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Richard Bernstein Tactical Series, American Industrial Renaissance®, 2017-2

Manufacturing Renaissance

A variety of factors are driving the manufacturing renaissance in the United States. Slower growth in hourly compensation compared to some global competitors and lower natural gas and electricity prices are leading the U.S. to become one of the lowest-cost countries for manufacturing in the developed world, according to Boston Consulting Group (BCG). We believe the U.S. will have a competitive advantage over other countries, which could potentially allow U.S. industrial and manufacturing companies to gain market share.

For many decades, American companies sent their manufacturing work overseas. But today, in a trend known as "reshoring," many companies are bringing their manufacturing back to the U.S. According to Reshoring Initiative, about 240,000 manufacturing jobs have been brought back to the U.S. from offshore over the last six years. That gain in manufacturing jobs is the result of both new reshoring and Foreign Direct Investment (FDI) by foreign companies into our manufacturing sector. It also represents about 28% of the total increase in u.s. manufacturing jobs since the low of 11.45 million in February 2010. In addition, business leaders around the world have chosen the U.S. as the number one place to invest (see chart 1). According to an A.T. Kearney survey of corporate executives, the U.S. is perceived as a bedrock of stability. Investors are optimistic about solid U.S. fundamentals, including an increasingly competitive workforce and improving cost factors that are helping the U.S. business environment.

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Richard Bernstein Advisors believes the following four factors point to the U.S. gaining industrial market share over the next five to ten years:

Wages and Productivity

American workers are increasingly willing to work for less while labor costs in low-cost countries, such as China, are on the rise. The wage lag is a key factor contributing to the rebounding competitiveness of U.S.industry. China's manufacturing cost advantage over the US shrank from 14% in 2004 to an insignificant 1% in 2016, according to The Boston Consutlant Group.

Although the absolute level of wages in the emerging markets remains less than that in the United States, the gap has been closing. According to BCG, cost structures in Mexico and the U.S. improved more than in all of the other 25 largest exporting economies. Because of low wage growth, sustained productivity gains, stable exchange rates and a big energy-cost advantage, these two nations are the current rising stars of global manufacturing. Of course, there can be no assurance that these trends will continue.

Quality Control, Transportation Costs and Decreased Time to Market

Some companies that have already begun to reshore have cited the benefits in having designers, engineers and sales people at the same facility rather than oceans apart.1 The cost of shipping parts around the world and the associated time to market can create hidden costs that may negatively impact both profit margins and market share.

1 Source: A.T. Kearney

Energy costs

Natural gas had long been the second-most prevalent fuel for electricity generation behind coal. According to the U.S. Energy Information Administration, natural gas-fired generation first surpassed coal generation on a monthly basis in April 2015. Natural gas-fired generation has surpassed coalfired generation in most months since then. In 2016, natural gas had the largest percentage contribution to electricty generation at 33.8%. coal contributed 30.4% and nuclear rounded out the top 3 at 19.7%.

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The Potential Advantage for Small Banks

Large U.S. banks have strayed from traditional lending sources of income toward more risky sources of return, for example, investing in corporate bonds rather than making corporate loans, according to Richard Bernstein Advisors (RBA).

RBA believes it may be prudent to avoid the larger banks until they return to their traditional income-oriented roots. In contrast, smaller U.S. banks generally have strengthening balance sheets and continue to aid U.S. capital formation. Admittedly, traditional banking typically has lower profitability ratios, but smaller U.S. banks do not need massive trading infrastructures and unnecessary global risk-taking to be profitable. Manufacturing is a capital-intensive business that requires equipment, tooling and raw materials. For the manufacturing renaissance to come to fruition, RBA believes manufacturers will turn to smaller banks for the financing required to hire more workers, buy new equipment and aggressively market themselves.

The Richard Bernstein Advisors Tactical Series, American Industrial Renaissance®, is a unit investment trust (UIT) which seeks above-average capital appreciation by investing in small- and mid-cap U.S. companies in the industrial and community banking sectors. The stocks are selected for the trust by Richard Bernstein Advisors using a comprehensive process and held for approximately two years. There is no assurance the objective of the trust will be met.

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Not FDIC Insured • Not Bank Guaranteed • May Lose Value

You should consider the portfolio's investment objectives, risks, and charges and expenses carefully before investing. Contact your financial advisor or call First Trust Portfolios, L.P. at 1.800.621.1675 to request a prospectus, which contains this and other information about the portfolio. Read it carefully before you invest.

Risk Considerations:
An investment in this unmanaged unit investment trust should be made with an understanding of the risks involved with owning common stocks, such as an economic recession and the possible deterioration of either the financial condition of the issuers of the equity securities or the general condition of the stock market.

You should be aware that the portfolio is concentrated in stocks in the industrials sector making it subject to additional risks, including limited diversification. The companies engaged in the industrials sector are subject to certain risks, including a deterioration in the general state of the economy, intense competition, domestic and international politics, excess capacity and changing spending trends.

The trust also invests in companies in the financials sector. The companies engaged in the financials sector are subject to the adverse effects of volatile interest rates, economic recession, decreases in the availability of capital, increased competition from new entrants in the field, and potential increased regulation.

An investment in a portfolio containing small-cap and mid-cap companies is subject to additional risks, as the share prices of small-cap companies and certain mid-cap companies are often more volatile than those of larger companies due to several factors, including limited trading volumes, products, financial resources, management inexperience and less publicly available information.

This UIT is a buy and hold strategy and investors should consider their ability to hold the trust until maturity. There may be tax consequences unless units are purchased in an IRA or other qualified plan.

The value of the securities held by the trust may be subject to steep declines or increased volatility due to changes in performance or perception of the issuers.

 
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