
INTERNATIONAL/ GLOBAL EQUITY (continued)
Sustainable International Thematic Fund1
INTERNATIONAL/ GLOBAL VALUE
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
Tax-Aware Fixed Income Portfolio
National Portfolio
Arizona Portfolio
California Portfolio
Massachusetts Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
TAXABLE
Bond Inflation Strategy
FlexFee™ High Yield Portfolio1
FlexFee™ International Bond Portfolio
Global Bond Fund
High Income Fund
Income Fund
Intermediate Bond Portfolio
Limited Duration High Income Portfolio
Short Duration Portfolio
ALTERNATIVES
All Market Real Return Portfolio
Global Real Estate Investment Fund
Select US Long/Short Portfolio
Unconstrained Bond Fund
MULTI-ASSET
All Market Income Portfolio
All Market Total Return Portfolio
Conservative Wealth Strategy
Emerging Markets Multi-Asset Portfolio
Global Risk Allocation Fund
Tax-Managed All Market Income Portfolio
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
CLOSED-END FUNDS
Alliance California Municipal Income Fund
AllianceBernstein Global High Income Fund
AllianceBernstein National Municipal Income Fund
We also offer Government Money Market Portfolio1, which serves as the money market fund exchange vehicle for the AB mutual funds. An investment in Government Money Market Portfolio 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.abfunds.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
1 | Prior to November 10, 2017, Government Money Market Portfolio was named Government Exchange Reserves; prior to January 8, 2018, Sustainable International Thematic Fund was named International Growth Fund; prior to February 23, 2018, FlexFee High Yield Portfolio was named High Yield Portfolio. |
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NOTES
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NOTES
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NOTES
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NOTES
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NOTES
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NOTES
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AB FLEXFEE CORE OPPORTUNITIES PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800 221 5672
FFCO-0152-0618
JUN 06.30.18
SEMI-ANNUAL REPORT
AB FLEXFEETM EMERGING MARKETS GROWTH 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.abfunds.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.abfunds.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.abfunds.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.
FROM THE PRESIDENT | ![]() |
Dear Shareholder,
We are pleased to provide this report for AB FlexFee Emerging Markets Growth Portfolio (the “Fund”). Please review the discussion of Fund performance, the market conditions during the reporting period and the Fund’s investment strategy.
As always, AB strives to keep clients ahead of what’s next by:
+ | Transforming uncommon insights into uncommon knowledge with a global research scope |
+ | Navigating markets with seasoned investment experience and sophisticated solutions |
+ | Providing thoughtful investment insights and actionable ideas |
Whether you’re an individual investor or a multi-billion-dollar institution, we put knowledge and experience to work for you.
AB’s global research organization connects and collaborates across platforms and teams to deliver impactful insights and innovative products. Better insights lead to better opportunities—anywhere in the world.
For additional information about AB’s range of products and shareholder resources, please log on to www.abfunds.com.
Thank you for your investment in the AB Mutual Funds.
Sincerely,
Robert M. Keith
President and Chief Executive Officer, AB Mutual Funds
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 1 |
SEMI-ANNUAL REPORT
August 14, 2018
This report provides management’s discussion of fund performance for AB FlexFee Emerging Markets Growth Portfolio for the semi-annual reporting period ended June 30, 2018.
The Fund’s investment objective is to seek long-term growth of capital.
NAV RETURNS AS OF JUNE 30, 2018 (unaudited)
6 Months | 12 Months | |||||||
AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | ||||||||
Advisor Class Shares | -5.51% | 7.68% | ||||||
MSCI EM Index (net) | -6.66% | 8.20% |
INVESTMENT RESULTS
The table above shows the Fund’s performance compared to its benchmark, the Morgan Stanley Capital International Emerging Markets (“MSCI EM”) Index (net), for the six- and 12-month periods ended June 30, 2018.
The Fund outperformed its benchmark for the six-month period, and underperformed for the 12-month period. The Fund’s performance-based advisory fee, which was instituted on July 1, 2017, was being accrued at its minimum rate. (The actual advisory fee payable by the Fund for its current performance period will be determined based on the Fund’s performance relative to the benchmark as of the end of such period, which runs from July 1, 2017 through December 31, 2018.)
Security selection drove performance for the six-month period, particularly in the financials and industrials sectors, relative to the benchmark. An overweight to the financials sector detracted, as did stock selection in technology. In terms of country positioning, overweights to China and India contributed, while an underweight to Taiwan detracted. (Country selection is a result of bottom-up security analysis combined with fundamental research.)
For the 12-month period, security selection in the technology and health care sectors detracted, while financials and industrials holdings contributed. An underweight in telecommunications contributed, and an underweight in materials detracted. An overweight to South Africa contributed, while an underweight to Taiwan detracted.
The Fund did not utilize derivatives during either period.
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MARKET REVIEW AND INVESTMENT STRATEGY
Global equities had mixed performance during the six-month period ended June 30, 2018. US stocks advanced, rallying to all-time highs at the very beginning of the period, as corporate tax reform helped boost investor sentiment. However, increasing inflation concerns and rising interest rates soon weighed on performance. While generally robust corporate earnings mitigated some downward pressure, worsening trade-war fears dragged on returns toward the end of the period, affecting Asian equities and US-listed Chinese ADRs in particular. The US Federal Reserve raised interest rates twice and began, as widely expected, to formally reduce its balance sheet by letting some of the bonds it holds mature without reinvesting the proceeds received but in June signaled more rate increases than previously expected for the rest of this year.
The Fund’s Senior Investment Management Team (the “Team”) continues to search across emerging markets for companies with unappreciated high-growth potential. The Team believes that a disciplined research process and risk control have positioned the Fund to capture long-term performance potential in a more uncertain environment for emerging-market stocks.
INVESTMENT POLICIES
At least 80% of the Fund’s net assets will under normal circumstances be invested in securities of emerging-market companies and related derivatives. An emerging-market country is a country whose per capita gross national income is not classified as “High Income” by the World Bank, that is not a member of the Organization for Economic Co-Operation and Development, or that is represented in a MSCI emerging-market equity index. Examples of emerging-market countries include Argentina, Brazil, Chile, Croatia, Egypt, Hong Kong, India, Indonesia, Kazakhstan, Malaysia, Mexico, the People’s Republic of China, Peru, the Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. Emerging-market countries may include countries referred to as “frontier” markets, such as Egypt, Nigeria and Vietnam.
In managing the Fund, the Adviser will employ a “bottom up” investment process that focuses on a company’s prospective earnings growth, valuation and business quality. The Adviser will typically look for companies that have strong, experienced management teams and the potential to support greater than expected earnings growth rates, and will combine fundamental and quantitative analyses in its stock selection process. The Adviser will not target any particular country, sector or market capitalization weightings for the Fund.
Fluctuations in currency exchange rates can have a dramatic impact
(continued on next page)
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on the returns of equity 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 also 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 traded in that currency.
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DISCLOSURES AND RISKS
Benchmark Disclosure
The MSCI EM Index is unmanaged and does not reflect fees and expenses associated with the active management of a mutual fund portfolio. The MSCI EM Index (net, free float-adjusted, market capitalization weighted) represents the equity market performance of emerging markets. 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
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.
Market Risk: The value of the Fund’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. It includes the risk that a particular style of investing, such as the Fund’s growth approach, may underperform the market generally.
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.
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.
Sector Risk: The Fund may have more risk because of concentrated investments in a particular market sector, such as the technology or financial services sector. Market or economic factors affecting that sector could have a major effect on the value of the Fund’s investments.
Management Risk: The Fund is subject to management risk because it is an actively managed investment fund. The Adviser will apply its investment
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 5 |
DISCLOSURES AND RISKS (continued)
techniques and risk analyses in making investment decisions for the Fund, 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 in this report 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.abfunds.com.
All fees and expenses related to the operation of the Fund have been deducted. Net asset value (“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. 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.
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HISTORICAL PERFORMANCE
AVERAGE ANNUAL RETURNS AS OF JUNE 30, 2018 (unaudited)
NAV Returns | SEC Returns (reflects applicable sales charges) | |||||||
ADVISOR CLASS SHARES1 | ||||||||
1 Year | 7.68% | 7.68% | ||||||
Since Inception2 | 4.70% | 4.70% |
SEC AVERAGE ANNUAL RETURNS
AS OF THE MOST RECENT CALENDAR QUARTER-END
JUNE 30, 2018 (unaudited)
SEC Returns (reflects applicable sales charges) | ||||
ADVISOR CLASS SHARES | ||||
1 Year | 7.68% | |||
Since Inception2 | 4.70% |
The Fund’s current prospectus fee table shows the Fund’s total annual operating expense ratio as 7.08% for Advisor Class shares, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements limit the Fund’s annual operating expense ratio exclusive of the Fund’s advisory fee, 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 0.10% for Advisor Class shares. These waivers/reimbursements may not be terminated before June 11, 2019. Any fees waived and expenses borne by the Adviser through December 31, 2018 may be reimbursed by the Fund until the end of the third fiscal year after the fiscal period in which the fee was waived or the expense was borne, provided that no reimbursement payment will be made that would cause the Fund’s total annual operating expenses to exceed these expense limitations. 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 ratio shown above may differ from the expense ratio in the Financial Highlights section since they are based on different time periods.
1 | This share class is offered at NAV to eligible investors and the SEC returns are the same as the NAV returns. |
2 | Inception date: 11/13/2014. |
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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 advisory 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 1/1/2018 | Ending Account Value 6/30/2018 | Expenses Paid During Period* | Annualized Expense Ratio* | |||||||||||||
Advisor Class |
| |||||||||||||||
Actual | $ | 1,000 | $ | 944.90 | $ | 0.72 | 0.15 | % | ||||||||
Hypothetical** | $ | 1,000 | $ | 1,024.05 | $ | 0.75 | 0.15 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
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PORTFOLIO SUMMARY
June 30, 2018 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $5.8
1 | All data are as of June 30, 2018. The Fund’s sector and country breakdowns are expressed as a percentage of total investments (excluding security lending collateral) and may vary over time. “Other” country weightings represent 1.0% or less in the following countries: Greece, Malaysia, Philippines, Poland and Vietnam. |
Please note: The sector classifications presented herein are based on the Global Industry Classification Standard (GICS) which was developed by Morgan Stanley Capital International and Standard & Poor’s. The components are divided into sector, industry group, and industry sub-indices as classified by the GICS for each of the market capitalization indices in the broad market. These sector classifications are broadly defined. The “Portfolio of Investments” section of the report reflects more specific industry information and is consistent with the investment restrictions discussed in the Fund’s prospectus.
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PORTFOLIO SUMMARY (continued)
June 30, 2018 (unaudited)
TEN LARGEST HOLDINGS1
Company | U.S. $ Value | Percent of Net Assets | ||||||
Tencent Holdings Ltd. | $ | 451,939 | 7.8 | % | ||||
Alibaba Group Holding Ltd. (Sponsored ADR) | 432,099 | 7.4 | ||||||
Naspers Ltd. – Class N | 260,464 | 4.5 | ||||||
Housing Development Finance Corp., Ltd. | 229,325 | 3.9 | ||||||
HDFC Bank Ltd. (ADR) | 216,453 | 3.7 | ||||||
Ctrip.com International Ltd. (ADR) | 212,430 | 3.7 | ||||||
AIA Group Ltd. | 182,940 | 3.1 | ||||||
Taiwan Semiconductor Manufacturing Co., Ltd. | 177,527 | 3.1 | ||||||
Hangzhou Hikvision Digital Technology Co., Ltd. – Class A | 171,917 | 3.0 | ||||||
Kweichow Moutai Co., Ltd. – Class A | 168,282 | 2.9 | ||||||
$ | 2,503,376 | 43.1 | % |
1 | Long-term investments. |
10 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS
June 30, 2018 (unaudited)
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
COMMON STOCKS – 99.6% | ||||||||||
Financials – 35.6% | ||||||||||
Banks – 19.7% | ||||||||||
Banco Macro SA (ADR) | 1,782 | $ | 104,764 | |||||||
Bank Central Asia Tbk PT | 59,500 | 88,859 | ||||||||
Bank Mandiri Persero Tbk PT | 185,000 | 88,509 | ||||||||
China Construction Bank Corp. – Class H | 140,000 | 128,106 | ||||||||
China Merchants Bank Co., Ltd. – Class H | 12,000 | 44,141 | ||||||||
Credicorp Ltd. | 270 | 60,782 | ||||||||
Grupo Financiero Galicia SA (ADR) | 990 | 32,650 | ||||||||
HDFC Bank Ltd. | 4,610 | 143,989 | ||||||||
HDFC Bank Ltd. (ADR) | 690 | 72,464 | ||||||||
IndusInd Bank Ltd. | 3,100 | 87,748 | ||||||||
Industrial & Commercial Bank of China Ltd. – Class H | 155,000 | 115,605 | ||||||||
Sberbank of Russia PJSC (Sponsored ADR) | 7,929 | 113,821 | ||||||||
TCS Group Holding PLC (GDR)(a) | 3,040 | 62,928 | ||||||||
|
| |||||||||
1,144,366 | ||||||||||
|
| |||||||||
Consumer Finance – 1.2% | ||||||||||
KRUK SA | 790 | 42,101 | ||||||||
Repco Home Finance Ltd. | 3,530 | 28,384 | ||||||||
|
| |||||||||
70,485 | ||||||||||
|
| |||||||||
Diversified Financial Services – 2.1% | ||||||||||
Chailease Holding Co., Ltd. | 30,000 | 98,109 | ||||||||
Cielo SA | 4,940 | 21,056 | ||||||||
|
| |||||||||
119,165 | ||||||||||
|
| |||||||||
Insurance – 5.8% | ||||||||||
AIA Group Ltd. | 21,000 | 182,940 | ||||||||
Max Financial Services Ltd.(b) | 3,832 | 24,431 | ||||||||
Prudential PLC | 5,590 | 127,431 | ||||||||
|
| |||||||||
334,802 | ||||||||||
|
| |||||||||
Thrifts & Mortgage Finance – 6.8% | ||||||||||
Housing Development Finance Corp., Ltd. | 8,230 | 229,325 | ||||||||
Indiabulls Housing Finance Ltd. | 10,090 | 168,189 | ||||||||
|
| |||||||||
397,514 | ||||||||||
|
| |||||||||
2,066,332 | ||||||||||
|
| |||||||||
Information Technology – 31.2% | ||||||||||
Electronic Equipment, Instruments & Components – 7.8% | ||||||||||
Elite Material Co., Ltd. | 34,000 | 88,865 | ||||||||
Hangzhou Hikvision Digital Technology Co., Ltd. – Class A | 30,800 | 171,917 | ||||||||
Sunny Optical Technology Group Co., Ltd. | 8,000 | 148,379 | ||||||||
Tongda Group Holdings Ltd. | 220,000 | 44,463 | ||||||||
|
| |||||||||
453,624 | ||||||||||
|
| |||||||||
Internet Software & Services – 17.1% | ||||||||||
Alibaba Group Holding Ltd. (Sponsored ADR)(b) | 2,329 | 432,099 |
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 11 |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
Baozun, Inc. (Sponsored ADR)(b)(c) | 1,330 | $ | 72,751 | |||||||
Tencent Holdings Ltd. | 9,000 | 451,939 | ||||||||
Yandex NV – Class A(b) | 940 | 33,746 | ||||||||
|
| |||||||||
990,535 | ||||||||||
|
| |||||||||
IT Services – 0.2% | ||||||||||
My EG Services Bhd | 60,500 | 14,432 | ||||||||
|
| |||||||||
Semiconductors & Semiconductor Equipment – 4.4% | ||||||||||
Koh Young Technology, Inc. | 150 | 13,713 | ||||||||
LandMark Optoelectronics Corp. | 1,000 | 9,325 | ||||||||
Realtek Semiconductor Corp.(b) | 8,000 | 29,068 | ||||||||
Silergy Corp. | 1,000 | 24,299 | ||||||||
Taiwan Semiconductor Manufacturing Co., Ltd. | 25,000 | 177,527 | ||||||||
|
| |||||||||
253,932 | ||||||||||
|
| |||||||||
Technology Hardware, Storage & Peripherals – 1.7% | ||||||||||
Samsung Electronics Co., Ltd. (Preference Shares) | 440 | 14,858 | ||||||||
Xiaomi Corp. – Class B(b)(d) | 38,400 | 83,206 | ||||||||
|
| |||||||||
98,064 | ||||||||||
|
| |||||||||
1,810,587 | ||||||||||
|
| |||||||||
Consumer Discretionary – 12.0% | ||||||||||
Auto Components – 0.5% | ||||||||||
MRF Ltd. | 28 | 30,698 | ||||||||
|
| |||||||||
Diversified Consumer Services – 0.2% | ||||||||||
Four Seasons Education Cayman, Inc. (ADR) | 2,207 | 11,962 | ||||||||
|
| |||||||||
Hotels, Restaurants & Leisure – 1.1% | ||||||||||
CVC Brasil Operadora e Agencia de Viagens SA | 2,800 | 32,655 | ||||||||
OPAP SA | 1,390 | 15,672 | ||||||||
Premium Leisure Corp. | 845,000 | 13,775 | ||||||||
|
| |||||||||
62,102 | ||||||||||
|
| |||||||||
Internet & Direct Marketing Retail – 4.7% | ||||||||||
Ctrip.com International Ltd. (ADR)(b) | 4,460 | 212,430 | ||||||||
MakeMyTrip Ltd.(b) | 1,680 | 60,732 | ||||||||
|
| |||||||||
273,162 | ||||||||||
|
| |||||||||
Media – 5.5% | ||||||||||
IMAX China Holding, Inc.(a) | 11,200 | 34,020 | ||||||||
Naspers Ltd. – Class N | 1,033 | 260,464 | ||||||||
Sun TV Network Ltd. | 2,020 | 23,033 | ||||||||
|
| |||||||||
317,517 | ||||||||||
|
| |||||||||
695,441 | ||||||||||
|
| |||||||||
Consumer Staples – 6.9% | ||||||||||
Beverages – 4.4% | ||||||||||
Kweichow Moutai Co., Ltd. – Class A | 1,530 | 168,282 | ||||||||
Wuliangye Yibin Co., Ltd. – Class A | 7,400 | 84,419 | ||||||||
|
| |||||||||
252,701 | ||||||||||
|
|
12 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||||
| ||||||||||
Food & Staples Retailing – 0.8% | ||||||||||
Lenta Ltd. (GDR)(a)(b) | 8,837 | $ | 48,557 | |||||||
|
| |||||||||
Tobacco – 1.7% |
| |||||||||
ITC Ltd. | 25,940 | 100,349 | ||||||||
|
| |||||||||
401,607 | ||||||||||
|
| |||||||||
Health Care – 3.9% |
| |||||||||
Biotechnology – 1.9% |
| |||||||||
Hugel, Inc.(b) | 149 | 64,437 | ||||||||
Medy-Tox, Inc. | 69 | 47,437 | ||||||||
|
| |||||||||
111,874 | ||||||||||
|
| |||||||||
Health Care Equipment & Supplies – 0.3% |
| |||||||||
Yestar Healthcare Holdings Co., Ltd. | 57,500 | 19,495 | ||||||||
|
| |||||||||
Pharmaceuticals – 1.7% |
| |||||||||
China Medical System Holdings Ltd. | 49,000 | 97,600 | ||||||||
|
| |||||||||
228,969 | ||||||||||
|
| |||||||||
Industrials – 3.7% |
| |||||||||
Industrial Conglomerates – 0.5% |
| |||||||||
SM Investments Corp. | 1,585 | 26,002 | ||||||||
|
| |||||||||
Professional Services – 1.7% |
| |||||||||
51job, Inc. (ADR)(b) | 1,000 | 97,640 | ||||||||
|
| |||||||||
Road & Rail – 1.5% |
| |||||||||
Globaltrans Investment PLC (Sponsored GDR)(a) | 8,750 | 89,250 | ||||||||
|
| |||||||||
212,892 | ||||||||||
|
| |||||||||
Telecommunication Services – 2.4% |
| |||||||||
Diversified Telecommunication Services – 0.8% |
| |||||||||
Tower Bersama Infrastructure Tbk PT | 124,000 | 43,163 | ||||||||
|
| |||||||||
Wireless Telecommunication Services – 1.6% |
| |||||||||
Safaricom PLC | 325,190 | 94,291 | ||||||||
|
| |||||||||
137,454 | ||||||||||
|
| |||||||||
Energy – 1.7% |
| |||||||||
Oil, Gas & Consumable Fuels – 1.7% |
| |||||||||
Novatek PJSC (Sponsored GDR)(a) | 260 | 38,558 | ||||||||
Petroleo Brasileiro SA (Preference Shares) | 14,200 | 62,981 | ||||||||
|
| |||||||||
101,539 | ||||||||||
|
| |||||||||
Materials – 1.4% |
| |||||||||
Metals & Mining – 1.4% |
| |||||||||
JSW Steel Ltd. | 17,190 | 81,982 | ||||||||
|
| |||||||||
Utilities – 0.8% |
| |||||||||
Electric Utilities – 0.8% |
| |||||||||
Equatorial Energia SA | 3,200 | 46,880 | ||||||||
|
| |||||||||
Total Common Stocks | 5,783,683 | |||||||||
|
|
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 13 |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||||||
| ||||||||||||
EQUITY LINKED NOTES – 1.0% |
| |||||||||||
Real Estate – 0.8% |
| |||||||||||
Vincom Retail JSC, Deutsche Bank AG, expiring 11/12/27(b) | 26,180 | $ | 44,249 | |||||||||
|
| |||||||||||
Consumer Discretionary – 0.2% | ||||||||||||
Mobile World Investment Corp., Macquarie Bank Ltd., expiring 3/31/20(b) | 2,750 | 13,657 | ||||||||||
|
| |||||||||||
Total Equity Linked Notes | 57,906 | |||||||||||
|
| |||||||||||
Principal Amount (000) | ||||||||||||
SHORT-TERM INVESTMENTS – 1.0% | ||||||||||||
Time Deposits – 1.0% | ||||||||||||
BBH, Grand Cayman | CHF | 0 | * | 12 | ||||||||
(0.57)%, 7/02/18 | EUR | 1 | 752 | |||||||||
0.23%, 7/02/18 | GBP | 0 | * | 351 | ||||||||
0.43%, 7/02/18 | SGD | 0 | * | 42 | ||||||||
4.85%, 7/02/18 | ZAR | 10 | 709 | |||||||||
Hong Kong & Shanghai Bank, Hong Kong | HKD | 422 | 53,762 | |||||||||
|
| |||||||||||
Total Time Deposits | 55,628 | |||||||||||
|
| |||||||||||
Shares | ||||||||||||
Investment Companies – 0.0% | ||||||||||||
AB Fixed Income Shares, Inc. – Government Money Market Portfolio – Class AB, 1.71%(e)(f)(g) | 2,849 | 2,849 | ||||||||||
|
| |||||||||||
Total Short-Term Investments | 58,477 | |||||||||||
|
| |||||||||||
Total Investments Before Security Lending Collateral for Securities Loaned – 101.6% | 5,900,066 | |||||||||||
|
| |||||||||||
INVESTMENTS OF CASH COLLATERAL FOR SECURITIES LOANED – 1.3% | ||||||||||||
Investment Companies – 1.3% | ||||||||||||
AB Fixed Income Shares, Inc. – Government Money Market Portfolio – Class AB, 1.71%(e)(f)(g) | 73,367 | 73,367 | ||||||||||
|
| |||||||||||
Total Investments – 102.9% | 5,973,433 | |||||||||||
Other assets less liabilities – (2.9)% | (166,114 | ) | ||||||||||
|
| |||||||||||
Net Assets – 100.0% | $ | 5,807,319 | ||||||||||
|
|
14 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS (continued)
* | Principal amount less than 500. |
(a) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities are considered restricted, but liquid and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At June 30, 2018, the aggregate market value of these securities amounted to $273,313 or 4.7% of net assets. |
(b) | Non-income producing security. |
(c) | Represents entire or partial securities out on loan. See Note E for securities lending information. |
(d) | Security in which significant unobservable inputs (Level 3) were used in determining fair value. |
(e) | To obtain a copy of the fund’s shareholder report, please go to the Securities and Exchange Commission’s website at www.sec.gov, or call AB at (800) 227-4618. |
(f) | The rate shown represents the 7-day yield as of period end. |
(g) | Affiliated investments. |
Currency Abbreviations:
CHF – Swiss Franc
EUR – Euro
GBP – Great British Pound
HKD – Hong Kong Dollar
SGD – Singapore Dollar
ZAR – South African Rand
Glossary:
ADR – American Depositary Receipt
GDR – Global Depositary Receipt
JSC – Joint Stock Company
PJSC – Public Joint Stock Company
See notes to financial statements.
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 15 |
STATEMENT OF ASSETS & LIABILITIES
June 30, 2018 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $5,309,606) | $ | 5,897,217 | (a) | |
Affiliated issuers (cost $76,216—including investment of cash collateral for securities loaned of $73,367) | 76,216 | |||
Foreign currencies, at value (cost $98,805) | 98,374 | |||
Receivable for investment securities sold and foreign currency transactions | 41,044 | |||
Receivable from Adviser | 22,087 | |||
Unaffiliated dividends receivable | 17,369 | |||
Affiliated dividends receivable | 146 | |||
|
| |||
Total assets | 6,152,453 | |||
|
| |||
Liabilities | ||||
Payable for investment securities purchased and foreign currency transactions | 188,790 | |||
Payable for collateral received on securities loaned | 73,367 | |||
Due to Custodian | 6,546 | |||
Transfer Agent fee payable | 1,501 | |||
Directors’ fee payable | 440 | |||
Accrued expenses and other liabilities | 74,490 | |||
|
| |||
Total liabilities | 345,134 | |||
|
| |||
Net Assets | $ | 5,807,319 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 50 | ||
Additional paid-in capital | 4,972,230 | |||
Undistributed net investment income | 48,576 | |||
Accumulated net realized gain on investment and foreign currency transactions | 201,979 | |||
Net unrealized appreciation on investments and foreign currency denominated assets and liabilities | 584,484 | |||
|
| |||
$ | 5,807,319 | |||
|
|
Net Asset Value Per Share—30 billion shares of capital stock authorized, $.0001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
Advisor | $ | 5,807,319 | 498,000 | $ | 11.66 | |||||||
|
(a) | Includes securities on loan with a value of $71,985 (See Note E). |
See notes to financial statements.
16 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2018 (unaudited)
Investment Income | ||||||||
Dividends | ||||||||
Unaffiliated issuers (net of foreign taxes withheld of $5,348) | $ | 55,759 | ||||||
Affiliated issuers | 518 | |||||||
Interest | 20 | $ | 56,297 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 1,570 | |||||||
Transfer agency—Advisor Class | 3,640 | |||||||
Administrative | 33,228 | |||||||
Audit and tax | 31,988 | |||||||
Custodian | 30,563 | |||||||
Legal | 15,166 | |||||||
Directors’ fees | 12,798 | |||||||
Registration fees | 10,382 | |||||||
Printing | 6,953 | |||||||
Miscellaneous | 15,191 | |||||||
|
| |||||||
Total expenses | 161,479 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B and Note E) | (156,797 | ) | ||||||
|
| |||||||
Net expenses | 4,682 | |||||||
|
| |||||||
Net investment income | 51,615 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | 381,631 | (a) | ||||||
Foreign currency transactions | (2,763 | ) | ||||||
Net change in unrealized appreciation/depreciation on: | ||||||||
Investments | (774,308 | )(b) | ||||||
Foreign currency denominated assets and liabilities | (410 | ) | ||||||
|
| |||||||
Net loss on investment and foreign currency transactions | (395,850 | ) | ||||||
|
| |||||||
Net Decrease in Net Assets from Operations | $ | (344,235 | ) | |||||
|
|
(a) | Net of foreign capital gains taxes of $495. |
(b) | Net of decrease in accrued foreign capital gains taxes of $1,301. |
See notes to financial statements.
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 17 |
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended June 30, 2018 (unaudited) | For the Period July 1, 2017 to December 31, 2017(a) | Year Ended June 30, 2017 | ||||||||||
Increase (Decrease) in Net Assets from Operations | ||||||||||||
Net investment income | $ | 51,615 | $ | 30,286 | $ | 16,249 | ||||||
Net realized gain on investment and foreign currency transactions | 378,868 | 365,943 | 60,220 | |||||||||
Net change in unrealized appreciation/depreciation on investments and foreign currency denominated assets and liabilities | (774,718 | ) | 366,427 | 976,566 | ||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in net assets from operations | (344,235 | ) | 762,656 | 1,053,035 | ||||||||
Dividends to Shareholders from | ||||||||||||
Net investment income | ||||||||||||
Class A | – 0 | – | – 0 | – | (5 | ) | ||||||
Advisor Class | – 0 | – | (41,135 | ) | (12,998 | ) | ||||||
Capital Stock Transactions | ||||||||||||
Net increase (decrease) | 1 | – 0 | – | (21,297 | ) | |||||||
|
|
|
|
|
| |||||||
Total increase (decrease) | (344,234 | ) | 721,521 | 1,018,735 | ||||||||
Net Assets | ||||||||||||
Beginning of period | 6,151,553 | 5,430,032 | 4,411,297 | |||||||||
|
|
|
|
|
| |||||||
End of period (including undistributed net investment income of $48,576 and distributions in excess of net investment income of ($3,039) and undistributed net investment income of $7,111, respectively) | $ | 5,807,319 | $ | 6,151,553 | $ | 5,430,032 | ||||||
|
|
|
|
|
|
(a) | The Fund changed its fiscal year end from June 30 to December 31. |
See notes to financial statements.
18 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS
June 30, 2018 (unaudited)
NOTE A
Significant Accounting Policies
AB Cap Fund, Inc. (the “Company”), which is a Maryland corporation, is registered under the Investment Company Act of 1940 as an open-end management investment company. The Company operates as a series company comprised of 28 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 FlexFee Emerging Markets Growth Portfolio (the “Fund”), a diversified portfolio. On December 29, 2016, the Fund’s name was changed from the AB Emerging Markets Growth Portfolio to the AB Performance Fee Series – Emerging Markets Growth Portfolio. On May 9, 2017, the Fund’s name was changed to its current name, the AB FlexFee Emerging Markets Growth Portfolio. The Fund has authorized issuance of Class A, Class C, Advisor Class, Class R, Class K, Class I, Class Z, Class T, Class 1, and Class 2 shares. Class R, Class K, Class I, Class Z, Class T, Class 1 or Class 2 shares have not been issued, and no shares of Class A or Class C were outstanding as of December 31, 2017. As of June 30, 2018, AllianceBernstein L.P. (the “Adviser”) was the sole shareholder of the Advisor Class shares. Advisor Class 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 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 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
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 19 |
NOTES TO FINANCIAL STATEMENTS (continued)
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 “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. Open end mutual funds are valued at the closing net asset value per share, while exchange traded funds are valued at the closing market price per share.
Securities for which market quotations are not readily available (including restricted securities) or are deemed unreliable are valued at fair value as deemed appropriate by the Adviser. 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
20 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 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 generally values 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) |
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
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NOTES TO FINANCIAL STATEMENTS (continued)
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.
The following table summarizes the valuation of the Fund’s investments by the above fair value hierarchy levels as of June 30, 2018:
Investments in | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Common Stocks: | ||||||||||||||||
Financials | $ | 468,465 | $ | 1,597,867 | $ | – 0 | – | $ | 2,066,332 | |||||||
Information Technology | 538,596 | 1,188,785 | 83,206 | 1,810,587 | ||||||||||||
Consumer Discretionary | 331,554 | 363,887 | – 0 | – | 695,441 | |||||||||||
Consumer Staples | – 0 | – | 401,607 | – 0 | – | 401,607 | ||||||||||
Health Care | 19,495 | 209,474 | – 0 | – | 228,969 | |||||||||||
Industrials | 186,890 | 26,002 | – 0 | – | 212,892 | |||||||||||
Telecommunication Services | – 0 | – | 137,454 | – 0 | – | 137,454 | ||||||||||
Energy | 101,539 | – 0 | – | – 0 | – | 101,539 | ||||||||||
Materials | – 0 | – | 81,982 | – 0 | – | 81,982 | ||||||||||
Utilities | 46,880 | – 0 | – | – 0 | – | 46,880 | ||||||||||
Equity Linked Notes: | ||||||||||||||||
Real Estate | – 0 | – | 44,249 | – 0 | – | 44,249 | ||||||||||
Consumer Discretionary | – 0 | – | 13,657 | – 0 | – | 13,657 | ||||||||||
Short-Term Investments: | ||||||||||||||||
Time Deposits | – 0 | – | 55,628 | – 0 | – | 55,628 | ||||||||||
Investment Companies | 2,849 | – 0 | – | – 0 | – | 2,849 | ||||||||||
Investments of Cash Collateral for Securities Loaned in Affiliated Money Market Fund | 73,367 | – 0 | – | – 0 | – | 73,367 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 1,769,635 | 4,120,592 | † | 83,206 | 5,973,433 | |||||||||||
Other Financial Instruments*: | – 0 | – | – 0 | – | – 0 | – | – 0 | – | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total^ | $ | 1,769,635 | $ | 4,120,592 | $ | 83,206 | $ | 5,973,433 | ||||||||
|
|
|
|
|
|
|
|
† | A significant portion of the Fund’s foreign equity investments are categorized as Level 2 investments since they are valued using fair value prices based on third party vendor modeling tools to the extent available, see note A.1. |
* | 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 swaps with upfront premiums, options written and swaptions written which are valued at market value. |
^ | An amount of $407,089 was transferred from Level 1 to Level 2 due to the above mentioned foreign equity fair valuation using third party vendor modeling tools during the reporting period. An amount of $266,093 was transferred from Level 2 to Level 1 due to the above mentioned foreign equity fair valuation using third party vendor modeling tools not being used during the reporting period. |
The Fund recognizes all transfers between levels of the fair value hierarchy assuming the financial instrument was transferred at the beginning of the reporting period.
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NOTES TO FINANCIAL STATEMENTS (continued)
Following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value.
Common Stocks: Consumer Discretionary | Common Stocks: Information Technology | Total | ||||||||||
Balance as of 12/31/17 | $ | 39,148 | $ | – 0 | – | $ | 39,148 | |||||
Realized gain (loss) | 555 | – 0 | – | 555 | ||||||||
Change in unrealized appreciation/ depreciation | (7,893 | ) | (840 | ) | (8,733 | ) | ||||||
Purchases | – 0 | – | 84,046 | 84,046 | ||||||||
Sales | (31,810 | ) | – 0 | – | (31,810 | ) | ||||||
Transfers into Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
Transfers out of Level 3 | – 0 | – | – 0 | – | – 0 | – | ||||||
|
|
|
|
|
| |||||||
Balance as of 6/30/18 | $ | – 0 | – | $ | 83,206 | $ | 83,206 | |||||
|
|
|
|
|
| |||||||
Net change in unrealized appreciation/depreciation from investments held as of 6/30/18** | $ | – 0 | – | $ | (840 | ) | $ | (840 | ) | |||
|
|
|
|
|
|
** | The unrealized appreciation/depreciation is included in net change in unrealized appreciation/depreciation of investments and other financial instruments in the accompanying statement of operations. |
As of June 30, 2018, all Level 3 securities were using prior transaction prices, which approximates fair value.
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 any 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
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NOTES TO FINANCIAL STATEMENTS (continued)
accuracy of prices including: 1) periodic vendor due diligence meetings, review of methodologies, new developments and process 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, 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 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 and 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.
24 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 (all years since inception of the Fund) 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 securities are purchased or sold. Investment gains and losses are determined on the identified cost basis. The Fund amortizes premiums and accretes discounts as adjustments to interest income.
6. Expense Allocations
Expenses of the Company are charged proportionately to each portfolio or based on other appropriate methods.
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. Change of Fiscal Year End
The Fund changed its fiscal year end from June 30 to December 31. Accordingly, the statement of operations, statement of changes in net assets and the financial highlights reflect the six months from July 1, 2017 to December 31, 2017.
NOTE B
Advisory Fee and Other Transactions with Affiliates
Effective July 1, 2017, under an amended investment advisory agreement, the Fund calculates and accrues daily a base fee, at an annualized rate of .75% of the Fund’s average daily net assets (“Base Fee”). The advisory fee is increased or decreased from the Base Fee by a performance adjustment (“Performance Adjustment”) that depends on whether, and to what extent, the investment performance of the Advisor Class shares of the Fund (“Measuring Class”) exceeds, or is exceeded by, the performance of the MSCI Emerging Markets Index (net) (“Index”) plus 1.75% (“Index Hurdle”) over the Performance Period (as defined below). For the period from
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NOTES TO FINANCIAL STATEMENTS (continued)
August 4, 2017 to October 31, 2017, the MSCI Emerging Markets Index with IDCo Fair Value Pricing (net) was used for purposes of calculating the Performance Adjustment. The Performance Adjustment is calculated and accrued daily, according to a schedule that adds or subtracts .004% of the Fund’s average daily net assets for each .01% of absolute performance by which the performance of the Measuring Class exceeds or lags the Index Hurdle for the period from the beginning of the Performance Period through the current business day. The maximum Performance Adjustment (positive or negative) will not exceed an annualized rate of +/- .70% (“Maximum Performance Adjustment”) of the Fund’s average daily net assets, which would occur when the performance of the Measuring Class exceeds, or is exceeded by, the Index Hurdle by 1.75% for the Performance Period. On a monthly basis, the Fund will pay the Adviser the minimum fee rate of .05% on an annualized basis (Base Fee minus the Maximum Performance Adjustment) applied to the average daily net assets for the month. At the end of the Performance Period, the Fund will pay to the Adviser the total advisory fee, less the amount of any minimum fees paid during the Performance Period and any waivers described below in this section. The Performance Period is initially from July 1, 2017 to December 31, 2018 and thereafter each 12-month period beginning on the first day in the month of January through December 31 of the same year. In addition, the Adviser has agreed to waive its advisory fee by limiting the Fund’s accrual of the advisory fee (Base Fee plus Performance Adjustment) on any day to the amount corresponding to the maximum fee rate multiplied by the Fund’s current net assets if such amount is less than the amount that would have been accrued based on the Fund’s average daily net assets for the Performance Period. For the reporting period ended June 30, 2018, the Fund accrued advisory fees of $1,570, as reflected in the statement of operations, at an annual effective rate (excluding the impact from any expense waivers in effect) of .05% of the Fund’s average net assets, which reflected a (.70)% Performance Adjustment of $(42,575). Prior to July 1, 2017, under the terms of the investment advisory agreement, the Fund paid the Adviser an advisory fee at an annual rate of 1.175% of the first $1 billion of the Fund’s average daily net assets, 1.05% of the next $1 billion up to $2 billion, 1.00% of the excess of $2 billion up to $3 billion, .90% of the excess of $3 billion up to $6 billion, and .85% of the excess of $6 billion. The fee was accrued daily and paid monthly.
The Adviser has agreed to waive its fees and bear certain expenses through June 11, 2019 to the extent necessary to limit total expenses (other than the advisory fee, 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 from exceeding
26 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
.10% of average daily net assets (the “Expense Cap”). Prior to July 1, 2017, the Adviser agreed to waive its fees and bear certain expenses to the extent necessary to limit total operating expenses (excluding 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 to 1.45% of the daily average net assets for Advisor Class shares (the “Old Expense Cap”). Any fees waived and expenses borne by the Adviser through December 31, 2018 are subject to repayment by the Fund until the end of the third fiscal year after the fiscal period in which the fee was waived or the expense was borne; such waivers/expenses borne that are subject to repayment amount to $214,650 for the year ended June 30, 2016, $230,326 for the year ended June 30, 2017, $169,436 for the period ended December 31, 2017, and $123,496 for the six months ended June 30, 2018. In any case, no repayment will be made that would cause the Fund’s total annual expenses (subject to the exclusions set forth above) to exceed .10% or, for fees waived or expenses borne prior to July 1, 2017, the Old Expense Cap. Also, prior to July 1, 2017, the Adviser was voluntarily waiving its advisory fee for the Fund in an additional amount of .05% of average daily net assets. For the year ended June 30, 2017, such waiver amounted to $2,420.
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 six months ended June 30, 2018, the Adviser voluntarily agreed to waive such fees in the amount of $33,228.
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. Such compensation retained by ABIS amounted to $3,263 for the six months ended June 30, 2018.
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 no front-end sales charges from the sale of Class A shares nor received any contingent deferred sales charges imposed upon redemptions by shareholders of Class A and Class C shares, respectively, for the year ended June 30, 2017.
The Fund may invest in AB Government Money Market Portfolio (the “Government Money Market Portfolio”) which has a contractual annual advisory fee rate of .20% of the portfolio’s average daily net assets and
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NOTES TO FINANCIAL STATEMENTS (continued)
bears its own expenses. In connection with the investment by the Fund in the Government Money Market Portfolio, the Adviser has contractually agreed to waive its advisory fee from the Fund in an amount equal to the Fund’s pro rata share of the effective advisory fee of Government Money Market Portfolio, as borne indirectly by the Fund as an acquired fund fee and expense. For the six months ended June 30, 2018, such waiver amounted to $61.
A summary of the Fund’s transactions in AB mutual funds for the six months ended June 30, 2018 is as follows:
Fund | Market Value 12/31/17 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value 06/30/18 (000) | Dividend Income (000) | |||||||||||||||
Government Money Market Portfolio | $ | 59 | $ | 1,276 | $ | 1,332 | $ | 3 | $ | 1 | ||||||||||
Government Money Market Portfolio** | – 0 | – | 252 | 179 | 73 | 0 | * | |||||||||||||
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|
|
| |||||||||||||||||
Total | $ | 76 | $ | 1 | ||||||||||||||||
|
|
|
|
* | Amount is less than $500. |
** | Investment of cash collateral for securities lending transactions (see Note E). |
Brokerage commissions paid on investment transactions for the six months ended June 30, 2018 amounted to $5,203, 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 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 pays 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 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 no expenses in excess of the distribution costs reimbursed by the Fund 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
28 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 six months ended June 30, 2018 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 2,546,806 | $ | 2,496,426 | ||||
U.S. government securities | – 0 | – | – 0 | – |
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 are as follows:
Gross unrealized appreciation | $ | 1,027,837 | ||
Gross unrealized depreciation | (440,226 | ) | ||
|
| |||
Net unrealized appreciation | $ | 587,611 | ||
|
|
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.
The Fund did not engage in derivative transactions for the six months ended June 30, 2018.
2. Currency Transactions
The Fund may invest in non-U.S. Dollar-denominated 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).
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 29 |
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE E
Securities Lending
The Fund may enter into securities lending transactions. Under the Fund’s securities lending program, all loans of securities will be collateralized continually by cash. The Fund will be compensated for the loan from a portion of the net return from the income earned on cash collateral after a rebate is paid to the borrower (in some cases, this rebate may be a “negative rebate” or fee paid by the borrower to the Fund in connection with the loan), and payments are made for fees of the securities lending agent and for certain other administrative expenses. It is the policy of the Fund to receive collateral consisting of cash in an amount exceeding the value of the securities loaned. A Fund will have the right to call a loan and obtain the securities loaned at any time on notice to the borrower within the normal and customary settlement time for the securities. While the securities are on loan, the borrower is obligated to pay the Fund amounts equal to any income or other distributions from the securities. The Fund will not be able to exercise voting rights with respect to any securities during the existence of a loan, but will have the right to regain ownership of loaned securities in order to exercise voting or other ownership rights. The lending agent has agreed to indemnify the Fund in the case of default of any securities borrower. Collateral received and securities loaned are marked to market daily to ensure that the securities loaned are secured by collateral. The lending agent currently invests the cash collateral received in Government Money Market Portfolio, an eligible money market vehicle, in accordance with the investment restrictions of the Fund, and as approved by the Board. The collateral received on securities loaned is recorded as an asset as well as a corresponding liability in the statement of assets and liabilities. When the Fund lends securities, its investment performance will continue to reflect changes in the value of the securities loaned. At June 30, 2018, the Fund had securities on loan with a value of $71,985 and had received cash collateral which has been invested into Government Money Market Portfolio of $73,367. The cash collateral will be adjusted on the next business day to maintain the required collateral amount. The Fund earned securities lending income of $0 and $91 from the borrowers and Government Money Market Portfolio, respectively, for the six months ended June 30, 2018; these amounts are reflected in the statement of operations. In connection with the cash collateral investment by the Fund in the Government Money Market Portfolio, the Adviser has agreed to waive a portion of the Fund’s share of the advisory fees of Government Money Market Portfolio, as borne indirectly by the Fund as an acquired fund fee and expense. For the six months ended June 30, 2018, such waiver amounted to $12. A principal risk of lending portfolio securities is that the borrower will fail to return the loaned securities upon termination of the loan and that the collateral will not be sufficient to replace the loaned securities.
30 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 | |||||||||||||||||||||||||||
Six Months Ended June 30, 2018 (unaudited) | July 1, 2017 to | Year Ended June 30, | Six Months Ended June 30, 2018 (unaudited) | July 1, 2017 to | Year Ended June 30, 2017 | |||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||
Shares redeemed | – 0 | – | – 0 | – | (1,000 | ) | $ | – 0 | – | $ | – 0 | – | $ | (10,750 | ) | |||||||||||||
| ||||||||||||||||||||||||||||
Net decrease | – 0 | – | – 0 | – | (1,000 | ) | $ | – 0 | – | $ | – 0 | – | $ | (10,750 | ) | |||||||||||||
| ||||||||||||||||||||||||||||
Class C | ||||||||||||||||||||||||||||
Shares redeemed | – 0 | – | – 0 | – | (1,000 | ) | $ | – 0 | – | $ | – 0 | – | $ | (10,550 | ) | |||||||||||||
| ||||||||||||||||||||||||||||
Net decrease | – 0 | – | – 0 | – | (1,000 | ) | $ | – 0 | – | $ | – 0 | – | $ | (10,550 | ) | |||||||||||||
| ||||||||||||||||||||||||||||
Advisor Class | ||||||||||||||||||||||||||||
Shares sold | 0 | (b) | – 0 | – | 0 | (b) | $ | 1 | $ | – 0 | – | $ | 3 | |||||||||||||||
| ||||||||||||||||||||||||||||
Shares issued in reinvestment of dividends | – 0 | – | 0 | (b) | – 0 | – | – 0 | – | 0 | (c) | – 0 | – | ||||||||||||||||
| ||||||||||||||||||||||||||||
Net increase | 0 | (b) | 0 | (b) | 0 | (b) | $ | 1 | $ | 0 | (c) | $ | 3 | |||||||||||||||
|
(a) | The Fund changed its fiscal year end from June 30 to December 31. |
(b) | less than 0.5 shares. |
(c) | less than $0.5. |
NOTE G
Risks Involved in Investing in the Fund
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.
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 Fund’s investments or reduce its returns.
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 may be subject to counterparty risk to a
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NOTES TO FINANCIAL STATEMENTS (continued)
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.
Sector Risk—The Fund may have more risk because of concentrated investments in a particular market sector, such as the technology or financial services sector. Market or economic factors affecting that sector could have a major effect on the value of the Fund’s investments.
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
Joint Credit Facility
A number of open-end mutual funds managed by the Adviser, including the Fund, 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 Fund did not utilize the Facility during the six months ended June 30, 2018. Effective July 3, 2018, the Facility will be increased to $325 million.
NOTE I
Distributions to Shareholders
The tax character of distributions paid for the year ending December 31, 2018 will be determined at the end of the current fiscal year.
The tax character of distributions paid during the fiscal period ended December 31, 2017, and years ended June 30, 2017 and June 30, 2016 were as follows:
December 2017 | June 2017 | June 2016 | ||||||||||
Distributions paid from: | ||||||||||||
Ordinary income | $ | 41,135 | $ | 13,003 | $ | 10,514 | ||||||
|
|
|
|
|
| |||||||
Total taxable distributions paid | $ | 41,135 | $ | 13,003 | $ | 10,514 | ||||||
|
|
|
|
|
|
32 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
As of December 31, 2017, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 1,441 | ||
Accumulated capital and other losses | (161,277 | )(a) | ||
Unrealized appreciation/(depreciation) | 1,339,111 | (b) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | 1,179,275 | ||
|
|
(a) | As of December 31, 2017, the Fund had a net capital loss carryforward of $161,277. During the fiscal period, the Fund utilized $368,957 of capital loss carry forwards to offset current year net realized gains. |
(b) | The differences between book-basis and tax-basis unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses on wash sales and the tax treatment of passive foreign investment companies (PFICs). |
For tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. Funds are permitted to carry forward capital losses for an indefinite period, and such losses will retain their character as either short-term or long-term capital losses. As of December 31, 2017, the Fund had a net short-term capital loss carryforward of $55,533 and a net long-term capital loss carryforward of $105,744, which may be carried forward for an indefinite period.
NOTE J
Subsequent Events
Management has evaluated subsequent events for possible recognition or disclosure in the financial statements through the date the financial statements are issued. Management has determined that there are no material events that would require disclosure in the Fund’s financial statements through this date.
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 33 |
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||||||||||||||
Six Months Ended June 30, 2018 (unaudited) | July 1, 2017 to 2017(a) | Year Ended June 30, | November 13, 2014(b) to June 30, 2015 | |||||||||||||||||
2017 | 2016 | |||||||||||||||||||
|
| |||||||||||||||||||
Net asset value, beginning of period | $ 12.35 | $ 10.90 | $ 8.82 | $ 9.64 | $ 10.00 | |||||||||||||||
|
| |||||||||||||||||||
Income From Investment Operations | ||||||||||||||||||||
Net investment income(c)(d) | .10 | .06 | .03 | .02 | .01 | |||||||||||||||
Net realized and unrealized gain (loss) on investment and foreign currency transactions | (.79 | ) | 1.47 | 2.08 | (.82 | ) | (.37 | ) | ||||||||||||
Contributions from Affiliates | – 0 | – | – 0 | – | – 0 | – | .00 | (e) | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net increase (decrease) in net asset value from operations | (.69 | ) | 1.53 | 2.11 | (.80 | ) | (.36 | ) | ||||||||||||
|
| |||||||||||||||||||
Less: Dividends | ||||||||||||||||||||
Dividends from net investment income | – 0 | – | (.08 | ) | (.03 | ) | (.02 | ) | – 0 | – | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ 11.66 | $ 12.35 | $ 10.90 | $ 8.82 | $ 9.64 | |||||||||||||||
|
| |||||||||||||||||||
Total Return | ||||||||||||||||||||
Total investment return based on net asset value(f) | (5.51 | )% | 13.96 | % | 24.06 | % | (8.27 | )% | (3.60 | )% | ||||||||||
Ratios/Supplemental | ||||||||||||||||||||
Net assets, end of period (000’s omitted) | $5,807 | $6,152 | $5,430 | $4,394 | $4,799 | |||||||||||||||
Ratio to average net assets of: | ||||||||||||||||||||
Expenses, net of waivers/reimbursement | .15 | %(g)(h) | .15 | %(g) | 1.40 | % | 1.40 | % | 1.45 | %(g) | ||||||||||
Expenses, before waivers/reimbursements | 5.14 | %(g)(h) | 7.08 | %(g) | 7.50 | % | 7.99 | % | 8.01 | %(g) | ||||||||||
Net investment income(d) | 1.64 | %(g) | 1.02 | %(g) | .34 | % | .28 | % | .22 | %(g) | ||||||||||
Portfolio turnover rate | 40 | % | 30 | % | 79 | % | 77 | % | 31 | % |
See footnote summary on page 35.
34 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
FINANCIAL HIGHLIGHTS (continued)
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
(a) | The Fund changed its fiscal year end from June 30 to December 31. |
(b) | Commencement of operations. |
(c) | Based on average shares outstanding. |
(d) | Net of expenses waived/reimbursed by the Adviser. |
(e) | Amount is less than $0.005. |
(f) | 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 charge or contingent deferred sales charge is not reflected in the calculation of total investment return. Total investment 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 for a period of less than one year is not annualized. |
(g) | Annualized. |
(h) | The advisory fee reflected in the Fund’s expense ratio may be higher or lower than the Base Fee plus Performance Adjustment due to the different time periods over which the fee is calculated (i.e., the financial reporting period vs. the Performance Period). |
See notes to financial statements.
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 35 |
BOARD OF DIRECTORS
Marshall C. Turner, Jr.(1), Chairman Michael J. Downey(1) William H. Foulk, Jr(1) Nancy P. Jacklin(1) | Robert M. Keith, President and Chief Executive Officer Carol C. McMullen(1) Garry L. Moody(1) Earl D. Weiner(1) |
OFFICERS
Laurent Saltiel(2), Vice President Joseph J. Mantineo, Treasurer and Chief Financial Officer | 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 portfolio is made by the Adviser. Mr. Saltiel is the investment professional with the most significant responsibility for the day-to-day management of the Fund’s portfolio. |
36 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
Information Regarding the Review and Approval of Amendment to the Fund’s Advisory Agreement
At a meeting of the Board of Directors of AB Cap Fund, Inc. (the “Company”) held on October 31-November 2, 2017, the Adviser recommended an amendment to the Company’s current Advisory Agreement with the Adviser (the “Amended Agreement”) in respect of AB FlexFeeTM Emerging Markets Growth Portfolio (the “Fund”) to change the Fund’s index to the MSCI Emerging Markets Index from the MSCI Emerging Markets Index with IDCo Fair Value Pricing for purposes of the Fund’s performance fee calculation and performance benchmark.
The Adviser had provided the disinterested directors (the “directors”) with a memorandum explaining its analysis and the form of amendment prior to the meeting. After discussion with experienced counsel who are independent of the Adviser and with the Adviser, the directors unanimously approved the Amended Agreement.
The directors approved the current Advisory Agreement at meetings held on August 1-2, 2017 (the “August 2017 Meeting”) and January 31-February 1, 2017 (the “January/February 2017 Meeting”) and discussions regarding the basis for the Board’s approval at these meetings are set forth below.
Board’s Approval at the August 2017 Meeting
Information Regarding the Review and Approval of Amendment to the Fund’s Advisory Agreement
At a meeting of the Board of Directors of AB Cap Fund, Inc. (the “Company”) held on August 1-2, 2017, the Adviser recommended an amendment to the Company’s current Advisory Agreement with the Adviser (the “Amended Agreement”) relating to a change in the daily fee computation methodology in respect of AB FlexFeeTM Emerging Markets Growth Portfolio (the “Fund”). The amendment provided that, for purposes of calculating the incentive portion of the Adviser’s advisory fee, the Fund’s investment performance on each business day would be compared with the performance of its benchmark index on the same day (rather than on the prior business day). The amendment also changed the Fund’s index to the MSCI Emerging Markets Index with IDCo Fair Value Pricing from the MSCI Emerging Markets Index for purposes of the Fund’s performance fee calculation and performance benchmark.
The Adviser had provided the disinterested directors (the “directors”) with a memorandum explaining its analysis and the form of amendment prior to the meeting. After discussion with experienced counsel who are independent of the Adviser and with the Adviser, the directors concluded that the proposed amendment would result in a more precise calculation of the Adviser’s incentive fee and unanimously approved the Amended Agreement.
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 37 |
The directors approved the Fund’s current Advisory Agreement at a meeting held on January 31-February 1, 2017 (the “January/February Meeting”) and a discussion regarding the basis for the Board’s approval is set forth below.
Board’s Approval at the January/February 2017 Meeting
Information Regarding the Review and Approval of the Fund’s Advisory Agreement
At a meeting held on January 31-February 1, 2017 (the “Meeting”), the disinterested directors (the “directors”) of AB Cap Fund, Inc. (the “Company”) unanimously approved an amendment to the Company’s Advisory Agreement with the Adviser in respect of AB FlexFeeTM Emerging Markets Growth Portfolio (the “Fund”) to change the Fund’s advisory fee effective July 1, 2017. The amended Advisory Agreement was approved for an initial two-year period. (The Fund was formerly known as AB Emerging Markets Growth Portfolio and, at the time of the approval of the amended Advisory Agreement, AB Performance Fee Series—Emerging Markets Growth Portfolio.)
Prior to approval of the Advisory Agreement, 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 Company’s Senior Officer (who is also the Company’s Independent Compliance Officer), who acted as their independent fee consultant, of the reasonableness of the proposed performance-based advisory fee (which consists of a base fee plus or minus a performance adjustment), in which the Senior Officer concluded that the proposed contractual fee for the Fund was reasonable. The directors also discussed the proposed approval in private sessions with counsel and the Company’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services to be provided by the Adviser to the Fund 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 AB Funds and review extensive materials and information presented by the Adviser.
38 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
The directors also considered all factors they believed relevant, including the specific matters discussed below. During the course of their deliberations, the directors evaluated, among other things, the reasonableness of the proposed advisory fee. 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 Fund and the overall arrangements between the Fund 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 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 Fund’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Fund will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Fund 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 Fund to the Adviser than the fee rate stated in the Advisory Agreement. The directors noted that the methodology to be used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Company’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Fund’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 Fund under the Advisory Agreement.
Costs of Services to be Provided and Profitability
Because the Fund had not yet commenced operations, the directors were unable to consider historical information about the profitability of the Fund. 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 Fund and that the Fund was unlikely to be profitable to the Adviser unless it achieves a material level of net assets. The directors also noted that, due to the performance fee component of the advisory fee, profitability would tend to be higher with better performance relative to the Fund’s benchmark, which they considered to create an appropriate alignment of incentives.
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 39 |
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their proposed relationships with the Fund, including, but not limited to, benefits relating to 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 Fund’s shares; and transfer agency fees to be paid by the Fund to a wholly owned subsidiary of the Adviser. The directors recognized that the Adviser’s future 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 Fund.
Investment Results
At the Meeting, the directors reviewed performance information for the Fund’s prior operations as AB Cap Fund—AB Emerging Markets Growth Portfolio and noted as well the Adviser’s experience in managing emerging markets growth accounts. Based on this information, together with the Adviser’s written and oral presentations regarding the management of the Fund 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 Fund management services to the Fund.
Advisory Fees and Other Expenses
The directors considered the proposed advisory fee rate payable by the Fund to the Adviser and information prepared by three analytical services that are not affiliated with the Adviser (the “15(c) service providers”), concerning advisory fee rates paid by other funds in the same category as the Fund at a hypothetical common asset level of $250 million. 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 considered the Fund’s proposed contractual effective advisory fee rate against a peer group median.
The directors recognized that the Adviser’s total compensation from the Fund 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 Fund and the extent to which the Adviser requests reimbursements pursuant to this provision.
The directors also considered the Adviser’s fee schedule for institutional 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 Company’s Senior Officer and noted the differences between the Fund’s proposed fee schedule, on the one hand, and the institutional fee schedule and the schedule of fees charged to any offshore
40 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
funds and any sub-advised funds, on the other. 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 Fund relative to institutional, offshore fund and sub-advised fund clients. In light of the substantial differences in services rendered by the Adviser to institutional, offshore fund and sub-advised fund clients as compared to funds such as the Fund, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors noted that the Fund 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 or to “equitize” cash inflows pending purchases of underlying securities, that the proposed advisory fee would be for services in addition to, rather than duplicative of, the services provided under the advisory contracts of the ETFs in which the Fund may invest.
The directors also considered the projected total expense ratio of the Advisor Class shares of the Fund in comparison to a peer group and a peer universe selected by each 15(c) service provider. The directors also considered the Adviser’s proposed expense cap for the “other expenses” of the Fund (expenses excluding the advisory fee, Rule 12b-1 fees, and certain other expenses typically excluded from the Adviser’s expense caps) for the period ending December 31, 2018. The directors noted that it was likely that the expense ratios of some of the other funds in the Fund’s 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 projected expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Fund by others. Based on their review, the directors concluded that the Fund’s projected expense ratio was acceptable.
Economies of Scale
The directors noted that the proposed advisory fee schedule for the Fund does not contain breakpoints and that they had previously discussed their strong preference for breakpoints in advisory contracts with the Adviser. The directors took into consideration prior presentations by an independent
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 41 |
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 in advance of the 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 Fund, 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 Fund’s assets and its profitability to the Adviser and anticipated revisiting the question of breakpoints in the future if circumstances warranted doing so.
42 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
This page is not part of the Shareholder Report or the Financial Statements.
AB FAMILY OF FUNDS
US EQUITY
US CORE
Core Opportunities Fund
FlexFee™ US Thematic Portfolio
Select US Equity Portfolio
US GROWTH
Concentrated Growth Fund
Discovery Growth Fund
FlexFee™ Large Cap Growth Portfolio
Growth Fund
Large Cap Growth Fund
Small Cap Growth Portfolio
US VALUE
Discovery Value Fund
Equity Income Fund
Relative Value Fund
Small Cap Value Portfolio
Value Fund
INTERNATIONAL/ GLOBAL EQUITY
INTERNATIONAL/ GLOBAL CORE
All China Equity Portfolio
FlexFee™ International Strategic Core Portfolio
Global Core Equity Portfolio
International Portfolio
International Strategic Core Portfolio
Sustainable Global Thematic Fund
Tax-Managed International Portfolio
Tax-Managed Wealth Appreciation Strategy
Wealth Appreciation Strategy
INTERNATIONAL/ GLOBAL GROWTH
Concentrated International Growth Portfolio
FlexFee™ Emerging Markets Growth Portfolio
INTERNATIONAL/ GLOBAL EQUITY (continued)
Sustainable International Thematic Fund1
INTERNATIONAL/ GLOBAL VALUE
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
Tax-Aware Fixed Income Portfolio
National Portfolio
Arizona Portfolio
California Portfolio
Massachusetts Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
TAXABLE
Bond Inflation Strategy
FlexFee™ High Yield Portfolio1
FlexFee™ International Bond Portfolio
Global Bond Fund
High Income Fund
Income Fund
Intermediate Bond Portfolio
Limited Duration High Income Portfolio
Short Duration Portfolio
ALTERNATIVES
All Market Real Return Portfolio
Global Real Estate Investment Fund
Select US Long/Short Portfolio
Unconstrained Bond Fund
MULTI-ASSET
All Market Income Portfolio
All Market Total Return Portfolio
Conservative Wealth Strategy
Emerging Markets Multi-Asset Portfolio
Global Risk Allocation Fund
Tax-Managed All Market Income Portfolio
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
CLOSED-END FUNDS
Alliance California Municipal Income Fund
AllianceBernstein Global High Income Fund
AllianceBernstein National Municipal Income Fund
We also offer Government Money Market Portfolio1, which serves as the money market fund exchange vehicle for the AB mutual funds. An investment in Government Money Market Portfolio 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.abfunds.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
1 | Prior to November 10, 2017, Government Money Market Portfolio was named Government Exchange Reserves; prior to January 8, 2018, Sustainable International Thematic Fund was named International Growth Fund; prior to February 23, 2018, FlexFee High Yield Portfolio was named High Yield Portfolio. |
abfunds.com | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | 43 |
NOTES
��
44 | AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO | abfunds.com |
AB FLEXFEE EMERGING MARKETS GROWTH PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800 221 5672
FFEMG-0152-0618
JUN 06.30.18
SEMI-ANNUAL REPORT
AB FLEXFEETM INTERNATIONAL STRATEGIC CORE 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.abfunds.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.abfunds.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.abfunds.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.
FROM THE PRESIDENT | ![]() |
Dear Shareholder,
We are pleased to provide this report for AB FlexFee International Strategic Core Portfolio (the “Fund”). Please review the discussion of Fund performance, the market conditions during the reporting period and the Fund’s investment strategy.
As always, AB strives to keep clients ahead of what’s next by:
+ | Transforming uncommon insights into uncommon knowledge with a global research scope |
+ | Navigating markets with seasoned investment experience and sophisticated solutions |
+ | Providing thoughtful investment insights and actionable ideas |
Whether you’re an individual investor or a multi-billion-dollar institution, we put knowledge and experience to work for you.
AB’s global research organization connects and collaborates across platforms and teams to deliver impactful insights and innovative products. Better insights lead to better opportunities—anywhere in the world.
For additional information about AB’s range of products and shareholder resources, please log on to www.abfunds.com.
Thank you for your investment in the AB Mutual Funds.
Sincerely,
Robert M. Keith
President and Chief Executive Officer, AB Mutual Funds
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 1 |
SEMI-ANNUAL REPORT
August 10, 2018
This report provides management’s discussion of fund performance for AB FlexFee International Strategic Core Portfolio for the semi-annual reporting period ended June 30, 2018.
The Fund’s investment objective is to seek long-term growth of capital.
NAV RETURNS AS OF JUNE 30, 2018 (unaudited)
6 Months | 12 Months | |||||||
AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | ||||||||
Advisor Class Shares | 1.68% | 10.34% | ||||||
MSCI EAFE Index (net) | -2.75% | 6.84% |
INVESTMENT RESULTS
The table above shows the Fund’s performance compared to its benchmark, the Morgan Stanley Capital International Europe, Australasia and the Far East (“MSCI EAFE”) Index (net), for the six- and 12-month periods ended June 30, 2018.
The Fund outperformed the benchmark for both periods. The Fund’s advisory fee, which is performance-based, was being accrued at its maximum rate. (The actual advisory fee payable by the Fund for its current performance period will be determined based on the Fund’s performance relative to the benchmark as of the end of such period, which is from inception on June 28, 2017 through December 31, 2018.)
For both periods, security selection in the consumer discretionary and financials sectors contributed, relative to the benchmark. An overweight in financials and stock selection in the energy sector detracted.
For the six-month period, an overweight to Israel contributed, while an underweight to France detracted.
For the 12-month period, an overweight to Norway contributed, while an overweight to Israel detracted.
The Fund utilized derivatives in the form of currency forwards for hedging purposes, which added to absolute returns during the six-month period, and detracted during the 12-month period.
MARKET REVIEW AND INVESTMENT STRATEGY
Global equities had mixed performance during the six-month period ended June 30, 2018. US stocks advanced, while non-US and emerging-market
2 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
stocks declined. Stocks in the US rallied to all-time highs at the very beginning of the period, as corporate tax reform helped boost investor sentiment. However, increasing inflation concerns and rising interest rates soon weighed on performance. While generally robust corporate earnings mitigated some downward pressure, worsening trade war fears and political turmoil in Europe dragged on returns toward the end of the period. The strengthening US dollar and investors’ decreased risk appetite caused emerging-market equities to significantly underperform developed markets.
The Fund’s Senior Investment Management Team (the “Team”) continued to be aware of the valuations of the most stable companies in the investable universe. The Fund has been positioned in such a way as to avoid the most crowded positions, mindful of the risks particularly in a rising-rate environment, while at the same time aiming to provide downside protection in case of a sell-off. The Team has been careful to avoid companies suffering from technological disruptions and changes in consumer preference. The Team continued to uncover what it believes are attractive opportunities with below-market volatility and looked for a diverse set of opportunities in companies with strong capital stewardship and business models with solid recurring revenues even in cyclical industries, and in companies benefiting from favorable regulations.
INVESTMENT POLICIES
The Adviser seeks to achieve the Fund’s investment objective by investing, under normal circumstances, primarily in common stocks of non-US companies, and in companies in at least three countries other than the United States.
The Fund will invest in companies that are determined by the Adviser to offer favorable long-term sustainable profitability, price stability and attractive valuations. The Adviser will employ an integrated approach that combines both fundamental and quantitative research to identify attractive investment opportunities. Factors that the Adviser will consider in this regard will include: a company’s record and projections of profitability, accuracy and availability of information with respect to the company, success and experience of management, competitive advantage, low stock price volatility and liquidity of the company’s securities. The Adviser will compare these results to the characteristics of the general stock markets to determine the relative attractiveness of each company at a given time. The Adviser will weigh economic, political and market factors in making investment decisions. The Adviser will seek to manage the Fund so that it is subject to less share price volatility than many other international mutual funds, although there can be no guarantee that the Adviser will be successful in this regard.
(continued on next page)
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 3 |
The Fund will primarily invest in mid- and large-capitalization companies, which are currently defined for the Fund as companies that have market capitalizations of $1.5 billion or more. The Fund’s holdings of non-US companies will generally include some companies located in emerging markets.
Fluctuations in currency exchange rates can have a dramatic impact on the returns of equity securities. The Adviser may adjust the foreign currency exposure resulting from the Fund’s security positions through the use of currency-related derivatives, primarily in an effort to minimize the currency risk to which the Fund is subject. However, the Adviser is not required to use such derivatives.
4 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
DISCLOSURES AND RISKS
Benchmark Disclosure
The MSCI EAFE Index is unmanaged and does not reflect fees and expenses associated with the active management of a mutual fund portfolio. The MSCI EAFE Index (net, free float-adjusted, market capitalization weighted) represents the equity market performance of developed markets, excluding the US and Canada. 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. Net returns include the reinvestment of dividends after deduction of non-US withholding tax. An investor cannot invest directly in an index, and its results are not indicative of the performance for any specific investment, including the Fund.
A Word About Risk
Market Risk: The value of the Fund’s assets will fluctuate as the stock or bond 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.
Foreign (Non-US) Risk: Investments in securities of non-US issuers may involve more risk than those of US issuers. These securities may fluctuate more widely in price and may be less liquid due to adverse market, economic, political, regulatory or other factors. These risks may be heightened with respect to investments in emerging-market countries, where there may be an increased amount of economic, political and social instability.
Currency Risk: Fluctuations in currency exchange rates may negatively affect the value of the Fund’s investments or reduce its returns.
Capitalization Risk: Investments in mid-capitalization companies may be more volatile than investments in large-capitalization companies. Investments in mid-capitalization companies may have additional risks because these companies have limited product lines, markets or financial resources.
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.
Sector Risk: The Fund may have more risk because of concentrated investments in a particular market sector, such as the technology or financial services sector. Market or economic factors affecting that sector could have a major effect on the value of the Fund’s investments.
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 5 |
DISCLOSURES AND RISKS (continued)
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 for the Fund, 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 in this report 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.abfunds.com. The Fund has been in operation only for a short period of time, and therefore has a very limited historical performance period. This limited performance period is unlikely to be representative of the performance the Fund will achieve over a longer period.
All fees and expenses related to the operation of the Fund have been deducted. Net asset value (“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. 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 FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
HISTORICAL PERFORMANCE
AVERAGE ANNUAL RETURNS AS OF JUNE 30, 2018 (unaudited)
NAV Returns | SEC Returns (reflects applicable sales charges) | |||||||
ADVISOR CLASS SHARES1 | ||||||||
1 Year | 10.34% | 10.34% | ||||||
Since Inception2 | 9.62% | 9.62% |
SEC AVERAGE ANNUAL RETURNS
AS OF THE MOST RECENT CALENDAR QUARTER-END
JUNE 30, 2018 (unaudited)
SEC Returns (reflects applicable sales charges) | ||||
ADVISOR CLASS SHARES | ||||
1 Year | 10.34% | |||
Since Inception2 | 9.62% |
The Fund’s current prospectus fee table shows the Fund’s total annual operating expense ratio as 13.02% for Advisor Class shares, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements limit the Fund’s annual operating expense ratio exclusive of the Fund’s advisory fees, 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 0.10% for Advisor Class shares. These waivers/reimbursements may not be terminated before June 11, 2019. Any fees waived and expenses borne by the Adviser through December 31, 2018 may be reimbursed by the Fund until the end of the third fiscal year after the fiscal period in which the fee was waived or the expense was borne, provided that no reimbursement payment will be made that would cause the Fund’s total annual operating expenses to exceed these expense limitations. 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 ratio shown above may differ from the expense ratio in the Financial Highlights section since they are based on different time periods.
1 | This share class is offered at NAV to eligible investors and the SEC returns are the same as the NAV returns. |
2 | Inception date: 6/28/2017. |
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 7 |
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 advisory 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.
8 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
EXPENSE EXAMPLE (continued)
Beginning Account Value 1/1/2018 | Ending Account Value 6/30/2018 | Expenses Paid During Period* | Annualized Expense Ratio* | Total Expenses Paid During Period+ | Total Annualized Expense Ratio+ | |||||||||||||||||||
Advisor Class | ||||||||||||||||||||||||
Actual | $ | 1,000 | $ | 1,016.80 | $ | 10.70 | 2.14 | % | $ | 10.75 | 2.15 | % | ||||||||||||
Hypothetical** | $ | 1,000 | $ | 1,014.18 | $ | 10.69 | 2.14 | % | $ | 10.74 | 2.15 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
+ | In connection with the Fund’s investments in affiliated/unaffiliated underlying portfolios, the Fund incurs no direct expenses, but bears proportionate shares of the fees and expenses (i.e., operating, administrative and investment advisory fees) of the affiliated/unaffiliated underlying portfolios. The Adviser has contractually agreed to waive its fees from the Fund in an amount equal to the Fund’s pro rata share of certain acquired fund fees and expenses of the affiliated underlying portfolios. The Fund’s total expenses are equal to the classes’ annualized expense ratio plus the Fund’s pro rata share of the weighted average expense ratio of the affiliated/unaffiliated underlying portfolios in which it invests, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 9 |
PORTFOLIO SUMMARY
June 30, 2018 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $3.3
1 | All data are as of June 30, 2018. The Fund’s sector and country breakdowns are 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 2.1% or less in the following countries: Finland, Italy, South Korea, Spain and Sweden. |
Please note: The sector classifications presented herein are based on the Global Industry Classification Standard (GICS) which was developed by Morgan Stanley Capital International and Standard & Poor’s. The components are divided into sector, industry group, and industry sub-indices as classified by the GICS for each of the market capitalization indices in the broad market. These sector classifications are broadly defined. The “Portfolio of Investments” section of the report reflects more specific industry information and is consistent with the investment restrictions discussed in the Fund’s prospectus.
10 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
PORTFOLIO SUMMARY (continued)
June 30, 2018 (unaudited)
TEN LARGEST HOLDINGS1
Company | U.S. $ Value | Percent of Net Assets | ||||||
Oracle Corp. Japan | $ | 81,505 | 2.5 | % | ||||
Aristocrat Leisure Ltd. | 80,388 | 2.5 | ||||||
Wolters Kluwer NV | 69,659 | 2.1 | ||||||
Royal Dutch Shell PLC – Class B | 68,761 | 2.1 | ||||||
Nice Ltd. | 67,273 | 2.1 | ||||||
Amadeus IT Group SA – Class A | 67,074 | 2.1 | ||||||
Hang Seng Bank Ltd. | 64,923 | 2.0 | ||||||
Nippon Telegraph & Telephone Corp. | 63,599 | 1.9 | ||||||
HKT Trust & HKT Ltd. – Class SS | 60,863 | 1.9 | ||||||
Capgemini SE | 59,902 | 1.8 | ||||||
$ | 683,947 | 21.0 | % |
1 | Long-term investments. |
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 11 |
PORTFOLIO OF INVESTMENTS
June 30, 2018 (unaudited)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
COMMON STOCKS – 99.5% | ||||||||
Financials – 25.7% | ||||||||
Banks – 14.4% | ||||||||
Bank Hapoalim BM | 2,840 | $ | 19,253 | |||||
BOC Hong Kong Holdings Ltd. | 8,500 | 39,950 | ||||||
Danske Bank A/S | 800 | 24,923 | ||||||
DBS Group Holdings Ltd. | 2,800 | 54,452 | ||||||
DNB ASA | 2,070 | 40,309 | ||||||
Hang Seng Bank Ltd. | 2,600 | 64,923 | ||||||
Mitsubishi UFJ Financial Group, Inc. | 5,400 | 30,590 | ||||||
National Australia Bank Ltd. | 1,880 | 38,173 | ||||||
Oversea-Chinese Banking Corp., Ltd. | 1,900 | 16,184 | ||||||
Royal Bank of Canada | 710 | 53,461 | ||||||
Seven Bank Ltd. | 5,600 | 17,100 | ||||||
Sumitomo Mitsui Financial Group, Inc. | 700 | 27,304 | ||||||
Toronto-Dominion Bank (The) | 760 | 43,988 | ||||||
|
| |||||||
470,610 | ||||||||
|
| |||||||
Capital Markets – 5.1% | ||||||||
Euronext NV(a) | 670 | 42,456 | ||||||
IG Group Holdings PLC | 4,520 | 51,253 | ||||||
Partners Group Holding AG | 73 | 53,366 | ||||||
Singapore Exchange Ltd. | 3,400 | 17,867 | ||||||
|
| |||||||
164,942 | ||||||||
|
| |||||||
Diversified Financial Services – 1.0% | ||||||||
ORIX Corp. | 2,100 | 33,100 | ||||||
|
| |||||||
Insurance – 5.2% | ||||||||
Admiral Group PLC | 650 | 16,336 | ||||||
Allianz SE (REG) | 99 | 20,399 | ||||||
Direct Line Insurance Group PLC | 4,910 | 22,157 | ||||||
NN Group NV | 1,000 | 40,557 | ||||||
Swiss Re AG | 459 | 40,075 | ||||||
Tryg A/S | 1,260 | 29,507 | ||||||
|
| |||||||
169,031 | ||||||||
|
| |||||||
837,683 | ||||||||
|
| |||||||
Consumer Discretionary – 18.2% | ||||||||
Automobiles – 0.5% | ||||||||
Subaru Corp. | 600 | 17,451 | ||||||
|
| |||||||
Distributors – 1.4% | ||||||||
PALTAC Corp. | 800 | 46,005 | ||||||
|
| |||||||
Hotels, Restaurants & Leisure – 4.0% | ||||||||
Aristocrat Leisure Ltd. | 3,520 | 80,388 | ||||||
Compass Group PLC | 1,465 | 31,227 | ||||||
Playtech PLC | 1,860 | 18,443 | ||||||
|
| |||||||
130,058 | ||||||||
|
|
12 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Household Durables – 3.6% | ||||||||
Auto Trader Group PLC(a) | 10,410 | $ | 58,342 | |||||
Nikon Corp. | 1,700 | 27,017 | ||||||
Persimmon PLC | 970 | 32,310 | ||||||
|
| |||||||
117,669 | ||||||||
|
| |||||||
Leisure Products – 2.6% | ||||||||
Amer Sports Oyj(b) | 1,500 | 47,166 | ||||||
Bandai Namco Holdings, Inc. | 900 | 37,073 | ||||||
|
| |||||||
84,239 | ||||||||
|
| |||||||
Media – 2.2% | ||||||||
CTS Eventim AG & Co. KGaA | 1,105 | 54,253 | ||||||
Daiichikosho Co., Ltd. | 400 | 19,303 | ||||||
|
| |||||||
73,556 | ||||||||
|
| |||||||
Multiline Retail – 1.3% | ||||||||
Next PLC | 540 | 42,983 | ||||||
|
| |||||||
Textiles, Apparel & Luxury Goods – 2.6% | ||||||||
HUGO BOSS AG | 294 | 26,662 | ||||||
Moncler SpA | 1,250 | 56,719 | ||||||
|
| |||||||
83,381 | ||||||||
|
| |||||||
595,342 | ||||||||
|
| |||||||
Information Technology – 16.1% | ||||||||
Internet Software & Services – 2.6% | ||||||||
carsales.com Ltd. | 1,815 | 20,288 | ||||||
Kakaku.com, Inc. | 1,100 | 24,769 | ||||||
Moneysupermarket.com Group PLC | 9,300 | 38,650 | ||||||
|
| |||||||
83,707 | ||||||||
|
| |||||||
IT Services – 5.4% | ||||||||
Amadeus IT Group SA – Class A | 853 | 67,074 | ||||||
Capgemini SE | 447 | 59,902 | ||||||
Otsuka Corp. | 1,300 | 50,892 | ||||||
|
| |||||||
177,868 | ||||||||
|
| |||||||
Software – 7.5% | ||||||||
Check Point Software Technologies Ltd.(b) | 337 | 32,918 | ||||||
Constellation Software, Inc./Canada | 48 | 37,225 | ||||||
Nice Ltd.(b) | 650 | 67,273 | ||||||
Oracle Corp. Japan | 1,000 | 81,505 | ||||||
SAP SE | 220 | 25,392 | ||||||
|
| |||||||
244,313 | ||||||||
|
| |||||||
Technology Hardware, Storage & Peripherals – 0.6% | ||||||||
Samsung Electronics Co., Ltd. | 70 | 2,932 | ||||||
Samsung Electronics Co., Ltd. (GDR)(a) | 15 | 15,558 | ||||||
|
| |||||||
18,490 | ||||||||
|
| |||||||
524,378 | ||||||||
|
|
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 13 |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Consumer Staples – 9.5% | ||||||||
Beverages – 3.9% | ||||||||
Diageo PLC | 1,565 | $ | 56,224 | |||||
Royal Unibrew A/S | 622 | 49,429 | ||||||
Suntory Beverage & Food Ltd. | 500 | 21,376 | ||||||
|
| |||||||
127,029 | ||||||||
|
| |||||||
Food Products – 1.7% | ||||||||
Nestle SA (REG) | 240 | 18,600 | ||||||
Salmar ASA | 910 | 38,169 | ||||||
|
| |||||||
56,769 | ||||||||
|
| |||||||
Personal Products – 1.5% | ||||||||
Unilever PLC | 905 | 49,993 | ||||||
|
| |||||||
Tobacco – 2.4% | ||||||||
British American Tobacco PLC | 1,093 | 55,058 | ||||||
Scandinavian Tobacco Group A/S(a) | 1,490 | 22,502 | ||||||
|
| |||||||
77,560 | ||||||||
|
| |||||||
311,351 | ||||||||
|
| |||||||
Industrials – 9.0% | ||||||||
Airlines – 1.9% | ||||||||
Japan Airlines Co., Ltd. | 600 | 21,259 | ||||||
Qantas Airways Ltd. | 9,260 | 42,166 | ||||||
|
| |||||||
63,425 | ||||||||
|
| |||||||
Construction & Engineering – 0.2% | ||||||||
Taisei Corp. | 100 | 5,507 | ||||||
|
| |||||||
Machinery – 0.4% | ||||||||
Atlas Copco AB – Class B | 440 | 11,463 | ||||||
|
| |||||||
Professional Services – 6.5% | ||||||||
Intertek Group PLC | 657 | 49,400 | ||||||
Recruit Holdings Co., Ltd. | 1,300 | 35,904 | ||||||
RELX PLC | 2,700 | 57,659 | ||||||
Wolters Kluwer NV | 1,240 | 69,659 | ||||||
|
| |||||||
212,622 | ||||||||
|
| |||||||
293,017 | ||||||||
|
| |||||||
Materials – 6.0% | ||||||||
Chemicals – 2.8% | ||||||||
Covestro AG(a) | 185 | 16,444 | ||||||
Croda International PLC | 770 | 48,646 | ||||||
Victrex PLC | 730 | 27,948 | ||||||
|
| |||||||
93,038 | ||||||||
|
| |||||||
Containers & Packaging – 1.1% | ||||||||
Amcor Ltd./Australia | 3,310 | 35,267 | ||||||
|
| |||||||
Metals & Mining – 2.1% | ||||||||
Boliden AB | 740 | 23,882 |
14 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Northern Star Resources Ltd. | 4,680 | $ | 25,336 | |||||
South32 Ltd. | 6,720 | 17,945 | ||||||
|
| |||||||
67,163 | ||||||||
|
| |||||||
195,468 | ||||||||
|
| |||||||
Energy – 5.5% | ||||||||
Oil, Gas & Consumable Fuels – 5.5% | ||||||||
Caltex Australia Ltd. | 930 | 22,381 | ||||||
TOTAL SA | 975 | 59,207 | ||||||
Royal Dutch Shell PLC – Class B | 1,920 | 68,761 | ||||||
Showa Shell Sekiyu KK | 1,900 | 28,308 | ||||||
|
| |||||||
178,657 | ||||||||
|
| |||||||
Health Care – 4.8% | ||||||||
Health Care Equipment & Supplies – 0.9% | ||||||||
Cochlear Ltd. | 205 | 30,351 | ||||||
|
| |||||||
Pharmaceuticals – 3.9% | ||||||||
Astellas Pharma, Inc. | 2,000 | 30,437 | ||||||
Novo Nordisk A/S – Class B | 970 | 44,805 | ||||||
Roche Holding AG | 225 | 49,918 | ||||||
|
| |||||||
125,160 | ||||||||
|
| |||||||
155,511 | ||||||||
|
| |||||||
Telecommunication Services – 4.7% | ||||||||
Diversified Telecommunication Services – 4.7% | ||||||||
HKT Trust & HKT Ltd. – Class SS | 48,000 | 60,863 | ||||||
Nippon Telegraph & Telephone Corp. | 1,400 | 63,599 | ||||||
Telenor ASA | 1,490 | 30,516 | ||||||
|
| |||||||
154,978 | ||||||||
|
| |||||||
Total Common Stocks | 3,246,385 | |||||||
|
| |||||||
SHORT-TERM INVESTMENTS – 0.5% | ||||||||
Investment Companies – 0.5% | ||||||||
AB Fixed Income Shares, Inc. – Government Money Market Portfolio – Class AB, 1.71%(c)(d)(e) | 15,927 | 15,927 | ||||||
|
| |||||||
Total Investments – 100.0% | 3,262,312 | |||||||
Other assets less liabilities – 0.0% | 1,599 | |||||||
|
| |||||||
Net Assets – 100.0% | $ | 3,263,911 | ||||||
|
|
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 15 |
PORTFOLIO OF INVESTMENTS (continued)
FORWARD CURRENCY EXCHANGE CONTRACTS (see Note C)
Counterparty | Contracts to Deliver (000) | In Exchange For (000) | Settlement Date | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
Brown Brothers Harriman & Co. | AUD | 109 | USD | 82 | 9/14/18 | $ | 1,377 | |||||||||||||||||
Brown Brothers Harriman & Co. | CAD | 150 | USD | 115 | 9/14/18 | 1,497 | ||||||||||||||||||
Brown Brothers Harriman & Co. | CAD | 26 | USD | 20 | 9/14/18 | (25 | ) | |||||||||||||||||
Brown Brothers Harriman & Co. | GBP | 121 | USD | 162 | 9/14/18 | 2,303 | ||||||||||||||||||
Brown Brothers Harriman & Co. | HKD | 293 | USD | 37 | 9/14/18 | 18 | ||||||||||||||||||
Brown Brothers Harriman & Co. | HKD | 79 | USD | 10 | 9/14/18 | (17 | ) | |||||||||||||||||
Brown Brothers Harriman & Co. | ILS | 370 | USD | 103 | 9/14/18 | 1,689 | ||||||||||||||||||
Brown Brothers Harriman & Co. | JPY | 721 | USD | 7 | 9/14/18 | 35 | ||||||||||||||||||
Brown Brothers Harriman & Co. | NOK | 673 | USD | 84 | 9/14/18 | 1,183 | ||||||||||||||||||
Brown Brothers Harriman & Co. | SGD | 55 | USD | 41 | 9/14/18 | 593 | ||||||||||||||||||
Brown Brothers Harriman & Co. | USD | 94 | CHF | 92 | 9/14/18 | (318 | ) | |||||||||||||||||
Brown Brothers Harriman & Co. | USD | 11 | EUR | 9 | 9/14/18 | 49 | ||||||||||||||||||
Brown Brothers Harriman & Co. | USD | 355 | EUR | 301 | 9/14/18 | (1,928 | ) | |||||||||||||||||
Brown Brothers Harriman & Co. | USD | 20 | GBP | 15 | 9/14/18 | (81 | ) | |||||||||||||||||
Brown Brothers Harriman & Co. | USD | 155 | JPY | 16,883 | 9/14/18 | (1,221 | ) | |||||||||||||||||
Brown Brothers Harriman & Co. | USD | 40 | SEK | 348 | 9/14/18 | (1,375 | ) | |||||||||||||||||
Citibank, NA | KRW | 12,204 | USD | 11 | 7/26/18 | 513 | ||||||||||||||||||
|
| |||||||||||||||||||||||
$ | 4,292 | |||||||||||||||||||||||
|
|
(a) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities are considered restricted, but liquid and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At June 30, 2018, the aggregate market value of these securities amounted to $155,302 or 4.8% of net assets. |
(b) | Non-income producing security. |
(c) | To obtain a copy of the fund’s shareholder report, please go to the Securities and Exchange Commission’s website at www.sec.gov, or call AB at (800) 227-4618. |
(d) | The rate shown represents the 7-day yield as of period end. |
(e) | Affiliated investments. |
Currency Abbreviations:
AUD – Australian Dollar
CAD – Canadian Dollar
CHF – Swiss Franc
EUR – Euro
GBP – Great British Pound
HKD – Hong Kong Dollar
ILS – Israeli Shekel
JPY – Japanese Yen
KRW – South Korean Won
NOK – Norwegian Krone
SEK – Swedish Krona
SGD – Singapore Dollar
USD – United States Dollar
Glossary:
GDR – Global Depositary Receipt
REG – Registered Shares
See notes to financial statements.
16 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
STATEMENT OF ASSETS & LIABILITIES
June 30, 2018 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $3,030,090) | $ | 3,246,385 | ||
Affiliated issuers (cost $15,927) | 15,927 | |||
Foreign currencies, at value (cost $11,209) | 11,219 | |||
Receivable from Adviser | 76,338 | |||
Receivable for investment securities sold and foreign currency transactions | 38,158 | |||
Unaffiliated dividends receivable | 10,194 | |||
Unrealized appreciation on forward currency exchange contracts | 9,257 | |||
Affiliated dividends receivable | 35 | |||
|
| |||
Total assets | 3,407,513 | |||
|
| |||
Liabilities | ||||
Custody fee payable | 45,581 | |||
Payable for investment securities purchased | 28,713 | |||
Audit and tax fee payable | 26,673 | |||
Legal fee payable | 13,374 | |||
Registration fee payable | 9,693 | |||
Directors’ fee payable | 7,891 | |||
Unrealized depreciation on forward currency exchange contracts | 4,965 | |||
Transfer Agent fee payable | 522 | |||
Accrued expenses and other liabilities | 6,190 | |||
|
| |||
Total liabilities | 143,602 | |||
|
| |||
Net Assets | $ | 3,263,911 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 30 | ||
Additional paid-in capital | 2,999,296 | |||
Undistributed net investment income | 24,844 | |||
Accumulated net realized gain on investment | 19,308 | |||
Net unrealized appreciation on investments | 220,433 | |||
|
| |||
$ | 3,263,911 | |||
|
|
Net Asset Value Per Share—11 billion shares of capital stock authorized, $.0001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
Advisor | $ | 3,263,911 | 300,000 | $ | 10.88 | |||||||
|
See notes to financial statements.
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 17 |
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2018 (unaudited)
Investment Income | ||||||||
Dividends | ||||||||
Unaffiliated issuers (net of foreign taxes withheld of $6,874) | $ | 61,075 | ||||||
Affiliated issuers | 347 | $ | 61,422 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 32,963 | |||||||
Transfer agency—Advisor Class | 1,627 | |||||||
Custodian | 47,937 | |||||||
Administrative | 34,672 | |||||||
Amortization of offering expenses | 33,389 | |||||||
Audit and tax | 31,198 | |||||||
Directors’ fees | 13,973 | |||||||
Registration fees | 11,122 | |||||||
Legal | 10,271 | |||||||
Printing | 4,302 | |||||||
Miscellaneous | 1,661 | |||||||
|
| |||||||
Total expenses | 223,115 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (188,081 | ) | ||||||
|
| |||||||
Net expenses | 35,034 | |||||||
|
| |||||||
Net investment income | 26,388 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | 28,611 | |||||||
Forward currency exchange contracts | (12,848 | ) | ||||||
Foreign currency transactions | 744 | |||||||
Net change in unrealized appreciation/depreciation on: | ||||||||
Investments | 5,193 | |||||||
Forward currency exchange contracts | 7,152 | |||||||
Foreign currency denominated assets and liabilities | (154 | ) | ||||||
|
| |||||||
Net gain on investment and foreign currency transactions | 28,698 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 55,086 | ||||||
|
|
See notes to financial statements.
18 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017(a) to December 31, 2017 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 26,388 | $ | 26,843 | ||||
Net realized gain (loss) on investment and foreign currency transactions | 16,507 | (374 | ) | |||||
Net change in unrealized appreciation/depreciation on investments and foreign currency denominated assets and liabilities | 12,191 | 208,242 | ||||||
|
|
|
| |||||
Net increase in net assets from operations | 55,086 | 234,711 | ||||||
Dividends and Distributions to Shareholders from | ||||||||
Net investment income | ||||||||
Advisor Class | – 0 | – | (22,650 | ) | ||||
Net realized gain on investment and foreign currency transactions | ||||||||
Advisor Class | – 0 | – | (3,240 | ) | ||||
Capital Stock Transactions | ||||||||
Net increase | 1 | 3,000,003 | ||||||
|
|
|
| |||||
Total increase | 55,087 | 3,208,824 | ||||||
Net Assets | ||||||||
Beginning of period | 3,208,824 | – 0 | – | |||||
|
|
|
| |||||
End of period (including undistributed net investment income of $24,844 and including distributions in excess of net investment income of ($1,544)) | $ | 3,263,911 | $ | 3,208,824 | ||||
|
|
|
|
(a) | Commencement of operations. |
See notes to financial statements.
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 19 |
NOTES TO FINANCIAL STATEMENTS
June 30, 2018 (unaudited)
NOTE A
Significant Accounting Policies
AB Cap Fund, Inc. (the “Company”), which is a Maryland corporation, is registered under the Investment Company Act of 1940 as an open-end management investment company. The Company operates as a series company comprised of 28 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 FlexFee International Strategic Core Portfolio (the “Fund”), a diversified portfolio. The Fund commenced operations on June 28, 2017. The Fund has authorized issuance of Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I, Class Z, Class T, Class 1, and Class 2 shares. Class A, Class B, Class C, Class R, Class K, Class I, Class Z, Class T, Class 1, and Class 2 shares have not been issued. As of June 30, 2018, AllianceBernstein L.P. (the “Adviser”) was the sole shareholder of Advisor Class shares. Advisor Class shares are sold without an initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. All eleven 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 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
20 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 “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. Open end mutual funds are valued at the closing net asset value per share, while exchange traded funds are valued at the closing market price per share.
Securities for which market quotations are not readily available (including restricted securities) or are deemed unreliable are valued at fair value as deemed appropriate by the Adviser. 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 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 generally values many of its foreign
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 21 |
NOTES TO FINANCIAL STATEMENTS (continued)
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) |
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.
The fair value of debt instruments, such as bonds, and over-the-counter derivatives is generally based on market price quotations, recently executed
22 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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.
The following table summarizes the valuation of the Fund’s investments by the above fair value hierarchy levels as of June 30, 2018:
Investments in | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Common Stocks: | ||||||||||||||||
Financials | $ | 97,449 | $ | 740,234 | $ | – 0 | – | $ | 837,683 | |||||||
Consumer Discretionary | – 0 | – | 595,342 | – 0 | – | 595,342 | ||||||||||
Information Technology | 108,793 | 415,585 | – 0 | – | 524,378 | |||||||||||
Consumer Staples | 22,502 | 288,849 | – 0 | – | 311,351 | |||||||||||
Industrials | – 0 | – | 293,017 | – 0 | – | 293,017 | ||||||||||
Materials | – 0 | – | 195,468 | – 0 | – | 195,468 | ||||||||||
Energy | – 0 | – | 178,657 | – 0 | – | 178,657 | ||||||||||
Health Care | – 0 | – | 155,511 | – 0 | – | 155,511 | ||||||||||
Telecommunication Services | – 0 | – | 154,978 | – 0 | – | 154,978 | ||||||||||
Short-Term Investments: | ||||||||||||||||
Investment Companies | 15,927 | – 0 | – | – 0 | – | 15,927 | ||||||||||
Total Investments in Securities | 244,671 | 3,017,641 | † | – 0 | – | 3,262,312 | ||||||||||
Other Financial Instruments*: | ||||||||||||||||
Assets | ||||||||||||||||
Forward Currency Exchange Contracts | – 0 | – | 9,257 | – 0 | – | 9,257 | ||||||||||
Liabilities | ||||||||||||||||
Forward Currency Exchange Contracts | – 0 | – | (4,965 | ) | – 0 | – | (4,965 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total^ | $ | 244,671 | $ | 3,021,933 | $ | – 0 | – | $ | 3,266,604 | |||||||
|
|
|
|
|
|
|
|
† | A significant portion of the Fund’s foreign equity investments are categorized as Level 2 investments since they are valued using fair value prices based on third party vendor modeling tools to the extent available, see note A.1. |
* | 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 swaps with upfront premiums, options written and swaptions written which are valued at market value. |
^ | An amount of $162,122 was transferred from Level 1 to Level 2 due to the above mentioned foreign equity fair valuation using third party vendor modeling tools during the reporting period. An amount of $51,511 was transferred from Level 2 to Level 1 as the above mentioned foreign equity fair valuation using third party vendor modeling tools not being used during the reporting period. |
The Fund recognizes all transfers between levels of the fair value hierarchy assuming the financial instrument was transferred at the beginning of the reporting period.
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 23 |
NOTES TO FINANCIAL STATEMENTS (continued)
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 any 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 process 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 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
24 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
income investments, 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 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 and 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 the current initial tax year, 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 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. Expense Allocations
Expenses of the Company are charged proportionately to each portfolio or based on other appropriate methods.
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.
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 25 |
NOTES TO FINANCIAL STATEMENTS (continued)
8. Offering Expenses
Offering expenses of $68,085 were deferred and amortized on a straight line basis over a one year period starting from June 28, 2017 (commencement of operations).
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 .55% of the Fund’s average daily net assets (“Base Fee”). The advisory fee is increased or decreased from the Base Fee by a performance adjustment (“Performance Adjustment”) that depends on whether, and to what extent, the investment performance of the Advisor Class shares of the Fund (“Measuring Class”) exceeds, or is exceeded by, the performance of the MSCI EAFE Index (net) (“Index”) plus 1.40% (“Index Hurdle”) over the Performance Period (as defined below). For the period from August 4, 2017 to October 31, 2017, the MSCI EAFE Index with IDCo Fair Value Pricing (net) was used for purposes of calculating the Performance Adjustment. The Performance Adjustment is calculated and accrued daily, according to a schedule that adds or subtracts .00357% of the Fund’s average daily net assets for each .01% of absolute performance by which the performance of the Measuring Class exceeds or lags the Index Hurdle for the period from the beginning of the Performance Period through the current business day. The maximum Performance Adjustment (positive or negative) will not exceed an annualized rate of +/- .50% (“Maximum Performance Adjustment”) of the Fund’s average daily net assets, which would occur when the performance of the Measuring Class exceeds, or is exceeded by, the Index Hurdle by 1.40% or more for the Performance Period. On a monthly basis, the Fund will pay the Adviser the minimum fee rate of .05% on an annualized basis (Base Fee minus the Maximum Performance Adjustment) applied to the average daily net assets for the month. At the end of the Performance Period, the Fund will pay to the Adviser the total advisory fee, less the amount of any minimum fees paid during the Performance Period and any waivers described below. The period over which performance is measured (“Performance Period”) is initially from the commencement of operations to December 31, 2018 and thereafter each 12-month period beginning on the first day in the month of January through December 31 of the same year. In addition, the Adviser has agreed to waive its advisory fee by limiting the Fund’s accrual of the advisory fee (Base Fee plus Performance Adjustment) on any day to the amount corresponding to the maximum fee rate multiplied by the Fund’s current net assets if such amount is less than the amount that would have been accrued based on the Fund’s average daily net assets for the Performance Period. For the reporting period ended June 30, 2018, the Fund accrued advisory fees of $32,963, as reflected in the statement of operations, at an annual effective rate
26 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
(excluding the impact from any expense waivers in effect) of 1.05% of the Fund’s average net assets, which reflected a .50% Performance Adjustment of $16,072.
The Adviser has agreed to waive its fees and bear certain expenses through June 11, 2019 to the extent necessary to limit total expenses (other than the advisory fee, 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 from exceeding .10% of average daily net assets. Any fees waived and expenses borne by the Adviser through December 31, 2018 are subject to repayment by the Fund until the end of the third fiscal year after the fiscal period in which the fees were waived or the expenses were borne; such waivers/expenses borne that are subject to repayment amount to $194,120 for the fiscal period ended December 31, 2017 and $153,354 for the six months ended June 30, 2018. In any case, no repayment will be made that would cause the Fund’s total annual expenses (subject to the exclusions set forth above) to exceed .10%.
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 six months ended June 30, 2018, the Adviser voluntarily agreed to waive such fees in the amount to $34,672.
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. The compensation retained by ABIS amounted to $1,638 for the six months ended June 30, 2018.
The Fund may invest in AB Government Money Market Portfolio (the “Government Money Market Portfolio”) which has a contractual annual advisory fee rate of .20% of the portfolio’s average daily net assets and bears its own expenses. In connection with the investment by the Fund in the Government Money Market Portfolio, the Adviser has contractually agreed to waive its advisory fee from the Fund in an amount equal to the Fund’s pro rata share of the effective advisory fee of Government Money Market Portfolio, as borne indirectly by the Fund as an acquired fund fee and expense. For the six months ended June 30, 2018, such waiver amounted to $55.
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 27 |
NOTES TO FINANCIAL STATEMENTS (continued)
A summary of the Fund’s transactions in AB mutual funds for the six months ended June 30, 2018 is as follows:
Fund | Market Value 12/31/17 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value 06/30/18 (000) | Dividend Income (000) | |||||||||||||||
Government Money Market Portfolio | $ | 501 | $ | 1,284 | $ | 1,769 | $ | 16 | $ | 0 | * |
* | Amount is less than $500. |
Brokerage commissions paid on investment transactions for the six months ended June 30, 2018 amounted to $1,181, 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
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the six months ended June 30, 2018 were as follows:
Purchases | Sales | |||||||
Investment securities (excluding | $ | 1,103,428 | $ | 1,090,672 | ||||
U.S. government securities | – 0 | – | – 0 | – |
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 are as follows:
Gross unrealized appreciation | $ | 336,318 | ||
Gross unrealized depreciation | (115,731 | ) | ||
|
| |||
Net unrealized appreciation | $ | 220,587 | ||
|
|
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.
The principal types of derivatives utilized by the Fund, as well as the methods in which they may be used are:
• | 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
28 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 forward currency exchange contracts. 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 six months ended June 30, 2018, the Fund held forward currency exchange contracts for hedging purposes.
The Fund typically enters into International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreement”) with its OTC derivative contract counterparties in order to, among other things, reduce its credit risk to OTC 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 OTC counterparty certain derivative financial instruments’ 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. In the event of a default by an OTC 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 ISDA 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 OTC 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. If OTC derivatives were held at period end, please refer to netting arrangements by the OTC counterparty table below for additional details.
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 29 |
NOTES TO FINANCIAL STATEMENTS (continued)
During the six months ended June 30, 2018 the Fund had entered into the following derivatives:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Type | Statement of | Fair Value | Statement of | Fair Value | ||||||||
Foreign currency contracts | Unrealized appreciation on forward currency exchange contracts | $ | 9,257 | Unrealized depreciation on forward currency exchange contracts | $ | 4,965 | ||||||
|
|
|
| |||||||||
Total | $ | 9,257 | $ | 4,965 | ||||||||
|
|
|
|
Derivative Type | Location of | Realized Gain or (Loss) on Derivatives | Change in Unrealized Appreciation or (Depreciation) | |||||||
Foreign currency contracts | Net realized gain/(loss) on forward currency exchange contracts; Net change in unrealized appreciation/depreciation on forward currency exchange contracts | $ | (12,848 | ) | $ | 7,152 | ||||
|
|
|
| |||||||
Total | $ | (12,848 | ) | $ | 7,152 | |||||
|
|
|
|
The following table represents the average monthly volume of the Fund’s derivative transactions during the six months ended June 30, 2018:
Forward Currency Exchange Contracts: | ||||
Average principal amount of buy contracts | $ | 791,985 | ||
Average principal amount of sale contracts | $ | 804,274 |
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 OTC derivatives held at period end were subject to netting arrangements. The following table presents the Fund’s derivative assets and liabilities by OTC counterparty net of amounts available for offset under ISDA Master Agreements (“MA”) and net of the related collateral received/pledged by the Fund as of June 30, 2018. Exchange-traded derivatives and centrally cleared swaps are not subject to netting arrangements and as such are excluded from the table.
30 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
Counterparty | Derivative Assets Subject to a MA | Derivatives Available for Offset | Cash Collateral Received* | Security Collateral Received* | Net Amount of Derivatives Assets | |||||||||||||||
Brown Brothers Harriman & Co. | $ | 8,744 | $ | (4,965 | ) | $ | – 0 | – | $ | – 0 | – | $ | 3,779 | |||||||
Citibank, N.A. | 513 | – 0 | – | – 0 | – | – 0 | – | 513 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 9,257 | $ | (4,965 | ) | $ | – 0 | – | $ | – 0 | – | $ | 4,292 | ^ | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Counterparty | Derivative Liabilities Subject to a MA | Derivatives Available for Offset | Cash Collateral Pledged* | Security Collateral Pledged* | Net Amount of Derivatives Liabilities | |||||||||||||||
Brown Brothers Harriman & Co. | $ | 4,965 | $ | (4,965 | ) | $ | – 0 | – | $ | – 0 | – | $ | – 0 | – | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 4,965 | $ | (4,965 | ) | $ | – 0 | – | $ | – 0 | – | $ | 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. |
2. Currency Transactions
The Fund may invest in non-U.S. Dollar-denominated 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).
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NOTES TO FINANCIAL STATEMENTS (continued)
NOTE D
Capital Stock
Each class consists of 1,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||||||||||||||
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017* 2017 | Six Months Ended June 30, 2018 (unaudited) | June 28, 2017* 2017 | |||||||||||||||||||||
|
| |||||||||||||||||||||||
Advisor Class | ||||||||||||||||||||||||
Shares sold | 0 | (a) | 300,000 | $ | 1 | $ | 3,000,003 | |||||||||||||||||
|
|
| ||||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | – 0 | – | 0 | (a) | – 0 | – | 0 | (b) | ||||||||||||||||
|
|
| ||||||||||||||||||||||
Net increase | – 0 | – | 300,000 | $ | 1 | $ | 3,000,003 | |||||||||||||||||
|
|
|
* | Commencement of operations. |
(a) | less than 0.5 shares. |
(b) | less than $0.5. |
NOTE E
Risks Involved in Investing in the Fund
Foreign (Non-U.S.) Risk—Investments in securities of non-U.S. issuers may involve more risk than those of U.S. issuers. These securities may fluctuate more widely in price and may be less liquid due to adverse market, economic, political, regulatory or other factors. These risks may be heightened with respect to investments in emerging market countries, where there may be an increased amount of economic, political and social instability.
Currency Risk—Fluctuations in currency exchange rates may negatively affect the value of the Fund’s investments or reduce its returns.
Capitalization Risk—Investments in mid-capitalization companies may be more volatile than investments in large-capitalization companies. Investments in mid-capitalization companies may have additional risks because these companies have limited product lines, markets or financial resources.
Derivatives Risk—The Fund may enter into derivative transactions such as forwards, options, futures and swaps. Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Fund, and subject to counterparty risk to a greater degree than more traditional investments. Derivatives may result in significant losses, including losses that are far greater than the value of the derivatives reflected on the statement of assets and liabilities.
32 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 F
Distributions to Shareholders
The tax character of distributions paid for the year ending December 31, 2018 will be determined at the end of the current fiscal year.
The tax character of distributions paid during the fiscal period ended December 31, 2017 was as follows:
2017 | ||||
Distributions paid from: | ||||
Ordinary income | $ | 25,890 | ||
|
| |||
Total taxable distributions paid | $ | 25,890 | ||
|
|
As of December 31, 2017, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 9,078 | ||
Unrealized appreciation/(depreciation) | 200,421 | (a) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | 209,499 | ||
|
|
(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 passive foreign investment companies (PFICs), and the recognition for tax purposes of unrealized gains/losses on certain derivative instruments. |
For tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. Funds are permitted to carry forward capital losses for an indefinite period, and such losses will retain their character as either short-term or long-term capital losses. As of December 31, 2017, the Fund did not have any capital loss carryforwards.
NOTE G
Subsequent Events
Management has evaluated subsequent events for possible recognition or disclosure in the financial statements through the date the financial statements are issued. Management has determined that there are no material events that would require disclosure in the Fund’s financial statements through this date.
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FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017(a) to December 31, 2017 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 10.70 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .09 | .09 | ||||||
Net realized and unrealized gain on investment and foreign currency transactions | .09 | .70 | ||||||
|
| |||||||
Net increase in net asset value from operations | .18 | .79 | ||||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | – 0 | – | (.08 | ) | ||||
Distributions from net realized gain on investment and foreign currency transactions | – 0 | – | (.01 | ) | ||||
|
| |||||||
Total dividends and distributions | – 0 | – | (.09 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 10.88 | $ 10.70 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | 1.68 | % | 7.86 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $3,264 | $3,209 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements(e)† | 2.14 | %(f) | .15 | % | ||||
Expenses, before waivers/reimbursements(e)† | 13.64 | %(f) | 14.14 | % | ||||
Net investment income(c)(e) | 1.61 | % | 1.70 | % | ||||
Portfolio turnover rate | 34 | % | 29 | % | ||||
† Expense ratios exclude the estimated acquired fund fees of affiliated/unaffiliated underlying |
| |||||||
portfolios | .01 | % | .01 | %(g) |
(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 charge or contingent deferred sales charge is not reflected in the calculation of total investment return. Total investment 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 for a period of less than one year is not annualized. |
(e) | Annualized. |
(f) | The advisory fee reflected in the Fund’s expense ratio may be higher or lower than the Base Fee plus Performance Adjustment due to the different time periods over which the fee is calculated (i.e., the financial reporting period vs. the Performance Period). |
(g) | Unaudited. |
See notes to financial statements.
34 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
BOARD OF DIRECTORS
Marshall C. Turner, Jr(1), Chairman Michael J. Downey(1) William H. Foulk, Jr.(1) Nancy P. Jacklin(1) | Robert M. Keith, President and Chief Executive Officer Carol C. McMullen(1) Garry L. Moody(1) Earl D. Weiner(1) | |
OFFICERS
Kent W. Hargis(2), Vice President Sammy Suzuki(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 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) 221-6003 | 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 portfolio is made by the Adviser. Messrs. Hargis and Suzuki are the investment professionals with the most significant responsibility for the day-to-day management of the Fund’s portfolio. |
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Information Regarding the Review and Approval of Amendment to the Fund’s Advisory Agreement
At a meeting of the Board of Directors of AB Cap Fund, Inc. (the “Company”) held on October 31-November 2, 2017, the Adviser recommended an amendment to the Company’s current Advisory Agreement with the Adviser (the “Amended Agreement”) in respect of AB FlexFeeTM International Strategic Core Portfolio (the “Fund”) to change the Fund’s index to the MSCI EAFE Index from the MSCI EAFE Index with IDCo Fair Value Pricing for purposes of the Fund’s performance fee calculation and performance benchmark.
The Adviser had provided the disinterested directors (the “directors”) with a memorandum explaining its analysis and the form of amendment prior to the meeting. After discussion with experienced counsel who are independent of the Adviser and with the Adviser, the directors unanimously approved the Amended Agreement.
The directors approved the current Advisory Agreement at meetings held on August 1-2, 2017 (the “August 2017 Meeting”) and January 31-February 1, 2017 (the “January/February 2017 Meeting”) and discussions regarding the basis for the Board’s approval at these meetings are set forth below.
Board’s Approval at the August 2017 Meeting
Information Regarding the Review and Approval of Amendment to the Fund’s Advisory Agreement
At a meeting of the Board of Directors of AB Cap Fund, Inc. (the “Company”) held on August 1-2, 2017, the Adviser recommended an amendment to the Company’s current Advisory Agreement with the Adviser (the “Amended Agreement”) relating to a change in the daily fee computation methodology in respect of AB FlexFeeTM International Strategic Core Portfolio (the “Fund”). The amendment provided that, for purposes of calculating the incentive portion of the Adviser’s advisory fee, the Fund’s investment performance on each business day would be compared with the performance of its benchmark index on the same day (rather than on the prior business day). The amendment also changed the Fund’s index to the MSCI EAFE Index with IDCo Fair Value Pricing from the MSCI EAFE Index for purposes of the Fund’s performance fee calculation and performance benchmark.
The Adviser had provided the disinterested directors (the “directors”) with a memorandum explaining its analysis and the form of amendment prior to the meeting. After discussion with experienced counsel who are independent of the Adviser and with the Adviser, the directors concluded that the proposed amendment would result in a more precise calculation of the Adviser’s incentive fee and unanimously approved the Amended Agreement.
36 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
The directors approved the Fund’s current Advisory Agreement at a meeting held on January 31-February 1, 2017 (the “January/February Meeting”) and a discussion regarding the basis for the Board’s approval is set forth below.
Board’s Approval at the January/February 2017 Meeting
Information Regarding the Review and Approval of the Fund’s Advisory Agreement
The disinterested directors (the “directors”) of AB Cap Fund, Inc. (the “Company”) unanimously approved the Company’s Advisory Agreement with the Adviser in respect of AB FlexFeeTM International Strategic Core Portfolio (the “Fund”) for an initial two-year period at a meeting held on January 31-February 1, 2017 (the “Meeting”). (At the time of the approval of the Advisory Agreement, the Fund was known as AB Performance Fee Series—International Strategic Core Portfolio.)
Prior to approval of the Advisory Agreement, 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 Company’s Senior Officer (who is also the Company’s Independent Compliance Officer), who acted as their independent fee consultant, of the reasonableness of the proposed performance-based advisory fee (which consists of a base fee plus or minus a performance adjustment), in which the Senior Officer concluded that the proposed contractual fee for the Fund was reasonable. The directors also discussed the proposed approval in private sessions with counsel and the Company’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services to be provided by the Adviser to the Fund 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 AB Funds and review extensive materials and information presented by the Adviser.
The directors also considered all factors they believed relevant, including the specific matters discussed below. During the course of their deliberations, the
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 37 |
directors evaluated, among other things, the reasonableness of the proposed advisory fee. 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 Fund and the overall arrangements between the Fund 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 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 Fund’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Fund will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Fund 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 Fund to the Adviser than the fee rate stated in the Advisory Agreement. The directors noted that the methodology to be used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Company’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Fund’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 Fund under the Advisory Agreement.
Costs of Services to be Provided and Profitability
Because the Fund had not yet commenced operations, the directors were unable to consider historical information about the profitability of the Fund. 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 Fund and that the Fund was unlikely to be profitable to the Adviser unless it achieves a material level of net assets. The directors also noted that, due to the performance fee component of the advisory fee, profitability would tend to be higher with better performance relative to the Fund’s benchmark, which they considered to create an appropriate alignment of incentives.
38 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their proposed relationships with the Fund, including, but not limited to, benefits relating to 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 Fund’s shares; and transfer agency fees to be paid by the Fund to a wholly owned subsidiary of the Adviser. The directors recognized that the Adviser’s future 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 Fund.
Investment Results
Since the Fund had not yet commenced operations, no performance or other historical information for the Fund was available. The Adviser manages another AB Fund with a similar investment style, and, at the Meeting, the directors reviewed performance information for that AB Fund. Based on this information, together with the Adviser’s written and oral presentations regarding the management of the Fund 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 Fund management services to the Fund.
Advisory Fees and Other Expenses
The directors considered the proposed advisory fee rate payable by the Fund to the Adviser and information prepared by three analytical services that are not affiliated with the Adviser (the “15(c) service providers”), concerning advisory fee rates paid by other funds in the same category as the Fund at a hypothetical common asset level of $250 million. 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 considered the Fund’s proposed contractual effective advisory fee rate against a peer group median.
The directors recognized that the Adviser’s total compensation from the Fund 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 Fund and the extent to which the Adviser requests reimbursements pursuant to this provision.
The directors also considered the Adviser’s fee schedule for institutional 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 Company’s Senior Officer and noted the differences between the Fund’s proposed fee schedule, on the one hand, and the institutional fee schedule and the schedule of fees charged to any offshore funds and any sub-advised funds, on the other. The directors noted that
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 39 |
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 compared the proposed advisory fee for the Fund with that for another AB Fund with a similar investment style.
The Adviser reviewed with the directors the significantly greater scope of the services it provides to the Fund relative to institutional, offshore fund and sub-advised fund clients. In light of the substantial differences in services rendered by the Adviser to institutional, offshore fund and sub-advised fund clients as compared to funds such as the Fund, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors noted that the Fund 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 or to “equitize” cash inflows pending purchases of underlying securities, that the proposed advisory fee would be for services in addition to, rather than duplicative of, the services provided under the advisory contracts of the ETFs in which the Fund may invest.
The directors also considered the projected total expense ratio of the Advisor Class shares of the Fund in comparison to a peer group and a peer universe selected by each 15(c) service provider. The directors also considered the Adviser’s proposed expense cap for the “other expenses” of the Fund (expenses excluding the advisory fee, Rule 12b-1 fees, and certain other expenses typically excluded from the Adviser’s expense caps) for the period ending December 31, 2018. The directors noted that it was likely that the expense ratios of some of the other funds in the Fund’s 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 projected expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Fund by others. Based on their review, the directors concluded that the Fund’s projected expense ratio was acceptable.
Economies of Scale
The directors noted that the proposed advisory fee schedule for the Fund does not contain breakpoints and that they had previously discussed their strong preference 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
40 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
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 in advance of the 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 Fund, 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 Fund’s assets and its profitability to the Adviser and anticipated revisiting the question of breakpoints in the future if circumstances warranted doing so.
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 41 |
This page is not part of the Shareholder Report or the Financial Statements.
AB FAMILY OF FUNDS
US EQUITY
US CORE
Core Opportunities Fund
FlexFee™ US Thematic Portfolio
Select US Equity Portfolio
US GROWTH
Concentrated Growth Fund
Discovery Growth Fund
FlexFee™ Large Cap Growth Portfolio
Growth Fund
Large Cap Growth Fund
Small Cap Growth Portfolio
US VALUE
Discovery Value Fund
Equity Income Fund
Relative Value Fund
Small Cap Value Portfolio
Value Fund
INTERNATIONAL/ GLOBAL EQUITY
INTERNATIONAL/ GLOBAL CORE
All China Equity Portfolio
FlexFee™ International Strategic Core Portfolio
Global Core Equity Portfolio
International Portfolio
International Strategic Core Portfolio
Sustainable Global Thematic Fund
Tax-Managed International Portfolio
Tax-Managed Wealth Appreciation Strategy
Wealth Appreciation Strategy
INTERNATIONAL/ GLOBAL GROWTH
Concentrated International Growth Portfolio
FlexFee™ Emerging Markets Growth Portfolio
INTERNATIONAL/ GLOBAL EQUITY (continued)
Sustainable International Thematic Fund1
INTERNATIONAL/ GLOBAL VALUE
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
Tax-Aware Fixed Income Portfolio
National Portfolio
Arizona Portfolio
California Portfolio
Massachusetts Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
TAXABLE
Bond Inflation Strategy
FlexFee™ High Yield Portfolio1
FlexFee™ International Bond Portfolio
Global Bond Fund
High Income Fund
Income Fund
Intermediate Bond Portfolio
Limited Duration High Income Portfolio
Short Duration Portfolio
ALTERNATIVES
All Market Real Return Portfolio
Global Real Estate Investment Fund
Select US Long/Short Portfolio
Unconstrained Bond Fund
MULTI-ASSET
All Market Income Portfolio
All Market Total Return Portfolio
Conservative Wealth Strategy
Emerging Markets Multi-Asset Portfolio
Global Risk Allocation Fund
Tax-Managed All Market Income Portfolio
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
CLOSED-END FUNDS
Alliance California Municipal Income Fund
AllianceBernstein Global High Income Fund
AllianceBernstein National Municipal Income Fund
We also offer Government Money Market Portfolio1, which serves as the money market fund exchange vehicle for the AB mutual funds. An investment in Government Money Market Portfolio 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.abfunds.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
1 | Prior to November 10, 2017, Government Money Market Portfolio was named Government Exchange Reserves; prior to January 8, 2018, Sustainable International Thematic Fund was named International Growth Fund; prior to February 23, 2018, FlexFee High Yield Portfolio was named High Yield Portfolio. |
42 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
NOTES
abfunds.com | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | 43 |
NOTES
44 | AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO | abfunds.com |
AB FLEXFEE INTERNATIONAL STRATEGIC CORE PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800 221 5672
FFISCP-0152-0618
JUN 06.30.18
SEMI-ANNUAL REPORT
AB FLEXFEETM LARGE CAP GROWTH 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.abfunds.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.abfunds.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.abfunds.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.
FROM THE PRESIDENT | ![]() |
Dear Shareholder,
We are pleased to provide this report for AB FlexFee Large Cap Growth Portfolio (the “Fund”). Please review the discussion of Fund performance, the market conditions during the reporting period and the Fund’s investment strategy.
As always, AB strives to keep clients ahead of what’s next by:
+ | Transforming uncommon insights into uncommon knowledge with a global research scope |
+ | Navigating markets with seasoned investment experience and sophisticated solutions |
+ | Providing thoughtful investment insights and actionable ideas |
Whether you’re an individual investor or a multi-billion-dollar institution, we put knowledge and experience to work for you.
AB’s global research organization connects and collaborates across platforms and teams to deliver impactful insights and innovative products. Better insights lead to better opportunities—anywhere in the world.
For additional information about AB’s range of products and shareholder resources, please log on to www.abfunds.com.
Thank you for your investment in the AB Mutual Funds.
Sincerely,
Robert M. Keith
President and Chief Executive Officer, AB Mutual Funds
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 1 |
SEMI-ANNUAL REPORT
August 13, 2018
This report provides management’s discussion of fund performance for AB FlexFee Large Cap Growth Portfolio for the semi-annual reporting period ended June 30, 2018.
The Fund’s investment objective is long-term growth of capital.
NAV RETURNS AS OF JUNE 30, 2018 (unaudited)
6 Months | 12 Months | |||||||
AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | ||||||||
Advisor Class Shares | 9.03% | 23.35% | ||||||
Russell 1000 Growth Index | 7.25% | 22.51% |
Please keep in mind that high, double-digit returns are highly unusual and cannot be sustained. Investors should also be aware that these returns were primarily achieved during favorable market conditions.
INVESTMENT RESULTS
The table above shows the Fund’s performance compared to its benchmark, the Russell 1000 Growth Index, for the six- and 12-month periods ended June 30, 2018.
The Fund outperformed the benchmark for both periods. The Fund’s advisory fee, which is performance-based, was being accrued between its minimum mid-point rates. (The actual advisory fee payable by the Fund for its current performance period will be determined based on the Fund’s performance relative to the benchmark as of the end of such period, which is from inception on June 28, 2017 through December 31, 2018.)
For both periods, security selection in health care and consumer staples, as well as an underweight to the industrials sector, contributed relative to the benchmark. Security selection and an underweight in the consumer discretionary sector, as well as an overweight to health care, detracted.
The Fund did not utilize derivatives during either period.
MARKET REVIEW AND INVESTMENT STRATEGY
Global equities had mixed performance during the six-month period ended June 30, 2018. US stocks advanced, as stocks in the US rallied to all-time highs at the very beginning of the period, as corporate tax reform helped boost investor sentiment. However, increasing inflation concerns and rising interest rates soon weighed on performance. While generally robust corporate earnings mitigated some downward pressure, worsening trade
2 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
war fears and political turmoil in Europe dragged on returns toward the end of the period. The US Federal Reserve raised interest rates twice and began as widely expected to formally reduce its balance sheet by letting some of the bonds it holds mature without the proceeds received, but in June signaled more rate increases than previously expected for the rest of this year.
The Fund’s Senior Investment Management Team (the “Team”) believes that over time, fundamentals and earnings growth can be the most significant catalysts for stock performance, and this heightens the importance of active stock selection. The Team selects companies that exhibit attractive growth potential, high or improving return on capital and competitive advantages against their peers. The Team believes that this philosophy can deliver strong investment returns over time.
INVESTMENT POLICIES
The Fund invests primarily in equity securities of a limited number of large, carefully selected, high-quality US companies. The Fund invests primarily in the domestic equity securities of companies selected by the Fund’s Adviser for their growth potential within various market sectors. The Fund emphasizes investments in large, seasoned companies. Under normal circumstances, the Fund will invest at least 80% of its net assets in common stocks of large-capitalization companies.
The Adviser expects that normally the Fund’s portfolio will tend to emphasize investments in securities issued by US companies, although it may invest in foreign securities.
The investment team allocates the Fund’s investments among broad sector groups based on the fundamental company research conducted by the Adviser’s internal research staff, assessing the current and forecasted investment opportunities and conditions, as well as diversification and risk considerations. The investment team may vary the percentage allocations among market sectors and may change the market sectors in which the Fund invests as companies’ potential for growth within a sector matures and new trends for growth emerge.
The Adviser’s research focus is in companies with high sustainable growth prospects, high or improving return on invested capital, transparent business models, and strong and lasting competitive advantages.
The Fund may enter into derivatives transactions, such as options, futures contracts, forwards and swaps. The Fund may use options strategies involving the purchase and/or writing of various combinations of call and/or put options, including on individual securities and
(continued on next page)
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 3 |
stock indices, futures contracts (including futures contracts on individual securities and stock indices) or shares of exchange-traded funds. These transactions may be used, for example, in an effort to earn extra income, to adjust exposure to individual securities or markets, or to protect all or a portion of the Fund’s portfolio from a decline in value, sometimes within certain ranges.
4 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
DISCLOSURES AND RISKS
Benchmark Disclosure
The Russell 1000® Growth Index is unmanaged and does not reflect fees and expenses associated with the active management of a mutual fund portfolio. The Russell 1000 Growth Index represents the performance of large-cap growth companies within the US. An investor cannot invest directly in an index, and its results are not indicative of the performance for any specific investment, including the Fund.
A Word About Risk
Market Risk: The value of the Fund’s assets will fluctuate as the stock or bond market fluctuates. The value of its investments may decline, sometimes rapidly and unpredictably, simply because of economic changes or other events that affect large portions of the market. It includes the risk that a particular style of investing, such as the Fund’s growth approach, may underperform the market generally.
Foreign (Non-US) Risk: Investments in securities of non-US issuers may involve more risk than those of US issuers. These securities may fluctuate more widely in price and may be less liquid due to adverse market, economic, political, regulatory or other factors.
Derivatives Risk: Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Fund, and may be subject to counterparty risk to a greater degree than more traditional investments.
Management Risk: The Fund is subject to management risk because it is an actively managed investment fund. The Adviser will apply its investment techniques and risk analyses in making investment decisions for the Fund, 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 in this report 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.abfunds.com. The Fund has been in operation only for a short period of time, and therefore has a very limited historical performance period. This limited performance period is unlikely to be representative of the performance the Fund will achieve over a longer period.
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 5 |
DISCLOSURES AND RISKS (continued)
All fees and expenses related to the operation of the Fund have been deducted. Net asset value (“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. 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 FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
HISTORICAL PERFORMANCE
AVERAGE ANNUAL RETURNS AS OF JUNE 30, 2018 (unaudited)
NAV Returns | SEC Returns (reflects applicable sales charges) | |||||||
ADVISOR CLASS SHARES1 | ||||||||
1 Year | 23.35% | 23.35% | ||||||
Since Inception2 | 22.35% | 22.35% |
SEC AVERAGE ANNUAL RETURNS
AS OF THE MOST RECENT CALENDAR QUARTER-END
JUNE 30, 2018 (unaudited)
SEC Returns (reflects applicable sales charges) | ||||
ADVISOR CLASS SHARES | ||||
1 Year | 23.35% | |||
Since Inception2 | 22.35% |
The Fund’s current prospectus fee table shows the Fund’s total annual operating expense ratio as 33.94% for Advisor Class shares, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements limit the Fund’s annual operating expense ratio exclusive of the Fund’s advisory fees, 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 0.05% for Advisor Class shares. These waivers/reimbursements may not be terminated before April 30, 2019. Any fees waived and expenses borne by the Adviser may be reimbursed by the Fund until the end of the third fiscal year after the fiscal period in which the fee was waived or the expense was borne, provided that no reimbursement payment will be made that would cause the Fund’s total annual operating expenses to exceed these expense limitations. 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 ratio shown above may differ from the expense ratio in the Financial Highlights section since they are based on different time periods.
1 | This share class is offered at NAV to eligible investors and the SEC returns are the same as the NAV returns. |
2 | Inception date: 6/28/2017. |
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 7 |
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 advisory 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.
This 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 1/1/2018 | Ending Account Value 6/30/2018 | Expenses Paid During Period* | Annualized Expense Ratio* | Total Expenses Paid During Period+ | Total Annualized Expense Ratio+ | |||||||||||||||||||
Advisor Class |
| |||||||||||||||||||||||
Actual | $ | 1,000 | $ | 1,090.30 | $ | 3.01 | 0.58 | % | $ | 3.11 | 0.60 | % | ||||||||||||
Hypothetical** | $ | 1,000 | $ | 1,021.92 | $ | 2.91 | 0.58 | % | $ | 3.01 | 0.60 | % |
8 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
EXPENSE EXAMPLE (continued)
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
+ | In connection with the Fund’s investments in affiliated/unaffiliated underlying portfolios, the Fund incurs no direct expenses, but bears proportionate shares of the fees and expenses (i.e., operating, administrative and investment advisory fees) of the affiliated/unaffiliated underlying portfolios. The Adviser has contractually agreed to waive its fees from the Fund in an amount equal to the Fund’s pro rata share of certain acquired fund fees and expenses of the affiliated underlying portfolios. The Fund’s total expenses are equal to the classes’ annualized expense ratio plus the Fund’s pro rata share of the weighted average expense ratio of the affiliated/unaffiliated underlying portfolios in which it invests, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
** | Assumes 5% annual return before expenses. |
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 9 |
PORTFOLIO SUMMARY
June 30, 2018 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $76.7
TEN LARGEST HOLDINGS2
Company | U.S. $ Value | Percent of Net Assets | ||||||
Alphabet, Inc. – Class C | $ | 6,043,476 | 7.9 | % | ||||
Facebook, Inc. – Class A | 5,335,250 | 6.9 | ||||||
Visa, Inc. – Class A | 3,670,587 | 4.8 | ||||||
Home Depot, Inc. (The) | 3,114,186 | 4.1 | ||||||
UnitedHealth Group, Inc. | 3,030,194 | 3.9 | ||||||
Biogen, Inc. | 2,862,637 | 3.7 | ||||||
Costco Wholesale Corp. | 2,736,175 | 3.6 | ||||||
Apple, Inc. | 2,327,388 | 3.0 | ||||||
NIKE, Inc. – Class B | 2,191,598 | 2.9 | ||||||
Zoetis, Inc. | 2,121,742 | 2.8 | ||||||
$ | 33,433,233 | 43.6 | % |
1 | All data are as of June 30, 2018. The Fund’s sector breakdown is expressed as a percentage of total investments and may vary over time. |
2 | Long-term investments. |
Please note: The sector classifications presented herein are based on the Global Industry Classification Standard (GICS) which was developed by Morgan Stanley Capital International and Standard & Poor’s. The components are divided into sector, industry group, and industry sub-indices as classified by the GICS for each of the market capitalization indices in the broad market. These sector classifications are broadly defined. The “Portfolio of Investments” section of the report reflects more specific industry information and is consistent with the investment restrictions discussed in the Fund’s prospectus.
10 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS
June 30, 2018 (unaudited)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
COMMON STOCKS – 89.5% | ||||||||
Information Technology – 34.8% | ||||||||
Communications Equipment – 0.8% | ||||||||
Arista Networks, Inc.(a) | 2,272 | $ | 585,017 | |||||
|
| |||||||
Electronic Equipment, Instruments & Components – 0.5% | ||||||||
Amphenol Corp. – Class A | 4,037 | 351,824 | ||||||
|
| |||||||
Internet Software & Services – 14.8% | ||||||||
Alphabet, Inc. – Class C(a) | 5,417 | 6,043,476 | ||||||
Facebook, Inc. – Class A(a) | 27,456 | 5,335,250 | ||||||
|
| |||||||
11,378,726 | ||||||||
|
| |||||||
IT Services – 8.5% | ||||||||
Cognizant Technology Solutions Corp. – Class A | 6,509 | 514,146 | ||||||
Fiserv, Inc.(a) | 10,020 | 742,382 | ||||||
PayPal Holdings, Inc.(a) | 18,726 | 1,559,314 | ||||||
Visa, Inc. – Class A | 27,713 | 3,670,587 | ||||||
|
| |||||||
6,486,429 | ||||||||
|
| |||||||
Semiconductors & Semiconductor Equipment – 2.6% | ||||||||
NVIDIA Corp. | 1,073 | 254,194 | ||||||
Texas Instruments, Inc. | 2,595 | 286,099 | ||||||
Xilinx, Inc. | 22,328 | 1,457,125 | ||||||
|
| |||||||
1,997,418 | ||||||||
|
| |||||||
Software – 4.6% | ||||||||
Activision Blizzard, Inc. | 10,599 | 808,916 | ||||||
Adobe Systems, Inc.(a) | 6,161 | 1,502,113 | ||||||
Electronic Arts, Inc.(a) | 4,661 | 657,294 | ||||||
Red Hat, Inc.(a) | 2,007 | 269,681 | ||||||
salesforce.com, Inc.(a) | 2,120 | 289,168 | ||||||
|
| |||||||
3,527,172 | ||||||||
|
| |||||||
Technology Hardware, Storage & Peripherals – 3.0% | ||||||||
Apple, Inc. | 12,573 | 2,327,388 | ||||||
|
| |||||||
26,653,974 | ||||||||
|
| |||||||
Health Care – 18.3% | ||||||||
Biotechnology – 4.7% | ||||||||
Biogen, Inc.(a) | 9,863 | 2,862,637 | ||||||
Regeneron Pharmaceuticals, Inc.(a) | 2,100 | 724,479 | ||||||
|
| |||||||
3,587,116 | ||||||||
|
| |||||||
Health Care Equipment & Supplies – 6.4% | ||||||||
Edwards Lifesciences Corp.(a) | 14,486 | 2,108,727 | ||||||
Intuitive Surgical, Inc.(a) | 4,431 | 2,120,145 | ||||||
Stryker Corp. | 3,975 | 671,219 | ||||||
|
| |||||||
4,900,091 | ||||||||
|
|
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 11 |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Health Care Providers & Services – 3.9% | ||||||||
UnitedHealth Group, Inc. | 12,351 | $ | 3,030,194 | |||||
|
| |||||||
Life Sciences Tools & Services – 0.5% | ||||||||
Mettler-Toledo International, Inc.(a) | 686 | 396,940 | ||||||
|
| |||||||
Pharmaceuticals – 2.8% | ||||||||
Zoetis, Inc. | 24,906 | 2,121,742 | ||||||
|
| |||||||
14,036,083 | ||||||||
|
| |||||||
Consumer Discretionary – 16.0% | ||||||||
Hotels, Restaurants & Leisure – 1.1% | ||||||||
Starbucks Corp. | 17,989 | 878,763 | ||||||
|
| |||||||
Internet & Direct Marketing Retail – 2.3% | ||||||||
Booking Holdings, Inc.(a) | 881 | 1,785,866 | ||||||
|
| |||||||
Media – 0.5% | ||||||||
Comcast Corp. – Class A | 11,871 | 389,488 | ||||||
|
| |||||||
Multiline Retail – 1.3% | ||||||||
Dollar Tree, Inc.(a) | 11,537 | 980,645 | ||||||
|
| |||||||
Specialty Retail – 7.9% | ||||||||
Home Depot, Inc. (The) | 15,962 | 3,114,186 | ||||||
TJX Cos., Inc. (The) | 16,337 | 1,554,956 | ||||||
Ulta Salon Cosmetics & Fragrance, Inc.(a) | 5,898 | 1,376,947 | ||||||
|
| |||||||
6,046,089 | ||||||||
|
| |||||||
Textiles, Apparel & Luxury Goods – 2.9% | ||||||||
NIKE, Inc. – Class B | 27,505 | 2,191,598 | ||||||
|
| |||||||
12,272,449 | ||||||||
|
| |||||||
Consumer Staples – 8.9% | ||||||||
Beverages – 5.3% | ||||||||
Constellation Brands, Inc. – Class A | 9,618 | 2,105,092 | ||||||
Monster Beverage Corp.(a) | 34,340 | 1,967,682 | ||||||
|
| |||||||
4,072,774 | ||||||||
|
| |||||||
Food & Staples Retailing – 3.6% | ||||||||
Costco Wholesale Corp. | 13,093 | 2,736,175 | ||||||
|
| |||||||
6,808,949 | ||||||||
|
| |||||||
Industrials – 7.1% | ||||||||
Building Products – 3.0% | ||||||||
Allegion PLC | 14,077 | 1,088,996 | ||||||
AO Smith Corp. | 15,226 | 900,618 | ||||||
Lennox International, Inc. | 1,446 | 289,417 | ||||||
|
| |||||||
2,279,031 | ||||||||
|
| |||||||
Commercial Services & Supplies – 1.3% | ||||||||
Copart, Inc.(a) | 18,030 | 1,019,777 | ||||||
|
| |||||||
Industrial Conglomerates – 1.4% | ||||||||
Roper Technologies, Inc. | 4,064 | 1,121,298 | ||||||
|
|
12 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Machinery – 1.2% | ||||||||
IDEX Corp. | 2,029 | $ | 276,918 | |||||
WABCO Holdings, Inc.(a) | 5,332 | 623,951 | ||||||
|
| |||||||
900,869 | ||||||||
|
| |||||||
Trading Companies & Distributors – 0.2% | ||||||||
Fastenal Co. | 2,592 | 124,753 | ||||||
|
| |||||||
5,445,728 | ||||||||
|
| |||||||
Financials – 2.5% | ||||||||
Capital Markets – 2.5% | ||||||||
MarketAxess Holdings, Inc. | 2,760 | 546,094 | ||||||
S&P Global, Inc. | 6,881 | 1,402,967 | ||||||
|
| |||||||
1,949,061 | ||||||||
|
| |||||||
Materials – 1.9% | ||||||||
Chemicals – 1.9% | ||||||||
Sherwin-Williams Co. (The) | 3,637 | 1,482,332 | ||||||
|
| |||||||
Total Common Stocks | 68,648,576 | |||||||
|
| |||||||
SHORT-TERM INVESTMENTS – 7.8% | ||||||||
Investment Companies – 7.8% | ||||||||
AB Fixed Income Shares, Inc. – Government Money Market Portfolio – Class AB, 1.71%(b)(c)(d) | 5,983,468 | 5,983,468 | ||||||
|
| |||||||
Total Investments – 97.3% | 74,632,044 | |||||||
Other assets less liabilities – 2.7% | 2,082,959 | |||||||
|
| |||||||
Net Assets – 100.0% | $ | 76,715,003 | ||||||
|
|
(a) | Non-income producing security. |
(b) | Affiliated investments. |
(c) | The rate shown represents the 7-day yield as of period end. |
(d) | To obtain a copy of the fund’s shareholder report, please go to the Securities and Exchange Commission’s website at www.sec.gov, or call AB at (800) 227-4618. |
See notes to financial statements.
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 13 |
STATEMENT OF ASSETS & LIABILITIES
June 30, 2018 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $65,901,527) | $ | 68,648,576 | ||
Affiliated issuers (cost $5,983,468) | 5,983,468 | |||
Receivable for capital stock sold | 2,168,297 | |||
Receivable for investment securities sold | 84,695 | |||
Receivable from Adviser | 52,823 | |||
Unaffiliated dividends receivable | 7,785 | |||
Affiliated dividends receivable | 7,418 | |||
|
| |||
Total assets | 76,953,062 | |||
|
| |||
Liabilities | ||||
Payable for investment securities purchased | 183,195 | |||
Custody fee payable | 16,803 | |||
Audit and tax fee payable | 14,665 | |||
Payable for capital stock redeemed | 12,907 | |||
Due to Custodian | 3,566 | |||
Directors’ fee payable | 892 | |||
Transfer Agent fee payable | 581 | |||
Accrued expenses and other liabilities | 5,450 | |||
|
| |||
Total liabilities | 238,059 | |||
|
| |||
Net Assets | $ | 76,715,003 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 629 | ||
Additional paid-in capital | 74,146,569 | |||
Undistributed net investment income | 36,213 | |||
Accumulated net realized loss on investment transactions | (215,457 | ) | ||
Net unrealized appreciation on investments | 2,747,049 | |||
|
| |||
$ | 76,715,003 | |||
|
|
Net Asset Value Per Share—11 billion shares of capital stock authorized, $.0001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
Advisor | $ | 76,715,003 | 6,291,766 | $ | 12.19 | |||||||
|
See notes to financial statements.
14 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2018 (unaudited)
Investment Income | ||||||||
Dividends | ||||||||
Unaffiliated issuers | $ | 119,817 | ||||||
Affiliated issuers | 26,378 | $ | 146,195 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 104,601 | |||||||
Transfer agency—Advisor Class | 6,619 | |||||||
Administrative | 40,960 | |||||||
Amortization of offering expenses | 33,389 | |||||||
Custodian | 25,964 | |||||||
Audit and tax | 21,865 | |||||||
Directors’ fees | 13,798 | |||||||
Legal | 13,637 | |||||||
Registration fees | 12,477 | |||||||
Printing | 5,481 | |||||||
Miscellaneous | 10,387 | |||||||
|
| |||||||
Total expenses | 289,178 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (178,237 | ) | ||||||
|
| |||||||
Net expenses | 110,941 | |||||||
|
| |||||||
Net investment income | 35,254 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investments | ||||||||
Net realized (loss) on: | ||||||||
Investment transactions | (218,940 | ) | ||||||
Net change in unrealized appreciation/depreciation on: | ||||||||
Investments | 2,627,716 | |||||||
|
| |||||||
Net gain on investments | 2,408,776 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 2,444,030 | ||||||
|
|
See notes to financial statements.
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 15 |
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017(a) to December 31, 2017 | |||||||
Increase (Decrease) in Net Assets from Operations | ||||||||
Net investment income | $ | 35,254 | $ | 3,686 | ||||
Net realized gain (loss) on investment transactions | (218,940 | ) | 6,844 | |||||
Net change in unrealized appreciation/depreciation on investments | 2,627,716 | 119,333 | ||||||
|
|
|
| |||||
Net increase in net assets from operations | 2,444,030 | 129,863 | ||||||
Dividends and Distributions to Shareholders from | ||||||||
Net investment income | ||||||||
Advisor Class | – 0 | – | (2,802 | ) | ||||
Net realized gain on investment transactions | ||||||||
Advisor Class | – 0 | – | (3,361 | ) | ||||
Capital Stock Transactions | ||||||||
Net increase | 72,996,517 | 1,150,756 | ||||||
|
|
|
| |||||
Total increase | 75,440,547 | 1,274,456 | ||||||
Net Assets | ||||||||
Beginning of period | 1,274,456 | – 0 | – | |||||
|
|
|
| |||||
End of period (including undistributed net investment income of $36,213 and $959, respectively) | $ | 76,715,003 | $ | 1,274,456 | ||||
|
|
|
|
(a) | Commencement of operations. |
See notes to financial statements.
16 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS
June 30, 2018 (unaudited)
NOTE A
Significant Accounting Policies
AB Cap Fund, Inc. (the “Company”), which is a Maryland corporation, is registered under the Investment Company Act of 1940 as an open-end management investment company. The Company operates as a series company comprised of 28 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 FlexFee Large Cap Growth Portfolio (the “Fund”), a diversified portfolio. The Fund commenced operations on June 28, 2017. The Fund has authorized issuance of Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I, Class Z, Class T, Class 1, and Class 2 shares. Class A, Class B, Class C, Class R, Class K, Class I, Class Z, Class T, Class 1, and Class 2 shares have not been issued. Advisor Class shares are sold without an initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. All eleven 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 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
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 17 |
NOTES TO FINANCIAL STATEMENTS (continued)
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 “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. Open end mutual funds are valued at the closing net asset value per share, while exchange traded funds are valued at the closing market price per share.
Securities for which market quotations are not readily available (including restricted securities) or are deemed unreliable are valued at fair value as deemed appropriate by the Adviser. 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 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 generally values many of its foreign equity securities using fair value prices based on third party vendor modeling tools to the extent available.
18 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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) |
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.
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 19 |
NOTES TO FINANCIAL STATEMENTS (continued)
The following table summarizes the valuation of the Fund’s investments by the above fair value hierarchy levels as of June 30, 2018:
Investments in | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Common Stocks^ | $ | 68,648,576 | $ | – 0 | – | $ | – 0 | – | $ | 68,648,576 | ||||||
Short-Term Investments: | ||||||||||||||||
Investment Companies | 5,983,468 | – 0 | – | – 0 | – | 5,983,468 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 74,632,044 | – 0 | – | – 0 | – | 74,632,044 | ||||||||||
Other Financial Instruments*: | – 0 | – | – 0 | – | – 0 | – | – 0 | – | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total** | $ | 74,632,044 | $ | – 0 | – | $ | – 0 | – | $ | 74,632,044 | ||||||
|
|
|
|
|
|
|
|
^ | See Portfolio of Investments for sector classifications. |
* | 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 swaps with upfront premiums, options written and swaptions written which are valued at market value. |
** | There were no transfers between any levels during the reporting period. |
The Fund recognizes all transfers between levels of the fair value hierarchy assuming the financial instrument was transferred at the beginning of the reporting period.
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the 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 any 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 process at vendors, 2)
20 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 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, 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 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 and 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
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 21 |
NOTES TO FINANCIAL STATEMENTS (continued)
positions taken or expected to be taken on federal and state income tax returns for the current initial tax year, 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 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. Expense Allocations
Expenses of the Company are charged proportionately to each portfolio or based on other appropriate methods.
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 $68,085 were deferred and amortized on a straight line basis over a one year period starting from June 28, 2017 (commencement of operations).
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 .55% of the Fund’s average daily net assets (“Base Fee”). The advisory fee is increased or decreased from the Base Fee by a performance adjustment (“Performance Adjustment”) that depends on whether, and to what extent, the investment performance of the Advisor Class shares of the Fund (“Measuring Class”) exceeds, or is exceeded by, the performance of the Russell 1000 Growth Index (“Index”) plus 1.40% (“Index Hurdle”) over the Performance Period (as defined below). The Performance Adjustment is calculated and accrued daily, according to a schedule that adds or subtracts .00357% of the Fund’s average daily net assets for each .01% of absolute performance by which the performance of the Measuring Class exceeds or lags the Index Hurdle for the period from the beginning of the Performance
22 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
Period through the current business day. The maximum Performance Adjustment (positive or negative) will not exceed an annualized rate of +/-.50% (“Maximum Performance Adjustment”) of the Fund’s average daily net assets, which would occur when the performance of the Measuring Class exceeds, or is exceeded by, the Index Hurdle by 1.40% or more for the Performance Period. On a monthly basis, the Fund will pay the Adviser the minimum fee rate of .05% on an annualized basis (Base Fee minus the Maximum Performance Adjustment) applied to the average daily net assets for the month. At the end of the Performance Period, the Fund will pay to the Adviser the total advisory fee, less the amount of any minimum fees paid during the Performance Period and any waivers described below. The period over which performance is measured (“Performance Period”) is initially from the commencement of operations to December 31, 2018 and thereafter each 12-month period beginning on the first day in the month of January through December 31 of the same year. In addition, the Adviser has agreed to waive its advisory fee by limiting the Fund’s accrual of the advisory fee (Base Fee plus Performance Adjustment) on any day to the amount corresponding to the maximum fee rate multiplied by the Fund’s current net assets if such amount is less than the amount that would have been accrued based on the Fund’s average daily net assets for the Performance Period. For the reporting period ended June 30, 2018, the Fund accrued advisory fees of $104,601, as reflected in the statement of operations, at an annual effective rate (excluding the impact from any expense waivers in effect) of .53% of the Fund’s average net assets, which reflected a (.02)% Performance Adjustment of $(3,942).
The Adviser has agreed to waive its fees and bear certain expenses through December 31, 2018 to the extent necessary to limit total expenses (other than the advisory fee, 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 from exceeding .05% of average daily net assets. For the six months ended June 30, 2018, the reimbursements/waivers amounted to $133,932. Any fees waived and expenses borne by the Adviser through December 31, 2018 are subject to repayment by the Fund until the end of the third fiscal year after the fiscal period in which the fees were waived or the expenses were borne; such waivers/expenses borne that are subject to repayment amount to $173,083 for the fiscal period ended December 31, 2017. In any case, no repayment will be made that would cause the Fund’s total annual expenses (subject to the exclusions set forth above) to exceed .05%.
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 six months ended June 30, 2018, the Adviser voluntarily agreed to waive such fees in the amount of $40,960.
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 23 |
NOTES TO FINANCIAL STATEMENTS (continued)
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. The compensation retained by ABIS amounted to $9,000 for the six months ended June 30, 2018.
The Fund may invest in AB Government Money Market Portfolio (the “Government Money Market Portfolio”) which has a contractual annual advisory fee rate of .20% of the portfolio’s average daily net assets and bears its own expenses. In connection with the investment by the Fund in the Government Money Market Portfolio, the Adviser has contractually agreed to waive its advisory fee from the Fund in an amount equal to the Fund’s pro rata share of the effective advisory fee of Government Money Market Portfolio, as borne indirectly by the Fund as an acquired fund fee and expense. For six months ended June 30, 2018, such waiver amounted to $3,345.
A summary of the Fund’s transactions in AB mutual funds for the six months ended June 30, 2018 is as follows:
Fund | Market Value 12/31/17 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value 06/30/18 (000) | Dividend Income (000) | |||||||||||||||
Government Money Market Portfolio | $ | 117 | $ | 49,684 | $ | 43,818 | $ | 5,983 | $ | 26 |
Brokerage commissions paid on investment transactions for the six months ended June 30, 2018 amounted to $7,357, of which $96 and $0, respectively, was paid to Sanford C. Bernstein & Co. LLC and Sanford C. Bernstein Limited, affiliates of the Adviser.
NOTE C
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the six months ended June 30, 2018, were as follows:
Purchases | Sales | |||||||
Investment securities (excluding U.S. government securities) | $ | 74,740,645 | $ | 9,665,076 | ||||
U.S. government securities | – 0 | – | – 0 | – |
24 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 are as follows:
Gross unrealized appreciation | $ | 3,526,327 | ||
Gross unrealized depreciation | (779,278 | ) | ||
|
| |||
Net unrealized appreciation | $ | 2,747,049 | ||
|
|
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.
The Fund did not engage in derivative transactions for the six months ended June 30, 2018.
2. Currency Transactions
The Fund may invest in non-U.S. Dollar-denominated 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).
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 25 |
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE D
Capital Stock
Each class consists of 1,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||||||||||||||
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017* to December 31, | Six Months Ended June 30, 2018 (unaudited) | June 28, 2017* to December 31, | |||||||||||||||||||||
|
| |||||||||||||||||||||||
Advisor Class | ||||||||||||||||||||||||
Shares sold | 6,916,102 | 113,928 | $ | 81,644,911 | $ | 1,150,003 | ||||||||||||||||||
| ||||||||||||||||||||||||
Shares issued in reinvestment of dividends and distributions | – 0 | – | 67 | – 0 | – | 753 | ||||||||||||||||||
| ||||||||||||||||||||||||
Shares redeemed | (738,331 | ) | – 0 | – | (8,648,394 | ) | – 0 | – | ||||||||||||||||
| ||||||||||||||||||||||||
Net increase | 6,177,771 | 113,995 | $ | 72,996,517 | $ | 1,150,756 | ||||||||||||||||||
|
* | Commencement of operations. |
At June 30, 2018, the Adviser owned 35% of the Fund’s outstanding shares.
NOTE E
Risks Involved in Investing in the Fund
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.
Derivatives Risk—The Fund may enter into derivative transactions such as forwards, options, futures and swaps. Derivatives may be illiquid, difficult to price, and leveraged so that small changes may produce disproportionate losses for the Fund, and subject to counterparty risk to a greater degree than more traditional investments. Derivatives may result in significant losses, including losses that are far greater than the value of the derivatives reflected on the statement of assets and liabilities.
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.
26 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE F
Distributions to Shareholders
The tax character of distributions paid for the year ending December 31, 2018 will be determined at the end of the current fiscal year.
The tax character of distributions paid during the fiscal period ended December 31, 2017 was as follows:
2017 | ||||
Distributions paid from: | ||||
Ordinary income | $ | 6,163 | ||
|
| |||
Total taxable distributions paid | $ | 6,163 | ||
|
|
As of December 31, 2017, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 5,817 | ||
Unrealized appreciation/(depreciation) | 117,958 | (a) | ||
|
| |||
Total accumulated earnings/(deficit) | $ | 123,775 | ||
|
|
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the tax deferral of losses on wash sales. |
For tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. Funds are permitted to carry forward capital losses for an indefinite period, and such losses will retain their character as either short-term or long-term capital losses. As of December 31, 2017, the Fund did not have any capital loss carryforwards.
NOTE G
Subsequent Events
Management has evaluated subsequent events for possible recognition or disclosure in the financial statements through the date the financial statements are issued. Management has determined that there are no material events that would require disclosure in the Fund’s financial statements through this date.
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 27 |
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017(a) to December 31, 2017 | |||||||
|
| |||||||
Net asset value, beginning of period | $ 11.18 | $ 10.00 | ||||||
|
| |||||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .01 | .04 | ||||||
Net realized and unrealized gain on investments | 1.00 | 1.19 | ||||||
|
| |||||||
Net increase in net asset value from operations | 1.01 | 1.23 | ||||||
|
| |||||||
Less: Dividends and Distributions | ||||||||
Dividends from net investment income | – 0 | – | (.02 | ) | ||||
Distributions from net realized gain on investment transactions | – 0 | – | (.03 | ) | ||||
|
| |||||||
Total dividends and distributions | – 0 | – | (.05 | ) | ||||
|
| |||||||
Net asset value, end of period | $ 12.19 | $ 11.18 | ||||||
|
| |||||||
Total Return | ||||||||
Total investment return based on net asset value(d) | 9.03 | % | 12.34 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $76,715 | $1,274 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements(e)(f)† | .58 | %(g) | .08 | % | ||||
Expenses, before waivers/reimbursements(e)(f)† | 1.51 | %(g) | 37.04 | % | ||||
Net investment income(c)(f) | .18 | % | .65 | % | ||||
Portfolio turnover rate | 28 | % | 25 | % | ||||
† Expense ratios exclude the estimated acquired fund fees of affiliated/unaffiliated underlying |
| |||||||
portfolios | .02 | % | .02 | %(h) |
(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 charge or contingent deferred sales charge is not reflected in the calculation of total investment return. Total investment 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 for a period of less than one year is not annualized. |
(e) | In connection with the Fund’s investments in affiliated underlying portfolios, the Fund incurs no direct expenses but bears proportionate shares of the acquired fund fees and expenses (i.e. operating, administrative and investment advisory fees) of the affiliated underlying portfolios. The Adviser has contractually agreed to waive its fees from the Fund in an amount equal to the Fund’s pro rata share of certain acquired fund fees and expenses, and for the six months ended June 30, 2018 and the period ended December 31, 2017, such waiver amounted to 0.02% (annualized) and 0.02% (annualized), respectively. |
(f) | Annualized. |
(g) | The advisory fee reflected in the Fund’s expense ratio may be higher or lower than the Base Fee plus Performance Adjustment due to the different time periods over which the fee is calculated (i.e., the financial reporting period vs. the Performance Period). |
(h) | Unaudited. |
See notes to financial statements.
28 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
BOARD OF DIRECTORS
Marshall C. Turner, Jr(1), Chairman Michael J. Downey(1) William H. Foulk, Jr.(1) Nancy P. Jacklin(1) | Robert M. Keith, President and Chief Executive Officer Carol C. McMullen(1) Garry L. Moody(1) Earl D. Weiner(1) |
OFFICERS
Frank V. Caruso(2), Vice President John H. Fogarty(2), Vice President Vinay Thapar(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 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) 221-6003 | 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’s portfolio are made by the Adviser’s U.S. Large Cap Growth Investment Team. Messrs. Caruso, Fogarty and Thapar are the investment professionals with the most significant responsibility for the day-to-day management of the Fund’s portfolio. |
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 29 |
Information Regarding the Review and Approval of Amendment to the Fund’s Advisory Agreement
At a meeting of the Board of Directors of AB Cap Fund, Inc. (the “Company”) held on August 1-2, 2017, the Adviser recommended an amendment to the Company’s current Advisory Agreement with the Adviser (the “Amended Agreement”) relating to a change in the daily fee computation methodology in respect of AB FlexFeeTM Large Cap Growth Portfolio (the “Fund”). The amendment provided that, for purposes of calculating the incentive portion of the Adviser’s advisory fee, the Fund’s investment performance on each business day would be compared with the performance of its benchmark index on the same day (rather than on the prior business day).
The Adviser had provided the disinterested directors (the “directors”) with a memorandum explaining its analysis and the form of amendment prior to the meeting. After discussion with experienced counsel who are independent of the Adviser and with the Adviser, the directors concluded that the proposed amendment would result in a more precise calculation of the Adviser’s incentive fee and unanimously approved the Amended Agreement.
The directors approved the Fund’s current Advisory Agreement at a meeting held on January 31-February 1, 2017 (the “January/February Meeting”) and a discussion regarding the basis for the Board’s approval is set forth below.
Board’s Approval at the January/February 2017 Meeting
Information Regarding the Review and Approval of the Fund’s Advisory Agreement
The disinterested directors (the “directors”) of AB Cap Fund, Inc. (the “Company”) unanimously approved the Company’s Advisory Agreement with the Adviser in respect of AB FlexFeeTM Large Cap Growth Portfolio (the “Fund”) for an initial two-year period at a meeting held on January 31-February 1, 2017 (the “Meeting”). (At the time of the approval of the Advisory Agreement, the Fund was known as AB Performance Fee Series—Large Cap Growth Portfolio.)
Prior to approval of the Advisory Agreement, 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 Company’s Senior Officer (who is also the Company’s Independent Compliance Officer), who acted as their independent fee consultant, of the reasonableness of the proposed performance-based advisory fee (which consists of a base fee plus or minus a performance adjustment), in which the Senior Officer concluded
30 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
that the proposed contractual fee for the Fund was reasonable. The directors also discussed the proposed approval in private sessions with counsel and the Company’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services to be provided by the Adviser to the Fund 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 AB Funds and review extensive materials and information presented by the Adviser.
The directors also considered all factors they believed relevant, including the specific matters discussed below. During the course of their deliberations, the directors evaluated, among other things, the reasonableness of the proposed advisory fee. 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 Fund and the overall arrangements between the Fund 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 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 Fund’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Fund will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Fund 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 Fund to the Adviser than the fee rate stated in the Advisory Agreement. The directors
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 31 |
noted that the methodology to be used to determine the reimbursement amounts had been reviewed by an independent consultant retained by the Company’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Fund’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 Fund under the Advisory Agreement.
Costs of Services to be Provided and Profitability
Because the Fund had not yet commenced operations, the directors were unable to consider historical information about the profitability of the Fund. 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 Fund and that the Fund was unlikely to be profitable to the Adviser unless it achieves a material level of net assets. The directors also noted that, due to the performance fee component of the advisory fee, profitability would tend to be higher with better performance relative to the Fund’s benchmark, which they considered to create an appropriate alignment of incentives.
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their proposed relationships with the Fund, including, but not limited to, benefits relating to 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 Fund’s shares; and transfer agency fees to be paid by the Fund to a wholly owned subsidiary of the Adviser. The directors recognized that the Adviser’s future 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 Fund.
Investment Results
Since the Fund had not yet commenced operations, no performance or other historical information for the Fund was available. The Adviser manages another AB Fund with a similar investment style, and, at the Meeting, the directors reviewed performance information for that AB Fund. Based on this information, together with the Adviser’s written and oral presentations regarding the management of the Fund 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 Fund management services to the Fund.
Advisory Fees and Other Expenses
The directors considered the proposed advisory fee rate payable by the Fund to the Adviser and information prepared by three analytical services
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that are not affiliated with the Adviser (the “15(c) service providers”), concerning advisory fee rates paid by other funds in the same category as the Fund at a hypothetical common asset level of $250 million. 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 considered the Fund’s proposed contractual effective advisory fee rate against a peer group median.
The directors recognized that the Adviser’s total compensation from the Fund 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 Fund and the extent to which the Adviser requests reimbursements pursuant to this provision.
The directors also considered the Adviser’s fee schedule for institutional 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 Company’s Senior Officer and noted the differences between the Fund’s proposed fee schedule, on the one hand, and the institutional fee schedule and the schedule of fees charged to any offshore funds and any sub-advised funds, on the other. 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 compared the proposed advisory fee for the Fund with that for another AB Fund with a similar investment style.
The Adviser reviewed with the directors the significantly greater scope of the services it provides to the Fund relative to institutional, offshore fund and sub-advised fund clients. In light of the substantial differences in services rendered by the Adviser to institutional, offshore fund and sub-advised fund clients as compared to funds such as the Fund, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors noted that the Fund 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 or to “equitize” cash inflows pending purchases of underlying securities, that the proposed advisory fee would be for services in addition to, rather than duplicative of, the services provided under the advisory contracts of the ETFs in which the Fund may invest.
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 33 |
The directors also considered the projected total expense ratio of the Advisor Class shares of the Fund in comparison to a peer group and a peer universe selected by each 15(c) service provider. The directors also considered the Adviser’s proposed expense cap for the “other expenses” of the Fund (expenses excluding the advisory fee, Rule 12b-1 fees, and certain other expenses typically excluded from the Adviser’s expense caps) for the period ending December 31, 2018. The directors noted that it was likely that the expense ratios of some of the other funds in the Fund’s 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 projected expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Fund by others. Based on their review, the directors concluded that the Fund’s projected expense ratio was acceptable.
Economies of Scale
The directors noted that the proposed advisory fee schedule for the Fund does not contain breakpoints and that they had previously discussed their strong preference 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 in advance of the 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 Fund, 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 Fund’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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This page is not part of the Shareholder Report or the Financial Statements.
AB FAMILY OF FUNDS
US EQUITY
US CORE
Core Opportunities Fund
FlexFee™ US Thematic Portfolio
Select US Equity Portfolio
US GROWTH
Concentrated Growth Fund
Discovery Growth Fund
FlexFee™ Large Cap Growth Portfolio
Growth Fund
Large Cap Growth Fund
Small Cap Growth Portfolio
US VALUE
Discovery Value Fund
Equity Income Fund
Relative Value Fund
Small Cap Value Portfolio
Value Fund
INTERNATIONAL/ GLOBAL EQUITY
INTERNATIONAL/ GLOBAL CORE
All China Equity Portfolio
FlexFee™ International Strategic Core Portfolio
Global Core Equity Portfolio
International Portfolio
International Strategic Core Portfolio
Sustainable Global Thematic Fund
Tax-Managed International Portfolio
Tax-Managed Wealth Appreciation Strategy
Wealth Appreciation Strategy
INTERNATIONAL/ GLOBAL GROWTH
Concentrated International Growth Portfolio
FlexFee™ Emerging Markets Growth Portfolio
INTERNATIONAL/ GLOBAL EQUITY (continued)
Sustainable International Thematic Fund1
INTERNATIONAL/ GLOBAL VALUE
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
Tax-Aware Fixed Income Portfolio
National Portfolio
Arizona Portfolio
California Portfolio
Massachusetts Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
TAXABLE
Bond Inflation Strategy
FlexFee™ High Yield Portfolio1
FlexFee™ International Bond Portfolio
Global Bond Fund
High Income Fund
Income Fund
Intermediate Bond Portfolio
Limited Duration High Income Portfolio
Short Duration Portfolio
ALTERNATIVES
All Market Real Return Portfolio
Global Real Estate Investment Fund
Select US Long/Short Portfolio
Unconstrained Bond Fund
MULTI-ASSET
All Market Income Portfolio
All Market Total Return Portfolio
Conservative Wealth Strategy
Emerging Markets Multi-Asset Portfolio
Global Risk Allocation Fund
Tax-Managed All Market Income Portfolio
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
CLOSED-END FUNDS
Alliance California Municipal Income Fund
AllianceBernstein Global High Income Fund
AllianceBernstein National Municipal Income Fund
We also offer Government Money Market Portfolio1, which serves as the money market fund exchange vehicle for the AB mutual funds. An investment in Government Money Market Portfolio 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.abfunds.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
1 | Prior to November 10, 2017, Government Money Market Portfolio was named Government Exchange Reserves; prior to January 8, 2018, Sustainable International Thematic Fund was named International Growth Fund; prior to February 23, 2018, FlexFee High Yield Portfolio was named High Yield Portfolio. |
abfunds.com | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | 35 |
NOTES
36 | AB FLEXFEE LARGE CAP GROWTH PORTFOLIO | abfunds.com |
AB FLEXFEE LARGE CAP GROWTH PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800 221 5672
FFLCG-0152-0618
JUN 06.30.18
SEMI-ANNUAL REPORT
AB FLEXFEETM US THEMATIC 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.abfunds.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.abfunds.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.abfunds.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.
FROM THE PRESIDENT | ![]() |
Dear Shareholder,
We are pleased to provide this report for AB FlexFee US Thematic Portfolio (the “Fund”). Please review the discussion of Fund performance, the market conditions during the reporting period and the Fund’s investment strategy.
As always, AB strives to keep clients ahead of what’s next by:
+ | Transforming uncommon insights into uncommon knowledge with a global research scope |
+ | Navigating markets with seasoned investment experience and sophisticated solutions |
+ | Providing thoughtful investment insights and actionable ideas |
Whether you’re an individual investor or a multi-billion-dollar institution, we put knowledge and experience to work for you.
AB’s global research organization connects and collaborates across platforms and teams to deliver impactful insights and innovative products. Better insights lead to better opportunities—anywhere in the world.
For additional information about AB’s range of products and shareholder resources, please log on to www.abfunds.com.
Thank you for your investment in the AB Mutual Funds.
Sincerely,
Robert M. Keith
President and Chief Executive Officer, AB Mutual Funds
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 1 |
SEMI-ANNUAL REPORT
August 14, 2018
This report provides management’s discussion of fund performance for AB FlexFee US Thematic Portfolio for the semi-annual reporting period ended June 30, 2018.
The Fund’s investment objective is long-term growth of capital.
NAV RETURNS AS OF JUNE 30, 2018 (unaudited)
6 Months | 12 Months | |||||||
AB FLEXFEE US THEMATIC PORTFOLIO | ||||||||
Advisor Class Shares | 3.69% | 16.47% | ||||||
S&P 500 Index | 2.65% | 14.37% |
Please keep in mind that high, double-digit returns are highly unusual and cannot be sustained. Investors should also be aware that these returns were primarily achieved during favorable market conditions.
INVESTMENT RESULTS
The table above shows the Fund’s performance compared to its benchmark, the Standard and Poor’s (“S&P”) 500 Index, for the six- and 12-month periods ended June 30, 2018.
The Fund outperformed the benchmark for both periods. The Fund’s advisory fee, which is performance-based, was being accrued between its mid-point and maximum rates. (The actual advisory fee payable by the Fund for its current performance period will be determined based on the Fund’s performance relative to the benchmark as of the end of such period, which is from inception on June 28, 2017 through December 31, 2018.)
For the six-month period, both security and sector selection contributed to relative returns. Security selection in the financials and health care sectors contributed; underweights to the consumer staples and financials sectors also contributed. Stock selection in the consumer discretionary and utilities sectors detracted, as did an underweight to technology and cash holdings in a rising market environment.
For the 12-month period, both security and sector selection contributed. Security selection in the financials and health care sectors contributed; underweights to consumer staples and industrials also contributed. Security selection in energy and consumer discretionary detracted; an overweight to health care and cash holdings in a rising market also detracted.
The Fund did not utilize derivatives during either period.
2 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
MARKET REVIEW AND INVESTMENT STRATEGY
Global equities had mixed performance during the six-month period ended June 30, 2018. US stocks advanced, rallying to all-time highs at the very beginning of the period, as corporate tax reform helped boost investor sentiment. However, increasing inflation concerns and rising interest rates soon weighed on performance. While generally robust corporate earnings mitigated some downward pressure, worsening trade-war fears and political turmoil in Europe dragged on returns toward the end of the period. The US Federal Reserve raised interest rates twice and began to formally reduce its balance sheet, as widely expected, but in June signaled more rate increases than previously expected for the rest of this year.
The Fund remains focused on secular growth themes, supported by companies with attractive fundamentals. The Fund’s Senior Investment Management Team (the “Team”) continues to favor companies with strong company-specific revenue growth over those that are more exposed to cyclical shifts in the equity market. The Team has positioned the Fund to be ready to take advantage of any market dislocations.
INVESTMENT POLICIES
The Fund pursues opportunistic growth by investing primarily in a portfolio of US companies. Under normal conditions, the Fund invests at least 80% of its net assets in equity securities of US companies and related derivatives.
The Adviser employs a combination of “top-down” and “bottom-up” investment processes with the goal of identifying the most attractive US securities, fitting into broader themes, which are developments that have broad effects across industries and companies. Drawing on its fundamental research capabilities, the Adviser seeks to identify long-term secular growth trends (often resulting from innovation) that will affect multiple industries. The Adviser will assess the effects of these trends on entire industries and on individual companies. Through this process, the Adviser intends to identify key investment themes, which will be the focus of the Fund’s investments and which are expected to change over time based on the Adviser’s research.
In addition to this “top-down” thematic approach, the Adviser will also use a “bottom-up” analysis of individual companies that focuses on prospective earnings growth, valuation and quality of company management. The Adviser normally considers a universe of primarily US mid- to large-capitalization companies for investment.
The Adviser expects that normally the Fund’s portfolio will emphasize investments in securities issued by US companies, although it may invest in foreign securities.
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 3 |
DISCLOSURES AND RISKS
Benchmark Disclosure
The S&P 500® Index is unmanaged and does not reflect fees and expenses associated with the active management of a mutual fund portfolio. The S&P 500 Index includes 500 US stocks and is a common representation of the performance of the overall US stock market. An investor cannot invest directly in an index, and its results are not indicative of the performance for any specific investment, including the Fund.
A Word About Risk
Market Risk: The value of the Fund’s assets will fluctuate as the stock or bond market fluctuates. The value of its investments may decline, sometimes rapidly and unpredictably, simply because of economic changes or other events that affect large portions of the market. It includes the risk that a particular style of investing, such as the Fund’s growth approach, may underperform the market generally.
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.
Capitalization Risk: Investments in mid-capitalization companies may be more volatile than investments in large-capitalization companies. Investments in mid-capitalization companies may have additional risks because these companies may have limited product lines, markets or financial resources.
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 for the Fund, 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 in this report 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.abfunds.com. The Fund has been in operation only for a short period of time, and therefore has a very limited historical
4 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
DISCLOSURES AND RISKS (continued)
performance period. This limited performance period is unlikely to be representative of the performance the Fund will achieve over a longer period.
All fees and expenses related to the operation of the Fund have been deducted. Net asset value (“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. 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.
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 5 |
HISTORICAL PERFORMANCE
AVERAGE ANNUAL RETURNS AS OF JUNE 30, 2018 (unaudited)
NAV Returns | SEC Returns (reflects applicable sales charges) | |||||||
ADVISOR CLASS SHARES1 | ||||||||
1 Year | 16.47% | 16.47% | ||||||
Since Inception2 | 15.33% | 15.33% |
SEC AVERAGE ANNUAL RETURNS
AS OF THE MOST RECENT CALENDAR QUARTER-END
JUNE 30, 2018 (unaudited)
SEC Returns (reflects applicable sales charges) | ||||
ADVISOR CLASS SHARES | ||||
1 Year | 16.47% | |||
Since Inception2 | 15.33% |
The Fund’s current prospectus fee table shows the Fund’s total annual operating expense ratio as 34.48% for Advisor Class shares, gross of any fee waivers or expense reimbursements. Contractual fee waivers and/or expense reimbursements limit the Fund’s annual operating expense ratio exclusive of the Fund’s advisory fees, 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 0.05% for Advisor Class shares. These waivers/reimbursements may not be terminated before April 30, 2019. Any fees waived and expenses borne by the Adviser through December 31, 2018 may be reimbursed by the Fund until the end of the third fiscal year after the fiscal period in which the fee was waived or the expense was borne, provided that no reimbursement payment will be made that would cause the Fund’s total annual operating expenses to exceed these expense limitations. 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 ratio shown above may differ from the expense ratio in the Financial Highlights section since they are based on different time periods.
1 | This share class is offered at NAV to eligible investors and the SEC returns are the same as the NAV returns. |
2 | Inception date: 6/28/2017. |
6 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
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 advisory 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.
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 7 |
EXPENSE EXAMPLE (continued)
Beginning Account Value 1/1/2018 | Ending Account Value 6/30/2018 | Expenses Paid During Period* | Annualized Expense Ratio* | Total Expenses Paid During Period+ | Total Annualized Expense Ratio+ | |||||||||||||||||||
Advisor Class | ||||||||||||||||||||||||
Actual | $ | 1,000 | $ | 1,036.90 | $ | 3.89 | 0.77 | % | $ | 3.94 | 0.78 | % | ||||||||||||
Hypothetical** | $ | 1,000 | $ | 1,020.98 | $ | 3.86 | 0.77 | % | $ | 3.91 | 0.78 | % |
* | Expenses are equal to the classes’ annualized expense ratios multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
+ | In connection with the Fund’s investments in affiliated/unaffiliated underlying portfolios, the Fund incurs no direct expenses, but bears proportionate shares of the fees and expenses (i.e., operating, administrative and investment advisory fees) of the affiliated/unaffiliated underlying portfolios. The Adviser has contractually agreed to waive its fees from the Fund in an amount equal to the Fund’s pro rata share of certain acquired fund fees and expenses of the affiliated underlying portfolios. The Fund’s total expenses are equal to the classes’ annualized expense ratio plus the Fund’s pro rata share of the weighted average expense ratio of the affiliated/unaffiliated underlying portfolios in which it invests, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the since one-half year period). |
** | Assumes 5% annual return before expenses. |
8 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
PORTFOLIO SUMMARY
June 30, 2018 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $50.4
TEN LARGEST HOLDINGS2
Company | U.S. $ Value | Percent of Net Assets | ||||||
UnitedHealth Group, Inc. | $ | 1,626,850 | 3.2 | % | ||||
Visa, Inc. – Class A | 1,623,705 | 3.2 | ||||||
MSCI, Inc. – Class A | 1,497,638 | 3.0 | ||||||
Home Depot, Inc. (The) | 1,377,211 | 2.8 | ||||||
Charles Schwab Corp. (The) | 1,361,150 | 2.7 | ||||||
Xylem, Inc./NY | 1,286,554 | 2.6 | ||||||
Microsoft Corp. | 1,221,679 | 2.4 | ||||||
West Pharmaceutical Services, Inc. | 1,173,111 | 2.3 | ||||||
Hexcel Corp. | 1,172,735 | 2.3 | ||||||
EOG Resources, Inc. | 1,154,586 | 2.3 | ||||||
$ | 13,495,219 | 26.8 | % |
1 | All data are as of June 30, 2018. The Fund’s sector breakdown is expressed as a percentage of total investments and may vary over time. |
2 | Long-term investments. |
Please note: The sector classifications presented herein are based on the Global Industry Classification Standard (GICS) which was developed by Morgan Stanley Capital International and Standard & Poor’s. The components are divided into sector, industry group, and industry sub-indices as classified by the GICS for each of the market capitalization indices in the broad market. These sector classifications are broadly defined. The “Portfolio of Investments” section of the report reflects more specific industry information and is consistent with the investment restrictions discussed in the Fund’s prospectus.
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 9 |
PORTFOLIO OF INVESTMENTS
June 30, 2018 (unaudited)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
COMMON STOCKS – 93.2% | ||||||||
Information Technology – 22.7% | ||||||||
Communications Equipment – 1.7% | ||||||||
Lumentum Holdings, Inc.(a) | 14,200 | $ | 822,180 | |||||
|
| |||||||
Electronic Equipment, Instruments & Components – 1.8% | ||||||||
Flex Ltd.(a) | 65,204 | 920,028 | ||||||
|
| |||||||
Internet Software & Services – 3.2% | ||||||||
Alphabet, Inc. – Class C(a) | 993 | 1,107,841 | ||||||
New Relic, Inc.(a) | 4,880 | 490,879 | ||||||
|
| |||||||
1,598,720 | ||||||||
|
| |||||||
IT Services – 3.2% | ||||||||
Visa, Inc. – Class A | 12,259 | 1,623,705 | ||||||
|
| |||||||
Semiconductors & Semiconductor Equipment – 6.0% | ||||||||
Broadcom, Inc. | 2,661 | 645,665 | ||||||
KLA-Tencor Corp. | 6,732 | 690,232 | ||||||
Monolithic Power Systems, Inc. | 7,603 | 1,016,293 | ||||||
NVIDIA Corp. | 2,866 | 678,955 | ||||||
|
| |||||||
3,031,145 | ||||||||
|
| |||||||
Software – 4.5% | ||||||||
Microsoft Corp. | 12,389 | 1,221,679 | ||||||
salesforce.com, Inc.(a) | 7,747 | 1,056,691 | ||||||
|
| |||||||
2,278,370 | ||||||||
|
| |||||||
Technology Hardware, Storage & Peripherals – 2.3% | ||||||||
Apple, Inc. | 6,193 | 1,146,386 | ||||||
|
| |||||||
11,420,534 | ||||||||
|
| |||||||
Health Care – 19.8% | ||||||||
Biotechnology – 1.1% | ||||||||
Regeneron Pharmaceuticals, Inc.(a) | 1,554 | 536,114 | ||||||
|
| |||||||
Health Care Equipment & Supplies – 6.4% | ||||||||
Abbott Laboratories | 16,361 | 997,858 | ||||||
Danaher Corp. | 10,891 | 1,074,724 | ||||||
West Pharmaceutical Services, Inc. | 11,815 | 1,173,111 | ||||||
|
| |||||||
3,245,693 | ||||||||
|
| |||||||
Health Care Providers & Services – 3.2% | ||||||||
UnitedHealth Group, Inc. | 6,631 | 1,626,850 | ||||||
|
| |||||||
Health Care Technology – 1.1% | ||||||||
Medidata Solutions, Inc.(a) | 6,711 | 540,638 | ||||||
|
| |||||||
Life Sciences Tools & Services – 5.2% | ||||||||
Bio-Rad Laboratories, Inc. – Class A(a) | 3,389 | 977,862 |
10 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Bruker Corp. | 24,055 | $ | 698,557 | |||||
ICON PLC(a) | 7,058 | 935,397 | ||||||
|
| |||||||
2,611,816 | ||||||||
|
| |||||||
Pharmaceuticals – 2.8% | ||||||||
Johnson & Johnson | 5,712 | 693,094 | ||||||
Roche Holding AG (Sponsored ADR) | 26,236 | 724,901 | ||||||
|
| |||||||
1,417,995 | ||||||||
|
| |||||||
9,979,106 | ||||||||
|
| |||||||
Consumer Discretionary – 14.4% | ||||||||
Auto Components – 3.5% | ||||||||
Aptiv PLC | 11,560 | 1,059,243 | ||||||
Delphi Technologies PLC | 15,610 | 709,631 | ||||||
|
| |||||||
1,768,874 | ||||||||
|
| |||||||
Diversified Consumer Services – 2.2% | ||||||||
Bright Horizons Family Solutions, Inc.(a) | 10,745 | 1,101,577 | ||||||
|
| |||||||
Internet & Direct Marketing Retail – 2.3% | ||||||||
Amazon.com, Inc.(a) | 664 | 1,128,667 | ||||||
|
| |||||||
Media – 1.7% | ||||||||
Walt Disney Co. (The) | 8,177 | 857,031 | ||||||
|
| |||||||
Specialty Retail – 2.7% | ||||||||
Home Depot, Inc. (The) | 7,059 | 1,377,211 | ||||||
|
| |||||||
Textiles, Apparel & Luxury Goods – 2.0% | ||||||||
VF Corp. | 12,409 | 1,011,582 | ||||||
|
| |||||||
7,244,942 | ||||||||
|
| |||||||
Financials – 11.8% | ||||||||
Banks – 1.0% | ||||||||
Credicorp Ltd. | 2,221 | 499,991 | ||||||
|
| |||||||
Capital Markets – 9.0% | ||||||||
Affiliated Managers Group, Inc. | 3,967 | 589,774 | ||||||
Charles Schwab Corp. (The) | 26,637 | 1,361,150 | ||||||
Intercontinental Exchange, Inc. | 14,749 | 1,084,789 | ||||||
MSCI, Inc. – Class A | 9,053 | 1,497,638 | ||||||
|
| |||||||
4,533,351 | ||||||||
|
| |||||||
Insurance – 1.8% | ||||||||
AIA Group Ltd. (Sponsored ADR) | 25,865 | 905,922 | ||||||
|
| |||||||
5,939,264 | ||||||||
|
| |||||||
Industrials – 8.2% | ||||||||
Aerospace & Defense – 2.3% | ||||||||
Hexcel Corp. | 17,667 | 1,172,735 | ||||||
|
| |||||||
Electrical Equipment – 3.4% | ||||||||
Rockwell Automation, Inc. | 4,647 | 772,471 | ||||||
Vestas Wind Systems A/S (ADR) | 44,836 | 920,931 | ||||||
|
| |||||||
1,693,402 | ||||||||
|
|
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 11 |
PORTFOLIO OF INVESTMENTS (continued)
Company | Shares | U.S. $ Value | ||||||
| ||||||||
Machinery – 2.5% | ||||||||
Xylem, Inc./NY | 19,094 | $ | 1,286,554 | |||||
|
| |||||||
4,152,691 | ||||||||
|
| |||||||
Utilities – 5.0% | ||||||||
Electric Utilities – 1.5% | ||||||||
NextEra Energy, Inc. | 4,442 | 741,947 | ||||||
|
| |||||||
Water Utilities – 3.5% | ||||||||
American Water Works Co., Inc. | 12,890 | 1,100,548 | ||||||
Aqua America, Inc. | 18,957 | 666,908 | ||||||
|
| |||||||
1,767,456 | ||||||||
|
| |||||||
2,509,403 | ||||||||
|
| |||||||
Energy – 4.1% | ||||||||
Oil, Gas & Consumable Fuels – 4.1% | ||||||||
Concho Resources, Inc.(a) | 6,726 | 930,542 | ||||||
EOG Resources, Inc. | 9,279 | 1,154,586 | ||||||
|
| |||||||
2,085,128 | ||||||||
|
| |||||||
Materials – 2.2% | ||||||||
Chemicals – 2.2% | ||||||||
Ecolab, Inc. | 7,926 | 1,112,256 | ||||||
|
| |||||||
Consumer Staples – 2.0% | ||||||||
Food Products – 2.0% | ||||||||
Nestle SA (Sponsored ADR) | 12,940 | 1,001,944 | ||||||
|
| |||||||
Real Estate – 1.8% | ||||||||
Equity Real Estate Investment Trusts (REITs) – 1.8% | ||||||||
SBA Communications Corp.(a) | 5,508 | 909,481 | ||||||
|
| |||||||
Telecommunication Services – 1.2% | ||||||||
Diversified Telecommunication Services – 1.2% | ||||||||
China Unicom Hong Kong Ltd. (ADR) | 48,910 | 611,864 | ||||||
|
| |||||||
Total Common Stocks | 46,966,613 | |||||||
|
| |||||||
SHORT-TERM INVESTMENTS – 6.5% | ||||||||
Investment Companies – 6.5% | ||||||||
AB Fixed Income Shares, Inc. – Government Money Market Portfolio – Class AB, 1.71%(b)(c)(d) | 3,274,211 | 3,274,211 | ||||||
|
| |||||||
Total Investments – 99.7% | 50,240,824 | |||||||
Other assets less liabilities – 0.3% | 172,486 | |||||||
|
| |||||||
Net Assets – 100.0% | $ | 50,413,310 | ||||||
|
|
12 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
PORTFOLIO OF INVESTMENTS (continued)
(a) | Non-income producing security. |
(b) | Affiliated investments. |
(c) | The rate shown represents the 7-day yield as of period end. |
(d) | To obtain a copy of the fund’s shareholder report, please go to the Securities and Exchange Commission’s website at www.sec.gov, or call AB at (800) 227-4618. |
Glossary:
ADR – American Depositary Receipt
See notes to financial statements.
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 13 |
STATEMENT OF ASSETS & LIABILITIES
June 30, 2018 (unaudited)
Assets | ||||
Investments in securities, at value | ||||
Unaffiliated issuers (cost $46,432,712) | $ | 46,966,613 | ||
Affiliated issuers (cost $3,274,211) | 3,274,211 | |||
Receivable for capital stock sold | 207,464 | |||
Receivable from Adviser | 33,729 | |||
Unaffiliated dividends receivable | 7,124 | |||
Affiliated dividends receivable | 3,664 | |||
|
| |||
Total assets | 50,492,805 | |||
|
| |||
Liabilities | ||||
Custody fee payable | 25,683 | |||
Audit and tax fee payable | 17,687 | |||
Legal fee payable | 15,773 | |||
Registration fee payable | 9,727 | |||
Payable for capital stock redeemed | 5,000 | |||
Due to Custodian | 2,985 | |||
Directors’ fee payable | 496 | |||
Transfer Agent fee payable | 314 | |||
Accrued expenses and other liabilities | 1,830 | |||
|
| |||
Total liabilities | 79,495 | |||
|
| |||
Net Assets | $ | 50,413,310 | ||
|
| |||
Composition of Net Assets | ||||
Capital stock, at par | $ | 438 | ||
Additional paid-in capital | 50,040,047 | |||
Undistributed net investment income | 97,802 | |||
Accumulated net realized loss on investment transactions | (258,878 | ) | ||
Net unrealized appreciation on investments | 533,901 | |||
|
| |||
$ | 50,413,310 | |||
|
|
Net Asset Value Per Share—11 billion shares of capital stock authorized, $.0001 par value
Class | Net Assets | Shares Outstanding | Net Asset Value | |||||||||
| ||||||||||||
Advisor | $ | 50,413,310 | 4,376,035 | $ | 11.52 | |||||||
|
See notes to financial statements.
14 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2018 (unaudited)
Investment Income | ||||||||
Dividends | ||||||||
Unaffiliated issuers (net of foreign taxes withheld of $6,698) | $ | 225,216 | ||||||
Affiliated issuers | 20,250 | $ | 245,466 | |||||
|
| |||||||
Expenses | ||||||||
Advisory fee (see Note B) | 142,289 | |||||||
Transfer agency-Advisor Class | 6,323 | |||||||
Administrative | 33,479 | |||||||
Amortization of offering expenses | 33,390 | |||||||
Audit and tax | 23,393 | |||||||
Custodian | 20,707 | |||||||
Directors’ fees | 12,854 | |||||||
Registration fees | 12,693 | |||||||
Legal | 10,787 | |||||||
Printing | 4,723 | |||||||
Miscellaneous | 8,787 | |||||||
|
| |||||||
Total expenses | 309,425 | |||||||
Less: expenses waived and reimbursed by the Adviser (see Note B) | (160,090 | ) | ||||||
|
| |||||||
Net expenses | 149,335 | |||||||
|
| |||||||
Net investment income | 96,131 | |||||||
|
| |||||||
Realized and Unrealized Gain (Loss) on Investment | ||||||||
Net realized gain (loss) on: | ||||||||
Investment transactions | (261,129 | ) | ||||||
Net change in unrealized appreciation/depreciation on: | ||||||||
Investments | 426,598 | |||||||
|
| |||||||
Net gain on investments | 165,469 | |||||||
|
| |||||||
Net Increase in Net Assets from Operations | $ | 261,600 | ||||||
|
|
See notes to financial statements.
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 15 |
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017(a) to December 31, 2017 | |||||||
Increase in Net Assets from Operations | ||||||||
Net investment income | $ | 96,131 | $ | 3,526 | ||||
Net realized gain (loss) on investment transactions | (261,129 | ) | 2,251 | |||||
Net change in unrealized appreciation/depreciation on investments | 426,598 | 107,303 | ||||||
|
|
|
| |||||
Net increase in net assets from operations | 261,600 | 113,080 | ||||||
Dividends to Shareholders from | ||||||||
Net investment income | ||||||||
Advisor Class | – 0 | – | (2,170 | ) | ||||
Capital Stock Transactions | ||||||||
Net increase | 49,040,797 | 1,000,003 | ||||||
|
|
|
| |||||
Total increase | 49,302,397 | 1,110,913 | ||||||
Net Assets | ||||||||
Beginning of period | 1,110,913 | – 0 | – | |||||
|
|
|
| |||||
End of period (including undistributed net investment income of $97,802 and $1,671, respectively) | $ | 50,413,310 | $ | 1,110,913 | ||||
|
|
|
|
(a) | Commencement of operations. |
See notes to financial statements.
16 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS
June 30, 2018 (unaudited)
NOTE A
Significant Accounting Policies
AB Cap Fund, Inc. (the “Company”), which is a Maryland corporation, is registered under the Investment Company Act of 1940 as an open-end management investment company. The Company operates as a series company comprised of 28 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 FlexFee US Thematic Portfolio (the “Fund”), a diversified portfolio. The Fund commenced operations on June 28, 2017. The Fund has authorized issuance of Class A, Class B, Class C, Advisor Class, Class R, Class K, Class I, Class Z, Class T, Class 1, and Class 2 shares. Class A, Class B, Class C, Class R, Class K, Class I, Class Z, Class T, Class 1, and Class 2 shares have not been issued. Advisor Class shares are sold without an initial or contingent deferred sales charge and are not subject to ongoing distribution expenses. All eleven 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 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
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 17 |
NOTES TO FINANCIAL STATEMENTS (continued)
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 “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. Open end mutual funds are valued at the closing net asset value per share, while exchange traded funds are valued at the closing market price per share.
Securities for which market quotations are not readily available (including restricted securities) or are deemed unreliable are valued at fair value as deemed appropriate by the Adviser. 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 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 generally values many of its
18 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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) |
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.
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 19 |
NOTES TO FINANCIAL STATEMENTS (continued)
The following table summarizes the valuation of the Fund’s investments by the above fair value hierarchy levels as of June 30, 2018:
Investments in Securities | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Common Stocks^ | $ | 46,966,613 | $ | – 0 | – | $ | – 0 | – | $ | 46,966,613 | ||||||
Short-Term Investments: | ||||||||||||||||
Investment Companies | 3,274,211 | – 0 | – | – 0 | – | 3,274,211 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investments in Securities | 50,240,824 | – 0 | – | – 0 | – | 50,240,824 | ||||||||||
Other Financial Instruments*: | – 0 | – | – 0 | – | – 0 | – | – 0 | – | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total** | $ | 50,240,824 | $ | – 0 | – | $ | – 0 | – | $ | 50,240,824 | ||||||
|
|
|
|
|
|
|
|
^ | See Portfolio of Investments for sector classifications. |
* | 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 swaps with upfront premiums, options written and swaptions written which are valued at market value. |
** | There were no transfers between any levels during the reporting period. |
The Fund recognizes all transfers between levels of the fair value hierarchy assuming the financial instrument was transferred at the beginning of the reporting period.
The Adviser established the Committee to oversee the pricing and valuation of all securities held in the 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 any 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 process at vendors, 2)
20 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 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, 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 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 and 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
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 21 |
NOTES TO FINANCIAL STATEMENTS (continued)
positions taken or expected to be taken on federal and state income tax returns for the current initial year, 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 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. Expense Allocations
Expenses of the Company are charged proportionately to each portfolio or based on other appropriate methods.
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 $68,085 were deferred and amortized on a straight line basis over a one year period starting from June 28, 2017 (commencement of operations).
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 .55% of the Fund’s average daily net assets (“Base Fee”). The advisory fee is increased or decreased from the Base Fee by a performance adjustment (“Performance Adjustment”) that depends on whether, and to what extent, the investment performance of the Advisor Class shares of the Fund (“Measuring Class”) exceeds, or is exceeded by, the performance of the S&P 500 Index (“Index”) plus 1.40% (“Index Hurdle”) over the Performance Period (as defined below). The Performance Adjustment is calculated and accrued daily, according to a schedule that adds or subtracts .00357% of the Fund’s average daily net assets for each .01% of absolute performance by which the performance of the Measuring Class exceeds or lags the Index Hurdle for the period from the beginning of the Performance Period through the current business day. The maximum Performance Adjustment
22 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
(positive or negative) will not exceed an annualized rate of +/- .50% (“Maximum Performance Adjustment”) of the Fund’s average daily net assets, which would occur when the performance of the Measuring Class exceeds, or is exceeded by, the Index Hurdle by 1.40% or more for the Performance Period. On a monthly basis, the Fund will pay the Adviser the minimum fee rate of .05% on an annualized basis (Base Fee minus the Maximum Performance Adjustment) applied to the average daily net assets for the month. At the end of the Performance Period, the Fund will pay to the Adviser the total advisory fee, less the amount of any minimum fees paid during the Performance Period and any waivers described below. The period over which performance is measured (“Performance Period”) is initially from the commencement of operations to December 31, 2018 and thereafter each 12-month period beginning on the first day in the month of January through December 31 of the same year. In addition, the Adviser has agreed to waive its advisory fee by limiting the Fund’s accrual of the advisory fee (Base Fee plus Performance Adjustment) on any day to the amount corresponding to the maximum fee rate multiplied by the Fund’s current net assets if such amount is less than the amount that would have been accrued based on the Fund’s average daily net assets for the Performance Period. For the reporting period ended June 30, 2018, the Fund accrued advisory fees of $142,289, as reflected in the statement of operations, at an annual effective rate (excluding the impact from any expense waivers in effect) of .72% of the Fund’s average net assets, which reflected a .17% Performance Adjustment of $34,063.
The Adviser has agreed to waive its fees and bear certain expenses through April 30, 2019 to the extent necessary to limit total expenses (other than the advisory fee, 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 from exceeding .05% of average daily net assets. For the six months ended June 30, 2018, the reimbursement waivers amounted to $123,900. Any fees waived and expenses borne by the Adviser through December 31, 2018 are subject to repayment by the Fund until the end of the third fiscal year after the fiscal period in which the fees were waived or the expenses were borne; such waivers/expenses borne that are subject to repayment amount to $171,634 for the fiscal period ended December 31, 2017. In any case, no repayment will be made that would cause the Fund’s total annual expenses (subject to the exclusions set forth above) to exceed .05%.
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 six months ended June 30, 2018, the Adviser voluntarily agreed to waive such fees in the amount of $33,479.
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 23 |
NOTES TO FINANCIAL STATEMENTS (continued)
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. The compensation retained by ABIS amounted to $9,000 for the six months ended June 30, 2018.
The Fund may invest in AB Government Money Market Portfolio (the “Government Money Market Portfolio”) which has a contractual annual advisory fee rate of .20% of the portfolio’s average daily net assets and bears its own expenses. In connection with the investment by the Fund in the Government Money Market Portfolio, the Adviser has contractually agreed to waive its advisory fee from the Fund in an amount equal to the Fund’s pro rata share of the effective advisory fees of Government Money Market Portfolio, as borne indirectly by the Fund as an acquired fund fee and expense. For the six months ended June 30, 2018, such waiver amounted to $2,711.
A summary of the Fund’s transactions in AB mutual funds for the six months ended June 30, 2018 is as follows:
Fund | Market Value 12/31/17 (000) | Purchases at Cost (000) | Sales Proceeds (000) | Market Value 06/30/18 (000) | Dividend Income (000) | |||||||||||||||
Government Money Market Portfolio | $ | 73 | $ | 38,467 | $ | 35,266 | $ | 3,274 | $ | 20 |
Brokerage commissions paid on investment transactions for the six months ended June 30, 2018 amounted to $9,558, 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
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments) for the six months ended June 30, 2018, were as follows:
Purchases | Sales | |||||||
Investment securities (excluding U.S. government securities) | $ | 49,738,182 | $ | 3,978,311 | ||||
U.S. government securities | – 0 | – | – 0 | – |
24 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
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 are as follows:
Gross unrealized appreciation | $ | 2,111,182 | ||
Gross unrealized depreciation | (1,577,281 | ) | ||
|
| |||
Net unrealized appreciation | $ | 533,901 | ||
|
|
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.
The Fund did not engage in derivative transactions during the six months ended June 30, 2018.
2. Currency Transactions
The Fund may invest in non-U.S. Dollar-denominated securities on a currency hedged or unhedged basis. The Fund may seek investment opportunities by taking long or short positions in currencies through the use of currency-related derivatives, including forward currency exchange contracts, futures and options on futures, swaps, and other options. The Fund may enter into transactions for investment opportunities when it anticipates that a foreign currency will appreciate or depreciate in value but securities denominated in that currency are not held by the Fund and do not present attractive investment opportunities. Such transactions may also be used when the Adviser believes that it may be more efficient than a direct investment in a foreign currency-denominated security. The Fund may also conduct currency exchange contracts on a spot basis (i.e., for cash at the spot rate prevailing in the currency exchange market for buying or selling currencies).
NOTE D
Capital Stock
Each class consists of 1,000,000,000 authorized shares. Transactions in capital shares for each class were as follows:
Shares | Amount | |||||||||||||||||||||||
Six Months Ended June 30, 2018 (unaudited) | June 28, 2017* to December 31, | Six Months Ended June 30, 2018 (unaudited) | June 28, 2017* to December 31, | |||||||||||||||||||||
|
| |||||||||||||||||||||||
Advisor Class | ||||||||||||||||||||||||
Shares sold | 4,280,093 | 100,000 | $ | 49,087,856 | $ | 1,000,003 | ||||||||||||||||||
| ||||||||||||||||||||||||
Shares redeemed | (4,058 | ) | – 0 | – | (47,059 | ) | – 0 | – | ||||||||||||||||
| ||||||||||||||||||||||||
Net increase | 4,276,035 | 100,000 | $ | 49,040,797 | $ | 1,000,003 | ||||||||||||||||||
|
* | Commencement of operations. |
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 25 |
NOTES TO FINANCIAL STATEMENTS (continued)
At June 30, 2018, the Adviser owned 80% of the Fund’s outstanding shares.
NOTE E
Risks Involved in Investing in the Fund
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.
Capitalization Risk—Investments in mid-capitalization companies may be more volatile than investments in large-capitalization companies. Investments in mid-capitalization companies may have additional risks because these companies have limited product lines, markets or financial resources.
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 F
Distributions to Shareholders
The tax character of distributions paid for the year ending December 31, 2018 will be determined at the end of the current fiscal year.
The tax character of distributions paid during the fiscal period ended December 31, 2017 was as follows:
2017 | ||||
Distributions paid from: | ||||
Ordinary income | $ | 2,170 | ||
|
| |||
Total taxable distributions paid | $ | 2,170 | ||
|
|
As of December 31, 2017, the components of accumulated earnings/(deficit) on a tax basis were as follows:
Undistributed ordinary income | $ | 3,922 | ||
Unrealized appreciation/(depreciation) | 107,303 | |||
|
| |||
Total accumulated earnings/(deficit) | $ | 111,225 | ||
|
|
For tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. Funds are permitted to carry forward capital
26 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
NOTES TO FINANCIAL STATEMENTS (continued)
losses for an indefinite period, and such losses will retain their character as either short-term or long-term capital losses. As of December 31, 2017, the Fund did not have any capital loss carryforwards.
NOTE G
Subsequent Events
Management has evaluated subsequent events for possible recognition or disclosure in the financial statements through the date the financial statements are issued. Management has determined that there are no material events that would require disclosure in the Fund’s financial statements through this date.
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 27 |
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
Advisor Class | ||||||||
Six Months June 30, 2018 | June 28, 2017(a) to December 31, 2017 | |||||||
|
|
|
| |||||
Net asset value, beginning of period | $ 11.11 | $ 10.00 | ||||||
|
|
|
| |||||
Income From Investment Operations | ||||||||
Net investment income(b)(c) | .03 | .04 | ||||||
Net realized and unrealized gain on investments | .38 | 1.09 | ||||||
|
|
|
| |||||
Net increase in net asset value from operations | .41 | 1.13 | ||||||
|
|
|
| |||||
Less: Dividends | ||||||||
Dividends from net investment income | – 0 | – | (.02 | ) | ||||
|
|
|
| |||||
Net asset value, end of period | $ 11.52 | $ 11.11 | ||||||
|
|
|
| |||||
Total Return | ||||||||
Total investment return based on net asset value(d) | 3.69 | % | 11.32 | % | ||||
Ratios/Supplemental Data | ||||||||
Net assets, end of period (000’s omitted) | $50,413 | $1,111 | ||||||
Ratio to average net assets of: | ||||||||
Expenses, net of waivers/reimbursements(e)(f)† | .77 | %(g) | .33 | % | ||||
Expenses, before waivers/reimbursements(e)(f)† | 1.59 | %(g) | 37.77 | % | ||||
Net investment income(c)(f) | .49 | % | .66 | % | ||||
Portfolio turnover rate | 12 | % | 22 | % | ||||
† Expense ratios exclude the estimated acquired fund fees of affiliated/unaffiliated underlying |
| |||||||
portfolios | .01 | % | .01 | %(h) |
(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 charge or contingent deferred sales charge is not reflected in the calculation of total investment return. Total investment 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 for a period of less than one year is not annualized |
(e) | In connection with the Fund’s investments in affiliated underlying portfolios, the Fund incurs no direct expenses but bears proportionate shares of the acquired fund fees and expenses (i.e. operating, administrative and investment advisory fees) of the affiliated underlying portfolios. The Adviser has contractually agreed to waive its fees from the Fund in an amount equal to the Fund’s pro rata share of certain acquired fund fees and expenses, and for the six months ended June 30, 2018, such waiver amounted to 0.01% annualized. |
(f) | Annualized. |
(g) | The advisory fee reflected in the Fund’s expense ratio may be higher or lower than the Base Fee plus Performance Adjustment due to the different time periods over which the fee is calculated (i.e., the financial reporting period vs. the Performance Period). |
(h) | Unaudited. |
See notes to financial statements.
28 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
BOARD OF DIRECTORS
Marshall C. Turner, Jr(1), Chairman Michael J. Downey(1) William H. Foulk, Jr.(1) Nancy P. Jacklin(1) | Robert M. Keith, President and Chief Executive Officer Carol C. McMullen(1) Garry L. Moody(1) Earl D. Weiner(1) |
OFFICERS
Daniel C. Roarty(2), Vice President Benjamin Ruegsegger(2) 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 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 | 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 |
Transfer Agent
AllianceBernstein Investor Services,
Inc.
P.O. Box 786003
San Antonio, TX 78278-6003
Toll-Free (800) 221-6003
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 Adviser’s Global Growth and Thematic Investment Team. Messrs. Roarty and Ruegsegger are the investment professional with the most significant responsibility for the day-to-day management of the Fund on the Team. |
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 29 |
Information Regarding the Review and Approval of Amendment to the Fund’s Advisory Agreement
At a meeting of the Board of Directors of AB Cap Fund, Inc. (the “Company”) held on August 1-2, 2017, the Adviser recommended an amendment to the Company’s current Advisory Agreement with the Adviser (the “Amended Agreement”) relating to a change in the daily fee computation methodology in respect of AB FlexFeeTM US Thematic Portfolio (the “Fund”). The amendment provided that, for purposes of calculating the incentive portion of the Adviser’s advisory fee, the Fund’s investment performance on each business day would be compared with the performance of its benchmark index on the same day (rather than on the prior business day).
The Adviser had provided the disinterested directors (the “directors”) with a memorandum explaining its analysis and the form of amendment prior to the meeting. After discussion with experienced counsel who are independent of the Adviser and with the Adviser, the directors concluded that the proposed amendment would result in a more precise calculation of the Adviser’s incentive fee and unanimously approved the Amended Agreement.
The directors approved the Fund’s current Advisory Agreement at a meeting held on January 31-February 1, 2017 (the “January/February Meeting”) and a discussion regarding the basis for the Board’s approval is set forth below.
Board’s Approval at the January/February 2017 Meeting
Information Regarding the Review and Approval of the Fund’s Advisory Agreement
The disinterested directors (the “directors”) of AB Cap Fund, Inc. (the “Company”) unanimously approved the Company’s Advisory Agreement with the Adviser in respect of AB FlexFeeTM US Thematic Portfolio (the “Fund”) for an initial two-year period at a meeting held on January 31-February 1, 2017 (the “Meeting”). (At the time of the approval of the Advisory Agreement, the Fund was known as AB Performance Fee Series—US Thematic Portfolio.)
Prior to approval of the Advisory Agreement, 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 Company’s Senior Officer (who is also the Company’s Independent Compliance Officer), who acted as their independent fee consultant, of the reasonableness of the proposed performance-based advisory fee (which consists of a base fee plus or minus a performance adjustment), in which the Senior Officer concluded
30 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
that the proposed contractual fee for the Fund was reasonable. The directors also discussed the proposed approval in private sessions with counsel and the Company’s Senior Officer.
The directors considered their knowledge of the nature and quality of the services to be provided by the Adviser to the Fund 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 AB Funds and review extensive materials and information presented by the Adviser.
The directors also considered all factors they believed relevant, including the specific matters discussed below. During the course of their deliberations, the directors evaluated, among other things, the reasonableness of the proposed advisory fee. 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 Fund and the overall arrangements between the Fund 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 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 Fund’s portfolio management team and other senior personnel of the Adviser. The directors also considered that the Advisory Agreement provides that the Fund will reimburse the Adviser for the cost to it of providing certain clerical, accounting, administrative and other services to the Fund 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 Fund to the Adviser than the fee rate stated in the Advisory Agreement. The directors noted that the methodology to be used to determine the reimbursement
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 31 |
amounts had been reviewed by an independent consultant retained by the Company’s Senior Officer. The quality of administrative and other services, including the Adviser’s role in coordinating the activities of the Fund’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 Fund under the Advisory Agreement.
Costs of Services to be Provided and Profitability
Because the Fund had not yet commenced operations, the directors were unable to consider historical information about the profitability of the Fund. 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 Fund and that the Fund was unlikely to be profitable to the Adviser unless it achieves a material level of net assets. The directors also noted that, due to the performance fee component of the advisory fee, profitability would tend to be higher with better performance relative to the Fund’s benchmark, which they considered to create an appropriate alignment of incentives.
Fall-Out Benefits
The directors considered the other benefits to the Adviser and its affiliates from their proposed relationships with the Fund, including, but not limited to, benefits relating to 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 Fund’s shares; and transfer agency fees to be paid by the Fund to a wholly owned subsidiary of the Adviser. The directors recognized that the Adviser’s future 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 Fund.
Investment Results
Since the Fund had not yet commenced operations, no performance or other historical information for the Fund was available. The Adviser manages another AB Fund with a somewhat similar investment style, and, at the Meeting, the directors reviewed performance information for that AB Fund. Based on this information, together with the Adviser’s written and oral presentations regarding the management of the Fund 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 Fund management services to the Fund.
Advisory Fees and Other Expenses
The directors considered the proposed advisory fee rate payable by the Fund to the Adviser and information prepared by three analytical services
32 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
that are not affiliated with the Adviser (the “15(c) service providers”), concerning advisory fee rates paid by other funds in the same category as the Fund at a hypothetical common asset level of $250 million. 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 considered the Fund’s proposed contractual effective advisory fee rate against a peer group median.
The directors recognized that the Adviser’s total compensation from the Fund 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 Fund and the extent to which the Adviser requests reimbursements pursuant to this provision.
The directors also considered the Adviser’s fee schedule for institutional 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 Company’s Senior Officer and noted the differences between the Fund’s proposed fee schedule, on the one hand, and the institutional fee schedule and the schedule of fees charged to any offshore funds and any sub-advised funds, on the other. 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 Fund relative to institutional, offshore fund and sub-advised fund clients. In light of the substantial differences in services rendered by the Adviser to institutional, offshore fund and sub-advised fund clients as compared to funds such as the Fund, the directors considered these fee comparisons inapt and did not place significant weight on them in their deliberations.
The directors noted that the Fund 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 or to “equitize” cash inflows pending purchases of underlying securities, that the proposed advisory fee would be for services in addition to, rather than duplicative of, the services provided under the advisory contracts of the ETFs in which the Fund may invest.
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 33 |
The directors also considered the projected total expense ratio of the Advisor Class shares of the Fund in comparison to a peer group and a peer universe selected by each 15(c) service provider. The directors also considered the Adviser’s proposed expense cap for the “other expenses” of the Fund (expenses excluding the advisory fee, Rule 12b-1 fees, and certain other expenses typically excluded from the Adviser’s expense caps) for the period ending December 31, 2018. The directors noted that it was likely that the expense ratios of some of the other funds in the Fund’s 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 projected expense ratio information as relevant to their evaluation of the Adviser’s services because the Adviser is responsible for coordinating services provided to the Fund by others. Based on their review, the directors concluded that the Fund’s projected expense ratio was acceptable.
Economies of Scale
The directors noted that the proposed advisory fee schedule for the Fund does not contain breakpoints and that they had previously discussed their strong preference 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 in advance of the 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 Fund, 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 Fund’s assets and its profitability to the Adviser and anticipated revisiting the question of breakpoints in the future if circumstances warranted doing so.
34 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
This page is not part of the Shareholder Report or the Financial Statements.
AB FAMILY OF FUNDS
US EQUITY
US CORE
Core Opportunities Fund
FlexFee™ US Thematic Portfolio
Select US Equity Portfolio
US GROWTH
Concentrated Growth Fund
Discovery Growth Fund
FlexFee™ Large Cap Growth Portfolio
Growth Fund
Large Cap Growth Fund
Small Cap Growth Portfolio
US VALUE
Discovery Value Fund
Equity Income Fund
Relative Value Fund
Small Cap Value Portfolio
Value Fund
INTERNATIONAL/ GLOBAL EQUITY
INTERNATIONAL/ GLOBAL CORE
All China Equity Portfolio
FlexFee™ International Strategic Core Portfolio
Global Core Equity Portfolio
International Portfolio
International Strategic Core Portfolio
Sustainable Global Thematic Fund
Tax-Managed International Portfolio
Tax-Managed Wealth Appreciation Strategy
Wealth Appreciation Strategy
INTERNATIONAL/ GLOBAL GROWTH
Concentrated International Growth Portfolio
FlexFee™ Emerging Markets Growth Portfolio
INTERNATIONAL/ GLOBAL EQUITY (continued)
Sustainable International Thematic Fund1
INTERNATIONAL/ GLOBAL VALUE
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
Tax-Aware Fixed Income Portfolio
National Portfolio
Arizona Portfolio
California Portfolio
Massachusetts Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
TAXABLE
Bond Inflation Strategy
FlexFee™ High Yield Portfolio1
FlexFee™ International Bond Portfolio
Global Bond Fund
High Income Fund
Income Fund
Intermediate Bond Portfolio
Limited Duration High Income Portfolio
Short Duration Portfolio
ALTERNATIVES
All Market Real Return Portfolio
Global Real Estate Investment Fund
Select US Long/Short Portfolio
Unconstrained Bond Fund
MULTI-ASSET
All Market Income Portfolio
All Market Total Return Portfolio
Conservative Wealth Strategy
Emerging Markets Multi-Asset Portfolio
Global Risk Allocation Fund
Tax-Managed All Market Income Portfolio
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
CLOSED-END FUNDS
Alliance California Municipal Income Fund
AllianceBernstein Global High Income Fund
AllianceBernstein National Municipal Income Fund
We also offer Government Money Market Portfolio1, which serves as the money market fund exchange vehicle for the AB mutual funds. An investment in Government Money Market Portfolio 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.abfunds.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.
1 | Prior to November 10, 2017, Government Money Market Portfolio was named Government Exchange Reserves; prior to January 8, 2018, Sustainable International Thematic Fund was named International Growth Fund; prior to February 23, 2018, FlexFee High Yield Portfolio was named High Yield Portfolio. |
abfunds.com | AB FLEXFEE US THEMATIC PORTFOLIO | 35 |
NOTES
36 | AB FLEXFEE US THEMATIC PORTFOLIO | abfunds.com |
AB FLEXFEE US THEMATIC PORTFOLIO
1345 Avenue of the Americas
New York, NY 10105
800 221 5672
FFUT-0152-0618
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 Cap Fund, Inc.
By: | /s/ Robert M. Keith | |
Robert M. Keith | ||
President | ||
Date: | August 27, 2018 |
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: | August 27, 2018 | |
By: | /s/ Joseph J. Mantineo | |
Joseph J. Mantineo | ||
Treasurer and Chief Financial Officer | ||
Date: | August 27, 2018 |