Asset Management Version Belgium For Professional Investors only Asset Allocation in times of change Investment Summit Brussels Dr. Daniel Rudis, CAIA Strategist, Global Investment Solutions 26 February 2014
Complexity will remain a challenge Eight structural and cyclical investment themes The great rotation 1 Inflation 2 3 Deleveraging 4 Central bank action 5 6 Global rebalancing The eurozone crisis 7 8 Energy evolution Growth and austerity
Downside risk is here to stay Returns and market corrections (S&P 500 Index) The calendar-year returns were positive 27 of 34 years Note: Calendar year returns refer to the price return for the S&P 500 Index for each calendar year. Intra-Year Drops refer to the largest market drops over periods within that calendar year Past performance is no guarantee of future results. This chart is for illustrative purposes only. Data as of 12/31/13. Standard & Poor s market returns represented by the S&P 500 Index return and do not include dividends. Refer to the Index Definitions pages for listing of index definitions. Unlike mutual funds, indices are not managed and do not incur fees or expenses. It is not possible to invest directly in an index. How much downside can investors digest?
Investor Returns: not the same as Investment Returns Why? Buying and selling at the wrong times. Average annual total returns: 1993 2012 Average holding period of equity mutual fund investors: 3.3 years Source: "Quantitative Analysis of Investor Behavior, 2012," DALBAR, Inc.; used with permission. For illustrative purposes only. Past performance is not a guarantee of future results. The S&P 500 is an unmanaged, weighted index comprising 500 widely held common stocks varying in composition and is unavailable for direct investment. Average Equity Fund Investor is comprised of the cash flow of 4,585 equity funds as classified by ICI (Investment Company Institute). The returns are represented by the change in total equity mutual fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined. Performance calculated assumes reinvestment of all dividends and capital gains. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period. Holding period reflects the length of time the average investor holds a fund if the current redemption rate persists. It is the time required to fully redeem the account. Retention rates are expressed in years and fractions of years. Over the time period 1993-2012, the average equity fund investor held their mutual funds for an average of 3.3 years.
Beware of short-sighted selection decisions What happens to 1st and 4th quartile managers 5 years later? Average of rolling 5-year periods ending 12/31/1995-12/31/1999 Average of subsequent rolling 5-year periods 12/31/2000-12/31/2004 1 st Quartile Star managers became: 2 nd Quartile 3 rd Quartile 1st 2nd 3rd 4th 4 th Quartile Lagging managers became: 30% 25% 23% 22% Subsequent quartile Stick to a plan Source: CRA RogersCasey, Past Performance Really Isn t an Indicator of Future Results. The large cap value universe included 187 managers. CRA RogersCasey, an independent investment manager research firm, analyzed past performance as a predictor of future results. Managers were grouped by asset class and style. Their results in each quartile from the first five-year period were compared to their results from subsequent five-year periods.
Investors do not want a rollercoaster ride Today s challenges Approach for today s challenges Equities Historically relatively strong long-term real returns, But Investors have to live through periodic and painful bear markets Return expectations going forward may be lower than historical longterm averages Seek optimal mix of risk premia Bonds Generally provide relative safety of principal, But Alternatives Low correlation to markets, But A potential rising rate environment can harm principal prior to maturity Return expectations going forward may be lower than historical longterm averages Lack of transparency, liquidity questionable and typically high fees Be risk-conscious Be flexible Stay liquid (or be conscious about illiquidity) Seek stable returns without being tied to a benchmark
Desired outcomes from recent investor discussions Desired outcomes Potential investment responses Constant Income Defensive income strategy with better features than a pure fixed income portfolio Total Return Asymmetric returns in a transparent and liquid way Capital Growth Flexible approach to provide equity-like returns with more moderate risk With the common denominator unconstrained
Managing without benchmark requires a different set of tools Traditional tools Tracking error Normal distribution Linear investments Annual review of adequacy of benchmarks New tools Total portfolio risk VaR & Expected shortfall measured with non-normality Achieving asymmetry through options (non-linear instruments) Stress tests of portfolios
Italy Election Asian Markets sell-off Fed starts tapering talk Looming military intervention in Syria Fed postpones tapering German Elections Debt Ceiling avoided Fed starts tapering Take exposures where you think risks are compensated Bond and equity market exposures reflect market sentiment 5 DAS USD Duration (yrs) Equity (%) 4.5 90% 4 70% 3.5 50% 3 2.5 30% 2 10% 1.5-10% 1 0.5-30% 0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13-50% Event Portfolio Duration (lhs) Equity Total (rhs) Source: UBS Global Asset Management. Data as of 6 January 2014.
-20% -17.5% -15% -12.5% -10% -7.5% -5% -2.5% 2.5% 5% 7.5% 10% 12.5% 15% 17.5% 20% Incorporate asymmetry in the portfolio Example: End of August 2013 Asset Classes Market Exposure Convexity via options 1 Equity Shifts 15% 10% Total Derivatives 5% 0% -5% Portfolio Impact Options properly managed and assessed in an overall portfolio context are a powerful tool Source Left hand chart: Unconstrained Asset Allocation Strategy. As at end of August 2013. For illustration purposes. Source Right hand chart: UBS Global Asset Management. RiskMetrics. Unconstrained Asset Allocation Strategy as of 31 August 2013. For illustration purposes. NB: This represents the impact on the equity component of the portfolio from a sell-off in equities in isolation
Impact of stress scenarios varies over time A reflection of our probability assessment Analysing scenarios Vulnerability to "flashcrash" shock scenarios over time Bank failure Equities Nom. Rates US -15% -0.23% Dev. Europe -15% 0.09% Japan -20% -0.10% EM Asia -45% 0.21% US Monetary Crisis Equities Nom. Rates US -15% 1.43% Dev. Europe -10% 0.17% Japan -15% 0.19% EM Asia -25% 1.43% Eurozone Crisis Equities Nom. Rates US -5% -0.28% Dev. Europe -10% -0.17% Japan -5% 0.04% EM Asia -10% 0.00% Source: UBS Global Asset Management, Data as of as at end of December 2013 This does not constitute a guarantee from UBS AG, Global AM.
A longer-term outlook Entering a phase where both equities and fixed income appear rich In the next 5+ years we see the investment strategy evolve over 3 stages: Late-cycle boom favoring cyclical assets (Now) Crisis outbursts favoring nominal assets temporarily (watch out in 2014/2015) Reduce exposure to nominal assets as markets price in higher inflation
S&P 500 Price, Indexed to 1000 Is it different this time? S&P 500 Bull markets since previous troughs 3.500 23 March 2000 3.000 2.500 3 Feb 2014 2.000 9 Oct 2007 1.500 1.000 187 440 693 946 1.199 1.452 1.705 1.958 Trading Days since beginning of Bull Market S&P 500 (Rise 2000) S&P 500 (Fall 2000) S&P 500 (Rise 2007) S&P 500 (Fall 2007) S&P 500 (Rise 2014) Source: Bloomberg, UBS. Data as of 3 February 2014. 2014 A momentum trade?
Portfolio Allocation Real assets Nominal assets Stylized Asset Allocation as a function of inflation Inflation as a main allocation driver in the coming years 100% 2014/15 2016/17 2017+ Money market / cash Sovereign bonds 80% Corporate bonds 60% Index-linked bonds 40% 20% Gold Crude Oil / Oil industry Real Estate 0% Deflation (< 0%) Moderate Inflation (<5%) Increasing Inflation Zunehmende Inflation Heightened Inflation (>5%) Hyperinflation Equities Moderate inflation will be supportive for equities Source: UBS. For illustrative purposes only.
Govt. debt as % of GDP Government debt: A longer-term view Debt ratio of countries that have never been insolvent since 1815 300 250 200 150 100 50 0 1700 1750 1800 1850 1900 1950 2000 UK Sweden US Netherlands Belgium G7 (estimate) Source: IWF, UBS CIO Research; Data as of 11.11.2013
Financial Repression Effect Historical example: US-Debt Reduction US-Debt to GDP ratio (%) over 1946 1957 130 120 110 100 90 80 70 60 1946-1957 2% Primary Surplus 3.5% Inflation 1.9% Debt interest 3.5% real GDP Growth Hypothetical paths Without financial repression Without austerity Without Inflation Actual path 50 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 3.5% real GDP Growth + 3.5% inflation 1.9% nominal rate Financial Repression Source: Thomson Financials, UBS. Data as of 11.11.2013
Main take-aways Nothing is constant but change The 'journey' matters Exploit options to optimize upside / downside participation
UBS asset allocation funds February 2014 UBS (Lux) Key Selection SICAV Global Allocation 1st quartile ranking by Morningstar 1st prize by Lipper awards 2014 in Switzerland Note: UBS (Lux) Key Selection SICAV - Global Allocation (EUR) P-acc : Morningstar category for quartile ranking for Europe OE EUR Flexible Allocation- 1st quartile over 1 year, 2 years, 3 years, 5 years. A UBS (Lux) Key Selection SICAV Global Allocation sub-fund is awarded by Lipper and ranked 1st place in Switzerland over 3 years and 5 years. Date: As at 6 February 2014
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