What It Means to Be a Value Investor International Investment German Forum 19 September 2007 Nicholas Davidson Senior Portfolio Manager Bernstein Value Equities

Agenda What is Value investing? Why does Value investing work? Is now the time to buy Value?

Some Insights From Ben Graham: What is Value Investing? Markets are inefficient Intrinsic value and market price are not the same A strategy of buying stocks well below intrinsic value will produce superior returns in the long run

Alternative Approaches to Value Investing Classic Quasi-Control Modern Portfolio Research Cursory Intensive Extensive Value Metrics Tangible Assets Franchise Value Normalised Earnings Replacement Value Private Market Value Relative Value Portfolio Diversified Concentrated Time Horizon Medium Very long Any Examples Graham Buffett Gabelli, Neff

Academic Research Suggests Value Investing Works Year of Discovery Research Period Monthly Premium % Subsequent Monthly Premium % Australia 1998 1975 to 1995 0.2 0.7 Belgium 0.5 Canada 1995 1986 to 1993 0.1 France 1993 1981 to 1992 0.4 Germany (0.1) Hong Kong (0.3) Italy (0.2) Japan 1991 1972 to 1988 Netherlands 1.4 Singapore 0.3 1.2 Sweden Switzerland UK US 1985 1973 to 1984 *Maturity premium from year of discovery through end of 2003 Source: Low-Cap and Low-Rated Companies, Dimson, Marsh and Staunton, The Journal of Portfolio Management European 2004

Value Outperforms, but… Since Inception relative performance of MSCI Value Index versus Broad Market Index Market Alpha Beta Value Volatility Market Volatility Japan* 3.1 0.9 22.1 22.6 Pac Basin ex Japan* 1.4 1.0 23.1 22.4 UK* 1.2 22.7 Emerging Markets** 25.3 25.2 Europe ex UK* 1.1 17.3 17.1 USA* 14.6 15.2 *Inception Date: 31 December 1974 **Inception Date: 31 December 1998 MSCI Value Index vs. MSCI Core Index As of July 31, 2007 Source: MSCI and AllianceBernstein

…is it Compensation for Higher Risk? Not if defined in the usual way Market Alpha Beta Value Volatility Market Volatility Japan* 3.1 0.9 21.5 22.0 Pac Basin ex Japan* 1.4 1.0 22.4 21.7 UK* 1.2 22.3 Emerging Markets** 20.6 20.8 Europe ex UK* 1.1 16.9 16.7 USA* 14.2 14.7 *Inception Date: 31 December 1974 **Inception Date: 31 December 1998 MSCI Value Index vs. MSCI Core Index As of July 31, 2007 Source: MSCI and AllianceBernstein

Agenda What is Value investing? Why does Value investing work? Is now the time to buy Value?

Why does Value investing work? Emotional biases lead investors astray Loss Aversion Anchoring Competitive markets ensure reversion to the mean

Behavioural Explanations: Loss Aversion Which Would You Prefer? Choice A Choice B Amount Probability Amount Probability $4,000 80% $3,000 100% Expected Value $3,200 $3,000 Popularity 20% 80%

Pleasure Loss Gain Pain Loss Aversion Pleasure Small Pleasure Loss Gain Big Pain Pain

Value Investing Paradigm Long-Term Earnings Power Investment Controversy Stock-Price Decline Fundamental Price Level Over-Reaction Triggered by Loss Aversion Actual Price Level

Behavioural Explanations: Heuristic-Driven Bias What’s the Answer? Group A Group B 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = 512

Anchoring: Reference Point Distorts Conclusions What’s the Answer? Group A Group B 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = 512 = 2,250 Actual Answer = 40,320

Consensus Growth-Rate Forecasts Quintile Prior 3 Years Future Actual Fastest Growth 1 20% 19% 11% 2 12 13 8 3 5 11 9 4 1 10 8 Slowest Growth 5 (1) 6 7

Value Investing Paradigm Long-Term Earnings Power Price Performance Under-Estimation of Mean Reversion Investment Controversy Analysts’ Forecasts Stock-Price Decline Research Conclusion

Agenda What is Value investing? Why does Value investing work? Is now the time to buy Value?

Has Value Run Its Course? Cumulative Returns (US$) Mar 2000–Apr 2007 (Index) MSCI World Value Value Outperformance 35.4% The degree of value’s outperformance since March 2000 is really quite remarkable The MSCI World Value Index has returned 26.1% more than MSCI World on a cumulative basis This translates into an annualized premium of 5.3%, helping to boost value’s long term annualized premium since 1975 to 1.6% On the basis that all good things come to an end eventually , it’s little wonder that investors are nervous that value might soon begin to falter MSCI World Past performance does not guarantee future results. *Annualized premium since 1975 Index = 100 at March 2000 Source: MSCI

The Value Opportunity is Lower Than in Past Discount to Fair Value: Global Equities Value Spreads Below Average (%) Oil Shock Japan Asset Bubble Internet Euphoria It’s not surprising, therefore, that value investors are getting a little anxious Viewed through our own internal measure of the value opportunity, the outlook is not bright This slide is one which I’m sure many of you are familiar with. It shows the amount by which the most attractively priced stocks within the global market sell below the aggregate market Think of it as a gauge of investor sentiment. When the line spikes upwards, investors are usually anxious about something (even in the Internet bubble they were anxious…about the demise of the old economy) At those extreme levels, valuations between stocks and sectors tend to vary quite dramatically depending on their exposure to the perceived problems When the line falls, it usually reflects investors’ more settled frame of mind. Perhaps even complacency As you can see, we’re currently right at the bottom of the historical range which, in simple terms, means that there are very few pricing discrepancies for us to exploit Where, you may ask, is our outperformance going to come from in the future? Average Current valuations do not guarantee future results. Through June 30, 2007 These data represent the amount by which the most attractively priced large-cap stocks within each market sell below overall market valuations. The proportion of Bernstein investments in stocks from this group will vary over time but will typically be high. Bernstein’s estimates of the fair value of these stocks may not be realized for a variety of reasons. Source: Compustat, Datastream, DRI, FactSet, MSCI and AllianceBernstein

Value Outperforms Over the Long Run Value vs. Broad Market Rolling 3-Year Annualized Comparison Average Through 31 July 2007 MSCI The World Index Value rolling 3 year annualized excess return vs. MSCI The World Index Core Source: MSCI and Bernstein Value Equities

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