Global convertible bonds

June 2012

Uli Sperl, CFA

For professional investors only

Senior Portfolio Manager

Asset management

1

Table of contents

Section 1 Asset Class 2

Section 2 Convertible Bonds at UBS Global Asset Management 9

Section 3 Performance & Positioning 15

Section 1

Asset Class

3

Convertible bonds are fixed-income instruments that pay a coupon and can be redeemed at a predetermined price at maturity

Prior to maturity, the investor may exchange a convertible bond for a predetermined number of shares

When the stock markets are performing well, the convertible bond will behave like an equity share, and the probability of conversion will increase

Convertible bonds: The best of both worlds?

When the stock markets are performing badly, the convertible bond will behave like a straight bond, and the probability of conversion will fall

Note: For illustration purposes only

4

Total = USD 475 billion

2280 issues

US the largest market

Asia & Europe were the most active with new issues in the past 2 years

Broadly diversified by sector and countries

Global Convertible Bond MarketCapitalization by region

Source: UBS Investment BankData: as at 29 December 2011

Others35.0

Asia77.0

Japan40.0

USA206.0

Europe117.0

5

The multi-asset angle: Attractive risk/return attributesGlobal Convertibles hedged in EUR 1994 – 2012

Source: Bloomberg, UBS Global Asset Management, * currency hedged returns based on own calculations Data: as of 31 May 2012These figures refer to the past. Past performance is not a reliable indicator of future results

6.7%

10.7%

5.9%

3.4%

15.3%

5.2%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

Return in % Risk in %

Convertibles (UBS Global Convertible Index - Global Vanilla Hedged (EUR))

Equities (MSCI World Total Return Hedged (EUR)* )

Bonds (JPM GBI Global Hedged (EUR)*)

6

Dec

-93

Dec

-96

Dec

-99

Dec

-02

Dec

-05

Dec

-08

Dec

-11

Dec-93

Dec-96

Dec-99

Dec-02

Dec-05

Dec-08

Dec-11

Buy date

Sell

dat

e

20%-25%15%-20%10%-15%5%-10%0%-5%-5%-0%-10%--5%-15%--10%-20%--15%

Example: Investing in converts at the end of 1996 and selling in

2002 generated between 5-10% more return per annum than an

investment in equities

Global CB hedged in EUR relative performance vs equitiesMore green than red and with much less risk

Source: Bloomberg, UBSData: as of 31 May 2012These figures refer to the past. Past performance is not a reliable indicator of future results.

Annualized outperformance of global convertible

bonds vs. MSCI World Total Return

7

This information represents the views of UBS Global Asset Management as of June 2012While these forward-looking statements represent our judgments and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations.

Convertible bond asset classPositive drivers slightly dominate

Equity Markets(equity component) We believe equity markets are fairly valued from a fundamental point of view

Many convertible bonds convert into shares with high alphas

Interest rates Rates may increase from current levels, negatively impacting performance Convertible market exposure to interest rates, however, is quite low

(approx. 1.5 year duration)

Credit spreads(Credit component) Credit spreads trade after on attractive levels

Diversification remains key

Market valuation(Option component)

The overall convertible bond market trades on a cheap valuation. Cheapness is most pronounced in smaller, less well known, more complex, less

liquid, sub investment grade issues

New issues(Supply)

Volumes are picking up in 2012 so far. We expect more attractively priced new issues as companies need financing for

future M&A as well as refinancing

Investor demand The selling pressure from outright investors has abated and the market seems to have found a new equilibrium

Hedge funds, non traditional buyers and issuing companies are selective buyers into weakness

8

Source: BoA Merill Lynch Global ResearchData: As of 31 May 2012These figures refer to the past. Past performance is not a reliable indicator of future results.

Still rather cheap

Global theoretical convertible bond valuations

-5

0

5

10

15

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12

Asia & OtherJapanEuropeUS

Section 2

Convertible Bonds at UBS Global Asset Management

10

• One of Europe’s largest convertible bond manager (currently roughly 2.4 bn EUR under management)

• Excellent long term track record in Europe, Asia and Global rewarded by several “Lipper” and “€uro am Sonntag” fund awards as well as with a AA Citywire rating.

• Stable management team with a long investment experience in convertible bonds

• Team can leverage UBS Global Asset Managements resources across equity, credit, derivative and asset allocation

• Broad global market network the team can access for valuable insights, liquidity, new issues

UBS Global Asset ManagementYour partner for convertible bonds

Data: As of 31 May 2012

11

Convertible bond – investment process

Give access to the convertible bond asset class

– Benefit from its long term attractive risk/reward characteristics

– Making use of our privileged access to a stream of attractively priced new issues

– Benefit from opportunities across regions, credit quality, structures

– Offer regional as well as global portfolios

Add value with active portfolio management

– Leveraging UBS Global Asset Management global research platform– Equities

– Fixed income & Credit

– Derivatives & Convertible bond specific

– Asset Allocation & Currencies

– Strong risk management infrastructure

Our main goals

12

Convertible bond – investment process

Bottom up convertible bond selection based on

– Underlying equity view

– Issuer credit view

– Convertible bond theoretical valuation as well as specific terms and conditions

– Bond risk/reward profile

Portfolio construction taking into account

– Risk and factor exposures

– Asset allocation and currency views

– Characteristics of the portfolio

Main steps

Combining them into an attractive portfolio

Choosing the most attractive bonds

13

Bringing it all togetherOur views on the drivers are weighted by their importance

Buy candidate Sell candidate

“positive” view “neutral” view “negative” view

Equity

Convertible specific

CreditEquity

Convertible specific

Credit

Equity

Credit

Convertible specificDri

vers

Equity value

Va

lue o

f co

nv

ert

ible

bo

nd

Junk Bond proxy “Real”convertible bond

Equity proxy

Investment value

Underlying sh

are value (parit

y)

Equity value

Va

lue o

f co

nv

ert

ible

bo

nd

Junk Bond proxy “Real”convertible bond

Equity proxy

Investment value

Underlying sh

are value (parit

y)

Note: For illustration purposes only

14

What we do and what we don’t do

WE DO

Select bonds in a bottom up perspective

Set strategies in absolute terms

Look at all available opportunities (equity, credit, sector, geography, structure) thanks to our broad research

Leverage our internal research

Tend to like convexity (“real”/balanced convertibles)

Use a comprehensive database to monitor the entire convertible bond universe

Invest in a long only way

Have a strong focus on risk & diversification

Have a long term investment horizon

Maintain strong relations with relevant counterparties

WE DON’T

Buy bonds just because they are in a benchmark

Buy overpriced positions just because they are “defensive”

Buy overpriced positions just because they are investment grade

Buy overpriced positions just because of liquidity

Arbitrage bonds valuation anomalies

Buy or sell stocks or equity futures as their risk profile is linear

Set a top down strategy and then fill it up with bonds

Build up cash as a tactical position

Take significant currency bets

Section 3

Performance & Positioning

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Track Record

Source: MorningstarData: as of 31 May 2012These figures refer to the past. Past performance is not a reliable indicator of future results.

Our bottom up approach adds value over the cycle

17

Track Record

Source: UBS Global Asset Management; Bank of America Merrill LynchData: as of 15 May 2012These figures refer to the past. Past performance is not a reliable indicator of future results.

Strong correlation to changes in market valuations

-15%

-10%

-5%

0%

5%

10%

15%

Jan

08

Ap

r 0

8

Jul 0

8

Oct

08

Jan

09

Ap

r 0

9

Jul 0

9

Oct

09

Jan

10

Ap

r 1

0

Jul 1

0

Oct

10

Jan

11

Ap

r 1

1

Jul 1

1

Oct

11

Jan

12

Ap

r 1

2

-6

-4

-2

0

2

4

6

3M Change in Global Convertible Bond Cheapness (RHS)

Relative Performance UBS (LUX) Bond Sicav - Convert Global

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Average delta 30.7%

Average equity premium 150.5%

Average effective duration 1.44

Average premium to inv. value 8.7%

Average running yield 3.4%

Percentage investment grade 61.0%

Yield to worst 3.0%

Number of bonds in fund 118

Fund profile Balanced

UBS (LUX) Bond Sicav – Convert Global (EUR)

Credit quality Breakdown per region (based on underlying equity)

Currency Exposure: EUR: 101.3 Characteristics

Source: UBS Global Asset ManagementData: as of 31 May 2012

Nicely balanced

8.8%

9.8%

42.1%

0.3%

25.1%

14.0%AAA

AA

A

BBB

BB

B and below

35.4%

12.4%

37.0%

5.0%

10.1%Europe

Asia ex Japan

US

Japan

Other markets

-2.3%

-1.1%

0.9%0.4% 0.7%0.7%

-0.8%

0.8%0.4%

-0.9%

-3.0%

0.0%

3.0%

6.0%

USD

AU

D

GBP

HU

F

NZD

AED SEK

MY

R

HK

D

Oth

er

19

Uli Sperl, CFAExecutive Director

Senior Portfolio Manager

Munich University, Master of EconomicsInvestment Experience: 13 years,

with UBS for 8 years

Portfolio Management Team – Convertible BondsLong Term Experience in Managing Convertible Bonds

HWZ Zurich, Bachelor of BAInvestment Experience: 11 years,

with UBS for 15 years

Daniel LutzAssociate DirectorPortfolio Manager

Dominic LocherAssociate Portfolio Manager

FHNW Zurich, MAS Banking & FinanceInvestment Experience: 3 years,

with UBS for 6 years

Alain Eckmann, CFAExecutive Director

Senior Portfolio Manager

Geneva University, Master of MathematicsInvestment Experience: 18 years,

with UBS for 15 years

Data: as of April 2012

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Uli Sperl, CFA

Uli Sperl is a Senior Portfolio Manager within the Asymmetric Portfolio Solutions team. He is responsible for the management and strategy of convertible bond funds. The managed funds won several “Lipper” & “€uro am Sonntag” fund awards.

He joined UBS in 2005. Before, he worked as a portfolio manager at Activest Investment in Munich. His responsibilities included global index-linked equity portfolios as well as European convertible bond portfolios.

In 2008 Uli successfully completed the post graduate “Certified Rating Analyst” program at the Hochschule St. Gallen (HSG).

Uli is co-author of the publication “The benefits of convertible bonds” and has repeatedly published on convert related matters in financial newspapers such as “NZZ” and “Finanz & Wirtschaft”. In addition, he is a member of the Swiss CFA Society and of the CFA Institute.

Years of investment industry experience: 13

Education: University of Munich (Germany), Masters degree in Economics

Senior Portfolio ManagerExecutive Director

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Disclaimer

For marketing and information purposes by UBS. For professional investors only. This document has been issued by the German registered UBS Deutschland AG respectively UBS Global Asset Management (Deutschland) GmbH. Both are subsidiaries of UBS AG, a company registered under the Laws of Switzerland. This document is for distribution only under such circumstancesas may be permitted by applicable law. It was written without reference to any specific or future investment objective, financial or tax situation or requirement on the part of a particularindividual or group. The document is for information purposes only and is not intended to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy orsell any securities or related financial instruments. The products or securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The informationand opinions contained in this document have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the document. The details and opinions contained in this document areprovided by UBS without any guarantee or warranty and are for the recipient's personal use and information purposes only. Past performance of investments (whether simulated or actual) isnot necessarily an indicator of future results. The performance shown, unless not otherwise specified, is after costs but does not take account of any commissions and costs charged whensubscribing to and redeeming units. Commissions and costs have a negative impact on performance. Should the currency of a financial product or service not match your reference currency, performance may rise or fall due to currency fluctuations. All such information and opinions are subject to change without notice. UBS AG and / or other members of the UBS Group may have a position in and may make a purchase and / or sale of any of the securities or other financial instruments mentioned in this document. This document may not be reproduced, redistributed orrepublished for any purpose without the written permission of one of the above mentioned companies. This document contains statements that constitute “forward-looking statements”, including, but not limited to, statements relating to our future business development. While these forward-looking statements represent our judgments and future expectations concerning thedevelopment of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. Prospectuses, simplified prospectuses, the articles of association or the management regulations as well as annual and semi-annual reports of UBS funds are available free of charge from UBS Deutschland AG or from UBS Global Asset Management (Deutschland) GmbH, Bockenheimer Landstraße 2-4, 60306 Frankfurt am Main. Source for all data and charts (if not indicated otherwise): UBS Global Asset Management.

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