Update. UBS Tax-Optimized Active ETF MAP Opportunistic model 3Q2017

Transcription

1 Update UBS Tax-Optimized Active ETF MAP Opportunistic model 3Q017 The quarter in review Equity markets broadly posted strong gains in the third quarter, essentially shrugging off North Korea's saberrattling, Hurricanes Harvey, Irma, and Jose, and September's rising bond yields. Global equities gained 5.% (measured by MSCI All Country World Index net), led by Canada (+8.1%) which benefited from stronger oil prices and the Bank of Canada's September 6 rate hike. Continuing economic growth and US dollar weakness buoyed Eurozone equities ( +8.0%) and emerging markets (+7.9%). The S&P 500 returned +4.5%, with tech (+8.4%), energy (+6.9%), and materials (+6.%) outperforming real estate (+0.9%), consumer discretionary (+0.8%) and consumer staples (-1.1%). Emerging markets debt led fixed income markets, with local currency EMD gaining +3.3% and hard currency EMD gaining +.7%. High yield (Markit iboxx $ Liquid High Yield, +1.7%), investment grade corporate bonds (+1.3%) and munis (+1.1%) outperformed TIPS (+0.9%) and nominal US Treasuries (+0.4%). Following a tough second quarter, oil prices rallied (Bloomberg Brent Crude Subindex Total Return, +15.6%). Conversely, the US dollar continued to weaken versus the euro, yen, and many emerging market currencies. Macro view Global growth and a weaker US dollar continue to support equities and credit-sensitive fixed income. While the Bank of Canada, Bank of England, and US Federal Reserve (Fed) are on the path to further raise rates, global monetary conditions remain accommodative, as the European Central Bank and Bank of Japan have yet to turn that corner. We believe the speed and extent of policy tightening is likely to be limited over the next 1-18 months, and inflation may remain benign through early 018. While not our base case, the biggest risk to our view is a rapid tightening of monetary conditions, either through sharp US dollar appreciation or a more rapid pace of central bank tightening. Other risks include the potential for financial sector deleveraging in China in early 018 and exogenous risks such as escalation of tensions with North Korea. We remain constructive on equities, particularly cyclical US equities, ex-us developed equities (on a US dollarhedged basis) and emerging markets equities. Within fixed income, we prefer hard currency emerging markets debt over high yield and TIPS over nominal US Treasuries. On valuation grounds, we prefer short-duration US Treasuries over short-duration municipal bonds. Please see page 5 for Index Definitions. Asset allocation represents model portfolio. Composition of client portfolio may vary.

2 Portfolio allocation and rationale Asset Class Holdings Currency Current Weight Change in Weight 1 Rationale and Outlook Equity 67.0% -- US Large Cap Equity 8.0% -- Value Equities IVE USD Quality Factor QUAL USD Technology XLK USD Financials XLF USD.6 -- Healthcare XLV USD.0 -- Very attractively valued relative to growth equities, and stand to benefit from broad global economic upswing. Held on a sector-neutral basis to provide downside mitigation in volatile equity markets. Sector stands to benefit from US economic expansion, steeper yield curve, and potential tax reform. Consumer Discretionary XLY USD Industrials XLI USD Prefer sector due to potential for increased capital investment and continued global growth. Consumer Staples XLP USD Energy XLE USD Utilities XLU USD No exposure given potential for pressure on bond proxy equity sectors. Materials XLB USD Real Estate XLRE USD US Mid Cap Equity IJH USD Provides diversification from US large cap exposure. US Small Cap Equity IJR USD.0 -- Provides diversification from US large cap exposure despite stretched valuations. Developed Ex-US Equity 6.5% -- Eurozone HEZU USD-hgd Attractively valued and stands to benefit from improving corporate earnings. Added to exposure on 9/7 given potential for near-term reversal of USD weakness. Eurozone EZU Unhedged Attractively valued and stand to benefit from continued Eurozone economic recovery. Japan EWJ, DBJP Both Attractively valued relative to Pacific ex-japan developed market equities. Added to USD-hedged exposure on 9/7 given potential for near-term reversal of USD weakness. United Kingdom EWU Unhedged.8 -- Despite near-term pressures, UK equities and the pound sterling appear undervalued relative to longer-term expectations. Emerging Markets Equity 7.5% -- Core Exposure IEMG Unhedged Fixed Income 33.0% -- Municipal Fixed Income PZA, VTEB USD US Govt. Fixed Income SHY, IEI, SCHP US High Yield Bond PHB USD Emerging Markets Debt EMB USD Cash USD 0.0% -- Source: UBS Asset Management Economic growth continues to pick up across EM. EM equities and FX remain attractively valued despite recent outperformance. Reallocated short-term muni exposure to US Treasuries on a duration neutral basis on 9/5 due to rich valuations. USD TIPS held as diversification against rising real yields. We continue to hold no exposure to bonds rated CCC or below. Converted all local currency EMD exposure to USDdenominated EMD on 9/7given potential near-term reversal of USD weakness. 1 Change in weight over the previous month. Sector breakdown maximizes tax harvesting opportunities and reflects strong sector conviction views where appropriate. Asset allocation represents model portfolio. Composition of client portfolio may vary. Page of 6

3 Strategy changes In late July, we adjusted our US equity positioning by increasing exposure to the tech sector and reducing exposure to energy and utilities. Global economic expansion and oil producers' efforts to curb production hadn't supported energy prices to the extent we had anticipated. Market support for the tech sector remained more resilient than we had expected, and we believed utilities would face pressure in a rising rate environment. Early in September, we reinvested our 3.0% position in short-duration municipal bonds into US Treasuries on a duration-neutral basis, maintaining 33.0% overall fixed income exposure. Short-duration muni valuations looked stretched by historical standards, and we expected new muni issuance to provide less of a tailwind for munis in coming months. The change reflects our intent to gain more granular exposure to the short, intermediate, and long-duration portions of the muni bond and US Treasuries yield curves. Late in the quarter, due to recent sharp US dollar depreciation, we converted all of our local currency Emerging Markets Debt (EMD) exposure into hard currency EMD, maintaining 6.0% overall EMD exposure. We also sold 1.0% of Eurozone equities (4.75% to 3.75%) to buy 1.0% USD-hedged Japan equities (4.0% to 5.0%). We believed recent US dollar weakening relative to the euro, Japanese yen, and emerging markets currencies was overdone. Historical allocation Below we show the historical market exposures of the UBS Tax-Optimized Active ETF MAP Strategy Opportunistic as a percentage of assets: 100% 90% 80% 70% 60% 50% 40% 30% 0% 10% US Large Cap Equity US Mid Cap Equity US Small Cap Equity Developed (Ex-US) Equity Emerging Markets Equity Municipal Fixed Income US Government Fixed Income Investment Grade Credit High Yield Bonds Emerging Markets Debt Nontraditional Cash 0% 1/31/016 3/31/017 6/30/017 7/31/017 8/31/017 9/30/017 Source: UBS Asset Management. Asset allocation represents model portfolio. Composition of client portfolio may vary. Page 3 of 6

4 Risk allocation The UBS Tax-Optimized Active ETF MAP Strategy Opportunistic is managed to a target risk range of 9.0%- 13.0%. 1 The portfolio's estimated risk was approximately 9.6% at quarter-end, down 0.8% from the end of the second quarter.. Equity exposure remains the biggest contributor to risk, led by developed ex-us exposure (hedged Eurozone and Japan equities), US large caps (value-oriented, quality-oriented, and financials), and emerging markets. Fixed income contributed less than one-fifth of the portfolio's total risk. Exposure to nominal interest rates via the portfolio's municipal bond and TIPS exposure provided the biggest risk diversifier. Currency exposure contributed 0.9% the portfolio's total risk, led by the US dollar, euro, and Japanese yen. Portfolio risk allocation as of September 30, % 1% 10% 8% 6% 4% % 0% US Large Cap Equity US Mid Cap Equity US Small Cap Equity Developed (Ex-US) Equity Emerging Markets Equity Municipal Fixed Income US Government Fixed Income Investment Grade Credit High Yield Bonds Emerging Market Debt Nontraditional Cash Currency Diversification Benefit Portfolio Risk Source: UBS Asset Management. 1 The portfolio s estimated risk range is consistent with a traditional multi-asset portfolio composed of approximately 70% global equities and 30% global fixed income. Asset allocation represents model portfolio. Composition of client portfolio may vary. Page 4 of 6

5 Performance of Model Implementation The UBS Tax-Optimized Active ETF MAP Strategy Opportunistic had positive returns during the third quarter and continues to be up year to date. Primary contributors during the quarter included unhedged and USD-hedged Eurozone equities, emerging markets equities, and US value equities. Detractors included exposure to the consumer discretionary sector and nominal US Treasuries. Fixed income positions contributed to performance, led by municipal bonds and local and hard currency emerging markets debt. Since inception, all positions have contributed to absolute performance except exposure to the energy sector (reduced July 6) and nominal US Treasuries. Equity positioning contributed as well, led by unhedged and USD-hedged Eurozone equities, core and low volatility emerging markets, and US value. Given the investment team's risk and return assumptions as of September 30, 017, the portfolio's estimated return range is 4.8% to 5.8% annualized over a full market cycle of five to seven years. About UBS Tax-Optimized Active ETF MAP Opportunistic Rather than being tied to a benchmark, the UBS Tax-Optimized Active MAP Opportunistic is a portfolio of exchange-traded funds focused on maximizing returns within a UBS Asset Management (UBS AM) risk range that is consistent with a moderately aggressive MAP risk profile. This provides the investment team with more flexibility to invest in asset classes it believes will help maximize returns or diversify risk. Due to this benchmarkagnostic approach, the portfolios' positioning and performance will vary from the investment team's benchmarkrelative offerings. The investment team invests across a vast range of asset classes (traditional and nontraditional), market capitalizations, regions and styles by selecting from a continually expanding universe of 1,400 US-listed ETFs. The portfolio s asset allocation will change over time based on the team s assessment of market opportunities and risks. While the portfolio does not have preset maximum or minimum asset class weights, it will generally maintain diversified exposure to both higher risk and lower risk asset classes given its moderately aggressive risk range. The portfolio includes UBS AM s Personalized Tax Management (PTM) overlay. 3 PTM pursues the same pre-tax performance as each portfolio s underlying strategy, and then seeks to maximize after-tax returns at the individual client account level. By monitoring client portfolios tax gains and losses on a daily basis throughout the year, the 10-member MAPs team takes each client s tax exposures into account in every investment decision. It then applies sophisticated risk-aware techniques (including active tax-loss harvesting and the deferral of short-term capital gains) in an attempt to improve each client s after-tax returns. Because PTM is applied at the individual client account level, each client portfolio s performance, positioning, holdings and individual position sizes may vary from the pre-tax strategy and other clients accounts. UBS AM expectations over a full market cycle (five to seven years) including estimated cash return (1.3%) as of September 30, 017. Subject to change. Due to market volatility, actual returns may be negative or significantly higher or lower than the range shown. 3 Although PTM is designed to make tax-aware trades, potential benefits will vary based upon individual client circumstances. Neither UBS Asset Management nor UBS Financial Services Inc. provides tax advice on client accounts, including UBS MAPs. Consult your tax advisor. Index definitions The MSCI All Country World Index (net) is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets. Net total return indices reinvest dividends after the deduction of withholding taxes, using a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. The index is constructed and managed with a view to being fully investable from the perspective of international institutional investors. The S&P 500 Index is an index of the 500 largest capitalized stocks in the United States. The Markit iboxx $ Liquid High Yield Index consists of liquid USD high yield bonds, selected to provide a balanced representation of the broad USD high yield corporate bond universe. The Bloomberg Brent Crude Subindex Total Return is a single commodity index composed of futures contracts on Brent crude. The index is part of the Bloomberg CITR family. It reflects the return on fully collateralized futures positions and is quoted in USD. The indices are unmanaged, do not reflect the deduction of any fees or expenses, and are not available for direct investment. The index returns reflect all items of income, gain and loss, and the reinvestment of dividends and other income. Page 5 of 6

6 For more information Please contact the UBS Asset Management National Sales Desk at There are fees associated with investing in separately managed accounts. ETFs impose an additional layer of management and administration fees. For fees charged in connection with the Private Wealth Solutions program, please refer to the UBS Asset Management (Americas) Inc. Private Wealth Solutions Wrap Fee Program Brochure. Past performance is not a guarantee of future results. Nothing contained herein constitutes investment, legal, tax or other advice. This should not be construed as a solicitation, offer or recommendation to acquire or dispose of an investment, or to engage in any other transaction. Views expressed The views expressed are as of September 30, 017, and those of UBS Asset Management. These views, and asset allocations, are subject to change at any time in response to changing circumstances in the markets and are not intended to predict or guarantee the future performance of any individual security, asset class, the markets generally or any fund. Risk considerations Investors in the UBS Multi-Asset Portfolios should be able to withstand short-term fluctuations in the equity and fixed income markets in return for potentially higher returns over the long term. The value of the securities held within the MAPs changes every day and can be affected by changes in interest rates, general market conditions and other political, social and economic developments, as well as specific matters relating to the issuers and companies in whose securities the MAPs invest. Securities held within the MAPs are not guaranteed. Market risk. The risk that the market value of a MAP will fluctuate as the stock and bond markets fluctuate. Market risk may affect a single issuer, industry or section of the economy, or it may affect the market as a whole. Investments in ETFs risk. The portfolio s investment in ETFs may subject the portfolio to additional risks than if the portfolio would have invested directly in the ETF s underlying securities. These risks include the possibility that an ETF may experience a lack of liquidity that can result in greater volatility than its underlying securities; an ETF may trade at a premium or discount to its net asset value, or an ETF may not replicate exactly the performance of the benchmark index it seeks to track. In addition, investing in an ETF may also be more costly than if a portfolio had owned the underlying securities directly. ETFs impose an additional layer of fees, including management and advisory fees and other expenses, which are not included in the PWS Program Fee. Passive strategy risk. The ETFs that the MAP invests in are passively managed and attempt to track the performance of unmanaged indices of securities. The ETFs may hold constituent securities of an index, which they track regardless of the current or projected performance of a specific security or a particular industry or market sector. Maintaining investments in securities regardless of market conditions or the performance of individual securities could cause an ETF's return to be lower than if the ETF employed an active strategy. Asset allocation risk. The portfolio is subject to asset allocation risk, which is the risk that the allocation of the portfolio s assets among the various asset classes and market segments will cause the portfolio to underperform other funds with a similar investment objective. Foreign investing and emerging markets risks. Investing internationally presents certain risks not associated with investing solely in the US such as currency fluctuation, political and economic change, social unrest, changes in government relations, differences in accounting and available legal remedies, and the lesser degree of accurate public information available. A decline in the value of foreign currencies relative to the US dollar will reduce the value of securities denominated in those currencies. Also, foreign securities are sometimes less liquid and harder to sell and to determine the value of than securities of US issuers. Each of these risks is more severe for securities of issuers in emerging market countries. A company is considered a US company even though it is organized outside of the United States, if it meets any of the following conditions: (a) it is included in an index representative of the United States; (b) it has its headquarters or principal location of operations in the United States; (c) its primary listing is on a securities exchange or market in the United States; (d) it issues securities that are guaranteed by the United States government, its agencies, political subdivisions or instrumentalities; (e) it derives at least 50% of its revenues in the United States; or (f) it has at least 50% of its assets in the United States. Certain Strategies, such as the Global (Ex-US) Equity Strategy, within the Multi-Asset Portfolio are permitted to invest in F shares (so called due to their ticker symbols, which end in F ). F shares are ordinary shares of a foreign company s common stock that trade in their home (local) market. F shares are quoted in US dollars by registered market makers who provide their quotes on over-the-counter (OTC) quote platforms. F shares provide access to the securities of certain foreign companies that do not have American Depositary Receipts (ADRs) available. There are certain risks associated with investing in F shares. The risks include, but are not limited to, the risks associated with foreign investing. F shares are not listed on US exchanges but are subject to foreign local registration requirements. F shares trade over-the-counter via the pink sheets based on broker/dealers or market makers who offer quotes, and therefore are not subject to the listing and reporting requirements of issuers listed on a US exchange. Further, as F shares access the same liquidity as the local (foreign) market, when local markets are closed, liquidity will be reduced and spreads may be wider. F shares are also subject to the risk that a market maker may decide to exit the market for a particular company s F shares, thereby reducing liquidity and widening the security s spreads. F shares are custodied in local (foreign) markets and have additional trading, custody and tax costs associated with their trading. For a detailed description of the risks associated with the individual portfolios, please refer to the respective portfolio Profile. UBS Asset Management consists of the asset management subsidiaries worldwide of UBS AG. Private Wealth Solutions accounts are offered through UBS Asset Management (Americas) Inc., which serves as the program sponsor. UBS Financial Services Inc. provides nondiscretionary consulting, custody and execution services to clients of the Private Wealth Solutions program. UBS 017. All rights reserved C /17 UBS Asset Management (Americas) Inc. is an indirect asset management subsidiary of UBS Group AG. Page 6 of 6