UBS Global Allocation Fund

Transcription

1 UBS Global Allocation Fund Strategy Update December 31, 2017 Morningstar category Share class: Ticker/billing symbols World Allocation OE A: BNGLX C: BNPCX P: BPGLX MFPWGM MFPWGO MFPWGP Strategy summary Equities: We see attractive valuations and the improving growth backdrop as supportive to international equities. Fixed Income: We continue to prefer investment grade credit to global sovereign bonds and also find emerging market debt attractive. Currency: Among developed market currencies we continue to see the Canadian dollar as unattractive while we see valuation support for the Japanese yen. In emerging markets we retain a constructive view on the Mexican peso. Market review Investment markets saw a continued focus on developments within the political sphere globally over the final quarter of 2017, as equities advanced and volatility remained low amidst continued strong economic indicators. Much attention was given to progress of tax reform through the US Congress in particular. Investors were cheered by clear signs of a legislative package emerging which would have support across the Republican Party, and the final deal was passed in December. Equity markets worldwide again delivered a positive return, making it seven consecutive quarters of growth since the falls seen in early In local currency terms, the MSCI World index delivered a total return of 5.4% over the quarter, and a return of19% over the last twelve months. US equities again increased in value over the period, with the S&P delivering its second best year since 2009 in total return terms. European equities did not share in the gains seen in many other equity markets over the quarter. This was despite further good news in terms of improving economic growth and buoyant sentiment. Emerging market equities enjoyed their strongest calendar year since 2009 in local currency terms and saw further advances in the fourth quarter. Economic data was positive, as better-than-expected trade continues to drive growth while more stable current account balances and lower currency volatility are also supportive. Government bond performance was varied over the quarter. US Treasuries fell in value, with the fiscal stimulus anticipated from the proposed tax reforms. Emerging market debt had a difficult start in the quarter, as concerns increased over the possibility over a default by Venezuela in particular. However, performance recovered to round off a strong year for the asset class. Similarly, US high yield suffered its worst month in a year in November but recovered to post a small positive return over the three months. Portfolio performance summary During the period, the UBS Global Allocation Fund posted a positive return. Market allocation contributed positively to returns while security selection was flat and the currency allocation detracted. With regards to market allocation, the Fund s long exposure to global equities (US, developed ex-us, and emerging markets) contributed positively over the reporting period. A relative value trade of long emerging market equities vs. US equities performed strongly during the quarter. Additionally, several fixed income relative value trades supported positive performance such as the Fund s preference for Australian government bonds over US Treasuries. On the other hand, certain equity relative value trades detracted from performance. A preference for US value stocks over the broader US equity market weighed on performance given momentum and negative sector rotation, particularly with the outperformance of tech stocks. Additionally, the Fund s preference for developed ex-us equities over US equities also negatively impacted performance as the US enjoyed a boost in optimism surrounding the passage of tax reform towards the end of the year. Further, duration exposure to US Treasuries and relative value trade of long Canadian 10-year government bonds vs. US Treasuries both detracted from performance. Economic data in Canada improved and the Bank of Canada raised rates twice in 2H 2017.

2 Bottom-up security selection was positive for the period. Ex-US and emerging market equity selection contributed to performance while US equity selection detracted. Currency allocation was negative for the period. Our long Turkish lira vs. South African rand position was a primary detractor from performance. We closed the position during the quarter following South African elections where our original thesis for the trade was violated. Other detractors included our long Mexican peso vs. US dollar position. The peso depreciated over the time period due to a confluence of factors: market sentiment relating to US tax reforms and possible NAFTA renegotiations; a political corruption scandal ahead of forthcoming Presidential elections; and signs of inflationary pressure being more persistent than expected. Portfolio positioning Equities Overall, we prefer equity markets outside of the US. However, with both the domestic and external demand environment positive and core inflationary pressures subdued, we see continued earnings growth as a key support for continued positive US equity market performance. The extensive overhaul of the US tax code is likely to support equities and is prolonging the duration of the business cycle in the US. We look towards cyclical sectors to maintain their strong momentum. On some measures, valuations of US equities look elevated but we do not see them as so stretched as to be concerning or to preclude further repricing upside. Outside of the US, we see attractive valuations and the improving growth backdrop as supportive to international equities. In Europe, we continue to believe that the European earnings recovery story has further to run. Europe has been home to the most consistent positive economic data surprises in 2017 and demand momentum going into year-end appears to be reaccelerating rather than slowing. ECB policy, improving consumer and business sentiment, accelerating credit growth and a healthier banking sector are all contributing to the recovery. While the recent strength in the euro may act as a short-term headwind to profits and upcoming elections in Europe in 2018 present risks, we believe there is still significantly further to go in the region s profits recovery. The economic recovery in Japan also supports a constructive view of Japanese equities. In our view, emerging markets (EM) are at an even earlier stage of their recovery than Europe. Better-than-expected trade continues to drive demand growth while more stable current account balances and lower currency volatility are key supports, while capital expenditure is starting to pick up. Despite the outperformance in 2017, we believe EM equities remain attractively valued relative to their own history and to international peers on a number of measures. With regards to relative value positions, we continue to hold a preference for EM vs.us equities and China H shares vs. China A shares. Fixed Income We are maintaining a low but positive duration stance among fixed income holdings in the strategy. While US Treasury yields remain low by historical standards, they look attractive relative to most other developed government bond markets. In the absence of a material pick-up in inflation, yields are likely to remain range bound. In aggregate we see global bonds outside of the US as unattractive. One exception is our preference for Canadian bonds over the US Treasuries. We see Canadian bonds as an attractive hedge for lower oil prices given the importance of energy to the Canadian economy. We also believe that the Canadian economy has a long process of restructuring ahead as its reliance on the energy sector diminishes. In mid-december we closed a relative value trade of long Australian 10-year vs. US 10-year government bond position following a strong relative performance move and given the increasing risk of macro indicators in Australia to surprise to the upside. Further, with regards to high yield, we hold a short position in US high yield because significant spread compression in recent years has resulted in what we view as an unattractive risk/reward scenario looking forward. Currencies We remain constructive on the US dollar, particularly at the expense of richly-valued developed market commodity currencies such as the New Zealand dollar and Canadian dollar. We are also positive on the Japanese yen given valuation support and the outlook for the Japanese economy. Among emerging market currencies, we continue to hold a long position in the Colombian peso vs. US dollar as peso fundamentals appear reasonable and do not justify the current real weakness of the currency. We also maintain a long position in the Mexican peso relative to the US dollar. Despite recent weakness, we retain conviction in the Mexican peso. It continues to benefit from strong tailwinds such as valuation and carry though the currency may be volatile in the first half of 2018 on account of ongoing NAFTA renegotiations, the impact of US tax reform, and presidential elections. 2

3 Asset class allocations 1, 2 Current risk 2, % Equity 38.00% Bond 3.50% Cash The Fund s current total risk is 4.17%. The table below illustrates the contribution to current risk for allocations across equity, currency and fixed income securities in the Fund. The diversification effect is measured as a reduction in portfolio risk created by combining diversified sources of return across multiple asset classes and securities. Equity 3.98 Fixed Income 1.43 Currency 1.31 Diversification effect Total , 2, 4 Strategy weights 4Q17 3Q17 2Q17 1Q17 US Equity Global (Ex-US) Equity Emerging Markets Equity US Bonds Global (Ex-US) Bonds Emerging Markets Debt High Yield Bonds Cash The Fund s portfolio is actively managed; allocations shown are as of December 31, Percentages may not equal 100% due to rounding. 2 Please see last page for a discussion of the risks associated with UBS Global Allocation Fund. 3 The current risk of the portfolio is calculated by taking the standard deviation of returns for each position in the portfolio (as if it were a static holding in the portfolio) over the prior one-year period. 4 Cash is inclusive of cash offsets for derivative positions. 3

4 UBS Global Allocation Fund 5 YTD 1 year 3 years 5 years 10 years Since inception 8 10-year standard deviation 9 Expense ratio gross/ net UBS Global Allocation Fund Class P Shares /1.06 UBS Global Allocation Fund Class A Shares /1.31 after maximum sales charge of 5.50% MSCI All Country World Index (net) N/A Citigroup World Government Bond Index (hedged in USD) % MSCI All Country World Index (net)/40% Citigroup World Government Bond Index (hedged in USD) N/A Performance is historical and does not represent future performance. Short-term performance is not necessarily an indication of how the Fund will perform on a long-term basis. The investment return and principal value of an investment will fluctuate, so that an investor s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Performance current to most recent month-end can be found at 5 Except where noted, comparative fund performance does not account for the deduction of sales charges and would be different if sales charges were included. Performance results assume reinvestment of all dividends and capital gains. Returns would be lower if certain expense waivers had not been in effect. Class A shares of the UBS Global Allocation Fund (offered on June 30, 1997) are subject to a maximum 5.50% initial sales charge. They are subject to an ongoing 12b-1 service fee of 0.25%. Purchases of $1 million or more are not subject to an initial sales charge; however, there is a 1.00% contingent deferred sales charge on redemptions of purchases made in the first year. Class P shares of UBS Global Allocation Fund (offered on August 31, 1992) are a no-load share class. 6 Other share classes are offered and their returns will vary depending on expenses and sales charges. Performance is net of fees. 7 The MSCI All Country World Index (net) is a market-capitalization-weighted index designed to provide a broad measure of equity market performance throughout the world. The MSCI ACWI (net) is maintained by Morgan Stanley Capital International and is composed of stocks from both developed and emerging markets. The Citigroup World Government Bond Index (hedged in USD) is an unmanaged market-capitalization-weighted index designed to measure the performance of fixed-rate, local currency, investment grade sovereign bonds with a one-year minimum maturity and is hedged back to the US dollar. Indices are unmanaged and not available for direct investment. Index performance does not reflect deduction of fees and expenses. 8 Since inception is based on the inception date of the fund s oldest share class. The MSCI All Country World Index (net) inception post dates the inception of the fund. 9 Standard deviation is a measure of the range of a portfolio s performance that is, the degree to which it rises above and falls below its average return. This is not an invitation to subscribe and is by way of information only. Mutual funds are sold by prospectus only. Nothing contained herein constitutes investment, legal, tax or other advice, nor is it to be relied on in making an investment or other decision. Nothing herein should 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 December 31, 2017 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. For more information Contact your Financial Advisor, or UBS Asset Management at for a current Fund prospectus or summary prospectus, or visit us on the Web at Investors should carefully read a Fund s prospectus and carefully consider a Fund s investment objectives, risks, all charges, expenses and other matters of interest before investing. The prospectus contains this and other information about a Fund. It is important you have all the information you need to make a sound investment decision. 4

5 Special considerations Investors in the Fund should be able to withstand short-term fluctuations in the equity markets and fixed income markets in return for potentially higher returns over the long term. The value of the Fund s portfolio 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 Fund invests. It is important to note that an investment in a Fund is only one component of a balanced investment plan. The value of a Fund s investments in foreign securities may fall due to adverse political, social and economic developments abroad, and due to decreases in foreign currency values relative to the US dollar. These risks are greater for investments in emerging market issuers than for issuers in more developed countries. Additional risks for UBS Global Allocation Fund An investment in the Fund is not guaranteed; you may lose money by investing in the Fund. The other principal risks presented by an investment in the Fund is: Foreign investing risk and emerging markets risks. The risk that prices of the Fund s investments in foreign securities may go down because of unfavorable foreign government actions, political instability or the absence of accurate information about foreign issuers. Also, 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 value than securities of US issuers. Each of these risks is more severe for securities of issuers in emerging market countries. Derivatives risk. Derivatives involve risks different from, and possibly greater than, the risks associated with investing directly in securities and other instruments. Derivatives require investment techniques and risk analyses different from those of other investments. The use of derivatives may accelerate the velocity of potential losses. If the Advisor incorrectly forecasts the value of securities, currencies, interest rates, total return rates or other economic factors in using derivatives, the Fund or an Underlying Fund might have been in a better position if it had not entered into the derivatives. UBS All rights reserved C /18 UBS Asset Management (US) Inc., the Fund s distributor, is a subsidiary of UBS Group AG.