Version Belgium

For Professional Investors only

26 February 2014

Strategist, Global Investment Solutions

Dr. Daniel Rudis, CAIA

Asset Allocation in times of change

Investment Summit Brussels

Asset Management

Complexity will remain a challenge

Eight structural and cyclical investment themes

The great rotation

Deleveraging

Global rebalancing

Energy evolution

Inflation

Central bank action

The eurozone crisis

Growth and austerity

1

2

4

3

6 5

8 7

The calendar-year returns were positive 27 of 34 years

Downside risk is here to stay

Returns and market corrections (S&P 500 Index)

Note: “Calendar year returns” refer to the price return for the S&P 500 Index for each calendar year. “Intra-Year Drops” refer to the largest market drops over periods within that calendar year

Past performance is no guarantee of future results. This chart is for illustrative purposes only. Data as of 12/31/13. Standard & Poor’s market returns represented by the S&P 500 Index return and

do not include dividends. Refer to the Index Definitions pages for listing of index definitions. Unlike mutual funds, indices are not managed and do not incur fees or expenses.

It is not possible to invest directly in an index.

How much downside can investors digest?

Investor Returns: not the same as Investment Returns

Source: "Quantitative Analysis of Investor Behavior, 2012," DALBAR, Inc.; used with permission. For illustrative purposes only. Past performance is not a guarantee of future results.

The S&P 500 is an unmanaged, weighted index comprising 500 widely held common stocks varying in composition and is unavailable for direct investment. Average Equity Fund Investor is comprised of

the cash flow of 4,585 equity funds as classified by ICI (Investment Company Institute). The returns are represented by the change in total equity mutual fund assets after excluding sales, redemptions

and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor

returns in dollar terms, two percentages are calculated for the period examined. Performance calculated assumes reinvestment of all dividends and capital gains. Total return rate is determined by

calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period. Holding period reflects the length of time the average investor holds a fund if the

current redemption rate persists. It is the time required to fully redeem the account. Retention rates are expressed in years and fractions of years. Over the time period 1993-2012, the average equity fund

investor held their mutual funds for an average of 3.3 years.

Average annual total returns: 1993 – 2012 Average holding period of equity

mutual fund investors: 3.3

years

Why? Buying and selling at the wrong times.

Beware of short-sighted selection decisions

Stick to a plan Source: CRA RogersCasey, “Past Performance Really Isn’t an Indicator of Future Results.” The large cap value universe included 187 managers.

CRA RogersCasey, an independent investment manager research firm, analyzed past performance as a predictor of future results.

Managers were grouped by asset class and style. Their results in each quartile from the first five-year period were compared to their results from

subsequent five-year periods.

4th Quartile

1st Quartile

2nd Quartile

3rd Quartile

Average of rolling 5-year periods ending

12/31/1995-12/31/1999

Average of subsequent rolling 5-year periods 12/31/2000-

12/31/2004

Star

managers

became:

What happens to 1st and 4th quartile managers 5 years later?

Lagging

managers

became:

30%25% 23% 22%

Subsequent quart ile

1st 2nd 3rd 4th

Investors do not want a rollercoaster ride

Equities

Historically relatively

strong long-term real

returns, But

Bonds

Generally provide

relative safety of

principal, But

Alternatives

Low correlation to

markets, But

• Investors have to live through

periodic and painful bear markets

• Return expectations going forward

may be lower than historical long-

term averages

• A potential rising rate environment

can harm principal prior to maturity

• Return expectations going forward

may be lower than historical long-

term averages

• Lack of transparency, liquidity

questionable and typically high fees

Today’s challenges Approach for today’s challenges

Seek optimal mix of

risk premia

Be risk-conscious

Be flexible

Stay liquid (or be

conscious about

illiquidity)

Seek stable returns without being tied to a benchmark

Desired outcomes from recent investor discussions

Constant Income

Capital Growth

Total Return Asymmetric returns in a transparent and liquid way

Defensive income strategy with better features than a pure

fixed income portfolio

Flexible approach to provide equity-like returns with more

moderate risk

Desired outcomes Potential investment responses

With the common denominator ‚unconstrained‘

Traditional tools

Tracking error

Normal distribution

Linear investments

Annual review of adequacy

of benchmarks

Managing without benchmark requires a different set of tools

New tools

Total portfolio risk

VaR & Expected shortfall measured

with non-normality

Achieving asymmetry through

options (non-linear instruments)

Stress tests of portfolios

Take exposures where you think risks are compensated

Bond and equity market exposures reflect market sentiment

Source: UBS Global Asset Management. Data as of 6 January 2014.

-50%

-30%

-10%

10%

30%

50%

70%

90%

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

DAS USD

Event Portfolio Duration (lhs) Equity Total (rhs)

Fe

d s

tart

s t

ap

erin

g

De

bt

Ce

ilin

g a

vo

ided

Ge

rma

n E

lectio

ns

Fe

d p

ostp

on

es t

ape

ring

Loo

min

g m

ilita

ry in

terv

entio

n in

Syria

Fe

d s

tart

s t

ap

erin

g t

alk

Asia

nM

ark

ets

se

ll-o

ff

Italy

Ele

ctio

n

Duration (yrs) Equity (%)

Incorporate asymmetry in the portfolio

Source Left hand chart: Unconstrained Asset Allocation Strategy. As at end of August 2013. For illustration purposes.

Source Right hand chart: UBS Global Asset Management. RiskMetrics. Unconstrained Asset Allocation Strategy as of 31 August 2013. For illustration purposes.

NB: This represents the impact on the equity component of the portfolio from a sell-off in equities in isolation

Convexity via options1

Options – properly managed and assessed in an

overall portfolio context – are a powerful tool

Example: End of August 2013

-20%

-15%

-10%

-5%

5%

10%

15%

20%

17.5

%

12.5

%

7.5

%

2.5

%

-2.5

%

-7.5

%

-12.5

%

-17.5

%

Equity Shifts

15%

10%

5%

0%

-5%

Total

Derivatives

Portfolio Impact

Asset Classes Market Exposure

Impact of stress scenarios varies over time – A reflection of our probability assessment

Source: UBS Global Asset Management, Data as of as at end of December 2013

This does not constitute a guarantee from UBS AG, Global AM.

Vulnerability to "flashcrash" shock scenarios over time

Analysing scenarios

Bank failure Equities

Nom.

Rates

US -15% -0.23%

Dev. Europe -15% 0.09%

Japan -20% -0.10%

EM Asia -45% 0.21%

US Monetary Crisis Equities

Nom.

Rates

US -15% 1.43%

Dev. Europe -10% 0.17%

Japan -15% 0.19%

EM Asia -25% 1.43%

Eurozone Crisis Equities

Nom.

Rates

US -5% -0.28%

Dev. Europe -10% -0.17%

Japan -5% 0.04%

EM Asia -10% 0.00%

Entering a phase where both equities and fixed income appear rich

In the next 5+ years we see the investment strategy evolve over 3 stages:

– Late-cycle boom favoring cyclical assets (Now)

– Crisis outbursts favoring nominal assets temporarily (watch out in 2014/2015)

– Reduce exposure to nominal assets as markets price in higher inflation

A longer-term outlook

Is it different this time?

Source: Bloomberg, UBS. Data as of 3 February 2014.

S&P 500 Bull markets since previous troughs

2014 – A momentum trade ?

23 March 2000

9 Oct 2007

3 Feb 2014

1.000

1.500

2.000

2.500

3.000

3.500

1.9581.7051.4521.199946693440187

S&

P 5

00

Price

, In

de

xe

d to

10

00

Trading Days since beginning of Bull Market

S&P 500 (Rise 2000) S&P 500 (Fall 2000) S&P 500 (Rise 2007) S&P 500 (Fall 2007) S&P 500 (Rise 2014)

Stylized Asset Allocation as a function of inflation

Inflation as a main allocation driver in the coming years

Moderate inflation will be supportive for equities

Deflation

(< 0%)

Heightened Inflation

(>5%)

Moderate Inflation

(<5%)

Hyperinflation

Sovereign bonds

Money market / cash

Corporate bonds

Index-linked bonds

Gold

Crude Oil / Oil industry

Real Estate

Equities

Nom

ina

l a

sse

ts

Rea

l a

sse

ts

Zunehmende Inflation

2017+ 2016/17 2014/15

Increasing Inflation

Po

rtfo

lio A

lloca

tio

n

Source: UBS. For illustrative purposes only.

0%

20%

40%

60%

80%

100%

Government debt: A longer-term view

Debt ratio of countries that have never been insolvent since 1815

0

50

100

150

200

250

300

1700 1750 1800 1850 1900 1950 2000

UK Sweden US Netherlands Belgium G7 (estimate)

Go

vt.

de

bt a

s %

of G

DP

Source: IWF, UBS CIO Research; Data as of 11.11.2013

Historical example: US-Debt Reduction

US-Debt to GDP ratio (%) over 1946 – 1957

50

60

70

80

90

100

110

120

130

1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957

Actual path

Without austerity

Without Inflation

Without financial repression

Source: Thomson Financials, UBS. Data as of 11.11.2013

1946-1957

2% Primary Surplus

3.5% Inflation

1.9% Debt interest

3.5% real GDP Growth

Hypothetical paths

3.5% real GDP Growth + 3.5% inflation ≠ 1.9% nominal rate

Financial Repression

Fin

an

cia

l

Re

pre

ss

ion

Eff

ect

Nothing is constant but change

The 'journey' matters

Exploit options to optimize upside / downside participation

Main take-aways

UBS asset allocation funds

February 2014

Note: UBS (Lux) Key Selection SICAV - Global Allocation (EUR) P-acc : Morningstar category for quartile ranking for Europe OE EUR Flexible Allocation- 1st quartile over 1 year, 2 years,

3 years, 5 years. A UBS (Lux) Key Selection SICAV Global Allocation sub-fund is awarded by Lipper and ranked 1st place in Switzerland over 3 years and 5 years .

Date: As at 6 February 2014

UBS (Lux) Key Selection SICAV – Global Allocation

1st quartile ranking by Morningstar

1st prize by Lipper awards 2014 in Switzerland

Disclaimer

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