UBS Global Sustainable Equity

Transcription

1 UBS Global Sustainable Equity June 30, 2015 I. Investment Philosophy There are five elements to the investment philosophy for UBS Global Asset Management's Global Sustainable Equities strategy: 1. We pursue our investment objectives by investing in companies that we believe have the competitive stamina to generate value for shareholders relative to their peers. They achieve this by proactively "creating shared value" not only with their customers, but often times also with their employees and the broader society. 2. To measure and assess a company's competitive edge, we take a holistic approach to security analysis that starts with the valuation of "tangible" financial data and modeling discounted cash flows to arrive at a security's "intrinsic value." We then combine this financial analysis with our proprietary measurement and analysis of "intangible" assets and non-financial data (i.e. sustainability data) such as brand, reputation, supply chain risks, health and safety, and employee satisfaction. 3. We maintain our own proprietary sustainability database, building environmental, social and governance (ESG) scores from the ground up for each security in the MSCI All Country World Index (ACWI) universe. Each company is assigned a custom set of Key Performance Indicators (KPIs) that are weighted differently by industry. We then collect data for each KPI from a range of data providers, like Bloomberg. We believe our proprietary data collection process gives us more timely and accurate snapshots of a company's sustainability practices compared with most ESG rating vendors. 4. As equity investors, we look for companies that we believe can consistently generate tangible shareholder value, in part by approaching -ESG issues as investment opportunities, rather than as seeing sustainability merely as a boxchecking exercise. 5. We believe that analyzing non-financial data and intangible assets will not be labeled as "sustainability" or ESG investing in the near future. Instead, this form of analysis will be incorporated into mainstream security analysis. A (r)evolution in security analysis Equity investing is undergoing a paradigm shift toward integrating non-financial sustainability factors into security analysis. This shift reflects the fact that many public companies today embrace asset-light business models, where intangibles like brand value and employee health and productivity are significant contributors to shareholder value. Measuring and evaluating these intangibles can be difficult since this information is often not listed in financial statements. In parallel to this paradigm shift, sustainable investing has evolved from an investment approach that was heavily reliant on exclusionary screens, and dogged by questions about underperformance, toward identifying outperforming companies using a broader mosaic of data, including the analysis of intangibles and non-financial data. This holistic approach can reveal insights that traditional equity analysts may overlook because they limit their analysis mainly to easily sourced financial data. We believe our approach to sustainable investing is simply an evolution of traditional security analysis and helps us in managing our clients' equity portfolios. While our approach to sustainable investing is not mainstream yet, this is rapidly changing. New reporting standards for sustainability data are UBS Global Asset Management Page 1 of 11

2 emerging in both the US and Europe. Furthermore, analysis of non-financial factors is now becoming part of the curriculum for analyst certification programs. In our view, security analysis that incorporates a broader set of non-financial data on ESG issues will soon be the new normal. Our investment approach is grounded in the evolution of corporate business models, as well as the market's valuation of business intangibles. The composition of a company's market value has changed meaningfully in the past 40 years. In 1975, 83% of the market value of S&P 500 firms could be linked to a company's tangible assets (see Exhibit 1). Back then, an equity analyst could safely rely on financial statements to estimate the value of hard (tangible) assets and estimate the intrinsic value of a security. Today, the situation is very different: only 20% of the market value of the S&P 500 firms is explained by tangible assets, while the remaining 80% is associated with intangible assets. Evidently, the market considers intangible assets to be extremely valuable. Exhibit 1: Market Value components, S&P 500, Ocean Tomo 2010 Estimating the value of a public company is more than just adding up the sum of its physical parts and data from financial statements. While the present value of future cash flows still anchors our fundamental analysis, key drivers of future cash flows are increasingly composed of intangibles like intellectual property, management know-how, patents, the skill of company employees, brand equity and a company's supply chain. Identifying and evaluating non-financial assets such as reputation, company culture, customer satisfaction, human capital, risk management, research and development, and a company s social license to operate can be challenging because assessing them requires access to data and information that usually sits outside a company's financial statements. Evaluating them might also require the application of new fields of academic and financial study, such as assessing environmental risks and evaluating societal externalities, both positive and negative. As equity investors, our task is to build the most complete mosaic of data possible to craft an informed opinion of a company s future cash flows. Since the founding of one of our predecessor firms, Brinson Partners, we sought to capture investment opportunities by identifying discrepancies between the current price the market places on a security, and our estimates of its long-term value what we call intrinsic value. Our equity analysts' financial valuations reside in a proprietary database called the Global Equity Valuation System (GEVS). Today, by incorporating non-financial data and intangibles into our security analysis, we believe that we can paint a more accurate picture of a company s future profitability, identify risks to its value chain and evaluate its ability to innovate and grow see Exhibit Michael E. Porter and Mark R. Kramer, Creating Shared Value, Harvard Business Review, January 2011 UBS Global Asset Management Page 2 of 11

3 Exhibit 2: Adapted from Porter & Kramer, 2011 Our team's approach to security analysis and portfolio management is defined by three key concepts: We harvest a breadth of investment ideas from across the global equity universe. We use consistent sustainability & valuation frameworks to make comparisons. We build in-depth sustainability data from the ground up to reveal unique insights. We start by leveraging a breadth of insights from UBS Global Asset Management's global equity analyst platform, supported by 70 analysts. Our analysts have extensive industry-specific backgrounds and are trained to evaluate future cash flows. Consistent with our Brinson Partners heritage, the Sustainable Investors team combines the bottom-up fundamental research of our global equity analysts and integrates additional insights gleaned from our proprietary sustainable database. This approach often involves qualitative discussions with our equity analysts, as we seek to analyze financial and non-financial factors together holistically. Our discussions include identifying key signposts that a company must achieve to realize our investment thesis. We then combine our bottom-up, company-level analysis with top-down views that we glean from our firm's Quarterly Cyclical Market Forum. This forum brings together senior portfolio managers from UBS Global Asset Management's Fixed Income, Equities, Global Investment Solutions, and hedge fund groups, along with guest speakers, and helps our team formulate top-down views and opinions on macroeconomic trends. In order to make effective comparisons between securities, it is important that our financial models use consistent valuation and sustainability methodology to produce peer rankings. Our global equity analysts use financial valuation models that help them evaluate and rank a firm's intrinsic value alongside competing firms in the same industry. Similarly, our sustainability database strives to incorporate ESG factors that can be placed on a quantitative continuum, giving us the ability to rankorder companies within an industry. Simply identifying that a company has a sustainability policy is not enough if we cannot compare it with the sustainable activities of its peers. Our sustainable database is currently designed to align with the reporting framework set forth by the Sustainability Accounting Standards Board Materiality Map. However, as sustainability data continues to evolve, so too will our framework and our data collection methodology. For example, in April 2014 the European Union mandated ESG disclosure for listed companies with over 500 employees starting in By creating our own sustainability database from the ground up, we gain a real depth of insight that most ESG rating providers do not provide. Our ESG data is industry-specific and weighted by its level of materiality to particular business models. In some cases we have found that external databases are out of sync with forward-looking assessments, either issuing a high rating when we believe a company's ESG policy is deteriorating, or maintaining a low rating depsite significant sustainability improvements by corporate management. Because sustainability data is a fast-moving space, collecting and owning the entire chain of data ourselves is critical. Most UBS Global Asset Management Page 3 of 11

4 important of all, however, is the fact that our Sustainable Investors team can review the companylevel ESG data and specific KPIs with our global equity analysts. This gives us the ability to consider, weigh, discuss and debate the sustainability data directly with our global equity analysts. By doing so, we fully integrate non-financial data and intangibles into our qualitative security analysis and decisionmaking process. Sustainability factors are not simply a bolt-on adjunct. Our overall goal is to identify companies that appear attractively valued and that also rank well on sustainability metrics which quite often happen to be the hallmarks of businesses that successfully provide shareholder value. By simultaneously considering financial-based valuations with sustainability factors means that neither is compromised for the other. We invest in companies that meet traditional standards of valuation and also have the added benefit of superior sustainability practices. To sum up our philosophy, we seek to invest in companies that meet three important criteria: First, the company must be fundamentally attractive from a conventional valuation standpoint as defined by our analysts' cash-flow forecasts, which are housed in our Global Equity Valuation System (GEVS). The company must have a detailed income statement, balance sheet and fund flow projections, along with a company research note from the analyst that details his or her investment thesis and signposts for monitoring the thesis as it unfolds. Second, we invest in companies that have strong, above-average, forward-looking sustainability profiles. We do not rely on outside ESG rating providers for stock selection input. We find outside rating providers often lag changes in corporate sustainability. Instead, we build our ESG assessment from the ground up using company-level data, which provides us more depth and valuable insights that we discuss with our equity analysts. Finally, we invest in companies that we believe have strong business models, and a management team that knows how to transform various sustainability factors into a competitive advantage. These are companies that are efficient in the use of inputs, attract and retain talented employees, operate safe facilities, and supervise their supply chains with a careful eye. By creating and supporting shared values with their customers and the broader society, they boost their brand and shareholder value. Taken as a whole, we believe that companies that fulfill this description typically achieve significant long-term competitive advantages. II. Research Process defining our investible universe A. Our approach In order to explain UBS Global Asset Management's research process, it is important that we also clarify how our approach differs from other managers who may label themselves as Sustainable, ESG, Socially Responsible Investing (SRI) or impact investors. But first, let's begin with a brief summary of our research process. Our approach to sustainable investing is an evolutionary extension of fundamentals-based Graham Dodd type of security analysis. We pursue our investment objectives by investing in businesses that we believe will outperform competitors over the long term. By incorporating a broader mosaic of non-financial data (i.e. intangibles) into our fundamental security analysis, we believe we can construct a more complete picture of a company's ability to drive shareholder value. To accurately identify these companies, our research process combines three elements: 1) a robust sustainability database built from the ground up, 2) consistent valuation and sustainability frameworks that help us compare and contrast companies within the same industry, and 3) the ability to pinpoint and qualitatively evaluate the most meaningful factors that drive shareholder value, and then weight those factors accordingly as part of our holistic security analysis. Our approach is specifically designed to identify objective, UBS Global Asset Management Page 4 of 11

5 measurable metrics that we believe can help predict future business success. The approach we just outlined explicitly integrates both financial and non-financial factors simultaneously with the aim of meeting our investment objectives. This is significantly different from some prior ESG approaches. What has traditionally been termed SRI is an approach guided by philosophical values and negative screening. Investors using this process automatically exclude companies associated with tobacco, weapons, gambling or pornography from their universe of acceptable securities. This approach focuses mainly on the investor's philosophical or moral objection to a particular industry, as opposed to identifying attractive, return-generating fundamentals. We think negative screening is a client-defined option, and therefore is not a central feature of our investment process. As long as an exclusion list is reasonably limited, it will not have a material impact on our investment performance. We generally exclude companies with more than 5% of revenues in alcohol, tobacco, defense, nuclear, GMO, water bottles, gambling and pornography from the portfolio. Our approach is also different from sustainable managers who have very loosely defined parameters for measuring and evaluating a company's sustainability profile. Often times, managers in this camp rely almost entirely on a company's own disclosures and reporting. With this approach, a company might receive a high ESG rating simply because they have disclosed more information to shareholders about their own sustainability initiatives, such as adopting a climate change policy, a commitment to avoiding destruction of old growth forests, or not using child or slave labor. If merely taken at face value and not closely examined, we believe the vast majority of this information has no clear link to better financial performance. Simply announcing participation in a sustainability initiative in an annual report that is printed on recycled paper does not offer a strong link to creating shareholder value. Without a deeper analysis of a company's sustainability factors, it is quite difficult to determine whether these factors actually add value to shareholders, or possibly detract from shareholder values. The approach to sustainable investing described above was largely an outgrowth of the corporate ESG reporting environment that has grown over the past 15 years. During this time a corporate culture emerged that became obsessed with a checklist approach to sustainability initiatives and disclosures, nurtured by a range of voluntary initiatives such as the UN Global Compact and ISO Environmental Management Standard. As these sustainability disclosure initiatives evolved, some sustainable investors focused more on the disclosures themselves without carefully examining the link between sustainability practices and actual business results, or casual improvements to social well-being and the environment. 2 While disclosures are certainly important, we believe there also has to be a measurable link from a particular sustainability factor to an actual operating practice that increases shareholder value. 3 With our approach to sustainable investing, our research seeks to determine if a company's sustainability factors (clearly disclosed or not) can be linked to a demonstrable economic impact and positive returns for shareholders. Simply identifying a generalized social philosophy is not our objective. In some cases, sustainable factors like having good community relations and positive interactions with key stakeholders like regulators can positively buttress shareholder value, especially during times when external events outside management's control threaten to drag shareholder value down. 4 As active stock investors, we look for sustainability signposts of competitive superiority that can lead to observable and realizable financial returns for shareholders. 2 Koehler, Dinah A. "The Effectiveness of Voluntary Environmental Programs A Policy at a Crossroads?," Policy Studies Journal, Vol. 35: 4, pages , November Koehler, Dinah A. and Eric J. Hespenheide, "Disclosure of Long-term Business Value: What matters?," Deloitte University Press, March Koehler, Dinah A. and Eric J. Hespenheide, "Finding the Value in Environmental, Social and Governance Performance," Deloitte Review, January UBS Global Asset Management Page 5 of 11

6 In the past decade, various ESG ratings providers have emerged to fill the gap between the sustainability information companies disclose and what those practices really mean to shareholders. However, academic research and our own assessment of these ESG ratings reveals that they are neither predictive of future financial performance, nor linked to better outcomes for society or the environment. 5 Because of these shortcomings, we have designed our investment process around the concepts of breadth, consistency and depth, as we previously outlined in our investment philosophy. We briefly recap these concepts below, as each is a critical component of our research process and holistic security analysis. We harvest a breadth of investment ideas from across the global equity universe. We use consistent sustainability & valuation frameworks to make comparisons. We build in-depth sustainability data from the ground to reveal unique insights. Our proprietary research platform, which includes Pedestal and GEVS, provides our Sustainable Investors team with easy access to a breadth of investment ideas across the global equity universe. These ideas are sourced, researched and flagged by our 70 equity analysts, each of whom has industryspecific experience that is relevant to the sectors they cover. We use their insights to better understand the important value drivers for a particular stock and can easily view the factors that comprise their valuation model(s), as well as company financial reports. Both the models we use for our security valuations (intrinsic value) and our sustainability rankings use a consistent framework for measurement and analysis. This allows us to make comparisons between companies in the same industry. Our sustainability database was purposely designed to place ESG factors on a quantitative continuum, allowing us to rank-order companies within an industry. By building our sustainability scores from the ground up, we are able to leverage a depth of insight that ESG scoring providers do not offer. This deeper level of analysis is critical to our holistic security analysis that seeks to identify sustainability metrics that are clearly linked to a company's superior competitive positioning and future value creation for shareholders. Research shows that superior competitive positioning often leads to aboveaverage ROA and ROE over time, and excess returns for shareholders. 6 B. The Evolution of Our Sustainability Database While our approach to analyzing a security's intrinsic value has remained fairly consistent over the past decade, our analysis of sustainability factors that can lead to value creation for shareholders has been significantly refined over the past seven years. Prior to 2007, the SRI team at UBS Global Asset Management was focused primarily on negative screening and managing strategies for Swiss retail clients. After Bruno Bertocci assumed responsibility for the Global Sustainable Equity strategy (previously known as the Eco Performance portfolio) at the end of 2007, he led an effort to design and execute an investment philosophy and process that fully leveraged the bottom-up security research produced by our global equity analysts, utilized our firm's institutional portfolio construction and risk management tools, and further integrated sustainability factors into our security research process. Shari Gilfillan, the Equity Strategist for Sustainable Investors, also joined the Sustainable Team at the end of 2007 and she helped support the enhancement of the team's investment philosophy and process. 5 Chatterji, Aaron K., David I. Levine, and Michael W. Toffel. How Well Do Social Ratings Actually Measure Corporate Social Responsibility? Journal of Economics & Management Strategy (2009): ; Aaron Chatterji, Rodolphe Durand, David Levine, et al. (2014). Do Ratings of Firms Converge? Implications for Strategy Research. IRLE Working Paper No Eccles, Ioannou, Serafeim, "The impact of corporate sustainability on organizational processes and performance," Management Science, Vol 60:1, 2014, UBS Global Asset Management Page 6 of 11

7 Over the past seven years, UBS Global Asset Management has transitioned all of its sustainable investment strategies to this fundamental process. In addition, we have invested considerable resources in the development of a proprietary sustainability database. The initial framework for our database project, launched in 2008, was greatly enhanced by the work of the Sustainability Accounting Standards Board (SASB), formed in The SASB identifies sustainability factors at the industry level and creates accounting standards to measure them. Bruno's team quickly realized that this was a useful paradigm because it foretold how sustainability data would eventually be measured and accounted for within the body of public company financial statements. Today, our sustainability database is aligned with the reporting framework of the SASB Materiality Map, which was created by working groups of investors, accountants, industry experts and data providers. These expert groups identified measurable and relevant KPIs that are industryspecific and can be indicators of superior sustainability performance. After a period of public review, these KPIs formed the foundation for SASB s accounting standards tailored for each individual KPI. In time, we believe these accounting standards will help inform globally accepted disclosure and reporting standards for all public companies. The process of globally implementing these standards, which we intend to help shape and promote globally, will be lengthy and deliberate, just as it took many years for global accounting standards to converge into a US standard that is set by the Financial Accounting Standards Board and International Accounting Standards. Armed with SASB KPIs, our quantitative research team worked with an outside consultant, SustainAbility, to source and map actual public data for each relevant KPI. Because UBS Global Asset Management has significant experience building quantitative factor libraries, we decided to build our own library of relevant sustainability data that we could use to compare and rank companies within the same industry. The architectural framework for our database is aligned with the SASB Materiality Map, with customized KPIs for different industries. For example, for the automobile sector the most important KPIs focus on vehicle performance (average carbon and energy intensity per vehicle across the entire fleet) and worker safety (e.g. lost time incident rate) see Exhibit 3. Exhibit 3: UBS Global Asset Management KPIs and Weights for auto industry. For illustrative purposes only. Each KPI is converted into a score using industryspecific weightings, which, combined, produces a final score for the company. In theory, our scores would be 0 to 100, but in practice the maximum score is currently 87. This will change over time as the scores are updated. The scores are broken into deciles for each industry group i.e. score ranges are different between industry groups. Because each decile typically has the same number of companies, our scoring system helps us filter out companies that are not attractive candidates, while focusing our attention on the most attractive stocks from a sustainability perspective. It is important to note that we do not use the sustainability score as a single basis for decision making. The score is simply a first step that enables us to prioritize our entire research universe and to provide us with deeper insights that we use in our qualitative discussions with our global equity analysts. Our Sustainable Investors team reviews the sustainability ratings on a weekly basis in conjunction with updated security valuations from our Global Equity Valuation System and analyst research flags issued on Pedestal. While our UBS Global Asset Management Page 7 of 11

8 sustainability ratings do not typically change on a weekly basis, our security valuation rankings do. In total, our sustainability database includes 68 sustainability factors across 21 industries. By weighting these metrics, normalizing them and then rolling them up into a company-specific score, we are able to rank-order companies within their industries, covering all companies in the MSCI ACWI, a benchmark which is a free float adjusted marketcapitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets including 23 developed and 23 emerging market countries. Exhibit 4 summarizes the process by which we create our proprietary ESG database and rankings. Our stock selection universe is the top right hand quadrant, where we believe stocks have the potential to produce high alpha on both our sustainability and valuation scores. Exhibit 4: UBS Global Asset Management ESG database creation process. For illustrative purposes only. III. Portfolio Construction Process & Risk Management A. Stock Selection The objective of our portfolio construction process is to build a diversified portfolio of our best ideas approximately stocks. Each stock must offer a compelling investment thesis and rationale for price appreciation and must also rank highly using our sustainability scoring methodology. We do not compromise on either fundamental valuations or sustainability rankings. Our Quadrant Report, which we graphically represent below, lists our sustainability rankings, which use non-financial data, alongside our security valuations, which are comprised of financial data. Exhibit 5: UBS Value Matrix. Top companies considered for inclusion in our portfolio are pre-selected for us by using our scoring methodology and appear in our stock selection universe, which is represented by the upper right quadrant in the graphic above. This universe lists all stocks that are in the 6th decile or above using both our valuation and sustainability rankings. Each of these stocks must have a supporting Company Research Note (CRN) that outlines the global equity analyst's investment thesis, specific signposts for monitoring the thesis and detailed financial projections. The Sustainable Investor team meets weekly to review potential new ideas from the universeand discuss investment themes and recent market trends, while also analyzing performance and the risk profiles of the team s individual portfolios. The utility of our Quadrant Report is that it captures all of the stocks that our global equity analysts cover and highlights the ones that rank highly enough to be placed in the universe. In addition, our internal investment library, Pedestal, circulates all of our analysts research notes and flags new investment theses. This makes it possible for our team to remain up-to-date and aware of any changes to our analyst's estimates, opinions, new ideas and downgrades. Quadrant Reports can be run at will, but are also produced once a week for the Sustainable team's weekly investment meeting. UBS Global Asset Management Page 8 of 11

9 For new investment ideas that we believe merit further attention, we tag the stock for an in-depth discussion with the assigned equity analyst. The purpose of these qualitative discussions is to fully explore the soundness of the analyst's investment thesis, while also discussing our sustainability scoring and drilling down into each sustainability KPI that we believe can drive shareholder value. Discussions can vary and may include testing our confidence and conviction of the thesis, while also evaluating the scope of the stock's potential upside as well as downside risks. While an equity analysts' research notes provide guidance on what to monitor in terms of management decisions and signposts for the unfolding investment thesis, we also press the analyst to help us examine the viability of the company s sustainability score and how it stacks up to peers in its industry. When examining a company's management, we look for solid patterns of achievement related to our sustainability metrics that support our overall thesis. At the end of these qualitative discussions, each sustainability portfolio manager assesses the idea and ranks it relative to other stocks in the portfolio based on its potential for alpha generation, the conviction of our analysis and unique insights. Those ideas that are the most differentiated, or where we have a unique insight into management's ability to deliver excess returns, become our top investment ideas with highest active share. We believe these stocks are most likely to generate the largest contribution to active risk and rank highest in the portfolio by contribution to active risk. Our Sustainable Investors team is also supported by sophisticated risk management systems, and quantitative risk experts to help ensure that portfolios are driven by the team's top insights. Subject to client-specific investment guidelines, portfolio construction and security selection guidelines include: Typical number of holdings: approximately 65 to 90 Maximum weight in any one security: generally ± 4%, relative to the security s weight within the global benchmark. Maximum weight in any one sector: generally ± 10%, relative to the sector s weight within the global benchmark (10 sectors). Maximum regional over/underweights: generally ±10% Typical active risk: up to 6% prospective Beta policy: normal range (ex-ante) from 0.90 to 1.10 Objective with respect to defined benchmark: seek to outperform the benchmark by 3% per year, gross of management fees, over rolling 3-year periods B. Portfolio Risk Management We have developed our own multi-asset risk models, and for equity risk calculations, Barra risk models are also used. Positions are loaded at the end of each business day from the fund accounting systems into the Global Risk System (GRS), and risk calculations are done overnight. GRS is the responsibility of a separate risk team, housed within our Global Investment Solutions (GIS) team. Risk figures are checked before they are released to portfolio managers and client facing staff. As well as calculating ex-ante portfolio, benchmark and active risk, GRS also does VaR and Expected Shortfall calculations using Monte Carlo simulation. Our Sustainable Investors team uses an internally developed portfolio construction tool (referred to as POP) to further review risks in the portfolio. Weekly reports from POP include risk allocations for the overall portfolio, specific sectors, regions and individual stocks. The model provides insight to UBS Global Asset Management Page 9 of 11

10 the risk generated by individual positions, sector, country and factor views as well as estimates of overall predicted tracking error. We do not optimize the portfolio using the risk models, but rather, we seek to understand the effect of active weightings on portfolio risk. Proposed changes in holdings can be tested to ensure that they do not generate unintended consequences. In constructing our Global Sustainable Equity strategy, we seek to build a portfolio that has a predefined ex-ante tracking error, with the active risk coming from intended weightings that take advantage of price/intrinsic value anomalies. Bruno Bertocci is ultimately responsible for the risk management of the Global Sustainable Equity strategy. There have been no material changes to our risk management process since January 1, 2008, yet we continuously monitor and improve our risk management functions. IV. Buy and Sell Discipline BUY: Stocks must rank 6th decile or better on both valuation and sustainability rankings, and they must be supported by a Company Research Note and detailed financial projections. Sizing of positions is informed by our portfolio construction and risk management tools. The objective for the portfolio is for a predicted active risk target, generally between 4% and 6%, with the majority coming from stockspecific exposure. We also target an active share of about 90%, ensuring that the portfolio is truly active. No stock can contribute more than 10% of the total active risk of the portfolio under normal market conditions. SELL: Sell decisions are driven by two different factors. Firstly, we consider selling if the valuation of a stock fully reflects the positive elements of the investment thesis and is trading near our estimate of intrinsic value, or if we perceive that better value exists in another company. These are stocks that have performed well and that have reached a low alpha or fair value, unless we believe there is good reason to increase our estimates of cash flow. This can mean selling the whole position or alternatively reducing the weight in the portfolio if we still like the company in the long term. Secondly, we consider selling when we reach the conclusion that our assumptions will not be met. Underperforming stocks are flagged and re-reviewed to see if our investment thesis is flawed or if the company's management is failing to execute our signposts. This can occur if either the sustainability thesis or the fundamental valuation thesis has proven to be flawed. Trading Strategy We do take trading volume of a stock into consideration when evaluating a security for purchase. There is no minimum market cap, but we typically invest in stocks that can be sold in 2 to 3 days without significantly moving the market price. We generally aim to be less than 20% of the market s trading volume so that we do not significantly move the market price when we are buying or selling a smaller cap name. Our trading desks in London, Chicago and Singapore have a global trading system that allows for efficient trading of client portfolios. In addition, our desks use sophisticated trading software that measures market trading impact and costs, allowing us to trade each order in the least costly and most efficient method. We also have access to all the offmarket trading tools, often allowing us to trade directly with buyers and sellers, further minimizing trading costs. UBS Global Asset Management Page 10 of 11

11 Disclosures. The views expressed are as of the date of this document and are a general guide to the views of UBS Global Asset Management. This document does not replace portfolio and fund-specific materials. Commentary is at a macro or strategy level and is not with reference to any particular registered or unregistered fund. This document is intended for limited distribution to the clients and associates of UBS Global Asset Management. Use or distribution by any other person is prohibited. Copying any part of this publication without the written permission of UBS Global Asset Management is prohibited. Care has been taken to ensure the accuracy of its content but no responsibility is accepted for any errors or omissions herein. Please note that past performance is not a guide to the future. Potential for profit is accompanied by the possibility of loss. The value of investments and the income from them may go down as well as up, and investors may not get back the original amount invested. This document is a marketing communication. Any market or investment views expressed are not intended to be investment research. The document has not been prepared in line with the requirements of any jurisdiction designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this document does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The information and opinions contained in this document have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. All such information and opinions are subject to change without notice. A number of the comments in this document are based on current expectations and are considered forward-looking statements. Actual future results, however, may prove to be different from expectations. The opinions expressed are a reflection of UBS Global Asset Management s best judgment at the time this document is compiled and any obligation to update or alter forward-looking statements as a result of new information, future events or otherwise is disclaimed. Furthermore, these views are not intended to predict or guarantee the future performance of any individual security, asset class or markets generally, nor are they intended to predict the future performance of any UBS Global Asset Management account, portfolio or fund. Services to US persons are provided by UBS Global Asset Management (Americas) Inc. ("Americas"). Americas is registered as an investment adviser with the US Securities and Exchange Commission ("SEC") under the Investment Advisers Act of From time to time, Americas' non-us affiliates in the Global Asset Management division who are not registered with the SEC ("Participating Affiliate") provide investment advisory services to Americas' US clients. Americas has adopted procedures to ensure that its Participating Affiliates are in compliance with SEC registration rules. IRS CIRCULAR 230 DISCLOSURE NOTICE. UBS Group AG and its affiliates do not provide tax advice. To the extent this document discusses tax matters, it is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding any tax-related penalties that may be imposed on you or any other person under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter discussed in this communication. Any taxation positions described in this document are general statements and should only be used as a guide. You should seek independent professional tax advice on any taxation matters. UBS The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. UBS Global Asset Management Page 11 of 11