Equity Strategy Special

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1 Cross Asset Research Equity Strategy Special Economics, FI/FX & Commodities Research 17 July 2013 Credit Research Equity Research Cross Asset Research The sector strategy that beats the market Keeping things simple Significant outperformance through the combination of fundamental and quantitative signals Over the medium term, the business cycle is the most consistent fundamental driver for sector performance and allocation The additional efficient use of trend-following strategies makes a considerable contribution to generating the outperformance Since 2002, the overall strategy demonstrates annual returns of 10.4% net of transaction costs, the STOXX Europe 600 (net return) 5.4% The strategy can be implemented efficiently using sector ETFs Christian Stocker, Equity Strategist, CEFA (UniCredit Bank) Dr. Stefan Schulz, Cross Asset Strategist (UniCredit Bank)

2 Contents 3 Investment strategy based on sector indices 3 The business cycle as a fundamental driver 5 Fundamental sector selection 7 Quantitative sector allocation model 8 Signal 1: The business cycle model 10 Signal 2: The positive feedback model 11 Simulation results and performance attribution 13 Peer group comparison 14 Analysis of the strategy 15 References UniCredit Research page 2 See last pages for disclaimer.

3 Investment strategy based on sector indices Christian Stocker, CEFA (UniCredit Bank) unicreditgroup.de Our sector investment strategy invests exclusively in the European equity market and selected sectors. The strategy is based on regular reviews of, and active adjustments to, the sector weights and is not, therefore, a passive investment strategy. Our strategy is not geared to generating short-term returns but targets longer-term capital accumulation with the objective of outperforming the European market (STOXX Europe 600). The investment universe comprises the STOXX Europe 600 and sectors selected from it based on fundamental criteria. Our rotation model is based on a mix of fundamental and quantitative indicators. The fundamental driver for allocation decisions is the business cycle in Europe; quantitative signals are derived from a trend-following model. Without explicit market forecasts, our strategy is based on the fundamental correlation between the business cycle and equity market performance, as well as on quantitative trend-following analyses. In our view, combining this fundamental approach with quantitative signals produces an interesting and highly promising investment strategy. The business cycle as a fundamental driver Over the medium term, the business cycle is the most consistent fundamental driver for sector performance and allocation. Since not all sectors of the economy perform equally at the same time in the same way, the objective of our strategy is to invest in the most promising sectors during each stage of the business cycle. Consequently, the timing of the business cycle plays a decisive role for the allocation. Here, we use signals derived from the internationally recognized German Ifo business climate index (concerning the implications for Europe, see page 4). We do not subdivide the business cycle into the usual four phases (upswing phase, cyclical high, downswing phase, cyclical low) but merely into upswing and downswing phases based on the growth expectations from the Ifo business climate index (see table 1 below). Subdivision into further phases would pose the difficulty of determining and defining the point at which one phase transitions into the next. Based on our experience, this would also not bring any improvement in performance and would merely increase the costs through more frequent adjustment of the allocation. By far the best performance is achieved when the business cycle is divided only into upswing and downswing phases in order to decide which sectors to invest in. Based on our experience over a lengthy period, i.e. over several business cycles, every other definition leads to an unstable model. The backdrop here is the varying strength of the individual business cycles, for example from which sector of the economy in Europe the drivers for a recovery emerge first. For that reason, the ranking of the profiting cyclical sectors does not always remain the same over the respective upswing phases the only statistically significant aspect is that the cyclical sectors we selected profit disproportionately in economic upswing phases and the selected defensive sectors profit disproportionately during economic downswing phases. GROWTH PHASES AND GROWTH EXPECTATIONS* Growth phase Cyclical low Upswing Cyclical high Downswing Table 1: Growth phases and growth expectations *According to the classification used in the Ifo business climate Growth expectation negative positive positive negative Source: UniCredit Research UniCredit Research page 3 See last pages for disclaimer.

4 Source: Thomson Reuters Datastream 17 July 2013 Cross Asset Research Comparison of Ifo business expectations for Germany and Europe The Ifo business expectations for Germany are an outstanding indicator for the European economy.[2] For the following reasons, we use the Ifo growth expectations for Germany in our sector rotation model as an indicator of the performance of the European economy: Fundamental validity: The Ifo growth expectations for Germany are based on monthly surveys of roughly 7,000 German companies from all sectors of the economy and, therefore, directly reflect sentiment and expectations in industry. As a result of Germany s high export share (roughly 70% of German exports go to other European countries, see right chart in figure 1), the close correlation between the German economy and the rest of Europe is clear. The business expectations for the eurozone (e.g. Ifo World Economic Survey) are, in contrast, based as a rule on the assessments and expectations of financial experts rather than expectations directly from companies. Other European indicators such as those from Markit (PMI indices), do not have a comparably long history and in past years have not shown any significant differences to the Ifo business climate index. In our rotation model, the use of the Ifo business climate has produced considerably better allocation signals compared to, for example, the Composite PMI for the eurozone. Figure 1 (left) highlights the strong correlation between the growth expectations for Germany and the eurozone. Long history: The Ifo business climate has been published by the Ifo Institute for Economic Research since 1972 and is based on monthly data. To be able to react in a timely manner to changes in growth expectations, monthly data are advantageous. The Ifo business expectations for the eurozone are, in contrast, only available on a quarterly basis. Good indicator for the equity market: As a rule, investors extrapolate positive/negative developments in Europe s largest economy to Europe as a whole. Consequently, the Ifo business expectations for Germany have in the past proved to be an excellent indicator for equity market and sector performance, not only for Germany but also for the European market as a whole because of Germany s close economic ties with Europe (see Figure 2). IFO BUSINESS EXPECTATIONS AS PROXY FOR GROWTH IN EUROPE Business expectations for Germany and Europe compared German foreign trade by region Australia / Oceania 0.74% Asia 17.22% America 10.39% EU countries 56.64% Africa 2.28% Europe ex EU 12.74% World Economic Survey: business expectations eurozone Ifo business climate, expectations component (rs) 75 Figure 1: Business expectations and foreign trade Source: Thomson Datastream, Ifo Institute, Destatis, UniCredit Research UniCredit Research page 4 See last pages for disclaimer.

5 Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream 17 July 2013 Cross Asset Research CLOSE CORRELATION BETWEEN IFO BUSINESS CLIMATE AND EUROPEAN EQUITY MARKET Performance STOXX Europe 600 and Ifo business climate Relative performance of cyclical versus defensive basket and Ifo business climate STOXX Europe 600, 12M performance in %, 3M smoothed Ifo business climate, expectations component (rs) Relative performance cyclical basket / defensive basket Ifo business climate, expectations component (rs) 75 Figure 2: Ifo business climate and equity market Source: Thomson Datastream, UniCredit Research Fundamental sector selection For the investment strategy, we used fundamental criteria (such as stability against swings in demand in the production cycle, earnings momentum and valuation sensitivity, among other things) to select a total of ten sectors from the pan-european STOXX Europe 600 universe that demonstrate a high sensitivity to cyclical impulses. For cyclical upswing phases, these are five sectors that demonstrate strong cyclicality and in the process regularly generate an above-average return. For downswing phases, we selected five sectors that demonstrate a more stable, defensive bias. We did not include Financials for our selection since they do not show a consistent correlation over several business cycles between share price performance and growth dynamic. If, over time, the character of a sector (cyclical or defensive) were to change on a lasting basis, adjustments to the respective basket are possible following an extensive review. Cyclical sector basket The cyclical sector basket comprises the five sectors with the highest growth sensitivity based on the fundamentals. The selection of the individual sectors was made with the goal of identifying sectors that were able to generate a stable outperformance in the upswing phases over several business cycles. The main criterion for the selection was the strength of the earnings dynamic generated in upswing phases relative to the overall market. The development of earnings is always the medium-term, fundamental basis for the extent of the possible share price performance. The cyclical sector basket comprises the following STOXX Europe 600 sectors: Automobiles & Parts Basic Resources Chemicals Construction & Materials Industrial Goods & Services After every allocation change, the sectors are equally weighted again within the basket. No adjustment is made to the weighting between allocation changes, i.e. the relative weights of the individual sectors change in line with their respective performance. UniCredit Research page 5 See last pages for disclaimer.

6 Defensive sector basket The defensive sector basket comprises the five sectors with the highest earnings stability. The selection of the individual sectors was analogous to the cyclical basket, but with the focus on high earnings stability in economic downswing phases. Earnings stability, as the main characteristic for defensive sectors, becomes considerably more appealing in an environment of falling growth expectations; the performance of these sectors is clearly better then cyclical sectors and also versus overall market. In this context, it is important to mention that in a bear market all sectors can fall on an absolute basis. Even if the defensive basket outperforms the cyclical basket and overall market in a bear market, losses can therefore occur. The defensive sector basket comprises the following STOXX Europe 600 sectors: Food & Beverage Health Care Oil & Gas Telecommunications Utilities After every allocation change, the sectors are equally weighted again within the basket. No adjustment is made to the weighting between allocation changes, i.e. the relative weights of the individual sectors change in line with their respective performance. Performance in the business cycle The two sector baskets clearly outperform the overall market in their respective growth phases. The following chart highlights the successful, composition of the two sector baskets based on fundamental criteria. The cyclical sector basket clearly outperforms the overall market in an environment of rising expectations in the Ifo business climate (area above the STOXX Europe 600). In contrast, the defensive basket clearly outperforms on falling business expectations (area to the right of the STOXX Europe 600). EMPIRICAL DISTRIBUTION OF SECTOR PERFORMANCE IN THE BUSINESS CYCLE 500% Cumulated return during increasing business expectations 400% 300% 200% 100% Industrial Goods & Services Automobiles & Parts Construction & Materials STOXX Europe 600 Basic Resources Chemicals Food & Beverage Health Care Utilities Telecommunications Oil & Gas 0% -60% -50% -40% -30% -20% -10% 0% Cumulated return during decreasing business expectations Figure 3: Empirical distribution of sector performance in the business cycle. Analysis from 28 August 2002 to 25 January Only full business cycles are included. Source: UniCredit Research UniCredit Research page 6 See last pages for disclaimer.

7 Quantitative sector allocation model Stefan Schulz, Quantitative Cross Asset Strategist (UniCredit Bank) The quantitative sector allocation model described in this section distills the fundamental observations and analyses described above into a rule-based investment strategy. Value creation is targeted on both the allocation and the timing level: Allocation level: Based on fundamental considerations, we first identify those sectors that demonstrate pronounced defensive or cyclical characteristics along the business cycle. The sectors selected are then combined to create a defensive and a cyclical sector basket (see pages 5 and 6). Timing level: In terms of timing, value is created by a rule-based rebalancing between the defensive and cyclical sector basket and, where appropriate, the STOXX Europe 600. The sectors currently included in the defensive and cyclical baskets are listed in table 2. The composition of the defensive and cyclical baskets is reviewed regularly in order to make adjustments where necessary in the event of lasting structural breaks. For example, such a structural break occurred in the aftermath of the dotcom bubble, metamorphosing the telecommunications sector into a defensive investment. COMPOSITION OF THE CYCLICAL AND DEFENSIVE SECTOR BASKETS Cyclical sector basket Defensive sector basket 20% Automobiles & Parts 20% Food & Beverage 20% Basic Resources 20% Health Care 20% Chemicals 20% Oil & Gas 20% Construction & Materials 20% Telecommunications 20% Industrial Goods 20% Utilities Table 2: Sector weights in the sector baskets Source: UniCredit Research Historical simulation To backtest the results achievable with the proposed investment strategy, in the following sections we present some results obtained from historical simulations. To this end, we use the historical net return time series calculated by the index provider STOXX Ltd. These time series factor in reinvestment of the divided after deduction of the respective withholding taxes and are, therefore, very close to the investment results that most investors could actually have achieved. Because Telecommunications is included in the defensive sector basket, we begin the historical simulation only after the dotcom bubble burst, when investors increasingly began to perceive Telecommunications as defensive. In our model, the signals derived from the business cycle model and the positive feedback model lead to the allocations compiled in table 3. In the next sections we will give a comprehensive description of the two signals that govern the allocation of the strategy. SIGNAL-DRIVEN ALLOCATION SCHEME Signal 1 (business expectations) Signal 2 (positive feedback) Neutral basket (STOXX Europe 600) (%) Cyclical sector basket (%) Defensive sector basket (%) Cyclical sector basket Cyclical sector basket Cyclical sector basket Benchmark Cyclical sector basket Defensive sector basket Defensive sector basket Cyclical sector basket Defensive sector basket Benchmark Defensive sector basket Defensive sector basket Table 3: Allocation scheme derived from the model signals Source: UniCredit Research UniCredit Research page 7 See last pages for disclaimer.

8 Business-cycle sensitivity Signal 1: The business cycle model The motivation underlying this signal is the tried-and-tested economic triad of business cycle, corporate earnings and based on that corporate valuations. The use of adequately diversified sector indices extensively eliminates idiosyncratic risks, while the varying sensitivity of these sectors to the European business cycle remains intact and can, therefore, be used specifically for the investment strategy. The business cycle model is shown in schematic form in figure 4. To align the allocation of our investment strategy with the business cycle, it is necessary to identify the turning points of the European business cycle. This is discussed in the following sections. ALIGNING THE SECTOR ALLOCATION TO THE BUSINESS CYCLE economic upswing economic downturn cyclical sector basket 20% Automobiles & Parts 20% Basic Resources 20% Chemicals 20% Construction & Materials 20% Industrial Goods & Services defensive sector basket 20% Food & Beverage 20% Health Care 20% Oil & Gas 20% Telecommunications 20% Utilities Figure 4: Schematic representation of the business cycle model. The weights are normalized to 100% Source: UniCredit Research Good leading properties Turning point for the beginning of an uptrend Several studies have demonstrated the good leading properties of the Ifo business climate, particularly in identifying cyclical turning points of the German business cycle [1,2]. Within the framework of our strategy, we exclusively use the expectations component of the Ifo business climate index. In our view, the Ifo business expectations reflect the forward-looking assessment of the most important group of economic agents: entrepreneurs and managers. Because of the German economy s strong dependence on foreign trade with Europe, the German business cycle is a material factor influencing the earnings of the companies included in the sector baskets. To identify the turning points of the business expectations as early as possible, we used the two following simple rules. We refer to the Ifo business expectations for the current month published at time t k as I 0( tk ). Since the revisions and seasonal adjustments incorporated by this point in time may also change the readings of already published business expectations retroactively, we use the notation I m ( t k ). We identify an uptrend if at time t k the Ifo business expectations have risen for three consecutive months by a total of 2 or more index points: (1) I t ) I ( t ) > I ( t ) I ( t ) 0( k 1 k 2 k > 3 k > with t ) I ( t ) 2 I. 0 ( k 3 k > We define a turning point for the beginning of an uptrend as the third month of an uptrend after a previous downtrend. Turning point for the beginning of a downtrend We identify a downtrend if at time t k the Ifo business expectations have fallen for three consecutive months by a total of 2 or more index points: (2) I t ) I ( t ) < I ( t ) I ( t ) 0( k 1 k 2 k < 3 k < with t ) I ( t ) 2 I. 3 ( k 0 k > We define a turning point for the beginning of a downtrend as the third month of a downtrend after a previous uptrend. UniCredit Research page 8 See last pages for disclaimer.

9 Quantitative allocation rule One pitfall of historical simulations is the often unconscious use of information that was not yet known at the time of an investment decision. With most economic indicators, revisions and seasonal adjustments often result in subsequent adjustments. In our case, we must factor in the Ifo business expectations exactly as they were known at the simulation time. The data at our disposal go back to 26 March 2002; prior to February 2004, the Ifo Institute calculated separate business expectations for West and East Germany. For the historical simulation in this period we use exclusively the data for West Germany. EXAMPLES FOR HISTORICAL IFO BUSINESS EXPECTATIONS AND REVISIONS Published on Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 Signal 24 Jun unchanged signal 24 May unchanged signal 24 Apr unchanged signal 22 Mar unchanged signal 22 Feb uptrend 25 Jan new uptrend 19 Dec unchanged signal 23 Nov unchanged signal 24 Oct unchanged signal 24 Sep downtrend Table 4: The Ifo business expectations of the respective last 4 months Source: Ifo Institute, UniCredit Research To illustrate the quantitative identification of turning points, table 4 compiles the publication dates of the Ifo business expectations between September 2012 and June Each row contains the respective Ifo business expectations figure as well as the revised and seasonally adjusted figures of the last three previous months. These four values are used to determine the existence of a given trend as defined by the inequalities (1) and (2). For example, the onset of an uptrend identified with the data release on 25 January 2013 marks a new turning point in our business-cycle model, since this is the first uptrend following the downtrend identified on 24 September UniCredit Research page 9 See last pages for disclaimer.

10 Behavioral finance Quantitative allocation rule Signal 2: The positive feedback model Many people feel better if they agree in their assessments and actions with their fellow human beings. On equity markets, this phenomenon, also called herding, frequently results in selffulfilling share price developments via so-called positive feedback processes. The positive share price performance of an equity market or equity sector leads to an even more positive assessment by market participants, which in turn contributes to a further rise in stock prices, and so on. The emergence of feedback processes on the capital markets, above all on the equity markets, has been examined and documented in detail in the academic literature [3,4]. The second signal uses the existence of positive feedback processes to switch between the three allocations shown in figure 5. On the publication date of the Ifo business climate, the average performance of the three allocations over the preceding three months is calculated, and the three values compared. For simplicity's sake, we use the arithmetic mean of the last three monthly returns to calculate the average performance. Subsequently, capital is allocated to the basket with the highest average return. Theoretically, therefore, a maximum of 12 rebalancing transactions are possible per year. The existence of positive feedback processes is, however, manifested in a significant reduction of the rebalancing frequency to roughly four per year. In terms of cost efficiency, a low rebalancing frequency plays a role that is difficult to overestimate when it comes to practically implementing an investment strategy. If, for example, instead of the switching possibilities shown in figure 5 between the three pre-defined allocation components, one were to permit switching between all individual sectors, the rebalancing costs would be prohibitively high. In contrast to the previous signal, the STOXX Europe 600 serves not only as a benchmark but can, within this signal, be allocated as a neutral sector basket. ALIGNING THE STRATEGY WITH POSITIVE FEEDBACK PROCESSES neutral sector basket 100% STOXX Europe 600 cyclical sector basket 20% Automobiles & Parts 20% Basic Resources 20% Chemicals 20% Construction & Materials 20% Industrial Goods defensive sector basket 20% Food &Beverage 20% Health Care 20% Oil & Gas 20% Telecommunications 20% Utilities Figure 5: Schematic representation of the second signal. The weights are normalized to 100% Source: UniCredit Research UniCredit Research page 10 See last pages for disclaimer.

11 Results of the historical simulation Simulation results and performance attribution The results of the historical simulations are shown in figure 6. The chart on the left shows the performance of the strategy excluding transaction costs. The cumulative outperformance does suffer clear setbacks at times, but with respect to the long-term trend it provides impressive confirmation of the differing relative business cycle sensitivity of the two sector baskets, as well as the efficient use of positive feedback processes for the systematic generation of outperformance. For the simulation shown in the right chart of figure 6 we factored in transactions costs that can typically be expected when implementing the strategy with physically replicating ETFs. In the concrete case, this means that a switch between the defensive and cyclical sector basket is penalized with a wealth loss of 0.4%. If, on the other hand, a switch is made between one of the sector baskets and the benchmark (STOXX Europe 600), we assume a wealth loss of 0.7%. Despite these relatively high transaction costs, the investor generates a noticeable excess return versus the benchmark. EXCLUDING TRANSACTION COSTS INCLUDING TRANSACTION COSTS 250% outperformance 250% outperformance 200% STOXX Europe % STOXX Europe 600 cumulative performance 150% 100% 50% strategy cumulative performance 150% 100% 50% strategy 0% 0% -50% % Figure 6: Outperformance of the strategy in the period from 28 August 2002 to 5 July 2013 Source: Bloomberg, UniCredit Research Performance attribution The performance of the investment strategy stems from both the allocation and the timing. To examine performance attribution in an economically intuitive way, we start by comparing the performance of an equally-weighted static allocation consisting of all 10 defensive and cyclical sectors as well as the benchmark with the performance of the STOXX Europe 600. The static allocation thus assigns an equal weight to each of the 11 portfolio constituents. In the process, the equal weighting is restored on exactly the same days as the original strategy through corresponding rebalancing transactions. Assuming the same rebalancing frequency, investment universe and transaction costs, allows us to isolate the performance that can be attributed to the timing decisions of the strategy. Figure 7 visualizes the dynamic allocation profiles of both our strategy and the equally-weighted static allocation. The performance resulting from these two different allocations is shown in figure 8. During the period from 28 August 2002 to 5 July 2013, the equally-weighted allocation delivered a simulated outperformance, linked to the sector selection decision, of 35 percentage points. The timing decisions implemented by our strategy further enhanced the outperformance to a total cumulative outperformance of 92 percentage points. The performance figures in Table 5 confirms that the performance of an investment strategy is determined by both allocation and timing decisions. In both the 10Y and the 5Y period, our strategy shows a better performance than the equallyweighted static allocation. Although the performance numbers already include transaction costs, a management fee usual for fund solutions is not included. The performance after factoring in a management fee is discussed in the next section using a peer group comparison. UniCredit Research page 11 See last pages for disclaimer.

12 WEIGHTS OF THE STRATEGY WEIGHTS OF THE STATIC ALLOCATION 100% 100% 80% 80% weight 60% 40% weight 60% 40% 20% 20% 0% % Figure 7: The weights of the strategy (left chart) and an equally-weighted allocation (right chart) from 28 August 2002 to 5 July 2013 Source: Bloomberg, UniCredit Research PERFORMANCE OF THE STRATEGY PERFORMANCE OF THE STATIC ALLOCATION 200% outperformance 200% outperformance cumulative performance 150% 100% 50% 0% STOXX Europe 600 strategy kumulierte Wertentwicklung 150% 100% 50% 0% STOXX Europe 600 equally-weighted -50% % Figure 8: Performance and outperformance of the strategy (left chart) and the equally-weighted static allocation (right chart) Source: UniCredit Research In the last three years, the Ifo business expectations that steer the business cycle model were increasingly overshadowed by monetary policy measures (LTRO, OMT). As a result, the turning points of the business expectations index were often not as decisive for the performance of the sectors as in the past. On the other hand, the positive feedback model was able to exploit all the better the share price movements driven by the monetary policy measures. PERFORMANCE From To STOXX Europe 600 Net Return (%) Static allocation* (%) Strategy* (%) 30 June June June June June June June June June June Table 5: *Including transaction costs Source: Bloomberg, UniCredit Research UniCredit Research page 12 See last pages for disclaimer.

13 Peer group comparison Survivorship bias Peer group comparison For a better understanding of the simulated investment results, we turn to the monthly statistics of the Bundesverband Investment und Asset Management (BVI) and compare the simulated performance of the strategy over a 5Y and 10Y period with the performance of all equity mutual funds listed in the BVI database that invest primarily in Europe. To ensure comparability between the simulated performance of our strategy and the actual performance of mutual funds, in addition to the transaction costs already included in our simulation, we assume a total annual expense ratio of 1.5%. This number is the median total expense ratio of all equity funds in our comparison sample. The latest BVI-report, dated 31 May 2013, lists a total of 101 equity mutual funds that invest primarily in Europe with a history of 5 or more years. Of these 101 funds, only 66 funds have a history of 10 or more years. Our peer group comparison looks at both the period from 31 May 2003 to 31 May 2013 and the period marked by the financial market and sovereign debt crisis from 31 May 2008 to 31 May Investment funds that were closed or merged during these timeframes do not appear in these statistics. Since a fund company often decides to merge or liquidate a fund because the fund volume is too small often combined with a preceding poor performance, this survivorship bias results in the historical fund performance actually achieved being statistically overestimated. Notwithstanding this performance distortion, the value performance generated by our strategy appears very attractive. PEER GROUP COMPARISON IN THE 1OY TIMEFRAME PEER GROUP COMPARISON IN THE 5Y TIMEFRAME cumulative performance 250% 200% 150% 100% 50% STOXX Europe 600 Net Return strategy mutual equity funds with investment focus europe median fund performance cumulative performance 60% 40% 20% 0% STOXX Europe 600 strategy mutual equity funds with investment focus europe median fund performance 0% -20% -50% -40% Figure 9: Peer group comparison of the partial strategies with equity mutual funds investing primarily in Europe for two different timeframes. Source: Bloomberg, BVI, UniCredit Research UniCredit Research page 13 See last pages for disclaimer.

14 Analysis of the strategy The stable course of the strategy's outperformance relative to the benchmark shows that the two allocation-driving signals are a good mutual complement. For the quantitative analysis of the outperformance of the strategy we look at the information ratio R IR = σ (3) 0.64, TE R b = where R = 10.37% is the annualized performance of the strategy, Rb = 5.38% the annualized performance of the benchmark, and σ TE = 7.73% the volatility of the relative returns, known as tracking error. Because the information ratio compares the strategy's relative performance to its relative risk, it is a measure of the risk-adjusted performance. On the other hand, the Sharpe ratio R r f (4) 0.45 SR = σ = R r over the risk-free rate r f to the volatility σ measures the ratio of the excess return f of the strategy. For the calculation of the Sharpe ratio displayed in table 6 we have used the annualized compounded return of 1.82% obtained from a daily EONIA deposit as the risk-free rate. PERFORMANCE FIGURES Figure STOXX Europe 600 Strategy Tracking error - 7.7% Information ratio Sharpe ratio Maximum drawdown -58.7% -44.1% Last maximum on 16 July May 2013 Table 6: Performance figures for the period from 30 June 2003 to 28 June 2013 Source: Bloomberg, UniCredit Research Core satellite approach Institutional investors often stipulate ceilings for the tracking error when awarding portfolio management mandates. If, for example, the maximum tracking error is to be 4%, this can be achieved via a simple core satellite approach with a 52% weighting of the overall strategy (4% = 52% x 7.73%). The remaining 48% are invested passively in the STOXX Europe 600 benchmark with a tracking error of zero. UniCredit Research page 14 See last pages for disclaimer.

15 References [1] Abberger, K. und Nierhaus, W., Das Ifo Geschäftsklima und Wendepunkte der deutschen Konjunktur. Ifo-Schnelldienst 3/ Jahrgang [2] Rees, A., Weekly Focus, issue dated 19 January 2012, UniCredit Bank AG [3] Sentana, E. and Wadhwani, S., (1992), Feedback Traders and Stock Return Autocorrelations: Evidence from a Century of Daily Data, Economic Journal, 102, [4] Shiller, R. J., (1984), Stock Prices and Social Dynamics, Brooking Papers on Economic Activity, 2, UniCredit Research page 15 See last pages for disclaimer.

16 Notes UniCredit Research page 16 See last pages for disclaimer.

17 Notes UniCredit Research page 17 See last pages for disclaimer.

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Grzybowska 53/57, PL Warsaw, Poland Regulatory authority: Polish Financial Supervision Authority, Plac Powstańców Warszawy 1, Warsaw, Poland i) ZAO UniCredit Bank Russia (UniCredit Russia), Prechistenskaya emb. 9, RF Moscow, Russia Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow , Russia j) UniCredit Bank Slovakia a.s. (UniCredit Slovakia), Šancova 1/A, SK Bratislava, Slovakia Regulatory authority: National Bank of Slovakia, Imricha Karvaša 1, Bratislava, Slovakia k) UniCredit Tiriac Bank (UniCredit Tiriac), Bucharest 1F Expozitiei Boulevard, RO Bucharest 1, Romania Regulatory authority: National Bank of Romania, 25 Lipscani Street, RO , 3rd District, Bucharest, Romania POTENTIAL CONFLICTS OF INTEREST UniCredit Bank AG acts as a Specialist or Primary Dealer in government bonds issued by the Italian, Portuguese and Greek Treasury. Main tasks of the Specialist are to participate with continuity and efficiency to the governments' securities auctions, to contribute to the efficiency of the secondary market through market making activity and quoting requirements and to contribute to the management of public debt and to the debt issuance policy choices, also through advisory and research activities. ANALYST DECLARATION The author s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly. ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST To prevent or remedy conflicts of interest, UniCredit Bank, UniCredit Bank London, UniCredit Bank Milan, UniCredit Bank Vienna, UniCredit Bulbank, Zagrebačka banka, UniCredit Bank Czechia, Bank Pekao, UniCredit Russia, UniCredit Slovakia, UniCredit Tiriac, and ATF Bank have established the organizational arrangements required from a legal and supervisory aspect, adherence to which is monitored by its compliance department. Conflicts of interest arising are managed by legal and physical and non-physical barriers (collectively referred to as Chinese Walls ) designed to restrict the flow of information between one area/department of UniCredit Bank, UniCredit Bank London, UniCredit Bank Milan, UniCredit Bank Vienna, UniCredit Bulbank, Zagrebačka banka, UniCredit Bank Czechia, Bank Pekao, UniCredit Russia, UniCredit Slovakia, UniCredit Tiriac, ATF Bank and another. In particular, Investment Banking units, including corporate finance, capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries from Markets Units, as well as the research department. In the case of equities execution by UniCredit Bank AG Milan Branch, other than as a matter of client facilitation or delta hedging of OTC and listed derivative positions, there is no proprietary trading. Disclosure of publicly available conflicts of interest and other material interests is made in the research. Analysts are supervised and managed on a day-to-day basis by line managers who do not have responsibility for Investment Banking activities, including corporate finance activities, or other activities other than the sale of securities to clients. ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED Notice to Australian investors This publication is intended for wholesale clients in Australia subject to the following: UniCredit Bank AG and its branches do not hold an Australian Financial Services licence but are exempt from the requirement to hold a licence under the Act in respect of the financial services to wholesale clients. UniCredit Bank AG and its branches are regulated by BaFin under German laws, which differ from Australian laws. This document is only for distribution to wholesale clients as defined in Section 761G of the Corporations Act. UniCredit Bank AG and its branches are not Authorised Deposit Taking Institutions under the Banking Act 1959 and are not authorised to conduct a banking business in Australia. UniCredit Research page 18

19 Notice to Austrian investors This document does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any securities and neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. This document is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in whole or part, for any purpose. Notice to Czech investors This report is intended for clients of UniCredit Bank, UniCredit Bank London, UniCredit Bank Milan, UniCredit Bank Vienna, UniCredit Bulbank, Zagrebačka banka, UniCredit Bank Czechia, Bank Pekao, UniCredit Russia, UniCredit Slovakia, UniCredit Tiriac, ATF Bank in the Czech Republic and may not be used or relied upon by any other person for any purpose. Notice to Italian investors This document is not for distribution to retail clients as defined in article 26, paragraph 1(e) of Regulation n approved by CONSOB on October 29, In the case of a short note, we invite the investors to read the related company report that can be found on UniCredit Research website Notice to Japanese investors This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Notice to Polish investors This document is intended solely for professional clients as defined in Art. 3 39b of the Trading in Financial Instruments Act of 29 July 2005.The publisher and distributor of the recommendation certifies that it has acted with due care and diligence in preparing the recommendation, however, assumes no liability for its completeness and accuracy. Notice to Russian investors As far as we are aware, not all of the financial instruments referred to in this analysis have been registered under the federal law of the Russian Federation "On the Securities Market" dated 22 April 1996, as amended (the "Law"), and are not being offered, sold, delivered or advertised in the Russian Federation. This analysis is intended for qualified investors, as defined by the Law, and shall not be distributed or disseminated to a general public and to any person, who is not a qualified investor. Notice to Turkish investors Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities. Investment advisory services are provided in accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the clients. Comments and recommendations stated herein rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not suit your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely on the information stated here may not result in consequences that meet your expectations. Notice to UK investors This communication is directed only at clients of UniCredit Bank, UniCredit Bank London, UniCredit Bank Milan, UniCredit Bank Vienna, UniCredit Bulbank, Zagrebačka banka, UniCredit Bank Czechia, Bank Pekao, UniCredit Russia, UniCredit Slovakia, UniCredit Tiriac, or ATF Bank who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) ( high net worth companies, unincorporated associations, etc. ) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as relevant persons ). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. Notice to U.S. investors UniCredit Bank has entered into an arrangement with Kepler Capital Markets, Inc. ("KCM") which enables this report to be furnished to U.S. recipients in reliance on Rule 15a-6 ("Rule 15a-6") with KCM under the U.S. Securities Exchange Act of 1934, as amended. Each U.S. recipient of this report represents and agrees, by virtue of its acceptance thereof, that it is such a "major U.S. institutional investor" (as such term is defined in Rule 15a-6) and that it understands the risks involved in executing transactions in such securities. Any U.S. recipient of this report that wishes to discuss or receive additional information regarding any security or issuer mentioned herein, or engage in any transaction to purchase or sell or solicit or offer the purchase or sale of such securities, should contact a registered representative of KCM. KCM is a broker-dealer registered with the Securities and Exchange Commission ("SEC"), Member of the Financial Industry Regulatory Authority ("FINRA") and Securities Investor Protection Corporation ("SIPC"). Nothing herein excludes or restricts any duty or liability to a customer that KCM has under applicable law. Investment products provided by or through KCM are not FDIC insured, may lose value and are not guaranteed by the entity that published the research as disclosed on the front page or KCM. Investing in non-u.s. Securities may entail certain risks. The securities referred to in this report and non-u.s. issuers may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S. reporting and/or other requirements. The information available about non-u.s. companies may be limited, and non-u.s. companies are generally not subject to the same uniform auditing and reporting standards as U.S. companies. Securities of some non-u.s. companies may not be as liquid as securities of comparable U.S. companies. Analysts employed by non-u.s. broker-dealers are not required to take the FINRA analyst exam. The information contained in this report is intended solely for certain "major U.S. institutional investors" and may not be used or relied upon by any other person for any purpose. Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as amended, or under any other U.S. federal or state securities laws, rules or regulations. The investment opportunities discussed in this report may be unsuitable for certain investors depending on their specific investment objectives, risk tolerance and financial position. In jurisdictions where KCM is not registered or licensed to trade in securities, or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to jurisdiction and which may require that a transaction be made in accordance with applicable exemptions from registration or licensing requirements. The information in this publication is based on sources believed to be reliable, but KCM does not make any representation with respect to its completeness or accuracy. All opinions expressed herein reflect the author's judgment at the original time of publication, without regard to the date on which you may receive such information, and are subject to change without notice. KCM or its affiliates may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. 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Factors that could cause a company's actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic conditions that adversely affect the level of demand for the company's products or services, changes in foreign exchange markets, changes in international and domestic financial markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement. You can reach KCM at 600 Lexington Avenue, New York, NY 10022, phone (212) ; Equity trading: You may obtain information about SIPC, including the SIPC brochure, by contacting SIPC directly at ; website: KCM refers to branches, affiliates and subsidiaries of Kepler Capital Markets S.A. KCM, a wholly owned subsidiary of Kepler Capital Markets S.A., is a broker dealer in the United States and a Member of FINRA and SIPC. KCM is responsible for the distribution of research in the United States. This document may not be distributed in Canada. UniCredit Research page 19