For qualified investors only.

November 2014

Active Asset Allocation UBS Global Asset Management Global Investment Solutions (GIS) Gregor Hirt – CIO Europe

Asset Management For qualified investors only.

Content

1

Section 1 Active asset allocation – why now? 2

Section 2 Our approach to active asset allocation 10

Section 3 Example of Implementation: Dynamic Alpha Fund 17

Active asset allocation – why now?

Section 1

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The Great Moderation The great moderation seems to be over…

Real GDP growth in the US

Source: US Department of Commerce: Bureau of Economic Analysis. For illustrative purpose only, from 31.12.2013

The Great Moderation

…hence higher volatility is to be expected

Falling returns of the major asset classes

Consequences of a suppressed risk-free rate

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0%

1%

2%

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4%

5%

6%

7%

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10%

0% 5% 10% 15% 20% 25%

Exp

ecte

d r

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Risk

Equities Global Equities Emerging Markets Bonds U.S. Gov. Bonds U.S. Corporate

Real Estate Global Cash U.S. Bonds U.S. High Yield

Supressed risk-free rates reduces expected returns on all major asset classes

Suppressed risk-free rates reduce expected returns of all major asset classes

Valuations increased therefore sharply from low levels in 2009 to the historically high levels today.

Consequently, investors are pushed into more risky and less liquid assets

Active asset allocation offers an opportunity for additional returns

Source: UBS Global Asset Management. Return and risk expectations are no guarantee for future results. The chart is based on UBS internal risk-return estimates as at 31.05.2014

Historically high valuations

Valuation trend of the past five years

Source: UBS Global AM Valmod. For illustrative purposes only.

Due to the high absolute valuation of major asset classes, the returns of a benchmark portfolio are expected to decrease and reverse back to fair value

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2009 2010 2011 2012 2013 2014

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e Global Equity

Global ex. USGovernment Bonds

US GovernmentBonds

High Yield Bonds

Emerging MarketBonds

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Overvalued

Undervalued

Mean reversion hits benchmark portfolios

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

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e

Valuation of a typical benchmark portfolio*

Balanced Portfolio

Overvalued

Undervalued

How to offset lower expected returns

1. Illiquidity premia:

• Investment in less liquid asset classes

• e.g. Alternative Investments

2. Tactical Asset Allocation

• Active strategies to be less dependent on benchmark returns

Mean reversion

6

Source: UBS Global AM Valmod

Balanced Portfolio describe a portfolio with 65% Global Equity /10% US Government bonds / 15% Global ex-US sovereign bonds / 5% High Yield Bonds / 5% EM Bonds. The portfolio valuation is comprised of weighted single asset valuations without taking correlation effects into consideration. This does not constitute a guarantee by UBS AG, Global Asset Management. Valuation data as at 31.05.2014

Active Asset Allocation – a growing market

Studies (Wyman) highlight the great potential of asset allocation

Source: Oliver Wyman Bluepaper March 20, 2014. Title: Wholesale & Investment Banking Outlook Mis-allocated Resources: Why Banks Need to Optimise Now

7

Asset allocation dominated leader board for EU mutual fund sales in 2013

"Concern around equity market volatility, and the end of the bull market in bonds combined with ageing demographics to increase client focus on absolute return outcomes with a degree of volatility protection." (pp. 56)

"Most large asset managers and private bankers that we speak to are intensely focused on this area, putting solutions at the heart of their business." (pp.57)

Active Asset Allocation – a growing market

AuM to double in the next 5 years

8

• Oliver Wyman estimates Multi-asset AuM today at $3.5trn and believes it will grow 2-4x faster than other actively managed products over the next 5 years.

Oliver Wyman believes that AuM could roughly double over the coming 5 years driven by growth in outcome” solutions products (USDbn)

"The most compelling growth we expect will be in the "outcome oriented" space – products designed to solve for a specific client need – be it income, inflation protection, riskcontrolled growth etc." (pp. 57)

Source: Oliver Wyman Bluepaper March 20, 2014. Title: Wholesale & Investment Banking Outlook Mis-allocated Resources: Why Banks Need to Optimise Now

Active asset allocation – why now

Conclusion

Source: UBS Global AM.

Active asset allocation can provide the flexibility and additional returns an investor needs to cope with current and future market challenges

9

The end of the great moderation

– After 20 years of falling interest rates and central bank moderation, returns are expected to be more volatile in the future

Depressed interest rates

– An unusually low risk-free rate reduces expected returns for all major asset classes

– Investment strategies need to cope with negative real interest rates

High valuations of major asset classes

– Overvalued asset classes are likely to mean revert and hence investors need to be prepared for an extensive phase with below average returns

A growing market

– Independent studies demonstrate the great potential of active asset allocation

Our approach to active asset allocation

Section 2

Key beliefs

Markets have inherent inefficiencies that can be exploited by analysing both fundamental valuation and market behavioural indicators

Team-generated ideas with individuals accountable for their implementation offers best approach to

getting ample high conviction positions in portfolios

Risk should only be taken where compensated

Our edge

Global team comprised of high calibre investment professionals with diverse backgrounds

Risk management expertise and proprietary tools that allow us to better understand sources of risk

Our culture

Flat organisational structure encourages all team members irrespective of seniority to contribute to

trade ideas

Alignment of manager objectives and strategy objectives, with team members’ compensation

correlated with the strategies that they manage

How do we think about multi-asset investing?

11

A wealth of talent with leading edge ideas Global Asset Allocation & Currency Investment Committee

Source: UBS Global Asset Management. As at October 2014. * Indicates trade-sponsoring member

More than 600 years cumulative industry experience

12

Name Location Rank Years

with Firm Years of Ind. Exp.

J. Adams* Chicago D 11.4 11.4

J. Andrés Zurich D 6.7 6.7

M. Bance London D 10.5 10.5

I. Barnes* London ED 4.8 14.1

E. Beekman London D 12.6 17.4

M. Both Zurich ED 7.8 15.4

P. Brides* Chicago MD 0.3 12.3

A. Buetzberger Zurich NO 8.6 8.6

C. Chen Hong Kong AD 0.1 7.3

K. Concannon Chicago AD 7.3 7.3

C. Custard Chicago GMD 6.6 24.4

J. Davies* London MD 22.3 22.3

M. Deans London ED 10.3 20.4

P. Dutli Zurich ED 15.0 17.7

V. Duval Zurich D 9.8 18.4

A. Fay Chicago NO 1.8 11.6

S. Friel London NO 3.4 3.4

M. Gambera Chicago ED 4.6 14.4

G. Graff Chicago ED 29.1 32.2

N. Habegger Zurich NO 0.5 9.7

R. Hellstrand Zurich DI 7.0 17.4

L. Henzen Zurich NO 3.8 3.8

G. Hirt* Zurich MD 0.6 17.8

B. John Zurich D 17.2 23.9

J. Lin London

Name Location Rank Years

with Firm Years of Ind. Exp.

A. Kikuchi Tokyo NO 0.1 3.6

C. Kim Hong Kong NO 1.2 1.2

K. Kondo* Hong Kong MD 10.6 22.0

A. Köster* Zurich MD 5.7 20.4

R. Kramer Zurich NO 1.1 1.1

S. Lecher Hong Kong MD 10.2 16.4

A. Leung Hong Kong AD 0.4 16.5

S. McConnell Hong Kong NO 1.2 3.4

A. Moran London NO 1.8 6.1

G. Murray London D 27.1 29.1

G. Plebani Zurich NO 1.8 2.6

M. Quaife Hong Kong D 7.2 8.2

M. Richards London D 5.8 15.1

T. Rivers* London ED 13.0 13.0

D. Rudis Zurich ED 4.6 12.4

A. Sakaji Tokyo D 1.1 23.6

J. Saxon Chicago AD 9.4 9.4

M. Schaffner Zurich D 11.6 14.4

N. Shetty Chicago ED 0.0 11.1

J. Tang* Chicago D 7.1 13.4

A. van Royen Chicago ED 0.4 14.8

P. Weller London ED 21.4 25.4

B. Willems Zurich AD 2.1 4.2

Total of 48 members Avg. 7.3 13.4

Investment process since 2009 Disciplined, accountable, repeatable, continuous, process-driven approach

Risk Management

Valuation

Market behaviour analysis

Cyclical market forum

Risk analysis

Risk capital allocation

– Magnitude of opportunity

– Contribution to Risk

Trade diversification

Market developments

Trades

Portfolios

• Overall risk profile

• Sources of risk

• Risk committee

Correlation analysis

Portfolio manager conviction

13

Establishing a common pool of sponsored trades, accessible by all portfolios

Source: UBS Global Asset Management Per 28. October 2014 DAS represents High Alpha Strategies; GAF represents Growth & Income Strategies; Swiss Balanced represents Balanced strategies

14

Idea Generation

& Debate

Portfolio Construction

Monitoring

Asset Allocation & Currency process

Directional Equity Relative Fixed Income Relative

Currencies Relative Alts

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D

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R v

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itie

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Balanced 3 3 3 3 3 3 3 3

Growth 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

High Alpha

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

Does our investment process work? Information ratios since 2009 above target…

…and have been driven by consistency of portfolio manager performance

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PM 1 PM 2 PM 3 PM 4 PM 5 PM 6 PM 7 GACC

Info

rmati

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PM SAA assumption (IR 0.3)

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PM 1 PM 2 PM 3 PM 4 PM 5 PM 6 PM 7 GACC

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PM SAA hurdle (HR 50%)

PM: Portfoliomanager GACC: Global Allocation & Currency Committee SAA: Strategic Asset Allocation IR / HR: Information Ratio / hit ratio As at March 2014

Monitoring: Market developments, portfolios and trades

Twice-weekly Investment Committee meetings provide forum for monitoring of market developments and their risk/return implications

Individual trades are reviewed relative to trade thesis, milestones and pre-determined profit & loss limits

16

Portfolio risk budgets are reviewed to ensure they are commensurate with the opportunity set available

Utilizing our proprietary Global Risk System (GRS), portfolio risk is decomposed to ensure an understanding of the sources of risk in our portfolios

Using GRS, proprietary stress testing

is carried out to help understand how portfolios will react under a number oh historical and hypothetical stressed market environments

For illustrative purpose only

Idea Generation

& Debate

Portfolio Construction

Monitoring

Asset Allocation & Currency process

Section 3

UBS Dynamic Alpha Fund

Exploit investment opportunities independently

of a benchmark

18

A smoother track along the way

We call it the "good night" effect

Return

Time

Benchmark

Traditional Balanced

Dynamic Multi Asset

• Active multi asset management to avoid the volatility of the benchmark

• Avoid tail-events by cautiously monitoring market developments

• Add value by profiting from market miss valuations

For illustrative purpose only.

19

The way forward: Dynamic Alpha Strategy (DAS)

Source: UBS Global Asset Management, Lipper. 1 Lipper Fund Awards 2014: UBS (Lux) KSS DAS – winner of Best Fund over 3 Years Absolute Return (USD) Medium in Europe; France; Austria; Switzerland; UK; Germany

2 This does not constitute a guarantee by UBS AG, Global Asset Management.

Positive asymmetry by design

Our multi-award winning1 total-return strategy

Alpha-seeking Risk-conscious Unconstrained

Seeks total returns of cash +4.5 % p.a.2, over a full market cycle (gross of fees)

Exploits multi-asset investment opportunities independent of a benchmark

Expected volatility of 7% p.a., or roughly half of global equities

Downside management through use of option strategies to build an asymmetric return profile

Daily liquidity

20-25 high conviction trade ideas diversified by asset class, economic theme, time horizon and directional/intra-market views

Overall risk profile is managed commensurate with the opportunity set

Employs derivatives for smarter implementation and capital efficiency

20

An evolved construction in line with strategy objectives Dynamic Alpha Strategy: Portfolio construction

Diversification benefit of this trade

in DAS

Is the Fund doubling up on exposures or does this trade improve diversification?

Directional vs. relative risk allocation

Ensuring an ability to perform in both trending and sideways markets, across both markets and currencies

Linear vs. non-linear exposure

Factoring in market volatility, accessibility of instruments and the level of conviction in a trade

Level of drawdown protection

Making sure the portfolio has strong positive asymmetry of returns

21

Dynamic Alpha - Current target weights - Detailed

Source: UBS Global Asset Management Note: Strategy weights

As of 31 October 2014

Duration = 1.9 years

44.0%

0.2%

44.2%

50.0%

12.5%

20.0%

82.5%

-36.8%

0.0%

0.0%

15.0%

60.8%

1.5%

-6.4%

Equity Futures

Equity Options (Delta adjusted)

TOTAL EQUITY

Corporate Bonds

Bonds Opportunistic

US Treasury Bills

TOTAL PHYSICAL BONDS

Bond Futures

CDX US Investment Grade

CDX US High Yield

CDX EM Debt

TOTAL FIXED INCOME

Alternative Income

Cash

Asset Class Market Exposure

8.0%

4.0%

2.0%

2.0%

2.0%

2.0%

2.0%

-2.0%

-2.0%

-2.0%

-6.0%

-8.0%

USD

JPY

EUR

HUF

MXN

PHP

SEK

AUD

GBP

MYR

CHF

NZD

Active Currency Strategy

22

Dynamic Alpha Strategy: Current trade ideas

Directional Relative Value Currency

• Long Developed Equities

• Long Investment Grade Bonds

• Long Catastrophe insurance

• Long European Bank Loans

• Long European Equities vs. US Equities

• Long Canadian Equities vs. Australian Equities

• Long Japanese Equities vs. German Equities

• Long North Asia vs. MSCI EM

• Long Chinese A Shares vs. Chinese H Shares

• Long Australian Bonds vs. US Treasuries

• Short Japanese Bonds (JGBs) vs. EM Debt

• Short HY vs. long US Equities

• Long 30 yrs Italian Bonds vs. 10 yrs Italian Bonds

Subject to change.

• Long MXN vs. CAD

• Long USD vs. AUD

• Long USD vs. NZD

• Long PHP vs. USD

• Long EUR vs. CHF

• Short G2 (EUR, USD) vs. JPY

• Long HUF vs EUR

• Long SEK vs GBP

• Long MXN vs. MYR

Relative Value Market

As of 31 October 2014

Currently 22 trade ideas are implemented

23

Past performance of investments is not necessarily an indicator of future results. Source: UBS Global Asset Management. Data as at end of October 2014. Based on gross return of UBS (Lux) Key Selection SICAV - Dynamic Alpha (USD) P-acc Fund since May 2009.

Positive asymmetry by design

Following 2010 we successfully improved our risk budgeting process

Monthly returns of Dynamic Alpha

More emphasis placed on asymmetry of returns

Dynamic Alpha Strategy seeks to minimize losses

23

-5%

0%

5%

10%

15%

Mai 2009

Jul 2009

Sep

2009

No

v 2

009

Jan

201

0

Mrz

2010

Mai 2010

Jul 2010

Sep

2010

No

v 2

010

Jan

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1

Mrz

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Mai 2011

Jul 2011

Sep

2011

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Jan

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Mrz

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Jul 2012

Sep

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Jul 2013

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Mrz

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Mai 2014

Jul 2014

Sep

2014

24

Scenario Total Return

Autumn 2008 -4.64%

October 2008 whole year -4.37%

Emerging markets shock May to June 2013 -4.26%

October 2008 (two weeks) -4.05%

October 2008 (one week) -4.00%

October 2008 (two days) -2.81%

Russian Crisis 1998 (two weeks) -2.71%

September 11th (two weeks) -2.47%

Euro Sovereign Credit Crisis 2010Q2 -2.17%

Flash Crash Quarter 2010 -1.63%

September 11th (one week) -1.21%

Flash Crash 2010 -1.14%

September 11th (two days) -0.85%

Euro Sovereign Credit Crisis 2010Q4 1.10%

2009 Recovery Quarter 13.74%

Testing the portfolio against stressed environments

Risk management using our proprietary Global Risk System

For illustrative purposes only. Scenario analysis reflects expected returns. Sources: UBS Global Asset Management, Global Risk System (GRS), Data as at end of 3rd quarter 2014 Note: Past performance of investments is not necessarily an indicator of future results. 24

25

Dynamic Alpha Strategy: Performance Performance (gross) as of 31 October 2014

Source: UBS Global Asset management. These figures refer to the past. Past performance is not a reliable indicator of future results. Performance is gross of fees. Risk based upon standard deviation of the portfolio 1 Performance annualized. Date of inception: 06.2005 (performance is shown only for whole months)

25

Performance Month YtD 1 year 2 years ¹ 3 years ¹ 4 years ¹ 5 years ¹ Since inception¹

UBS KSS Dynamic Alpha Strategy 1.08% 5.24% 6.97% 7.69% 9.08% 6.18% 6.13% 4.66%

USD 3 month Cash 0.02% 0.18% 0.22% 0.27% 0.32% 0.31% 0.30% 1.87%

Added Value 1.06% 5.05% 6.75% 7.42% 8.76% 5.88% 5.83% 2.79%

Risk 2.01% 4.55% 4.40% 4.41% 5.39% 9.19%

Information Ratio 3.37 1.63 1.99 1.33 1.08 0.30

26

Dynamic Alpha Strategy: Performance vs. Peers Performance (net) as of 31 October 2014

26

90

95

100

105

110

115

120

125

130

135

Okt

2009

Dez 2

009

Feb

2010

Ap

r 20

10

Jun

2010

Au

g 2

010

Okt

2010

Dez 2

010

Feb

2011

Ap

r 20

11

Jun

2011

Au

g 2

011

Okt

2011

Dez 2

011

Feb

2012

Ap

r 20

12

Jun

2012

Au

g 2

012

Okt

2012

Dez 2

012

Feb

2013

Ap

r 20

13

Jun

2013

Au

g 2

013

Okt

2013

Dez 2

013

Feb

2014

Ap

r 20

14

Jun

2014

Au

g 2

014

Okt

2014

UBS (Lux) KSS Dynamic Alpha (USD) P Morningstar Peer Group EAA OE Alt - Global Macro

Fund / Morningstar Category MTD YTD 1year 2year (an) 3year (an) 5year (an)

UBS (Lux) KSS Dyn Alpha USD P 0.91% 3.57% 5.31% 5.64% 7.01% 4.16%

Quartile Ranking 1 2 2 1 1 1

Morningstar Average - Europe OE Alt - Global Macro -0.59% 1.73% 2.13% 3.62% 3.49% 1.52%

Source: Morningstar Note: Past performance of investments is not necessarily an indicator of future results.

27

One of the world's largest multi-asset managers

• Approx. 100 employees located in 6 countries across 4 continents

• Established high-calibre team drawing on a diverse range of investment disciplines

• Leveraging the full extent of UBS Global AM and UBS AG's resources

People

Global Investment Solutions

Our value proposition

As at 30 June 2014 1 Assets under product include AA&C, Manager Selection, and Structured Solutions 2 External assets under Advisory are AAC, SIA, PRM and Risk Advisory mandates: Both include assets booked under other sections of UBS Global AM

Markets have inherent inefficiencies

• These can be successfully exploited by analysing fundamental valuation, market behavioural indicators, macroeconomic analysis and an understanding of cyclical & secular themes

Fostering long-term relationships

• As advisor, partner and asset manager, we engage with clients, building relationships that last

• Managing USD 116bn1 of assets globally

• Advising on USD 68bn2 of assets globally

Disciplined, accountable, repeatable, continuous

• Team-generated ideas with individuals accountable for their implementation

• Risk should only be taken when compensated

Philosophy

Process

Global Presence

27

28

Disclaimer

For marketing and information purposes by UBS. For qualified investors only. 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, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the document. UBS AG and / or other members of the UBS Group may have a position in and may make a purchase and / or sale of any of the securities or other financial instruments mentioned in this document.

UBS funds under Luxembourg law.

Before investing in a product please read the latest prospectus carefully and thoroughly. Units of UBS funds mentioned herein may not be eligible for sale in all jurisdictions or to certain categories of investors and may not be offered, sold or delivered in the United States. The information mentioned herein is not intended to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not a reliable indicator of future results. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming units. Commissions and costs have a negative impact on performance. If the currency of a financial product or financial service is different from your reference currency, the return can increase or decrease as a result of currency fluctuations. This information pays no regard to the specific or future investment objectives, financial or tax situation or particular needs of any specific recipient. The details and opinions contained in this document are provided by UBS without any guarantee or warranty and are for the recipient's personal use and information purposes only. This document may not be reproduced, redistributed or republished for any purpose without the written permission of UBS AG.

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Representative in Switzerland for UBS funds established under foreign law: UBS Fund Management (Switzerland) AG, P.O. Box, CH-4002 Basel. Paying agent: UBS AG. Prospectuses, simplified prospectuses or Key investor information, the articles of association or the management regulations as well as annual and semi-annual reports of UBS funds are available free of charge from UBS AG, P.O. Box, CH-4002 Basel or from UBS Fund Management (Switzerland) AG, P.O. Box, CH-4002 Basel.

Source for all data and charts (if not indicated otherwise): UBS Global Asset Management

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