Targeting income opportunities UBS Emerging Markets Income Fund

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1 Asset management UBS Funds FOR PUBLIC DISTRIBUTION IN CH Targeting income opportunities UBS Emerging Markets Income Fund For marketing and information purposes by UBS February 2013

2 Extreme risks in developed markets have waned and most economies are returning to modest growth. Despite a modest turn for the better structural headwinds remain 1

3 Emerging markets paint a more colorful picture They are capturing the imagination of Travellers and growth-seeking investors alike 2

4 However, these markets are not just about growth Many emerging economies are Ripe with income opportunities! 3

5 Executive summary Targeting income opportunities primarily across emerging markets (EM) via a broad range of income sources The investment climate is characterized by low bond yields in the developed world and considerable uncertainty across financial markets. Investors are increasingly looking for income generating assets to be able to respond to these changing market conditions. EM provide a positive backdrop given their sound economies. UBS EM Income Fund is broadly diversified across asset classes with the aim to generate attractive income at comparably low risk. For explanations on financial wordings please refer to the glossary at or contact your UBS client advisor for further information. 4

6 Risk disclosure UBS Emerging Markets Income Fund invests primarily in emerging markets. Emerging markets are at an early stage of development which can typically involve a high level of price volatility and other specific risks such as lower market transparency, regulatory hurdles, corporate governance and political and social challenges. The Fund also invests in equities and corporate bonds and may therefore be subject to high fluctuations in value. For these reasons, an investment horizon of at least five years and corresponding risk tolerance and capacity are required. Investors should also be aware of the political and social challenges that emerging markets face. All investments are subject to market fluctuations. The fund can use derivatives, which may result in additional risks (particularly counterparty risk). Every Fund has specific risks, which can significantly increase under unusual market conditions. The Fund charges all or part of its fees and expenses to capital which means that the fund may effectively pay dividend out of capital. Where an SFC-authorized fund pays dividends out of gross income and charges / pays all or part of the fund s fees and expenses to / out of capital, this may result in an increase in distributable income for the payment of dividends. For complete information about the fund, including the risks of investing, applicable fees and other important information, prospective investors are advised to read the Key investor information and full prospectus. 5

7 A challenging new environment for income-seeking investors Investors are seeking income opportunities because. Nominal bond yields, especially in developed markets, are exceptionally low Potential of global inflation Developed world faces structural issues and a low growth environment A diversified exposure to growth in emerging markets can translate into income opportunities, thus provides a compelling source of return for investors over the longer term. 6

8 EM are an attractive investment destination Growth engine for world GDP: EM will be an increasingly significant contributor to global economic growth Sound balance sheets: low debt levels at government, corporate and household levels. Good diversification: EM assets usually have lower correlation (less than one) to developed markets. Structural growth potential: driven by demographics, urbanization, productivity and consumption growth. EM continue to grow faster than developed economies, with little need to deleverage and repair balance sheets. 7

9 UBS Emerging Markets Income Fund in a nutshell Fund profile Multi-asset portfolio focused on generating income, primarily across emerging markets Flexible allocation across asset classes to generate high income Income sources Equity dividends (3.1%)* Coupons from fixed income (2.5%)* Investor profile Investors seeking a regular income stream via a diversified exposure to EM Suitable for risk tolerant investors who are able to bear the risk and volatility of the associated income generating assets Investors who want to benefit from the EM growth story Option premiums from call overwriting (2.0%)* Actively managed by a dedicated team of experts Access to a well-diversified and compelling income opportunity, where income is predominantly generated via dividends, coupons and call overwriting strategies. For explanations on financial wordings please refer to the glossary at or contact your UBS client advisor for further information. * Based on current yield as of end December

10 Sustainable income via dividends Equity dividends EM companies pay out some of the cash they generate as dividends EM companies feature a growing dividend culture as they have cash and low debt on their balance sheets are becoming more shareholder-friendly 8 7 Dividend yields emerging markets (EM) versus developed markets (DM) Emerging markets Developed markets Historically, emerging markets show superior dividend yields EM - DIVIDEND YIELD DM - DIVIDEND YIELD Source: based off the MSCI EM and MSCI World indices; Datastream, as at 30 December

11 EM debt another income generator Fixed income coupons Bridging the yield gap via EM bonds Government bond yields: developed vs. EM yields in % 8 6 Emerging markets 4 2 Developed markets 0 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 USA 10y Germany 10y Switzerland 10y JPM GBI-EM GD EMBI Global Data: as at 14 January 2013 Source: UBS Global Asset Management with data from the IMF, IIF and own calculations Current government bond yields in EM exceed those in developed markets, thus offering an interesting opportunity for investors with higher risk appetite. 10

12 Call overwriting further helps to enhance income Option premium from CC Call overwriting is a defensive strategy which can be used to enhance income Call options: Sells an option contract Seller (UBS Emerging Markets Income Fund) Buyer +2% income* Pays a premium Buyer has the right but not the obligation to exercise the contract Funds exchange some of the (uncertain) upside potential for more certain income. * Number subject to change at the investment manager s discretion For illustrative purposes only. 11

13 Impact of call overwriting strategy Backtesting shows positive impact on income generation with only a minimal reduction of total returns 30% Option premium from CC 25% With Covered Call No Covered Call 20% 15% 10% 5% 0% -5% -10% -15% -20% 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 Call overwriting strategy resulted in slightly lower returns only in 2 out of 27 quarters. Source: UBS Global AM 12

14 A compelling portfolio for income-seeking investors Multi-asset portfolio focused on a broad range of income sources, primarily across emerging markets Flexible allocation across asset classes to generate high income Income sources Equity dividends (3.1%)* Coupons from fixed income (2.5%)* Option premiums from call overwriting (2.0%)* Actively managed by a dedicated team of experts who can draw upon the full benefit of UBS s global asset allocation resources and comprehensive risk management systems. Targeting three income sources UBS Emerging Markets Income Fund is incomefocused and actively managed * Based on current yield as of end December

15 Neutral allocations: simple balanced portfolio Neutral allocation of EM income strategy: weights and allocations will change over time reflecting the market environment By asset class: Income from both Equity and Fixed Income Detailed breakdown: Flexible use of broad range of income sources Asia Equity High Dividend 20% EM Debt USD 20% Fixed Income 50% Equities 50% 80% emerging markets Source: UBS Global AM, end of December 2012 EM Equity High Dividend 30% Asia High Yield 5% Asia Credit 5% EM Debt (local) 20% 14

16 Allocation ranges Flexible allocation across asset classes to generate high income Neutral 55% Equities 50% 40% Fixed Income 50% 5% Cash / Indirect commodity exposure 0% 0% 20% 40% 60% 80% 100% Investment range Current allocation* Source: UBS Global Asset Management *Based on model portfolio 15

17 Base case call overwriting strategy Backtesting results Income generation with 40% call overwriting strategy 10.0% 9.0% 2.0% 8.0% 7.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 6.0% 5.0% 4.0% 2.0% 2.0% 2.0% 2.0% 1.5% 2.2% 1.9% 2.3% 3.4% 2.9% 3.4% 3.0% 3.1% 3.4% 3.2% 3.0% 2.0% 1.0% 3.8% 3.1% 3.4% 3.2% 3.5% 3.5% 4.3% 4.2% 3.3% 3.3% 2.9% 0.0% FI EQ COW Source: UBS Global AM; 2012 figure shows full year i.e. Jan to end of Dec 2012; FI = Fixed Income, EQ = Equities, COW = Call Overwriting Strategy Base case scenario for the fund 16

18 Asset class yields Backtesting results Historical and current yields of asset classes in neutral allocation 10% 9% 8% 7% 6% 6.7% 7.0% Fixed Income Equity UBS EM Income Fund 8.2% 7.6% 7.0% +2% from 6.3% 6.1% COW +2% from 5.8% 5.8% COW 5.5% 5.4% 5.3% 5% 4% 3% 4.7% 4.0% 6.2% 5.6% 2% 1% 0% EMD (USD) EMD (Local) Asia Credit Asia HY EME HD Asia Eq HD EM Income Historical Avg Current Abbreviations: EMD = Emerging Market Debt; HY = High Yield; HD = High Dividend; COW = Call Overwriting Source: UBS Global Asset Management Historical average yields from January 2002 to December 2012 Current yields as of end December

19 Simulated historical returns From January 2002 to December UBS EM Income* 500 MSCI EM Index JPM EMBI Global (USD) 400 JPM GB Index EM Global Div (Local) Annualized Returns Annualized Volatility UBS EM Income Fund* 16.3% 13.9% MSCI EM Index 14.6% 23.8% JPM EMBI Global (USD) 11.7% 9.3% JPM GB Index EM Global Div (Local) 13.7% 11.7% Source: UBS Global Asset Management; Bloomberg *Covered call simulation only available from March 2006 onwards 18

20 Indicative portfolio characteristics Model portfolio Equity % of equity Top 10 Holdings portfolio Eletropaulo Metropoli - Pref 1.58 Indo Tambangraya Megah Tbk PT 1.56 Singapore Telecom Ltd 1.52 Hang Seng Bank Ltd 1.52 Keppel Corp Ltd 1.50 Thai Oil PCL 1.39 British American Tobacco Malaysia 1.37 KT Corp 1.35 PTT Global Chemical PCL 1.35 China CITIC Bank Corp Ltd 1.33 Fixed Income Key Data (fixed income portion only) Theoretical yield to maturity: 5.4% Modified duration: 6.02 years Average credit rating: BBB % in corporate bonds: 22% % in sovereign bonds: 66% Source: UBS Global Asset Management; as of February

21 Key benefits at a glance UBS Emerging Markets Income Fund Participate in the upside potential of some of the world s fastest growing economies via an actively managed and well-diversified exposure to a broad range of income generating assets across emerging markets Call overwriting strategy yields higher income than straightforward equity exposure, particularly in periods when investors receive very large premiums for writing calls Daily liquidity Potential to achieve significantly higher returns based on proven in-depth research and disciplined investment approach looking beyond short-term news and emotions UBS has long-term experience in managing multi-asset income portfolios and implementing state-of the-art risk management 20

22 Technical data UBS Emerging Markets Income Fund Legal fund name: Fund type: Fund domicile: Base currency: UBS (Lux) Key Selection SICAV Emerging Markets Income (USD) Open-end mutual fund, SICAV Part 1, UCITS IV Luxembourg USD Launch date: 15 March 2013 Distribution: Management fee: EU savings tax: Daily liquidity: Swing pricing: Valor / ISIN / Initial NAV: Accumulating / Annual P-acc: 166 bps Affected Yes Yes (USD) P-acc: / LU / Initial NAV: 100 (USD) P-dist: / LU / Initial NAV: 100 (EUR-hedged) P-acc: / LU / Initial NAV: 100 (EUR-hedged) P-dist: / LU / Initial NAV:

23 Proposed share classes & distribution policy UBS EM Income Fund with different share classes and distributing policies P-acc (accumulating share class) No distribution P-dist (annual distributing share class) Flexible rate Total payout is 100% of income source minus costs* * Subject to investment manager s discretion 22

24 Keiko Kondo Senior Portfolio Manager Executive Director Years of investment industry experience: 19 Education: Boston University (US), BS, MBA Keiko Kondo is a Senior Portfolio Manager within the Asset Allocation and Currency team. She is responsible for conducting research on macro economics and financial markets to aid in the decision making of multi-asset portfolio strategies. She is also the lead portfolio manager on a number of Australian and Japanese balanced accounts. As a member of the Asset Allocation & Currency Committee, Keiko also contributes to strategy setting across the full range of GIS capabilities. Keiko joined UBS Global Asset Management in 2004 as the regional representative of the Asset Allocation and Risk team for Asia Pacific. She moved to her current role in September 2009 as part of an international assignment. Prior to joining UBS, Keiko was a senior strategist at Sanwa Securities where she headed the equity investment strategy research team for three years. Her previous roles include senior strategist at JP Morgan and strategist at Merrill Lynch. 23

25 Matthew Quaife, CFA, CAIA Associate Portfolio Manager, Global Investment Solutions Associate Director Years of investment industry experience: 5 Education: University of Bath (UK), BSc Matthew Quaife is a member of the Asset Allocation and Currency Committee within Global Investment Solutions. He is a portfolio manager assisting with APAC based multi-asset portfolios. Additionally, he is a member of the Commodity Investment Committee and is responsible for commodity research / modeling. Matthew joined UBS Global Asset Management in 2007 and has worked as an analyst in both Structured Equities and the Strategic Planning team. He moved into Global Investment Solutions in 2010 as a Strategist in London. In 2011, he moved to his current role which is based in Hong Kong. Matthew is a member of both the CFA Institute and the CAIA Association and was also awarded the Certificate in Quantitative Finance in

26 Edward Bang Head Strategist, APAC, Global Investment Solutions Managing Director Years of investment industry experience: 25 Education: Wesleyan University (US), BA; Wharton School, Univ. of Pennsylvania (US), MBA Edward Bang is a senior member of the Global Investment Solutions Strategist team. He is responsible for communicating our multi-asset capabilities to current and prospective clients and oversight of all GIS strategist activity across the APAC region. He has overall responsibility for the Asian GIS product offering, promotion of all Asia-distributed GIS products and supporting the development, marketing and distribution of investment advisory solutions. Edward joined UBS Global Asset Management in January Prior to this, he was CEO and Head of Asia at Olivant Limited for two years, where he was one of four original senior partners creating the entity. He also sourced private equity deals across the Asia Pacific region and oversaw the management of an absolute return portfolio. Before this, he held senior equity portfolio management roles at York Capital Management, Wellington Management, Fidelity and the Boston Company. 25

27 Diana To Strategist, Global Investment Solutions Director Years of investment industry experience: 12 Education: Wellesley College (US), BA Diana is a member of the Global Investment Solutions (GIS) team. She is responsible for communicating our multi-asset capabilities and products to current and prospective clients in the Asia Pacific region, as well as assisting with portfolio management and analysis work. Diana joined UBS Global Asset Management in August Prior to this, she was with Wellington Management in Singapore as a Portfolio Specialist. She also held various positions in equity research, business development, and product management at Wellington Management in the United States and Hong Kong. 26

28 Disclaimer For marketing and information purposes by UBS. UBS funds under Luxembourg law. Representative in Switzerland for UBS funds established under foreign law: UBS Fund Management (Switzerland) AG, P.O. Box, CH-4002 Basel. Paying agent: UBS AG. Prospectuses, simplified prospectuses or Key investor information, 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 AG, P.O. Box, CH-4002 Basel or from UBS Fund Management (Switzerland) AG, P.O. Box, CH-4002 Basel. Before investing in a product please read the latest prospectus carefully and thoroughly. Units of UBS funds mentioned herein may not be offered, sold or delivered in the United States. The information mentioned herein is not intended to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not a reliable indicator of future results. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming units. Commissions and costs have a negative impact on performance. If the currency of a financial product or financial service is different from your reference currency, the return can increase or decrease as a result of currency fluctuations. This information pays no regard to the specific or future investment objectives, financial or tax situation or particular needs of any specific recipient. The details and opinions contained in this document are provided by UBS without any guarantee or warranty and are for the recipient's personal use and information purposes only. 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 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. Source for all data and charts (if not indicated otherwise): UBS Global Asset Management. UBS The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. 27

29 Appendix Additional information on UBS Emerging Markets Income Fund

30 Portfolio management Global Investment Solutions (GIS) managing asset allocation and currency strategies with a focus on income and yield Incorporating attractive high dividend strategies run by equity teams Leveraging broad emerging market debt strategies run by fixed income teams Utilizing complementary strategies if conditions are favorable for income and yield generation (e.g. Asian REITs, high yield, etc)* Income generated will come from First and primarily from equity dividends and coupons from fixed income instruments Potential income from option premiums received (call overwriting strategy in case of favorable conditions and otherwise low yields achievable) Potential foreign currency appreciation *) Opportunistic asset classes would be reflected under other and can incorprate smaller allocations to other high income equity markets, fixed income markets, REITs, Listed infrastructure, Commodities. 29