Index Opportunity FundsAn evolved strategy for today's investment climatePortfolio construction series

Presented by Tracey McNaughton, UBS, Head of Investment Strategy Australia

October 2016

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1

Housekeeping

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Disclaimer

This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

Strictly confidential

October 2016

Index Opportunity Funds – An evolved strategy for today's investment climate

Tracey McNaughtonHead of Investment Strategy, Australia

Evolve or…

The investment environment has changed

0

5

10

15

20

25

30

35

<-20% -20% to -15%

-15% to -10%

-10% to -5%

-5% to 0% 0% to 5% 5% to 10% 10% to15%

15% to20%

>20%

0

100

200

300

400

500

600

Jan-00 Jan-04 Jan-08 Jan-12 Jan-16

Naughties (2000-16) – The Great Volatility

Equities

Bonds

Source: Bloomberg, Quarterly returns for S&P500 and US Treasuries

0

100

200

300

400

500

600

Dec-89 Jun-91 Dec-92 Jun-94 Dec-95 Jun-97 Dec-98

Inde

x Ja

n-19

90=1

00

1990s - The Great Moderation

Bonds

Equities

0

5

10

15

20

25

30

35

<-20% -20% to -15%

-15% to -10%

-10% to -5%

-5% to 0% 0% to 5% 5% to10%

10% to15%

15% to20%

>20%

Freq

uenc

y

7.5% annual avg

18% annual avg

2.2% annual avg

5.4% annual avg

Returns are lower; Volatility is higher

What an evolved balanced fund looks like

Charts are for illustrative purposes only

Low cost• Lower returns means portfolio costs have

to come down• Passive building blocks reduces trading

costs

Stable• More volatile environment means

diversification more important to enhance stability

Active• Set and forget in the market is no longer

sufficient• More volatile environment brings

opportunity to add value

276 330442

714

1,181

1,591

1,953

2,449

2,995

3,3133,551

3,938

4,396

03 04 05 06 07 08 09 10 11 12 13 14 15

Source: PwC

Num

ber of ETFs globallyLow costLow cost –ETF's cheap, liquid, varied

ETFs categorized by sector and style. Size=3-month avg dollar volume

Source: http://www.finviz.com

Low costETF Universe – 1 year performance

Low costWhat is an ETF?

Portfolio Management Benefits

• Diversification

• Liquidity

• Tax efficiency

• Low cost

• Transparency

ETF Selection Criteria

• Strategy mapping

• Index construction

• Diversification

• Low tracking error

• Liquidity

• Expense

Low costUsing ETF's to build a balanced portfolio

Allocation

Low costUsing ETF's in the Index Opportunity fund

StableStable – why diversification matters

Winning by not losing

Successful long-term investing is more to do with avoiding catastrophic losses than it is to do with capturing unrealised gains

S&P/ASX 200 relative to pre-crisis peak (Sep-07=100)

Source: Bloomberg, UBS,

Loss percentage Gain percentage required

-10% 11%

-20% 25%

-30% 43%

-40% 67%

-50% 100%

-60% 150%

-70% 233%

-80% 400%

-90% 900% 40

50

60

70

80

90

100

110

05 06 07 08 09 10 11 12 13 14 15 16

ActiveActive - The importance of active management

Index Opportunity: Passive foundation, activeoverlay

• Benchmark: Start with a balanced portfolio of passive pooled funds and ETFs

• Asset allocation: Determine where we are in the cycle and where we are heading

• Tactical asset allocation: Allocate to the appropriate mix of assets that will provide superior risk-adjusted returns

Equities50%

Fixed income45%

Commodities5%

Recovery Expansion Slowdown Recession

Equities50%

Fixed income45%

Commodities5%

China

USEuropeJapan

Cost effective design

Index Opportunity Fund – a core solution

• An active overlay for added alphaActive

• Diversified foundation for stabilityStable

• Passive foundation reduces trading costsLow cost

Strictly confidential

September 2016

Economic issues affecting investors today

Tracey McNaughtonHead of Investment Strategy, Australia

Equities

12.5%

6.2%

3.4%

2.6%

-1.4%

-14.1%

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

Topix

DAX

ASX200

MSCI World

S&P 500

MSCI EM

How is 2016 going?2016 performance of different asset classes

Fixed Income (10-year bonds, total return)

12.3%

11.7%

8.4%

5.6%

3.5%

0.0% 5.0% 10.0% 15.0%

Japan

Italy

US

Australia

UK

17

Source Bloomberg; As of 31/08/2016

Currencies

-14.1%

-11.4%

0.5%

2.7%

3.2%

15.7%

-20% -10% 0% 10% 20%

USDJPY

AUDJPY

AUDEUR

EURUSD

AUDUSD

AUDGBP

Commodities

33.6%

23.2%

4.3%

-3.6%

-10% 0% 10% 20% 30% 40%

Copper

Oil

Gold

Iron Ore

What issues are trending?

Quantitative Easing China slowdown

Divergence

Negative interest rates

Geopolitical risk

Lower for longer

Dollar

Anti-establishment

Fed rate rise

TantrumChina

Stimulus

Oil pricesBrexit

Trump

Economic issue #1 – "Lower for longer"

Source: UBS, Bloomberg

Economic growth comparison (average GDP%)

3.7

2.8

3.4

1.4

2.3

0.71.0

0.5

2.6

1.2

5.45.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1996-06 2006-16

Australia US Europe Japan DM EM

A developed markets issue

Lower growth means lower inflation & interest rates

(4)

(3)

(2)

(1)

0

1

2

3

Indi

aU

KIn

done

siaIta

ly EUM

exic

oGe

rman

yAu

stra

liaCh

ina US

Fran

ceTu

rkey

Japa

nSo

uth

Kore

aCa

nada

Saud

i Ara

bia

Russ

iaSo

uth

Afric

aBr

azil

Change in CPI 2016 - 2013 (ppts)

-4.0 -3.0 -2.0 -1.0 0.0 1.0

Italy

France

South Korea

Australia

Germany

UK

Canada

US

India

Japan

China

Indonesia

Mexico

Turkey

Russia

South Africa

Brazil

Change in 10-year Government bond yield - 2016-2013 (bpts)

Source: UBS, BloombergAs at 31 August 2016

Lower interest rates means lower returnsConsequences of a suppressed risk-free rate

Source: UBS Asset Management. Return and risk expectations are no guarantee for future results. The chart is based on UBS internal risk-return estimates.For illustrative purposes only.

21

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

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

Expe

cted

Ret

urn

Expected Risk

Equities Global Equities Emerging Markets Bonds U.S. Gov. Bonds U.S. Corporate

Real Estate Global Cash U.S. Bonds U.S. High Yield

1

Curve Shift

Flattening

2

3?

2016

Source: Bloomberg, UBSAs at 31 August 2016

-4

-2

0

2

4

6

8

10

08 09 10 11 12 13 14 15 16

Consumer Price Index (yoy%)

0

5

10

15

20

25

30

05 06 07 08 09 10 11 12 13 14 15 16

China Li Ke Qiang Index (composite electricity output, rail freight and loan growth)

-30

-20

-10

0

10

20

30

40

50

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

China: Exports (yoy%)

Economic issue #2 – "China" - growth stabilising

Source: Bloomberg, UBSAs at 31 August 2016

50

60

70

80

90

100

110

120

130

140

150

04 05 06 07 08 09 10 11 12 13 14 15 16

China Monetary Conditions Index(composire of real eff exchange rate, loan growth, real interest rate)

Looser

Tighter

-8

-6

-4

-2

0

2

4

6

8

10

12

05 06 08 09 10 11 13 14 15

House prices (yoy%)

China – financial conditions easier

Economic issue #3 – Quantitative failureUS recovery is weakest in post-WWII era

Source: BloombergAs at 31 August 2016

7.6

5.6

5.14.9

4.4 4.3 4.34

3.6

2.8

2.1

0

1

2

3

4

5

6

7

8

Q4 1949-Q21953

Q2 1958-Q21960

Q4 1970-Q41973

Q1 1961-Q41969

Q3 1980-Q31981

Q4 1982-Q3 1990

Q1 1975-Q11980

Q2 1954-Q31957

Q1 1991 -Q1 2001

Q4 2001 -Q4 2007

Q2 2009 -Q2 2016

Average annual change in US GDP, by expansion (%)

Source: Bloomberg, UBSAs at 31 August 2016

0.38

0.4

0.42

0.44

0.46

0.48

70 74 77 80 84 87 90 94 97 00 04 07 10 14

US Gini Index of Income Inequality

$28,524 $33,277 $33,077 $32,851 $33,297

$269,102

$689,373

$581,738

$639,514 $671,061

1979 2007 2009 2013 2014

US Real Annual WagesBottom 90% Top 1%

53.351

57

61.9

67.170.7

68.8

53.156 56.4

58.4

66.1

77.7

82.986.8

50

55

60

65

70

75

80

85

90

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

US Household Net Worth ($tn)

The issue: Quantitative easing has increased inequality

Economic issue #4 – "Trump"

Populist parties and politicians polling strongly

Country Party/Politician Stance Latest Polling

Austria Freedom Party of Austria Far Right 35%

France# National Front Far Right 28%

Germany# Alternative for Germany Far Right 12%

Greece Syriza Far Left 35%

Italy Five Star / Northern League Far right 42%

Netherlands# Freedom Party Far Right 24%

Hungary# Fidesz/Jobbik Far Right 65%

Poland Law and justice Far Right 39%

Portugal Unitary Democrat Coalition Far Left 8%

Spain Podemos Far Left 21%

Sweden Sweden Democrats Far Right 21%

Switzerland SVP Far Right 29%

USA Donald Trump Far Right 41.8%*

*Huffington Post model; #Elections in 2017

Source: Citi Research

Referendum Risk: Scottish referendum, Brexit, Catelonia

Separatism, Nationalism, Populism

Non-Mainstream/Minority Governments

Protests, Government Collapses

Political Fragmentation

Electoral Uncertainty Weak/Divided Govt

Limited reform

Myopic or populist policy making

Difficulty responding to crisis

Yearly avg DM/EM Election & Mass Protests

21.7

Post-crisis average

14.1

Pre-crisis average

Depletion of political capital

8

9

10

11

12

13

14

15

88 89 90 92 93 94 96 97 98 00 01 02 04 05 06 08 09 10 12 13 14 16

Thou

sand

s

Real net national disposable income/capita

Australia's long income boom has ended

Economic issue #5 – Australia transitioning

Source: Bloomberg, ABS, UBSAs at 31 August 2016

-2

-1

0

1

2

3

4

5

6

7

90 92 93 95 96 98 99 01 02 04 05 07 08 10 11 13 14 16

%

Australian GDP

QoQ YoY

1990: Recession we had to have

2002: Resources-led China boom starts

2008: GFC

2.0

2.5

3.0

3.5

4.0

4.5

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Wage Cost Index(yoy%)

• Lower economic growth here for the next few years:– Ageing demographics

– Excess debt

– Excess capacity following the GFC

• Structural issues still confronting China impacting:– emerging markets

– commodity prices

– global trade

• Unconventional monetary policy here to stay for at least next 2-3 years– Fed rate hike cycle will be "slower than an asthmatic snail" and will revisit unconventional policy at the

next downturn

• Weak political mandates challenge fiscal policy – deficits will rise

• Australia is transitioning through the mining bust

Conclusions

Where to invest?Unattractive Neutral Attractive

Equi

ties

Fixe

d In

com

eCu

rren

cies

Emerging

Japan

EurozoneUS

Australia

Corporates

AustraliaEurozoneJapan

US

UK

Switzerland

UK

Switzerland

EMD US$

CAD

GBP

NZD

AUD

CHF

EUR

JPY

High Yield

USD

EMD local

Source: UBS Asset Management's Asset Allocation and Currency team, as of August 31, 2016. Views are provided on the basis of a 12-18 month investment horizon, are not necessarily reflective of actual portfolio positioning and are subject to change.

Disclaimer

This presentation and accompanying documents is intended to provide general information only and has been prepared by UBS Asset Management (Australia) Ltd (ABN 31 003 146 290) (AFS Licence No. 222605) without taking into account any particular person’s objectives, financial situation or needs. Investors should before acting on the information provided in this presentation, consider the appropriateness of the information having regard to their personal objectives, financial situation or needs.

Any opinions expressed in this material are those of UBS Asset Management (Australia) Ltd, a member of the Asset Management division of UBS Group AG, and are subject to change without notice. Although all information in this presentation and documents is obtained in good faith from sources believed to be reliable no representation of warranty, express or implied is made as to its accuracy or completeness. Neither UBS Group AG nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material.

The information provided during this presentation must not be relied on to make an investment decision. It is not an offer or recommendation to acquire an interest in the UBS Managed Investment Funds (UBS Funds) or recommendation to purchase or sell any particular security. Offers of interests in the UBS Funds are contained in the relevant current Product Disclosure Statement (PDS). An investment in any of the UBS Funds does not represent deposits or other liabilities of UBS Group AG or any other member company of the UBS Group. Your investment is subject to investment risk, including possible delays in repayment and loss of income and capital invested. The repayment of capital or income is not guaranteed by any company in the UBS Group.

Performance can be volatile and future returns can vary from past returns. Up-to-date performance information can be obtained by contacting UBS Asset Management (Australia) Ltd. A copy of the PDS is available from UBS Asset Management (Australia) Ltd, the issuer of the UBS Funds, on (02) 9324 3222 or freecall on 1800 023 043. You should consider that PDS and obtain professional advice before making any decision about whether to acquire or continue to hold an investment in the Fund(s).

This document may not be reproduced or copies circulated without prior authority from UBS Asset Management (Australia) Ltd.

© UBS Group AG 2016. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

Thank you

| Netwealth

Disclaimer

This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.