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ab October 2013

What’s new?Why many investment innovations are really old-fashioned common sense with added computer power

Current Perspectives

Curt CustardHead of Global Investment SolutionsUBS Global Asset Management

Asset management research October 2010

Current Perspectives Learning to love risk.

Slow growth doesn’t feel that different from a recession

Despite reasonable corporate earnings, a palpable pallor of pessimism has settled over the equity markets. Investor sentiment is very poor.

Concerned that the US economy is heading into a double-dip recession, investors are piling into bonds and cash, driving bond yields to record lows. These same low yields are, in turn, used to justify the expectations of lower economic growth.

Just how bad is the US economy? On balance, the data are consistent with weak growth – not a technical double-dip, as shown in Chart 1. Most US indicators, other than those relating to the consumer (Charts 1a and 1b) and employment, are showing a fairly typical recovery. But the consumer, the part of the economy that is most frustrated, most vocal and most likely to impact politicians, is making headlines. The unemployment rate, a lagging indicator of economic growth, is likely to be the last thing to improve. The problem is that expectations for growth were stronger and the recent data, which are consistent with anaemic growth, have been underperforming those expectations.

Curt CustardHead of Global Investment Solutions UBS Global Asset Management [email protected]

“Volatility is likely to be here to stay for as long as slow growth and uncertainty over the direction and effectiveness of macro policy reign”

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For more information, please ask your regular UBS Global Asset Management representative.

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UBS Global Asset Management’s 31-year track record in multi-asset funds is one of the longest in the investment industry. And we have pioneered services that go beyond fund management by delivering outcome-oriented solutions to clients, whatever their needs.

Our Global Investment Solutions team boasts a diverse range of investment and risk management specialists based in seven different time zones. The team leverages UBS Global Asset Management’s global resources while providing local expertise.

Clients have access to tailored investment advice and to a range of multi-asset funds catering to a wide range of needs. The offering continues to evolve with the ever-changing requirements of investors.

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UBS Current Perspectives

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They say that there is no sentence that has not been written before, that there are only six movie plots, and that there are only six degrees that separate us from the actor Kevin Bacon. So why does the market seem to be awash with new ways to manage money? Terms like ‘risk parity,’ ‘factor-based investing,’ ‘alternative beta,’ ’alternative risk premia’ (or alternative anything), and ‘investment solutions’ are making the rounds of the institutional investment marketplace. Airtime and marketing budgets are being spent on convincing clients that the new paradigm will either enhance returns, lower volatility, or some combination of both. How much of this represents a real shift in the thought process on how you manage money? And how much is just another way to convince clients to part with their hard-earned cash? As with much innovation, there is a mixture of hype and substance. Below I consider four buzzwords that

have become common currency in investment circles over the past decade. Spoiler warning – while the buzzwords may be new(ish), the concepts that they describe are not.

What has changed is that the investment world has gone digital. Warren Buffett famously does not have a computer in his office, but he is in an ever-smaller minority. The NASA computers behind the Apollo moon landings in 1969 had less computing power than a modern-day mobile phone. With so much computer power on tap, the investment industry has become more quantitative. This paper looks beneath the quantitative overlay and argues that the fundamental underpinnings have not changed as much as the latest fads suggest.

Risk parity Risk parity is one of the hot techniques in portfolio construction, having delivered strong risk-adjusted returns and made a small number of asset management firms very successful. Figure 1 shows how, judging by Google searches, interest in the concept has taken off in the past five years. It may or may not be coincidence that people started searching for the term around the time of the post-Lehman financial crisis.

There is nothing new under the sunEcclesiastes 1:9

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Figure 2: Two approaches to diversification

Interest over time. The number 100 represents the peak search volume


FixedIncome10%

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Traditional Approach (example) Risk Parity Approach (example)

Figure 1: The search is on

Google searches for ‘risk parity’

Source: UBS Global Asset Management

Executive Summary •Theassetmanagementindustryisawashwithbuzzwords

that are claimed to be innovative investment concepts.

•Thispaperarguesthatwhilethebuzzwordsmaybenew(ish), the concepts that they describe are not. If you strip away the quantitative overlay made possible by huge advances in computer power, the fundamental underpinnings have not changed as much as the latest fads suggest.

•Welookindetailatfourbuzzwords:riskparity,alternativeinvestments, factor-based investing and solutions.

•SincetheGlobalInvestmentSolutionsbusinessareawascreated within UBS Global Asset Management in 2005, the number of solutions teams in asset management firms has multiplied. We discuss what solutions means to us and our clients.

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Risk parity means that instead of diversifying your portfolio in cash terms, you do so in terms of risk, as shown in Figure 2. You equal-weight the contribution to risk from the various asset classes and set the target level of risk for the whole portfolio. In practice, in a multi-asset context, you end up leveraging the fixed income portfolio or deleveraging the equity portion of the portfolio. The more strict versions of risk parity also espouse an efficient markets approach. That means that there are no active views embedded in the portfolio construction – the expected risk-adjusted return is expected to be the same for each asset class.

Risk parity funds have had a terrific run. They increase the contribution to risk from low-risk assets such as bonds, thus improving diversification benefits and creating a more stable portfolio. As a result, risk parity portfolios have historically generated much improved Sharpe ratios compared with traditional balanced portfolios, and they have done a much better job of protecting against downside losses. However, as every asset manager’s disclaimer says, past performance is no guide to the future. The simulation shown in Figure 3 suggests that applying risk parity principles over a longer period would not have generated such an impressive performance.

Risk parity, as a technique, hinges on the correlation between assets and the liquidity conditions of low-volatility assets such as government and investment grade bonds. The risk-reducing characteristics are lost if correlations rise. This is especially true of the correlation between equities and bonds, since they are typically portions of the portfolio with the greatest diversification benefit. When liquidity dries up, or there are fears of a liquidity drought, investors sell risk assets indiscriminately and correlations spike. Because risk parity involves leverage, this can amplify losses over the short term.

In a risk parity portfolio, if risk at the portfolio level is set at higher risk levels such as those associated with the equity market, as shown in Figure 4, another wrinkle appears. Because many of the less volatile assets will need to be leveraged up to the equity market level of risk, substantial

borrowing may be needed. This can increase the operational complexity of running the portfolio, such as management of collateral and counterparty risk, making it more of a challenge to reduce or change positions if faced with a liquidity crisis as outlined above. So while you are improving your diversification, you are increasing your liquidity risk.

Finally, it doesn’t seem like a stretch to assume that bonds are not going to provide the returns they have over the last 30 years. Given that leveraged bonds are often a critical part of a risk parity portfolio, this implies a high probability that a risk parity portfolio could underperform versus a traditional balanced portfolio.

In summary, I think that risk parity is a good idea, but an idea whose time has come and gone (at least for now). It makes eminent sense to look at your portfolio of assets not in terms of their cash allocation but their potential for gains and losses. However, you should do so in the context of what future returns are likely to be, taking into account the impact of leverage and the increased sensitivity to correlations. Check this space when bond yields are higher.

Alternative investmentsRemember when REM and U2 used to be ‘alternative’ music (here I run the risk of dating myself)? They were different from the rock bands of the day – cooler, and out of the mainstream status quo. People who listened to them were ‘independent,’ and always seemed to know something the rest of us didn’t. Soon after music industry executives realized there was as a cachet to ‘alternative,’ we saw an explosion of ‘alternative’ music stations. Previously ‘alternative’ music became mainstream and was relabeled ‘classic rock.’

Today, the finance industry has imbued the term ‘alternative’ with an equally fuzzy and imprecise definition, and tried to define it as any asset that is not categorized simply as equities or bonds. The definition has even included stocks and bonds if there can be an ‘alternative’ wrapper around them, such as a hedge fund. Fund managers are slapping the


Source: UBS Global Asset Management, Morningstar, Bloomberg

Source: Bloomberg Financial L.P., UBS Global Asset Management

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Figure 3: A long-term perspective

Simulated return of a simple risk parity strategy versus a traditional

60/40 strategy (January 1926 to January 2013)

Figure 4: Bonds + leverage = high volatility

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label ‘alternative’ on everything and commanding a higher fee. However, many of these things are not likely to stay alternative forever. For example, emerging market equities, like much of what was ‘alternative’ 20 years ago, are now considered mainstream by most institutional investors, as shown in Figure 5.

So what is truly alternative? What will really diversify your portfolio with a source of return that is truly different from the drivers of equity and bond returns? Frankly, very little. Let’s start with some ‘alternatives’ that really aren’t that alternative. Although the following overview is not exhaustive, it provides some guidance.

Hedge funds are neither an asset class nor really alternative. For the most part, though not exclusively, they buy and sell equities and bonds like long-only asset managers. Hedge funds are an investment style that is more dependent on skill, sits outside the regulatory framework of most mutual funds, and generally has a different fee structure.Emerging market equities and bonds are not alternative, and in many cases have already ‘emerged.’ Their drivers of returns are broadly the same as those of their developed market counterparts.

Private equity is not truly alternative either. It can be thought of as a leveraged, semi-liquid alternative to ‘value’ small-capitalization equities. While some may argue that venture capital and leveraged buy outs provide a level of access to expertise that traded equities cannot, the bulk of the risk that these investments provide is similar to a small-cap equity.

So what are the real alternatives? Direct real estate holdings have a different return stream than equities and bonds, namely rents. Real estate does suffer from some of the same economic cyclicality as equities and bonds, but rents (often slow-moving and locked in for a long time) and their scarcity value are sufficiently unique to make them different. However, real estate is not very alternative any more, with many institutional investors having a substantial portfolio. Real estate investment trusts, or REITs, are an equities sector offering indirect exposure to real estate. REITs fall into the category of being not really alternative. Their benefits in terms of liquidity are outweighed by their high correlation to small cap equities. Ultimately, REITs are an equities sector, highly correlated with other equities sectors.

Infrastructure counts as a real alternative. As with REITs, there are components of rent and leverage in play and the cycle of these is often unrelated to equities or bonds. Much infrastructure is driven by political choices and plays out over many years. Toll roads, for example, take a very long time to build and the revenue stream is driven as much by demographics and political policy choices as by shorter-term economic cycles.

Catastrophe bonds also have diversifying characteristics. They are created when an insurer wants to off lay risk into the securitized market, usually for diversification or regulatory reasons. They pay out depending on the cost of catastrophes such as earthquakes, floods and hurricanes over a given period. Putting aside arguments about global warming, there is little to link the return on these investments (based on catastrophe frequency) to the economically driven return

Mainstream Alternative

1960s/70s Domestic Equities Real Estate

Domestic Government bonds

1970s/80s Domestic Equities Overseas Equities

Domestic Government bonds

Real Estate

1980s/90s Domestic Equities Index-Linked Government bonds

Domestic Government bonds Emerging Markets Equities

Real Estate

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1990s/Now Domestic Equities Commodities

Domestic Government bonds High Yield Bonds

Overseas Equities Hedge Funds

Real Estate Private Equity

Index-Linked Government bonds Infrastructure

Emerging Market Equities

Figure 5: Entering the mainstream



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on stocks and bonds. However, like most ‘alternatives,’ catastrophe bonds are a small asset class.

Unfortunately, the world of truly alternative investments is a small, illiquid one, as shown in Figure 6. The idea that a substantial portion of institutional portfolios (say 20%) could be invested in alternatives is not always realistic – though currencies are a notable exception. The market depth and

liquidity is not there, and as investors increasingly flock to alternatives, their asset prices rise, making future returns dramatically less attractive. With the current options, there is little ‘alternative’ to the traditional asset classes. So it’s not surprising that, in contrast to ‘risk parity,’ the frequency of the Google search term ‘alternative investments’ has been in steady decline for several years, as shown in Figure 7.

Asset class Investable market size (USD bn)

5% institutional allocation as a % of investable market*

Liquidity and price certainty

Real estate unlisted funds 1,800 28% Variable liquidity and certainty of price

REITs 1,200 42% Variable liquidity and certainty of price

Farm land** 1,000 50% Very illiquid; price uncertain

Timber land** 300 167% Very illiquid; price uncertain

Infrastructure*** 93 537% Fairly illiquid; price somewhat uncertain

Commodities**** 200 250% Fairly good liquidity and price certainty in main commodities

Catastrophe bonds 15 3,333% Moderate/good liquidity and price certainty, but only in small size

Currencies >20,000 (daily volume 4,000) <2.5% Highly liquid; price relatively certain (comparable to or better than equities price certainty)

Figure 6: Consider the alternatives

* Assumes alternatives are eligible investments for one-third of the USD30,000bn of institutional assets under management worldwide. Assumes the remaining two-thirds of institutional AUM cannot invest in these types of alternatives owing to liquidity, risk appetite, regulatory and other constraints.

Source: CFTC, Guy Carpenter, Macquarie, LPA, UBS Global Asset Management** Includes direct holdings*** Based on total AUM of all unlisted infrastructure funds**** Based on net long positions in US futures markets


Figure 7: Call off the search

Google searches for ‘alternative investments’

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Factor-based investing“Factor-based asset allocation” is becoming more and more popular. Many commentators seem to suggest that it may supplant the more traditional approach, which looks at the investment universe in terms of asset classes and countries and tries to assess their attractiveness directly.

Factors are not new to finance, as they have been part of the finance toolkit at least since the Capital Asset Pricing Model (or CAPM, which is a one-factor model, the factor being the ’market’) and Asset Pricing Theory (APT, which more explicitly linked equities’ expected returns to their exposure to a number of factors). Today, most quantitative approaches to equity portfolio management are based on some sort of factor model. Investors are used to analyzing portfolios using factor-based risk models. So, one could conclude, why shouldn’t asset allocation decisions be based on factors?

There are many reasons to prefer working in ‘factor space’ rather than within the traditional framework. Factors offer insights into the working of a market or of a portfolio, which is not possible with other approaches. Specifically, certain events impact more than one asset class or market at a time, as there are underlying nonlinear relationships among asset classes. So looking at each asset class separately may miss the impact of these events across markets and lead to either wrong decisions or missed opportunities. Identifying the factors involved could help one understand the interactions better, spot otherwise unidentified risks and, as an added bonus, suggest how to structure a trade in a less obvious but more effective way than the traditional approach would suggest.

Also, it is often argued that the rationale for doing asset allocation in the traditional way is disappearing. Does a mostly country-centric asset allocation still make sense in a globalized world with free goods and capital flows? Are asset allocators therefore overestimating the power of diversification across geographies and asset classes? A factor-based asset allocation might help improve diversification by focusing on the drivers of returns rather than on the markets and asset classes.

However, while everyone agrees factors are useful, there is very little agreement on what a factor actually is. Factors are typically described as a categorization of a common driver of return, but beyond that there is little consensus. Financial journals and academic literature have described factors as varying as ‘momentum,’ ‘volatility,’ ‘small cap premium,’ ‘GDP’, ‘inflation,’ and ‘regulation.’ Unfortunately, the definitions presented are often so vague and uncertain as to render them unhelpful. For example, if ‘inflation’ is a factor, is that good or bad for equities? Surely it depends on the reaction function of the central bank.

So how does one define a factor if there is no generally accepted definition? I define a factor as a financial or economic variable or indicator, which will impact the risk and/or return of financial assets. In order to work effectively

with factors in investment decisions, we think a factor needs certain characteristics:

• Itmustberelevantforthefuturebehavioroffinancialassets

•The impact must be consistent over time, with stable statistical behavior (known as ‘stationarity’)

• It must be relevant for more than one asset class

• It should be possible to understand how the factor impacts financialmarkets

•The factor should be measurable

•Factors should ideally have reasonably low correlations among themselves

Most of the characteristics listed above are fulfilled by many macroeconomic variables. Indicators such as growth and inflation are observable, have an impact on financial markets, tend to influence the behavior of several asset classes, and their impact can be explained using economic or financial logic. The impact, though, is not necessarily linear. Just think how inflation can lead to different reactions depending on expectations and even more importantly inflation history: In a country suffering from persistent deflation, an increase in inflation will probably have a different impact on financial markets than in a country whose economy is overheating.

There is a further category of factors that are expected to deliver a systematic risk premium for staying exposed to them. Examples include of course ‘the market’ (as in the CAPM), the capitalization factor (small cap equities tend to have higher risk and return) and, one might argue, the value factor (value equities are ‘cheap’ based on the ratio of price to metrics such as earnings and book value). Why set these factors apart? Consider, for example, the value factor: Many papers by both academics and practitioners provide evidence that value stocks outperform the general market over time. However, the evidence suggests that this outperformance is cyclical and value stocks can underperform the market over several years. So, while one might want to have a strategic exposure to the value factor, from a tactical viewpoint this factor should be combined with other factors to estimate whether now is a good time to gain exposure to value stocks.

Neither the decision-making process nor the portfolio construction process need change once the switch to a factor-based allocation has been made. The main difference is that traditionally the portfolio manager estimates the attractiveness of markets and asset classes directly and then uses these estimates to create a portfolio. However, in a factor-based approach, the first step is to assess which factors are particularly important at the time, and what is their likely evolution. In a second step, this is used to estimate how the various asset classes and markets should evolve, for example, by using an econometric model projecting the expected factor


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changes into expected returns. In other words, a factor-based allocation impacts mostly the way one identifies opportunities and estimates future returns and risks. It therefore affects the way one analyzes financial markets but does not really change the portfolio construction process per se.

Therefore, there is no reason to expect that results obtained using a factor-based approach need to be automatically better than those obtained in a traditional set-up. The factor approach is in a sense just a different lens with which to look at markets and asset classes, with advantages and disadvantages. Let’s briefly explore some of them.

As mentioned previously, a major strength of a factor-based approach is that it allows views on the main drivers of returns to be applied consistently across asset classes. This is particularly useful when considering contrasting economic scenarios, as their impact on portfolio positioning can be assessed directly and systematically.

A factor-based approach is also well suited to portfolio managers with a strong risk management process, who routinely check and calibrate their exposures using risk models. As risk models are factor-based, the feedback loop between risk analysis and portfolio construction becomes clearer if the portfolio manager’s decisions are based on factors.

Factor-based allocation is not a panacea. It has weaknesses, which should not be underestimated. You have to identify the right factors and be able to predict how they are likely to evolve. An additional stand-out weakness is model risk. A factor can work over the long term but completely fail over shorter investment horizons. So, for a factor-based approach to work, a link between the factor exposures and the future returns of the investment must be established over the relevant time horizon. This link is normally supplied by a mathematical model. If the model is wrong, then the results, even when using the best factor projections, will also be wrong.

So, factor-based investing does not protect investors from making bad investment decisions, at either the strategic level or the tactical level. In fact, it increases the complexity of the decision-making framework for lay people and many decision-making bodies such as pension fund boards, and requires increased dedication to investor education.

Investment solutions Within UBS Global Asset Management, the Global Investment Solutions business area was created in 2005 to address the needs of clients that were not met by traditional products at the time. Since then, the number of ‘solutions’ teams in asset managers has multiplied. Even when I call my TV repairman, I am actually ringing an Audio Visual Solutions expert. So what does it really mean?

Since I am deeply biased (and proud of what my team has done), I will abandon all attempts at industry-wide objectivity and describe what ‘solutions’ means to us and our clients. We start by having a dialogue with our clients on the financial goals they wish to achieve. This may include concepts such as total return, limiting drawdowns (i.e. peak-to-trough losses), income, diversification, or improving a pension funding ratio. We believe that ultimately, for investors of all stripes, total return is more important than ‘alpha’ or ‘beta.’ We also believe that the asset management industry that evolved in the investment environment of the past three decades is on the cusp of changing. The next 30 years will demand a different industry structure.

As such, the roughly 100 people in the Global Investment Solutions team are not organized along traditional product-oriented lines (such as emerging market equities or corporate bonds) but along skill sets or centers of expertise, as shown in Figure 8. We pull from each of these centers to try and deliver the outcomes our clients expect. It doesn’t mean that we can deliver 100% of the time - no investment manager can. But it does mean that we actively try and narrow down the outcomes to meet client expectations within reason. Like most good teams in the asset management industry, we nurture a team culture, reward collaboration, and have a collective remuneration arrangement aligned with our clients’ interests.

In practice, this means that we do a lot of customized work for clients large and small, and spend a great deal of time in the initial stages working to understand their needs upfront. This means that our institutional business is inherently less scalable than a simple mutual fund. It also means we have longer relationships with our clients, and a deeper, more holistic understanding of their investment needs.

In our investment products designed for individual investors, we focus a lot on the individual experience. The majority of our individual client base is over 60 years old, which means the theoretical 30-year investment horizon is less relevant for them than what is likely to happen over the next 10 years. We want our clients to sleep well at night, and we know that chasing overambitious returns can produce losses that keep people awake.

‘Solutions’ is about addressing the whole of a client’s experience. It acknowledges that alpha and beta are part of total return and that risk is not defined purely as standard deviation. ‘Solutions’ is about acknowledging that clients have individual investment objectives that demand individual solutions, and that the investing world is dynamic and ever-changing. It is premised on the belief that the returns of the past 30 years were an anomaly, and that the resulting industry structure will need to change. In sum, as we define it, ‘solutions’ is here to stay.


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Figure 8: Four centers of expertise



Asset Allocation & Currency •Manageawidearrayofglobalmulti-assetportfolios

from traditional balanced mandates to unconstrained high alpha and absolute return strategies

•Increasingfocusonoutcome-orientedsolutions

•Majorglobalpresenceininstitutionalandwholesalechannels

•Offerinvestmentadvisorysolutions

•Demonstrabletrackrecordsince1982inmanagingmulti-asset portfolios

•Long-standing,disciplinedinvestmentphilosophy

Structured SolutionsGlobally focused capability targeting a diversified client base, providing:

•Customizedriskmanagementsolutionstypicallyemploying derivatives or derivative techniques

•Collaborativemanagementofclients’marketexposuresto achieve precise outcomes such as downside risk control or targeted income

•Solutionsofparticularrelevancetoclientsswitchingfroma focus on benchmark-relative returns to a focus on outcomes

Investment Risk SolutionsUnique offering spanning all aspects of a sound risk management practice:

•Consistentriskmeasurementforabroadrangeoftraditional and alternative assets using proprietary models with a common methodology

•Turnkeysystemwithfulloperationalsupportandoversight of data and processing designed for risk management requirements

•Aflexibleadvisoryservicerunbyexperiencedriskmanagerswho have worked with portfolio managers, investment risk committees and boards to provide risk measurement insight and both tactical and strategic risk guidance

Manager Selection•Conductthoroughandcomprehensiveduediligenceto

identify truly skillful managers•Researchinsightsandinvestmentdecisionssupported

by qualitative and quantitative assessment and documentation

•Leverageinformedknowledgeofmanagers’skillsandstyles to construct portfolios with diversified alpha sources to achieve consistent portfolio alpha

•Ongoingandextensivereviewofportfoliosforriskexposure

•Adjust,rebalanceandmodifymanagerselectionandcombination based on forecast opportunities

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ConclusionLet me end with another quote, from French writer Jean-Baptiste Alphonse Karr: “The more things change, the more they stay the same.” In recent decades, investors have increasingly come to rely on the concept of the efficient frontier. This is a mathematically elegant way of combining several assets to create a portfolio with the lowest level of risk required to achieve a given level of return. Or, to put it another way, it’s a quantitative development of the timeless principle “don’t put all your eggs in one basket.” Add leverage to achieve higher expected returns, and you have the essence of the risk parity concept – although the term ‘risk parity’ was only introduced in a paper published in 2005.

In a similar vein, adding alternatives to an equity-and-bond portfolio essentially means, in terms of asset classes, “don’t put all your eggs in two baskets.” Again, this is hardly revolutionary – owning a combination of shares, bonds, rentable buildings and farm land was common practice for wealthy investors in the 19th century. In the long view, the practice of only owning shares and bonds was a temporary aberration.

The concept of looking at risk factors that affect several asset classes is not a new idea. The term ‘factor-based investing’ may be novel, but the concept is not. However, risk management is arguably the aspect of investing that has become most dependent on computer-powered quantitative analysis – just look at the number of risk management professionals with PhDs in quantitative disciplines.

Finally, the idea behind ‘investment solutions’ is not so new either. It essentially means taking the time to understand clients’ investment needs, and drawing on all the resources of a large asset management firm to help those clients meet their investment goals. This is something that UBS Global Asset Management has been doing for its clients for decades – our longest-standing clients have been with us since the 1950s. The world has changed a lot since then, but some basic principles of investing haven’t – define your goals, figure out how to achieve them, consider all the risks, and don’t put all your eggs in one (or two) baskets.


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The views expressed are as of October 2013 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 registered or other mutual 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, markets generally, nor are they intended to predict the future performance of any UBS Global Asset Management account, portfolio or fund.

Services to US clients for any strategy herein are provided by UBS Global Asset Management (Americas) Inc. which is registered as an investment adviser with the US Securi-ties and Exchange Commission under the Investment Advisers Act of 1940.

© UBS 2013. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

Additional information regarding the simulated returns of a Traditional 60/40 strategy and a Simple Risk Parity strategy.The Traditional 60/40 strategy and Simple Risk Parity strategy represent simulated returns. The Traditional 60/40 strategy figures are calculated by taking the actual perfor-mance of the Ibbotson Associates SBBI S&P 500 Total Return Index and Ibbotson Associates SBBI US Long-Term Government Total Return Index over the time period. Returns are calculated in accordance with the following allocations: 60% Ibbotson Associates SBBI S&P 500 Total Return Index and 40% Ibbotson Associates SBBI US Long-Term Government Total Return Index. Returns are sourced from Morningstar and Bloomberg Finance L.P. Allocations are rebalanced on a monthly basis. The Simple Risk Parity approach includes leveraged exposure to equities and sovereign bonds, 43.2% exposure to the Ibbotson Associates SBBI S&P 500 Total Return Index, 98.8% exposure to the Ibbotson Associates SBBI US Long- Term Government Total Return Index, and a short cash position comprising 42% short exposure to the Ibbotson Associates SBBI US 30 Day T-Bill Total Return Index. The simulated returns do not represent actual trading using client assets and may not reflect the impact that material economic and market factors that may impact UBS Global Asset Management’s decision making if actual client assets were managed during the time period portrayed. The comparison between the simulated returns is shown for illustrative purposes to demonstrate the relationship between the two sets of returns. 22813


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