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2013 LAPERS Conference

September 16, 2013. 2013 LAPERS Conference. “The Case for Dow 20,000 (S&P 2,000) & Beyond”. Joe Lawrence Managing Director— Southeastern US Institutional Investments.

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2013 LAPERS Conference

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  1. September 16, 2013 2013 LAPERS Conference “The Case for Dow 20,000 (S&P 2,000) & Beyond” Joe Lawrence Managing Director—Southeastern US Institutional Investments This presentation is provided by AllianceBernstein L.P. Bernstein Value Equities is referred to as Bernstein herein; Alliance Growth Equities is referred to as Alliance herein; AllianceBernstein Fixed Income is referred to as AllianceBernstein herein. This presentation booklet has been provided to you for use in a private and confidential meeting to discuss a potential or existing investment advisory relationship. This presentation is not an advertisement and is not intended for public use or distribution beyond our private meeting.

  2. Trustee Quiz 17.8% Annualized return of S&P 500 for 1980s and 1990s* 10.0% Annualized return of Barclays US Aggregate for 1980s and 1990s* *20 year period of January 1, 1980 – December 31, 1999 Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business(January 1976); Standard & Poor’s; and AllianceBernstein

  3. What Is Most Important to You? In the next three to five years, which of the following do you expect to be most important when selecting an investment strategy? Increasing return Reducing risk Uncorrelated returns

  4. 50 60 70 80 90 00 12 Major Declines in the Stock Market S&P 500 Two of the worst bear markets since World War II occurred within the last 10 years. (41)% $72.9 Mil. (51)% (15)% (15)% (30)% (29)% (17)% (43)% (16)% (22)% Growth of$100,000 (15)% Past performance does not guarantee future results. Through December 31, 2012 Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business(January 1976); Standard & Poor’s; and AllianceBernstein

  5. Equities Have Disappointed Investors Past Five Years but Bonds Still Dominated Hedge Funds Reduced Risk, Hedge funds Bonds Stocks Safety assets turned out to be the best performers! As of June 30, 2013 Stocks are represented by MSCI World, bonds by Barclays Global Aggregate and hedge funds by HFRI Fund Weighted Composite. Risk is measured as annualized standard deviation of monthly returns. Source: Barclays, Hedge Fund Research, MSCI and AllianceBernstein

  6. Five Years of Volatile Equity Returns Spurred Investor Flight to Bonds Growth of US $100* 2008–2012 Net Fund Flows:** 2008–2012 USD Billion US Bonds $133 US Stocks $109 Global Stocks $94 Past performance does not guarantee future results. *January 2008–December 2012. US stocks represented by S&P 500 Index, global stocks by MSCI ACWI Index and bonds by the Barclays US Aggregate Bond Index **US-domiciled mutual funds, excluding sector and specialty equity funds, money market funds and ETFs Source: Barclays, Lipper, Morgan Stanley Capital International (MSCI), Standard & Poor’s, Strategic Insight and AllianceBernstein

  7. Fund Flows Reflect Lingering Risk Aversion After Buying Fixed Income Heavily… …Investors May Be Lacking Equity Exposure Bond flows $1.1 trillion above normal USD Billions USD Billions Equity flows $1.2 trillion below normal Cumulative Bond Flows Cumulative Equity Flows Through May 31, 2013 Cumulative bond and equity flows include all mutual funds and exchange-traded funds based in, or registered to invest in, the US. Source: Deutsche Bank and Investment Company Institute

  8. Why Do We Own Equities? Equity Risk Premium • Capture economic growth through corporate earnings • Protect against inflation • Earn risk premium associated with equities’ place in the capital structure Equities Attractive +1 Std. Dev. Average –1 Std. Dev. Equities Unattractive 13 Through June 30, 2013 Source: Bloomberg, S&P and AllianceBernstein

  9. The Equity Allocation Conundrum Potential Conflict Long-Term Fiduciary Goals Short-Term Measurement Goals • Meet liabilities due over 30+ years • Manage funding ratio along the way • Beat the benchmark or peers over a quarter or year • Avoid calling Treasurer (Corporate Plans) for a contribution; Avoid tax increase (Public Plans) to fund a contribution. Key metrics • Absolute • Relative

  10. The Equity Allocation Conundrum Potential Conflict Long-Term Fiduciary Goals Short-Term Measurement Time frames have become shorter in recent years, even as long-term funding ratios have deteriorated

  11. Defined Benefit (DB) Plans Face Serious Challenges No Recovery from Twin Shocks Average Funded Status for Fortune 1000 Cos. No Love for Equities Aggregate Pension Asset Allocation Source: Towers Watson

  12. Market Declines Put Fiduciaries on Edge Source: www.CartoonStock.com

  13. Losses Have Usually Been Made Up Quickly Cumulative Length Total Return First Year Three Years Five YearsDown Markets (Months) (S&P 500) After Decline After Decline After Decline Aug 1957–Dec 1957 5 (15.0)% 43.4% 61.3% 86.8% Jan 1960–Oct 1960 10 (8.4) 32.6 52.6 102.5 Jan 1962–Jun 1962 6 (22.3) 31.2 69.1 94.6 Feb 1966–Sep 1966 8 (15.6) 30.6 33.9 51.0 Dec 1968–Jun 1970 19 (29.1) 41.8 57.3 56.2 Jan 1973–Sep 1974 21 (42.7) 38.2 72.9 118.0 Jan 1977–Feb 1978 14 (14.2) 16.5 76.8 122.4 Dec 1980–Jul 1982 20 (17.2) 59.5 104.6 266.0 Sep 1987–Nov 1987 3 (29.6) 23.4 55.8 122.1 Jun 1990–Oct 1990 5 (14.7) 33.5 68.7 121.6 Sep 2000–Mar 2003 31 (42.0) 35.1 61.1 71.0 Average 13 (23.2)% 33.8 64.9% 110.2% Nov 2007–Feb 2009 16 (51.0) 53.6% 97.9% ? Past performance does not guarantee future results. Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business(January 1976); Standard & Poor’s; and AllianceBernstein

  14. Stocks vs Bonds as of December 31, 1999 Periods Ended December 31, 1999 Five Years 20 Years 30 Years* One Year Three Years 10Years Stocks 21.0% 27.6% 28.6% 18.2% 17.8% 13.7% Bonds (0.8)% 5.7% 7.7% 7.7% 10.0% 9.2% Relative Returns +21.8% +21.9% +20.9% +10.5% +7.8% +4.5% Source: Stocks are represented by the S&P 500 Index and Bonds are represented by the Barclays Aggregate Bond Index for all periods *except the 30 Year Bond returns are represented by the 30 Year U.S. Long Term Corporate/Treasury Index.

  15. Stocks vs Bonds as of March 31, 2009 Periods Ended March 31, 2009 One Year Three Years 30 Years Five Years 10Years 20 Years Stocks (38.1)% (13.1)% (4.8)% (3.0)% 7.4% 10.3% Bonds 3.1% 5.8% 4.1% 5.7% 7.4% 8.6% Relative Returns (41.2)% (18.9)% (8.9)% (8.7)% 0.0% +1.7% Source: Stocks are represented by the S&P 500 Index and Bonds are represented by the Barclays Aggregate Bond Index.

  16. After 30 Years of Decline, Interest Rates May Have Hit Bottom 10-Year US Treasury Yields Percent Bond returns remained positive, while yields rose to record highs As rates trended to historic lows, returns were strong for a long period 2Q:2013 may have marked the bottom in rates 1955–1980Annualized Return: 4.5% 1981–2012Annualized Return: 8.6% 2013 Past performance does not guarantee future results. Through June 30, 2013 Treasury bonds provide fixed rates of return as well as principal guarantees if held to maturity. Source: Bloomberg and Haver Analytics

  17. US Taxable Bonds—Projections Probability 5% Range of Compound Growth Rates* 10% 50% 90% 95% *Represents pre-tax compound annual growth rates. **Annual equivalent volatility differs from the first year volatility because the expectation and distribution of asset class returns change over time. Based on Bernstein's estimates of the range of returns for the applicable capital markets over the next 10 years as of June 30, 2013. Data does not represent past performance and is not a promise of actual or range of future results. “US Taxable Bonds” comprised of taxable bonds with 7 year maturity (60% investment grade and 40% sovereign). See Assumptions and Notes on Wealth Forecasting System in Appendix for further details.

  18. The Case for the 20,000 Dow (2,000 S&P 500) What We Said Last Year (July, 2012): • Dow = 12,880* • S&P 500 = 1,362* *As of June 30, 2012 Source: Dow Jones, Standard & Poors and Bernstein

  19. Simplified Return Model + Income Price Growth Note: Assumes payout rate is constant

  20. Simplified Return Model for Stocks + Income Price Growth Dividend Yield Earnings Growth Change in Price/Earnings + and Note: Assumes payout rate is constant

  21. Historically, the Stock Market Has Risen with GDP and Earnings S&P 500* Compound Return Earnings Growth** GDP Growth 7% Earnings Growth 7 S&P 500 7 GDP Growth Through December 31, 2011 Historical performance is no guarantee of future results. *S&P 500 composite price returns **Reported earnings, also called ordinary earnings, are net income (after tax) from continuing operations calculated using generally accepted accounting principles, excluding discontinued operations and extraordinary items. Source: Bureau of Economic Analysis, Haver Analytics, Standard & Poor’s, and The Wall Street Journal

  22. Building Blocks of Growth + Income Price Growth Dividend Yield Earnings Growth Change in Price/Earnings + and Population Growth Productivity Growth + + Inflation

  23. US Productivity Growth Has Been Remarkably Consistent Output per Hour for All Persons Compound Return = 2% Through December 31, 2011 Historical performance is no guarantee of future results. Source: Bureau of Labor Statistics, FreeLunch.com and AllianceBernstein

  24. Suppose Growth Is 6% Population Growth Productivity Growth + + = Inflation Growth 3% 1% 2% 6% + + = For illustrative purposes only

  25. What the S&P 500 at 1,300 Implies Long-Term Expected Returns Under Two Scenarios Annualized Years to FinalP/E Dividend Earnings Scenario EPS Yield Growth* Return 20,000 Dow** Current Earnings, No Growth $104 8% 0% 12.5× 8% Infinite Current Earnings, Normal Growth $104 2% 6% 15.0× 9% 5 As of June 30, 2012 *Assumes constant payout ratio, so that dividends grow with earnings **Assumes Dow Jones Industrial Average continues to be roughly 10 times S&P 500 Source: Thomson I/B/E/S and AllianceBernstein

  26. Stock Market Multiples Tend to Rise as Interest Rates Fall Recent Years Have Been Exceptional 1970–June 2012 1970–2007 2008–June 2012 Average P/E: 17.6× June 2012 Trend Line S&P 500 data from Irrational Exuberance, Robert J. Shiller, Princeton University Press, 2000 and 2005; updated through June 2012 Source: Robert J. Shiller and AllianceBernstein

  27. What the S&P 500 at 1,300 Implies Long-Term Expected Returns Under Five Scenarios Annualized Years to FinalP/E Dividend Earnings Scenario EPS Yield Growth* Return 20,000 Dow** Current Earnings, No Growth $104 8% 0% 12.5× 8% Infinite Current Earnings, Normal Growth $104 2% 6% 15.0× 9% 5 Current Earnings, P/E Normalized $104 2% 6% 20.0× — 0 Normalized Margins, Normal Growth $74 2% 6% 17.5× 5% 10 Normalized Margins, Low Growth $74 2% 2% 17.5× 4% 20 As of June 30, 2012 *Assumes constant payout ratio, so that dividends grow with earnings **Assumes Dow Jones Industrial Average continues to be roughly 10 times S&P 500 Source: Thomson I/B/E/S and AllianceBernstein

  28. The Case for Dow 20,000 (S&P 2,000) Our View Today (July 2013) • Dow = 14,910* • S&P 500 = 1,606* *As of June 30, 2013 Source: Dow Jones, Standard & Poors and Bernstein

  29. The Odds of Success with Stocks Are Very High… S&P 500 Return Minus 10-Year Treasury ReturnPercent Average: 5.8 ? • Past 10 Years • Next 10 Years As of December 31, 2012 Based on S&P 500 annualized returns; includes all 10-year rolling periods when the S&P 500 lagged 10-year US Treasury bonds from 1901 through the beginning of the 2008 credit crunch; the average is for the green bars. Source: Global Financial Data, S&P and AllianceBernstein

  30. At Today’s Level, US Equities Are More Attractive than at Prior Peaks Third Time’s the Charm? S&P 500 Index Returns Through June 30, 2013Source: Bloomberg, Center for Research in Security Prices, Deutsche Bank, FactSet, MSCI, S&P and AllianceBernstein

  31. Even at Today’s Level, Equities Are More Attractive than at Previous Peaks S&P 500 Comparative Metrics Past performance does not guarantee future results. *Total debt less cash and cash equivalentsSource: FactSet and AllianceBernstein

  32. Rising Bond Yields Are Not Necessarily a Threat to Stocks One-Month Stock Returns: 1970–2012 Stock Performance and Treasury Yields: Jun 01–Dec 06 US Stocks (Right Scale) When Rates Rise from Low Levels* Stagnant Yields 10-YearTreasury Yields(Left Scale) Falling Yields RisingYields Historical analysis is not necessarily predictive of future results. Analysis based on 10-year government yields and equity returns for France, Germany, Japan, UK and US. *When starting yields are less than 4% Source: Barclays, Bloomberg, MSCI, Standard and Poor’s and AllianceBernstein

  33. Two Big Risks to Not Owning Enough Equities • Longevity • Inflation

  34. Today’s Retirement Confidence “If we take a late retirement and an early death, we’ll just squeak by.”

  35. Retirement: A Novel Idea in 1889… Life Expectancy 1889: Bismarck Launches Pensions (Germany) Retirement Age: 70 Source: Statistiska Centralbyrån, UN Population Division and US Census Bureau

  36. …a Key Component of the Welfare State by the 1930s… Life Expectancy 1930s: US Social Security System; Defined Benefit Plans 1889: Bismarck Launches Pensions (Germany) Retirement Age: 70 65 Source: Statistiska Centralbyrån, UN Population Division and US Census Bureau

  37. …a Basic Entitlement by 2000… Life Expectancy 1930s: US Social Security System; Defined Benefit Plans 1889: Bismarck Launches Pensions (Germany) Retirement Age: 70 65 1981: US 401(k) Plans Source: Statistiska Centralbyrån, UN Population Division and US Census Bureau

  38. …and a Growing Challenge in Coming Years Life Expectancy 1930s: US Social Security System; Defined Benefit Plans 1889: Bismarck Launches Pensions (Germany) ??? Retirement Age: 70 ??? 65 1981: US 401(k) Plans Source: Statistiska Centralbyrån, UN Population Division and US Census Bureau

  39. Life Expectancy Keeps Climbing Total US Population Life Expectancy in Years As of March 31, 2013Source: US Centers for Disease Control and Prevention and Columbia University Mailman School of Public Health, “New Research Predicts Longer Life Expectancy for Americans,” 2009

  40. People Are Living Longer 85 92 50% chance of living beyond 25% beyond Male Age 65 88 94 50% chance of living beyond 25% beyond Female Age 65 92 97 50% chance of living beyond 25% beyond Couple Age 65 Source: Society of Actuaries RP-2000 Mortality Tables

  41. 26 37 49 61 73 85 98 12 Stocks Have Won over the Long Term Annualized Returns 1926–2012 Stocks: $3,518 Stocks 9.8% Bonds 5.6 T-Bills 3.7 Inflation 3.0 Bonds: $110 T-Bills: $24 Inflation: $13 $1 Logscale Past performance does not guarantee future results. US stocks are represented by the S&P 500; bonds are represented by US long-term government bonds from 1926 to January 1962, US five-year Treasuries from February 1962 to 1975 and Barclays US Aggregate Bond Index 1976 and thereafter; T-bills are represented by three-month Treasury bills; and inflation is represented by the Consumer Price Index.Source: Barclays; Bureau of Labor Statistics; Center for Research in Security Prices; Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business (January 1976); Standard and Poor’s; and AllianceBernstein

  42. Stock Returns Have Been Volatile over the Short Term S&P 500 Annual Returns Average12% Best Year: 54% Worst Year: (43)% Past performance does not guarantee future results or a range of results. Through December 31, 2012 Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns”, University of Chicago Press Journal of Business (January 1976); Standard & Poor’s; and AllianceBernstein

  43. Five-Year Losses Have Been Rare S&P 500 Rolling Five-Year Periods (Annualized) Average10% Best Case: 29% Worst Case: (12)% 26 38 50 62 74 86 98 12 Past performance does not guarantee future results or a range of results. Through December 31, 2012 Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business(January 1976); Standard & Poor’s; and AllianceBernstein 39

  44. Stocks Have Not Lost Money over the Long Term S&P 500: Rolling Periods (Annualized) 15 Years Average11% Best Case: 19% Worst Case: 1% Past performance does not guarantee future results or a range of results. Through December 31, 2012 Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns”, University of Chicago Press Journal of Business (January 1976); Standard & Poor’s; and AllianceBernstein

  45. Stocks Have Not Lost Money over the Long Term S&P 500: Rolling Periods (Annualized) 20 Years Average11% Best Case: 18% Worst Case: 3% Past performance does not guarantee future results or a range of results. Through December 31, 2012 Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns”, University of Chicago Press Journal of Business (January 1976); Standard & Poor’s; and AllianceBernstein

  46. Stocks Have Not Lost Money over the Long Term S&P 500: Rolling Periods (Annualized) 30 Years Average11% Best Case: 14% Worst Case: 8% Past performance does not guarantee future results or a range of results. Through December 31, 2012 Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns”, University of Chicago Press Journal of Business (January 1976); Standard & Poor’s; and AllianceBernstein

  47. Annualized Inflation (CPI) Rates by Decade: 1930s (1930–1939) 1940s (1940–1949) 1950s (1950–1959) 1960s (1960–1969) 1970s (1970–1979) 1980s (1980–1989) 1990s (1990–1999) 2000s (2000–2009) -2.0% 5.4% 2.2% 2.5% 7.4% 5.1% 2.9% 2.5% ? 2010s (2010–2019) Source: U.S. Department of Labor: bureau of Labor Statistics

  48. Inflation Can Undermine Traditional Stock/Bond Portfolios Inflation and Negative 60/40 Real Returns U.S. Rolling 10-Year WWI Spike WWII Spike 1970s Spike Inflation Negative 10yr 60/40 Real Returns Past performance does not guarantee future results. This is a hypothetical example and is not representative of any AllianceBernstein product. An investor cannot invest directly in an index or average and they do not include sales charges or operating expenses associated with an investment in a mutual fund, which would reduce total returns. The portfolio comprises 60% stocks and 40% bonds; stocks are represented by the S&P 500 (with a Global Financial Data extension) and bonds by 10-year Treasuries. Inflation is measured by US CPI, US City Average, all items, not seasonally adjusted, through 12/2009 Source: Global Financial Data (GFD), US Bureau of Labor Statistics (BLS), and AllianceBernstein

  49. MoreReal More Protection Liabilities Less Protection MoreNominal Higher Lower Risk Tolerance Key Decision for Buyers of Real Investments How Much? Source: AllianceBernstein

  50. Real Investment Allocation Varies by Investor Typeand Risk Tolerance Inflation Protected Allocation Percent Individual Investors Pension Plans Pension (Benefits Indexed to Inflation) Late-Retirement Investor with Excess Capital At- Retirement Pension (No Benefits Indexation) Working Age Source: AllianceBernstein

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