UBS Dynamic Alpha Strategy Fund A. Monthly investment report to 30 June-2014

Transcription

1 UBS Dynamic Alpha Strategy Fund A Monthly investment report to 30 June-2014

2 Portfolio Overview The Dynamic Alpha Strategy is an actively managed, core portfolio solution that is globally diversified across multiple asset classes but seeks to reduce volatility relative to traditional multi-asset investments. The Fund aims to provide investors with an absolute return over a full market cycle (usually three to five years) of 3.5% - 5.5% per annum gross above the UBS Bank Bill Index. The Fund aims to generate positive returns through active market selection, currency overlay management and tactical asset allocation and may be net long or short overall market exposure or across individual markets or currencies. These decisions are a function of analysis of global market and economic conditions. The strategies are implemented using our proprietary risk management systems in a controlled manner ensuring the portfolio is consistent with its risk budget limits. Performance Review Market effect was positive for the month driven by both our fixed income and equity positions. Bond yields were mostly lower over the month, our preference for Australian, French and German bonds contributed to performance. Our exposure to credit markets also contributed to performance during June. In aggregate, our exposure to equity markets also added to performance. Our long position in Japan contributed to performance. The TOPIX rose by 5.1% in the month on the back of an improvement in the economic outlook and reform discussions. Our long position in Canadian equities versus Australian equities paid off during June, with both positions contributing to performance, driven partially by the oil price movement due to developments in the Middle East and Iraq. Our long industrials versus consumer staples position in the US contributed to performance. Our long China A shares relative to China H shares detracted from performance, driven mainly by gains in China H shares over the month. Currency positioning was negative for the month. The primary driver was our short position in NZ dollars where the Reserve Bank of New Zealand raised interest rates during June. Our long position in the US dollar and short position in the Swiss franc added to performance over the month. This performance was offset by long positions in the Japanese yen, Mexican peso and Philippine peso, which detracted from performance. Fund Size The net asset value (NAV) of the Fund as at 30 th June 2014 was AUD million UBS Dynamic Alpha Strategy Fund A Performance (gross) % Return (gross) Fund Benchmark* Difference 1 month months year years years Calendar Year to Date Since inception (18/06/07) * UBS Bank Bill Index Performance can be volatile and future returns can vary from past returns. Performance is quoted gross of fees and expenses. The benchmark does not incur these costs. The performance figures quoted are historical, calculated using end of month redemption prices and do not allow for the effects of income tax or inflation. The calculations also assume that all income distributions have been reinvested. Performance has been prepared in accordance with 2012 GIPS standards. UBS Dynamic Alpha Strategy Fund A Performance (net) % Return (net) Fund Benchmark* Difference 1 month months year years years Calendar Year to Date Since inception (18/06/07) * UBS Bank Bill Index Performance can be volatile and future returns can vary from past returns. Performance is quoted net of fees and expenses. The benchmark does not incur these costs. The performance figures quoted are historical, calculated using end of month redemption prices and do not allow for the effects of income tax or inflation. The calculations also assume that all income distributions have been reinvested. Performance has been prepared in accordance with 2012 GIPS standards. UBS Global Asset Management 2

3 Market Review Developed sharemarkets around the world were mostly positive in June, although regional differences prevailed. Amid the escalating geopolitical tension in the Middle East, the US equity market marked another high over the month, buoyed by solid economic data. The June FOMC meeting confirmed another incremental step-down in asset purchases, which is expected to wind up around October. As widely expected, the ECB moved interest rates below 0% in June and introduced a Targeted Long-Term Refinancing Operation (TLTRO) initiative designed to stimulate corporate non-financial and household (non-mortgage) related lending. Manufacturing data over the month has shown some signs of slowing, and inflation remains well under the ECB s target of 2.0%. Draghi has so far resisted the use of large-scale asset purchases, but he has signaled that the groundwork is being done and will activate the program if necessary. The MSCI Developed Markets Index rose 1.6% over the month with the US Nasdaq up 3.9% and Canada up 3.7%. The Japanese Nikkei was also up by 3.6%. Weaker economic data out of Germany and France dragged down European indicies with the French CAC down 2.1% and the Italian MIB down 1.6%. The MSCI Emerging Markets Index rose 2.2% lead by a 4.9% gain in Thailand, and a 3.8% gain in Brazil. The Australian ASX200 underperformed most global markets falling by 1.8% in June. Resources staged a recovery over the second half of the month, outperforming the ASX 200 index as the price of iron ore found some footing and positive news out of the Chinese manufacturing sector, a pickup in retail sales and improving industrial production further fuelling the rebound. The best performers for the month were Property (+0.6%), Utilities (-0.2%) and Financials ex Property (-1.1%). The worst performers were Consumer Staples (- 4.6%), Industrials (-3.3%) and Health Care (-3.3%). Bonds proved to be the best-performing asset class last month as investors turned to the safe-haven asset class on forecasts of sluggish global growth, although shares refused to succumb to the traditional sell in May and go away till September, market notion. US 10-year yields fell by 17 basis points to 2.48%. Investor confidence rose around the recovery in the European periphery and with the ECB announcing a further easing in monetary policy, most government bond yields for the non-core European countries continued to fall. For the first time since April 2010, Spanish 10-year yields fell below those of US Treasuries. Spanish yields hit historic lows of 2.584%. Italian five-year yields were also below US equivalents, highlighting the policy divergence between the ECB, which has launched further stimulus, and the Fed, which has been reducing its asset purchases. Irish bond yields dipped to a record low after Standard & Poor's upgraded the country's credit ratings, adding to the buoyant mood in peripheral euro zone debt triggered by fresh European Central Bank stimulus. S&P's upgrade of Ireland's credit standing to A- from BBB+. Australian 10-year bond yields fell 12 basis points over the month, outperforming the 5 basis point rise in US 10-year yields. The Australian dollar firmed following the dovish Fed Reserve meeting. This also helps to reinforce the popularity of carry trade strategies. The Aussie was up against the greenback (+1.2%), the euro (+0.8%) and the yen (+0.7%). During the month, the USD weakened against most other major currencies. A third rate hike in New Zealand supported the kiwi over the month. Despite ECB going ahead with the monetary stimulus program, the EUR appreciated slightly against the USD. The strength of the Aussie dollar was surpassed only by the UK pound sterling. Escalating violence in Iraq drove oil prices up sharply to levels not seen in six months. Meanwhile, a weakening USD helped gold prices to recover. Iron ore finished the month slightly weaker, down 2.0% to be down 32% year-to-date. Portfolio Strategy Asset Allocation and Currency Overlay Strategy Given the new accommodative measures of the ECB and a more dovish Janet Yellen, central banks have helped to push down volatility across markets to levels last seen in Low volatility is generally perceived as positive, but it can cut both ways, since some level of volatility is needed to correctly price financial assets and avoid distortion of risk premiums. We expect volatility to return somewhat, as soon as the rate hiking cycle becomes more imminent. Overall, we see - with the continued support of central banks and an improving global economy lead by the OECD countries - a supportive environment for equities until year end. In a nutshell, high yield bonds appear to have reached a valuation ceiling, while equity multiples still have room to expand. We are alert to any change in the equity picture, but it is not time to reduce allocations yet. 3 UBS Global Asset Management

4 Asset class market exposure (% allocation)* Equity exposure (% allocation) * Negative percentage allocations to cash indicate that the portfolio is leveraged through the use of derivatives. Derivatives may be used in this fund as part of its investment strategy or to manage risk. Asset Classes Market Exposure detail (% allocation) Strategy weights are the target asset allocation of the Fund at month end. Due to market drift these positions may vary slightly from the actual positions. Note that where options are used, positions are represented by their delta exposure. Fixed income exposure (% Allocation) Strategy weights are the target asset allocation of the Fund at month end. Due to market drift these positions may vary slightly from the actual positions Strategy weights are the target asset allocation of the Fund at month end. Due to market drift these positions may vary slightly from the actual positions. UBS Global Asset Management 4

5 Currency strategy (% allocation) Additional Key Information ASIC Regulatory Guide 240 requires the publication of additional key information about the UBS Dynamic Alpha Strategy Fund A on an annual basis. This information is presented below and is as at 30 June Liquidity Profile The below table demonstrates the UBS Dynamic Alpha Strategy Fund's liquidity profile, which represents the estimated percentage of the Fund's total assets that can be liquidated into cash within the given timeframes. Timeframe Percentage of the Fund's assets 1 Day 96.9% 1 Week 99.1% Strategy weights are the target asset allocation of the Fund at month end. Due to market drift these positions may vary slightly from the actual positions. The US dollar (USD) is still our largest long position, based on our valuation measures. Data out of the US is beginning to firm up and support the recovery story after being clouded by weather effects. The ISM manufacturing index was at 55.3 percent in June, a PMI in excess of 43.2 percent over a period of time, generally indicates and expansion of the overall economy. The unemployment rate continued to fall from 6.3% to a new 5½ year low of 6.1%. The Fund holds a relative value trade within Europe, long the euro (EUR) versus the Swiss franc (CHF). In anticipation of monetary stimulus in Europe, the Fund also holds a short euro versus UK pound position. The yen remains the most undervalued of the G10 currencies and as such we have taken a long position versus euro and USD. The Fund holds some small long positions in emerging market (EM) currencies where we see attractive valuations and sound economic fundamentals, such as the Philippine peso (PHP) and the Mexican peso (MXN). We remain short commodity currencies where we see overvaluations and vulnerability to weaker commodity prices as supply increases. In particular, our largest short position is in the New Zealand dollar, and we also remain short the Australian dollar and to a lesser extend the Canadian dollar. (Note: The calculations in the table do not include the liabilities of the Fund, principally consisting of accrued management fees, as these were immaterial as a percentage of the Fund's total assets as at 30 June 2014.) Leverage Ratio The Fund does not borrow money to invest or create financial leverage, however it may become leveraged through the use of derivatives. The maximum permitted gross exposure level of the Fund, taking into account leverage, is 750% of the net asset value of the Fund. This means, compared with an unleveraged fund and assuming the Fund reaches a gross exposure level of 250% of net asset value, that a 1% increase in the return on the assets of the Fund will result in a 2.5% increase in return to investors, and a 1% decrease in the return on assets of the Fund will result in a 2.5% decrease in returns to investors. As at 30 June 2014, the gross exposure of the Fund was 284% of net asset value. 5 UBS Global Asset Management

6 Derivative counterparties engaged In the period 1 July 2013 to 30 June 2014, the Fund engaged the following derivative counterparties: Exchange Traded Derivatives Goldman Sachs International Deutsche Bank AG Merrill Lynch International Bank Ltd UBS AG OTC Derivatives Barclays Bank PLC Credit Suisse International Deutsche Bank AG Citibank NA Changes to key Service Providers There have been no changes to the Fund's list of key service providers (and related party status) in the reporting period: Responsible Entity: UBS Global Asset Management (Australia) Ltd. Custodian: National Australia Bank Ltd. Collateral Manager: JPMorgan Chase Bank, N.A. Auditor: Ernst & Young UBS Global Asset Management 6

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8 UBS Global Asset Management (Australia) Ltd Chifley Tower Level 16 2 Chifley Square Sydney NSW 2000 Tel Fax UBS Global Asset Management (Australia) Ltd (ABN ) (AFS Licence No ) is a subsidiary of UBS AG. This material provides general information only and has been prepared by UBS Global Asset Management (Australia) Ltd without taking into account your objectives, financial situation or needs. This material does not constitute an offer or recommendation to buy or sell any securities or financial products, or to conclude any legal act of any kind whatsoever. Any opinions or forecasts expressed in this material are subject to change without notice and may differ or be contrary to opinions or forecasts expressed by other business areas or divisions of UBS AG or its affiliates ("UBS") as a result of using different assumptions and criteria. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS. Neither UBS 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. Your investment does not represent deposits or other liabilities of UBS, and is subject to investment risk, including loss of capital invested. UBS The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.