Uli Sperl, CFA Senior Portfolio Manager

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1 Asset management For professional investors only Wandelanleihen: Das Beste Uli Sperl, CFA Senior Portfolio Manager aus zwei Welten September 2012

2 Section 1 Asset Class

3 Convertible bonds: The best of both worlds? Convertible bonds are fixed-income instruments that pay a coupon and can be redeemed at a predetermined price at maturity Prior to maturity, the investor may exchange a convertible bond for a predetermined number of shares When the stock markets are performing well, the convertible bond will behave like an equity share, and the probability of conversion will increase When the stock markets are performing badly, the convertible bond will behave like a straight bond, and the probability of conversion will fall Note: For illustration purposes only 2

4 Global Convertible Bond Market Capitalization by region Asia 77.0 Others 35.0 Europe Total = USD 475 billion 2280 issues US the largest market Asia & Europe were the most active with new issues in the past 2 years Japan 40.0 Broadly diversified by sector and countries USA Source: UBS Investment Bank Data: as at 29 December

5 The multi-asset angle: Attractive risk/return attributes Global Convertibles hedged in EUR Source: Bloomberg, UBS Global Asset Management, * currency hedged returns based on own calculations Data: as of 31 July 2012 These figures refer to the past. Past performance is not a reliable indicator of future results 4

6 Global CB hedged in EUR relative performance vs More green than red and with much less risk Dec-11 Dec-08 Dec-05 equities Annualized outperformance of global convertible bonds vs. MSCI World Total Return Sell date Dec-93 Dec-96 Dec-99 Example: Investing in converts at the end of 1996 and selling in 2002 generated between 5-10% more return per annum than an investment in equities Dec-02 Dec-05 Dec-08 Dec-11 Dec-02 Dec-99 Dec-96 Dec-93 20%-25% 15%-20% 10%-15% 5%-10% 0%-5% -5%-0% -10%--5% -15%--10% -20%--15% Source: Bloomberg, UBS Buy date Data: as of 30 July 2012 These figures refer to the past. Past performance is not a reliable indicator of future results. 5

7 Convertible bond asset class Why should the risk / return stay that attractive? Recurrent value added due to under-priced new issues Recurrent value added due to suboptimal call exercises by issuers Very good protection of optionality dividends) against corporate actions (takeover, Optionality investors often priced with high stock borrow which favours outright Exposure to correlation (the bond value is the exchange property) Can not be replicated with other asset classes Attractive risk/reward Convertible arbitrage a very successful hedge fund strategy 6

8 Convertible bond asset class Positive drivers slightly dominate Equity Markets (equity component) We believe equity markets are fairly valued from a fundamental point of view Many convertible bonds convert into shares with high alphas Interest rates Rates may increase from current levels, negatively impacting performance Convertible market exposure to interest rates, however, is quite low (approx. 1.5 year duration) Credit spreads (Credit component) Credit spreads trade on attractive levels Diversification remains key Market valuation (Option component) The overall convertible bond market trades on a rather cheap valuation. Cheapness is most pronounced in smaller, less well known, more complex, less liquid, sub investment grade issues New issues (Supply) Volumes are picking up in 2012 so far. We expect more attractively priced new issues as companies need financing for future M&A as well as refinancing Investor demand The selling pressure from outright investors has abated and the market seems to have found a new equilibrium Hedge funds, non traditional buyers and issuing companies are selective buyers into weakness This information represents the views of UBS Global Asset Management as of August 2012 While these forward-looking statements represent our judgments and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. 7

9 Global theoretical convertible bond valuations Still rather cheap Asia & Other Japan Europe US Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Source: BoA Merill Lynch Global Research Data: As of 30 June 2012 These figures refer to the past. Past performance is not a reliable indicator of future results. 8

10 Section 2 Convertible Bonds at UBS Global Asset Management

11 UBS Global Asset Management Your partner for convertible bonds One of Europe s largest convertible bond manager (currently roughly 2.4 bn EUR under management) Excellent long term track record in Europe, Asia and Global rewarded by several Lipper and uro am Sonntag fund awards as well as with a AA Citywire rating. Stable management team with a long investment experience in convertible bonds Team can leverage UBS Global Asset Managements resources across equity, credit, derivative and asset allocation Broad global market network the team can access for valuable insights, liquidity, new issues Data: As of 31 July

12 Convertible bond Our main goals investment process Give access to the convertible bond asset class Benefit from its long term attractive risk/reward characteristics Making use of our privileged access to a stream of attractively priced new issues Benefit from opportunities across regions, credit quality, structures Offer regional as well as global portfolios Add value with active portfolio management Leveraging UBS Global Asset Management global research platform Equities Fixed income & Credit Derivatives & Convertible bond specific Asset Allocation & Currencies Strong risk management infrastructure 11

13 Convertible bond Main steps investment process Bottom up convertible bond selection based on Underlying equity view Issuer credit view Convertible bond theoretical valuation as well as specific terms Bond risk/reward profile and conditions Choosing the most attractive bonds Portfolio construction taking into account Risk and factor exposures Asset allocation and currency views Characteristics of the portfolio Combining them into an attractive portfolio 12

14 Bringing it all together Our views on the drivers are weighted by their importance Junk Bond proxy Real convertible bond Equity proxy Equity Credit Convertible specific Value of convertible bond Underlying share value (parity) Investment value Equity value Equity Drivers Credit Convertible specific Buy candidate Sell candidate positive view neutral view negative view Note: For illustration purposes only 13

15 What we do and what we don t do WE DO WE DON T Select bonds in a bottom up perspective Set strategies in absolute terms Look at all available opportunities (equity, credit, sector, geography, structure) thanks to our broad research Leverage our internal research Tend to like convexity ( real /balanced convertibles) Use a comprehensive database to monitor the entire convertible bond universe Invest in a long only way Have a strong focus on risk & diversification Buy bonds just because they are in a benchmark Buy overpriced positions just because they are defensive Buy overpriced positions just because they are investment grade Buy overpriced positions just because of liquidity Arbitrage bonds valuation anomalies Buy or sell stocks or equity futures as their risk profile is linear Set a top down strategy and then fill it up with bonds Have a long term investment horizon Build up cash as a tactical position Maintain strong relations with relevant counterparties Take significant currency bets 14

16 Section 3 Performance & Positioning

17 Track Record Global Strategy Source: UBS Global Asset Management Data as of 31 May 2012 These figures refer to the past. Past performance is not a reliable indicator of future results. 16

18 Track Record Strong correlation to changes in market valuations 15% 6 10% 4 5% 2 0% 0-5% -10% -15% 3M Change in Global Convertible Bond Cheapness (RHS) Relative Performance UBS (LUX) Bond Sicav - Convert Global Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Source: UBS Global Asset Management; Bank of America Merrill Lynch Data: as of 15 July 2012 These figures refer to the past. Past performance is not a reliable indicator of future results. 17

19 Track Record Our bottom up approach adds value over the cycle Source: Morningstar Data: as of 31 May 2012 These figures refer to the past. Past performance is not a reliable indicator of future results. 18

20 UBS (LUX) Bond Sicav Convert Global (EUR) Credit quality Breakdown per region (based on underlying equity) AAA AA A BBB 22.3% 15.4% 7.1% 6.4% 11.9% Europe Asia ex Japan US 10.1% 3.4% 35.7% BB Japan 40.8% B and below 37.0% Other markets 10.0% Currency Exposure: EUR: % 3.0% 0.7% 0.7% 0.4% 0.4% 0.4% 0.6% 0.0% -0.6% -0.5% -1.0% -3.0% -2.2% USD AUD AED GBP HUF NZD HKD SEK MYR Other Source: UBS Global Asset Management Data: as of 31 July 2012 Characteristics Average delta 31.6% Average equity premium 137.6% Average effective duration 1.28 Average premium to inv. value 12.6% Average running yield 3.1% Percentage investment grade 62.4% Yield to worst 1.3% Number of bonds in fund 117 Fund profile Balanced Nicely balanced 19

21 Portfolio Management Team Convertible Bonds Long Term Experience in Managing Convertible Bonds Alain Eckmann, CFA Executive Director Senior Portfolio Manager Geneva University, Master of Mathematics Investment Experience: 18 years, with UBS for 15 years Dominic Locher Associate Portfolio Manager FHNW Zurich, MAS Banking & Finance Investment Experience: 3 years, with UBS for 6 years Daniel Lutz Associate Director Portfolio Manager HWZ Zurich, Bachelor of BA Investment Experience: 11 years, with UBS for 15 years Uli Sperl, CFA Executive Director Senior Portfolio Manager Munich University, Master of Economics Investment Experience: 13 years, with UBS for 8 years Data: as of August

22 Uli Sperl, CFA Senior Portfolio Manager Executive Director Years of investment industry experience: 13 Education: University of Munich (Germany), Masters degree in Economics Uli Sperl is a Senior Portfolio Manager within the Asymmetric Portfolio Solutions team. He is responsible for the management and strategy of convertible bond funds. The managed funds won several Lipper & uro am Sonntag fund awards. He joined UBS in Before, he worked as a portfolio manager at Activest Investment in Munich. His responsibilities included global index-linked equity portfolios as well as European convertible bond portfolios. In 2008 Uli successfully completed the post graduate Certified Rating Analyst the Hochschule St. Gallen (HSG). program at Uli is co-author of the publication The benefits of convertible bonds and has repeatedly published on convert related matters in financial newspapers such as NZZ and Finanz & Wirtschaft. In addition, he is a member of the Swiss CFA Society and of the CFA Institute. 21

23 Ihre lokalen Ansprechpartner in Deutschland Markus Bertl Director UBS Deutschland AG Bockenheimer Landstraße Frankfurt am Main Tel.: Fax: Dirk Bradtmüller Director UBS Deutschland AG Bockenheimer Landstraße Frankfurt am Main Tel.: Fax:

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