ubs americas perspectives -...

12
UBS Americas Perspectives Q2 2011 This material is issued by UBS AG or affiliates thereof (“UBS”). This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is published solely for information purposes. No representation or warranty, either express or implied is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the developments referred to in this material. This material does not constitute an offer to sell or a solicitation to offer to buy or sell any securities or investment instruments, to effect any transactions or to conclude any legal act of any kind whatsoever. Nothing herein shall limit or restrict the particular terms of any specific offering. No offer of any interest in any product will be made in any jurisdiction in which the offer, solicitation or sale is not permitted, or to any person to whom it is unlawful to make such offer, solicitation or sale. Foreign investments present certain risks not associated with domestic investments, such as currency fluctuation and political and economic changes. This may result in greater price volatility. Not all products and services are available to citizens or residents of all countries. Any opinions expressed in this material are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of UBS as a result of using different assumptions and criteria. UBS is under no obligation to update or keep current the information contained herein. Neither UBS AG nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material. © UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. The F1 FORMULA 1 logo, F1, FORMULA 1, FIA FORMULA ONE WORLD CHAMPIONSHIP, GRAND PRIX and related marks are trademarks of Formula One Licensing B.V., a Formula One group company. Other marks may be trademarks of their respective owners. All rights reserved. UBS AG 677 Washington Boulevard Stamford, CT 06901 Tel: +1-203-719 3000 www.ubs.com X3097 Q2 2011 UBS American Perspectives The Cube (Lobby of Mac Store), 59th Steet and Fifth Avenue, New York, NY Contents • When it Comes to Inflation, All Markets are Local • Geopolitics: The Blind Side • Integrating Solutions to Meet Complex Client Needs • Evolving Defined Contribution Retirement Plan Design: New Ways to Manage 401(k) Plans Investing in US Energy: Trepidation or Transformation? • Bringing Alive a Commitment to High Performance • Creating a Mining Equipment Company With Unmatched Product Range • The A-B-Cs of Illiteracy

Upload: vuongliem

Post on 30-May-2018

232 views

Category:

Documents


0 download

TRANSCRIPT

UBS Americas Perspectives

Q2 2011

This material is issued by UBS AG or affiliates thereof (“UBS”). This material has no regard to the specific investment objectives, financial situation or particular needs ofany specific recipient and is published solely for information purposes. No representation or warranty, either express or implied is provided in relation to the accuracy,completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the developments referred to in this material. This material does not constitute an offer to sell or a solicitation to offer to buy or sell any securities or investment instruments, to effect any transactions or to conclude any legal act of any kind whatsoever. Nothing herein shall limit or restrict the particular terms of any specific offering. No offer of any interest in any product will be made in any jurisdiction in which the offer, solicitation or sale is not permitted, or to any person to whom it is unlawful to make such offer, solicitation or sale. Foreign investments present certain risks not associated with domestic investments, such as currency fluctuation and political and economic changes. This may result in greater price volatility. Not all products and services are available to citizens or residents of all countries. Any opinions expressed in this material are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of UBS as a result of using different assumptions and criteria. UBS is under no obligation to update or keep current the information contained herein. Neither UBS AG nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material.

© UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. The F1 FormUlA 1 logo, F1, FormUlA 1, FIA FormUlA oNe World ChAmpIoNShIp, GrANd prIx and related marks are trademarks of Formula one licensing B.V., a Formula one group company. other marks may be trademarks of their respective owners. All rights reserved.

UBS AG677 Washington BoulevardStamford, CT 06901Tel: +1-203-719 3000

www.ubs.com

x3097 Q2 2011 UBS American perspectives

The

Cub

e (l

obby

of

mac

Sto

re),

59

th S

teet

and

Fif

th A

venu

e, N

ew Y

ork,

NY

Contents• When it Comes to Inflation, All Markets are Local

• Geopolitics: The Blind Side

• Integrating Solutions to Meet Complex Client Needs

• Evolving Defined Contribution Retirement Plan design: New Ways to Manage 401(k) Plans

• Investing in US energy: Trepidation or Transformation?

• Bringing Alive a Commitment to high performance

• Creating a Mining Equipment Company With Unmatched product range

• The A-B-Cs of Illiteracy

1C

“ At UBS, two areas where we continue to focus are an ongoing investment in the communities in which we live and work…and our unrelenting commitment to providing clients with integrated solutions.”

— Phillip J. Lofts and Robert Wolf

Welcome

Robert WolfChairman, UBS Americas UBS Investment Bank

Philip J. LoftsCEO, UBS Americas UBS Investment Bank

Change is, and always has been, at the very core of business. And so it should be. Change drives opportunity. The pace at which the current business landscape is evolving is unprecedented, however, and this velocity of change is driving greater and greater demand for insight as businesses and individuals focus on near- and longer-term investment decisions.

In this issue of UBS Americas Perspectives, we are therefore pleased to offer our perspective on a variety of topics of global and regional relevance. paul donovan, UBS’s director of Global economics, addresses inflationary trends around the world and the degree to which they are influenced by commodities pricing.

We also take a look at the manner in which major geopolitical events, such as those unfolding in the middle east and North Africa, are reflected in the financial markets. In parallel, on a longer timescale, employment trends are also changing, with maturation in the defined contribution and defined benefit retirement landscapes affecting participants and sponsors alike.

An area that is seeing less change than anticipated is US energy. despite widespread discussion recently on clean energy and energy independence, energy use in the US has actually remained relatively stable over the past several decades, a critical consideration for those investing in energy and environmental markets.

These topics, among others covered in this issue, are as widely varied as the issues facing our clients today. We hope you will find the content in this issue of UBS Americas Perspectives insightful and relevant.

At UBS, two areas where we continue to focus are an ongoing investment in the communities in which we live and work, as outlined in a piece on literacy, and our unrelenting commitment to providing clients with integrated solutions. As a UBS Americas client, you have access to the full spectrum of our capabilities across Wealth management Americas, Investment Banking and Global Asset management, with services tailored to your priorities. Nothing matters to us more than consistently surpassing your expectations through truth, clarity and performance.

We hope you enjoy the latest installment in the UBS Americas Perspectives series. After reading it and thinking over your relationship with us, there is one question we hope you will help us answer:

how can we serve you better?

email us directly at [email protected] to let us know.

32

Although conventional wisdom may point to something called “global inflation,” there are very few things in the world that are actually global in price. Commodities happen to be one of them, and their prices are rising relative to other prices. But the impact of these rising commodity prices is different depending on the market.

When it Comes to Inflation, All Markets are Local

In a mature economy, like the US or Germany, commodities are not very important at all. Commodities themselves account for only 8 to 10% of consumer spending. The price of food that is bought in well-developed economies, for example, isn’t actually based on the food (commodity) itself. It’s a function of the labor costs that are involved with processing, distributing, advertising and retailing food. Currently, most developed countries have excess capacity in the labor markets, which makes labor costs low, which means that food is cheap.

In an emerging market, however, commodities have a very different impact because the food that is purchased here is less processed—and thus has a lower labor cost. While a developed economy consumer might buy a box of rice (carefully packaged and advertised, from a fully staffed supermarket), an emerging market consumer might purchase a bag of rice from a local vendor.

In between emerging markets and developed countries are fringe economies: Ireland, portugal, Spain, and Greece. Inflation matters in a completely different way in these economies. right now, Ireland has barely emerged from deflation, and excluding food and energy it remains in deflation. Where there are price increases in fringe economies, inflation, where it exists, is having a very negative impact on growth.

In portugal, where inflation is only 2.4%, it “feels” worse. Because the average portuguese consumer’s income growth is almost nil, even a small increase in food prices is painful. And if people there feel their living standards are declining, they will rein in spending. This may cause a downward spiral and negatively impact growth.

This same sort of pattern is being repeated around the periphery of europe. Ireland is experiencing very little consumer demand. Unemployment has gone up, and the Irish economy needs to experience falling wages and prices in order to restore the country’s competitiveness.

In a climate like this, central banks have to preserve financial system integrity and support growth. The best way for the US Federal Reserve to stimulate growth and provide support and liquidity to the bankng system is to leave interest rates alone. However, the European Central Bank (ECB) is grappling with much thornier issues.

Temporary inflation in the UKInflation in the United States and the United Kingdom, as well as the rest of the developed world, is unlikely to be an issue until at least 2013. however, the recent one-off increase in the British Value Added Tax, or VAT, makes the UK inflation number temporarily look very high. once the VAT tax is backed out, inflation in the UK drops to 2.4% (the same as the average for the euro area). In fact, most economists would say that an inflation rate of 2% is actually desirable.

The impact of interest ratesIn a climate like this, central banks have to preserve financial system integrity and support growth. The best way for the US Federal reserve to stimulate growth and provide support and liquidity to the banking system is to leave interest rates alone this year. This would help banks in the US recover from the financial crisis.

however, the european Central Bank (eCB) is grappling with much thornier issues. It is proving almost impossible to set monetary rates for economies like Germany, which is showing 4% growth currently, and for Greece, which has -6.6% growth. The eCB may raise interest rates a little for Germany, which needs a tighter monetary policy, but if it raises interest rates aggressively it will aggravate the economic weakness of fringe countries—and maybe even economies like France.

German inflation could well be above the euro Zone average for the next few years because it has less excess labor capacity than its peers. The eCB’s problem is that if it sets an interest rate for europe as a whole, it is almost certain to be too low for the German economy.

Demystifying ChinaContrary to popular belief, the export side of the Chinese economy is too small to cause inflation globally. The internal domestic labor costs of any given economy is what causes inflation for that market. If wages remain under control, then inflation won’t exist.

even if all commodities were to rise in price by 10%, it would only add around 1% to the inflation rate. Inflation is largely a domestic phenomenon and is not generally communicable from one country to another. It is correlated from one country to another, but not communicable.

Playing the commodities gameInvestors should treat commodities with a great deal of caution because there is so much political interference in the commodities markets. russia and the Ukraine are forbidding the export of wheat and corn because they want to keep those prices low domestically.

Paul Donovan is the Managing Director, Global Economics at UBS Investment Bank and Co-author of the forthcoming book, From Red to Green: How the Financial Credit Crunch Could Bankrupt the Environment.

europe has effectively imposed a poultry embargo on the United States. The United States has increased the regulation of commodity investments. politicians in emerging markets regulate commodity prices to prevent political unrest. Commodities have become intensely politicized over the last year and a half.

The inflation variableWhat drives price inflation varies dramatically from country to country. In the UK, it’s the VAT sales tax. In China, it is domestic labor costs. In India it is onions. In egypt it’s wheat. It tends to vary from country to country.

While many believe oil has a large role in inflation, it actually represents only 4 to 7% of inflation’s total in developed economies. But people are acutely aware of it.

This leads us to another truth about inflation, aside from the fact that it is largely an internal, domestic phenomenon. perception, or the way people feel about the price of any given product, has an enormous impact on the way they will behave as consumers. And that behavior has enormous consequences for growth or the lack of it, and subsequent inflation or deflation.

54

Current events in the middle east and North Africa illustrate just how quickly localized domestic tensions can boil over into broader geopolitical instability.

• Although hostilities and power vacuums may pose little immediate threat to economies and financial markets outside these regions, the potential disruption to oil and natural gas supplies could short-circuit a still tenuous economic recovery.

• While at first glance these conflicts may appear purely regional in nature—particularly among those states that are ruled by unpopular dictators—the political upheaval appears to be part of a much larger global trend.

Geopolitics: The Blind Side

In this issue of UBS Americas Perspectives, we seek to provide a useful framework for understanding how geopolitical events are reflected in the financial markets and to illustrate how investors can preemptively protect their portfolios, as well as how to react when events arise.

Why geopolitics is important to investorsIn the years following the end of the Cold War, market participants focused primarily on macroeconomic trends when attempting to determine financial market outcomes. Geopolitical risk was treated as an afterthought, a mere blip on the radar screen. Now, however, geopolitics is a much more potent force that can undermine global financial markets—not only can events shape the economic environment and fundamental investment outlook, driving economic growth and asset returns, they can potentially blindside an investment portfolio.

In this environment, understanding geopolitical risk is important to determining outcomes for the economy and financial markets. The type of geopolitical event can determine how financial markets behave and whether the

reaction is temporary or sustained, localized or global. But since probability, causality, timing, magnitude and impact are difficult to assess, market participants rarely give geopolitics the full attention it deserves.

Geopolitical events should be evaluated in their own contextGeopolitical risk refers to low-probability, high-impact events. They are the proverbial “bolts out of the blue” and are unpredictable and highly uncertain. The 9/11 terrorist attacks and the global credit crunch took nearly everyone by surprise.

While geopolitical events can heavily influence economic growth and asset returns, each has to be understood in its own context. For example, unlike the broad global markets, US equities generated modest but positive inflation-adjusted returns during World War II, leading many to conclude that this period was an extension of the economic recovery that followed the Great depression. But it was the large mobilization of labor and resources toward supplying the war effort that benefited equities, despite the high rates of inflation that emerged.

Geopolitical conflict will play a bigger role in shaping investment outcomes during the next decade. Such conflict will likely keep risk premiums elevated—primarily for stocks but also for bonds—and may induce bouts of weakness in risk assets, as well as demand for safe havens.

• Flight to quality flows, as well as heightened liquidity preferences and risk aversion, would tend to depress real interest rates.

• Prospects for increased defense spending would likely push inflation expectations higher.

• Increased uncertainty would be expected to increase the risk premium, at least among the affected countries.

meanwhile, a sustained military offensive could lead to:

• A decline in trade, labor and investment flows, which would reduce economic growth prospects in more than just the affected countries.

• Higher commodity prices (for example, energy), which would weigh on economic growth and increase inflation expectations, potentially across the global economy.

• A diversion of resources (including labor) to military use would also likely drive up the cost of goods and wages.

The end of the Cold War fundamentally altered the course of history. The relaxation of geopolitical tension in the 1990s coincided with the spread of globalization, quantum leaps in technology and privatization of state-owned industries. however, in recent years economic activity and financial market performance have grown increasingly turbulent as geopolitaical upheavals leave their mark.

Understanding where geopolitics intersects with financeGeopolitics should be understood as a type of risk that interacts with other sources of risk in an investment portfolio. A negative event will tend to increase the risk premium and alter the direction of asset prices. one that depresses economic growth and changes the course of inflation is likely to have a sustained effect. meanwhile, the direction of the impact will depend on the asset in question, and the magnitude will depend on the severity and resolution of the incident.

The key to assessing the investment implications of geopolitics lies in under-standing how it affects the main drivers of investment returns. Fortunately, the same variables that are relevant in any generic investment context are relevant here.

To illustrate, assume a conflict erupts between two neighboring states, diplomatic solutions are exhausted and military action looms. Such news, if unexpected, is likely to affect the following market drivers:

Variable Stocks Bonds

Real interest rates – –

Inflation expectations – –

Risk premium – –

Growth expectations (economic, earnings) + neutral

Credit trends ? + (corporate bonds)

Liquidity premium – –

The main drivers of investment returns Impact on financial markets assuming an increase in each variable

Source: UBS Wmr

Source: dimson, marsh and Staunton (2008)

Different geopolitical stresses pose different threatsWe see four broad categories of geopolitical tension—natural resource needs, national strategic ambitions, non-state ideological ambitions and income inequality—each with unique threats leading to different financial market outcomes.

preventive steps, such as diversification and ongoing risk assessment, are important precautionary measures to help limit losses, but how one reacts to the shock of a geopolitical event can be just as important.

• The impact of an event that causes minimal shock to the broader economy may be only temporary, and the cost of hedging these fleeting risks would likely outweigh the benefit.

• When investing during prolonged periods of heightened geopolitical risk, one might target assets that would be expected to perform well both in a baseline scenario and when tensions boil over. Another is to seek natural hedges—commodities would stand to gain from conflict in the middle East, and allocations to higher-quality government bonds can offset declines when uncertainties surge.

Different events, countries and outcomes Real equity return over selected periods, in %

France Germany Japan WorldUSUK World ex-US

World War I (1914-18) World War II (1939-48) Oil shock (1973-74)

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Kurt E. Reiman is Head of Thematic Research Wealth Management Americas.

6 7

Understanding the financial implications of specific shockseven the most astute observers of geopolitical events will not be able to completely insulate their portfolios from geopolitical risk, since events are often unanticipated. hence, it is important that investors consider the possible economic and financial market outcomes of the various hot spots were they to erupt into a major crisis.

Natural resource needs. endowment of critical natural resources confers a strong geopolitical advantage to exporting countries. russia could seek to leverage its position as europe’s natural gas supplier through an embargo. Iran could disrupt oil supplies in reaction to economic sanctions aimed at curbing its nuclear program or a preventive strike by Israel. Actions that restrict the supply of natural resources will most likely constrain economic activity and raise inflation, at least in the short term, which would be a positive scenario for certain commodity subsectors. however, not all clashes over resources lead to stagflation. Importing countries will do everything in their power to secure access to natural resources. A military standoff would likely trigger heightened risk aversion and an increase in the risk premium.

National strategic ambitions. Initially, when countries build new strategic capabilities or attempt to exert influence over others, we see a flight to safety. eventually, however, these developments can lead to armed conflict. Geopolitical events that involve strategic ambitions tend to be negative for growth and fairly neutral for inflation, assuming they do not escalate into a multicountry war or nuclear attack. The typical reaction in these more muted scenarios, especially if the potential fallout is large but the event is short-lived, is to park money in safe haven assets, which currently include US Treasuries and gold. however, other strategic pursuits, such as a full-scale nuclear attack or sustained armed conflict, could lead to extreme economic outcomes, such as hyperinflation or deflation.

Geopolitical Events Impact on Assets

Sources of Stress Geopolitical Events Specific Shock or Trigger Asset Consequences

Natural Resource

Needs

• Resource supply shock • Russian energy embargo• Oil supply disruption

Stagflation• Government bond prices down• Stocks mixed• Gold up• Commodities mixed

• Conflict over resources • Standoff over resource access between China and India

• Coup in Saudia Arabia• Disputed water access rights

Flight to safety

• Government bond prices up• Stocks down

National Strategic

Ambitions

• Access to nuclear weapons• Border/territory dispute

• Iran/North Korea develop nuclear capabilities• Taiwan/China escalation

• Gold up• Reserve currency up• Commodities mixed

Non-State Ideological Ambitions

• Terrorist attack • Car bomb in Times Square Hyperinflation

• Paper assets down

• Hard assets up

OR

• Terrorist attack • Nuclear or biological attack

• Sustainained global war*

• Nuclear attack

• Broad escalation of military conflict

• Use of nuclear first-strike capabilities

Income Inequality

• Trade protectionism

• Current crisis

• US/China trade war

• Euro collapse

• US dollar collapse

Depression/deflation

• Government bond prices mixed• Stocks down• Gold mixed• Commodities down

Non-state ideological ambitions. Fundamentalist views and ideological ambitions become geopolitical events when they erupt in the form of terrorist attacks. According to a recent study, terrorist attacks usually only have a fleeting impact on equity returns. Only a small share of the 1,312 recorded attacks in 2001 through 2006 had a statistically significant negative effect on stock prices on that day, and this usually faded soon thereafter. Unsurprisingly, the magnitude of the effect was substantial for statistically significant events, and only the 9/11 attacks had a structural impact on equity market fundamentals. If future terrorist incidents undermine vital infra- structure, such as a nuclear or biological attack, they will likely have a persistent and damaging effect on equities.

Few terrorist attacks with statistical significance

Note: Share of terrorist attacks that led to statistically significant negative equity returns on the day of the attack and after 6 and 11 days.Source: Carrera and musslo (2009)

1-day 6-day 11-day

Colombia India Spain Thailand UK US

0%

10%

20%

30%

40%1-day 6-day 11-day

MIn Max Min Max Min Max

Colombia -1.0 -12.4 -3.0 -24.8 -6.0 -14.2

India -1.4 -6.0 -2.6 -5.0 -2.4 -5.8

Spain -1.5 -4.1 -6.4 -8.4 -8.3 -9.2

Thailand -1.9 -16.8 -5.2 -11.1 -3.8 -16.1

U.K. -1.6 -1.9 -1.7 -1.7 -3.8 -3.8

US -1.3 -3.0 -4.0 -5.1 na na

Range of negative impact from terrorist attack can be quite large

Note: Share of terrorist attacks that led to statistically significant negative equity returns on the day of the attack and after 6 and 11 days.Source: Carrera and musslo (2009)

*historical experience shows that hyperinflation results after sustained global wars.Source UBS Wmr

Income inequality. protectionism is a greater risk when labor markets are weak, as is the case now. Trade wars and currency crises are usually the by-products of income inequality among countries and the consequences are usually deflationary, as reduced trade flows would likely depress overall economic activity. They also carry the potential for a wider escalation of conflict. At its most basic level, the present crisis within the EMU stems from income inequality and differences in competitiveness among member states. recall that the emU developed as an effort to reduce the potential for war within europe after the devastation wrought during the twentieth century, hence the importance attached to maintaining the currency union.

98

A look at recent hot spots

In our view, geopolitical risk is on the rise amid high rates of unemployment, increased government involvement in economic matters and widespread income inequality. In addition to political unrest in the Middle East and North Africa, the past year has seen its fair share of geopolitical hot spots emerge:

• Tensions on the Korean peninsula escalated when North Korea allegedly torpedoed a South Korean warship.

• An attempted car bombing in New York’s Times Square was defused without casualty but raised fresh concerns about the risks of terrorism.

• The future of the Euro was called into question amid mounting sovereign debt pressures among member states.

• The US and China faced off over currency practices and also engaged in a larger number of trade disputes.

Incorporating geopolitics into an investment processAll too often, investors spend their time incorporating quantifiable variables into their investment process when deciding which assets to own and in which proportion. Typically, geopolitical risk only enters the discussion as a sort of catch-all caveat to things that can go wrong. rarely do investors reflect upon geopolitical risk at the outset of the investment process, along with all the other quantifiable variables, to create a view of the investment environment and the associated level of risk that is priced into financial markets.

The difficulty for investors is that it is not easy to distinguish between noise and an unfolding game-changing event. Full-blown geopolitical conflicts can take a while to play out. At each stage of the investment process, it is not necessarily clear whether further escalation is avoidable, a peaceful resolution is possible or outright confrontation will result.

An outburst of geopolitical conflict will typically prove negative for stocks and, with the exception of a natural resource supply shock and an international liquidation of US Treasury securities, would tend to support government bond prices. heightened geopolitical risk would also imply periodic and significant bouts of weakness in stocks, and perhaps even episodes of sustained high volatility.

That said, our view that geopolitical risk will increase over the coming decade does not preclude a material advance in stocks, nor does it imply that a portfolio should be heavily skewed in the direction of government bonds. It should simply moderate an otherwise overtly optimistic outlook for assets such as stocks, when the macroeconomic outlook and valuations are both favorable.

Investors need to remain aware of the critical and ever changing geopolitical landscape, understand how these shocks can impact various assets within a portfolio and regard geopolitics as central to the investment decision, rather than simply as an afterthought. We believe that investors are better served by following a more pragmatic approach based on diversification across countries and assets, ongoing risk assessment, actively managing exposure, and tactical investing.

For more detailed information on this subject, please see the complete UBS research focus entitled “Geopolitics: The Blind Side,” dated June 2010.

Case in Point: A private client is looking to generate liquidity by selling a privately held business.

Affluent investors are often the owners of successful businesses and the day may come when they look to plan an exit strategy. The advice of an investment banker can help position their business, perhaps well in advance of the Ipo or sale, to capture the best opportunity and execute a smooth transaction. once the deal is closed, a personal financial advisor can help manage the newly liquid assets, from estate planning and charitable giving to monetizing a potential concentrated position.

Case in Point: A corporation needs to shore up an under-funded pension while meeting the daily financial needs of the business.

All too often, public-company pension plans find themselves under-funded and the plan liability close to or exceeding the company market cap. proper risk management is a Chief Financial officer-level concern in addition to addressing the daily financial needs of the business. prudent investment management and fiduciary oversight are critical in today’s economic and regulatory environments. An asset manager can deliver a high level of accountability, reduced risk, diversified sources of return, and strategic and tactical asset allocation solutions.

Case in Point: The sale of a business results in changes to the company retirement plan, as well as the financial status of key executives.

The sale of a company for cash and stock leaves many senior executives flush with

newly acquired liquidity. In addition, the corporate retirement plan may need changes to its plan design, investment options and compliance procedures. Bringing in diverse professionals with the appropriate skill sets can help solve the company’s needs as well as those of its key executives.

Big company resources, boutique-level attentionWhile the benefits of integration are clear, achieving them can be challenging even for the most sophisticated of organizations: big companies with the resources to touch diverse client needs can be hard to navigate. UBS has created a centralized framework to integrate resources for our clients and their advisors and bankers. This allows us to deliver the extensive resources of a world-class financial services firm with the personal and focused approach of a boutique firm.

Clients from all UBS business areas can access our full range of banking, asset management and wealth management expertise. Clients work with specialists who deliver timely and actionable insights and opportunities. These specialists work in tandem to ensure a smooth client experience, share insights and coordinate services and solutions, where appropriate. even if you are not ready to move forward with a strategy today, our advisors and bankers will advise and guide you, positioning you to capitalize on opportunity when those important milestones arise.

Today’s investors and businesses are looking for more than just a wide range of financial services and solutions. Central to their needs are how those services and solutions can be personalized to help build a company or find personal financial security. often professional endeavors can impact personal financial needs and goals, and vice versa. But these needs and the solutions that satisfy them are vastly different. Integrating wealth management, investment banking and asset management solutions can provide a holistic approach to addressing business as well as personal financial ambitions.

Integrating Solutions to Meet Complex Client Needs

FOCUS ON CLIENTS

How can we better serve your needs?

The financial advisors at Wealth Management Americas deliver a fully integrated set of products and services to address the needs of affluent individuals and families. our size and strength enable us to develop and execute unique wealth management strategies drawn from a substantial suite of offerings, including investing, financing, banking as well as services for your business.

one of the world’s premier advisory and securities businesses, the Investment Bank provides expert advice, innovative solutions, out-standing execution and comprehensive access to the world’s capital markets. Whether our clients require investment banking, equities, fixed income or foreign exchange services, our intelligence, market insight and global coverage can help capture opportunities and manage risk.

Global Asset Management offers investment capabilities and investment styles across all major traditional and alternative asset classes. These include equity, fixed income, currency, hedge fund, real estate and infrastructure investment capabilities that can also be combined in multi-asset strategies.

10 11

Increasingly for corporations, defined contribution (dC) plans are the primary—even exclusive—retirement benefit for their employees. These plans are commonly referred to as 401(k) plans. As traditional defined benefit (dB) pension plans recede from the corporate landscape, dC plans are evolving to bring more dB features to participants. drew Carrington describes the way forward for sponsors and participants in the defined contribution world.

participants have to build their own portfolios. plan sponsors can now provide their full participant base with a well-constructed starter kit with highly diversified investments built with best-in-class tools and techniques in a simple and straightforward way. A sponsor can implement automatic escalation, which regularly increases the contribution rate over time, as well as default options, which can help ensure diversification.

Interestingly, up to now, regulatory changes were all about accumulation—building assets. Today the focus is on how savings can be turned into income during retirement. right now there is a bill in front of Congress, the lifetime Income Disclosure Act, which will require plan sponsors to tell participants, in addition to how much savings they have accumulated, the amount of monthly income they can expect that balance to provide throughout retirement—similar to how your Social Security statement estimates benefits based on your current income. The conversation is being reframed, moving away from a savings balance toward an income flow. This is very similar to how dB pension plans are understood and appreciated.

Is the recent surge in the popularity and design of target date funds directly connected to these changes?Absolutely. Target date funds are the most widely used default investment option. As they are maturing, we are starting to see some important enhancements, particularly within very large dC plans. The evolution of target date funds parallels the changes in regulation. They are the natural strategies for a plan sponsor and participant to employ holistic investment thinking. The first generation of these funds came about prior to default approaches—an individual had to select them from a list of investment choices. So they were generally limited to mutual funds, which were very familiar to participants, and to simple portfolio construction for fear they would

Sponsors and regulators are beginning to focus on lifetime income designs that can ensure that participants will have the income they need late in life.

be too complex for the average participant to understand. With default options, it is now the plan sponsor who selects the strategies and they have begun to demand improved investment thinking and more cost-sensitive vehicles. Sponsors are looking to build target date solutions that are relevant to their particular workforce, that are institutionally priced, and that are more diversified. By moving away from mutual funds to institutional collective funds and separate accounts, the sponsor can gain economies of scale in pricing, delivering lower costs and better investment results to participants.

perhaps most important is how the thinking behind asset class selections is changing. Sponsors are looking for solutions that are appropriate for their employee demo-graphics. For example, if the company is in a volatile industry, less risk in the asset allocation of the default option combined with automatic escalation may balance less stable inputs such as job security, compensation and company match.

They are looking for broader diversification. originally, target date funds just held domestic equity and bonds, maybe with some international equity thrown in. Now we are seeing a more modern institutional approach including, for example, emerging market debt and equity or REITs and high yield bonds. Some sponsors are considering Treasury Inflation protected Securities (TIpS), or other inflation-hedging asset classes (such as commodities) or alternative asset classes for their default offering. These asset categories may not make sense as stand- alone options on a line-up where participants could select them directly, but they are appropriate for a properly structured, pro- fessionally managed institutional portfolio.

Sponsors are also revisiting the glide path to better address all the little, but important, decisions along the way. how much should we invest in this asset class? do we make strategic or tactical asset allocation moves? how rapidly should allocation changes be made along the path? Is the glide path linear or curved as you near retirement? As employees near

Interview with Drew Carrington, Managing Director and Head of the Defined Contribution and Retirement Solutions Group at UBS Global Asset Management.

retirement, what is the most appropriate risk-free asset? Which securities best protect against inflation to help retirees maintain their standard of living?

It sounds like an attempt to bring the best of DB to DC plans. What remains to be done?one of the things dB plans do well that we still need to work on is the payout in retirement. The risk that your savings will not generate enough income in retirement to last your entire life is referred to as longevity risk. longevity risk is a significant issue that is being tackled around the world with examples being Australia’s industry pooled super-annuation funds and New Zealand‘s KiwiSaver funds.

The next step is helping participants turn their 401(k) plan balance into a “paycheck” during retirement. This might include hybrid investment solutions that incorporate insurance concepts, which would not only suggest what a participant’s income may be in retirement but would actually provide some peace of mind about the specific income they would receive.

The conundrum for plan sponsors often is, to what extent should and can we educate employees on their post-retirement decisions? You have to realize that, thanks to target date funds, default options and automatic features, we are raising a generation of participants who may have never made a decision about their plan. What constitutes education and advice? employers want to know that assistance they provide won’t trigger some new fiduciary responsibility. So the industry leaders and regulators are engaging in discussions about the definition of a fiduciary and advice.

It sounds very complicated. How do plan sponsors and participants stay informed?let’s start with the participant. For them it is actually less complicated; after all, most key decisions are automated. We spent 20 years trying to turn every 401(k)

eligible participant into their own Chief Investment officer. As we all know, the results were mediocre. prior to automatic enrollment, participation rates were typically only 70% of eligible employees: under auto-designs, we are seeing 95% participation rates. participant portfolios now contain eight to 10 asset classes (in their default option), where before one or two funds was typical.

For sponsors, the reverse has happened. Things are definitely more complex. Sponsors are looking for help in helping their participants. We are seeing the finance department, which used to be involved in dB decisions, cooperating with human resource professionals to make dC plan decisions. And we are seeing the industry step up to bring their best thinking to the sponsor.

What are the primary catalysts driving DC plan discussions?right now, much is being said and written about the historical shortcomings of dC plans. There is not yet enough emphasis on the strengths and possibilities of dC plans to provide secure retirements. There are opportunities to use behavioral finance to reframe the conversation to encourage better solutions and better decisions, and therefore, better outcomes. It has only been in the last five years that we have begun to fully take advantage of automation to turn dC plans into proper retirement plans—and the best that dC plans can do is still in the future.

dC plans will play an increasingly larger role in the retirement of Americans, and delivering on their promise is important and personally motivating. We are at another crucial policy inflection point and the industry needs to proactively move things forward with policy makers because there is always the danger of counter-productive regulations. I believe we need to move quickly to continue to embed best practices in dC plans as broadly as possible. As long as we remain focused on improving retirement outcomes for participants, everybody wins.

Evolving Defined Contribution Retirement Plan Design: New Ways to Manage 401(k) Plans

What has caused the shift away from defined benefit plans?There are really two reasons. First, as a wave of regulatory and accounting changes were introduced, the costs of sponsoring a dB plan became more transparently sensitive to market conditions: companies were required to reflect changes in value of their liabilities based on interest rate changes, to fund that liability more quickly, and to reduce smoothing periods, making the plans more volatile for the corporate balance sheet, income statement and cash flow. dC plans shift those risks and volatility to participants.

The other is that the mobility of today’s workforce reduces the perceived value of dB plans as an employee retention tool because they tend to benefit workers who are long tenured. Further, the actual “benefit” of a dB plan is viewed as complicated and participants may not value it appropriately. In comparison, the portability and clarity of dC plans are attractive attributes for participants.

The Pension Protection Act of 2006 introduced rules to help DC plans better meet the needs of sponsors and employees. Can you talk about the impact of these rules, and what other changes we might expect?regulation often gets a bad name for constraining commerce. In the case of dC plans it has actually been the enabler of better practices. dC plans were not designed as retirement plans and, thus, haven’t always addressed the retirement issues that people face. In fact, many employees did not take advantage of their dC plans—they didn’t enroll, or didn’t save enough, or invested sub-optimally. The pension protection Act opened the door for important plan design changes—such as automatic enrollment, automatic escalation and default investment options—designed to improve the probability that employees will fully benefit from their dC plan.

For example, the ability to automatically enroll a new employee harnesses the power of inertia—and puts employees on the right track, right from the start. No longer does a 401(k) plan simply offer a line-up of mutual funds where

Many of the changes we are seeing are effectively bringing the best of defined benefit plans to the defined contribution market.

12 13

Focus on the US electric power sector

Investing in US Energy: Trepidation or Transformation?

despite talk of clean energy and energy independence, energy use in the US has changed very little in the past four decades. Comparing total energy consumed in 1970 with 2010:

• Fossil fuels declined from 87% only to 84%.

• Nuclear power now provides 9% of total energy.

• Oil imports have risen from 11% to 21%.

It is also worth noting that we have seen ongoing efficiency gains— it now takes about half as much energy to generate a dollar of Gdp as it did in 1970.

Unfortunately, with the policies that are in place today, change will remain limited. The US energy Information Administration (eIA) forecasts that fossil fuels will provide 82% and oil imports 17% of total energy consumption in 2035, with Co2 emissions almost keeping pace with consumption. Further, this “no new policy” scenario forecasts more incremental energy from natural gas and coal than from renewables and biomass. hardly the clean energy revolution one might imagine.

This brief history sheds some light on how investors in US energy stocks fared over the past five years and how challenging cleantech investment has been in the absence of national climate and energy policy.

International Energy Agency (IEA) data (in quadrillion BTU’s,”quads”) from World Energy Outlook, November 2010.

2035Compound Annual

Growth Rate

Current Policies 450ppm Policy % Change 450ppm vs 2008 Actual

Fossil Fuel 72 48 -33% -1.7% p.a.

Non-Fossil 22 35 +60% +3.6% p.a.

Total Demand 94 83 -12% -0.5% p.a.

Moving to de-carbonization could significantly impact portfolios

The energy landscape under climate policy change policies that de-carbonize the energy system would have a profound impact for investors, particularly in light of the large weighting of fossil fuel securities in most portfolios. At present sectors directly related to fossil fuel production comprise 12.7% of the S&p 500 index. Consider what could happen if the US moved from current policies to those consistent with limits of 450 parts per million (ppm) in atmospheric Co2 concentration and 2ºC increase in temperature (from pre-industrial).

Given the magnitude of these potential changes, investors need to be cognizant of any policy shift and consider specific technologies and companies that might be best positioned for de-carbonization

policies. Success in picking non-fossil winners (such as wind, solar, nuclear, efficiency, biofuels and clean coal) is not just a function of the cheapest technology, but also of policy design, financing and liability.

policy adoption could kick off a rebalancing of energy portfolios fairly quickly. Several conclusions can be drawn from a cursory look at a single possible scenario. remember this is just one projection in an industry that is undergoing significant technological change.

• Coal would decline significantly unless clean coal develops more rapidly than anticipated.

• Oil would suffer less but would be pressured by biofuels, peVs and efficient vehicles.

• Natural gas (about half the emissions of coal in electricity generation) will likely grow over the next decade—before ultimately losing some market share to zero-emission sources.

• Nuclear would expand, particularly if technologies such as modular reactors with fuel recycling found public acceptance.

• Biofuels and renewables will grow significantly off a small base, and could be much bigger if technology breakthroughs occurred.

Interestingly for investors, the reduction in coal (which has the highest Co2 intensity) is almost fully covered by efficiency gains, some of which will be realized regardless of policy since the cost of early Co2 mitigation by this means is quite low. The smart grid, smart meters, batteries, led bulbs, hybrid vehicles, window coatings, insulation, and combined heat and power are just a few efficiency technologies that merit consideration.

Rebalancing portfolios for policy change

IEA World Energy Outlook 2010 (difference in 2035 quads)

-15

-10

-5

0

5

10

15

EfficiencyBio-wasteRenewableNuclearHydroGasOilCoal

-11.2

0.1

4.8 5.0

10.9

-8.5

-4.4

3.3

Energy Sector PerformanceTotal return 6/27/06 through 3/10/11

* S&p 500 Index Groups from Bloomberg (6/27/05 to date, total return: S5oIlp, S5CCSF, S5elUT, and pBW Cleantech eTF.

-60%

-40%

-20%0%

20%40%60%

80%

CleantechS&P 500ElectricCoalOil E&P

62%

21% 23% 16%

-45%

Policies that de-carbonize the energy system would have a profound impact for investors, particularly in light of the large weighting of fossil fuel securities in most portfolios.

Jon Anda is UBS’s Vice Chairman and Head of UBS Environmental Markets Group.

The largest sector affected by epA regulation is electric power (including tighter limits on hazardous air pollutants, or hAps).1 Further, the president’s “80% clean power by 2035” is targeted exclusively to electric power. So it is worth outlining key challenges and opportunities for that sector.

US electricity is a legacy system that worked fine in a century when energy was wasted in the pursuit of growth. But since the end of the 20th century, the thing wasted has been data (gathering, processing and transmitting). The electricity sector needs to embrace data in the form of smart grid—while managing Co2 pollution costs that won’t be zero for much longer. Addressing legacy industry characteristics, like the four listed below, may bring as much opportunity as challenge (EIA 2008 data, rounded):

• Inefficient: Of our 100 quads of consumed primary energy, 40 provide the four trillion kilowatt hours of electricity we use. of this, electricity-related losses, such as wasted steam heat and line losses, account for 27—meaning only 13 quads are actually delivered as electricity.

• Carbon-intensive: The sector emits 186 million tons of Co2 per quad of delivered energy, while non-electricity sectors emit just 58. Cap and trade is expected to have its biggest impact on utilities because, under current regulations, utilities make more selling clean kilowatts than reducing kilowatt hours through efficiency. As a result, Co2 Capture and Storage (CCS) and nuclear are important to the industry.

• Under-utilized: We have just under a thousand gigawatts of generating capacity that could provide more than double the kilowatt hours we currently use. less than a third of that capacity is coal-fired.

• Economically small: Since we spend roughly 3% of Gdp on electricity, if de-carbonizing increased this cost by half, Gdp would be 1.5% lower—relatively small over a multi-decade transition period and arguably far cheaper than the risk-adjusted economic damage from climate change.

even from these brief overview points, investors can envision an electric power industry that could be far more dynamic than it has been historically.

1 Note, however, that an 80% reduction by 2035 in Co2 from electric power, assuming full carbon accounting for natural gas if included in a low carbon energy standard for utilities, would achieve roughly a 25% reduction in total US greenhouse gas emissions by 2035 relative to 2008 levels. This modest reduction, of course, comes from the proposals’ exclusion of non-electric energy and non-energy greenhouse gases.

3. Cap and trade, ironically, is a republican solution that is now supported mostly by democrats.

4. epA regulation of Co2, though less efficient than a cap or carbon tax, is now four years in the works.

5. While “80% Clean power by 2035” (or other legislation) could replace it, epA is now the base case.

6. International pressure (competitive or geopolitical) may ultimately impact US policy decisions.

Climate policy is about risk managementThere has been no shortage of noise and emotion around whether greenhouse gas emissions need to be reduced at all and, if so, over what time frame and by whom. At UBS, we think of potential damages from climate change as analogous to the risk management challenges we face in the securities business.

Climate and energy timeline—science, economics, global policy and EPA regulation

1827 1896 1954 1956 1958 1960 1988 1990 1997 2003 2007 2007 2007 2009 2010 2010 2011 2011 2011 2012Fourier calculates that earth’s temperature is warmer than distance from the sun would indicate.

Arrhenius theorizes that the level of carbon dioxide in the atmosphere creates a greenhouse effect.

Samuelson: if price=marginal cost and marginal cost=0, then freeriding (i.e., pollution) is rational.

Plass predicts 1900 to 2000: 1ºC warmer, 30% more CO2 and climate sensitivity of 3.6ºC.

Kealing begins measuring atmospheric CO2 concentrations (for Scripps) at Mauna Loa, Hawaii.

Coase theorem sets an economic framework for “avoiding the more serious harm” in free goods.

UN IPCC formed (first IPCC report on climate change released in1990).

President HW Bush amended the Clean Air Act of 1970, authorizing cap and trade for acid rain.

Kyoto Protocol adopted (never presented for a vote in the US Senate).

McCain-Lieberman bill brought to the Senate floor proposing economy-wide cap and trade.

UN IPCC says 1900 to 2000: 0.7º warmer, 37% more CO2 and climate sensitivity of 2–4.5º.

USCAP: US corporations, across an array of industries, advocate economy-wide cap and trade.

Supreme Court, in Massachusetts vs. EPA, defines CO2 as an air pollutant under the Clean Air Act.

ACES, the Waxman-Markey economy-wide cap and trade bill, passes in the US House.

APA, the Kerry-Lieberman economy-wide cap and trade bill, fails to get traction in the US Senate.

NASA released that the 12-month running global mean temperature reached a record in 2010.

EPA begins regulation of CO2 for new sources under the Clean Air Act (January 1, 2011).

President Obama’s State of the Union proposes legislation for 80% clean electric power by 2035.

EPA will propose performance standards for power plants (July) and refineries (December).

EPA will issue final performance standards for power plants (May) and refineries (November).

The financial crisis exposed understated fat-tail risks and ignored feedback loops—and today serves as a useful analogy to climate policy analytics.

• Climate change has the same kind of fat-tailed risk distribution, with the exception that it is largely irreversible for centuries. This irreversibility makes climate policy choices critically important for future generations.

• Regardless of how much we study the science, the shape of anthropogenic climate risk isn’t likely to change. And the odds are decidedly against us. Feedback loops (such as melting permafrost and ice sheets) make it so.

• The biggest climate hoax is denying the need to hedge the risk we already perceive. Thanks to the financial crisis, the notion of public policy as a hedge against an uncertain future risk is no longer foreign.

proceeding immediately with climate policy and making adjustments (or dynamically hedging) over time keeps open a valuable option on the asset of a stable climate.

Basic conclusions for all investorsClimate and energy are complicated and nuanced topics. however, there are a few rational conclusions for all investors, regardless of bias and belief.

• Investing in clean technology without a national cap or tax on carbon needs to be done cautiously. epA regulation is likely to be the biggest factor in energy transformation over the near term unless legislative alternatives or epA blockage, both unlikely, come to fruition. Additionally, state regulations, voluntary actions, cheap efficiency, or the trend towards natural gas over coal are all potential alpha generators, even without national policy. epA regulation is likely to be the biggest factor in energy transformation over the near term unless legislative alternatives or epA blockage, both unlikely, come to fruition.

• A stable climate and clean energy have been in the works for many decades. The science has very deep roots; what grows out of those roots, whether in carbon taxes or cleantech, is more likely to survive and flourish than to die off. Investors should recognize that defaulting to a full-weighting of fossil fuel stocks, without exposure to clean energy, could well be a losing strategy over the medium-to-long-term.

UBS looks to help clients in this dynamic area for years to come. our research, advisory services and investment products are designed to help clients profit from clean energy and a sustainable future.

Making a bet on policy changeShifting portfolio allocations from traditional energy to new technologies is highly dependent on credible long-term energy policies. To date, public market investment in anticipation of policy has been a risky and money-losing endeavor. Nonetheless, understanding the policy context can help guide future re-weightings.

To what degree can investors bet that de-carbonization policy is either likely or unlikely under current facts and circumstances? To help answer the question, there are a few conclusions an investor might draw from history. (For further insight, please explore the Climate and Energy Timeline.)

1. The path of scientific conclusions on greenhouse gas warming of the planet is long and consistent.

2. policy-driven mitigation of Co2

emissions, after several decades of consideration, is still on the table.

1514

Shifting portfolio allocations from traditional energy to new technologies is highly dependant on credible long-term energy policies.

16

Did you know…?

• A Formula 1 car is made up of 80,000 components. If it were assembled 99.9% correctly, it would start the race with 80 things wrong.

• A Formula 1 car can go from zero to 100 mph (160 km/h) and back in four seconds.

• When a driver hits the brakes he experiences retardation or deceleration comparable to a regular car driving through a brick wall at 186 mph (300 km/h).

• An average Formula 1 driver loses about eight pounds (4 kgs) of weight after just one race due to prolonged exposure to high G forces and temperatures.

• Formula 1 refuelers supply over three gallons (12 liters) of fuel per second. This means it would take just four seconds to fill the tank of an average family car.

Formula 1 travels to 19 countries, staging 19 races with drivers from 15 different nationalities. The sport enjoys a massive following; in 2010 it attracted more than 527 million viewers in 187 countries—making it the most-watched annual sport in the world.

recognizing that Formula 1 is one of the world’s most popular and prestigious annual sporting series, UBS engaged in a sponsorship program with the organization beginning in 2010. Formula 1 offers an exceptional platform that is aligned with the UBS brand, provides benefits for clients and delivers a local as well as a global presence.

Bringing Alive a Commitment to High Performance

A shared passion to perfect what is goodIn the most technologically advanced of motor sports, Formula 1 drivers strive for a perfection that is measured in hundredths of seconds. The attitude that drives Formula 1 teams aligns with the focus at UBS: to continually create and identify innovative solutions to achieve our clients’ financial goals. This partnership with Formula 1 underscores these shared values and brings alive our commitment to high performance and success through teamwork.

Unmatched client experiencesA Formula 1 season consists of a series of races, known as Grands prix, held on purpose-built circuits and public roads. The results of each race are combined to determine two annual World Championships, one for drivers and one for constructors. This year, the FormUlA 1 GrANd prIx dU CANAdA 2011 will be held in montreal in June and the FormUlA 1 GrANde prêmIo do BrASIl 2011 in Sao paulo in November. We are also pleased to announce that the FormUlA oNe UNITed STATeS GrANd prIx is returning in 2012, hosted in Austin, Texas.

Formula 1 offers one of the most exciting client entertainment opportunities in sports. The UBS hospitality paddock Club enables guests to be a part of the action. Seated above team garages, clients enjoy a direct view of tires being changed during qualifying rounds and races. Between events, clients can walk around the pit for a behind-the-scenes look at the cars, drivers and their team.

A global reach with local relevanceAs one of the most prestigious sporting events in the world, a select number of leading blue-chip corporations benefit from an association with Formula 1. This program gives the UBS brand a stature and visibility that is hard to achieve elsewhere. UBS enjoys guaranteed brand exposure during all races, so whether fans are at the racetrack or watching on television, UBS is visible at a time when they are engaged and interested. As a Global partner of Formula 1, UBS is in a unique position to demonstrate the strength of a global firm in a local and personally relevant way.

Formula 1™ has its roots in the european Grand prix motor™ racing of the 1920s and 1930s. The first FIA World drivers’ Championship™ was held in 1950. Today, it is the highest class of single-seater auto racing. Sanctioned by the Fédération Internationale de l’Automobile, (FIA), it is the most advanced and most competitive of the FIA’s racing formulae (thus the use of the term “formula” in its name).

“ UBS is a global company where performance, teamwork and superior execution are integral to their clients’ success. These values complement those of Formula 1 and I’m delighted to welcome UBS to Formula 1.”

— Bernie Ecclestone, Group Ceo of Formula 1

In 2011, races will be held in Montreal (June) and Brazil (November). 2012 marks the return of the FORMULA ONE UNITED STATES GRAND PRIx, to be held in Austin, Texas.

17

18

UBS has acted as a financial advisor to Bucyrus International Inc., one of the world’s largest manufacturers of mining machinery, on its $8.6 billion sale to Caterpillar Inc. Bucyrus shareholders will receive $92 per share, representing 32% premium to the closing price of $69.62 on 11/12/10 and a nearly 16% premium to its all-time high.

The acquisition creates a preeminent global mining equipment company with an unmatched product range, one of Caterpillar’s key strategic initiatives.

• Purchasing US-based Bucyrus enables Caterpillar to expand its leadership in the industry by offering the widest range of mining equipment of any global manufacturer.

• Caterpillar may also benefit from Bucyrus’ reputation with coal miners in China where it has a strong presence.

• Caterpillar’s financing business will help clients purchase Bucyrus products cheaper and easier than previously.

• The deal provides miners with one-stop shopping, allowing them to simplify their supply chain for improved scale and cost efficiencies and enjoy improved service and support.

Caterpillar estimates more than $400 million in annual synergies beginning in 2015 from their combined financial strength and complementary product offerings.

The Financial Times* reports that while the purchase surprised the markets (the deal was stitched together in just 60 days) it has generally been viewed in the industry as a sensible long-term bet on commodity markets and emerging economies. Across the sector, capital expenditure is forecast to increase by at least 15% next year. It is indicative of booming commodities activity as demand in China and other emerging countries tightens mining markets from copper to iron ore. The acquisition positions Caterpillar to capitalize on the robust long-term outlook for commodities in emerging markets which are improving infrastructure, rapidly developing urban areas and industrializing their economies. “ Neque porro quisquam est qui dolorem ipsum quia dolor sit amet,

consectetur, adipisci velit.”

— Cary Kochman, head of Americas m&A, UBS Investment Bank

Bucyrus share price performance since IPO07/22/20041

Source; Company press release. Company investor presentation, Company filings. Thomson one estimates. Bloomberg and FactSet as of 11/21/2010.1 Share prices and volume adjusted to reflect the two-for-one split of Bucyrus’ common stock on 05/27/2008.

Caterpillar Offer: $92.00 per share

Prem. to All-Time High 15.7%

Prem. to LTM High 21.2%

Prem. to LTM Low 104.3%

100

80

60

40

20

0

2004 2005 2006 2007 2008 2009 2010

Volume (000s) Share Price ($)

SharePrice ($)

40,000

30,000

20,000

10,000

0

Volume (000s)

Surface Mining Equipment Underground Mining Equipment

Company doz

ers

and

Gra

ders

Whe

el l

oade

rs

min

ing

Truc

ks

hyd

raul

ic S

hove

ls

hig

hwal

l min

ers

Surf

ace

dril

ls

rope

Sho

vels

dra

glin

es

Surf

ace

Belt

Syst

ems

Belt

Syst

ems

roof

Sup

port

s

Arm

ored

Fac

e C

onve

yors

Shea

rers

dril

ls

Truc

ks a

nd l

oade

rs

Con

tinuo

us m

iner

s

die

sel T

rans

port

Caterpillar

Bucyrus

Joy Global

Komatsu

hitachi

liebherr

*Financial Times, Tuesday, November 15, 2010

Mining equipment

19

Creating a Mining Equipment Company with Unmatched Product Range

DEAL SPOTLIGHT

“ There is no better way to spend an hour than reading with a student. The program has meant so much to everyone involved, bringing together UBS colleagues at every level, and I am very proud to be a part of it.

“ It truly makes my day to see the face of my reading buddy light up when I walk through the door every Monday.” 

– Maryellen Frank, Fx, Investment Bank, and a Power Lunch reader for 10 years

The A-B-Cs of IlliteracyA central theme of community affairs at UBS is “empowerment through education” and it is present at many levels of our organization. In one of our longest standing programs, power lunch, UBS employees work one-on-one with low-income students at nearby elementary schools reading aloud, sharing favorite stories and talking about books. By reading to children, we can arouse their curiosity, reassure and inspire them, and motivate them to read by themselves.

One mentor, one child, one book at a time power lunch is a lunchtime literacy and mentoring program proven to improve reading skills, and the love of reading. The simple equation—one mentor, one child, one book at a time—works. The purpose of literature is to enrich and provide meaning in our lives and through power lunch we’re hoping to create lifetime readers by serving as role models.

evaluation proves that power lunch students gain literacy skills, improve reading attitudes, increase reading confidence and score higher on standardized tests. Children listen on a higher level than they read, and listening to readers stimulates growth and understanding of vocabulary and language. Not only do these weekly meetings foster strong academic and social development in students, it provides volunteers with a rewarding way to spend their lunch hour.

20

Power Lunch gives at-risk children…

• Greater enthusiasm for reading.

• Increased confidence and ability to speak and read English.

• Encouragement and motivation to succeed in school.

• Support and friendship from their reading mentor.

• Greater appreciation for their own cultural backgrounds through the sharing of their culture with the mentor.

“ My daughter loves Power Lunch and in the past two months has jumped reading levels. This is a child who struggled with reading in first and second grade and now finds it a joy. When I asked her to describe Power Lunch in one word, she said enthusiastically, ‘Awesome!’ and we agree.”

– Mother of a Power Lunch student

21

employees volunteer on a weekly basis to read with their assigned student, or partner with another employee volunteer to alternate weeks. over the past 11 years, over 1,400 UBS Americas employees have read aloud to over 1,600 students—sharing nearly 50,000 volunteer hours. In addition to readers, UBS has executives on the boards of our partner organizations, participates in their fundraising activities, funds scholarships and grants and hosts holiday parties for the children. But it is the readers who perhaps have the biggest and most personal impact over time.

We also commend our partners— Working in the Schools in Chicago, Il, Everybody Wins! Foundation in New York City, and Stamford Public Education Foundation in Stamford, CT—for their commitment to developing a love of reading in children and showing them the opportunities available through books and learning. We hope to continue to make an impact.

UBS IN THE COMMUNITY