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A Perspective on Markets
There is no guarantee that any forecasts or opinions in this material will be realized. Information should not be construed as investment advice.
2
Topics
• Lousy Market Returns
• Compounded by Poor Investor Decisions
• Have We Been Here Before?
• Okay….What Should We Do Now?
3
Nowhere to HideYTD Returns - August 2002
-45
-40
-35
-30
-25
-15
-10
5
0
5%
-43%
TechnologyGrowth
-30%
Small Cap
-25%
Large CapGrowth
-13%
Large CapValue
-11%
International Small CapValue
-9%
1%
Cash
7%
Bonds
Past performance is no guarantee of future results. Technology is represented by the Lipper Science & Technology Funds Average, measuring the average performance of funds in the Lipper science & technology category. Large Cap Growth is represented by the Russell 1000 Growth index, which contains those Russell 1000 securities with a greater-than-average growth orientation and higher price-to-book and price-to-earnings ratios. Small Cap Growth is represented by the Russell 2000 Growth Index which measures the performance of those Russell 2000 securities with a greater than average growth orientation. International is represented by the MSCI EAFE index which measures the performance of stock markets in developed countries in Europe, Australasia and the Far East. Large Cap Value is represented by the Russell 1000 Value Index which measures the performance of those Russell 1000 companies with a less-than-average growth orientation and lower price-to-earnings ratios. Cash is represented by the 90-day Treasury Bill. Bonds are represented by the Lehman Brothers Aggregate Index, comprised of all US investment-grade fixed-rate bonds. Small Cap Value is represented by the Russell 2000 Value index which contains those Russell 2000 companies with a less-than-average growth orientation and lower price-to-earnings ratios. All indices mentioned are unmanaged. An investor cannot invest in an index and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
4
Nowhere To Hide15 Weeks ended August 31, 2002
DJIA
S&P 500
-16.3%
All 30 Stocks Are Down
NASDAQ 100
-17.2%
456/500 Stocks Are Down
-28.9%
92/100 Stocks Are Down
Past performance is no guarantee of future results. DJIA is the Dow Jones Industrial Average which contains 30 stocks widely held by both individual and institutional investors. These 30 stocks represent approx. one-fifth of the value of all US stocks. The S&P 500 stock index is comprised of 500 US stocks and is an indicator of the performance of the overall US stock market. The Nasdaq 100 Index represents the largest and most active non-financial domestic and international issues listed on the Nasdaq Stock Market based on market capitalization. All indices mentioned are unmanaged. An investor cannot invest in an index and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
5
Short Term, Investors Have Suffered -
-15%-17%
-15%
8%
-2%
-11%
9%
0%2%
-2%
8%9%10%
4% 7%
-10%
-40%
-50
-40
-30
-20
-10
0
10
20%
Technology US Small Cap US Large Cap International Bonds
Long Term, Investors Still Positive
-26%
10%
1Yr 3Yr 10Yr
Through August 31, 2002. Past performance is no guarantee of future results. Technology is represented by the Lipper Science & Technology Funds Average, measuring the average performance of funds in the Lipper science & technology category. US Small Cap is represented by the Russell 2000 Index which is comprised of the smallest 2,000 companies in the broad-market Russell 3000 Index. US Large Cap is represented by the Russell 1000 Index which contains those largest securities in the Russell 3000 Index. International is represented by the MSCI EAFE index which measures the performance of markets in developed regions of Europe, Australasia and the Far East. Bonds are represented by the Lehman Brother s Aggregate, comprised of US investment-grade fixed-rate bonds. All indices mentioned are unmanaged. An investor cannot invest in an index, and its results are not indicative of the performance of any specific investment, including an Alliance mutual fund.
5Yr
-5%
There is no guarantee that any forecasts or opinions in this material will be realized. Information should not be construed as investment advice.
Lousy Market Returns
Compounded by Poor Investor Decisions
7
- 25%
-22%
39%30%
Investors Chase Returns Large Cap Growth
* Projected 2002 net mutual fund flows off of May 2002 base, performance as of 8/31/02. Source: Financial Research Corporation.Past performance is no guarantee of future results. Large Cap Growth is represented by the Russell 1000 Growth Index. The unmanaged Russell 1000 Growth Index is comprised of those stocks in the larger Russell 1000 Index with a greater-than-average growth orientation and higher-than average price-to-earnings ratios. An investor cannot invest in an index and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
33%
-20%
23%
1996 1997 1998 1999 2000 2001
-60
-40
-20
0
20
40
60
80
100
120%
(60)
(40)
(20)
0
20
40
60
80
100
$120
Returns Cash Flows($ billions)2002*
Net Fund Flows
8
16%
Investors Chase Returns Large Cap Value
7% 7%
-13%
22%
35%
-6%
-60
-40
-20
0
20
40
60
80
100
120%
(60)
(40)
(20)
0
20
40
60
80
100
$1201996 1997 1998 1999 2000 2001
Returns Cash Flows($ billions)2002*
* Projected 2002 net mutual fund flows off of May 2002 base, performance as of 8/31/02. Source: Financial Research Corporation.Past performance is no guarantee of future results. Large Cap Value is represented by the Russell 1000 Value Index. The unmanaged Russell 1000 Value Index is comprised of those stocks in the larger Russell 1000 Index with a less-than-average growth orientation and lower-than average price-to-earnings ratios. An investor cannot invest in an index and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
Net Fund Flows
Investors Chase Returns Large Growth & Large Value
-60
-40
-20
0
20
40
60
80
100
120%
(60)
(40)
(20)
0
20
40
60
80
100
$1201996 1997 1998 1999 2000 2001
Returns Cash Flows($ billions)
9
2002*
* Projected 2002 net mutual fund flows off of May 2002 base, performance as of 8/31/02. Source: Financial Research Corporation.Past performance is no guarantee of future results. Large Cap Value is represented by the Russell 1000 Value Index. The Russell 1000 Value Index is comprised of those stocks in the larger Russell 1000 Index with a less-than-average growth orientation and lower-than average price-to-earnings ratios. Large Cap Growth is represented by the Russell 1000 Growth Index. The Russell 1000 Growth Index is comprised of those stocks in the larger Russell 1000 Index with a greater-than-average growth orientation and higher-than average price-to-earnings ratios. Both indices are unmanaged. An investor cannot invest in an index and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
10
4%
Investors Chase Returns Fixed Income
12%7%
-1%
9%10% 8%
-60
-40
-20
0
20
40
60
80
100
120%
(60)
(40)
(20)
0
20
40
60
80
100
$1201996 1997 1998 1999 2000 2001
Returns Cash Flows($ billions)2002*
* Projected 2002 net mutual fund flows off of May 2002 base, performance as of 8/31/02. Source: Financial Research Corporation.Past performance is no guarantee of future results. Fixed Income is represented by the Lehman Brothers Aggregate Index. This unmanaged Index is comprised of US investment grade fixed-rate bonds and Is an indicator of the performance of the overall US bond market. An investor cannot invest in an index and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
Net Fund Flows
11
Investors Continue To Chase Returns... 76% of June 2002 Net Mutual Fund Flows Went To Fixed Income
Source: Financial Research Corporation.
1 Intermediate-Term Bond $4,538
2 Intermediate-Term Government $2,454
3 Foreign Stock $2,068
4 Short-Term Bond $1,553
5 Ultrashort Bond $1,378
6 Short-Term Government $1,023
7 Muni Short $994
8 Specialty Real Estate $718
9 Domestic Hybrid $621
10 International Hybrid $333
CategoryRank June 2002
15% International
Equity
9%
U.S. Equity
76% Fixed Income
12
The Bottom Line...
• Bad Markets
• Bad Decisions
There is no guarantee that any forecasts or opinions in this material will be realized. Information should not be construed as investment advice.
Lousy Markets Have Happened Before(Maybe We’ll Learn Something?)
14
$10,000
$9,090
$8,010
$6,235
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
August 31, 20021999 2000 2001
$
Internet Bubble - What’s Next?$10,000 Invested in S&P 500 Index - December 1999
?
Past performance is no guarantee of future results. The S&P 500 stock index is comprised of 500 US stocks and is an indicator of the performance of the overall US stock market. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
15
Historical Points of Reference Only 3 Other Times When the S&P 500 Has Been Down 2 or More Years in A Row
1929 30
3132
Duration Context
4 Years The Great Depression
3 Years World War II
2 Years Recession - Oil Crisis
2+ Years? Internet Bubble
197374
19394041
200001
02
Years
Past performance is no guarantee of future results.
16
Historically, Patience Paid Off $10,000 Invested in S&P 500 Index
The Great Depression
Past performance is no guarantee of future results. The S&P 500 stock index is comprised of 500 US stocks and is an indicator of the performance of the overall US stock market. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
Market BottomJune 1, 1932
$6,900
$10,000
$2,200
$5,400
$10,700
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
1928 1929 1930 1931 1932 1933 1934 1935 1936
$
17
Investor Experience - The Great Depression (1928-36)
Did Nothing Recovered in 4 Yrs 4 mos
Bought More Recovered in 3 Months($10,000 additional investment)
Sold Out Realized 78% Loss
1-Yr Recovery From Bottom + 137.6%
Market Bottom - June 1, 1932
Past performance is no guarantee of future results.
18
Historically, Patience Paid Off $10,000 Invested in S&P 500 Index
World War II
Past performance is no guarantee of future results. The S&P 500 stock index is comprised of 500 US stocks and is an indicator of the performance of the overall US stock market. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
Market BottomApril 28, 1942
$12,000
$6,900
$10,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
1938 1939 1940 1941 1942 1943
$
19
Investor Experience - World War II (1938-46)
Did Nothing Recovered in 9 months
Bought More Recovered in 4 Months($10,000 additional investment)
Sold Out Realized 31% Loss
1-Yr Recovery From Bottom + 64.3%
Market Bottom - April 28, 1942
Past performance is no guarantee of future results.
20
Historically, Patience Paid Off $10,000 Invested in S&P 500 Index
Recession - Oil Crisis
Market BottomOctober 3, 1974
Past performance is no guarantee of future results. The S&P 500 stock index is comprised of 500 US stocks and is an indicator of the performance of the overall US stock market. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
$10,700
$5,600
$10,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
1972 1973 1974 1975 1976
$
21
Investor Experience - Oil Crisis (1972-76)
Did Nothing Recovered in 1 yr 8 mos
Bought More Recovered in 5 Months($10,000 additional investment)
Sold Out Realized 44% Loss
1-Yr Recovery From Bottom + 44.4%
Market Bottom - October 3, 1974
Past performance is no guarantee of future results.
22
Investors Who Time...
12 Months After The Bottom
June 1933
April 1942
October 1975
One Year Return
137.6%
64.3%
44.4%
Miss The Recovery
Past performance is no guarantee of future results.
• Picking the Bottom is Hard!
• Close is Good Enough!
23
24
Investing Near the Bottom -- Short-Term RecoveryS&P Cumulative Returns From Market Bottom
Past performance is no guarantee of future results. The S&P 500 stock index is comprised of 500 US stocks and is an indicator of the performance of the overall US stock market. An investor cannot invest in an index and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
The Great Depression 12/31 - 6/33 6/32 - 6/33 12/32 - 6/33
48% 50%
138%
1 Yr Return From Bottom
Return From 6 Months
Before Bottom
Return From6 Months
After Bottom
World War II
10/41 - 4/43 4/42 - 4/43 10/42 - 4/43
43% 27%
64%
Oil Crisis 4/74 - 10/75 10/74 - 10/75 4/75 - 10/75
16% 8%
44%
25
World War II
10/41 - 4/47 4/42 - 4/47 10/42 - 4/47
98% 91%148%
Investing Near the Bottom -- Long-Term RecoveryS&P Cumulative Returns From Market Bottom
Past performance is no guarantee of future results. The S&P 500 stock index is comprised of 500 US stocks and is an indicator of the performance of the overall US stock market. An investor cannot invest in an index and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
The Great Depression 12/31 - 6/37 6/32 - 6/37 12/32 - 6/37
127% 192%
364%
5 Yr Return From Market Bottom
Return From 6 Months
Before Bottom
Return From6 Months
After Bottom
Oil Crisis 4/74 - 10/79 10/74 - 10/79 4/75 - 10/79
51% 66%123%
There is no guarantee that any forecasts or opinions in this material will be realized. Information should not be construed as investment advice.
Okay…What Should We Do?
27
What Should We Do?
• Establish a Plan Suited to Your Needs
• Stick With It
• Systematically Invest and Rebalance
28
Professional Advice and Asset AllocationCase Study: Typical Investor Allocation 1997
Bonds20%
Technology10%
Large Growth
25%
Small Cap10%
Large Value25%
International Equities
10%
The following study is hypothetical and does not necessarily represent the actual experience of any investor.
29
Case Study: $100,000 Initial Investment & $10,000 Annual Contribution
Investor A: Rebalanced...
$179,059
Investor B: Chased Returns...
$153,569
Capital Invested
$150,000
Aug 2002
100,000
150,000
200,000
1996 1997 1998 1999 2000 2001Source: Financial Research Corporation & Lipper, Inc. This case study is hypothetical and doesn’t necessarily represent the experience of any investor. This example assumes the following: Investor A invested $100,000 on January 1, 1997, $10,000 at the beginning of each of the next five years, and annually rebalanced according the following asset allocation: 10% Technology Equity, 20% Bonds, 10% International Equity, 25% Large Cap Value Equity, 10% Small Cap Equity, and 25% Large Cap Growth Equity. Investor B invested $100,000 on January 1, 1997, according to the following asset allocation: 10% Technology Equity, 20% Bonds, 10% International Equity, 25% Large Cap Value Equity, 10% Small Cap Equity, and 25% Large Cap Growth Equity. At the beginning of each of the next five years, Investor B invested $10,000 per year and annually rebalanced based on the percentage of mutual fund net flows into each category. Technology is represented by the Morningstar Category Specialty Technology Average; Bonds are represented by the Lehman Brothers Aggregate Index; International Equity is represented by the MSCI EAFE; Large Cap Value is represented by the Russell 1000 Value Index; Small Cap Equity is represented by the Russell 2000 Index; Large Cap Growth is represented by the Russell 1000 Growth Index. An investor cannot invest in an index and its results are not indicative of any specific investment, including an Alliance mutual fund.
30
Lessons Learned
• Asset Allocation Matters
• Investing is a Long Term Proposition
• Chasing Returns is a Losers Game
• A Paper Loss is a Paper Loss
• Stocks Have Outperformed Bonds, Cash and InflationOver Long Periods of Time
• Recoveries are Hard to Time
• Miss the Recovery and You Miss the Boat
31
50
60
70
80
90
100
Week1
Week16
Week31
Week46
Week61
Week76
Week91
Week106
Week121
Week136
Week151
Week166
Week181
Week196
Week211
Week226
Week241
Week256
January 1973- December 1976 March 2000-Present
?
1973-1976
Have We Been Here Before?S&P 500 Peak and Troughs- 1970’s and 1990’s
Past performance is no guarantee of future results. The S&P 500 stock index is comprised of 500 US stocks and is an indicator of the performance of the overall US stock market. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
32
Are The Fundamentals Intact?Economic Indicators at Bottom in 1970’s and Today
Fed Funds Rate
Federal Funds Rate Source: National Bureau Economic Research
Oct ‘74
10.1%
1.7%
Jul ‘02
Oil Prices
Real Crude Oil Prices (WTI SPOT) in US. $ 2001Source: Merrill Lynch
$43.6
$23.7
Oct ‘74 July ‘02
Unemployment
Civilian Unemployment Rate Source: National Bureau Economic Research
6.0%5.9%
Oct ‘74 Jul ‘02
Inflation
Consumer Price Index Source: National Bureau Economic Research & Alliance Capital
11.9%
Oct ‘74 July ‘02
2.5%
33
What To Advise Clients To Do?
• Do Nothing
• Move To Cash
• Buy More…Asset Allocate
34
50
60
70
80
90
100
Week1
Week16
Week31
Week46
Week61
Week76
Week91
Week106
Week121
Week136
Week151
Week166
Week181
Week196
Week211
Week226
Week241
Week256
January 1973- December 1976 March 2000-Present
1973-1976
Have We Been Here Before?S&P 500 Peak and Troughs- 1970’s and 1990’s
Past performance is no guarantee of future results. The S&P 500 stock index is comprised of 500 US stocks and is an indicator of the performance of the overall US stock market. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment, including an Alliance mutual fund.
?
35
The Wall Street JournalAugust 8th, 2002
36
There is no guarantee that any forecasts or opinions contained in this material will be realized.This information should not be construed as investment advice.
A Word About Risk
Investment Products Offered:
Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed
Alliance Fund Distributors, Inc., the principal underwriter of Alliance mutual funds and an affiliate of Alliance Capital Management, L.P.,
the manager of the funds, is a member of the NASD.