File Nos. 333-37177
811-08403
It is proposed that this filing will become effective (check appropriate box):
|_| immediately upon filing pursuant to paragraph (b) X
|X| on January 31, 2014 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|_| on (date) pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| on (date) pursuant to paragraph (a)(2) of Rule 485.
____This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
This Post-Effective Amendment No. 27 relates to the Class I shares of the
AllianceBernstein Global Real Estate Investment Fund II. No information
contained in the Registrant's Registration Statement relating to the Class II
shares of the AllianceBernstein Global Real Estate Investment Fund II is amended
or superseded hereby.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.
ADDITIONAL INFORMATION ABOUT THE FUND'S RISKS AND INVESTMENTS
This section of the Prospectus provides additional information about the Fund's
investment practices and related risks. Most of these investment practices are
discretionary, which means that the Adviser may or may not decide to use them.
This Prospectus does not describe all of the Fund's investment practices and
additional information about the Fund's risks and investments can be found in
the Fund's Statement of Additional Information ("SAI").
DERIVATIVES
The Fund may, but is not required to, use derivatives for hedging or other risk
management purposes or as part of its investment strategies. Derivatives are
financial contracts whose value depends on, or is derived from, the value of an
underlying asset, reference rate or index. The Fund may use derivatives to earn
income and enhance returns, to hedge or adjust the risk profile of its
investments, to replace more traditional direct investments and to obtain
exposure to otherwise inaccessible markets.
There are four principal types of derivatives--options, futures, forwards and
swaps--each of which is described below. Derivatives include listed and cleared
transactions where the Fund's derivative trade counterparty is an exchange or
clearinghouse and non-cleared, bilateral "over-the-counter" transactions, where
the Fund's derivative trade counterparty is a financial institution.
Exchange-traded or cleared derivatives transactions tend to be more liquid and
subject to less counterparty credit risk than those that are privately
negotiated.
The Fund's use of derivatives may involve risks that are different from, or
possibly greater than, the risks associated with investing directly in
securities or other more traditional instruments. These risks include the risk
that the value of a derivative instrument may not correlate perfectly, or at
all, with the value of the assets, reference rates, or indices that they are
designed to track. Other risks include: the possible absence of a liquid
secondary market for a particular instrument and possible exchange-imposed
price fluctuation limits, either of which may make it difficult or impossible
to close out an unfavorable position; and the risk that the counterparty will
not perform its obligations. Certain derivatives may have a leverage component
and involve leverage risk. Adverse changes in the value or level of the
underlying asset, note or index can result in a loss substantially greater than
the Fund's investment (in some cases, the potential loss is unlimited).
The Fund's investments in derivatives may include, but are not limited to, the
following:
. FORWARD CONTRACTS. A forward contract is an agreement that obligates one
party to buy, and the other party to sell, a specific quantity of an
underlying commodity or other tangible asset for an agreed-upon price at a
future date. A forward contract generally is settled by physical delivery of
the commodity or tangible asset to an agreed-upon location (rather than
settled by cash), or is rolled forward into a new forward contract or, in
the case of a non-deliverable forward, by a cash payment at maturity. The
Fund's investments in forward contracts may include the following:
- Forward Currency Exchange Contracts. The Fund may purchase or sell forward
currency exchange contracts for hedging purposes to minimize the risk from
adverse changes in the relationship between the U.S. Dollar and other
currencies or for non-hedging purposes as a means of making direct
investments in foreign currencies, as described below under "Currency
Transactions". The Fund, for example, may enter into a forward contract as a
transaction hedge (to "lock in" the U.S. Dollar price of a non-U.S. Dollar
security), as a position hedge (to protect the value of securities the Fund
owns that are denominated in a foreign currency against substantial changes
in the value of the foreign currency) or as a cross-hedge (to protect the
value of securities the Fund owns that are denominated in a foreign currency
against substantial changes in the value of that foreign currency by
entering into a forward contract for a different foreign currency that is
expected to change in the same direction as the currency in which the
securities are denominated).
. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A futures contract is a
standardized, exchange-traded agreement that obligates the buyer to buy and
the seller to sell a specified quantity of an underlying asset (or settle
for cash the value of a contract based on an underlying asset, rate or
index) at a specific price on the contract maturity date. Options on futures
contracts are options that call for the delivery of futures contracts upon
exercise. The Fund may purchase or sell futures contracts and options
thereon to hedge against changes in interest rates, securities (through
index futures or options) or currencies. The Fund may also purchase or sell
futures contracts for foreign currencies or options thereon for non-hedging
purposes as a means of making direct investments in foreign currencies, as
described below under "Other Derivatives and Strategies--Currency
Transactions".
. OPTIONS. An option is an agreement that, for a premium payment or fee, gives
the option holder (the buyer) the right but not the obligation to buy (a
"call option") or sell (a "put option") the underlying asset (or settle for
cash an amount based on an underlying asset, rate or index) at a specified
price (the exercise price) during a period of time or on a specified date.
Investments in options are considered speculative. The Fund may lose the
premium paid for them if the price of the underlying security or other asset
decreased or remained the same (in the case of a call option) or increased
or remained the same (in the case of a put option). If a put or call option
purchased by the Fund were permitted to expire without being sold or
exercised, its premium would represent a loss to the Fund. The Fund's
investments in options include the following:
- Options on Foreign Currencies. The Fund may invest in options on foreign
currencies that are privately-negotiated
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or traded on U.S. or foreign exchanges for hedging purposes to protect
against declines in the U.S. Dollar value of foreign currency denominated
securities held by the Fund and against increases in the U.S. Dollar cost of
securities to be acquired. The purchase of an option on a foreign currency
may constitute an effective hedge against fluctuations in exchange rates,
although if rates move adversely, the Fund may forfeit the entire amount of
the premium plus related transaction costs. The Fund may also invest in
options on foreign currencies for non-hedging purposes as a means of making
direct investments in foreign currencies, as described below under "Other
Derivatives and Strategies--Currency Transactions".
- Options on Securities. The Fund may purchase or write a put or call option
on securities. The Fund may write covered options, which means writing an
option on securities that the Fund owns, and uncovered options.
- Options on Securities Indices. An option on a securities index is similar to
an option on a security except that, rather than taking or making delivery
of a security at a specified price, an option on a securities index gives
the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the chosen index is greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the
option.
- Other Option Strategies. In an effort to earn extra income, to adjust
exposure to individual securities or markets, or to protect all or a portion
of its portfolio from a decline in value, sometimes within certain ranges,
the Fund may use option strategies such as the concurrent purchase of a call
or put option, including on individual securities and stock indices, futures
contracts (including on individual securities and stock indices) or shares
of ETFs at one strike price and the writing of a call or put option on an
individual security, the same stock index, futures contract or ETF at a
higher strike price in the case of a call option or at a lower strike price
in the case of a put option. The maximum profit from this strategy would
result for the call options from an increase in the value of an individual
security, the stock index, futures contract or ETF above the higher strike
price or for the put options the decline in the value of the individual
security, stock index, futures contract or ETF below the lower strike price.
If the price of the individual security, stock index, futures contract or
ETF declines in the case of the call option or increases in the case of the
put option, the Fund has the risk of losing the entire amount paid for the
call or put options.
. SWAP TRANSACTIONS--A swap is an agreement that obligates two parties to
exchange a series of cash flows at specified intervals (payment dates) based
upon or calculated by reference to changes in specified prices or rates
(e.g., interest rates in the case of interest rate swaps, currency exchange
rates in the case of currency swaps) for a specified amount of an underlying
asset (the "notional" principal amount). Most swaps are entered into on a
net basis (i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments). Generally, the notional principal amount is used solely to
calculate the payment stream, but is not exchanged. Certain standardized
swaps, including certain interest rate swaps and credit default swaps, are
(or soon will be) subject to mandatory central clearing. Cleared swaps are
transacted through futures commission merchants ("FCMs") that are members of
central clearinghouses with the clearinghouse serving as central
counterparty, similar to transactions in futures contracts. Portfolios post
initial and variation margin to support their obligations under cleared
swaps by making payments to their clearing member FCMs. Central clearing is
expected to reduce counterparty credit risks and increase liquidity, but
central clearing does not make swap transactions risk free. Centralized
clearing will be required for additional categories of swaps on a phased-in
basis based on Commodity Futures Trading Commission ("CFTC") approval of
contracts for central clearing. Bilateral swap agreements are two-party
contracts entered into primarily by institutional investors and are not
cleared through a third party.
The Fund's investments in swap transactions include the following:
- Currency Swaps. The Fund may invest in currency swaps for hedging purposes
in an attempt to protect against adverse changes in exchange rates between
the U.S. Dollar and other currencies or for non-hedging purposes as a means
of making direct investments in foreign currencies, as described below under
"Other Derivatives and Strategies--Currency Transactions". Currency swaps
involve the exchange by the Fund with another party of a series of payments
in specified currencies. Currency swaps may involve the exchange of actual
principal amounts of currencies by the counterparties at the initiation and
again upon the termination of the transaction. Currency swaps may be
bilateral and privately negotiated, with the Fund expecting to achieve an
acceptable degree of correlation between its portfolio investments and its
currency swap positions. The Fund will not enter into any currency swap
unless the credit quality of the unsecured senior debt or the claims-paying
ability of the counterparty thereto is rated in the highest short-term
rating category of at least one nationally recognized statistical rating
organization ("NRSRO") at the time of entering into the transaction.
- Credit Default Swap Agreements. The "buyer" in a credit default swap
contract is obligated to pay the "seller" a periodic stream of payments over
the term of the contract in return for a contingent payment upon the
occurrence of a credit event with respect to an underlying reference
obligation. Generally, a credit event means bankruptcy, failure to pay,
obligation acceleration or restructuring. The Fund may be either the buyer
or seller in the transaction. If the Fund is a seller, the Fund receives a
fixed rate of income throughout the term of the contract,
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which typically is between one month and ten years, provided that no credit
event occurs. If a credit event occurs, the Fund typically must pay the
contingent payment to the buyer, which will be either: (i) the "par value"
(face amount) of the reference obligation in which case the Fund will
receive the reference obligation in return or (ii) an amount equal to the
difference between the par value and the current market value of the
reference obligation. The periodic payments received by the Fund, coupled
with the value of any reference obligation received, may be less than the
full amount it pays to the buyer, resulting in a loss to the Fund. If the
Fund is a buyer and no credit event occurs, the Fund will lose its periodic
stream of payments over the term of the contract. However, if a credit event
occurs, the buyer typically receives full notional value for a reference
obligation that may have little or no value.
Credit default swaps may involve greater risks than if the Fund had invested in
the reference obligation directly. Credit default swaps are subject to general
market risk, liquidity risk and credit risk.
. OTHER DERIVATIVES AND STRATEGIES
- Currency Transactions. The Fund may invest in non-U.S. Dollar-denominated
securities on a currency hedged or unhedged basis. The Adviser may actively
manage the Fund's currency exposures and 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 options. The Adviser 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).
- Synthetic Foreign Equity Securities. The Fund may invest in different types
of derivatives generally referred to as synthetic foreign equity securities.
These securities may include international warrants or local access
products. International warrants are financial instruments issued by banks
or other financial institutions, which may or may not be traded on a foreign
exchange. International warrants are a form of derivative security that may
give holders the right to buy or sell an underlying security or a basket of
securities representing an index from or to the issuer of the warrant for a
particular price or may entitle holders to receive a cash payment relating
to the value of the underlying security or index, in each case upon exercise
by the Fund. Local access products are similar to options in that they are
exercisable by the holder for an underlying security or a cash payment based
upon the value of that security, but are generally exercisable over a longer
term than typical options. These types of instruments may be American style,
which means that they can be exercised at any time on or before the
expiration date of the international warrant, or European style, which means
that they may be exercised only on the expiration date.
Other types of synthetic foreign equity securities in which the Fund may
invest include covered warrants and low exercise price warrants. Covered
warrants entitle the holder to purchase from the issuer, typically a
financial institution, upon exercise, common stock of an international
company or receive a cash payment (generally in U.S. Dollars). The issuer of
the covered warrants usually owns the underlying security or has a
mechanism, such as owning equity warrants on the underlying securities,
through which it can obtain the underlying securities. The cash payment is
calculated according to a predetermined formula, which is generally based on
the difference between the value of the underlying security on the date of
exercise and the strike price. Low exercise price warrants are warrants with
an exercise price that is very low relative to the market price of the
underlying instrument at the time of issue (e.g., one cent or less). The
buyer of a low exercise price warrant effectively pays the full value of the
underlying common stock at the outset. In the case of any exercise of
warrants, there may be a time delay between the time a holder of warrants
gives instructions to exercise and the time the price of the common stock
relating to exercise or the settlement date is determined, during which time
the price of the underlying security could change significantly. In
addition, the exercise or settlement date of the warrants may be affected by
certain market disruption events, such as difficulties relating to the
exchange of a local currency into U.S. Dollars, the imposition of capital
controls by a local jurisdiction or changes in the laws relating to foreign
investments. These events could lead to a change in the exercise date or
settlement currency of the warrants, or postponement of the settlement date.
In some cases, if the market disruption events continue for a certain period
of time, the warrants may become worthless, resulting in a total loss of the
purchase price of the warrants.
The Fund will acquire synthetic foreign equity securities issued by entities
deemed to be creditworthy by the Adviser, which will monitor the
creditworthiness of the issuers on an ongoing basis. Investments in these
instruments involve the risk that the issuer of the instrument may default
on its obligation to deliver the underlying security or cash in lieu
thereof. These instruments may also be subject to liquidity risk because
there may be a limited secondary market for trading the warrants. They are
also subject, like other investments in foreign securities, to foreign
(non-U.S.) risk and currency risk.
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CONVERTIBLE SECURITIES
Prior to conversion, convertible securities have the same general
characteristics as non-convertible debt securities, which generally provide a
stable stream of income with generally higher yields than those of equity
securities of the same or similar issuers. The price of a convertible security
will normally vary with changes in the price of the underlying equity security,
although the higher yield tends to make the convertible security less volatile
than the underlying equity security. As with debt securities, the market value
of convertible securities tends to decrease as interest rates rise and increase
as interest rates decline. While convertible securities generally offer lower
interest or dividend yields than non-convertible debt securities of similar
quality, they offer investors the potential to benefit from increases in the
market prices of the underlying common stock. Convertible debt securities that
are rated Baa3 or lower by Moody's Investors Service, Inc. ("Moody's") or BBB-
or lower by Standard & Poor's Rating Services ("S&P") or Fitch Ratings and
comparable unrated securities may share some or all of the risks of debt
securities with those ratings.
FORWARD COMMITMENTS
Forward commitments for the purchase or sale of securities may include
purchases on a "when-issued" basis or purchases or sales on a "delayed
delivery" basis. In some cases, a forward commitment may be conditioned upon
the occurrence of a subsequent event, such as approval and consummation of a
merger, corporate reorganization or debt restructuring (i.e., a "when, as and
if issued" trade).
The Fund may invest significantly in TBA-mortgaged-backed securities. A TBA, or
"To Be Announced," trade represents a contract for the purchase or sale of
mortgage-backed securities to be delivered at a future agreed-upon date;
however, the specific mortgage pool numbers or the number of pools that will be
delivered to fulfill the trade obligation or terms of the contract are unknown
at the time of the trade. Mortgage pools (including fixed rate or variable rate
mortgages) guaranteed by the Government National Mortgage Association, or GNMA,
the Federal National Mortgage Association, or FNMA, or the Federal Home Loan
Mortgage Corporation, or FHLMC, are subsequently allocated to the TBA
transactions.
When forward commitments are negotiated, the price is fixed at the time the
commitment is made, but payment for and delivery of the securities take place
at a later date. Securities purchased or sold under a forward commitment are
subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date. There is the risk of loss if the value
of either a purchased security declines before the settlement date or the
security sold increases before the settlement date. The use of forward
commitments helps the Fund to protect against anticipated changes in interest
rates and prices.
ILLIQUID SECURITIES
Under current Securities and Exchange Commission (the "Commission") guidelines,
the Fund limits its investments in illiquid securities to 15% of its net
assets. The term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount the Fund has valued the securities. The Fund may not
be able to sell such securities and may not be able to realize their full value
upon sale. Restricted securities (securities subject to legal or contractual
restrictions on resale) may be illiquid. Some restricted securities (such as
securities issued pursuant to Rule 144A under the Securities Act of 1933 or
certain commercial paper) may be treated as liquid, although they may be less
liquid than registered securities traded on established secondary markets.
INVESTMENT IN EXCHANGE-TRADED FUNDS AND OTHER INVESTMENT COMPANIES
The Fund may invest in shares of ETFs, subject to the restrictions and
limitations of the Investment Company Act of 1940 ("1940 Act") or any
applicable rules, exemptive orders or regulatory guidance thereunder. ETFs are
pooled investment vehicles, which may be managed or unmanaged, that generally
seek to track the performance of a specific index. The ETFs in which the Fund
invests will not be able to replicate exactly the performance of a specific
index. ETFs will not track their underlying indices precisely since the ETFs
have expenses and may need to hold a portion of their assets in cash, unlike
the underlying indices, and the ETFs may not invest in all of the securities in
the underlying indices in the same proportion as the indices for varying
reasons. The Fund will incur transaction costs when buying and selling ETF
shares, and indirectly bear the expenses of the ETFs. In addition, the market
value of an ETF's shares, which are based on supply and demand in the market
for the ETFs shares, may differ from its net asset value, or NAV. Accordingly,
there may be times when an ETF's shares trade at a discount or premium to its
NAV.
The Fund may also invest in investment companies other than ETFs, as permitted
by the 1940 Act or the rules and regulations thereunder. As with ETF
investments, if the Fund acquires shares in other investment companies,
shareholders would bear, indirectly, the expenses of such investment companies
(which may include management and advisory fees), which are in addition to the
Fund's expenses. The Fund intends to invest uninvested cash balances in an
affiliated money market fund as permitted by Rule 12d1-1 under the 1940 Act.
LOANS OF PORTFOLIO SECURITIES
For the purposes of achieving income, the Fund may make secured loans of
portfolio securities to brokers, dealers and financial institutions
("borrowers") to the extent permitted under the 1940 Act or the rules and
regulations thereunder (as such statute, rules or regulations may be amended
from time to time) or by guidance regarding, interpretations of or exemptive
orders under the 1940 Act. Under the Fund's securities lending program, all
securities loans will be secured continually by cash collateral. The loans will
be made only to borrowers deemed by the Adviser to be creditworthy, and when,
in the judgment of the Adviser, the consideration that can be earned currently
from securities loans justifies the attendant risk. The Fund will be
compensated for the loan from a portion of the net return from the interest
earned on cash collateral after a rebate 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
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with the loan) and payments for fees of the securities lending agent and for
certain other administrative expenses.
The 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 have the right to vote 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. When
the Fund lends securities, its investment performance will continue to reflect
changes in the value of the securities loaned.
The Fund will invest cash collateral in a money market fund approved by the
Fund's Board of Directors (the "Board") and expected to be managed by the
Adviser, such as AllianceBernstein Exchange Reserves. Any such investment will
be at the Fund's risk. The Fund may pay reasonable finders', administrative,
and custodial fees in connection with a loan.
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.
MORTGAGE-BACKED SECURITIES AND ASSOCIATED RISKS
Mortgage-backed securities may be issued by the U.S. Government or one of its
sponsored entities or may be issued by private organizations. Interest and
principal payments (including prepayments) on the mortgages underlying
mortgage-backed securities are passed through to the holders of the securities.
As a result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate.
Prepayments occur when the mortgagor on a mortgage prepays the remaining
principal before the mortgage's scheduled maturity date. Because the prepayment
characteristics of the underlying mortgages vary, it is impossible to predict
accurately the realized yield or average life of a particular issue of
pass-through certificates. Prepayments are important because of their effect on
the yield and price of the mortgage-backed securities. During periods of
declining interest rates, prepayments can be expected to accelerate and if the
Fund invests in these securities, it would be required to reinvest the proceeds
at the lower interest rates then available. Conversely, during periods of
rising interest rates, a reduction in prepayments may increase the effective
maturity of the securities, subjecting them to a greater risk of decline in
market value in response to rising interest rates. In addition, prepayments of
mortgages underlying securities purchased at a premium could result in capital
losses.
Mortgage-backed securities include mortgage pass-through certificates and
multiple-class pass-through securities, such as REMIC pass-through
certificates, CMOs and stripped mortgage-backed securities, or SMBS, and other
types of mortgage-backed securities that may be available in the future.
Guaranteed Mortgage Pass-Through Securities. The Fund may invest in guaranteed
mortgage pass-through securities that represent participation interests in
pools of residential mortgage loans and are issued by U.S. governmental or
private lenders and guaranteed by the U.S. Government or one of its agencies or
instrumentalities, including but not limited to GNMA, FNMA and FHLMC.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
Mortgage-backed securities also include CMOs and REMIC pass-through or
participation certificates, which may be issued by, among others, U.S.
Government agencies and instrumentalities as well as private lenders. CMOs and
REMIC certificates are issued in multiple classes and the principal of and
interest on the mortgage assets may be allocated among the several classes of
CMOs or REMIC certificates in various ways. Each class of CMOs or REMIC
certificates, often referred to as a "tranche," is issued at a specific
adjustable or fixed interest rate and must be fully retired no later than its
final distribution date. Generally, interest is paid or accrued on all classes
of CMOs or REMIC certificates on a monthly basis. The Fund will not invest in
the lowest tranche of CMOs and REMIC certificates.
Typically, CMOs are collateralized by GNMA or FNMA certificates but also may be
collateralized by other mortgage assets such as whole loans or private mortgage
pass-through securities. Debt service on CMOs is provided from payments of
principal and interest on collateral of mortgage assets and any reinvestment
income.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code (the "Code") and invests in certain mortgages primarily secured by
interests in real property and other permitted investments. Investors may
purchase "regular" and "residual" interest shares of beneficial interest in
REMIC trusts, although the Fund does not intend to invest in residual interests.
PREFERRED STOCK
The Fund may invest in preferred stock. Preferred stock is subordinated to any
debt the issuer has outstanding. Accordingly, preferred stock dividends are not
paid until all debt obligations are first met. Preferred stock may be subject
to more fluctuations in market value, due to changes in market participants'
perceptions of the issuer's ability to continue to pay dividends, than debt of
the same issuer.
REPURCHASE AGREEMENTS AND BUY/SELL BACK TRANSACTIONS
The Fund may enter into repurchase agreements in which the Fund purchases a
security from a bank or broker-dealer, which agrees to repurchase the security
from the Fund at an agreed upon future date, normally a day or a few days
later. The purchase and repurchase transactions are transacted under one
agreement. The resale price is greater than the purchase price, reflecting an
agreed-upon interest rate for the period the buyer's money is invested in the
security. Such agreements permit the Fund to keep all of its assets at work
while retaining "overnight" flexibility in pursuit of investments of a
longer-term nature. If the bank or broker-dealer defaults on its
repurchase obligation, the Fund would suffer a loss to the extent that the
proceeds from the sale of the security were less than the repurchase price.
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The Fund may enter into buy/sell back transactions, which are similar to
repurchase agreements. In this type of transaction, the Fund enters a trade to
buy securities at one price and simultaneously enters a trade to sell the same
securities at another price on a specified date. Similar to a repurchase
agreement, the repurchase price is higher than the sale price and reflects
current interest rates. Unlike a repurchase agreement, however, the buy/sell
back transaction is considered two separate transactions.
RIGHTS AND WARRANTS
Rights and warrants are option securities permitting their holders to subscribe
for other securities. Rights are similar to warrants except that they have a
substantially shorter duration. Rights and warrants do not carry with them
dividend or voting rights with respect to the underlying securities, or any
rights in the assets of the issuer. As a result, an investment in rights and
warrants may be considered more speculative than certain other types of
investments. In addition, the value of a right or a warrant does not
necessarily change with the value of the underlying securities, and a right or
a warrant ceases to have value if it is not exercised prior to its expiration
date.
SHORT SALES
The Fund may make short sales as a part of overall portfolio management or to
offset a potential decline in the value of a security. A short sale involves
the sale of a security that the Fund does not own, or if the Fund owns the
security, is not to be delivered upon consummation of the sale. When the Fund
makes a short sale of a security that it does not own, it must borrow from a
broker-dealer the security sold short and deliver the security to the
broker-dealer upon conclusion of the short sale.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur
a loss; conversely, if the price declines, the Fund will realize a short-term
capital gain. Although the Fund's gain is limited to the price at which it sold
the security short, its potential loss is theoretically unlimited.
STANDBY COMMITMENT AGREEMENTS
Standby commitment agreements are similar to put options that commit the Fund,
for a stated period of time, to purchase a stated amount of a security that may
be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security are fixed at the time of the commitment. At the time of
entering into the agreement, the Fund is paid a commitment fee, regardless of
whether the security ultimately is issued.
There is no guarantee that a security subject to a standby commitment will be
issued. In addition, the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
is at the option of the issuer, the Fund will bear the risk of capital loss in
the event the value of the security declines and may not benefit from an
appreciation in the value of the security during the commitment period if the
issuer decides not to issue and sell the security to the Fund.
ADDITIONAL RISK AND OTHER CONSIDERATIONS
Investment in the Fund involves the special risk considerations described below.
REAL ESTATE INVESTMENTS
Although the Fund does not invest directly in real estate, it does invest
primarily in securities of real estate companies. An investment in the Fund is
subject to certain risks associated with the direct ownership of real estate
and with the real estate industry in general. These risks include, among
others: possible declines in the value of real estate; risks related to general
and local economic conditions, including increases in the rate of inflation;
possible lack of availability of mortgage funds; overbuilding; extended
vacancies of properties; increases in competition, property taxes and operating
expenses; changes in zoning laws; costs resulting from the clean-up of, and
liability to third parties for damages resulting from, environmental problems;
casualty or condemnation losses; uninsured damages from floods, earthquakes or
other natural disasters; limitations on and variations in rents; and changes in
interest rates. To the extent that assets underlying the Fund's investments are
concentrated geographically, by property type or in certain other respects, the
Fund may be subject to certain of these risks to a greater extent. These risks
may be greater for investments in non-U.S. real estate companies.
In addition, if the Fund receives rental income or income from the disposition
of real property acquired as a result of a default on securities the Fund owns,
the receipt of such income may adversely affect the Fund's ability to retain
its tax status as a regulated investment company. Investments by the Fund in
securities of companies providing mortgage servicing will be subject to the
risks associated with refinancings and their impact on servicing rights.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Equity REITs
may be affected by changes in the value of the underlying property owned by the
REITs, while mortgage REITs may be affected by the quality of any credit
extended. REITs are dependent upon management skills, are not diversified, and
are subject to heavy cash flow dependency, default by borrowers and
self-liquidation. REITs are also subject to the possibilities of failing to
qualify for tax-free pass-through of income under the Code and failing to
maintain their exemptions from registration under the 1940 Act.
REITs (especially mortgage REITs) are also subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed-rate obligations.
Investing in REITs involves risks similar to those associated with investing in
small capitalization companies. REITs may
14
have limited financial resources, may trade less frequently and in a limited
volume and may be subject to more abrupt or erratic price movements than larger
company securities. Historically, small capitalization stocks, such as REITs,
have been more volatile in price than larger capitalization stocks.
FOREIGN (NON-U.S.) SECURITIES
Investing in foreign securities involves special risks and considerations not
typically associated with investing in U.S. securities. The securities markets
of many foreign countries are relatively small, with the majority of market
capitalization and trading volume concentrated in a limited number of companies
representing a small number of industries. A fund that invests in foreign
securities may experience greater price volatility and significantly lower
liquidity than a portfolio invested solely in securities of U.S. companies.
These markets may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States.
Securities registration, custody, and settlement may in some instances be
subject to delays and legal and administrative uncertainties. Foreign
investment in the securities markets of certain foreign countries is restricted
or controlled to varying degrees. These restrictions or controls may at times
limit or preclude investment in certain securities and may increase the costs
and expenses of the Fund. In addition, the repatriation of investment income,
capital, or the proceeds of sales of securities from certain of the countries
is controlled under regulations, including in some cases the need for certain
advance government notification or authority, and if a deterioration occurs in
a country's balance of payments, the country could impose temporary
restrictions on foreign capital remittances.
The Fund also could be adversely affected by delays in, or a refusal to grant,
any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investment. Investing in local
markets may require the Fund to adopt special procedures or seek local
governmental approvals or other actions, any of which may involve additional
costs to the Fund. These factors may affect the liquidity of the Fund's
investments in any country and the Adviser will monitor the effect of any such
factor or factors on the Fund's investments. Transaction costs, including
brokerage commissions for transactions both on and off the securities
exchanges, in many foreign countries are generally higher than in the United
States.
Issuers of securities in foreign jurisdictions are generally not subject to the
same degree of regulation as are U.S. issuers with respect to such matters as
insider trading rules, restrictions on market manipulation, shareholder proxy
requirements, and timely disclosure of information. The reporting, accounting
and auditing standards of foreign countries may differ, in some cases
significantly, from U.S. standards in important respects, and less information
may be available to investors in foreign securities than to investors in U.S.
securities. Substantially less information is publicly available about certain
non-U.S. issuers than is available about most U.S. issuers.
The economies of individual foreign countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product or gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, and balance of payments position. Nationalization,
expropriation or confiscatory taxation, currency blockage, political changes,
government regulation, political or social instability, revolutions, wars or
diplomatic developments could affect adversely the economy of a foreign
country. In the event of nationalization, expropriation, or other confiscation,
the Fund could lose its entire investment in securities in the country
involved. In addition, laws in foreign countries governing business
organizations, bankruptcy and insolvency may provide less protection to
security holders such as the Fund than that provided by U.S. laws.
Investments in securities of companies in emerging markets involve special
risks. There are approximately 100 countries identified by the World Bank as
Low Income, Lower Middle Income and Upper Middle Income countries that are
generally regarded as emerging markets. Emerging market countries that the
Adviser currently considers for investment are listed below. Countries may be
added to or removed from this list at any time.
Argentina Hungary Peru
Belarus India Philippines
Belize Indonesia Poland
Brazil Iraq Russia
Bulgaria Ivory Coast Senegal
Chile Jamaica Serbia
China Jordan South Africa
Colombia Kazakhstan South Korea
Croatia Lebanon Sri Lanka
Dominican Republic Lithuania Taiwan
Ecuador Malaysia Thailand
Egypt Mexico Turkey
El Salvador Mongolia Ukraine
Gabon Nigeria Uruguay
Georgia Pakistan Venezuela
Ghana Panama Vietnam
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Investing in emerging market securities imposes risks different from, or
greater than, risks of investing in domestic securities or in foreign,
developed countries. These risks include: smaller market capitalization of
securities markets, which may suffer periods of relative illiquidity;
significant price volatility; restrictions on foreign investment; and possible
repatriation of investment income and capital. In addition, foreign investors
may be required to register the proceeds of sales; and future economic or
political crises could lead to price controls, forced mergers, expropriation or
confiscatory taxation, seizure, nationalization, or creation of government
monopolies. The currencies of emerging market countries may experience
significant declines against the U.S. Dollar, and devaluation may occur
subsequent to investments in these currencies by the Fund. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, negative
effects on the economies and securities markets of certain emerging market
countries.
15
Additional risks of emerging market securities may include: greater social,
economic and political uncertainty and instability; more substantial
governmental involvement in the economy; less governmental supervision and
regulation; unavailability of currency hedging techniques; companies that are
newly organized and small; differences in auditing and financial reporting
standards, which may result in unavailability of material information about
issuers; and less developed legal systems. In addition, emerging securities
markets may have different clearance and settlement procedures, which may be
unable to keep pace with the volume of securities transactions or otherwise
make it difficult to engage in such transactions. Settlement problems may cause
the Fund to miss attractive investment opportunities, hold a portion of its
assets in cash pending investment, or be delayed in disposing of a portfolio
security. Such a delay could result in possible liability to a purchaser of the
security.
FOREIGN (NON-U.S.) CURRENCIES
The Fund invests its assets in securities denominated in, and receives revenues
in, foreign currencies and will be adversely affected by reductions in the
value of those currencies relative to the U.S. Dollar. Foreign currency
exchange rates may fluctuate significantly. They are determined by supply and
demand in the foreign exchange markets, the relative merits of investments in
different countries, actual or perceived changes in interest rates, and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks or by currency controls or political developments. In light of
these risks, the Fund may engage in certain currency hedging transactions, as
described above, which involve certain special risks.
The Fund may also invest directly in foreign currencies for non-hedging
purposes directly on a spot basis (i.e., cash) or through derivative
transactions, such as forward currency exchange contracts, futures and options
thereon, swaps and options as described above. These investments will be
subject to the same risks. In addition, currency exchange rates may fluctuate
significantly over short periods of time, causing the Fund's NAV to fluctuate.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices that are not
currently contemplated for use by the Fund, or are not available but may yet be
developed, to the extent such investment practices are consistent with the
Fund's investment objective and legally permissible for the Fund. Such
investment practices, if they arise, may involve risks that exceed those
involved in the activities described above.
STATEMENT OF ADDITIONAL INFORMATION
January 31, 2014
This Statement of Additional Information ("SAI") is not a prospectus
but supplements and should be read in conjunction with the current prospectus
dated January 31, 2014, for AllianceBernstein(R) Global Real Estate Investment
Fund II (the "Fund"), a series of AllianceBernstein Institutional Funds, Inc.
(the "Company"), that offers Class I shares of the Fund (the "Prospectus").
Financial statements for the Fund for the year ended October 31, 2013, are
included in the annual report to shareholders and are incorporated into this SAI
by reference. Copies of the Prospectus and annual report may be obtained by
contacting AllianceBernstein Investor Services, Inc. ("ABIS") at the address or
the "For Literature" telephone number shown above or on the Internet at
www.AllianceBernstein.com.
TABLE OF CONTENTS
Page
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INFORMATION ABOUT THE FUND AND ITS INVESTMENTS.................................1
INVESTMENT RESTRICTIONS.......................................................33
MANAGEMENT OF THE FUND........................................................35
EXPENSES OF THE FUND..........................................................55
PURCHASE OF SHARES............................................................56
REDEMPTION AND REPURCHASE OF SHARES...........................................63
SHAREHOLDER SERVICES..........................................................66
NET ASSET VALUE...............................................................69
DIVIDENDS, DISTRIBUTIONS AND TAXES............................................73
PORTFOLIO TRANSACTIONS........................................................77
GENERAL INFORMATION...........................................................81
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM.....................................................84
APPENDIX A: STATEMENT OF POLICIES AND PROCEDURES
FOR PROXY VOTING........................................................A-1
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AllianceBernstein(R) and the AB Logo are registered trademarks and service marks
used by permission of the owner, AllianceBernstein L.P.
INFORMATION ABOUT THE FUND AND ITS INVESTMENTS
The Fund is a series of the Company. The Company is an open-end
investment company. The Fund is a separate pool of assets constituting, in
effect, a separate open-end management investment company with its own
investment objective and policies.
Except as otherwise indicated, the investment objective and policies
of the Fund are not "fundamental policies" within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act"), and may, therefore, be changed
by the Company's Board of Directors (the "Directors" or the "Board") without a
shareholder vote. However, the Fund will not change its investment objective
without at least 60 days' prior written notice to its shareholders. The Fund is
a diversified fund as a matter of fundamental policy. There can be, of course,
no assurance that the Fund will achieve its investment objective. Whenever any
investment policy or practice, including any restriction, described in the
Prospectus or herein states a maximum percentage of the Fund's assets that may
be invested in any security or other asset, it is intended that such maximum
percentage limitation be determined immediately after and as a result of the
Fund's acquisition of such securities or other assets. Accordingly, any later
increase or decrease in percentage beyond the specified limitation resulting
from a change in values or net assets will not be considered a violation of any
such maximum.
Additional Investment Policies and Practices
The following investment policies and practices supplements the
information set forth in the Prospectus.
Convertible Securities
Convertible securities include bonds, debentures, corporate notes
and preferred stocks that are convertible at a stated exchange ratio into shares
of the underlying common stock. Prior to their conversion, convertible
securities have the same general characteristics as non-convertible debt
securities, which provide a stable stream of income with generally higher yields
than those of equity securities of the same or similar issuers. As with all debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
While convertible securities generally offer lower interest or dividend yields
than non-convertible debt securities of similar quality, they do enable the
investor to benefit from increases in the market price of the underlying common
stock.
When the market price of the common stock underlying a convertible
security increases, the price of the convertible security increasingly reflects
the value of the underlying common stock and may rise accordingly. As the market
price of the underlying common stock declines, the convertible security tends to
trade increasingly on a yield basis, and thus may not depreciate to the same
extent as the underlying common stock. Convertible securities rank senior to
common stocks on an issuer's capital structure. They consequently entail less
risk than the issuer's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed-income security.
Derivatives
The Fund may, but is not required to, use derivatives for hedging or
other risk management purposes or as part of its investment strategies.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates,
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices.
There are four principal types of derivatives--forwards, futures,
options, and swaps. These principal types of derivative instruments, as well as
the methods in which they may be used by the Fund are described below.
Derivatives include listed and cleared transactions where the Fund's derivative
trade counterparty is an exchange or clearinghouse and non-cleared bilateral
"over-the-counter" ("OTC") transactions, where the Fund's derivative trade
counterparty is a financial institution. Exchange-traded or cleared derivatives
transactions tend to be more liquid and subject to less counterparty credit risk
than those that are privately negotiated. The Fund may use derivatives to earn
income and enhance returns, to hedge or adjust the risk profile of a portfolio
and either to replace more traditional direct investments or to obtain exposure
to otherwise inaccessible markets.
Forward Contracts. A forward contract, which may be standardized or
customized and privately negotiated, is an agreement for one party to buy, and
the other party to sell, a specific quantity of an underlying commodity or other
tangible asset for an agreed-upon price at a future date. A forward contract
generally is settled by physical delivery of the commodity or other tangible
asset underlying the forward contract to an agreed-upon location at a future
date (rather than settled by cash) or is rolled forward into a new forward
contract. Non-deliverable forwards ("NDFs") specify a cash payment upon
maturity.
Futures Contracts and Options on Futures Contracts. A futures
contract is an agreement that obligates the buyer to buy and the seller to sell
a specified quantity of an underlying asset (or settle for cash the value of a
contract based on an underlying asset, rate or index) at a specific price on the
contract maturity date. Options on futures contracts are options that call for
the delivery of futures contracts upon exercise. Futures contracts are
standardized, exchange-traded instruments and are fungible (i.e., considered to
be perfect substitutes for each other). This fungibility allows futures
contracts to be readily offset or canceled through the acquisition of equal but
opposite positions, which is the primary method in which futures contracts are
liquidated. A cash-settled futures contract does not require physical delivery
of the underlying asset but instead is settled for cash equal to the difference
between the values of the contract on the date it is entered into and its
maturity date.
Options. An option, which may be standardized and exchange-traded or
customized and privately negotiated, is an agreement that, for a premium payment
or fee, gives the option holder (the buyer) the right but not the obligation to
buy (a "call") or sell (a "put") the underlying asset (or settle for cash an
amount based on an underlying asset, rate or index) at a specified price (the
exercise price) during a period of time or on a specified date. Likewise, when
an option is exercised the writer of the option is obligated to sell (in the
case of a call option) or to purchase (in the case of a put option) the
underlying asset (or settle for cash an amount based on an underlying asset,
rate or index).
Swaps. A swap is an agreement that obligates two parties to exchange
a series of cash flows at specified intervals (payment dates) based upon or
calculated by reference to changes in specified prices or rates (interest rates
in the case of interest rate swaps, currency exchange rates in the case of
currency swaps) for a specified amount of an underlying asset (the "notional"
principal amount). Swaps are entered into on a net basis (i.e., the two payment
streams are netted out, with the Fund receiving or paying, as the case may be,
only the net amount of the two payments). Generally, the notional principal
amount is used solely to calculate the payment streams but is not exchanged.
Certain standardized swaps, including certain interest rate swaps and credit
default swaps, are (or soon will be) subject to mandatory central clearing.
Cleared swaps are transacted through futures commission merchants ("FCMs") that
are members of central clearinghouses with the clearinghouse serving as central
counterparty, similar to transactions in futures contracts. Funds post initial
and variation margin to support their obligations under cleared swaps by making
payments to their clearing member FCMs. Central clearing is expected to reduce
counterparty credit risks and increase liquidity, but central clearing does not
make swap transactions risk free. Centralized clearing will be required for
additional categories of swaps on a phased-in basis based on Commodity Futures
Trading Commission ("CFTC") approval of contracts for central clearing.
Bilateral swap agreements are two-party contracts entered into primarily by
institutional investors and are not cleared through a third party.
Risks of Derivatives and Other Regulatory Issues. Investment
techniques employing such derivatives involve risks different from, and, in
certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives.
-- Market Risk. This is the general risk attendant to all
investments that the value of a particular investment will change in
a way detrimental to the Fund's interest.
-- Management Risk. Derivative products are highly specialized
instruments that require investment expertise and risk analyses
different from those associated with stocks and bonds. The use of a
derivative requires an understanding not only of the underlying
instrument but also of the derivative itself, without the benefit of
observing the performance of the derivative under all possible
market conditions. In particular, the use and complexity of
derivatives require the maintenance of adequate controls to monitor
the transactions entered into, the ability to assess the risk that a
derivative adds to the Fund's investment portfolio, and the ability
to forecast price, interest rate or currency exchange rate movements
correctly.
-- Credit Risk. This is the risk that a loss may be sustained by the
Fund as a result of the failure of another party to a derivative
(usually referred to as a "counterparty") to comply with the terms
of the derivative contract. The credit risk for derivatives traded
on an exchange or through a clearinghouse is generally less than for
uncleared OTC derivatives, since the exchange or clearinghouse,
which is the issuer or counterparty to each derivative, provides a
guarantee of performance. This guarantee is supported by a daily
payment system (i.e., margin requirements) operated by the
clearinghouse in order to reduce overall credit risk. For uncleared
OTC derivatives, there is no similar clearing agency guarantee.
Therefore, the Fund considers the creditworthiness of each
counterparty to an uncleared OTC derivative in evaluating potential
credit risk.
-- Counterparty Risk. The value of an OTC derivative will depend on
the ability and willingness of the Fund's counterparty to perform
its obligations under the transaction. If the counterparty defaults,
the Fund will have contractual remedies but may choose not to
enforce them to avoid the cost and unpredictability of legal
proceedings. In addition, if a counterparty fails to meet its
contractual obligations, the Fund could miss investment
opportunities or otherwise be required to retain investments it
would prefer to sell, resulting in losses for the Fund. Participants
in OTC derivatives markets generally are not subject to the same
level of credit evaluation and regulatory oversight as are exchanges
or clearinghouses. As a result, OTC derivatives generally expose the
Fund to greater counterparty risk than derivatives traded on an
exchange or through a clearinghouse.
New regulations affecting derivatives transactions now, or will
soon, require certain standardized derivatives, including many types
of swaps, to be subject to mandatory central clearing. Under these
new requirements, a central clearing organization will be
substituted as the counterparty to each side of the derivatives
transaction. Each party to derivatives transactions will be required
to maintain its positions with a clearing organization through one
or more clearing brokers. Central clearing is expected to reduce,
but not eliminate, counterparty risk. The Fund will be subject to
the risk that its clearing member or clearing organization will
itself be unable to perform its obligations.
-- Liquidity Risk. Liquidity risk exists when a particular
instrument is difficult to purchase or sell. If a derivative
transaction is particularly large or if the relevant market is
illiquid (as is the case with many privately negotiated
derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous price.
' -- Leverage Risk. Since many derivatives have a leverage
component, adverse changes in the value or level of the underlying
asset, rate or index can result in a loss substantially greater than
the amount invested in the derivative itself. In the case of swaps,
the risk of loss generally is related to a notional principal
amount, even if the parties have not made any initial investment.
Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
-- Regulatory Risk. The U.S. Government is in the process of
adopting and implementing additional regulations governing
derivatives markets, including clearing as discussed above, margin,
reporting and registration requirements. While the full extent and
cost of these regulations is currently unclear, these regulations
could, among other things, restrict the Fund's ability to engage in
derivatives transactions and/or increase the cost of such
derivatives transactions (through increased margin or capital
requirements). In addition, Congress, various exchanges and
regulatory and self-regulatory authorities have undertaken reviews
of options and futures trading in light of market volatility. Among
the actions that have been taken or proposed to be taken are new
limits and reporting requirements for speculative positions, new or
more stringent daily price fluctuation limits for futures and
options transactions, and increased margin requirements for various
types of futures transactions. These regulations and actions may
adversely affect the instruments in which the Fund invests and its
ability to execute its investment strategy.
-- Other Risks. Other risks in using derivatives include the risk of
mispricing or improper valuation of derivatives and the inability of
derivatives to correlate perfectly with underlying assets, rates and
indices. Many derivatives, in particular privately negotiated
derivatives, are complex and often valued subjectively. Improper
valuations can result in increased cash payment requirements to
counterparties or a loss of value to the Fund. Derivatives do not
always perfectly or even highly correlate or track the value of the
assets, rates or indices they are designed to closely track.
Consequently, the Fund's use of derivatives may not always be an
effective means of, and sometimes could be counterproductive to,
furthering the Fund's investment objective.
Other. The Fund may purchase and sell derivative instruments only to
the extent that such activities are consistent with the requirements of the
Commodity Exchange Act ("CEA") and the rules adopted by the "CFTC" thereunder.
Under CFTC rules, a registered investment company that conducts more than a
certain amount of trading in futures, commodity options, swaps and other
commodity interests is a commodity pool and its adviser must register as a
commodity pool operator ("CPO"). Under such rules, registered investment
companies are subject to additional registration and reporting requirements.
AllianceBernstein L.P., the Fund's adviser (the "Adviser") and the Fund have
claimed an exclusion from the definition of CPO under CFTC Rule 4.5 under the
CEA with respect to the Fund and are not currently subject to these registration
and reporting requirements under the CEA.
Use of Options, Futures, Forwards and Swaps by the Fund
--Forward Currency Exchange Contracts. A forward currency exchange
contract is an obligation by one party to buy, and the other party to sell, a
specific amount of a currency for an agreed-upon price at a future date. A
forward currency exchange contract may result in the delivery of the underlying
asset upon maturity of the contract in return for the agreed-upon payment. NDFs
specify a cash payment upon maturity. NDFs are normally used when the market for
physical settlement of the currency is underdeveloped, heavily regulated or
highly taxed.
The Fund may, for example, enter into forward currency exchange
contracts to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. Dollar and other currencies. The Fund may
purchase or sell forward currency exchange contracts for hedging purposes
similar to those described below in connection with its transactions in foreign
currency futures contracts. The Fund may also purchase or sell forward currency
exchange contracts for non-hedging purposes as a means of making investments in
foreign currencies, as described below under "Currency Transactions".
If a hedging transaction in forward currency exchange contracts is
successful, the decline in the value of portfolio securities or the increase in
the cost of securities to be acquired may be offset, at least in part, by
profits on the forward currency exchange contract. Nevertheless, by entering
into such forward currency exchange contracts, the Fund may be required to forgo
all or a portion of the benefits which otherwise could have been obtained from
favorable movements in exchange rates.
The Fund may also use forward currency exchange contracts to seek to
increase total return when the Adviser 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.
For example, the Fund may enter into a foreign currency exchange contract to
purchase a currency if the Adviser expects the currency to increase in value.
The Fund would recognize a gain if the market value of the currency is more than
the contract value of the currency at the time of settlement of the contract.
Similarly, the Fund may enter into a foreign currency exchange contract to sell
a currency if the Adviser expects the currency to decrease in value. The Fund
would recognize a gain if the market value of the currency is less than the
contract value of the currency at the time of settlement of the contract.
The cost of engaging in forward currency exchange contracts varies
with such factors as the currencies involved, the length of the contract period
and the market conditions then prevailing. Since transactions in foreign
currencies are usually conducted on a principal basis, no fees or commissions
are involved.
--Options on Securities. The Fund may write and purchase call and
put options on securities. In purchasing an option on securities, the Fund would
be in a position to realize a gain if, during the option period, the price of
the underlying securities increased (in the case of a call) or decreased (in the
case of a put) by an amount in excess of the premium paid; otherwise the Fund
would experience a loss not greater than the premium paid for the option. Thus,
the Fund would realize a loss if the price of the underlying security declined
or remained the same (in the case of a call) or increased or remained the same
(in the case of a put) or otherwise did not increase (in the case of a put) or
decrease (in the case of a call) by more than the amount of the premium. If a
put or call option purchased by the Fund were permitted to expire without being
sold or exercised, its premium would represent a loss to the Fund.
The Fund may write a put or call option in return for a premium,
which is retained by the Fund whether or not the option is exercised. The Fund
may write covered or uncovered call or put options on securities. A call option
written by the Fund is "covered" if the Fund owns the underlying security, has
an absolute and immediate right to acquire that security upon conversion or
exchange of another security it holds, or holds a call option on the underlying
security with an exercise price equal to or less than of the call option it has
written. A put option written by the Fund is covered if the Fund holds a put
option on the underlying securities with an exercise price equal to or greater
than of the put option it has written. Uncovered options, or naked options, are
riskier than covered options. For example, if the Fund wrote a naked call option
and the price of the underlying security increased, the Fund would have to
purchase the underlying security for delivery to the call buyer and sustain a
loss equal to the difference between the option price and the marked price of
the security.
The Fund may purchase put options to hedge against a decline in the
value of portfolio securities. If such decline occurs, the put options will
permit the Fund to sell the securities at the exercise price or to close out the
options at a profit. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized on the underlying security by the amount
of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the future. If
such increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund and the Fund will suffer a loss on the transaction to the
extent of the premium paid.
The Fund may also, as an example, write combinations of put and call
options on the same security, known as "straddles", with the same exercise and
expiration date. By writing a straddle, the Fund undertakes a simultaneous
obligation to sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently rises above the
exercise price, the call will likely be exercised and the Fund will be required
to sell the underlying security at or below market price. This loss may be
offset, however, in whole or part, by the premiums received on the writing of
the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of the security
remains relatively stable and neither the call nor the put is exercised. In
those instances where one of the options is exercised, the loss on the purchase
or sale of the underlying security may exceed the amount of the premiums
received.
The Fund may purchase or write options on securities of the types in
which it is permitted to invest in privately negotiated (i.e., over-the-counter)
transactions. By writing a call option, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security above
the exercise price of the option. By writing a put option, the Fund assumes the
risk that it may be required to purchase the underlying security for an exercise
price above its then current market value, resulting in a capital loss unless
the security subsequently appreciates in value. Where options are written for
hedging purposes, such transactions constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the value
of securities to be acquired, up to the amount of the premium.
The Fund will effect such transactions only with investment dealers
and other financial institutions (such as commercial banks or savings and loan
institutions) deemed creditworthy by the Adviser, and the Adviser has adopted
procedures for monitoring the creditworthiness of such entities. Options
purchased or written in negotiated transactions may be illiquid and it may not
be possible for the Fund to effect a closing transaction at a time when the
Adviser believes it would be advantageous to do so.
--Options on Securities Indices. An option on a securities index is
similar to an option on a security except that, rather than taking or making
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the chosen index is greater than (in the case of a
call) or less than (in the case of a put) the exercise price of the option.
The Fund may write (sell) call and put options and purchase call and
put options on securities indices. If the Fund purchases put options on
securities indices to hedge its investments against a decline in the value of
portfolio securities, it will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of the
Fund's investments does not decline as anticipated, or if the value of the
option does not increase, the Fund's loss will be limited to the premium paid
for the option. The success of this strategy will largely depend on the accuracy
of the correlation between the changes in value of the index and the changes in
value of the Fund's security holdings.
The Fund may also write put or call options on securities indices
to, among other things, earn income. If the value of the chosen index declines
below the exercise price of the put option, the Fund has the risk of loss of the
amount of the difference between the exercise price and the closing level of the
chosen index, which it would be required to pay to the buyer of the put option
and which may not be offset by the premium it received upon sale of the put
option. Similarly, if the value of the index is higher than the exercise price
of the call option, the Fund has the risk of loss of the amount of the
difference between the exercise price and the closing level of the chosen index,
which may not be offset by the premium it received upon sale of the call option.
If the decline or increase in the value securities index is significantly below
or above the exercise price of the written option, the Fund could experience a
substantial loss.
The purchase of call options on securities indices may be used by
the Fund to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Fund will also bear the risk of
losing all or a portion of the premium paid if the value of the index does not
rise. The purchase of call options on stock indices when the Fund is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing call options on
securities the Fund owns.
Other Option Strategies. In an effort to earn extra income, to
adjust exposure to individual securities or markets, or to protect all or a
portion of its portfolio from a decline in value, sometimes within certain
ranges, the Fund may use option strategies such as the concurrent purchase of a
call or put option, including on individual securities and stock indices,
futures contracts (including on individual securities and stock indices) or
shares of exchange-traded funds ("ETFs") at one strike price and the writing of
a call or put option on the same individual security, stock index, futures
contract or ETF at a higher strike price in the case of a call option or at a
lower strike price in the case of a put option. The maximum profit from this
strategy would result for the call options from an increase in the value of the
individual security, stock index, futures contract or ETF above the higher
strike price or for the put options the decline in the value of the individual
security, stock index, futures contract or ETF below the lower strike price. If
the price of the individual security, stock index, futures contract or ETF
declines in the case of the call option or increases in the case of the put
option, the Fund has the risk of losing the entire amount paid for the call or
put options.
--Options on Foreign Currencies. The Fund may purchase and write
options on foreign currencies for hedging and non-hedging purposes. For example,
a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, the Fund may
purchase put options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a fixed amount
in dollars and could thereby offset, in whole or in part, the adverse effect on
its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may purchase call options on the currency. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund from purchases of foreign currency options will
be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in foreign
currency options which would require it to forgo a portion or all of the
benefits of advantageous changes in such rates.
In addition, where the Fund anticipates a decline in the dollar
value of non-U.S. Dollar-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
could be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the Fund
could write a put option on the relevant currency, which, if rates move in the
manner projected, will expire unexercised and allow the Fund to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund will be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund also may be required to forgo all or a
portion of the benefits that might otherwise have been obtained from favorable
movements in exchange rates.
In addition to using options for the hedging purposes described
above, the Fund may also invest in options on foreign currencies for non-hedging
purposes as a means of making direct investments in foreign currencies. The Fund
may use options on currency to seek to increase total return when the Adviser
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. For example, the Fund may purchase
call options in anticipation of an increase in the market value of a currency.
The Fund would ordinarily realize a gain if, during the option period, the value
of such currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise, the Fund would realize no gain or loss on the
purchase of the call option. Put options may be purchased by the Fund for the
purpose of benefiting from a decline in the value of a currency that the Fund
does not own. The Fund would normally realize a gain if, during the option
period, the value of the underlying currency decreased below the exercise price
sufficiently to more than cover the premium and transaction costs. Otherwise,
the Fund would realize no gain or loss on the purchase of the put option. For
additional information on the use of options on foreign currencies for
non-hedging purposes, see "Currency Transactions" below.
Special Risks Associated with Options on Currencies. An exchange
traded options position may be closed out only on an options exchange that
provides a secondary market for an option of the same series. Although the Fund
will generally purchase or sell options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time. For
some options, no secondary market on an exchange may exist. In such event, it
might not be possible to effect closing transactions in particular options, with
the result that the Fund would have to exercise its options in order to realize
any profit and would incur transaction costs on the purchase or sale of the
underlying currency.
--Futures Contracts and Options on Futures Contracts. Futures
contracts that the Fund may buy and sell may include futures contracts on
fixed-income or other securities, and contracts based on interest rates, foreign
currencies or financial indices, including any index of U.S. Government
securities. The Fund may, for example, purchase or sell futures contracts and
options thereon to hedge against changes in interest rates, securities (through
index futures or options) or currencies.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on
the Fund's current or intended investments in fixed-income securities. For
example, if the Fund owned long-term bonds and interest rates were expected to
increase, the Fund might sell interest rate futures contracts. Such a sale would
have much the same effect as selling some of the long-term bonds in the Fund's
portfolio. However, since the market for interest rate futures contracts may be
more liquid than the cash market for individual bonds, and the use of interest
rate futures contracts as a hedging technique allows the Fund to hedge its
interest rate risk without having to sell its portfolio securities. If interest
rates were to increase, the value of the debt securities in the portfolio would
decline, but the value of the Fund's interest rate futures contracts would be
expected to increase at approximately the same rate, thereby keeping the net
asset value, or NAV, of the Fund from declining as much as it otherwise would
have. On the other hand, if interest rates were expected to decline, interest
rate futures contracts could be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Because the fluctuations in the
value of the interest rate futures contracts should be similar to those of
long-term bonds, the Fund could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying them
until the necessary cash becomes available or the market has stabilized. At that
time, the interest rate futures contracts could be liquidated and the Fund's
cash reserves could then be used to buy long-term bonds on the cash market.
The Fund may purchase and sell foreign currency futures contracts
for hedging or risk management purposes in order to protect against fluctuations
in currency exchange rates. Such fluctuations could reduce the dollar value of
portfolio securities denominated in foreign currencies, or increase the cost of
non-U.S. Dollar-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains constant. The
Fund may sell futures contracts on a foreign currency, for example, when it
holds securities denominated in such currency and it anticipates a decline in
the value of such currency relative to the dollar. If such a decline were to
occur, the resulting adverse effect on the value of non-U.S. Dollar-denominated
securities may be offset, in whole or in part, by gains on the futures
contracts. However, if the value of the foreign currency increases relative to
the dollar, the Fund's loss on the foreign currency futures contract may or may
not be offset by an increase in the value of the securities because a decline in
the price of the security stated in terms of the foreign currency may be greater
than the increase in its value as a result of the change in exchange rates.
Conversely, the Fund could protect against a rise in the dollar cost
of non-U.S. Dollar-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in part, the
increased cost of such securities resulting from a rise in the dollar value of
the underlying currencies. When the Fund purchases futures contracts under such
circumstances, however, and the price in dollars of securities to be acquired
instead declines as a result of appreciation of the dollar, the Fund will
sustain losses on its futures position which could reduce or eliminate the
benefits of the reduced cost of portfolio securities to be acquired.
The Fund may also engage in currency "cross hedging" when, in the
opinion of the Adviser, the historical relationship among foreign currencies
suggests that the Fund may achieve protection against fluctuations in currency
exchange rates similar to that described above at a reduced cost through the use
of a futures contract relating to a currency other than the U.S. Dollar or the
currency in which the foreign security is denominated. Such "cross hedging" is
subject to the same risks as those described above with respect to an
unanticipated increase or decline in the value of the subject currency relative
to the U.S. Dollar.
The Fund may also use foreign currency futures contracts and options
on such contracts for non-hedging purposes. Similar to options on currencies
described above, the Fund may use foreign currency futures contracts and options
on such contracts to seek to increase total return when the Adviser 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. The risks associated with foreign currency
futures contracts and options on futures are similar to those associated with
options on foreign currencies, as described above. For additional information on
the use of futures contracts on foreign currencies and options on such contracts
for non-hedging purposes, see "Currency Transactions" below.
Purchases or sales of stock or bond index futures contracts may be
used for hedging purposes to attempt to protect the Fund's current or intended
investments from broad fluctuations in stock or bond prices. For example, the
Fund may sell stock or bond index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of the Fund's
portfolio securities that might otherwise result. If such decline occurs, the
loss in value of portfolio securities may be offset, in whole or part, by gains
on the futures position. When the Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock or
bond index futures contracts in order to gain rapid market exposure that may, in
whole or in part, offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, the corresponding positions in
stock or bond index futures contracts will be closed out.
Options on futures contracts are options that call for the delivery
of futures contracts upon exercise. Options on futures contracts written or
purchased by the Fund will be traded on U.S. exchanges.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities in the Fund's
portfolio. If the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the futures contract. If
the futures price at expiration of the put option is higher than the exercise
price, the Fund will retain the full amount of the option premium, which
provides a partial hedge against any increase in the price of securities which
the Fund intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and changes in the value of its options on
futures positions, the Fund's losses from exercised options on futures may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase options on futures contracts for hedging
purposes instead of purchasing or selling the underlying futures contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline or changes in interest or exchange
rates, the Fund could, in lieu of selling futures contracts, purchase put
options thereon. In the event that such decrease were to occur, it may be
offset, in whole or part, by a profit on the option. If the anticipated market
decline were not to occur, the Fund will suffer a loss equal to the price of the
put. Where it is projected that the value of securities to be acquired by the
Fund will increase prior to acquisition due to a market advance or changes in
interest or exchange rates, the Fund could purchase call options on futures
contracts, rather than purchasing the underlying futures contracts. If the
market advances, the increased cost of securities to be purchased may be offset
by a profit on the call. However, if the market declines, the Fund will suffer a
loss equal to the price of the call, but the securities that the Fund intends to
purchase may be less expensive.
--Credit Default Swap Agreements. The "buyer" in a credit default
swap contract is obligated to pay the "seller" a periodic stream of payments
over the term of the contract in return for a contingent payment upon the
occurrence of a credit event with respect to an underlying reference obligation.
Generally, a credit event means bankruptcy, failure to pay, obligation
acceleration or restructuring. The Fund may be either the buyer or seller in the
transaction. As a seller, the Fund receives a fixed rate of income throughout
the term of the contract, which typically is between one month and ten years,
provided that no credit event occurs. If a credit event occurs, the Fund
typically must pay the contingent payment to the buyer. The contingent payment
will be either (i) the "par value" (face amount) of the reference obligation, in
which case the Fund will receive the reference obligation in return, or (ii) an
amount equal to the difference between the par value and the current market
value of the reference obligation. The periodic payments received by the Fund,
coupled with the value of any reference obligation received, may be less than
the full amount it pays to the buyer, resulting in a loss to the Fund. If the
Fund is a buyer and no credit event occurs, the Fund will lose its periodic
stream of payments over the term of the contract. However, if a credit event
occurs, the buyer typically receives the full notional value for a reference
obligation that may have little or no value.
Credit default swaps may involve greater risks than if the Fund had
invested in the reference obligation directly. Credit default swaps are subject
to general market risk, liquidity risk and credit risk.
--Currency Swaps. The Fund may enter into currency swaps for hedging
purposes in an attempt to protect against adverse changes in exchange rates
between the U.S. Dollar and other currencies or for non-hedging purposes as a
means of making direct investments in foreign currencies, as described below
under "Currency Transactions". Currency swaps involve the exchange by the Fund
with another party of a series of payments in specified currencies. Currency
swaps may involve the exchange of actual principal amounts of currencies by the
counterparties at the initiation and again upon termination of the transaction.
Currency swaps may be bilateral and privately negotiated, with the Fund
expecting to achieve an acceptable degree of correlation between its portfolio
investments and its currency swaps positions. The Fund will not enter into any
currency swap unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty thereto is rated in the highest
short-term rating category of at least one nationally recognized statistical
rating organization ("NRSRO") at the time of entering into the transaction.
--Eurodollar Instruments. Eurodollar instruments are essentially
U.S. Dollar-denominated futures contracts or options thereon that are linked to
the London Interbank Offered Rate and are subject to the same limitations and
risks as other futures contracts and options.
--Currency Transactions. The Fund may invest in non-U.S.
Dollar-denominated securities on a currency hedged or un-hedged basis. The
Adviser may actively manage the Fund's currency exposures and 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 options. The Adviser 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 securities).
Special Risks Associated with Swaps. Risks may arise as a result of
the failure of the counterparty to a bilateral swap contract to comply with the
terms of the swap contract. The loss incurred by the failure of a counterparty
is generally limited to the net interim payment to be received by a Fund, and/or
the termination value at the end of the contract. Therefore, the Fund considers
the creditworthiness of the counterparty to a bilateral swap contract. The risk
is mitigated by having a netting arrangement between the Fund and the
counterparty and by the posting of collateral by the counterparty to the Fund to
cover the Fund's exposure to the counterparty. Certain standardized swaps,
including interest rate swaps and credit default swaps, are, or soon will be
subject to mandatory central clearing. Central clearing is expected, among other
things, to reduce counterparty credit risk, but does not eliminate it
completely.
Additionally, risks may arise from unanticipated movements in
interest rates or in the value of the underlying securities. The Fund accrues
for the changes in value on swap contracts on a daily basis, with the net amount
recorded within unrealized appreciation/depreciation of swap contracts on the
statement of assets and liabilities. Once the interim payments are settled in
cash, the net amount is recorded as realized gain/(loss) on swaps on the
statement of operations, in addition to any realized gain/(loss) recorded upon
the termination of swap contracts. Fluctuations in the value of swap contracts
are recorded as a component of net change in unrealized
appreciation/depreciation of swap contracts on the statement of operations. '
--Synthetic Foreign Equity Securities. The Fund may invest in
different types of derivatives generally referred to as synthetic foreign equity
securities. These securities may include international warrants or local access
products. International warrants are financial instruments issued by banks or
other financial institutions, which may or may not be traded on a foreign
exchange. International warrants are a form of derivative security that may give
holders the right to buy or sell an underlying security or a basket of
securities representing an index from or to the issuer of the warrant for a
particular price or may entitle holders to receive a cash payment relating to
the value of the underlying security or index, in each case upon exercise by the
Fund. Local access products are similar to options in that they are exercisable
by the holder for an underlying security or a cash payment based upon the value
of that security, but are generally exercisable over a longer term than typical
options. These types of instruments may be American style which means that they
can be exercised at any time on or before their expiration date, or European
style, which means that they may be exercised only on the expiration date.
Other types of synthetic foreign equity securities in which the Fund
may invest include covered warrants and low exercise price warrants. Covered
warrants entitle the holder to purchase from the issuer, typically a financial
institution, upon exercise, common stock of an international company or receive
a cash payment (generally in U.S. Dollars). The issuer of the covered warrant
usually owns the underlying security or has a mechanism, such as owning equity
warrants on the underlying securities, through which they can obtain the
securities. The cash payment is calculated according to a predetermined formula,
which is generally based on the difference between the value of the underlying
security on the date of exercise and the strike price. Low exercise price
warrants are warrants with an exercise price that is very low relative to the
market price of the underlying instrument at the time of issue (e.g., one cent
or less). The buyer of a low exercise price warrant effectively pays the full
value of the underlying common stock at the outset. In the case of any exercise
of warrants, there may be a time delay between the time a holder of warrants
gives instructions to exercise and the time the price of the common stock
relating to exercise or the settlement date is determined, during which time the
price of the underlying security could change significantly. In addition, the
exercise or settlement date of the warrants may be affected by certain market
disruption events, such as difficulties relating to the exchange of a local
currency into U.S. Dollars, the imposition of capital controls by a local
jurisdiction or changes in the laws relating to foreign investments. These
events could lead to a change in the exercise date or settlement currency of the
warrants, or postponement of the settlement date. In some cases, if the market
disruption events continue for a certain period of time, the warrants may become
worthless resulting in a total loss of the purchase price of the warrants.
The Fund will acquire synthetic foreign equity securities issued by
entities deemed to be creditworthy by the Adviser, which will monitor the
creditworthiness of the issuers on an ongoing basis. Investments in these
instruments involve the risk that the issuer of the instrument may default on
its obligation to deliver the underlying security or cash in lieu thereof. These
instruments may also be subject to liquidity risk because there may be a limited
secondary market for trading the warrants. They are also subject, like other
investments in foreign securities, to foreign risk and currency risk.
International warrants also include equity warrants, index warrants,
and interest rate warrants. Equity warrants are generally issued in conjunction
with an issue of bonds or shares, although they also may be issued as part of a
rights issue or scrip issue. When issued with bonds or shares, they usually
trade separately from the bonds or shares after issuance. Most warrants trade in
the same currency as the underlying stock (domestic warrants), but also may be
traded in different currency (euro-warrants). Equity warrants are traded on a
number of foreign exchanges and in over-the-counter markets. Index warrants and
interest rate warrants are rights created by an issuer, typically a financial
institution, entitling the holder to purchase, in the case of a call, or sell,
in the case of a put, respectively, an equity index or a specific bond issue or
interest rate index at a certain level over a fixed period of time. Index
warrants transactions settle in cash, while interest rate warrants can typically
be exercised in the underlying instrument or settle in cash.
The Fund also may invest in long-term options of, or relating to,
international issuers. Long-term options operate much like covered warrants.
Like covered warrants, long term-options are call options created by an issuer,
typically a financial institution, entitling the holder to purchase from the
issuer outstanding securities of another issuer. Long-term options have an
initial period of one year or more, but generally have terms between three and
five years. Unlike U.S. options, long-term European options do not settle
through a clearing corporation that guarantees the performance of the
counterparty. Instead, they are traded on an exchange and subject to the
exchange's trading regulations.
Forward Commitments and When-Issued and Delayed Delivery Securities
Forward commitments for the purchase or sale of securities may
include purchases on a "when-issued" basis or purchases or sales on a "delayed
delivery" basis. In some cases, a forward commitment may be conditioned upon the
occurrence of a subsequent event, such as approval and consummation of a merger,
corporate reorganization or debt restructuring (i.e., a "when, as and if issued"
trade). When forward commitment transactions are negotiated, the price is fixed
at the time the commitment is made. The Fund assumes the rights and risks of
ownership of the security, but the Fund does not pay for the securities until
they are received. If the Fund is fully or almost fully invested when forward
commitment purchases are outstanding, such purchases may result in a form of
leverage. Leveraging the portfolio in this manner may increase the Fund's
volatility of returns.
The use of forward commitments enables the Fund to protect against
anticipated changes in interest rates and/or prices. For instance, the Fund may
enter into a forward contract when it enters into a contract for the purchase or
sale of a security denominated in a foreign currency in order to "lock in" the
U.S. Dollar price of the security ("transaction hedge"). In addition, when the
Fund believes that a foreign currency may suffer a substantial decline against
the U.S. Dollar, it may enter into a forward sale contract to sell an amount of
that foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency, or when the Fund believes that
the U.S. Dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward purchase contract to buy that foreign currency for a
fixed dollar amount ("position hedge"). If the Adviser were to forecast
incorrectly the direction of exchange rate movements, the Fund might be required
to complete such when-issued or forward transactions at prices inferior to the
then current market values. When-issued securities and forward commitments may
be sold prior to the settlement date. If the Fund chooses to dispose of the
right to acquire a when-issued security prior to its acquisition or dispose of
its right to deliver or receive against a forward commitment, it may incur a
gain or loss. Any significant commitment of the Fund's assets to the purchase of
securities on a when-issued basis may increase the volatility of the Fund's NAV.
Forward commitments include "to be announced" ("TBA")
mortgage-backed securities, which are contracts for the purchase or sale of
mortgage-backed securities to be delivered at a future agreed-upon date, but
where the specific mortgage pool number or the number of pools that will be
delivered to fulfill the trade obligation or terms of the contract are unknown
at the time of the trade. Subsequent to the time of the trade, a mortgage pool
or pools guaranteed by the Government National Mortgage Association, or GNMA,
the Federal National Mortgage Association, or FNMA, or the Federal Home Loan
Mortgage Corporation, or FHLMC, (including fixed rate or variable rate
mortgages) are allocated to the TBA mortgage-backed securities transactions.
At the time the Fund intends to enter into a forward commitment, it
will record the transaction and thereafter reflect the value of the security
purchased or, if a sale, the proceeds to be received, in determining its NAV.
Any unrealized appreciation or depreciation reflected in such valuation of a
"when, as and if issued" security would be canceled in the event that the
required conditions did not occur and the trade was canceled.
Purchases of securities on a forward commitment or when-issued basis
may involve more risk than other types of purchases. For example, by committing
to purchase securities in the future, the Fund subjects itself to a risk of loss
on such commitments as well as on its portfolio securities. Also, the Fund may
have to sell assets which have been set aside in order to meet redemptions. In
addition, if the Fund determines it is advisable as a matter of investment
strategy to sell the forward commitment or "when-issued" or "delayed delivery"
securities before delivery, the Fund may incur a gain or loss because of market
fluctuations since the time the commitment to purchase such securities was made.
Any such gain or loss would be treated as a capital gain or loss for tax
purposes. When the time comes to pay for the securities to be purchased under a
forward commitment or on a "when-issued" or "delayed delivery" basis, the Fund
will meet its obligations from the then available cash flow or the sale of
securities, or, although it would not normally expect to do so, from the sale of
the forward commitment or "when-issued" or "delayed delivery" securities
themselves (which may have a value greater or less than the Fund's payment
obligation). No interest or dividends accrue to the purchaser prior to the
settlement date for securities purchased or sold under a forward commitment. In
addition, in the event the other party files for bankruptcy, becomes insolvent,
or defaults on its obligation, the Fund may be adversely affected.
Illiquid Securities
The Fund will not invest in illiquid securities if immediately after
such investment more than 15% or such other amount permitted by guidance
regarding the 1940 Act of the Fund's net assets would be invested in such
securities. For this purpose, illiquid securities include, among others, (a)
direct placements or other securities which are subject to legal or contractual
restrictions on resale or for which there is no readily available market (e.g.,
trading in the security is suspended or, in the case of unlisted securities,
market makers do not exist or will not entertain bids or offers), (b) options
purchased by the Fund over-the-counter and the cover for options written by the
Fund over-the-counter, and (c) repurchase agreements not terminable within seven
days. Securities that have legal or contractual restrictions on resale but have
a readily available market are not deemed illiquid for purposes of this
limitation.
Mutual funds do not typically hold a significant amount of
restricted securities (securities that are subject to restrictions on resale to
the general public) or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund may also have to take certain steps
or wait a certain amount of time in order to remove the transfer restrictions
for such restricted securities in order to dispose of them, resulting in
additional expense and delay.
Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act") allows a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the Securities
Act for resales of certain securities to qualified institutional buyers. To the
extent permitted by applicable law, Rule 144A Securities will not be treated as
illiquid for purposes of the foregoing restriction so long as such securities
meet the liquidity guidelines established by the Directors. Pursuant to these
guidelines, the Adviser will monitor the liquidity of the Fund's investment in
Rule 144A Securities. An insufficient number of qualified institutional buyers
interested in purchasing certain restricted securities held by the Fund,
however, could affect adversely the marketability of such portfolio securities
and the Fund might be unable to dispose of such securities promptly or at
reasonable prices.
The Adviser, acting under the oversight of the Board, will monitor
the liquidity of restricted securities in the Fund that are eligible for resale
pursuant to Rule 144A. In reaching liquidity decisions, the Adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers issuing quotations to
purchase or sell the security; (3) the number of other potential purchasers of
the security; (4) the number of dealers undertaking to make a market in the
security; (5) the nature of the security (including its unregistered nature) and
the nature of the marketplace for the security (e.g., the time needed to dispose
of the security, the method of soliciting offers and the mechanics of the
transfer); and (6) any applicable interpretation by the Securities and Exchange
Commission (the "SEC") or position with respect to such type of securities.
Investment in Exchange-Traded Funds and Other Investment Companies
The Fund may invest in shares of ETFs, subject to the restrictions
and limitations of the 1940 Act, or any applicable rules, exemptive orders or
regulatory guidance. ETFs are pooled investment vehicles, which may be managed
or unmanaged, that generally seek to track the performance of a specific index.
ETFs will not track their underlying indices precisely since the ETFs have
expenses and may need to hold a portion of their assets in cash, unlike the
underlying indices, and the ETFs may not invest in all of the securities in the
underlying indices in the same proportion as the indices for varying reasons.
The Fund will incur transaction costs when buying and selling ETF shares, and
indirectly bear the expenses of the ETFs. In addition, the market value of an
ETF's shares, which are based on supply and demand in the market for the ETFs
shares, may differ from their NAV. Accordingly, there may be times when an ETF's
shares trade at a discount to its NAV.
The Fund may also invest in investment companies other than ETFs, as
permitted by the 1940 Act or the rules and regulations thereunder. As with ETF
investments, if the Fund acquires shares in other investment companies,
shareholders would bear, indirectly, the expenses of such investment companies
(which may include management and advisory fees), which are in addition to the
Fund's expenses. The Fund intends to invest uninvested cash balances in an
affiliated money market fund as permitted by Rule 12d1-1 under the 1940 Act.
Loans of Portfolio Securities
The Fund may seek to increase income by lending portfolio securities
to brokers, dealers and financial institutions ("borrowers") to the extent
permitted under the 1940 Act or the rules and regulations thereunder (as such
statute, rules and regulations may be amended from time to time). Under the
securities lending program, all securities loans will be secured continually by
cash collateral. A principal risk in lending portfolio securities is that the
borrower will fail to return the loaned securities upon termination of the loan
and the collateral will not be sufficient to replace the loaned securities upon
the borrower's default. In determining whether to lend securities to a
particular borrower, the Adviser (subject to oversight by the Board) will
consider all relevant facts and circumstances, including the creditworthiness of
the borrower. The loans would be made only to firms deemed by the Adviser to be
creditworthy, and when, in the judgment of the Adviser, the consideration that
can be earned currently from securities loans of this type justifies the
attendant risk. The Fund will be compensated for the loan from the net return
from the interest earned on the cash collateral after a rebate is paid to the
borrower (which may be a negative amount - i.e, the borrower may pay a fee to
the Fund in connection with the loan) and fees are paid to the securities
lending agent and for certain other administrative expenses.
The Fund will have the right, by providing notice to the borrower at
any time, to call a loan and obtain the securities loaned within the normal and
customary settlement time for the securities. While 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 invest any cash collateral in a money market fund that
complies with Rule 2a-7, has been approved by the Board and is expected to be
advised by the Adviser. Any such investment of cash collateral will be subject
to the money market fund's risks. The Fund may pay reasonable finders',
administrative, and custodial fees in connection with a loan.
The Fund will not have the right to vote on any securities having
voting rights during the existence of the loan. The Fund will have the right to
regain record ownership of loaned securities or equivalent securities in order
to exercise voting or ownership rights. When the Fund lends its securities, its
investment performance will continue to reflect the value of securities on loan.
Mortgage-Related Securities and Other Asset-Backed Securities
The mortgage-related securities in which the Fund may invest
typically are securities representing interests in pools of mortgage loans made
by lenders such as savings and loan associations, mortgage bankers and
commercial banks and are assembled for sale to investors (such as the Fund) by
governmental, government-related or private organizations. Private organizations
include commercial banks, savings associations, mortgage companies, investment
banking firms, finance companies, special purpose finance entities (called
special purpose vehicles or SPVs) and other entities that acquire and package
loans for resales as mortgage-related securities. Specifically, these securities
may include pass-through mortgage-related securities, collateralized mortgage
obligations ("CMOs"), CMO residuals, adjustable-rate mortgage securities
("ARMS"), stripped mortgage-backed securities ("SMBSs"), commercial
mortgage-backed securities, mortgage dollar rolls, collateralized obligations
and other securities that directly or indirectly represent a participation in or
are secured by and payable from mortgage loans on real property and other
assets.
Pass-Through Mortgage-Related Securities. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment consisting of both interest and principal
payments. In effect, these payments are a "pass-through" of the monthly payments
made by the individual borrowers on their residential mortgage loans, net of any
fees paid to the issuer or guarantor of such securities. Additional payments are
caused by repayments of principal resulting from the sale of the underlying
residential property, refinancing or foreclosure, net of fees or costs that may
be incurred. Some mortgage-related securities are described as "modified
pass-through". These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, regardless of
whether or not the mortgagor actually makes the payment.
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage and other social and demographic conditions. As
prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. For pools of
fixed-rate 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with other
maturities or different characteristics will have varying average life
assumptions. The assumed average life of pools of mortgages having terms of less
than 30 years, is less than 12 years, but typically not less than 5 years.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising
interest rates the rate of prepayment tends to decrease, thereby lengthening the
actual average life of the pool. Historically, actual average life has been
consistent with the 12-year assumption referred to above. Actual prepayment
experience may cause the yield to differ from the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest rates than the
original investment, thus affecting the yield of the Fund. The compounding
effect from reinvestment of monthly payments received by the Fund will increase
the yield to shareholders compared with bonds that pay interest semi-annually.
The principal governmental (i.e., backed by the full faith and
credit of the U.S. Government) guarantor of mortgage-related securities is GNMA.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Administration-insured or U.S. Department of Veterans
Affairs-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of
the U.S. Government) guarantors include FNMA and FHLMC. FNMA and FHLMC are a
government-sponsored corporation or corporate instrumentality of the U.S.
Government respectively (government-sponsored entities or "GSEs"), which were
owned entirely by private stockholders until 2008 when they were placed in
conservatorship by the U.S. Government. After being placed in conservatorship,
the GSEs issued senior preferred stock and common stock to the U.S. Treasury in
an amount equal to 79.9% of each GSE in return for certain funding and liquidity
arrangements. The GSEs continue to operate as going concerns while in
conservatorship and each remains liable for all of its obligations associated
with its mortgage-backed securities. The U.S. Treasury provided additional
funding to the GSEs, but recently the GSEs have been paying dividends to the
U.S. Treasury in a cumulative amount almost equal to the payments made to the
GSEs by the U.S. Treasury since 2008. The future of the GSEs is unclear as
Congress is considering whether to adopt legislation that would severely
restrict or even terminate their operations. FNMA purchases residential
mortgages from a list of approved seller/servicers which include state and
federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA and are now, in light of the funding and liquidity arrangements referenced
above, effectively backed by the full faith and credit of the U.S. Government.
Participation certificates issued by FHLMC, which represent interests in
mortgages from FHLMC's national portfolio, are guaranteed by FHLMC as to the
timely payment of interest and ultimate collection of principal and are now, in
effect, backed by the full faith and credit of the U.S. Government.
Commercial banks, savings and loan associations, private mortgage
insurance companies, mortgage bankers and other secondary market issuers create
pass-through pools of conventional residential mortgage loans. Securities
representing interests in pools created by non-governmental private issuers
generally offer a higher rate of interest than securities representing interests
in pools created by governmental issuers because there are no direct or indirect
governmental guarantees of the underlying mortgage payments. However, private
issuers sometimes obtain committed loan facilities, lines of credit, letters of
credit, surety bonds or other forms of liquidity and credit enhancement to
support the timely payment of interest and principal with respect to their
securities if the borrowers on the underlying mortgages fail to make their
mortgage payments. The ratings of such non-governmental securities are generally
dependent upon the ratings of the providers of such liquidity and credit support
and would be adversely affected if the rating of such an enhancer were
downgraded.
The structuring of the pass-through pool may also provide credit
enhancement. Examples of such credit support arising out of the structure of the
transaction include the issue of senior and subordinated securities (e.g., the
issuance of securities by a SPV in multiple classes or "tranches", with one or
more classes being senior to other subordinated classes as to payment of
principal and interest, with the result that defaults on the underlying mortgage
loans are borne first by the holders of the subordinated class); creation of
"reserve funds" ( in which case cash or investments sometimes funded from a
portion of the payments on the underlying mortgage loans, are held in reserve
against future losses); and "overcollateralization" (in which case the scheduled
payments on, or the principal amount of, the underlying mortgage loans exceeds
that required to make payment of the securities and pay any servicing or other
fees). There can be no guarantee that the credit enhancements, if any will be
sufficient to prevent losses in the event of defaults on the underlying mortgage
loans.
In addition, mortgage-related securities that are issued by private
issuers are not subject to the underwriting requirements for the underlying
mortgages that are applicable to those mortgage-related securities that have a
government or GSE guaranteed. As a result, the mortgage loans underlying private
mortgage-related securities may, and frequently do, have less favorable
collateral, credit risk or other underwriting characteristics than government or
government-sponsored mortgage-related securities and have wider variances in a
number of terms, including interest rate, term, size, purposes and borrower
characteristics. Privately issued pools more frequently include second
mortgages, high loan-to-value mortgages and manufactured housing loans. The
coupon rates and maturities of the underlying mortgage loans in a private-label
mortgage-related pool may vary to a greater extent than those included in a
government guaranteed pool, and the pool may include subprime mortgage loans.
Subprime loans refer to loans made to borrowers with weakened credit histories
or with a lower capacity to make timely payments on their loans. For these
reasons, the loans underlying these securities have had in many cases higher
default rates than those loans that meet government underwriting requirements.
Collateralized Mortgage Obligations. Another form of
mortgage-related security is a "pay-through" security, which is a debt
obligation of the issuer secured by a pool of mortgage loans pledged as
collateral that is legally required to be paid by the issuer, regardless of
whether payments are actually made on the underlying mortgages. CMOs are the
predominant type of "pay-through" mortgage-related security. In a CMO, a series
of bonds or certificates is issued in multiple classes. Each class of a CMO,
often referred to as a "tranche", is issued at a specific coupon rate and has a
stated maturity or final distribution date. Principal prepayments on collateral
underlying a CMO may cause one or more tranches of the CMO to be retired
substantially earlier than the stated maturities or final distribution dates of
the collateral. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by GNMA,
FNMA or FHLMC, these CMOs represent obligations solely of the private issuer and
are not insured or guaranteed by GNMA, FNMA, FHLMC, any other governmental
agency or any other person or entity.
Adjustable-Rate Mortgage Securities. Another type of
mortgage-related security, known as "ARMS", bears interest at a rate determined
by reference to a predetermined interest rate or index. ARMS may be secured by
fixed-rate mortgages or adjustable-rate mortgages. ARMS secured by fixed-rate
mortgages generally have lifetime caps on the coupon rates of the securities. To
the extent that general interest rates increase faster than the interest rates
on the ARMS, these ARMS will decline in value. The adjustable-rate mortgages
that secure ARMS will frequently have caps that limit the maximum amount by
which the interest rate or the monthly principal and interest payments on the
mortgages may increase. These payment caps can result in negative amortization
(i.e., an increase in the balance of the mortgage loan). Furthermore, since many
adjustable-rate mortgages only reset on an annual basis, the values of ARMS tend
to fluctuate to the extent that changes in prevailing interest rates are not
immediately reflected in the interest rates payable on the underlying
adjustable-rate mortgages.
Stripped Mortgage-Related Securities. Stripped mortgage-related
securities ("SMRS") are mortgage-related securities that are usually structured
with separate classes of securities collateralized by a pool of mortgages or a
pool of mortgage backed bonds or pass-through securities, with each class
receiving different proportions of the principal and interest payments from the
underlying assets. A common type of SMRS has one class of interest-only
securities ("IOs") receiving all of the interest payments from the underlying
assets and one class of principal-only securities ("POs") receiving all of the
principal payments from the underlying assets. IOs and POs are extremely
sensitive to interest rate changes and are more volatile than mortgage-related
securities that are not stripped. IOs tend to decrease in value as interest
rates decrease and are extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal prepayments may have a material adverse effect on the yield to
maturity of the IO class. POs generally increase in value as interest rates
decrease. If prepayments of the underlying mortgages are greater than
anticipated, the amount of interest earned on the overall pool will decrease due
to the decreasing principal balance of the assets. Due to their structure and
underlying cash flows, SMRS may be more volatile than mortgage-related
securities that are not stripped. Changes in the values of IOs and POs can be
substantial and occur quickly, such as occurred in the first half of 1994 when
the value of many POs dropped precipitously due to increases in interest rates.
The Fund will only invest in SMRS that are issued by the U.S.
Government, its agencies or instrumentalities and supported by the full faith
and credit of the United States. Although SMRS are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, the complexity of these instruments and the smaller number
of investors in the sector can lend to illiquid markets in the sector.
Commercial Mortgage-Backed Securities. Commercial mortgage-backed
securities are securities that represent an interest in, or are secured by,
mortgage loans secured by multifamily or commercial properties, such as
industrial and warehouse properties, office buildings, retail space and shopping
malls, and cooperative apartments, hotels and motels, nursing homes, hospitals
and senior living centers. Commercial mortgage-backed securities have been
issued in public and private transactions by a variety of public and private
issuers using a variety of structures, some of which were developed in the
residential mortgage context, including multi-class structures featuring senior
and subordinated classes. Commercial mortgage-backed securities may pay fixed or
floating-rates of interest. The commercial mortgage loans that underlie
commercial mortgage-related securities have certain distinct risk
characteristics. Commercial mortgage loans generally lack standardized terms,
which may complicate their structure, tend to have shorter maturities than
residential mortgage loans and may not be fully amortizing. Commercial
properties themselves tend to be unique and are more difficult to value than
single-family residential properties. In addition, commercial properties,
particularly industrial and warehouse properties, are subject to environmental
risks and the burdens and costs of compliance with environmental laws and
regulations.
"To Be Announced" Mortgaged-Backed Securities. TBA mortgage-backed
securities are described in "Forward Commitments and When-Issued and Delayed
Delivery Securities" above.
Certain Risks. The value of mortgage-related securities is affected
by a number of factors. Unlike traditional debt securities, which have fixed
maturity dates, mortgage-related securities may be paid earlier than expected as
a result of prepayments of underlying mortgages. Such prepayments generally
occur during periods of falling mortgage interest rates. If property owners make
unscheduled prepayments of their mortgage loans, these prepayments will result
in the early payment of the applicable mortgage-related securities. In that
event, the Fund may be unable to invest the proceeds from the early payment of
the mortgage-related securities in investments that provide as high a yield as
the mortgage-related securities. Early payments associated with mortgage-related
securities cause these securities to experience significantly greater price and
yield volatility than is experienced by traditional fixed-income securities. The
level of general interest rates, general economic conditions and other social
and demographic factors affect the occurrence of mortgage prepayments. During
periods of falling interest rates, the rate of mortgage prepayments tends to
increase, thereby tending to decrease the life of mortgage-related securities.
Conversely, during periods of rising interest rates, a reduction in prepayments
may increase the effective life of mortgage-related securities, subjecting them
to greater risk of decline in market value in response to rising interest rates.
If the life of a mortgage-related security is inaccurately predicted, the Fund
may not be able to realize the rate of return it expected.
As with other fixed-income securities, there is also the risk of
nonpayment of mortgage-related securities, particularly for those securities
that are backed by mortgage pools that contain subprime loans. Market factors
adversely affecting mortgage loan repayments include a general economic
downturn, high unemployment, a general slowdown in the real estate market, a
drop in the market prices of real estate, or higher mortgage payments required
to be made by holders of adjustable rate mortgages due to scheduled increases or
increases due to higher interest rates.
Subordinated mortgage-related securities may have additional risks.
The subordinated mortgage-related security may serve as credit support for the
senior securities purchased by other investors. In addition, the payments of
principal and interest on these subordinated securities generally will be made
only after payments are made to the holders of securities senior to the
subordinated securities. Therefore, if there are defaults on the underlying
mortgage loans, the holders of subordinated mortgage-related securities will be
less likely to receive payments of principal and interest and will be more
likely to suffer a loss.
Commercial mortgage-related securities, like all fixed-income
securities, generally decline in value as interest rates rise. Moreover,
although generally the value of fixed-income securities increases during periods
of falling interest rates, this inverse relationship is not as marked in the
case of single-family residential mortgage-related securities, due to the
increased likelihood of prepayments during periods of falling interest rates,
and may not be as marked in the case of commercial mortgage-related securities.
The process used to rate commercial mortgage-related securities may focus on,
among other factors, the structure of the security, the quality and adequacy of
collateral and insurance, and the creditworthiness of the originators, servicing
companies and providers of credit support.
Although the market for mortgage-related securities is becoming
increasingly liquid, those issued by certain private organizations may not be
readily marketable. There may be a limited market for these securities,
especially when there is a perceived weakness in the mortgage and real estate
market sectors. In particular, the secondary market for CMOs, IOs and POs may be
more volatile and less liquid than those for other mortgage-related securities,
thereby potentially limiting the Fund's ability to buy or sell those securities
at any particular time. Without an active trading market, mortgage-related
securities held in the Fund's portfolio may be particularly difficult to value
because of the complexities involved in the value of the underlying mortgages.
In addition, the rating agencies may have difficulties in rating commercial
mortgage-related securities through different economic cycles and in monitoring
such ratings on a longer-term basis.
As with fixed-income securities generally, the value of
mortgage-related securities can also be adversely affected by increases in
general interest rates relative to the yield provided by such securities. Such
an adverse effect is especially possible with fixed-rate mortgage securities. If
the yield available on other investments rises above the yield of the fixed-rate
mortgage securities as a result of general increases in interest rate levels,
the value of the mortgage-related securities will decline.
Other Asset-Backed Securities. The Fund may invest in other
asset-backed securities. The securitization techniques used to develop
mortgage-related securities are being applied to a broad range of financial
assets. Through the use of trusts and special purpose corporations, various
types of assets, including automobile loans and leases, credit card receivables,
home equity loans, equipment leases and trade receivables, are being securitized
in structures similar to the structures used in mortgage securitizations. For
example, the Fund may invest in collateralized debt obligations ("CDOs"), which
include collateralized bond obligations ("CBOs"), collateralized loan
obligations ("CLOs"), and other similarly structured securities. CBOs and CLOs
are types of asset-backed securities. A CBO is a trust, which is backed by a
diversified pool of high-risk, below investment grade fixed-income securities. A
CLO is a trust typically collateralized by a pool of loans, which may include,
among others, domestic and foreign senior secured loans, senior unsecured loans,
and subordinate corporate loans, including loans that may be rated below
investment grade or equivalent unrated loans. These asset-backed securities are
subject to risks associated with changes in interest rates, prepayment of
underlying obligations and defaults similar to the risks of investment in
mortgage-related securities discussed above.
Each type of asset-backed security also entails unique risks
depending on the type of assets involved and the legal structure used. For
example, credit card receivables are generally unsecured obligations of the
credit card holder and these debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There have also been proposals to cap the interest rate that a
credit card issuer may charge. In some transactions, the value of the
asset-backed security is dependent on the performance of a third party acting as
credit enhancer or servicer. Furthermore, in some transactions (such as those
involving the securitization of vehicle loans or leases) it may be
administratively burdensome to perfect the interest of the security issuer in
the underlying collateral and the underlying collateral may become damaged or
stolen.
Real Estate Investment Trusts
Real Estate Investment Trusts ("REITs") are pooled investment
vehicles that invest primarily in income-producing real estate or real estate
related loans or interests. REITs are generally classified as equity REITs,
mortgage REITs, or a combination of equity and mortgage REITs. Equity REITs
invest the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of principal and interest payments. Similar to investment
companies such as the Fund, REITs are not taxed on income distributed to
shareholders provided they comply with several requirements of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The Fund will indirectly
bear its proportionate share of expenses incurred by REITs in which the Fund
invests in addition to the expenses incurred directly by the Fund.
Investing in REITs involves certain unique risks in addition to
those risks associated with investing in the real estate industry in general.
Equity REITs may be affected by changes in the value of the underlying property
owned by the REITs, while mortgage REITs may be affected by the quality of any
credit extended. REITs are dependent upon management skills, are not
diversified, and are subject to heavy cash flow dependency, default by borrowers
and self-liquidation.
Investing in REITs involves risks similar to those associated with
investing in small capitalization companies. REITs may have limited financial
resources, may trade less frequently and in a limited volume and may be subject
to more abrupt or erratic price movements than larger company securities.
Historically, small capitalization stocks, such as REITs, have had more price
volatility than larger capitalization stocks.
REITs are subject to the possibilities of failing to qualify for
tax-free pass-through of income under the Code and failing to maintain their
exemptions from registration under the 1940 Act. REITs (especially mortgage
REITs) also are subject to interest rate risks. When interest rates decline, the
value of a REIT's investment in fixed-rate obligations can be expected to rise.
Conversely, when interest rates rise, the value of a REIT's investment in
fixed-rate obligations can be expected to decline. In contrast, as interest
rates on adjustable rate mortgage loans are reset periodically, yields on a
REIT's investments in such loans will gradually align themselves to reflect
changes in market interest rates, causing the value of such investments to
fluctuate less dramatically in response to interest rate fluctuations than would
investments in fixed-rate obligations.
Repurchase Agreements and Buy/Sell Back Transactions
A repurchase agreement is an agreement by which the Fund purchases a
security and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-upon price and date, normally one day or a week later. The
purchase and repurchase obligations are transacted under one document. The
resale price is greater than the purchase price, reflecting an agreed-upon
"interest rate" that is effective for the period of time the buyer's money is
invested in the security, and which is related to the current market rate of the
purchased security rather than its coupon rate. During the term of the
repurchase agreement, the Fund monitors on a daily basis the market value of the
securities subject to the agreement and, if the market value of the securities
falls below the resale amount provided under the repurchase agreement, the
seller under the repurchase agreement is required to provide additional
securities or cash equal to the amount by which the market value of the
securities falls below the resale amount. Because a repurchase agreement permits
the Fund to invest temporarily available cash on a fully-collateralized basis,
repurchase agreements permit the Fund to earn a return on temporarily available
cash while retaining "overnight" flexibility in pursuit of investments of a
longer-term nature. Repurchase agreements may exhibit the characteristics of
loans by the Fund.
The obligation of the seller under the repurchase agreement is not
guaranteed, and there is a risk that the seller may fail to repurchase the
underlying security, whether because of the seller's bankruptcy or otherwise. In
such event, the Fund would attempt to exercise its rights with respect to the
underlying security, including possible sale of the securities. The Fund may
incur various expenses in the connection with the exercise of its rights and may
be subject to various delays and risks of loss, including (a) possible declines
in the value of the underlying securities, (b) possible reduction in levels of
income and (c) lack of access to the securities (if they are held through a
third-party custodian) and possible inability to enforce the Fund's rights. The
Fund's Board of Directors has established procedures, which are periodically
reviewed by the Board, pursuant to which the Adviser monitors the
creditworthiness of the dealers with which the Fund enters into repurchase
agreement transactions.
The Fund may enter into buy/sell back transactions, which are
similar to repurchase agreements. In this type of transaction, the Fund enters a
trade to buy securities at one price and simultaneously enters a trade to sell
the same securities at another price on a specified date. Similar to a
repurchase agreement, the repurchase price is higher than the sale price and
reflects current interest rates. Unlike a repurchase agreement, however, the
buy/sell back transaction, though done simultaneously, is two separate legal
agreements. A buy/sell back transaction also differs from a repurchase agreement
in that the seller is not required to provide margin payments if the value of
the securities falls below the repurchase price because the transaction is two
separate transactions. The Fund has the risk of changes in the value of the
purchased security during the term of the buy/sell back agreement although these
agreements typically provide for the repricing of the original transaction at a
new market price if the value of the security changes by a specific amount.
Rights and Warrants
The Fund may invest in rights or warrants, which entitle the holder
to buy equity securities at a specific price for a specific period of time, but
will do so only if the equity securities themselves are deemed appropriate by
the Adviser for inclusion in the Fund's portfolio. Rights and warrants may be
considered more speculative than certain other types of investments in that they
do not entitle a holder to dividends or voting rights with respect to the
securities which may be purchased nor do they represent any rights in the assets
of the issuing company. Also, the value of a right or warrant does not
necessarily change with the value of the underlying securities and a right or
warrant ceases to have value if it is not exercised prior to the expiration
date.
Securities Acquired in Restructurings and Workouts
The Fund's investments may include fixed-income securities
(particularly lower-rated fixed-income securities) or loan participations that
default or are in risk of default ("Distressed Securities"). The Fund's
investments may also include senior obligations of a borrower issued in
connection with a restructuring pursuant to Chapter 11 of the U.S. Bankruptcy
Code (commonly known as "debtor-in-possession" or "DIP" financings). Distressed
Securities may be the subject of restructurings outside of bankruptcy court in a
negotiated workout or in the context of bankruptcy proceedings. In connection
with these investments or an exchange or workout of such securities, the Fund
may determine or be required to accept various instruments. These instruments
may include, but are not limited to, equity securities, warrants, rights,
participation interests in sales of assets and contingent-interest obligations.
Depending upon, among other things, the Adviser's evaluation of the potential
value of such securities in relation to the price that could be obtained at any
given time if they were sold, the Fund may determine to hold the securities in
its portfolio.
Short-Term Investments
The Fund may invest in short-term investments including corporate
commercial paper and other short-term commercial obligations, in each case rated
or issued by companies with similar securities outstanding that are rated
Prime-1, Aa3 or better by Moody's or A-1, AA- or better by S&P; obligations
(including certificates of deposit, time deposits, demand deposits, and bankers'
acceptances) of banks with securities outstanding that are rated Prime-1, Aa3 or
better by Moody's or A-1, AA- or better by S&P; and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities with
remaining maturities not exceeding 18 months.
The Fund may invest in debt securities rated BBB- or higher by S&P
or Baa3 or higher by Moody's or, if not rated, of equivalent credit quality as
determined by the Adviser. The Fund expects that it will not retain a debt
security that is downgraded below BBB- or Baa3 (or an equivalent rating) or, if
not rated, determined by the Adviser to have undergone similar credit quality
deterioration, subsequent to purchase by the Fund. For additional information
about securities ratings, please see "Additional Investment Policies and
Practices - Securities Ratings" below.
Standby Commitment Agreements
The Fund may from time to time enter into standby commitment
agreements. Such agreements commit the Fund, for a stated period of time, to
purchase a stated amount of a security which may be issued and sold to the Fund
at the option of the issuer. The price and coupon of the security are fixed at
the time of the commitment. At the time of entering into the agreement the Fund
is paid a commitment fee, regardless of whether or not the security ultimately
is issued, which is typically approximately 0.5% of the aggregate purchase price
of the security which the Fund has committed to purchase. The fee is payable
whether or not the security is ultimately issued.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
will bear the risk of capital loss in the event the value of the security
declines and may not benefit from an appreciation in the value of the security
during the commitment period if the issuer decides not to issue and sell the
security to the Fund.
The purchase of a security subject to a standby commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued and the value of the security
will thereafter be reflected in the calculation of the Fund's NAV. The cost
basis of the security will be adjusted by the amount of the commitment fee. In
the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Securities Ratings
The ratings of fixed-income securities by nationally recognized
statistical rating organizations including S&P, Moody's, Fitch Ratings
("Fitch"), Dominion Bond Rating Service Ltd. and A.M. Best Company are a
generally accepted barometer of credit risk. They are, however, subject to
certain limitations from an investor's standpoint. The rating of an issuer is
heavily weighted by past developments and does not necessarily reflect probable
future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. In addition, there may be varying degrees
of difference in credit risk of securities within each rating category.
The Adviser generally uses ratings issued by S&P, Moody's, Fitch and
Dominion Bond Rating Service Ltd. Some securities are rated by more than one of
these ratings agencies, and the ratings assigned to the security by the rating
agencies may differ. In such an event and for purposes of determining compliance
with restrictions on investments for the Fund, if a security is rated by two or
more rating agencies, the Adviser will deem the security to be rated at the
highest rating. For example, if a security is rated by Moody's and S&P only,
with Moody's rating the security as Ba and S&P as BBB, the Adviser will deem the
security to be rated as the equivalent of BBB (i.e., Baa by Moody's and BBB by
S&P). Or, if a security is rated by Moody's, S&P and Fitch, with Moody's rating
the security as Ba1, S&P as BBB and Fitch as BB, the Adviser will deem the
security to be rated as the equivalent of BBB (i.e., Ba1 by Moody's, BBB by S&P
and BBB by Fitch).
Unless otherwise indicated, references to securities ratings by one
rating agency in this SAI shall include the equivalent rating by another rating
agency.
Certain Risk and Other Considerations
Risks of Investments in Foreign Securities. The securities markets
of many foreign countries are relatively small, with the majority of market
capitalization and trading volume concentrated in a limited number of companies
representing a small number of industries. Consequently, the Fund whose
investments include securities of foreign issuers may experience greater price
volatility and significantly lower liquidity than a portfolio invested solely in
equity securities of U.S. companies. These markets may be subject to greater
influence by adverse events generally affecting the market, and by large
investors trading significant blocks of securities, than is usual in the U.S.
Securities settlements may in some instances be subject to delays and related
administrative uncertainties.
Certain foreign countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only a
specified percentage of an issuer's outstanding securities or a specific class
of securities that may have less advantageous terms (including price) than
securities of the company available for purchase by nationals. These
restrictions or controls may at times limit or preclude investment in certain
securities and may increase the costs and expenses of the Fund. In addition, the
repatriation of investment income, capital, or the proceeds of sales of
securities from certain countries is controlled under regulations, including in
some cases the need for certain advance government notification or authority. If
a deterioration occurs in a country's balance of payments, the country could
impose temporary or indefinite restrictions on foreign capital remittances.
The Fund also could be adversely affected by delays in, or a refusal
to grant, any required governmental approval for repatriation, as well as by the
application of other restrictions on investment. Investing in local markets may
require the Fund to adopt special procedures that may involve additional costs
to the Fund. These factors may affect the liquidity of the Fund's investments in
any country and the Adviser will monitor the effect of any such factor or
factors on the Fund's investments. Furthermore, transaction costs including
brokerage commissions for transactions both on and off the securities exchanges
in many foreign countries are generally higher than in the U.S.
Issuers of securities in foreign jurisdictions are generally not
subject to the same degree of regulation as are U.S. issuers with respect to
such matters as insider trading rules, restrictions on market manipulation,
shareholder proxy requirements, and timely disclosure of information. The
reporting, accounting and auditing standards of foreign countries may differ, in
some cases significantly, from U.S. standards in important respects and less
information may be available to investors in securities of foreign issuers than
to investors in U.S. securities. Substantially less information is publicly
available about certain foreign issuers than is available about U.S. issuers.
The economies of individual foreign countries may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
domestic product or gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
Nationalization, expropriation or confiscatory taxation, currency blockage,
political changes, government regulation, political or social instability,
revolutions, wars or diplomatic developments could affect adversely the economy
of a non-U.S. country and the Fund's investments. In such events, the Fund could
lose its entire investment in the country involved. In addition, laws in foreign
countries governing business organizations, bankruptcy and insolvency may
provide less protection to security holders such as the Fund than that provided
by U.S. laws.
Foreign Currency Transactions. The Fund may invest in securities
denominated in foreign currencies and a corresponding portion of the Fund's
revenues will be received in such currencies. In addition, the Fund may conduct
foreign currency transactions for hedging and non-hedging purposes on a spot
(i.e., cash) basis or through the use of derivatives transactions, such as
forward currency exchange contracts, currency futures and options thereon, and
options on currencies as described above. The dollar equivalent of the Fund's
net assets and distributions will be adversely affected by reductions in the
value of certain foreign currencies relative to the U.S. Dollar. Such changes
will also affect the Fund's income. The Fund will, however, have the ability to
attempt to protect itself against adverse changes in the values of foreign
currencies by engaging in certain of the investment practices listed above.
While the Fund has this ability, there is no certainty as to whether and to what
extent the Fund will engage in these practices.
Currency exchange rates may fluctuate significantly over short
periods of time causing, along with other factors, the Fund's NAV to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by the intervention of U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the U.S. or abroad. To the extent the
Fund's total assets adjusted to reflect the Fund's net position after giving
effect to currency transactions is denominated or quoted in the currencies of
foreign countries, the Fund will be more susceptible to the risk of adverse
economic and political developments within those countries.
The Fund will incur costs in connection with conversions between
various currencies. The Fund may hold foreign currency received in connection
with investments when, in the judgment of the Adviser, it would be beneficial to
convert such currency into U.S. Dollars at a later date, based on anticipated
changes in the relevant exchange rate. If the value of the foreign currencies in
which the Fund receives its income falls relative to the U.S. Dollar between
receipt of the income and the making of Fund distributions, the Fund may be
required to liquidate securities in order to make distributions if the Fund has
insufficient cash in U.S. Dollars to meet, among other things, distribution
requirements that the Fund must satisfy to qualify as a regulated investment
company for federal income tax purposes. Similarly, if the value of a particular
foreign currency declines between the time the Fund incurs expenses in U.S.
Dollars and the time cash expenses are paid, the amount of the currency required
to be converted into U.S. Dollars in order to pay expenses in U.S. Dollars could
be greater than the equivalent amount of such expenses in the currency at the
time they were incurred. In light of these risks, the Fund may engage in certain
currency hedging transactions, which themselves, involve certain special risks.
Risks of Forward Currency Exchange Contracts, Foreign Currency
Futures Contracts and Options thereon, Options on Foreign Currencies, and
Over-the-Counter Options on Securities. Transactions in forward currency
exchange contracts, as well as futures and options on foreign currencies, are
subject to all of the correlation, liquidity and other risks outlined above. In
addition, however, such transactions are subject to the risk of governmental
actions affecting trading in or the prices of currencies underlying such
contracts, which could restrict or eliminate trading and could have a
substantial adverse effect on the value of positions held by the Fund. In
addition, the value of such positions could be adversely affected by a number of
other complex political and economic factors applicable to the countries issuing
the underlying currencies.
Further, unlike trading in most other types of instruments, there is
no systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading decisions will be based may not be as complete as the
comparable data on which the Fund makes investment and trading decisions in
connection with other transactions. Moreover, because the foreign currency
market is a global, twenty-four hour market, events could occur on that market
but will not be reflected in the forward, futures or options markets until the
following day, thereby preventing the Fund from responding to such events in a
timely manner.
Settlements of exercises of OTC forward currency exchange contracts
or foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make delivery
of such currencies in conformity with any U.S. or foreign restrictions and
regulations regarding the maintenance of foreign banking relationships and fees,
taxes or other charges.
Unlike transactions entered into by the Fund in futures contracts
and exchange-traded options, options on foreign currencies, forward currency
exchange contracts and OTC options on securities and securities indices, and
swaps may not be traded on contract markets regulated by the CFTC or (with the
exception of certain foreign currency options) the SEC. Such instruments may
instead be traded through financial institutions acting as market-makers,
although foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, that are subject to SEC regulation. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer could lose amounts substantially in excess
of the initial investment due to the margin and collateral requirements
associated with such positions.
In addition, OTC transactions can be entered into only with a
financial institution willing to take the opposite side, as principal, of the
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of OTC contracts, and the Fund could be required to retain options purchased or
written, or forward currency exchange contracts, until exercise, expiration or
maturity. This in turn could limit the Fund's ability to profit from open
positions or to reduce losses experienced, and could result in greater losses.
Further, OTC transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. The Fund will enter into an OTC transaction only with parties
whose creditworthiness has been reviewed and found to be satisfactory by the
Adviser.
Transactions in OTC options on foreign currencies are subject to a
number of conditions regarding the commercial purpose of the purchaser of such
option. The Fund is not able to determine at this time whether or to what extent
additional restrictions on the trading of OTC options on foreign currencies may
be imposed at some point in the future, or the effect that any such restrictions
may have on the hedging strategies to be implemented by them.
Options on foreign currencies traded on national securities
exchanges are within the jurisdiction of the SEC, as are other securities traded
on such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default. Further,
a liquid secondary market in options traded on a national securities exchange
may be more readily available than in the OTC market, potentially permitting the
Fund to liquidate open positions at a profit prior to exercise or expiration, or
to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
the margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the OTC market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, if the OCC determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or its clearing
member, the OCC may impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
INVESTMENT RESTRICTIONS
Fundamental Investment Policies
The following fundamental investment policies may not be changed
without approval by the vote of a majority of the Fund's outstanding voting
securities, which means the affirmative vote of the holders of (i) 67% or more
of the shares of the Fund represented at a meeting at which more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the outstanding shares of the Fund, whichever is less.
As a matter of fundamental policy the Fund may not:
(a) concentrate investments in an industry, other than the
real estate industry, as concentration may be defined under the 1940 Act or the
rules and regulations thereunder (as such statute, rules or regulations may be
amended from time to time) or by guidance regarding, interpretations of, or
exemptive orders under, the 1940 Act or the rules or regulations thereunder
published by appropriate regulatory authorities; (1)
1 The Fund has not adopted a policy to concentrate investments in any one
industry. Although it invests generally in the real estate industry
sector, the primary economic characteristics of companies in this sector
are materially different. For example, the Fund invests in equity and
mortgage REITs, each of which seek different types of investments. Equity
REITs invest directly in real estate properties and mortgage REITs make
loans to real estate owners and purchase mortgages on real estate. In
addition, there are many different types of REITs in which the Fund may
invest, including for example, those that invest in shopping malls,
industrial and office buildings, apartments, warehouses, lodging and
hotels, and health care facilities. REITs may also invest in specific
regions, states, or countries. Foreign REITs or other non-U.S. real estate
investments may have significantly different characteristics than those in
the U.S.
(b) issue any senior security (as that term is defined in the
1940 Act) or borrow money, except to the extent permitted by the 1940 Act or the
rules and regulations thereunder (as such statute, rules or regulations may be
amended from time to time) or by guidance regarding, or interpretations of, or
exemptive orders under, the 1940 Act or the rules or regulations thereunder
published by appropriate regulatory authorities. For purposes of this
restriction, margin and collateral arrangements, including, for example, with
respect to permitted borrowings, options, futures contracts, options on futures
contracts and other derivatives such as swaps are not deemed to involve the
issuance of a senior security;
(c) make loans except through (i) the purchase of debt
obligations in accordance with its investment objective and policies; (ii) the
lending of portfolio securities; (iii) the use of repurchase agreements; or (iv)
the making of loans to affiliated funds as permitted under the 1940 Act, the
rules and regulations thereunder (as such statutes, rules or regulations may be
amended from time to time), or by guidance regarding, and interpretations of, or
exemptive orders under, the 1940 Act;
(d) purchase or sell real estate except that it may dispose of
real estate acquired as a result of the ownership of securities or other
instruments. This restriction does not prohibit the Fund from investing in
securities or other instruments backed by real estate or in securities of
companies engaged in the real estate business;
(e) purchase or sell commodities regulated by the Commodity
Futures Trading Commission under the Commodity Exchange Act or commodities
contracts except for futures contracts and options on futures contracts; or
(f) act as an underwriter of securities, except that the Fund
may acquire restricted securities under circumstances in which, if such
securities were sold, the Fund might be deemed to be an underwriter for purposes
of the Securities Act.
As a fundamental policy, the Fund is diversified (as that term is
defined in the 1940 Act). This means that at least 75% of the Fund's assets
consist of:
o Cash or cash items;
o Government securities;
o Securities of other investment companies; and
o Securities of any one issuer that represent not more than 10%
of the outstanding voting securities of the issuer of the
securities and not more than 5% of the total assets of the
Fund.
Non-Fundamental Investment Policy
The following is a description of an operating policy that the Fund
has adopted but that is not fundamental and is subject to change without
shareholder approval.
The Fund may not purchase securities on margin, except (i) as
otherwise provided under rules adopted by the SEC under the 1940 Act or by
guidance regarding the 1940 Act, or interpretations thereof, and (ii) that the
Fund may obtain such short-term credits as are necessary for the clearance of
portfolio transactions, and the Fund may make margin payments in connection with
futures contracts, options, forward contracts, swaps, caps, floors, collars and
other financial instruments.
MANAGEMENT OF THE FUND
The Adviser
The Adviser, a Delaware limited partnership with principal offices
at 1345 Avenue of the Americas, New York, New York 10105, has been retained
under an investment advisory agreement (the "Advisory Agreement") to provide
investment advice and, in general, to conduct the management and investment
program of the Fund under the supervision of the Board. The Adviser is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended.
The Adviser is a leading global investment management firm
supervising client accounts with assets as of September 30, 2013, totaling
approximately $445 billion. The Adviser provides management services for many of
the largest U.S. public and private employee benefit plans, endowments,
foundations, public employee retirement funds, banks, insurance companies and
high net worth individuals worldwide.
As of September 30, 2013, the direct ownership structure of the
Adviser, expressed as a percentage of general and limited partnership interests,
was as follows:
AXA and its subsidiaries 64.0%
AllianceBernstein Holding L.P. 34.5
Unaffiliated holders 1.5
---------------------
100.0%
=====================
|
AXA is a societe anonyme organized under the laws of France and the
holding company for an international group of insurance and related financial
services companies, through certain of its subsidiaries ("AXA and its
subsidiaries"). AllianceBernstein Holding L.P. ("Holding") is a Delaware limited
partnership, the units of which ("Holding Units") are traded publicly on the New
York Stock Exchange under the ticker symbol "AB". As of September 30, 2013, AXA
also owned approximately 1.6% of the issued and outstanding assignments of
beneficial ownership of Holding Units.
AllianceBernstein Corporation (an indirect wholly-owned subsidiary
of AXA) is the general partner of both Holding and the Adviser.
AllianceBernstein Corporation owns 100,000 general partnership units in Holding
and a 1% general partnership interest in the Adviser. Including both the general
partnership and limited partnership interests in Holding and the Adviser, AXA
and its subsidiaries had an approximate 64.6% economic interest in the Adviser
as of September 30, 2013.
Advisory Agreement and Expenses
The Adviser serves as investment manager and adviser of the Fund,
continuously furnishes an investment program for the Fund, and manages,
supervises and conducts the affairs of the Fund, subject to the Board's
oversight.
Under the Advisory Agreement, the Adviser provides investment
advisory services and order placement facilities for the Fund and pays all
compensation of Directors and officers of the Fund who are affiliated persons of
the Adviser. The Adviser or an affiliate also furnishes the Fund, without
charge, management supervision and assistance and office facilities and provides
persons satisfactory to the Board of Directors to act as officers and employees
of the Company.
The Adviser is, under the Advisory Agreement, responsible for
certain expenses incurred by the Fund, including, for example, office facilities
and certain administrative services, and any expenses incurred in promoting the
sale of shares of the Fund (other than the portion of the promotional expenses
borne by the Fund in accordance with the Rule 12b-1 Plan, as defined below, and
the costs of printing Fund prospectuses and other reports to shareholders and
fees related to registration with the SEC and with state regulatory
authorities).
The Fund has, under the Advisory Agreement, assumed the obligation
for payment of all of its other expenses. As to the obtaining of services other
than those specifically provided to the Fund by the Adviser, the Fund may employ
its own personnel. For such services, it also may utilize personnel employed by
the Adviser or its affiliates and; in such event, the services will be provided
to the Fund at cost and the payments therefore must be specifically approved by
the Board. The Fund paid to the Adviser, after waiver or reimbursement, a total
of $47,156 in respect of such services during the Fund's fiscal year ended
October 31, 2013.
The Advisory Agreement will continue in effect so long as its
continuance is approved annually by a vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by the Board,
including, in either case, approval by a majority of the Directors who are not
parties to the Advisory Agreement or "interested persons" of any such party as
defined in the 1940 Act. Most recently, the Board approved continuance of the
Advisory Agreement for the Fund for an additional annual term at meetings held
on April 30-May 2, 2013.
Any material amendment to the Advisory Agreement must be approved by
the vote of a majority of the outstanding securities of the Fund and by the vote
of a majority of the Directors who are not interested persons of the Fund or the
Adviser. The Advisory Agreement is terminable without penalty on 60 days'
written notice by a vote of a majority of the outstanding voting securities of
the Fund, by a vote of a majority of the Directors, or by the Adviser, and will
automatically terminate in the event of its assignment. The Advisory Agreement
provides that, in the absence of willful misfeasance, bad faith or gross
negligence on the part of the Adviser, or of reckless disregard of its
obligations thereunder, the Adviser shall not be liable for any action or
failure to act in accordance with its duties thereunder.
For the services rendered by the Adviser under the Advisory
Agreement, the Fund paid the Adviser a fee effective September 7, 2004 of 0.55%
of the first $2.5 billion, 0.45% of the excess over $2.5 billion up to $5
billion and 0.40% of the excess over $5 billion as a percentage of the Fund's
average daily net assets. The fee is accrued daily and paid monthly.
For the fiscal years ended October 31, 2011, October 31, 2012 and
October 31, 2013, the Adviser received advisory fees of $4,513,064, $3,535,837
and $2,918,859, respectively, from the Fund.
Certain other clients of the Adviser may have investment objectives
and policies similar to those of the Fund. The Adviser may, from time to time,
make recommendations which result in the purchase or sale of the particular
security by its other clients simultaneously with a purchase or sale thereof by
the Fund. If transactions on behalf of more than one client during the same
period increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price. It is the policy
of the Adviser to allocate advisory recommendations and the placing of orders in
a manner that is deemed equitable by the Adviser to the accounts involved,
including the Fund. When two or more of the Adviser's clients (including the
Fund) are purchasing or selling the same security on a given day through the
same broker or dealer, such transactions may be averaged as to price.
ALL FUNDS
The Adviser may act as an investment adviser to other persons, firms
or corporations, including investment companies, and is the investment adviser
to: AllianceBernstein Blended Style Series, Inc., AllianceBernstein Bond Fund,
Inc., AllianceBernstein Cap Fund, Inc., AllianceBernstein Core Opportunities
Fund, Inc., AllianceBernstein Corporate Shares, AllianceBernstein Discovery
Growth Fund, Inc., AllianceBernstein Equity Income Fund, Inc., AllianceBernstein
Exchange Reserves, AllianceBernstein Fixed-Income Shares, Inc.,
AllianceBernstein Global Bond Fund, Inc., AllianceBernstein Global Real Estate
Investment Fund, Inc., AllianceBernstein Global Risk Allocation Fund, Inc.,
AllianceBernstein Global Thematic Growth Fund, Inc., AllianceBernstein Growth
and Income Fund, Inc., AllianceBernstein High Income Fund, Inc.,
AllianceBernstein International Growth Fund, Inc., AllianceBernstein Large Cap
Growth Fund, Inc., AllianceBernstein Municipal Income Fund, Inc.,
AllianceBernstein Municipal Income Fund II, AllianceBernstein Trust,
AllianceBernstein Unconstrained Bond Fund, Inc., AllianceBernstein Variable
Products Series Fund, Inc., Sanford C. Bernstein Fund, Inc., Sanford C.
Bernstein Fund II, Inc., The AllianceBernstein Pooling Portfolios and The
AllianceBernstein Portfolios, all open-end investment companies; and to
AllianceBernstein Global High Income Fund, Inc., AllianceBernstein Income Fund,
Inc., AllianceBernstein Multi-Manager Alternative Fund, AllianceBernstein
National Municipal Income Fund, Inc., Alliance California Municipal Income Fund,
Inc. and Alliance New York Municipal Income Fund, Inc., all registered
closed-end investment companies. The registered investment companies for which
the Adviser serves as investment adviser are referred to collectively below as
the "AllianceBernstein Fund Complex", while all of these investment companies,
except the Sanford C. Bernstein Fund, Inc. and the AllianceBernstein
Multi-Manager Alternative Fund, are referred to collectively below as the
"AllianceBernstein Funds".
Board of Directors Information
Certain information concerning the Company's Directors is set forth
below.
OTHER PUBLIC
COMPANY
PORTFOLIOS IN DIRECTORSHIPS
NAME, ADDRESS* PRINCIPAL ALLIANCEBERNSTEIN HELD BY
AGE AND OCCUPATION(S) FUND COMPLEX DIRECTOR IN
(YEAR FIRST DURING PAST FIVE OVERSEEN THE PAST
ELECTED**) YEARS OR LONGER BY DIRECTOR FIVE YEARS
---------- ---------------- ------------ -----------
INDEPENDENT DIRECTORS
Marshall C. Turner, Jr., #, ^ Private Investor since prior to 100 Xilinx, Inc. (programmable
Chairman of the Board 2009. Former CEO of DuPont logic semiconductors)
72 Photomasks, Inc. (components of and SunEdison, Inc.
(2005) semi-conductor manufacturing), (semi-conductor
2003-2006, and interim CEO substrates, solar
1999-2000. Interim CEO of MEMC materials and solar power
Electronic Materials, Inc. plants) since prior to
(semi-conductor and solar cell 2009
substrates) from November 2008
until March 2009. He has
extensive operating and
early-stage investment
experience, including prior
service as general partner of
three institutional venture
capital partnerships, and serves
on the boards of three education
and science-related non-profit
organizations. He has served as a
director of one AllianceBernstein
fund since 1992, and director or
trustee of multiple
AllianceBernstein funds since
2005. He is Chairman of the
AllianceBernstein Funds since
January 2014.
John H. Dobkin, # Independent Consultant since prior 100 None
71 to 2009. Formerly, President of
(1997) Save Venice, Inc. (preservation
organization) from 2001-2002,
Senior Advisor from June 1999-June
2000 and President of Historic
Hudson Valley (historic
preservation) from December
1989-May 1999. Previously,
Director of the National Academy
of Design. He has served as a
director or trustee of various
AllianceBernstein Funds since
1992.
Michael J. Downey, # Private Investor since prior to 100 Asia Pacific Fund, Inc.
70 2009. Formerly, managing partner since prior to 2009 and
(2005) of Lexington Capital, LLC Prospect Acquisition
(investment advisory firm) from Corp. (financial
December 1997 until December 2003. services) from 2007
From 1987 until 1993, Chairman and until 2009 and The
CEO of Prudential Mutual Fund Merger Fund since prior
Management, director of the to 2009 until 2013
Prudential mutual funds and member
of the Executive Committee of
Prudential Securities Inc. He has
served as a director or trustee of
the AllianceBernstein Funds since
2005 and is a director and
chairman of one other registered
investment company.
William H. Foulk, Jr., #, ## Investment Adviser and an 100 None
81 Independent Consultant since prior
(1997) to 2009. Formerly, he was Senior
Manager of Barrett Associates,
Inc., a registered investment
adviser. He was formerly Deputy
Comptroller and Chief Investment
Officer of the State of New York
and, prior thereto, Chief
Investment Officer of the New York
Bank for Savings. He has served
as a director or trustee of
various AllianceBernstein Funds,
and has been Chairman of the
Independent Directors Committee of
the AllianceBernstein Funds since
2003. He served as Chairman of
such Funds from 2003 through
December 2013.
D. James Guzy, # Chairman of the Board of PLX 100 PLX Technology
77 Technology (semi-conductors) and (semi-conductors) since
(2005) of SRC Computers Inc., with which prior to 2009, Cirrus
he has been associated since prior Logic Corporation
to 2009. He was a Director of (semi-conductors) since
Intel Corporation prior to 2009 until
(semi-conductors) from 1969 until July 2011
2008, and served as Chairman of
the Finance Committee of such
company for several years until
May 2008. He has served as a
director or trustee of one or more
of the AllianceBernstein Funds
since 1982.
Nancy P. Jacklin, #, ## Professorial Lecturer at the Johns 100 None
65 Hopkins School of Advanced
(2006) International Studies since 2008.
Formerly, U.S. Executive Director
of the International Monetary Fund
(December 2002-May 2006); Partner,
Clifford Chance (1992-2002);
Sector Counsel, International
Banking and Finance, and Associate
General Counsel, Citicorp
(1985-1992); Assistant General
Counsel (International), Federal
Reserve Board of Governors
(1982-1985); and Attorney Advisor,
U.S. Department of the Treasury
(1973-1982). Member of the Bar of
the District of Columbia and of
New York; and member of the
Council on Foreign Relations. She
has served as a director or
trustee of the AllianceBernstein
Funds since 2006.
Garry L. Moody, # Independent Consultant. Formerly, 100 Greenbacker Renewable
61 Partner, Deloitte & Touche LLP Energy Company LLC
(2008) (1995-2008) where he held a number (renewable energy and
of senior positions, including energy efficiency
Vice Chairman, and U.S. and Global projects) from August
Investment Management Practice 2013 until January
Managing Partner; President, 2014
Fidelity Accounting and Custody
Services Company (1993-1995); and
Partner, Ernst & Young LLP,
(1975-1993), where he served as
the National Director of Mutual
Fund Tax Services and Managing
Partner of its Chicago Office Tax
department. He is a member of
both the Governing Council of the
Independent Directors Council
(IDC), an organization of
independent directors of mutual
funds, and the Trustee Advisory
Board of BoardIQ, a biweekly
publication focused on issues and
news affecting directors of mutual
funds. He has served as a
director or trustee, and as
Chairman of the Audit Committee,
of the AllianceBernstein Funds
since 2008.
Earl D. Weiner, # Of Counsel, and Partner prior to 100 None
74 January 2007, of the law firm
(2007) Sullivan & Cromwell LLP, and
member of ABA Federal Regulation
of Securities Committee Task Force
to draft editions of the Fund
Director's Guidebook. He has
served as a director or trustee of
the AllianceBernstein Funds since
2007 and is Chairman of the
Governance and Nominating
Committees of the Funds.
INTERESTED DIRECTOR
Robert M. Keith, + Senior Vice President of the 100 None
53 Adviser++ and head of
AllianceBernstein Investments,
Inc. ("ABI")++ since July 2008;
Director of ABI and President of
the AllianceBernstein Mutual
Funds. Previously, he served as
Executive Managing Director of ABI
from December 2006 to June 2008.
Prior to joining ABI in 2006,
Executive Managing Director of
Bernstein Global Wealth
Management, and prior thereto,
Senior Managing Director and
Global Head of Client Service and
Sales of the Adviser's
institutional investment
management business since 2004.
Prior thereto, Managing Director
and Head of North American Client
Service and Sales in the Adviser's
institutional investment
management business.
|
* The address for each of the Fund's Directors is c/o AllianceBernstein
L.P., Attention: Philip L. Kirstein, 1345 Avenue of the Americas, New
York, NY 10105.
** There is no stated term of office for the Company's Directors.
# Member of the Audit Committee, the Governance and Nominating Committee and
the Independent Directors Committee.
## Member of the Fair Value Pricing Committee.
+ Mr. Keith is an "interested person", as defined in Section 2(a)(19) of the
1940 Act, of the Trust due to his position as a Senior Vice President of
the Adviser.
++ The Adviser and ABI are affiliates of the Fund.
^ Mr. Turner became Chairman of the Board on January 1, 2014.
The business and affairs of the Fund are managed under the direction
of the Board. Directors who are not "interested persons" of the Fund, as defined
in the 1940 Act, are referred to as "Independent Directors", and Directors who
are "interested persons" of the Fund are referred to as "Interested Directors".
Certain information concerning the Fund's governance structure and each Director
is set forth below.
Experience, Skills, Attributes, and Qualifications of the Fund's
Directors. The Governance and Nominating Committee of the Board, which is
composed of Independent Directors, reviews the experience, qualifications,
attributes and skills of potential candidates for nomination or election by the
Board, and conducts a similar review in connection with the proposed nomination
of current Directors for re-election by stockholders at any annual or special
meeting of stockholders. In evaluating a candidate for nomination or election as
a Director the Governance and Nominating Committee takes into account the
contribution that the candidate would be expected to make to the diverse mix of
experience, qualifications, attributes and skills that the Governance and
Nominating Committee believes contributes to good governance for the Fund.
Additional information concerning the Governance and Nominating Committee's
consideration of nominees appears in the description of the Committee below.
The Board believes that, collectively, the Directors have balanced
and diverse experience, qualifications, attributes and skills, which allow the
Board to operate effectively in governing the Fund and protecting the interests
of stockholders. The Board has concluded that, based on each Director's
experience, qualifications, attributes or skills on an individual basis and in
combination with those of the other Directors, each Director is qualified and
should continue to serve as such.
In determining that a particular Director was and continues to be
qualified to serve as a Director, the Board has considered a variety of
criteria, none of which, in isolation, was controlling. In addition, the Board
has taken into account the actual service and commitment of each Director during
his or her tenure (including the Director's commitment and participation in
Board and committee meetings, as well as his or her current and prior leadership
of standing and ad hoc committees) in concluding that each should continue to
serve. Additional information about the specific experience, skills, attributes
and qualifications of each Director, which in each case led to the Board's
conclusion that the Director should serve (or continue to serve) as a trustee or
director of the Fund, is provided in the table above and in the next paragraph.
Among other attributes and qualifications common to all Directors
are their ability to review critically, evaluate, question and discuss
information provided to them (including information requested by the Directors),
to interact effectively with the Adviser, other service providers, counsel and
the Fund's independent registered public accounting firm, and to exercise
effective business judgment in the performance of their duties as Directors. In
addition to his or her service as a Director of the Fund and other
AllianceBernstein Funds as noted in the table above: Mr. Dobkin has experience
as an executive of a number of organizations and served as Chairman of the Audit
Committee of many of the AllianceBernstein Funds from 2001 to 2008; Mr. Downey
has experience in the investment advisory business including as Chairman and
Chief Executive Officer of a large fund complex and as director of a number of
non-AllianceBernstein funds and as Chairman of a non-AllianceBernstein
closed-end fund; Mr. Foulk has experience in the investment advisory and
securities businesses, including as Deputy Comptroller and Chief Investment
Officer of the State of New York (where his responsibilities included bond
issuances, cash management and oversight of the New York Common Retirement
Fund), has served as the Independent Directors Committee since 2003, served as
Chairman of the AllianceBernstein Funds from 2003 through December 2013, and is
active in a number of mutual fund related organizations and committees; Mr. Guzy
has experience as a corporate director including as Chairman of a public company
and Chairman of the Finance Committee of a large public technology company; Ms.
Jacklin has experience as a financial services regulator including as U.S.
Executive Director of the International Monetary Fund, which is responsible for
ensuring the stability of the international monetary system, and as a financial
services lawyer in private practice; Mr. Keith has experience as an executive of
the Adviser with responsibility for, among other things, the AllianceBernstein
Funds; Mr. Moody has experience as a certified public accountant including
experience as Vice Chairman and U.S. and Global Investment Management Practice
Partner for a major accounting firm, is a member of both the governing council
of an organization of independent directors of mutual funds, and the Trustee
Advisory Board of BoardIQ, a biweekly publication focused on issues and news
affecting directors of mutual funds, has served as a Director of Greenbacker
Renewable Energy Company LLC, and has served as a director or trustee and
Chairman of the Audit Committee of the AllianceBernstein Funds since 2008; Mr.
Turner has experience as a director (including Chairman and Chief Executive
Officer of a number of companies) and as a venture capital investor including
prior service as general partner of three institutional venture capital
partnerships, and has served as Chairman of the AllianceBernstein Funds since
January 2014; and Mr. Weiner has experience as a securities lawyer whose
practice includes registered investment companies and as Chairman, director or
trustee of a number of boards, and has served as Chairman of the Governance and
Nominating Committee of the AllianceBernstein Funds since 2007. The disclosure
herein of a director's experience, qualifications, attributes and skills does
not impose on such director any duties, obligations, or liability that are
greater than the duties, obligations and liability imposed on such director as a
member of the Board and any committee thereof in the absence of such experience,
qualifications, attributes and skills.
Board Structure and Oversight Function. The Board is responsible for
oversight of the Fund. The Fund has engaged the Adviser to manage the Fund on a
day-to-day basis. The Board is responsible for overseeing the Adviser and the
Fund's other service providers in the operations of the Fund in accordance with
the Fund's investment objective and policies and otherwise in accordance with
its prospectus, the requirements of the 1940 Act and other applicable Federal,
state and other securities and other laws, and the Fund's charter and bylaws.
The Board typically meets in-person at regularly scheduled meetings eight times
throughout the year. In addition, the Directors may meet in-person or by
telephone at special meetings or on an informal basis at other times. The
Independent Directors also regularly meet without the presence of any
representatives of management. As described below, the Board has established
four standing committees - the Audit, Governance and Nominating, Independent
Directors, and Fair Value Pricing Committees - and may establish ad hoc
committees or working groups from time to time, to assist the Board in
fulfilling its oversight responsibilities. Each committee is composed
exclusively of Independent Directors. The responsibilities of each committee,
including its oversight responsibilities, are described further below. The
Independent Directors have also engaged independent legal counsel, and may from
time to time engage consultants and other advisors, to assist them in performing
their oversight responsibilities.
An Independent Director serves as Chairman of the Board. The
Chairman's duties include setting the agenda for each Board meeting in
consultation with management, presiding at each Board meeting, meeting with
management between Board meetings, and facilitating communication and
coordination between the Independent Directors and management. The Directors
have determined that the Board's leadership by an Independent Director and its
committees composed exclusively of Independent Directors is appropriate because
they believe it sets the proper tone to the relationships between the Fund, on
the one hand, and the Adviser and other service providers, on the other, and
facilitates the exercise of the Board's independent judgment in evaluating and
managing the relationships. In addition, the Fund is required to have an
Independent Director as Chairman pursuant to certain 2003 regulatory settlements
involving the Adviser.
Risk Oversight. The Fund is subject to a number of risks, including
investment, compliance and operational risks. Day-to-day risk management with
respect to the Fund resides with the Adviser or other service providers
(depending on the nature of the risk), subject to supervision by the Adviser.
The Board has charged the Adviser and its affiliates with (i) identifying events
or circumstances the occurrence of which could have demonstrable and material
adverse effects on the Fund; (ii) to the extent appropriate, reasonable or
practicable, implementing processes and controls reasonably designed to lessen
the possibility that such events or circumstances occur or to mitigate the
effects of such events or circumstances if they do occur; and (iii) creating and
maintaining a system designed to evaluate continuously, and to revise as
appropriate, the processes and controls described in (i) and (ii) above.
Risk oversight forms part of the Board's general oversight of the
Fund's investment program and operations and is addressed as part of various
regular Board and committee activities. The Fund's investment management and
business affairs are carried out by or through the Adviser and other service
providers. Each of these persons has an independent interest in risk management
but the policies and the methods by which one or more risk management functions
are carried out may differ from the Fund's and each other's in the setting of
priorities, the resources available or the effectiveness of relevant controls.
Oversight of risk management is provided by the Board and the Audit Committee.
The Directors regularly receive reports from, among others, management
(including the Global Heads of Investment Risk and Trading Risk of the Adviser),
the Fund's Senior Officer (who is also the Fund's chief compliance officer), its
independent registered public accounting firm, counsel, and internal auditors
for the Adviser, as appropriate, regarding risks faced by the Fund and the
Adviser's risk management programs.
Not all risks that may affect the Fund can be identified, nor can
controls be developed to eliminate or mitigate their occurrence or effects. It
may not be practical or cost-effective to eliminate or mitigate certain risks,
the processes and controls employed to address certain risks may be limited in
their effectiveness, and some risks are simply beyond the reasonable control of
the Fund or the Adviser, its affiliates or other service providers. Moreover, it
is necessary to bear certain risks (such as investment-related risks) to achieve
the Fund's goals. As a result of the foregoing and other factors the Fund's
ability to manage risk is subject to substantial limitations.
Board Committees. The Board has four standing committees -- an Audit
Committee, a Governance and Nominating Committee, a Fair Value Pricing Committee
and an Independent Directors Committee. The members of the Audit, Governance and
Nominating, Fair Value Pricing and Independent Directors Committees are
identified above.
The function of the Audit Committee is to assist the Board in its
oversight of the Fund's financial reporting process. The Audit Committee met
three times during the Fund's most recently completed fiscal year.
The function of the Governance and Nominating Committee includes the
nomination of persons to fill any vacancies or newly created positions on the
Board. The Governance and Nominating Committee met three times during the Fund's
most recently completed fiscal year.
The Board has adopted a charter for its Governance and Nominating
Committee. Pursuant to the charter, the Committee assists the Board in carrying
out its responsibilities with respect to governance of the Fund and identifies,
evaluates, selects and nominates candidates for the Board. The Committee may
also set standards or qualifications for Directors and reviews at least annually
the performance of each Director, taking into account factors such as attendance
at meetings, adherence to Board policies, preparation for and participation at
meetings, commitment and contribution to the overall work of the Board and its
committees, and whether there are health or other reasons that might affect the
Director's ability to perform his or her duties. The Committee may consider
candidates as Directors submitted by the Fund's current Board members, officers,
the Adviser, stockholders and other appropriate sources.
Pursuant to the charter, the Governance and Nominating Committee
will consider candidates for nomination as a director submitted by a shareholder
or group of shareholders who have beneficially owned at least 5% of the Fund's
common stock or shares of beneficial interest for at least two years prior to
the time of submission and who timely provide specified information about the
candidates and the nominating shareholder or group. To be timely for
consideration by the Governance and Nominating Committee, the submission,
including all required information, must be submitted in writing to the
attention of the Secretary at the principal executive offices of the Company not
less than 120 days before the date of the proxy statement for the previous
year's annual meeting of shareholders. If the Company did not hold an annual
meeting of shareholders in the previous year, the submission must be delivered
or mailed and received within a reasonable amount of time before the Fund begins
to print and mail its proxy materials. Public notice of such upcoming annual
meeting of shareholders may be given in a shareholder report or other mailing to
shareholders or by other means deemed by the Governance and Nominating Committee
or the Board to be reasonably calculated to inform shareholders.
Shareholders submitting a candidate for consideration by the
Governance and Nominating Committee must provide the following information to
the Governance and Nominating Committee: (i) a statement in writing setting
forth (A) the name, date of birth, business address and residence address of the
candidate; (B) any position or business relationship of the candidate, currently
or within the preceding five years, with the shareholder or an associated person
of the shareholder as defined below; (C) the class or series and number of all
shares of the Fund owned of record or beneficially by the candidate; (D) any
other information regarding the candidate that is required to be disclosed about
a nominee in a proxy statement or other filing required to be made in connection
with the solicitation of proxies for election of Directors pursuant to Section
20 of the 1940 Act and the rules and regulations promulgated thereunder; (E)
whether the shareholder believes that the candidate is or will be an "interested
person" of the Company (as defined in the 1940 Act) and, if believed not to be
an "interested person", information regarding the candidate that will be
sufficient for the Company to make such determination; and (F) information as to
the candidate's knowledge of the investment company industry, experience as a
director or senior officer of public companies, directorships on the boards of
other registered investment companies and educational background; (ii) the
written and signed consent of the candidate to be named as a nominee and to
serve as a Director if elected; (iii) the written and signed agreement of the
candidate to complete a directors' and officers' questionnaire if elected; (iv)
the shareholder's consent to be named as such by the Company; (v) the class or
series and number of all shares of each Fund of the Company owned beneficially
and of record by the shareholder and any associated person of the shareholder
and the dates on which such shares were acquired, specifying the number of
shares owned beneficially but not of record by each, and stating the names of
each as they appear on the Company's record books and the names of any nominee
holders for each; and (vi) a description of all arrangements or understandings
between the shareholder, the candidate and/or any other person or persons
(including their names) pursuant to which the recommendation is being made by
the shareholder. "Associated person of the shareholder" means any person who is
required to be identified under clause (vi) of this paragraph and any other
person controlling, controlled by or under common control with, directly or
indirectly, (a) the shareholder or (b) the associated person of the shareholder.
The Governance and Nominating Committee may require the shareholder
to furnish such other information as it may reasonably require or deem necessary
to verify any information furnished pursuant to the nominating procedures
described above or to determine the qualifications and eligibility of the
candidate proposed by the shareholder to serve on the Board. If the shareholder
fails to provide such other information in writing within seven days of receipt
of written request from the Governance and Nominating Committee, the
recommendation of such candidate as a nominee will be deemed not properly
submitted for consideration, and will not be considered, by the Committee.
The Governance and Nominating Committee will consider only one
candidate submitted by such a shareholder or group for nomination for election
at an annual meeting of shareholders. The Governance and Nominating Committee
will not consider self-nominated candidates. The Governance and Nominating
Committee will consider and evaluate candidates submitted by shareholders on the
basis of the same criteria as those used to consider and evaluate candidates
submitted from other sources. These criteria include the candidate's relevant
knowledge, experience, and expertise, the candidate's ability to carry out his
or her duties in the best interests of the Company, and the candidate's ability
to qualify as an Independent Director or Director. When assessing a candidate
for nomination, the Committee considers whether the individual's background,
skills, and experience will complement the background, skills, and experience of
other nominees and will contribute to the diversity of the Board.
The function of the Fair Value Pricing Committee is to consider, in
advance if possible, any fair valuation decision of the Adviser's Valuation
Committee relating to a security held by the Fund made under unique or highly
unusual circumstances not previously addressed by the Valuation Committee that
would result in a change in the Fund's NAV by more than $0.01 per share. The
Fair Value Pricing Committee did not meet during the Fund's most recently
completed fiscal year.
The function of the Independent Directors Committee is to consider
and take action on matters that the Board or Committee believes should be
addressed in executive session of the Independent Directors, such as review and
approval of the Advisory and Distribution Services Agreements. The Independent
Directors Committee met seven times during the Fund's most recently completed
fiscal year.
The dollar range of the Fund's securities owned by each Director and
the aggregate dollar range of securities of all funds in the AllianceBernstein
Fund Complex owned by each Director are set forth below.
AGGREGATE DOLLAR
RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES IN THE
EQUITY SECURITIES ALLIANCEBERNSTEIN
IN THE FUND AS OF FUND COMPLEX AS
DECEMBER 31, 2013 OF DECEMBER 31, 2013
------------------ ---------------------
John H. Dobkin None Over $100,000
Michael J. Downey None Over $100,000
William H. Foulk, Jr. None Over $100,000
D. James Guzy None Over $100,000
Nancy P. Jacklin None Over $100,000
Robert M. Keith None None
Garry L. Moody None Over $100,000
Marshall C. Turner, Jr. None Over $100,000
Earl D. Weiner None Over $100,000
|
Officer Information
Certain information concerning the Company's officers is set forth
below.
PRINCIPAL OCCUPATION
NAME, ADDRESS,* POSITION(S) HELD DURING PAST 5 YEARS
AND AGE WITH THE FUND OR LONGER
--------------- -------------- ---------------------
Robert M. Keith, President and Chief Executive See biography above.
53 Officer
Philip L. Kirstein, Senior Vice President Senior Vice President and
68 and Independent Independent Compliance Officer of
Compliance Officer the Funds in the AllianceBernstein
Fund Complex, with which he has been
associated since October 2004.
Prior thereto, he was Of Counsel to
Kirkpatrick & Lockhart, LLP from
October 2003 to October 2004, and
General Counsel of Merrill Lynch
Investment Managers, L.P. since
prior to March 2003.
Eric J. Franco, Senior Vice President Senior Vice President of the
53 Adviser,** with which he has been
associated since prior to 2009.
Emilie D. Wrapp, Secretary/Clerk Senior Vice President, Assistant
58 General Counsel and Assistant
Secretary of ABI,** with which she
has been associated since prior to
2009.
Joseph J. Mantineo, Treasurer and Chief Financial Senior Vice President of ABIS,**
54 Officer with which he has been associated
since prior to 2009.
Phyllis J. Clarke, Controller and Chief Accounting Vice President of ABIS,** with which
52 Officer she has been associated since prior
to 2009.
Vincent S. Noto, Chief Compliance Officer Chief Compliance Officer of the
49 AllianceBernstein Funds, and Vice
President of ABIS,** with which he
has been associated since prior to
2009.
|
* The address for each of the Company's officers is 1345 Avenue of the
Americas, New York, NY 10105.
** The Adviser, ABI, and ABIS are affiliates of the Company.
The Company does not pay any fees to, or reimburse expenses of, its
Directors who are considered "interested persons" of the Company. The aggregate
compensation paid by the Fund to each of the Directors during its fiscal year
ended October 31, 2013, the aggregate compensation paid to each of the Directors
during calendar year 2013 by the AllianceBernstein Fund Complex and the total
number of registered investment companies (and separate investment portfolios
within those companies) in the AllianceBernstein Fund Complex with respect to
which each of the Directors serves as a director or trustee, are set forth
below. Neither the Fund nor any other fund in the AllianceBernstein Fund Complex
provides compensation in the form of pension or retirement benefits to any of
its directors or trustees. Each of the Directors is a director or trustee of one
or more other registered investment companies in the AllianceBernstein Fund
Complex.
Total Number Total Number
of Investment of Investment
Companies Portfolios within
in the the
AllianceBernstein AllianceBernstein
Total Compensation Fund Complex, Fund Complex,
from the Including the Fund, Including the Fund,
AllianceBernstein as to which the as to which the
Aggregate Fund Complex, Director is Director is
Compensation Including a Director a Director
Name of Director from the Company the Company or Trustee or Trustee
---------------- ---------------- ----------------- ---------------- --------------------
John H. Dobkin $ 6,488 $262,000 31 100
Michael J. Downey $ 6,488 $262,000 31 100
William H. Foulk, Jr. $12,112 $487,000 31 100
D. James Guzy $ 6,488 $262,000 31 100
Nancy P. Jacklin $ 6,488 $262,000 31 100
Robert M. Keith $ 0 $ 0 31 100
Garry L. Moody $ 7,319 $297,000 31 100
Marshall C. Turner, Jr. $ 6,488 $262,000 31 100
Earl D. Weiner $ 6,939 $280,000 31 100
|
As of January 3, 2014, the Directors and officers of the Company as
a group owned less than 1% of the shares of the Fund.
Additional Information About the Fund's Portfolio Managers
The management of, and investment decisions for, the Fund's
portfolio are made by the Global REIT Senior Investment Management Team. Mr.
Eric Franco is the investment professional primarily responsible for the
day-to-day management of the Fund's portfolio. For additional information about
the portfolio management of the Fund, see "Management of the Fund - Portfolio
Managers" in the Fund's Prospectus.
2. Investment professionals at the Adviser include portfolio managers and
research analysts, investment professionals are part of investment groups
(or teams) that service individual fund portfolios. The number of
investment professionals assigned to a particular fund will vary from fund
to fund.
The dollar range of the Fund's equity securities owned directly or
beneficially by the Fund's portfolio manager is set forth below:
DOLLAR RANGE OF EQUITY
SECURITIES IN THE FUND
As of October 31, 2013
Eric J. Franco None
As of October 31, 2013, employees of the Adviser had approximately
$1,585,815.20 invested in shares of the Fund and approximately $96,058,819.18
invested in shares of all AllianceBernstein Mutual Funds (excluding
AllianceBernstein money market funds) through their interests in certain
deferred compensation plans, including the Partners Compensation Plan, including
both vested and unvested amounts.
The following tables provide information regarding registered
investment companies other than the Fund, other pooled investment vehicles and
other accounts over which the Portfolio Manager also has day-to-day management
responsibilities. The tables provide the numbers of such accounts, the total
assets in such accounts and the number of accounts and total assets whose fees
are based on performance. The information is provided as of the Fund's fiscal
year ended October 31, 2013.
---------------------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT COMPANIES
(excluding the Fund)
---------------------------------------------------------------------------------------------------------------
Number of Total Assets of
Registered Registered
Total Number Total Assets of Investment Investment
of Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
------------------------ ------------------ ----------------------- ------------------ ----------------------
Eric J. Franco 23 $659,000,000 None None
------------------------- ------------------ ----------------------- ------------------ -----------------------
|
---------------------------------------------------------------------------------------------------------------
OTHER POOLED INVESTMENT VEHICLES
---------------------------------------------------------------------------------------------------------------
Number of
Other Pooled Total Assets of
Total Number Investment Other Pooled
of Other Pooled Total Assets of Vehicles Investment
Investment Other Pooled Managed with Vehicles Managed
Vehicles Investment Performance- with Performance-
Portfolio Manager Managed Vehicles Managed based Fees based Fees
------------------------- ------------------ ----------------------- ------------------ -----------------------
Eric J. Franco 55 $501,000,000 None None
------------------------- ------------------ ----------------------- ------------------ -----------------------
|
---------------------------------------------------------------------------------------------------------------
OTHER ACCOUNTS
---------------------------------------------------------------------------------------------------------------
Number of Total Assets of
Other Accounts Other Accounts
Total Number of Total Assets of Managed with Managed with
Other Accounts Other Accounts Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
------------------------ ------------------- --------------------- ------------------- -----------------------
Eric J. Franco 9 $647,000,000 None None
------------------------- ------------------- --------------------- ------------------- -----------------------
|
Investment Professional Conflict of Interest Disclosure
As an investment adviser and fiduciary, the Adviser owes its clients
and shareholders an undivided duty of loyalty. The Adviser recognizes that
conflicts of interest are inherent in its business and accordingly has developed
policies and procedures (including oversight monitoring) reasonably designed to
detect, manage and mitigate the effects of actual or potential conflicts of
interest in the area of employee personal trading, managing multiple accounts
for multiple clients, including AllianceBernstein Mutual Funds, and allocating
investment opportunities. Investment professionals, including portfolio managers
and research analysts, are subject to the above-mentioned policies and oversight
monitoring to ensure that all clients are treated equitably. The Adviser places
the interests of our clients first and expects all of its employees to meet
their fiduciary duties.
Employee Personal Trading. The Adviser has adopted a Code of
Business Conduct and Ethics that is designed to detect and prevent conflicts of
interest when investment professionals and other personnel of the Adviser own,
buy or sell securities which may be owned by, or bought or sold for, clients.
Personal securities transactions by an employee may raise a potential conflict
of interest when an employee owns or trades in a security that is owned or
considered for purchase or sale by a client, or recommended for purchase or sale
by an employee to a client. Subject to the reporting requirements and other
limitations of its Code of Business Conduct and Ethics, the Adviser permits its
employees to engage in personal securities transactions, and also allows them to
acquire investments in certain Funds managed by the Adviser. the Adviser's Code
Business Conduct and Ethics requires disclosure of all personal accounts and
maintenance of brokerage accounts with designated broker-dealers approved by the
Adviser. The Code of Business Conduct and Ethics also requires preclearance of
all securities transactions (except transactions in U.S. Treasuries and open-end
mutual funds) and imposes a 90-day holding period for securities purchased by
employees to discourage short-term trading.
Managing Multiple Accounts for Multiple Clients. The Adviser has
compliance policies and oversight monitoring in place to address conflicts of
interest relating to the management of multiple accounts for multiple clients.
Conflicts of interest may arise when an investment professional has
responsibilities for the investments of more than one account because the
investment professional may be unable to devote equal time and attention to each
account. The investment professional or investment professional teams for each
client may have responsibilities for managing all or a portion of the
investments of multiple accounts with a common investment strategy, including
other registered investment companies, unregistered investment vehicles, such as
hedge funds, pension plans, separate accounts, collective trusts and charitable
foundations. Among other things, the Adviser's policies and procedures provide
for the prompt dissemination to investment professionals of initial or changed
investment recommendations by analysts so that investment professionals are
better able to develop investment strategies for all accounts they manage. In
addition, investment decisions by investment professionals are reviewed for the
purpose of maintaining uniformity among similar accounts and ensuring that
accounts are treated equitably. Investment professional compensation reflects a
broad contribution in multiple dimensions to long-term investment success for
our clients and is generally not tied specifically to the performance of any
particular client's account, nor is it generally tied directly to the level or
change in level of assets under management.
Allocating Investment Opportunities. The investment professionals at
the Adviser routinely are required to select and allocate investment
opportunities among accounts. The Adviser has adopted policies and procedures
intended to address conflicts of interest relating to the allocation of
investment opportunities. These policies and procedures are designed to ensure
that information relevant to investment decisions is disseminated promptly
within its portfolio teams and investment opportunities are allocated equitably
among different clients. The policies and procedures require, among other
things, objective allocation for limited investment opportunities (e.g., on a
rotational basis), and documentation and review of justifications for any
decisions to make investments only for select accounts or in a manner
disproportionate to the size of the account. Portfolio holdings, position sizes,
and industry and sector exposures tend to be similar across similar accounts,
which minimizes the potential for conflicts of interest relating to the
allocation of investment opportunities. Nevertheless, access to portfolio funds
or other investment opportunities may be allocated differently among accounts
due to the particular characteristics of an account, such as size of the
account, cash position, tax status, risk tolerance and investment restrictions
or for other reasons.
The Adviser's procedures are also designed to address potential
conflicts of interest that may arise when the Adviser has a particular financial
incentive, such as a performance-based management fee, relating to an account.
An investment professional may perceive that he or she has an incentive to
devote more time to developing and analyzing investment strategies and
opportunities or allocating securities preferentially to accounts for which the
Adviser could share in investment gains.
Portfolio Manager Compensation
The Adviser's compensation program for portfolio managers is
designed to align with clients' interests, emphasizing each portfolio manager's
ability to generate long-term investment success for the Adviser's clients,
including the Fund. The Adviser also strives to ensure that compensation is
competitive and effective in attracting and retaining the highest caliber
employees.
Portfolio managers receive a base salary, incentive compensation and
contributions to AllianceBernstein's 401(k) plan. Part of the annual incentive
compensation is generally paid in the form of a cash bonus, and part through an
award under the firm's Incentive Compensation Award Plan (ICAP). The ICAP awards
vest over a four-year period. Deferred awards are paid in the form of restricted
grants of the firm's Master Limited Partnership Units, and award recipients have
the ability to receive a portion of their awards in deferred cash. The amount of
contributions to the 401(k) plan is determined at the sole discretion of the
Adviser. On an annual basis, the Adviser endeavors to combine all of the
foregoing elements into a total compensation package that considers industry
compensation trends and is designed to retain its best talent.
The incentive portion of total compensation is determined by
quantitative and qualitative factors. Quantitative factors, which are weighted
more heavily, are driven by investment performance. Qualitative factors are
driven by contributions to the investment process and client success.
The quantitative component includes measures of absolute, relative
and risk-adjusted investment performance. Relative and risk-adjusted returns are
determined based on the benchmark in the Fund's prospectus and versus peers over
one-, three- and five-year calendar periods, with more weight given to
longer-time periods. Peer groups are chosen by Chief Investment Officers, who
consult with the product management team to identify products most similar to
our investment style and most relevant within the asset class. Portfolio
managers of the Fund do not receive any direct compensation based upon the
investment returns of any individual client account, and compensation is not
tied directly to the level or change in level of assets under management.
Among the qualitative components considered, the most important
include thought leadership, collaboration with other investment colleagues,
contributions to risk-adjusted returns of other portfolios in the firm, efforts
in mentoring and building a strong talent pool and being a good corporate
citizen. Other factors can play a role in determining portfolio managers'
compensation, such as the complexity of investment strategies managed, volume of
assets managed and experience.
The Adviser emphasizes four behavioral competencies--relentlessness,
ingenuity, team orientation and accountability--that support its mission to be
the most trusted advisor to its clients. Assessments of investment professionals
are formalized in a year-end review process that includes 360-degree feedback
from other professionals from across the investment teams and the Adviser.
EXPENSES OF THE FUND
Distribution Services Agreement
The Company has entered into a Distribution Services Agreement (the
"Agreement") with ABI, the Fund's principal underwriter, to permit ABI to
distribute the Fund's shares. The Agreement became effective on November 14,
1997. The Agreement continues in effect so long as its continuance is
specifically approved annually by the Directors or by vote of the holders of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
that class, and, in either case, by a majority of the Directors who are not
parties to the Agreement or interested persons, as defined in the 1940 Act, of
any such party (other than as directors of the Company). The Agreement was
approved for an additional annual term by a vote, cast in person, of the
Directors, including a majority of the Directors who are not "interested
persons", as defined in the 1940 Act, at their meetings held on April 30-May 2,
2013.
The Adviser may from time to time and from its own funds or such
other resources as may be permitted by rules of the SEC make payments for
distribution services to ABI; the latter may, in turn, pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Transfer Agency Agreement
ABIS, an indirect wholly-owned subsidiary of the Adviser, located
principally at 8000 IH 10 W, 4th Floor, San Antonio, Texas 78230, acts as the
Fund's registrar, transfer agent and dividend-disbursing agent for a fee based
upon the number of account holders of the Fund. For the fiscal year ended
October 31, 2013, the Fund paid ABIS $18,000 pursuant to the Transfer Agency
Agreement.
ABIS acts as the transfer agent for the Fund. ABIS, an indirect
wholly-owned subsidiary of the Adviser, registers the transfer, issuance and
redemption of Fund shares and disburses dividends and other distributions to
Fund shareholders.
Many Fund shares are owned by selected dealers or selected agents,
financial intermediaries or other financial representatives ("financial
intermediaries") for the benefit of their customers. In those cases, the Fund
often does not maintain an account for a customer. Thus, some or all of the
transfer agency functions for these accounts are performed by the financial
intermediaries. The Fund, ABI and/or the Adviser pay to these financial
intermediaries, including those that sell shares of the AllianceBernstein Mutual
Funds, fees for sub-accounting or shareholder servicing in amounts ranging up to
$19 per customer fund account per annum. Retirement plans may also hold Fund
shares in the name of the plan, rather than the participant. Plan recordkeepers,
who may have affiliated financial intermediaries who sell shares of the Fund,
may be paid for each plan participant fund account in amounts up to $19 per
account per annum and/or up to 0.25% per annum of the average daily assets held
in the plan. To the extent any of these payments for recordkeeping services,
transfer agency services or retirement plan accounts are made by the Fund, they
are included in your Prospectus in the Fund expense tables under "Fees and
Expenses of the Fund". In addition, financial intermediaries may be affiliates
of entities that receive compensation from the Adviser or ABI for maintaining
retirement plan "platforms" that facilitate trading by affiliated and
non-affiliated financial intermediaries and recordkeeping for retirement plans.
Because financial intermediaries and plan recordkeepers may be paid
varying amounts per class for sub-accounting or shareholder servicing, the
service requirements of which may also vary by class, this may create an
additional incentive for financial intermediaries and their financial advisors
to favor one fund complex over another or one class of shares over another.
PURCHASE OF SHARES
The following information supplements that set forth in the
Prospectus under the heading "Investing in the Fund".
Class I shares of the Fund may be purchased and held solely (i)
through accounts established under a fee-based program sponsored and maintained
by a registered broker-dealer or other financial intermediary and approved by
ABI, (ii) through employee benefit plans, including defined contribution and
defined benefit plans that have at least $10 million in assets ("Employee
Plans"), (iii) by investment advisory clients of the Adviser or its affiliates,
(iv) by (a) officers and present or former Directors of the Company, (b) present
or former directors and trustees of other investment companies managed by the
Adviser, (c) present or retired full-time employees of the Adviser, ABI, ABIS,
Inc. and their affiliates, (d) officers and directors of AB Corp., ABI, ABIS and
their affiliates, (e) (1) the spouse or domestic partner, sibling, direct
ancestor or direct descendant (collectively "relatives") of any person listed in
(a) through (d), (2) any trust, individual retirement account or retirement plan
account for the benefit of any person listed in (a) through (d) or a relative of
such person, or (3) the estate of any person listed in (a) through (d) or a
relative of such person, if such shares are purchased for investment purposes
(such shares may not be resold except to the Fund), (v) by (a) the Adviser, ABI,
ABIS and their affiliates or (b) certain employee benefit plans for employees of
the Adviser, ABI, ABIS and their affiliates, (vi) through registered investment
advisers or other financial intermediaries who charge a management, consulting
or other fee for their service and who purchase shares through a broker or agent
approved by ABI, and clients of such registered investment advisers or financial
intermediaries whose accounts are linked to the master account of such
investment adviser or financial intermediary on the books of such approved
broker or agent, and (vii) through registered investment advisers (a "Bernstein
Advisor") at the Bernstein Investment Management and Research Unit of the
Adviser.
The shares of the Fund are offered on a continuous basis at a price
equal to their NAV. The minimum initial investment in the Company is $2,000,000,
which may be invested in any one or more of the Funds. Investments made through
fee-based or "wrap fee" programs will satisfy the minimum initial investment
requirement if the fee-based or "wrap fee" program, as a whole, invests at least
$2,000,000 in one or more of the Funds. For any shares of the Fund bought
through a Bernstein Advisor, the minimum initial investment is $10,000, with no
minimum for subsequent investments. There is no minimum for subsequent
investments. The minimum initial investment may be waived in the discretion of
the Company.
Investors may purchase shares of the Fund through their financial
intermediaries. A transaction, service, administrative or other similar fee may
be charged by your financial intermediary with respect to the purchase, sale or
exchange of shares made through such financial intermediary. Such financial
intermediary may also impose requirements with respect to the purchase, sale or
exchange of shares that are different from, or in addition to, those imposed by
the Fund, as described in the Prospectus and this SAI, including requirements as
to classes of shares available through that financial intermediary and the
minimum initial and subsequent investment amounts. The Fund is not responsible
for, and has no control over, the decision of any financial intermediary to
impose such differing requirements.
In order to open your account, the Fund or your financial
intermediary is required to obtain certain information from you for
identification purposes. This information may include name, date of birth,
permanent residential address and social security/taxpayer identification
number. It will not be possible to establish your account without this
information. If the Fund or your financial intermediary is unable to verify the
information provided, your account may be closed and other appropriate action
may be taken as permitted by law.
Frequent Purchases and Redemptions of Fund Shares
The Board has adopted policies and procedures designed to detect and
deter frequent purchases and redemptions of Fund shares or excessive or
short-term trading that may disadvantage long-term Fund shareholders. These
policies are described below. There is no guarantee that the Fund will be able
to detect excessive or short-term trading or to identify shareholders engaged in
such practices, particularly with respect to transactions in omnibus accounts.
Shareholders should be aware that application of these policies may have adverse
consequences, as described below, and should avoid frequent trading in Fund
shares through purchases, sales and exchanges of shares. Each Fund reserves the
right to restrict, reject or cancel, without any prior notice, any purchase or
exchange order for any reason, including any purchase or exchange order accepted
by any shareholder's financial intermediary.
Risks Associated With Excessive Or Short-Term Trading Generally.
While the Fund will try to prevent market timing by utilizing the procedures
described below, these procedures may not be successful in identifying or
stopping excessive or short-term trading in all circumstances. By realizing
profits through short-term trading, shareholders that engage in rapid purchases
and sales or exchanges of a Fund's shares dilute the value of shares held by
long-term shareholders. Volatility resulting from excessive purchases and sales
or exchanges of Fund shares, especially involving large dollar amounts, may
disrupt efficient portfolio management and cause a Fund to sell shares at
inopportune times to raise cash to accommodate redemptions relating to
short-term trading activity. In particular, a Fund may have difficulty
implementing its long-term investment strategies if it is forced to maintain a
higher level of its assets in cash to accommodate significant short-term trading
activity. In addition, a Fund may incur increased administrative and other
expenses due to excessive or short-term trading, including increased brokerage
costs and realization of taxable capital gains.
Funds that may invest significantly in securities of foreign issuers
may be particularly susceptible to short-term trading strategies. This is
because foreign securities are typically traded on markets that close well
before the time the Fund ordinarily calculates its NAV at 4:00 p.m., Eastern
time, which gives rise to the possibility that developments may have occurred in
the interim that would affect the value of these securities. The time zone
differences among international stock markets can allow a shareholder engaging
in a short-term trading strategy to exploit differences in Fund share prices
that are based on closing prices of securities of foreign issuers established
some time before the Fund calculates its own share price (referred to as "time
zone arbitrage"). The Fund has procedures, referred to as fair value pricing,
designed to adjust closing market prices of securities of foreign issuers to
reflect what is believed to be the fair value of those securities at the time
the Fund calculates its NAV. While there is no assurance, the Fund expects that
the use of fair value pricing, in addition to the short-term trading policies
discussed below, will significantly reduce a shareholder's ability to engage in
time zone arbitrage to the detriment of other Fund shareholders.
A shareholder engaging in a short-term trading strategy may also
target the Fund irrespective of its investments in securities of foreign
issuers. Any Fund that invests in securities that are, among other things,
thinly traded, traded infrequently or relatively illiquid has the risk that the
current market price for the securities may not accurately reflect current
market values. A shareholder may seek to engage in short-term trading to take
advantage of these pricing differences (referred to as "price arbitrage"). All
Funds may be adversely affected by price arbitrage.
Policy Regarding Short-Term Trading. Purchases and exchanges of
shares of the Fund should be made for investment purposes only. The Fund seeks
to prevent patterns of excessive purchases and sales of Fund shares to the
extent they are detected by the procedures described below. The Fund reserves
the right to modify this policy, including any surveillance or account blocking
procedures established from time to time to effectuate this policy, at any time
without notice.
o Transaction Surveillance Procedures. The Fund, through its agents,
ABI and ABIS, maintains surveillance procedures to detect excessive
or short-term trading in Fund shares. This surveillance process
involves several factors, which include scrutinizing transactions in
Fund shares that exceed certain monetary thresholds or numerical
limits within a specified period of time. Generally, more than two
exchanges of Fund shares during any 60-day period or purchases of
shares followed by a sale within 60 days will be identified by these
surveillance procedures. For purposes of these transaction
surveillance procedures, the Fund may consider trading activity in
multiple accounts under common ownership, control or influence.
Trading activity identified by either, or a combination, of these
factors, or as a result of any other information available at the
time, will be evaluated to determine whether such activity might
constitute excessive or short-term trading. With respect to managed
or discretionary accounts for which the account owner gives his/her
broker, investment adviser or other this party authority to buy and
sell Fund shares, the Fund may consider trades initiated by the
account owner, such as trades initiated in connection with bona fide
cash management purposes, separately in its analysis. These
surveillance procedures may be modified from time to time, as
necessary or appropriate to improve the detection of excessive or
short-term trading or to address specific circumstances.
o Account Blocking Procedures. If the Fund determines, in its sole
discretion, that a particular transaction or pattern of transactions
identified by the transaction surveillance procedures described
above is excessive or short-term trading in nature, the Fund will
take remedial action that may include issuing a warning, revoking
certain account-related privileges (such as the ability to place
purchase, sale and exchange orders over the internet or by phone) or
prohibiting or "blocking" future purchase or exchange activity.
However, sales of Fund shares back to the Fund or redemptions will
continue to be permitted in accordance with the terms of the Fund's
current Prospectus. As a result, unless the shareholder redeems his
or her shares, which may have consequences if the shares have
declined in value, a CDSC is applicable or adverse tax consequences
may result, the shareholder may be "locked" into an unsuitable
investment. A blocked account will generally remain blocked for 90
days. Subsequent detections of excessive or short-term trading may
result in an indefinite account block or an account block until the
account holder or the associated broker, dealer or other financial
intermediary provides evidence or assurance acceptable to the Fund
that the account holder did not or will not in the future engage in
excessive or short-term trading.
o Applications of Surveillance Procedures and Restrictions to
Omnibus Accounts. Omnibus account arrangements are common forms of
holding shares of the Fund, particularly among certain brokers,
dealers and other financial intermediaries, including sponsors of
retirement plans and variable insurance products. The Fund applies
its surveillance procedures to these omnibus account arrangements.
As required by SEC rules, the Fund has entered into agreements with
all of its financial intermediaries that require the financial
intermediaries to provide the Fund, upon the request of the Fund or
their agents, with individual account level information about their
transactions. If the Fund detects excessive trading through their
monitoring of omnibus accounts, including trading at the individual
account level, the financial intermediaries will also execute
instructions from the Fund to take actions to curtail the activity,
which may include applying blocks to accounts to prohibit future
purchases and exchanges of Fund shares. For certain retirement plan
accounts, the Fund may request that the retirement plan or other
intermediary revoke the relevant participant's privilege to effect
transactions in Fund shares via the internet or telephone, in which
case the relevant participant must submit future transaction orders
via the U.S. Postal Service (i.e., regular mail).
Purchase of Shares
The Fund reserves the right to suspend the sale of its shares to the
public in response to conditions in the securities markets or for other reasons.
If the Fund suspends the sale of its shares, shareholders will not be able to
acquire its shares, including through an exchange.
The public offering price of shares of the Fund is their NAV. On
each Company business day on which a purchase or redemption order is received by
the Fund and trading in the types of securities in which the Fund invests might
materially affect the value of Fund shares, the NAV is computed as of the Fund
Closing Time, which is the close of regular trading on any day the Exchange is
open (ordinarily 4:00 p.m., Eastern time, but sometimes earlier in the case of
scheduled half-day trading or unscheduled suspensions of trading) by dividing
the value of the Fund's total assets, less its liabilities, by the total number
of its shares then outstanding. A Company business day is any day on which the
Exchange is open for trading.
The Fund will accept unconditional orders for its shares to be
executed at the public offering price equal to their NAV next determined as
described below. Orders received by ABI prior to the Fund Closing Time are
priced at the NAV computed as of the Fund Closing Time. In the case of orders
for the purchase of shares placed through financial intermediaries, the
applicable public offering price will be the NAV as so determined, but only if
the financial intermediary receives the order prior to the Fund Closing Time.
The financial intermediary is responsible for transmitting such orders by a
prescribed time to the Fund or its transfer agent. If the financial intermediary
fails to do so, the investor will not receive that day's NAV. If the financial
intermediary receives the order after the Fund Closing Time, the price received
by the investor will be based on the NAV determined as of the Fund Closing Time
on the next business day.
Following the initial purchase of Fund shares, a shareholder may
place orders to purchase additional shares by telephone if the shareholder has
completed the appropriate portion of the Mutual Fund Application or an "Autobuy"
application, both of which may be obtained by calling the "For Literature"
telephone number shown on the cover of this SAI. Except with respect to certain
omnibus accounts, telephone purchase orders with payment by electronic funds
transfer may not exceed $500,000. Payment for shares purchased by telephone can
be made only by electronic funds transfer from a bank account maintained by the
shareholder at a bank that is a member of the National Automated Clearing House
Association ("NACHA"). Telephone purchase requests must be received before the
Fund Closing Time to receive that day's public offering price. Telephone
purchase requests received after the Fund Closing Time are automatically placed
the following Company business day, and the applicable public offering price
will be the public offering price determined as of the Fund Closing Time on such
following business day.
Full and fractional shares are credited to a shareholder's account
in the amount purchased by the shareholder. As a convenience, and to avoid
unnecessary expense to the Fund, the Fund will not issue share certificates
representing shares of the Fund. Ownership of the Fund's shares will be shown on
the books of the Fund's transfer agent.
Dividend Reinvestment Program.
Under the Fund's Dividend Reinvestment Program, unless you specify
otherwise, your dividends and distributions will be automatically reinvested in
the same class of shares of the Fund without an initial sales charge or CDSC. If
you elect to receive your distributions in cash, you will only receive a check
if the distribution is equal to or exceeds $25.00. Distributions of less than
$25.00 will automatically be reinvested in Fund shares. To receive distributions
of less than $25.00 in cash, you must have bank instructions associated to your
account so that distributions can be delivered to you electronically via
Electronic Funds Transfer using the Automated Clearing House or "ACH". If you
elect to receive distributions by check, your distributions and all subsequent
distributions may nonetheless be reinvested in additional shares of the Fund
under the following circumstances:
(a) the postal service is unable to deliver your checks to your
address of record and the checks are returned to the Fund's transfer agent as
undeliverable; or
(b) your checks remain uncashed for nine months.
Additional shares of the Fund will be purchased at the then current
NAV. You should contact the Fund's transfer agent to change your distribution
option. Your request to do so must be received by the transfer agent before the
record date for a distribution in order to be effective for that distribution.
No interest will accrue on amounts represented by uncashed distribution checks.
Payments to Financial Advisors and Their Firms
Financial intermediaries market and sell shares of the Fund. These
financial intermediaries employ financial advisors and receive compensation for
selling shares of the Fund. This compensation is paid from various sources. Your
individual financial advisor may receive some or all of the amounts paid to the
financial intermediary that employs him or her.
Your financial advisor's firm receives compensation from the Fund,
ABI and/or the Adviser in several ways from various sources, which include some
or all of the following:
o additional distribution support;
o defrayal of costs for educational seminars and training; and
o payments related to providing shareholder record-keeping
and/or transfer agency services.
Please read your Prospectus carefully for information on this
compensation.
Other Payments for Distribution Services and Educational Support
In addition to the fees described under "Payments to Financial
Advisors and Their Firms", in your Prospectus, some or all of which may be paid
to financial intermediaries (and, in turn, to your financial advisor), ABI, at
its expense, currently provides additional payments to firms that sell shares of
the AllianceBernstein Mutual Funds. Although the individual components may be
higher and the total amount of payments made to each qualifying firm in any
given year may vary, the total amount paid to a financial intermediary in
connection with the sale of shares of the AllianceBernstein Mutual Funds will
generally not exceed the sum of (a) 0.25% of the current year's fund sales by
that firm and (b) 0.10% of average daily net assets attributable to that firm
over the year. These sums include payments to reimburse directly or indirectly
the costs incurred by these firms and their employees in connection with
educational seminars and training efforts about the AllianceBernstein Mutual
Funds for the firms' employees and/or their clients and potential clients. The
costs and expenses associated with these efforts may include travel, lodging,
entertainment and meals.
For 2014, ABI expects to pay approximately 0.05% of the average
monthly assets of the AllianceBernstein Mutual Funds, or approximately $22
million, for distribution services and education support related to the
AllianceBernstein Mutual Funds. In 2013, ABI paid approximately 0.05% of the
average monthly assets of the AllianceBernstein Mutual Funds or approximately
$21 million, for distribution services and education support related to the
AllianceBernstein Mutual Funds.
A number of factors are considered in determining the additional
payments, including each firm's AllianceBernstein Mutual Fund sales, assets and
redemption rates, and the willingness and ability of the firm to give ABI access
to its financial advisors for educational and marketing purposes. In some cases,
firms will include the AllianceBernstein Mutual Funds on a "preferred list".
ABI's goal is to make the financial advisors who interact with current and
prospective investors and shareholders more knowledgeable about the
AllianceBernstein Mutual Funds so that they can provide suitable information and
advice about the fund and related investor services.
The Fund and ABI also make payments for sub-accounting or
shareholder servicing to financial intermediaries that sell AllianceBernstein
Mutual Fund shares. Please see "Expenses of the Fund - Transfer Agency
Agreement" above. These expenses paid by the Fund are included in "Other
Expenses" under "Fees and Expenses of the Fund - Annual Fund Operating Expenses"
in your Prospectus.
If one mutual fund sponsor makes greater distribution assistance
payments than another, your financial advisor and his or her firm may have an
incentive to recommend one fund complex over another. Similarly, if your
financial advisor or his or her firm receives more distribution assistance for
one share class versus another, then they may have an incentive to recommend
that class.
Please speak with your financial advisor to learn more about the
total amounts paid to your financial advisor and his or her firm by the Fund,
the Adviser, ABI and by sponsors of other mutual funds he or she may recommend
to you. You should also consult disclosures made by your financial advisor at
the time of purchase.
ABI anticipates that the firms that will receive additional payments
for distribution services and/or educational support include:
Advisor Group, Inc.
Ameriprise Financial Services
AXA Advisors
Cadaret, Grant & Co.
CCO Investment Services Corp.
Commonwealth Financial Network
Donegal Securities
Financial Network Investment Company
JP Morgan Securities
LPL Financial
Merrill Lynch
Morgan Stanley
Northwestern Mutual Investment Services
Raymond James
RBC Wealth Management
Robert W. Baird
Santander Securities
UBS Financial Services
Wells Fargo Advisors
ABI expects that additional firms may be added to this list from
time to time.
Although the Fund may use brokers and dealers who sell shares of the
Fund to effect portfolio transactions, the Fund does not consider the sale of
AllianceBernstein Mutual Fund shares as a factor when selecting brokers or
dealers to effect portfolio transactions.
REDEMPTION AND REPURCHASE OF SHARES
The following information supplements that set forth in the
Prospectus under the heading "Investing in the Fund". If you are a shareholder
through an account established under a fee-based program, your fee-based program
may impose requirements with respect to the purchase, sale or exchange of shares
of the Fund that are different from those described herein. Similarly, if you
purchased your shares through your Bernstein Advisor, you must redeem your
shares through your Bernstein Advisor, and no exchanges are permitted. A
transaction fee may be charged by your financial intermediary with respect to
the purchase, sale or exchange of shares made through such financial
intermediary. The Fund has authorized one or more brokers to receive on its
behalf purchase and redemption orders. Such brokers are authorized to designate
other intermediaries to receive purchase and redemption orders on the Fund's
behalf. In such cases, orders will receive the NAV next computed after such
order is properly received by the authorized broker or designee and accepted by
the Fund.
Redemption
Subject to the limitations described below, the Fund will redeem the
shares tendered to it, as described below, at a redemption price equal to their
NAV as next computed following the receipt of shares tendered for redemption in
proper form. There is no redemption charge. Payment of the redemption price
normally will be made within seven days after the Fund's receipt of such tender
for redemption. If a shareholder is in doubt about what documents are required
by his or her fee-based program or Employee Plan, the shareholder should contact
the shareholder's financial intermediary.
The right of redemption may not be suspended or the date of payment
upon redemption postponed for more than seven days after shares are tendered for
redemption, except for any period during which the Exchange is closed (other
than customary weekend and holiday closings) or during which the SEC determines
that trading thereon is restricted, or for any period during which an emergency
(as determined by the SEC) exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or as a result of which it
is not reasonably practicable for the Fund fairly to determine the value of its
net assets, or for such other periods as the SEC may by order permit for the
protection of security holders of the Fund.
Payment of the redemption price normally will be made in cash or
may, at the option of the Fund, be made in kind. No interest will accrue on
uncashed redemption checks. The value of a shareholder's shares on redemption or
repurchase may be more or less than the cost of such shares to the shareholder,
depending upon the market value of the Fund's portfolio securities at the time
of such redemption or repurchase. Payment received by a shareholder upon
redemption or repurchase of the shareholder's shares, assuming the shares
constitute capital assets in the shareholder's hands, will result in long-term
or short-term capital gain (or loss) depending upon the shareholder's holding
period and basis in respect of the shares redeemed.
To redeem shares of the Fund for which no stock certificates have
been issued, the registered owner or owners should forward a letter to the
Company containing a request for redemption. The Fund may require the signature
or signatures on the letter to be Medallion Signature Guaranteed. Please contact
ABIS to confirm whether a Medallion Signature Guarantee is needed.
To redeem shares of the Fund represented by stock certificates, the
investor should forward the appropriate stock certificate or certificates,
endorsed in blank or with blank stock powers attached, to the Fund with the
request that the shares represented thereby, or a specified portion thereof, be
redeemed. The stock assignment form on the reverse side of each stock
certificate surrendered to the Fund for redemption must be signed by the
registered owner or owners exactly as the registered name appears on the face of
the certificate or, alternatively, a stock power signed in the same manner may
be attached to the stock certificate or certificates or, where tender is made by
mail, separately mailed to the Fund. The signature or signatures on the
assignment form must be guaranteed in the manner described above.
Telephone Redemption by Electronic Funds Transfer. Each Fund
shareholder is entitled to request redemption by electronic funds transfer (of
shares for which no stock certificates have been issued) by telephone at (800)
221-5672 if the shareholder has completed the appropriate portion of the Mutual
Fund Application or, if an existing shareholder has not completed this portion,
by an "Autosell" application obtained from ABIS (except for certain omnibus
accounts). A telephone redemption request may not exceed $100,000 and must be
made before the Fund Closing Time. Proceeds of telephone redemptions will be
sent by electronic funds transfer to a shareholder's designated bank account at
a bank selected by the shareholder that is a member of the NACHA.
Telephone Redemption by Check. Each Fund shareholder is eligible to
request redemption by check, once in any 30-day period, of shares for which no
stock certificates have been issued by telephone at (800) 221-5672 before the
Fund Closing Time, on a Fund business day in an amount not exceeding $100,000.
Proceeds of such redemptions are remitted by check to the shareholder's address
of record. A shareholder otherwise eligible for telephone redemption by check
may cancel the privilege by written instruction to ABIS, or by checking the
appropriate box on the Mutual Fund Application.
Telephone Redemptions - General. During periods of drastic economic,
market or other developments, such as the terrorist attacks on September 11,
2001, it is possible that shareholders would have difficulty in reaching ABIS by
telephone (although no such difficulty was apparent at any time in connection
with the attacks). If a shareholder were to experience such difficulty, the
shareholder should issue written instructions to ABIS at the address shown on
the cover of this SAI. The Fund reserves the right to suspend or terminate its
telephone redemption service at any time without notice. Telephone redemption by
check is not available with respect to shares (i) for which certificates have
been issued, (ii) held in nominee or "street name" accounts, (iii) held by a
shareholder who has changed his or her address of record within the preceding 30
calendar days or (iv) held in any retirement plan account. Neither the Fund, the
Adviser, ABI nor ABIS will be responsible for the authenticity of telephone
requests for redemptions that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that telephone
requests for redemptions are genuine, including, among others, recording such
telephone instructions and causing written confirmations of the resulting
transactions to be sent to shareholders. If the Fund did not employ such
procedures, it could be liable for losses arising from unauthorized or
fraudulent telephone instructions. Financial intermediaries may charge a
commission for handling telephone requests for redemptions.
Repurchase
The Fund may repurchase shares through ABI or financial
intermediaries. The repurchase price will be the NAV next determined after ABI
receives the request, except that requests placed through financial
intermediaries before the Fund Closing Time will be executed at the NAV
determined as the Fund Closing Time on that day if received by ABI prior to its
close of business on that day (normally 5:00 p.m., Eastern time). The financial
intermediary is responsible for transmitting the request to ABI by 5:00 p.m.,
Eastern time (certain financial intermediaries may enter into operating
agreements permitting them to transmit purchase information that was received
prior to the close of business to ABI after 5:00 p.m., Eastern time, and receive
that day's NAV). If the financial intermediary fails to do so, the shareholder's
right to receive that day's closing price must be settled between that
shareholder and that financial intermediary. A shareholder may offer shares of
the Fund to ABI either directly or through the shareholder's financial
intermediary. Neither the Fund nor ABI charges a fee or commission in connection
with the repurchase of shares. Normally, if shares of the Fund are offered
through a financial intermediary, the repurchase is settled by the shareholder
as an ordinary transaction with or through that financial intermediary, who may
charge the shareholder for this service. The repurchase of shares of the Fund as
described above with respect to financial intermediaries is a voluntary service
of the Fund and the Fund may suspend or terminate this practice at any time.
Account Closure
The Fund reserves the right to close out an account that has
remained below $1,000 for 90 days. In the case of a redemption or repurchase of
shares of the Fund recently purchased by check, redemption proceeds will not be
made available until the Fund is reasonably assured that the check has cleared,
normally up to 15 calendar days following the purchase date.
SHAREHOLDER SERVICES
The following information supplements that set forth in your
Prospectus under the heading "Investing in the Fund". If you are a shareholder
through an account established under a fee-based program, your fee-based program
may impose requirements with respect to the purchase, sale or exchange of shares
of the Fund that are different from those described herein.
Exchange Privilege
You may exchange your investment in the Fund for shares of the same
class of any other Fund and for Class A shares of any other AllianceBernstein
Mutual Fund (as defined below). Exchanges of shares are made at the NAV next
determined and without sales or service charges. Exchanges may be made by
telephone or written request. In order to receive a day's NAV, ABIS must receive
and confirm a telephone exchange request by the Fund Closing Time, on that day.
Currently, the AllianceBernstein Mutual Funds include:
AllianceBernstein Blended Style Series, Inc.
-AllianceBernstein 2000 Retirement Strategy
-AllianceBernstein 2005 Retirement Strategy
-AllianceBernstein 2010 Retirement Strategy
-AllianceBernstein 2015 Retirement Strategy
-AllianceBernstein 2020 Retirement Strategy
-AllianceBernstein 2025 Retirement Strategy
-AllianceBernstein 2030 Retirement Strategy
-AllianceBernstein 2035 Retirement Strategy
-AllianceBernstein 2040 Retirement Strategy
-AllianceBernstein 2045 Retirement Strategy
-AllianceBernstein 2050 Retirement Strategy
-AllianceBernstein 2055 Retirement Strategy
AllianceBernstein Bond Fund, Inc.
-AllianceBernstein Bond Inflation Strategy
-AllianceBernstein Floating Rate Strategies Fund
-AllianceBernstein Government Reserves Portfolio
-AllianceBernstein Intermediate Bond Portfolio
-AllianceBernstein Limited Duration High Income Portfolio
-AllianceBernstein Municipal Bond Inflation Strategy
-AllianceBernstein Real Asset Strategy
-AllianceBernstein Tax-Aware Fixed Income Portfolio
AllianceBernstein Cap Fund, Inc.
-AllianceBernstein Dynamic All Market Fund
-AllianceBernstein Emerging Markets Multi-Asset Portfolio
-AllianceBernstein International Discovery Equity Portfolio
-AllianceBernstein Market Neutral Strategy - Global
-AllianceBernstein Market Neutral Strategy - U.S.
-AllianceBernstein Select US Equity Portfolio
-AllianceBernstein Select US Long/Short Portfolio
-AllianceBernstein Small Cap Growth Portfolio
AllianceBernstein Core Opportunities Fund, Inc.
AllianceBernstein Discovery Growth Fund, Inc.
AllianceBernstein Equity Income Fund, Inc.
AllianceBernstein Exchange Reserves
AllianceBernstein Global Bond Fund, Inc.
AllianceBernstein Global Real Estate Investment Fund, Inc.
AllianceBernstein Global Risk Allocation Fund, Inc.
AllianceBernstein Global Thematic Growth Fund, Inc.
AllianceBernstein Growth and Income Fund, Inc.
AllianceBernstein High Income Fund, Inc.
AllianceBernstein International Growth Fund, Inc.
AllianceBernstein Large Cap Growth Fund, Inc.
AllianceBernstein Municipal Income Fund, Inc.
-AllianceBernstein High Income Municipal Portfolio
-California Portfolio
-National Portfolio
-New York Portfolio
AllianceBernstein Municipal Income Fund II
-Arizona Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
AllianceBernstein Trust
-AllianceBernstein Discovery Value Fund
-AllianceBernstein Global Value Fund
-AllianceBernstein International Value Fund
-AllianceBernstein Value Fund
AllianceBernstein Unconstrained Bond Fund, Inc.
The AllianceBernstein Portfolios
-AllianceBernstein Balanced Wealth Strategy
-AllianceBernstein Conservative Wealth Strategy
-AllianceBernstein Growth Fund
-AllianceBernstein Tax-Managed Balanced Wealth Strategy
-AllianceBernstein Tax-Managed Conservative Wealth Strategy
-AllianceBernstein Tax-Managed Wealth Appreciation Strategy
-AllianceBernstein Wealth Appreciation Strategy
Sanford C. Bernstein Fund, Inc.
-Intermediate California Municipal Portfolio
-Intermediate Diversified Municipal Portfolio
-Intermediate New York Municipal Portfolio
-International Portfolio
-Short Duration Portfolio
-Tax-Managed International Portfolio
Please read carefully the portions of the prospectus of the Fund or
AllianceBernstein Mutual Fund, as applicable, into which you wish to exchange
before submitting the request. Call ABIS at (800) 221-5672 to exchange
uncertificated shares. Exchanges of shares as described above in this section
are taxable transactions for federal income tax purposes.
All exchanges are subject to the minimum investment requirements and
any other applicable terms set forth in the Prospectuses or the prospectus for
the AllianceBernstein Mutual Fund whose shares are being acquired. An exchange
is effected through the redemption of the shares tendered for exchange and the
purchase of shares being acquired at their respective NAVs as next determined
following receipt by the Fund or the AllianceBernstein Mutual Fund, as
applicable, whose shares are being exchanged of (i) proper instructions and all
necessary supporting documents as described in that fund's prospectus, or (ii) a
telephone request for such exchange in accordance with the procedures set forth
in the following paragraph. Exchanges involving the redemption of shares
recently purchased by check will be permitted only after the fund whose shares
have been tendered for exchange is reasonably assured that the check has
cleared, normally up to 15 calendar days following the purchase date. Exchanges
of shares of AllianceBernstein Mutual Funds will generally result in the
realization of a capital gain or loss for federal income tax purposes.
Each Fund shareholder and the shareholder's financial intermediary
are authorized to make telephone requests for exchanges unless ABIS receives a
written instruction to the contrary from the shareholder, or the shareholder
declines the privilege by checking the appropriate box on the Mutual Fund
Application. Such telephone requests cannot be accepted with respect to shares
then represented by stock certificates. Shares acquired pursuant to a telephone
request for exchange will be held under the same account registration as the
shares redeemed through the exchange.
Eligible shareholders desiring to make an exchange should telephone
ABIS with their account number and other details of the exchange at (800)
221-5672 before the Fund Closing Time on a Fund business day as defined above.
Telephone requests for exchange received before 4:00 p.m., Eastern time, on a
Fund business day will be processed as of the close of business on that day.
During periods of drastic economic, market or other developments, such as the
terrorist attacks on September 11, 2001, it is possible that shareholders would
have difficulty in reaching ABIS by telephone (although no such difficulty was
apparent at any time in connection with the attacks). If a shareholder were to
experience such difficulty, the shareholder should issue written instructions to
ABIS at the address shown on the cover of this SAI.
None of the Fund, the AllianceBernstein Mutual Funds, the Adviser,
ABI or ABIS will be responsible for the authenticity of telephone requests for
exchanges that the Fund reasonably believes to be genuine. The Fund will employ
reasonable procedures in order to verify that telephone requests for exchanges
are genuine, including, among others, recording such telephone instructions and
causing written confirmations of the resulting transactions to be sent to
shareholders. If the Fund did not employ such procedures, it could be liable for
losses arising from unauthorized or fraudulent telephone instructions. Financial
intermediaries may charge a commission for handling telephone requests for
exchanges.
The exchange privilege is available only in states where shares of
the AllianceBernstein Mutual Fund being acquired may be legally sold. Each
AllianceBernstein Mutual Fund reserves the right, at any time on 60 days'
written notice to its shareholders, to modify, restrict or terminate the
exchange privilege.
Statements and Reports
Each shareholder of the Fund receives semi-annual and annual reports
which include a listing of the Fund's investments, financial statements and, in
the case of the annual report, the report of the Fund's independent registered
public accounting firm, Ernst & Young LLP, 5 Times Square, New York, New York
10036, as well as a confirmation of each purchase and redemption of shares by
the shareholder. By contacting his or her financial intermediary or ABIS, a
shareholder can arrange for copies of his or her account statements to be sent
to another person.
NET ASSET VALUE
The NAV is computed each day the Exchange is open at the close of
regular trading (ordinarily, 4:00 p.m., Eastern time, but sometimes earlier, as
in the case of scheduled half-day trading or unscheduled suspensions of trading)
following receipt of a purchase or redemption order by the Fund on each Fund
business day on which such an order is received and on such other days as the
Board of Directors deems appropriate or necessary in order to comply with Rule
22c-1 under the 1940 Act. The Fund's NAV is calculated by dividing the value of
the Fund's total assets, less its liabilities, by the total number of its shares
then outstanding. A Fund business day is any weekday on which the Exchange is
open for trading.
Portfolio securities are valued at current market value or at fair
value as determined in accordance with applicable rules under the 1940 Act and
the Fund's pricing policies and procedures (the "Pricing Policies") established
by and under the general supervision of the Board. The Board has delegated to
the Adviser, subject to the Board's continuing oversight, certain of the Board's
duties with respect to the Pricing Policies. The Adviser has established a
Valuation Committee, which operates under policies and procedures approved by
the Board, to value the Fund's assets on behalf of the Fund.
Whenever possible, securities are valued based on market information
on the business day as of which the value is being determined, as follows:
(a) an equity security listed on the Exchange or on other national
or foreign exchange (other than securities listed on the NASDAQ Stock Exchange
("NASDAQ")) is valued at the last sale price reflected on the consolidated tape
at the close of the exchange. If there has been no sale on the relevant business
day, the security is valued at the last traded price from the previous day. On
the following day, the security is valued in good faith at fair value by, or in
accordance with procedures approved by, the Board;
(b) an equity security traded on NASDAQ is valued at the NASDAQ
Official Closing Price; an OTC equity security is valued at the mid level
between the current bid and asked prices. If the mid price is not available, the
security will be valued at the bid price. An equity security traded on more than
one exchange is valued in accordance with paragraph (a) above by reference to
the principal exchange (as determined by the Adviser) on which the security is
traded;
(c) a listed or OTC put or call option is valued at the mid level
between the current bid and asked prices (for options or futures contracts, see
item (e)). If neither a current bid nor current ask price is available, the
Adviser will have discretion to determine the best valuation (e.g., last trade
price) and then bring the issue to the Valuation Committee the next day;
(d) an open futures contract and any option thereon are valued at
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 relevant business
day, the security is valued at the last available closing settlement price;
(e) a listed right is valued at the last traded price provided by
approved vendors. If there has been no sale on the relevant business day, the
right is valued at the last traded price from the previous day. On the following
day, the security is valued in good faith at fair value. For an unlisted right,
the calculation used in determining a value is the price of the reference
security minus the subscription price multiplied by the terms of the right.
There may be some instances when the subscription price is greater than the
referenced security right. In such instances, the right would be valued as
worthless;
(f) a listed warrant is valued at the last traded price provided by
approved vendors. If there is no sale on the relevant business day, the warrant
is valued at the last traded price from the previous day. On the following day,
the security is valued in good faith at fair value. All unlisted warrants are
valued in good faith at fair value. Once a warrant has expired, it will no
longer be valued;
(g) preferred securities are valued based on process received from
approved vendors that use last trade data for listed preferreds and evaluated
bid prices for non-listed preferreds, as well as for listed preferreds when
there is no trade activity;
(h) U.S. Government securities and any other debt instrument having
60 days or less remaining until maturity are generally valued at amortized cost
if their original maturity was 60 days or less. If the original term to maturity
exceeded 60 days, the securities are valued by an independent pricing vendor, if
a market price is available. If a market price is not available, the securities
are valued by using amortized cost as of the 61st day prior to maturity if the
original term to maturity exceeded 60 days. The Adviser is responsible for
monitoring whether any circumstances have occurred that indicate that the use of
the amortized cost method for any security is not appropriate due to such
factors as, but not limited to, an impairment of the creditworthiness of the
issuer or material changes in interest rates;
(i) a fixed-income security is typically valued on the basis of bid
prices provided by an approved pricing vendor when the Adviser believes that
such prices reflect the fair market value of the security. In certain markets,
the market convention may be to use the mid price between bid and offer.
Fixed-income securities may be valued on the basis of mid prices when the
approved pricing vendors normally provide mid prices, reflecting the conventions
of the particular markets. The prices provided by an approved pricing vendor may
take into account many factors, including institutional size, trading in similar
groups of securities and any developments related to specific securities. If the
Adviser determines that an appropriate pricing vendor does not exist for a
security in a market that typically values such securities on the basis of a bid
price or prices for a security are not available from a pricing source, the
security is valued on the basis of a quoted bid price or spread over the
applicable yield curve (a bid spread) by a broker-dealer in such security. If
the Adviser receives multiple broker quotes that are deemed to be reliable, then
the Adviser will utilize the second highest broker quote. If an appropriate
pricing vendor does not exist for a security in a market where convention is to
use the mid price, the security is valued on the basis of a quoted mid price by
a broker-dealer in such security;
(j) bank loans are valued on the basis of bid prices provided by a
pricing vendor;
(k) bridge loans are valued at fair value, which equates to the
outstanding loan amount unless it is determined by the Valuation Committee that
any particular bridge loan should be valued at something other than outstanding
loan amount. This may occur due to, for example, a significant change in the
high-yield market and/or a significant change in the status of any particular
issuer or issuers of bridge loans;
(l) whole loans: residential and commercial mortgage whose loans and
whole loan pools are market priced by an approved vendor;
(m) forward and spot currency pricing is provided by an independent
pricing vendor. The rate provided by the approved vendor is a mid price for
forward and spot rates. In most instances whenever both an "onshore" rate and an
"offshore" (i.e., non deliverable forward "NDF") rate is available, the Adviser
will use the offshore (NDF) rate. NDF contracts are used for currencies where it
is difficult (and sometimes impossible) to take actual delivery of the currency;
(n) swap pricing: Various approved external vendors are used to
obtain pricing information and analysis. This information is placed into various
pricing models (depending on the type of derivative) to devise a price for each
investment. These pricing models are monitored/reviewed on an ongoing basis by
the Adviser;
(o) interest rate caps, floors and swaptions are valued at the
present value of the terms of the agreements, which is provided by approved
vendors; and
(p) open-end mutual funds are valued at the closing NAV per share
and closed-end funds and exchange traded funds are valued at the closing market
price per share.
The Fund values its securities at their current market value
determined on the basis of market quotations as set forth above or, if market
quotations are not readily available or are unreliable, at "fair value" as
determined in accordance with procedures established by and under the general
supervision of the Board. When the Fund uses fair value pricing, it may take
into account any factors it deems appropriate. The Fund may determine fair value
based upon developments related to a specific security, current valuations of
foreign stock indices (as reflected in U.S. futures markets) and/or U.S. sector
or broader stock market indices. The prices of securities used by the Fund to
calculate its NAV may differ from quoted or published prices for the same
securities. Fair value pricing involves subjective judgments and it is possible
that the fair value determined for a security is materially different than the
value that could be realized upon the sale of that security.
The Fund expects to use fair value pricing for securities primarily
traded on U.S. exchanges only under very limited circumstances, such as the
early closing of the exchange on which a security is traded or suspension of
trading in the security. The Fund may use fair value pricing more frequently for
securities primarily traded in non-U.S. markets because, among other things,
most foreign markets close well before the Fund ordinarily 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. For example, the Fund believes that foreign
security values may be affected by events that occur after the close of foreign
securities markets. To account for this, the Fund may frequently value many of
its foreign equity securities using fair value prices based on third party
vendor modeling tools to the extent available.
Subject to its oversight, the Board has delegated responsibility for
valuing Fund's assets to the Adviser. The Adviser has established a Pricing
Group Valuation Committee, which operates under the policies and procedures
approved by the Board, to value the Fund's assets on behalf of the Fund. The
Pricing Group Valuation Committee values the Fund's assets as described above.
The Board may suspend the determination of its NAV (and the offering
and sale of shares), subject to the rules of the SEC and other governmental
rules and regulations, at a time when: (1) the Exchange is closed, other than
customary weekend and holiday closings, (2) an emergency exists as a result of
which it is not reasonably practicable for the Fund to dispose of securities
owned by it or to determine fairly the value of its net assets, or (3) for the
protection of shareholders, the SEC by order permits a suspension of the right
of redemption or a postponement of the date of payment on redemption.
For purposes of determining the Fund's NAV per share, all assets and
liabilities initially expressed in a foreign currency will be converted into
U.S. Dollars at the mean of the current bid and asked prices of such currency
against the U.S. Dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the basis of a pricing
service that takes into account the quotes provided by a number of such major
banks. If such quotations are not available as of the close of the Exchange, the
rate of exchange will be determined in good faith by, or under the direction of,
the Board.
DIVIDENDS, DISTRIBUTIONS AND TAXES
United States Federal Income Taxes
General. The Fund intends for each taxable year to qualify to be
taxed as a "regulated investment company" under the Code. To so qualify, the
Fund must, among other things, (i) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currency, certain other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currency or net income derived from interests
in certain qualified publicly traded partnerships; and (ii) diversify its
holdings so that, at the end of each quarter of its taxable year, the following
two conditions are met: (a) at least 50% of the value of the Fund's assets is
represented by cash, cash items, U.S. Government securities, securities of other
regulated investment companies and other securities with respect to which the
Fund's investment is limited, in respect of any one issuer, to an amount not
greater than 5% of the value of the Fund's assets and to not more than 10% of
the outstanding voting securities of such issuer and (b) not more than 25% of
the value of the Fund's assets is invested in securities of any one issuer
(other than U.S. Government securities or securities of other regulated
investment companies), securities of any two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses or
related trades or businesses, or in securities of one or more "qualified
publicly traded partnerships".
It is the present policy of the Fund to distribute to shareholders
all net investment income quarterly and to distribute net realized capital
gains, if any, annually. The amount of any such distributions must necessarily
depend upon the realization by the Fund of income and capital gains from
investments. No interest will accrue on uncashed distribution checks.
If the Fund qualifies as a regulated investment company for any
taxable year and makes timely distributions to its shareholders of 90% or more
of its investment company taxable income for that year (calculated without
regard to its net capital gain, i.e., the excess of its net long-term capital
gain over its net short-term capital loss) it will not be subject to federal
income tax on the portion of its taxable income for the year (including any net
capital gain) that it distributes to shareholders.
The Fund intends to avoid the 4% federal excise tax that would
otherwise apply to certain undistributed income for a given calendar year by
making timely distributions to the shareholders equal to at least the sum of (i)
98% of its ordinary income for that year; (ii) 98.2% of its capital gain net
income and foreign currency gains for the twelve-month period ending on October
31 of that year or, if later during the calendar year, the last day of the
Fund's taxable year (i.e., November 30 or December 31)if the fund is permitted
to elect and so elects; and (iii) any ordinary income or capital gain net income
from the preceding calendar year that was not distributed during that year. For
this purpose, income or gain retained by the Fund that is subject to corporate
income tax will be considered to have been distributed by the Fund by year-end.
For federal income tax purposes, dividends declared and payable to shareholders
of record as of a date in October, November or December of a given year but
actually paid during the immediately following January will be treated as if
paid by the Fund on December 31 of that calendar year, and will be taxable to
these shareholders for the year declared, and not for the year in which the
shareholders actually receive the dividend.
The information set forth in your Prospectus and the following
discussion relate solely to the significant U.S. federal income taxes on
dividends and distributions by the Fund and assumes that the Fund qualifies to
be taxed as a regulated investment company. An investor should consult the
investor's tax counsel with respect to the specific tax consequences of being a
shareholder of the Fund, including the effect and applicability of federal,
state, local and foreign tax laws to the investor's particular situation and the
possible effects of changes therein.
Dividends and Distributions. The Fund intends to make timely
distributions of the Fund's taxable income (including any net capital gain) so
that the Fund will not be subject to federal income and excise taxes. Dividends
of the Fund's net ordinary income and distributions of any net realized
short-term capital gain are taxable to shareholders as ordinary income. Due to
distributions of amounts representing a return of capital the Fund will receive
from REITs in which the Fund is invested, distributions made by the Fund may
also include nontaxable returns of capital, which will reduce a shareholder's
basis in shares of the Fund. If a shareholder's basis is reduced to zero (which
could happen if the shareholder does not reinvest distributions and returns of
capital are significant), any further returns of capital will be taxable as
capital gain. Dividends paid by the Fund and received by a corporate shareholder
are eligible for the dividends received deduction to the extent that the Fund's
income is derived from qualifying dividends received from domestic corporations.
Dividends received from REITs generally do not constitute qualifying dividends.
A corporate shareholder's dividends received deduction generally will be
disallowed unless the corporate shareholder holds shares in the Fund for at
least 46 days during the 90-day period beginning 45 days before the date on
which the shareholder becomes entitled to receive the dividend. In determining
the holding period of shares for this purpose, any period during which a
shareholder's risk of loss is offset by means of options, short sales or similar
transactions is not counted. Furthermore, the dividends received deduction will
be disallowed to the extent the investment in shares of the Fund is financed
with indebtedness. It is not expected that any of the Fund's dividends will be
treated as "qualified dividend income" taxable to individuals, trusts and
estates at the same tax rates as long-term capital gain.
Distributions of net capital gain will be taxable to shareholders as
long-term capital gain, regardless of how long a shareholder has held shares in
the Fund. Any dividend or distribution received by a shareholder on shares of
the Fund will have the effect of reducing the NAV of such shares by the amount
of such dividend or distribution. Furthermore, a dividend or distribution made
shortly after the purchase of such shares by a shareholder, although in effect a
return of capital to that particular shareholder, would be taxable to him or her
as described above. Dividends are taxable in the manner discussed regardless of
whether they are paid to the shareholder in cash or are reinvested in additional
shares of the Fund.
After the end of the taxable year, the Fund will notify shareholders
of the federal income tax status of any distributions made by the Fund to
shareholders during such year.
Sales and Redemptions. Any gain or loss arising from a sale or
redemption of Fund shares held as a capital asset will be capital gain or loss
except in the case of a dealer or a financial institution and will be long-term
capital gain or loss if the shareholder has held such shares for more than one
year at the time of the sale or redemption; otherwise it will be short-term
capital gain or loss. If a shareholder has held shares in the Fund for six
months or less and during that period has received a distribution of net capital
gain, any loss recognized by the shareholder on the sale of those shares during
the six-month period will be treated as a long-term capital loss to the extent
of the distribution. In determining the holding period of such shares for this
purpose, any period during which a shareholder's risk of loss is offset by means
of options, short sales or similar transactions is not counted.
Any loss realized by a shareholder on a sale or exchange of shares
of the Fund will be disallowed to the extent the shares disposed of are replaced
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are sold or exchanged. For this purpose, acquisitions pursuant to the
Dividend Reinvestment Plan would constitute a replacement if made within the
period. If disallowed, the loss will be reflected in an upward adjustment to the
basis of the shares acquired.
Cost Basis Reporting. As part of the Energy Improvement and
Extension Act of 2008, mutual funds are required to report to the Internal
Revenue Service the "cost basis" of shares acquired by a shareholder on or after
January 1, 2012 ("covered shares") and subsequently redeemed. These requirements
do not apply to investments through a tax-deferred arrangement, such as a 401(k)
plan or an individual retirement plan. The "cost basis" of a share is generally
its purchase price adjusted for dividends, return of capital, and other
corporate actions. Cost basis is used to determine whether a sale of the shares
results in a gain or loss. The amount of gain or loss recognized by a
shareholder on the sale or redemption of shares is generally the difference
between the cost basis of such shares and their sale price. If you redeem
covered shares during any year, then the Fund will report the cost basis of such
covered shares to the Internal Revenue Service (the "IRS") and you on Form
1099-B along with the gross proceeds received on the redemption, the gain or
loss realized on such redemption and the holding period of the redeemed shares.
Your cost basis in your covered shares is permitted to be calculated
using any one of three alternative methods: Average Cost, First In-First Out
(FIFO) and Specific Share Identification. You may elect which method you want to
use by notifying the Fund. This election may be revoked or changed by you at any
time up to the date of your first redemption of covered shares. If you do not
affirmatively elect a cost basis method then the Fund's default cost basis
calculation method, which is currently the Average Cost method - will be applied
to your account(s). The default method will also be applied to all new accounts
established unless otherwise requested.
If you hold Fund shares through a broker (or another nominee),
please contact that broker (nominee) with respect to the reporting of cost basis
and available elections for your account.
You are encouraged to consult your tax advisor regarding the
application of the new cost basis reporting rules and, in particular, which cost
basis calculation method you should elect.
Qualified Plans. A dividend or capital gains distribution with
respect to shares of the Fund held by a tax-deferred or qualified plan, such as
an individual retirement account, 403(b)(7) retirement plan or corporate pension
or profit-sharing plan, generally will not be taxable to the plan. Distributions
from such plans will be taxable to individual participants under applicable tax
rules without regard to the character of the income earned by the qualified
plan.
Backup Withholding. Any distributions and redemption proceeds
payable to a shareholder may be subject to "backup withholding" tax (at a rate
of 28%) if such shareholder fails to provide the Fund with his or her correct
taxpayer identification number, fails to make required certifications, or is
notified by the "IRS" that he or she is subject to backup withholding. Corporate
shareholders and certain other shareholders specified in the Code are exempt
from such backup withholding. Backup withholding is not an additional tax; any
amounts so withheld may be credited against a shareholder's U.S. federal income
tax liability or refunded by filing a refund claim with the IRS, provided that
the required information is furnished to the IRS.
Real Estate Mortgage Investment Conduits. The Fund may invest in
REMICs. Interests in REMICs are classified as either "regular" interests or
"residual" interests. Regular interests in a REMIC are treated as debt
instruments for federal income tax purposes to which the rules generally
applicable to debt obligations apply. If regular interests in a REMIC are issued
at a discount, application of the original issue discount provisions of the Code
may increase the amount of the Fund's net investment income available to be
distributed to shareholders, potentially causing the Fund to pay out as an
income distribution each year an amount which is greater than the total amount
of cash interest the Fund actually received.
Under the Code, special rules apply with respect to the treatment of
a portion of the Fund income from REMIC residual interests. (Such portion is
referred to herein as "Excess Inclusion Income"). Excess Inclusion Income
generally cannot be offset by net operating losses and, in addition, constitutes
unrelated business taxable income to entities which are subject to the unrelated
business income tax. The Code provides that a portion of Excess Inclusion Income
attributable to REMIC residual interests held by regulated investment companies
such as the Fund shall, pursuant to regulations, be allocated to the
shareholders of such regulated investment company in proportion to the dividends
received by such shareholders. Accordingly, shareholders of the Fund will
generally not be able to use net operating losses to offset such Excess
Inclusion Income. In addition, if a shareholder of the Fund is a tax-exempt
entity not subject to the unrelated business income tax and is allocated any
amount of Excess Inclusion Income, the Fund must pay a tax on the amount of
Excess Inclusion Income allocated to such shareholder at the highest corporate
rate. Any tax paid by the Fund as a result of this requirement may be deducted
by the Fund from the gross income of the residual interest involved. A
shareholder subject to the unrelated business income tax may be required to file
a return and pay a tax on such Excess Inclusion Income even though a shareholder
might not have been required to pay such tax or file such return absent the
receipt of such Excess Inclusion Income. It is anticipated that only a small
portion, if any, of the assets of the Fund will be invested in REMIC residual
interests. Accordingly, the amount of Excess Inclusion Income, if any, received
by the Fund and allocated to its shareholders should be quite small.
Shareholders that are subject to the unrelated business income tax should
consult their own tax advisor regarding the treatment of their income derived
from the Fund.
Taxation of Foreign Shareholders. The foregoing discussion relates
only to United States federal income tax law as it affects shareholders who are
United States citizens or residents or United States corporations. The effects
of federal income tax law on shareholders who are non-resident alien individuals
or foreign corporations may be substantially different. Foreign investors should
therefore consult their counsel for further information as to the United States
tax consequences of receipt of income from the Fund.
Other Taxes
The Fund may be subject to other state and local taxes.
PORTFOLIO TRANSACTIONS
Subject to the general oversight of the Board of the Fund, the
Adviser is responsible for the investment decisions and the placing of orders
for portfolio transactions for the Fund. The Adviser determines the broker or
dealer to be used in each specific transaction with the objective of negotiating
a combination of the most favorable commission (for transactions on which a
commission is payable) and the best price obtainable on each transaction
(generally defined as "best execution"). In connection with seeking best price
and execution, the Fund does not consider sales of shares of the Fund or other
investment companies managed by the Adviser as a factor in the selection of
brokers and dealers to effect portfolio transactions and has adopted a policy
and procedures reasonably designed to preclude such considerations.
When consistent with the objective of obtaining best execution,
brokerage may be directed to persons or firms supplying investment information
to the Adviser. There may be occasions where the transaction cost charged by a
broker may be greater than that which another broker may charge if it is
determined in good faith that the amount of such transaction cost is reasonable
in relation to the value of the brokerage, research and statistical services
provided by the executing broker.
Neither the Company nor the Adviser has entered into agreements or
understandings with any brokers regarding the placement of securities
transactions because of research services they provide. To the extent that such
persons or firms supply investment information to the Adviser for use in
rendering investment advice to the Fund, such information may be supplied at no
cost to the Adviser and, therefore, may have the effect of reducing the expenses
of the Adviser in rendering advice to the Fund. While it is impossible to place
an actual dollar value on such investment information, the Adviser believes that
its receipt probably does not reduce the overall expenses of the Adviser to any
material extent.
The investment information provided to the Adviser is of the type
described in Section 28(e) of the Securities Exchange Act of 1934, as amended,
and is designed to augment the Adviser's own internal research and investment
strategy capabilities. Research services furnished by brokers through which the
Fund effects securities transactions are used by the Adviser in carrying out its
investment management responsibilities with respect to all its clients' accounts
but not all such services may be used by the Adviser in connection with the
Fund.
The extent to which commissions that will be charged by
broker-dealers selected by the Fund may reflect an element of value for research
cannot presently be determined. To the extent that research services of value
are provided by broker-dealers with or through whom the Fund places portfolio
transactions, the Adviser may be relieved of expenses which it might otherwise
bear. Research services furnished by broker-dealers as a result of the placement
of portfolio transactions could be useful and of value to the Adviser in
servicing its other clients as well as the Fund; on the other hand, certain
research services obtained by the Adviser as a result of the placement of
portfolio brokerage of other clients could be useful and of value to it in
servicing the Fund.
The Fund may deal in some instances in securities which are not
listed on a national securities exchange but are traded in the over-the-counter
market. It may also purchase listed securities through the third market, i.e.,
from a dealer that is not a member of the exchange on which a security is
listed. Where transactions are executed in the over-the-counter market or third
market, the Fund will seek to deal with the primary market makers; but when
necessary in order to obtain best execution, it will utilize the services of
others. In all cases, the Fund will attempt to negotiate best execution.
The Fund's portfolio transactions in equity securities may occur on
foreign stock exchanges. Transactions on stock exchanges involve the payment of
brokerage commissions. On many foreign stock exchanges these commissions are
fixed. Securities traded in foreign over-the-counter markets (including most
fixed-income securities) are purchased from and sold to dealers acting as
principal. OTC transactions generally do not involve the payment of a stated
commission, but the price usually includes an undisclosed commission or markup.
The prices of underwritten offerings, however, generally include a stated
underwriter's discount. The Adviser expects to effect the bulk of its
transactions in securities of companies based in foreign countries through
brokers, dealers or underwriters located in such countries. U.S. Government or
other U.S. securities constituting permissible investments will be purchased and
sold through U.S. brokers, dealers or underwriters.
Investment decisions for the Fund are made independently from those
for other investment companies and other advisory accounts managed by the
Adviser. It may happen, on occasion, that the same security is held in the
portfolio of the Fund and one or more of such other companies or accounts.
Simultaneous transactions are likely when several funds or accounts are managed
by the same Adviser, particularly when a security is suitable for the investment
objectives of more than one of such companies or accounts. When two or more
companies or accounts managed by the Adviser are simultaneously engaged in the
purchase or sale of the same security, the transactions are allocated to the
respective companies or accounts both as to amount and price, in accordance with
a method deemed equitable to each company or account. In some cases this system
may adversely affect the price paid or received by the Fund or the size of the
position obtainable for the Fund. Allocations are made by the officers of the
Fund or of the Adviser. Purchases and sales of portfolio securities are
determined by the Adviser and are placed with broker-dealers by the order
department of the Adviser.
During the fiscal years ended October 31, 2013, October 31, 2012 and
October 31, 2011 the Fund incurred brokerage commissions amounting in the
aggregate to $1,720,770, $1,817,517 and $1,366,489, respectively.
The Fund may, from time to time, place orders for the purchase or
sale of securities (including listed call options) with SCB & Co., an affiliate
of the Adviser (the "Affiliated Broker"). In such instances, the placement of
orders with such brokers would be consistent with the Fund's objective of
obtaining best execution and would not be dependent upon the fact that the
Affiliated Broker is an affiliate of the Adviser. With respect to orders placed
with the Affiliated Broker for execution on a national securities exchange,
commissions received must conform to Section 17(e)(2)(A) of the 1940 Act and
Rule 17e-1 thereunder, which permit an affiliated person of a registered
investment company (such as the Fund), or any affiliated person of such person,
to receive a brokerage commission from such registered investment company
provided that such commission is reasonable and fair compared to the commissions
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time.
During the fiscal years ended October 31, 2013, October 31, 2012 and
October 31, 2011 brokerage commissions amounting in the aggregate to $590,
$5,327 and $988, respectively, were paid to the Affiliated Broker. During the
fiscal year ended October 31, 2013, the brokerage commissions paid to the
Affiliated Broker constituted 0.03% of the Fund's aggregate brokerage
commissions. During the fiscal year ended October 31, 2013, of the Fund's
aggregate dollar amount of brokerage transactions involving the payment of
commissions, 0.17% was effected through the Affiliated Broker.
Disclosure of Portfolio Holdings
The Fund believes that the ideas of the Adviser's investment staff
should benefit the Fund and its shareholders, and does not want to afford
speculators an opportunity to profit by anticipating Fund trading strategies or
using Fund information for stock picking. However, the Fund also believes that
knowledge of the Fund's portfolio holdings can assist shareholders in monitoring
their investment, making asset allocation decisions, and evaluating portfolio
management techniques.
The Adviser has adopted, on behalf of the Fund, policies and
procedures relating to disclosure of the Fund's portfolio securities. The
policies and procedures relating to disclosure of the Fund's portfolio
securities are designed to allow disclosure of portfolio holdings information
where necessary to the Fund's operation or useful to the Fund's shareholders
without compromising the integrity or performance of the Fund. Except when there
are legitimate business purposes for selective disclosure and other conditions
(designed to protect the Fund and its shareholders) are met, the Fund does not
provide or permit others to provide information about the Fund's portfolio
holdings on a selective basis.
The Fund includes portfolio holdings information as required in
regulatory filings and shareholder reports, discloses portfolio holdings
information as required by federal or state securities laws and may disclose
portfolio holdings information in response to requests by governmental
authorities. In addition, the Adviser may post portfolio holdings information on
the Adviser's website (www.AllianceBernstein.com). The Adviser generally posts
on the website a complete schedule of the Fund's portfolio securities, generally
as of the last day of each calendar month, approximately 30 days after the end
of that month. This posted information generally remains accessible on the
website for three months. For each portfolio security, the posted information
includes its name, the number of shares held by the Fund, the market value of
the Fund's holdings, and the percentage of the Fund's assets represented by the
Fund's holdings. In addition to the schedule of portfolio holdings, the Adviser
may post information about the number of securities the Fund holds, a summary of
the Fund's top ten holdings (including name and the percentage of the Fund's
assets invested in each holding), and a percentage breakdown of the Fund's
investments by country, sector and industry, as applicable approximately 10-15
days after the end of the month. The day after portfolio holdings information is
publicly available on the website, it may be mailed, e-mailed or otherwise
transmitted to any person.
The Adviser may distribute or authorize the distribution of
information about the Fund's portfolio holdings that is not publicly available,
on the website or otherwise, to the Adviser's employees and affiliates that
provide services to the Fund. In addition, the Adviser may distribute or
authorize distribution of information about the Fund's portfolio holdings that
is not publicly available, on the website or otherwise, to the Fund's service
providers who require access to the information in order to fulfill their
contractual duties relating to the Fund, to facilitate the review of the Fund by
rating agencies, for the purpose of due diligence regarding a merger or
acquisition, or for the purpose of effecting in-kind redemption of securities to
facilitate orderly redemption of portfolio assets and minimal impact on
remaining Fund shareholders. The Adviser does not expect to disclose information
about the Fund's portfolio holdings that is not publicly available to the Fund's
individual or institutional investors or to intermediaries that distribute the
Fund's shares. Information may be disclosed with any frequency and any lag, as
appropriate.
Before any non-public disclosure of information about the Fund's
portfolio holdings is permitted, however, the Adviser's Chief Compliance Officer
(or his designee) must determine that the Fund has a legitimate business purpose
for providing the portfolio holdings information, that the disclosure is in the
best interests of the Fund's shareholders, and that the recipient agrees or has
a duty to keep the information confidential and agrees not to trade directly or
indirectly based on the information or to use the information to form a specific
recommendation about whether to invest in the Fund or any other security. Under
no circumstances may the Adviser or its affiliates receive any consideration or
compensation for disclosing the information.
The Adviser has established procedures to ensure that the Fund's
portfolio holdings information is only disclosed in accordance with these
policies. Only the Adviser's Chief Compliance Officer (or his designee) may
approve the disclosure, and then only if he or she and a designated senior
officer in the Adviser's product management group determines that the disclosure
serves a legitimate business purpose of the Fund and is in the best interest of
the Fund's shareholders. The Adviser's Chief Compliance Officer (or his
designee) approves disclosure only after considering the anticipated benefits
and costs to the Fund and its shareholders, the purpose of the disclosure, any
conflicts of interest between the interests of the Fund and its shareholders and
the interests of the Adviser or any of its affiliates, and whether the
disclosure is consistent with the policies and procedures governing disclosure.
Only someone approved by the Adviser's Chief Compliance Officer (or his
designee) may make approved disclosures of portfolio holdings information to
authorized recipients. The Adviser reserves the right to request certifications
from senior officers of authorized recipients that the recipient is using the
portfolio holdings information only in a manner consistent with the Adviser's
policy and any applicable confidentiality agreement. The Adviser's Chief
Compliance Officer or another member of the compliance team reports all
arrangements to disclose portfolio holdings information to the Fund's Board on a
quarterly basis. If the Board determines that disclosure was inappropriate, the
Adviser will promptly terminate the disclosure arrangement.
In accordance with these procedures, each of the following third
parties have been approved to receive information concerning the Fund's
portfolio holdings: (i) the Fund's independent registered public accounting
firm, for use in providing audit opinions; (ii) R.R. Donnelley, Data Communique
International and, from time to time, other financial printers, for the purpose
of preparing Fund regulatory filings; (iii) the Fund's custodian in connection
with its custody of the Fund's assets; (iv) Institutional Shareholder Services,
Inc. for proxy voting services; and (v) data aggregators, such as Vestek.
Information may be provided to these parties at any time with no time lag. Each
of these parties is contractually and ethically prohibited from sharing the
Fund's portfolio holdings information unless specifically authorized.
GENERAL INFORMATION
Capitalization
The Company is a Maryland corporation organized on October 3, 1997
under the name "Alliance Institutional Funds, Inc." The name of the Company
became "AllianceBernstein Institutional Funds, Inc." on March 31, 2003. The Fund
changed its name from "Alliance Real Estate Investment Institutional Fund" to
"AllianceBernstein Real Estate Investment Institutional Fund" on May 21, 2001,
and changed its name from "AllianceBernstein Real Estate Investment
Institutional Fund" to "AllianceBernstein Global Real Estate Investment Fund II"
on March 1, 2007.
All shares of the Fund, when issued, are fully paid and
non-assessable. The Directors are authorized to reclassify and issue any
unissued shares to any number of additional series and classes without
shareholder approval. Accordingly, the Directors in the future, for reasons such
as the desire to establish one or more additional portfolios with different
investment objectives, policies or restrictions, may create additional classes
or series of shares. Any issuance of shares of another class or series would be
governed by the 1940 Act and the law of the State of Maryland. If shares of
another series were issued in connection with the creation of a new portfolio,
each share of each portfolio would normally be entitled to one vote for all
purposes. Generally, shares of all portfolios would vote as a single series on
matters, such as the election of Directors, that affected both portfolios in
substantially the same manner. As to matters affecting portfolios differently,
such as approval of the Advisory Agreement and changes in investment policy,
shares of each portfolio would vote as a separate series. The rights of the
holders of shares of a series may not be modified except by the vote of a
majority of the outstanding shares of such series.
It is anticipated that annual shareholder meetings will not be held;
shareholder meetings will be held only when required by federal or state law.
Shareholders have available certain procedures for the removal of Directors.
To the knowledge of the Fund, no persons owned, of record or
beneficially, 5% or more of a class of the outstanding shares of the Fund as of
January 3, 2014.
Custodian
State Street Bank and Trust Company ("State Street"), One Lincoln
Street, Boston, MA 02111, acts as the Fund's custodian but plays no part in
decisions as to the purchase or sale of portfolio securities. Subject to the
supervision of the Directors, State Street may enter into sub-custodial
agreements for the holding of the Fund's foreign securities.
Principal Underwriter
AllianceBernstein Investments, Inc., an indirect wholly-owned
subsidiary of the Adviser, located at 1345 Avenue of the Americas, New York, NY
10105, is the principal underwriter of shares of the Fund. Under the
Distribution Services Agreement between the Fund and ABI, the Fund has agreed to
indemnify ABI, in the absence of its willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations thereunder, against certain
civil liabilities, including liabilities under the Securities Act.
Counsel
Legal matters in connection with the issuance of the shares of
Common Stock offered hereby are passed upon by Seward & Kissel LLP, New York,
NY.
Independent Registered Public Accounting Firm
Ernst & Young LLP, 5 Times Square, New York, NY 10036, has been
appointed as the independent registered public accounting firm for the Company.
Code of Ethics and Proxy Voting Policies and Procedures
The Fund, the Adviser and ABI have each adopted codes of ethics
pursuant to Rule 17j-1 of the 1940 Act. These codes of ethics permit personnel
subject to the codes to invest in securities, including securities that may be
purchased or held by the Fund.
The Fund has adopted the Adviser's proxy voting policies and
procedures. The Adviser's proxy voting policies and procedures are attached as
Appendix A.
Information regarding how the Fund voted proxies related to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 227-4618; or on or
through the Fund's website at www.AllianceBernstein.com; or both; and (2) on the
SEC's website at www.sec.gov.
Additional Information
Any shareholder inquiries may be directed to the shareholder's
financial intermediary or to ABIS at the address or telephone number shown on
the front cover of this SAI. This SAI does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the
offices of the SEC in Washington, D.C.
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The financial statements for the Company for the fiscal year ended
October 31, 2013 and the report of Ernst & Young LLP, independent registered
public accounting firm, are incorporated herein by reference to the Company's
annual report. The annual report was filed on Form N-CSR with the SEC on January
6, 2014. It is available without charge upon request by calling ABIS at (800)
227-4618 or on the Internet at www.AllianceBernstein.com.
APPENDIX A
STATEMENT OF POLICIES AND
PROCEDURES FOR PROXY VOTING
1. Introduction
As a registered investment adviser, AllianceBernstein L.P.
("AllianceBernstein", "we" or "us") has a fiduciary duty to act solely in
the best interests of our clients. We recognize that this duty requires us
to vote client securities in a timely manner and make voting decisions
that are intended to maximize long-term shareholder value. Generally, our
clients' objective is to maximize the financial return of their portfolios
within appropriate risk parameters. We have long recognized that
environmental, social and governance ("ESG") issues can impact the
performance of investment portfolios. Accordingly, we have sought to
integrate ESG factors into our investment process to the extent that the
integration of such factors is consistent with our fiduciary duty to help
our clients achieve their investment objectives and protect their economic
interests. For additional information regarding our ESG policies and
practices, please refer to our firm's Statement of Policy Regarding
Responsible Investment.
We consider ourselves shareholder advocates and take this responsibility
very seriously. Consistent with our commitments, we will disclose our
clients' voting records only to them and as required by mutual fund vote
disclosure regulations. In addition, our Proxy Committee may, after
careful consideration, choose to respond to surveys so long as doing so
does not compromise confidential voting.
This statement is intended to comply with Rule 206(4)-6 of the Investment
Advisers Act of 1940. It sets forth our policies and procedures for voting
proxies for our discretionary investment advisory clients, including
investment companies registered under the Investment Company Act of 1940.
This statement applies to AllianceBernstein's investment groups investing
on behalf of clients in both U.S. and non-U.S. securities.
2. Proxy Policies
Our proxy voting policies are principle-based rather than rules-based. We
adhere to a core set of principles that are described in this Statement
and in our Proxy Voting Manual. We assess each proxy proposal in light of
those principles. Our proxy voting "litmus test" will always be what we
view as most likely to maximize long-term shareholder value. We believe
that authority and accountability for setting and executing corporate
policies, goals and compensation should generally rest with the board of
directors and senior management. In return, we support strong investor
rights that allow shareholders to hold directors and management
accountable if they fail to act in the best interests of shareholders. In
addition, if we determine that ESG issues that arise with respect to an
issuer's past, current or anticipated behaviors are, or are reasonably
likely to become, material to its future earnings, we address these
concerns in our proxy voting and engagement.
This statement is designed to be responsive to the wide range of proxy
voting subjects that can have a significant effect on the investment value
of the securities held in our clients' accounts. These policies are not
exhaustive due to the variety of proxy voting issues that we may be
required to consider. AllianceBernstein reserves the right to depart from
these guidelines in order to make voting decisions that are in our
clients' best interests. In reviewing proxy issues, we will apply the
following general policies:
2.1. Corporate Governance
We recognize the importance of good corporate governance in our proxy
voting policies and engagement practices in ensuring that management and
the board of directors fulfill their obligations to shareholders. We favor
proposals promoting transparency and accountability within a company. We
support the appointment of a majority of independent directors on boards
and key committees. Because we believe that good corporate governance
requires shareholders to have a meaningful voice in the affairs of the
company, we generally will support shareholder proposals which request
that companies amend their by-laws to provide that director nominees be
elected by an affirmative vote of a majority of the votes cast.
Furthermore, we have written to the SEC in support of shareholder access
to corporate proxy statements under specified conditions with the goal of
serving the best interests of all shareholders.
2.2. Elections of Directors
Unless there is a proxy fight for seats on the Board or we determine that
there are other compelling reasons to oppose directors, we will vote in
favor of the management proposed slate of directors. That said, we believe
that directors have a duty to respond to shareholder actions that have
received significant shareholder support. Therefore, we may vote against
directors (or withhold votes for directors where plurality voting applies)
who fail to act on key issues such as failure to implement proposals to
declassify the board, failure to implement a majority vote requirement,
failure to submit a rights plan to a shareholder vote or failure to act on
tender offers where a majority of shareholders have tendered their shares.
In addition, we will vote against directors who fail to attend at least
seventy-five percent of board meetings within a given year without a
reasonable excuse, and we may abstain or vote against directors of
non-U.S. issuers where there is insufficient information about the
nominees disclosed in the proxy statement. Also, we will generally not
oppose directors who meet the definition of independence promulgated by
the primary exchange on which the company's shares are traded or set forth
in the code we determine to be best practice in the country where the
subject company is domiciled. Finally, because we believe that cumulative
voting in single shareholder class structures provides a
disproportionately large voice to minority shareholders in the affairs of
a company, we will generally vote against such proposals and vote for
management proposals seeking to eliminate cumulative voting. However, in
dual class structures (such as A&B shares) where the shareholders with a
majority economic interest have a minority voting interest, we will
generally vote in favor of cumulative voting.
2.3. Appointment of Auditors
AllianceBernstein believes that the company is in the best position to
choose its auditors, so we will generally support management's
recommendation. However, we recognize that there are inherent conflicts
when a company's independent auditor performs substantial non-audit
services for the company. The Sarbanes-Oxley Act of 2002 prohibits certain
categories of services by auditors to U.S. issuers, making this issue less
prevalent in the U.S. Nevertheless, in reviewing a proposed auditor, we
will consider the fees paid for non-audit services relative to total fees
and whether there are other reasons for us to question the independence or
performance of the auditors.
2.4. Changes in Legal and Capital Structure
Changes in a company's charter, articles of incorporation or by-laws are
often technical and administrative in nature. Absent a compelling reason
to the contrary, AllianceBernstein will cast its votes in accordance with
management's recommendations on such proposals. However, we will review
and analyze on a case-by-case basis any non-routine proposals that are
likely to affect the structure and operation of the company or have a
material economic effect on the company. For example, we will generally
support proposals to increase authorized common stock when it is necessary
to implement a stock split, aid in a restructuring or acquisition, or
provide a sufficient number of shares for an employee savings plan, stock
option plan or executive compensation plan. However, a satisfactory
explanation of a company's intentions must be disclosed in the proxy
statement for proposals requesting an increase of greater than 100% of the
shares outstanding. We will oppose increases in authorized common stock
where there is evidence that the shares will be used to implement a poison
pill or another form of anti-takeover device. We will support shareholder
proposals that seek to eliminate dual class voting structures.''
2.5. Corporate Restructurings, Mergers and Acquisitions
AllianceBernstein believes proxy votes dealing with corporate
reorganizations are an extension of the investment decision. Accordingly,
we will analyze such proposals on a case-by-case basis, weighing heavily
the views of our research analysts that cover the company and our
investment professionals managing the portfolios in which the stock is
held.
2.6. Proposals Affecting Shareholder Rights
AllianceBernstein believes that certain fundamental rights of shareholders
must be protected. We will generally vote in favor of proposals that give
shareholders a greater voice in the affairs of the company and oppose any
measure that seeks to limit those rights. However, when analyzing such
proposals we will weigh the financial impact of the proposal against the
impairment of shareholder rights.
2.7. Anti-Takeover Measures
AllianceBernstein believes that measures that impede corporate
transactions (such as takeovers) or entrench management not only infringe
on the rights of shareholders but may also have a detrimental effect on
the value of the company. Therefore, we will generally oppose proposals,
regardless of whether they are advanced by management or shareholders,
when their purpose or effect is to entrench management or excessively or
inappropriately dilute shareholder ownership. Conversely, we support
proposals that would restrict or otherwise eliminate anti-takeover or
anti-shareholder measures that have already been adopted by corporate
issuers. For example, we will support shareholder proposals that seek to
require the company to submit a shareholder rights plan to a shareholder
vote. We will evaluate, on a case-by-case basis, proposals to completely
redeem or eliminate such plans. Furthermore, we will generally oppose
proposals put forward by management (including the authorization of blank
check preferred stock, classified boards and supermajority vote
requirements) that appear to be anti-shareholder or intended as management
entrenchment mechanisms.
2.8. Executive Compensation
AllianceBernstein believes that company management and the compensation
committee of the board of directors should, within reason, be given
latitude to determine the types and mix of compensation and benefits
offered to company employees. Whether proposed by a shareholder or
management, we will review proposals relating to executive compensation
plans on a case-by-case basis to ensure that the long-term interests of
management and shareholders are properly aligned. In general, we will
analyze the proposed plan to ensure that shareholder equity will not be
excessively diluted taking into account shares available for grant under
the proposed plan as well as other existing plans. We generally will
oppose plans that allow stock options to be granted with below market
value exercise prices on the date of issuance or permit re-pricing of
underwater stock options without shareholder approval. Other factors such
as the company's performance and industry practice will generally be
factored into our analysis. In markets where remuneration reports or
advisory votes on executive compensation are not required for all
companies, we will generally support shareholder proposals asking the
board to adopt a policy (i.e., "say on pay") that the company's
shareholders be given the opportunity to vote on an advisory resolution to
approve the compensation practices of the company. Although "say on pay"
votes are by nature only broad indications of shareholder views, they do
lead to more compensation-related dialogue between management and
shareholders and help ensure that management and shareholders meet their
common objective: maximizing the value of the company. In markets where
votes to approve remuneration reports or advisory votes on executive
compensation are required, we review the compensation practices on a
case-by-case basis. With respect to companies that have received
assistance through government programs such as TARP, we will generally
oppose shareholder proposals that seek to impose greater executive
compensation restrictions on subject companies than are required under the
applicable program because such restrictions could create a competitive
disadvantage for the subject company. We believe the U.S. Securities and
Exchange Commission ("SEC") took appropriate steps to ensure more complete
and transparent disclosure of executive compensation when it issued
modified executive compensation and corporate governance disclosure rules
in 2006 and February 2010. Therefore, while we will consider them on a
case-by-case basis, we generally vote against shareholder proposals
seeking additional disclosure of executive and director compensation,
including proposals that seek to specify the measurement of
performance-based compensation, if the company is subject to SEC rules. We
will support requiring a shareholder vote on management proposals to
provide severance packages that exceed 2.99 times the sum of an executive
officer's base salary plus bonus that are triggered by a change in
control. Finally, we will support shareholder proposals requiring a
company to expense compensatory employee stock options (to the extent the
jurisdiction in which the company operates does not already require it)
because we view this form of compensation as a significant corporate
expense that should be appropriately accounted for.'""'""""'
2.9. ESG
We are appointed by our clients as an investment manager with a fiduciary
responsibility to help them achieve their investment objectives over the
long term. Generally, our clients' objective is to maximize the financial
return of their portfolios within appropriate risk parameters. We have
long recognized that ESG issues can impact the performance of investment
portfolios. Accordingly, we have sought to integrate ESG factors into our
investment and proxy voting processes to the extent that the integration
of such factors is consistent with our fiduciary duty to help our clients
achieve their investment objectives and protect their economic interests.
For additional information regarding our approach to incorporating ESG
issues in our investment and decision-making processes, please refer to
our RI Policy, which is attached to this Statement as an Exhibit.
Shareholder proposals relating to environmental, social (including
political) and governance issues often raise complex and controversial
issues that may have both a financial and non-financial effect on the
company. And while we recognize that the effect of certain policies on a
company may be difficult to quantify, we believe it is clear that they do
affect the company's long-term performance. Our position in evaluating
these proposals is founded on the principle that we are a fiduciary. As
such, we carefully consider any factors that we believe could affect a
company's long-term investment performance (including ESG issues) in the
course of our extensive fundamental, company-specific research and
engagement, which we rely on in making our investment and proxy voting
decisions. Maximizing long-term shareholder value is our overriding
concern when evaluating these matters, so we consider the impact of these
proposals on the future earnings of the company. In so doing, we will
balance the assumed cost to a company of implementing one or more
shareholder proposals against the positive effects we believe implementing
the proposal may have on long-term shareholder value.
3. Proxy Voting Procedures
3.1. Engagement
In evaluating proxy issues and determining our votes, we welcome and seek
out the points of view of various parties. Internally, the Proxy Committee
may consult chief investment officers, directors of research, research
analysts across our value and growth equity platforms, portfolio managers
in whose managed accounts a stock is held and/or other Investment Policy
Group members. Externally, the Proxy Committee may consult company
management, company directors, interest groups, shareholder activists and
research providers. If we believe an ESG issue is, or is reasonably likely
to become, material, we engage a company's management to discuss the
relevant issues.""
3.2. Conflicts of Interest
AllianceBernstein recognizes that there may be a potential conflict of
interest when we vote a proxy solicited by an issuer whose retirement plan
we manage or administer, who distributes AllianceBernstein-sponsored
mutual funds, or with whom we have, or one of our employees has, a
business or personal relationship that may affect (or may be reasonably
viewed as affecting) how we vote on the issuer's proxy. Similarly,
AllianceBernstein may have a potentially material conflict of interest
when deciding how to vote on a proposal sponsored or supported by a
shareholder group that is a client. We believe that centralized management
of proxy voting, oversight by the Proxy Committee and adherence to these
policies ensures that proxies are voted based solely on our clients' best
interests. Additionally, we have implemented procedures to ensure that our
votes are not the product of a material conflict of interest, including:
(i) on an annual basis, the Proxy Committee taking reasonable steps to
evaluate (A) the nature of AllianceBernstein's and our employees' material
business and personal relationships (and those of our affiliates) with any
company whose equity securities are held in client accounts and (B) any
client that has sponsored or has a material interest in a proposal upon
which we will be eligible to vote; (ii) requiring anyone involved in the
decision making process to disclose to the Chair of the Proxy Committee
any potential conflict that he or she is aware of (including personal
relationships) and any contact that he or she has had with any interested
party regarding a proxy vote; (iii) prohibiting employees involved in the
decision making process or vote administration from revealing how we
intend to vote on a proposal in order to reduce any attempted influence
from interested parties; and (iv) where a material conflict of interests
exists, reviewing our proposed vote by applying a series of objective
tests and, where necessary, considering the views of third party research
services to ensure that our voting decision is consistent with our
clients' best interests.
Because under certain circumstances AllianceBernstein considers the
recommendation of third party research services, the Proxy Committee takes
reasonable steps to verify that any third party research service is, in
fact, independent taking into account all of the relevant facts and
circumstances. This includes reviewing the third party research service's
conflict management procedures and ascertaining, among other things,
whether the third party research service (i) has the capacity and
competency to adequately analyze proxy issues, and (ii) can make
recommendations in an impartial manner and in the best interests of our
clients.'
3.3. Proxies of Certain Non-U.S. Issuers
Proxy voting in certain countries requires "share blocking." Shareholders
wishing to vote their proxies must deposit their shares shortly before the
date of the meeting with a designated depositary. During this blocking
period, shares that will be voted at the meeting cannot be sold until the
meeting has taken place and the shares are returned to the clients'
custodian banks. Absent compelling reasons to the contrary,
AllianceBernstein believes that the benefit to the client of exercising
the vote is outweighed by the cost of voting (i.e., not being able to sell
the shares during this period). Accordingly, if share blocking is required
we generally choose not to vote those shares.
AllianceBernstein seeks to vote all proxies for securities held in client
accounts for which we have proxy voting authority. However, in non-US
markets, administrative issues beyond our control may at times prevent
AllianceBernstein from voting such proxies. For example, AllianceBernstein
may receive meeting notices after the cut-off date for voting or without
sufficient time to fully consider the proxy. As another example, certain
markets require periodic renewals of powers of attorney that local agents
must have from our clients prior to implementing AllianceBernstein's
voting instructions.''''''
3.4. Loaned Securities
Many clients of AllianceBernstein have entered into securities lending
arrangements with agent lenders to generate additional revenue.
AllianceBernstein will not be able to vote securities that are on loan
under these types of arrangements. However, under rare circumstances, for
voting issues that may have a significant impact on the investment, we may
request that clients recall securities that are on loan if we determine
that the benefit of voting outweighs the costs and lost revenue to the
client or fund and the administrative burden of retrieving the
securities.
3.5. Proxy Committee
We have formed a Proxy Committee, which includes investment professionals
from both our growth and value equities teams, which is directly involved
in the decision-making process to ensure that our votes are guided by the
investment professionals who are most familiar with a given company. The
Proxy Committee establishes general proxy policies for AllianceBernstein
and considers specific proxy voting matters as necessary. The Proxy
Committee periodically reviews these policies and new types of
environmental, social and governance issues, and decides how we should
vote on proposals not covered by these policies. When a proxy vote cannot
be clearly decided by an application of our stated policy, the Proxy
Committee will evaluate the proposal. In addition, the Proxy Committee, in
conjunction with the analyst that covers the company, may contact
corporate management, interested shareholder groups and others as
necessary to discuss proxy issues.
Different investment philosophies may occasionally result in different
conclusions being drawn regarding certain proposals and, in turn, may
result in the Proxy Committee making different voting decisions on the
same proposal for value and growth holdings. Nevertheless, the Proxy
Committee always votes proxies with the goal of maximizing the value of
the securities in client portfolios.
It is the responsibility of the Proxy Committee to evaluate and maintain
proxy voting procedures and guidelines, to evaluate proposals and issues
not covered by these guidelines, to evaluate proxies where we face a
potential conflict of interest (as discussed in section 3.2), to consider
changes in policy and to review the Proxy Voting Statement and the Proxy
Voting Manual no less frequently than annually. In addition, the Proxy
Committee meets as necessary to address special situations.
Members of the Proxy Committee include senior investment personnel and
representatives of the Legal and Compliance Department. The Proxy
Committee is chaired by Linda Giuliano, Senior Vice President and Chief
Administrative Officer-Equities.
Proxy Committee
Vincent DuPont: SVP-Equities
Linda Giuliano: SVP-Equities
Stephen Grillo: VP-Equities
David Lesser: VP-Legal
Mark Manley: SVP-Legal
Andrew Weiner: SVP-Equities
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3.6. Proxy Voting Records
You may obtain 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 AllianceBernstein's web site at
www.alliancebernstein.com, go to the Securities and Exchange Commission's
web site at www.sec.gov or call AllianceBernstein at (800) 227-4618.
Exhibit
Statement of Policy Regarding
Responsible Investment
Principles for Responsible Investment,
ESG, and Socially Responsible Investment
1. Introduction
AllianceBernstein L.P. ("AllianceBernstein" or "we") is appointed by our clients
as an investment manager with a fiduciary responsibility to help them achieve
their investment objectives over the long term. Generally, our clients'
objective is to maximize the financial return of their portfolios within
appropriate risk parameters. AllianceBernstein has long recognized that
environmental, social and governance ("ESG") issues can impact the performance
of investment portfolios. Accordingly, we have sought to integrate ESG factors
into our investment process to the extent that the integration of such factors
is consistent with our fiduciary duty to help our clients achieve their
investment objectives and protect their economic interests.
Our policy draws a distinction between how the Principles for Responsible
Investment ("PRI" or "Principles"), and Socially Responsible Investing ("SRI")
incorporate ESG factors. PRI is based on the premise that, because ESG issues
can affect investment performance, appropriate consideration of ESG issues and
engagement regarding them is firmly within the bounds of a mainstream investment
manager's fiduciary duties to its clients. Furthermore, PRI is intended to be
applied only in ways that are consistent with those mainstream fiduciary duties.
SRI, which refers to a spectrum of investment strategies that seek to integrate
ethical, moral, sustainability and other non-financial factors into the
investment process, generally involves exclusion and/or divestment, as well as
investment guidelines that restrict investments. AllianceBernstein may accept
such guideline restrictions upon client request.
2. Approach to ESG
Our long-standing policy has been to include ESG factors in our extensive
fundamental research and consider them carefully when we believe they are
material to our forecasts and investment decisions. If we determine that these
aspects of an issuer's past, current or anticipated behavior are material to its
future expected returns, we address these concerns in our forecasts, research
reviews, investment decisions and engagement. In addition, we have
well-developed proxy voting policies that incorporate ESG issues and engagement.
3. Commitment to the PRI
In recent years, we have gained greater clarity on how the PRI initiative, based
on information from PRI Advisory Council members and from other signatories,
provides a framework for incorporating ESG factors into investment research and
decision-making. Furthermore, our industry has become, over time, more aware of
the importance of ESG factors. We acknowledge these developments and seek to
refine what has been our process in this area.
After careful consideration, we determined that becoming a PRI signatory would
enhance our current ESG practices and align with our fiduciary duties to our
clients as a mainstream investment manager. Accordingly, we became a signatory,
effective November 1, 2011.
In signing the PRI, AllianceBernstein as an investment manager publicly commits
to adopt and implement all six Principles, where consistent with our fiduciary
responsibilities, and to make progress over time on implementation of the
Principles.
The six Principles are:
1. We will incorporate ESG issues into investment research and decision-making
processes. AllianceBernstein Examples: ESG issues are included in the research
analysis process. In some cases, external service providers of ESG-related tools
are utilized; we have conducted proxy voting training and will have continued
and expanded training for investment professionals to incorporate ESG issues
into investment analysis and decision-making processes across our firm.
2. We will be active owners and incorporate ESG issues into our ownership
policies and practices.
AllianceBernstein Examples: We are active owners through our proxy voting
process (for additional information, please refer to our Statement of Policies
and Procedures for Proxy Voting Manual); we engage issuers on ESG matters in our
investment research process (we define "engagement" as discussions with
management about ESG issues when they are, or we believe they are reasonably
likely to become, material).
3. We will seek appropriate disclosure on ESG issues by the entities in which we
invest.
AllianceBernstein Examples: Generally, we support transparency regarding ESG
issues when we conclude the disclosure is reasonable. Similarly, in proxy
voting, we will support shareholder initiatives and resolutions promoting ESG
disclosure when we conclude the disclosure is reasonable.
4. We will promote acceptance and implementation of the Principles within the
investment industry.
AllianceBernstein Examples: By signing the PRI, we have taken an important first
step in promoting acceptance and implementation of the six Principles within our
industry.
5. We will work together to enhance our effectiveness in implementing the
Principles.
AllianceBernstein Examples: We will engage with clients and participate in
forums with other PRI signatories to better understand how the PRI are applied
in our respective businesses. As a PRI signatory, we have access to information,
tools and other signatories to help ensure that we are effective in our
endeavors to implement the PRI.
6. We will report on our activities and progress towards implementing the
Principles. AllianceBernstein Examples: We will respond to the 2012 PRI
questionnaire and disclose PRI scores from the questionnaire in response to
inquiries from clients and in requests for proposals; we will provide examples
as requested concerning active ownership activities (voting, engagement or
policy dialogue).
4. RI Committee
Our firm's RI Committee provides AllianceBernstein stakeholders, including
employees, clients, prospects, consultants and service providers alike, with a
resource within our firm on which they can rely for information regarding our
approach to ESG issues and how those issues are incorporated in different ways
by the PRI and SRI. Additionally, the RI Committee is responsible for assisting
AllianceBernstein personnel to further implement our firm's RI policies and
practices, and, over time, to make progress on implementing all six Principles.
The RI Committee has a diverse membership, including senior representatives from
investments, distribution/sales and legal. The Committee is chaired by Linda
Giuliano, Senior Vice President and Chief Administrative Officer-Equities.
If you have questions or desire additional information about this Policy, we
encourage you to contact the RI Committee at RIinquiries@alliancebernstein.com
or reach out to a Committee member:
Erin Bigley: SVP-Fixed Income, New York
Alex Chaloff: SVP-Private Client, Los Angeles
Nicholas Davidson: SVP-Value, London
Kathy Fisher: SVP-Private Client, New York
Linda Giuliano: SVP-Equities, New York
Christopher Kotowicz: VP-Growth, Chicago
David Lesser: VP-Legal, New York
Mark Manley: SVP-Legal, New York
Takuji Oya: VP-Growth, Japan
Guy Prochilo: SVP-Institutional Investments, New York
Nitish Sharma: VP-Institutional Investments, Australia
Liz Smith: SVP-Institutional Investments, New York
Willem Van Gijzen: VP-Institutional Investments, Netherlands
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