European Distribution

Partners Conference

An insight in to Asian Bond markets

Ashley Perrott
Fixed Income Strategist

21 September 2011

For Professional
Clients Only

SECTION 1

Introduction

Investing in a UBS Asian debt fund means

Participating in the attractive return potential of Asian bond and
currency markets
Investing in a broadly diversified and actively managed portfolio of
Asian bonds
Providing diversification for your fixed income investments based on low
correlation to global fixed income and investments in bonds with an attractive riskreturn profile
Profiting from a global investment team using proprietary valuation tools
and models, fundamental driven credit analysis and a disciplined
investment approach, including a strict risk management approach

Strong economic fundamentals and corporate balance sheets

result of Asias structural changes since 1997 Asian crisis
Gross government debt as a % of GDP, 2009
250
200
150
100

Japan
Italy
Greece
Belgium
USA
India
Germany
Canada
France
Austria
Netherlands
UK
Brazil
Ireland
Argentina
Spain
Sweden
Turkey
Mexico
Denmark
Finland
Korea
Indonesia
South Africa
China
Australia
Saudi Arabia
Russia

50

Source: Deutsche Bank, OECD

Estimated growth of operating revenues and EBIT in

2010 (%)
40%

Earning Growth (EBIT)

Operating Revenue Growth

35%

80%
70%
60%
50%
40%
30%
20%
10%

30%
25%
20%
15%
10%
5%
0%

Estimated debt ratios of enterprises in 2010 (%)

0%
World

US

Europe

UK

Emerging Emerging
Asia
Markets

Note: For illustration purpose only. Source: UBS Securities, data as of 12 January 2011

72.2%

44.7%

45.4%

47.6%
37.7%
22.1%

World

US

Europe

UK

23.5%

Japan Emerging Emerging

Asia
Markets

Note: For illustration purpose only. Source: UBS Securities, data as of 12 January 2011

What to choose in a broad investment universe?

Active investment in this universe would improve returns
Asian bonds have a broad investment universe: USD-denominated sovereigns,
quasi-sovereigns, corporates, local currency bonds in different Asian countries but
also split amongst investment grade and high yield
Investment in a single universe could yield volatile results
Solution: Consider active investment across the full fixed income spectrum to
reduce volatility and improve returns

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011 YTD

15.1%

19.3%

9.2%

10.4%

5.7%

13.3%

8.2%

1.0%

31.7%

12.2%

8.6%

8.5%

15.6%

8.1%

7.3%

4.3%

5.8%

6.1%

-3.7%

28.9%

11.9%

7.3%

7.7%

14.5%

7.0%

5.4%

2.0%

4.8%

4.8%

-12.9%

6.3%

10.9%

3.1%

JP Morgan Asia Credit Index

Corporates (in USD)

JP Morgan Asia Credit Index

Sovereign (in USD)

HSBC Asian Bond Local Currency Index

(in USD; unhedged)

This chart represents the different market sector categories within Asia, ranked by returns, 2001 2011.
Note: Past performance is not indicative of future results. For illustrative purposes only. JP Morgan Asia Credit Index data before January 2006 sourced from the discontinued JP Morgan Asia
Credit Total Return Index series.
Source: Bloomberg (Data as of 31 August 2011)

SECTION 2

Asian local currency bond market

Asian local currency bonds an attractive investment picture

Asian countries have weathered the global downtrend far better than developed
markets due to strong fundamentals
Economic improvements lower fiscal deficits, lower and stable debt ratios, higher
GDP growth rates relative to developed economies
Based on economic and political improvements, majority of countries are currently
investment grade
Attractive long term returns and current yields compare favorably with developed
market bonds
Asia Bonds have been growing strongly as an asset class, and represent an
increasingly deep and well diversified opportunity set
Asian currencies still have strong potential for appreciation

Asian local currency bonds universe

Total size at USD6,060 billion (as of 31 December 2010)
3,500
Gov

Corp

3,000

(in USD bn)

2,500
2,000
1,500
1,000

Vietnam

Thailand

Taiwan

Singapore

Philippines

Malaysia

Korea

Indonesia

India

Hong kong

China

500

Note: For illustrative purposes only. Data for Asian local currency universes are as of 30 June 2010, excepting India and Indonesia which are as of 31 December 2010.
Source: BIS, ADB AsianBondsOnline, HSBC, Bloomberg

Asian bonds are under represented

Strong fundamentals support the investment case for Asia
Asia, driven by strong domestic growth, currently represents over 20% of
global GDP
Asian foreign reserves are strong represents almost 50% of worlds reserve
By contrast, Asia bonds represent less than 5% of the standard global bond index
Asia vs. Rest of the World
Population
Foreign reserves
GDP at PPP
Barclays Capital Global Agg Asia
representation
0%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Asia

Rest of the World

1 Asia representation includes China, Hong Kong, India, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand in the Barclays Capital Global Aggregate index.
Source: Population data from US Census Bureau (2010 estimates), Foreign reserves data from Bloomberg (as of 25 June 2010), 009), GDP data from IMF (2010 estimates)

Diversification benefits vs. developed market bonds

Correlation of monthly returns 30 June 2001 to 30 June 2011
Barclays
Barclays
Global
Citigroup Global
Barclays
Barclays
Agg
WGBI
Bayclays EUR Agg
Agg
US
Corp
(USD
US Agg
(EUR,
(USD;
Corporate
(USD;
Hedged) hedged) (USD) unhedged) HY (USD) hedged)
Citigroup WGBI
(USD Hedged)
Barclays Global Agg
(USD; hedged)
Bayclays US Agg (USD)
Barclays EUR Agg (EUR,
unhedged)
Barclays US Corporate
HY (USD)
Barclays Global Agg
Corp (USD; hedged)
JPM EMBI Global
HSBC Asian Local
Currency Bond

JPM
EMBI
Global

HSBC
Asian
Local
Currency
Bond

1.0
0.9
0.8

1.0
0.9

1.0

0.8

0.9

0.7

1.0

-0.2

0.1

0.2

0.0

1.0

0.5
0.2

0.8
0.4

0.8
0.4

0.6
0.3

0.5
0.7

1.0
0.7

1.0

0.3

0.4

0.4

0.3

0.4

0.5

0.5

1.0

All index data in USD or Hedged in USD as applicable.

Past performance is not indicative of future results.
Source: Barclays Capital, HSBC, Bloomberg, UBS Global Asset Management (Data as of 30 June 2011)

Fixed income risk and return differentiation

Asian local currency bonds demonstrate attractive risk / return attributes
Better risk and return profile than US and
EUR High Yield exposure that investors
often choose when seeking higher returns

Annualized return (in %)

10.0%
9.0%
Reward for risk
8.0% compared to typical
broad aggregate
benchmarks in
7.0%
traditional bond
markets
6.0%
5.0%
4.0%
2%

4%

6%

8%
Risk (in %)
HSBC Asian Local Currency Bond Index
Barclays Global Agg (USD; hedged)
Barclays US Agg Treasuries (USD)
Barclays Global Agg Corporates (USD; hedged)
Barclays EUR Agg (EUR, unhedged)

10%

12%

14%

Citigroup WGBI (USD Hedged)

Barclays US Agg (USD)
Barclays US Corporate HY (USD)
Barclays Pan European HY (EUR; unhedged)

Past performance is not indicative of future trends.

Source: Barclays Capital, HSBC, Merrill Lynch, Citigroup, UBS Global AM 31 December 2000 30 June 2011

10

Asian yields are attractive in a low yield world

10 year yields of Asian bonds versus developed market bonds
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Singapore

HK

EU

US

Thailand Malaysia

Korea

China

Philippines Indonesia

India

Source: Bloomberg (Data as of end August2011)

11

Asian currencies represent added potential return

Asian currencies have appreciated against USD in 2011 YTD
Follows on from strong appreciation
in 2010
Asias solid fundamentals and
attractive yields vs developed markets
could be a driver for capital inflows
and currency appreciation
We expect the liberalization of CNY to
be a gradual long term appreciation
story
Asian currencies in general should
benefit from the CNY appreciation

January July 2011 Performance of

Asian Currencies
INR
THB
TWD
ADXY
MYR
CNY
PHP
IDR
KRW
SGD
-4%

-2%

0%

2%

4%

6%

8%

Source: Bloomberg (as of 29 July 2011). ADXY is the Bloomberg-JP Morgan Asia Dollar Index (a trade and liquidity weighted basket of Asian currencies).

12

are still below pre-Asian crisis levels

Bloomberg JP Morgan Asia Dollar Index: pre-Asian crisis till 2011 end July
Bloomberg - JP Morgan Asia Currency Index

135
130
125

Index Value

120
115

1 year

7.21%

3 years p.a.

2.20%

5 years p.a.

2.34%

10 years p.a.

2.07%

15 years p.a.

-0.35%

110
105
100
95

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

90
For illustrative purposes only. Calculations are unaudited. Past performance is not indicative of future results.
Source: Bloomberg (Data as of 31 August 2011). Bloomberg-JP Morgan Asia Dollar Index (ADXY) is a trade and liquidity weighted index. (China 36%, Korea 14%, HK 10%, Singapore 9%, India
8%, Taiwan 8%, Malaysia 5%, Thailand 5%, Indonesia 3%, Philippines 2%)

13

SECTION 3

Asian USD bond market

Asian USD investment grade bonds universe

Total size at USD 161 billion (as of 31 December 2010)
70
60

In USD bn

50
40
30
20
10
China

Hong
Kong

India
Quasi-Sov

Korea
Sovereign

Malaysia

Singapore

Taiwan

Thailand

Corporates

Note: Estimated by using JP Morgan Asian Credit Index. For illustrative purposes only.
Source: Morgan Markets

15

Asian USD non investment grade bonds universe

Total size at USD 96 billion (as of 31 December 2010)
40
35

In USD bn

30
25
20
15
10
5

Quasi-Sov

Sovereign

Vietnam

Thailand

Taiwan

Sri lanka

Singapore

Philippines

Pakistan

Malaysia

Macau

Korea

Indonesia

India

Hong Kong

China

Corporates

Note: Estimated by using JP Morgan Asian Credit Index. For illustrative purposes only.
Source: Morgan Markets

16

Why Asian bonds, particularly corporates?

Better yield compensation vs. developed markets
Better yields for similar credit ratings
Investment Grade Asian bonds have historically yielded higher vs. global bonds,
particularly corporates

Expanded investment universe

Continued issuance over time has enhanced diversification, liquidity and
investment opportunities

13%
11%

Continued expansion of the Asian

bond universe

JP Morgan Asia Credit Index IG Corporate Yield

Barclays Capital Global Aggregate Corporates YTM
(USD; hedged)

1,400
1,200

7%
5%
3%
Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar05 06 06 07 07 08 08 09 09 10 10 11

In USD bn

9%

1,000

HSBC Asian Bond Local Currency Index Market

Cap (LHS)
250
HSBC Asian Dollar Bond Index Market
200
Cap (RHS)

800

150

600

100

400
200

In USD bn

Asian corporate bond yields attractive at

similar ratings

50

0
0
2000 2001taken
2002based
20032004
20052006 2007 20082009 2010
Barclays Capital Global Aggregate is compromised of IG only instruments. HSBC Asian Bond index market capitalization
on data availability.

1
Source: UBS Global Asset Management, Bloomberg, Barclays Capital. (Data as of 30 June 2011)

17

Relatively stronger fundamentals for corporate Asia

Less leverage and better credit rating performance
Stronger Asian fundamentals
Asian corporate fundamentals have outperformed, supported by relatively robust
economic growth, rising corporate profitability and previous deleveraging

Asia Ex-Japans leverage relatively low

Moodys regional upgrade / downgrade ratios

70
60

Avg. annual Avg. annual

upgrades downgrades
(1990 2010) (1990 2010)

50
40
30
20
10
0

US

Asia Pacific

9.9%

12.2%

US & Canada

8.5%

13.7%

All Region

8.6%

13.2%

Europe
UK
Japan EM Asia LATAM World
Interest Cover
Netdebt/Equity(%)

Source: UBS Quantitative Research, MSCI, Worldscope; data as at end Jun 2011

Source: Moodys
Note: All figures show the percentage of the total number of rated issuers
Data: As of 31 December 2010

18

Asian credit spreads appear attractive versus fundamentals

Credit Crisis

900
800
700
600

Volatility higher but

compression expected
to continue over time

500
400
300

Spread compression

200
100
0
2005

2006

2007

2008

2009

2010

JP Morgan Asia Credit Index Spreads

For illustrative purposes only.
Source: Bloomberg. (Data as of 31 August 2011)

19

Asia IG Corp Spread

30/06/2011

30/03/2011

30/12/2010

30/09/2010

30/06/2010

30/03/2010

30/12/2009

30/09/2009

30/06/2009

30/03/2009

30/12/2008

30/09/2008

30/06/2008

30/03/2008

30/12/2007

30/09/2007

30/06/2007

30/03/2007

30/12/2006

30/09/2006

30/06/2006

30/03/2006

30/12/2005

30/09/2005

bp

And also versus other markets

Asia vs. US IG Corp Spread
900

800

700

600

500

400

300

200

100

For illustrative purposes only.

Source: Bloomberg, JP Morgan, Barclays Capital. (Data as of 31 August 2011)

US IG Corp Spread

20

Fixed income risk and return differentiation

Asian USD bonds demonstrate attractive risk / return attributes
Better risk and return profile than US and EUR
High Yield exposure that investors often choose
when seeking higher returns

Annualized return (in %)

10.0%
9.0%

Reward for risk compared

to typical broad aggregate
8.0%
benchmarks in traditional
bond markets
7.0%
6.0%
5.0%
4.0%
2%

4%

6%

8%
Risk (in %)

JP Morgan Asia Credit Index

Barclays Global Agg (USD; hedged)
Barclays US Agg Treasuries (USD)
Barclays Global Agg Corporates (USD; hedged)
Barclays EUR Agg (EUR, unhedged)

10%

12%

14%

Citigroup WGBI (USD Hedged)

Barclays US Agg (USD)
Barclays US Corporate HY (USD)
Barclays Pan European HY (EUR; unhedged)

Past performance is not indicative of future trends.

Source: Barclays Capital, HSBC, Merrill Lynch, Citigroup, UBS Global AM 31 December 2000 30 June 2011

21

SECTION 4

Why UBS?

Two products offering access to these asset classes

UBS Asian Local Currency Bond Fund

UBS Full Cycle Asian Bond Fund

The diversified bond portfolio

provides access to the local currency
Asian bond market

A diversified portfolio of bonds

focused on the hard currency Asian
market

The fund invests principally in local

currency securities issued by Asian
(ex-Japan) economies / borrowers.
Generally, the fund is expected to
have 100% local currency exposure,
with a sovereign tilt

Invests primarily into USD

denominated sovereign, quasisovereign and corporate bonds in Asia
ex-Japan region. Some flexibility to
have local currency exposure but
expected to be primarily USD, with a
corporate bond tilt given the universe

This actively managed fund aims to

derive alpha primarily from duration
and yield curve positioning and
currency management, with a smaller
contribution from sector management

This actively managed fund aims to

derive alpha primarily from duration
and sector/security management, with
a smaller contribution from active
currency exposure
23

Accessing Asian bond and currency markets

Two products catering to different investment themes

UBS Asian Local Currency Bond

UBS Full Cycle Asian Bond

Benchmark

HSBC Asian Local Bond Index

JP Morgan Asia Credit Index

Currency Exposure

Asia Local Currency

Mostly USD (max 50% LC, typically less than 20%)

Sector Tilt

Sovereign

Corporate

UBS Asian Local Currency Bond

UBS Full Cycle Asian Bond

Positioning

For clients seeking Asian local currency appreciation For clients seeking opportunities in the improving
Asian credit market
Invests primarily into Asian currency government
bonds with relatively lower yield than corporate
bonds

Invests primarily into USD corporate bonds, which

offer relatively higher yields than equivalent
securities in developed markets

Duration strategies focused upon local rate curves

Duration strategies mix of local and US curves

24

Key benefits at a glance

UBS Asian Local Currency Bond Fund
An attractive asset class to tap the growth of Asia
Asian economies have shown resilience to recent downturn and are expected to be a
strong driver of global growth
Asian bonds have become one of the fastest growing asset classes with typically
higher yields vs. developed markets
Asian currencies offer appreciation potential vs. developed market currencies in the
medium term

Three alpha sources provide broad opportunity set across various market cycles
Local currency
Duration and yield curve
Sector/credit

Dedicated, strong portfolio management team

Dedicated strong team of experienced Asian fixed income and currency specialists
Integrated into global fixed income investment team including emerging market debt
and currency expertise
25

Fund characteristics
UBS Asian Local Currency Bond Fund
Average credit rating: A- (benchmark A-)
Modified duration: 3.8 years (benchmark 5.28 years)
Theoretical Yield to Maturity (gross of fees)^
In USD: 4.24%
In EUR-hedged: 4.68%

Benchmark 3.98%

Number of Issuers held: 101

Number of Issues held: 150
Fund size: USD 900.1m

Top 10 Issuers
Korea Government
Singapore Government
Malaysia Government
Indonesia Government
Philippines Government
Thailand Government
Bank Negara
Agricultural Bank of China
China Resources Land
New World Development

Top 10 Issues
Korea Treasury Bond 4% 03/10/16
Korea Treasury Bond 4% 09/10/15
Singapore Govt Bond 2.25% 06/01/21
Malaysia Government Bond 4.262% 9/15/16
Singapore Govt Bond 3.25% 09/01/20
Indonesia Govt Bond 9.5% 07/15/31
Philippine Govt Intl Bond 4.95% 01/15/21
Singapore Govt 11/03/11
Malaysia Government Bond 3.835% 08/12/15
Korea Monetary Stabilization Bond 4.64% 10/04/11

%
20.2
14.8
10.4
9.9
6.5
6.2
1.6
1.1
1.0
0.9

%
6.8
5.3
5.0
4.8
3.5
3.4
3.0
2.4
2.2
2.1

^ Theoretical YTM is gross of fees p.a. Please note that returns can deviate substantially from the theoretical YTM given pricing volatility.
Benchmark: HSBC Asian Local Bond Index
This information should not be considered as a recommendation to purchase or sell any bond.
Past performance is not indicative of future results
Source: UBS Global Asset Management, Bloomberg (Data as of end August 2011)

26

UBS Asia Local Currency Bond: Performance

Total returns for periods ending 31 August 2011 (in USD)
Since Inception1
% pa
Asia LC Bond

6.92

HSBC Asia LC Bond Index

9.70

Value added

(2.82)

Tracking error

n/a

Information ratio

n/a

Std deviation2

n/a

Std deviation2 Benchmark

n/a

The returns shown above are based on currently available information and are subject to revision. Past performance is no guarantee of future results. Performance figures are gross of
fees. Disclosures available on request.
1 Inception as of January 31, 2011
2 For periods greater than 1 year, the annualized standard deviation is based on monthly logarithmic returns.

27

Fund features
UBS Asian Local Currency Bond Fund
Fund name:
Legal structure:
Fund domicile:
Launch date:
Portfolio management:
Currency of account:
Benchmark:
Dealing / NAV calculation
Settlement
Accounting year ends:
Distribution:
Flat fee:
Swing pricing:

ISIN:

UBS (Lux) Bond Sicav Asian Local Currency Bond

UBS (Lux) Bond SICAV
Luxembourg
28 Jan 2011
UBS Global Asset Management (Hong Kong) Ltd.
USD
HSBC Asian Local Bond Index
daily
T+3
May 31
Yearly, monthly or accumulating
140 bps
Yes
(USD) P-acc LU0573605267
(USD) P-Mdist LU0573605424
(SGD) P-Mdist LU0573606828
(EUR) P-acc LU0573606232
The Non-USD-Share Classes of UBS (Lux) Bond SICAV Asian Local Currency Bond
are fully hedged back to their respective base currency against the USD, the pricing
currency of the underlying asset investment account. Please be informed that not
all share classes mentioned in this document have yet been launched. UBS has no
obligation or duty to launch any share class mentioned in this document

28

Key benefits at a glance

UBS Full Cycle Asian Bond Fund
An attractive asset class to harness the growth of Asia
Asian bonds especially corporates have historically offered higher yields vs. global
bonds and fundamentals have continued to improve over time
Corporate Asian bonds and currency are attractive on a risk adjusted basis

Actively manage across multiple Asian countries

Active management could help clients navigate through the various economic and
market cycles within the region and potentially enhance returns
Aspects of active management: Interest rates, credit and currency management

Dedicated, strong portfolio management team

Dedicated strong team of experienced Asian fixed income and currency specialists
Integrated into global fixed income investment team including EM debt and
currency expertise

29

Fund characteristics
UBS Full Cycle Asia Bond Fund
Average credit rating: BBB- (benchmark
BBB)

Top 10 Issuers
Philippines Government

Sovereign

4.41

Modified duration: 4.69 years (benchmark

5.41 years )

Majapahit Holding

Utilities

2.97

Woori Bank

Financials

2.82

Indonesia Government
Bumi Investment Pte

Sovereign
Metal & Mining

2.43
2.25

Shinhan Bank
Hutchison Whampoa

Financials
Conglomerates

2.05
1.98

New World Development

Berau Capital Resources Pte Ltd
Country Garden Holding

Property Development
Metal & Mining
Property Development

1.95
1.83
1.77

Number of Issuers held: 104

Number of Issues held: 148
Theoretical Yield to Maturity (gross of
fees)^
in USD: 5.91%

Top 10 Issues

In EUR*-hedged: 6.32%
Benchmark: 4.95%
Fund Size: USD 1,124.26mn
Benchmark: JP Morgan Asia Credit Index
^ Theoretical YTM is gross of fees p.a. Please note that returns can deviate substantially
from the theoretical YTM given pricing volatility.
* 12 month hedging cost is applied.
Past performance is not indicative of future results. This information should not be
considered as a recommendation to purchase or sell any bond.
Source: UBS Global Asset Management, Bloomberg (Data as of end August 2011)

Sector

Bumi Investment 10.75% 10/06/17

Sector
Metal & mining

%
2.25

Philippines Government 6.375% 10/23/34

Majapahit 7.75% 01/20/20

Sovereign
Utilities

2.21
2.20

New World Development 7% 02/10/20

Property Development

1.95

Berau Capital Res 12.5% 07/08/15

Metals & Mining

1.83

Woori Bank 6.208% 05/02/37

SBB Capital 6.62% 11/29/49

Financials
Financials

1.77
1.50

Bank of East Asia 6.125% 7/16/20

Financials

1.31

Chong Hing Bank 6% 11/04/20

Financials

1.31

AMBB Capital Ltd 6.77% 1/29/49

Financials

1.26

30

UBS Asia Bond (USD): Performance

Total returns for periods ending 31 August 2011 (in USD)
1 Year
% pa

Since Inception1
% pa

Asia Bond (USD)

4.14

9.63

JP Morgan Asia Credit Index

4.43

8.93

Value added

(0.29)

0.70

Tracking error

3.70

3.42

(0.08)

0.20

Std deviation2

5.42

5.98

Std deviation2 Benchmark

3.04

3.67

Information ratio

The returns shown above are based on currently available information and are subject to revision. Past performance is no guarantee of future results. Performance figures are gross of
fees. Disclosures available on request.
1 Inception as of January 31, 2010
2 For periods greater than 1 year, the annualized standard deviation is based on monthly logarithmic returns.

31

APPENDIX

UBS Asian Fixed Income platform

Experienced team supported by our global investment platform
UBS Asian Fixed Income
Pan Asia Portfolio Management Team
Ben Yuen (Lead PM), Cary Yeung (PM), Ashley Perrott (Capability Management),
Jason Pang (Assoc PM), Christy Lee (GTP), PM (TBA)
Credit Research
Ben Squire, Ross Dilkes, Paul Lee, Sebastian Petrich, Christy Lee,
Emerging Market Debt Team
Strategy input on Emerging Asia market, currency management and implementation
Global Teams

UBS HANA

Portfolio Management

Strategy input on south Korean economic and

interest rate market view

Research
Credit, Economics, Quantitative
Capabilities Management

UBS SDIC
Ad-hoc support on policy changes or
China-specific events

Data: as at September 2011

Note: For illustrative purposes only. May not represent reporting lines

33

Asian Fixed Income Asset overview

AUM USD 3.24 billion managed directly by local based team
Asia Fixed Income (passive)
Asia Fixed Income (active)
RMB Diversified Fund
Asia Local Currency Bond
Singapore Active Income Fund

3,500
3,000

Global Small Mkts (Asia)

Full Cycle Asian Bond Fund
RMB Fixed Income Fund
Taiwan Asian High Yield

USD m

2,500
2,000
1,500
1,000

Jun 11

Mar 11

Dec 10

Sep 10

Jun 10

Mar 10

Dec 09

Sep 09

Jun 09

Mar 09

Dec 08

Sep 08

Jun 08

Mar 08

Dec 07

Sep 07

Jun 07

Mar 07

Dec 06

Sep 06

Jun 06

500

Source: UBS Global Asset Management

Due to confidentiality reasons, names of clients will not be disclosed
As at end Jun 2011

34

Investment philosophy
Fixed Income, currency and credit each offer opportunities to generate
incremental return
Diversification of alpha sources is critical to generating consistency of returns
We diversify through a blend of tactical, thematic and strategic views
Our process is further diversified using a blend of judgement and models
Where credit is part of the opportunity set we combine top down and bottom up
security selection to generate greater consistency of credit alpha

Risk control an eye to the future combined with stress tests of the past
We live in an integrated world and a global approach in combination with regional
specialists is appropriate

35

Process and construction is disciplined and collaborative

Rigorous macro forecasting + strong research capabilities
Economic Forum: The broad investment
professional group assesses
macroeconomic fundamentals and
determines themes for the portfolio at
the Economic Forum
Portfolio Construction: themes are
translated into portfolio strategies
based on sector relative value and
security cash flow analysis
Constant debate and evaluation of
investment thesis is critical for alpha
generation
Risk management is critical for superior
portfolio construction

Quarterly Economic Forum

Macro themes: economic
growth,
inflation, risks and
opportunities
Portfolio Construction
Duration/yield curve, volatility, sector, credit
Fundamental and relatives value ranking
Proprietary cash flow analysis
Fixed Income Investment Committee
Fine-tune portfolio themes
Weekly Strategy
Tactical relative value opportunities
issue selection
Daily Analyst Interaction

Seek to identify discrepancies between market price and long run value
36

Investment process
Strategy and monitoring across multiple levels
Macro Strategy

Performance evaluation

Global fundamental and cyclical

Daily performance tracking

Monthly attribution and reporting
Formal Qtly Review

economic analysis helps determine

top-down risks

Identify market dislocations,

inefficiencies, and mispricings

Directional trend analysis of risk

and volatility

Implementation

Best execution sought in cash

and derivative markets

Evaluate model risk and
pricing data
Compliance

Sector & Position Level

Stress test individual positions using

proprietary models

Clearly defined investment thesis for

each sector and position

Portfolio Level

Internal surveillance and ongoing

Portfolio level risk modeling on a daily basis

Portfolio level strategy, sector, and position

research

adjustments are made to achieve ex-ante

return and volatility targets

37

Our process diversifies alpha sources, promotes consistency

Broad investment professional group
formulates views and are on record for
their decisions
Top-down and bottom-up strategies
diversify sources of alpha generation

Top-Down Strategies

Duration

Yield
Curve

Sector

Credit
Currency
Quality

Risk Management

We seek to generate consistent returns

in all market environments by closely
managing risk budgets

Client Portfolio

Credit
Analysis

Analytics/ Cost Effective

Technology
Trading

Bottom-Up Strategies

Diversification and risk management are the keys to consistent results

38

Fund structure
UBS Asian Local Currency Bond Fund
Credit Structure

Sector Exposure

Others
3.9%

BB
25.3%

Fund

90%

AAA
14.8%
AA
1.1%

B
3.1%

Maturity Structure
BM

80%
70%

Fund

BM

0-1Y

14%

1%

1-3Y

9%

29%

60%

3-5Y

29%

18%

50%

5-10Y

37%

30%

40%

10-15Y

2%

10%

30%

15Y+

10%

13%

20%

A
41.6%

BBB
11.2%

10%
0%
Quasi-Sov

Sovereign

Currency Exposure

Financials

Industrials

Utilities

Others

Country Exposure

20%
18%
16%

25%

14%
20%

12%
10%

15%

8%

10%

6%
4%

5%

2%
0%
CNY

HKD

IDR

INR

KRW MYR
Fund BM

PHP

SGD

THB

TWD

0%
China

HK

Indonesia

India

Korea Malaysia Philippines

Fund BM

SG

Thailand

Taiwan

Others

Past performance is not indicative of future results

Source: UBS Global Asset Management, Bloomberg (Data as of 31 August 2011)

39

Review and outlook

UBS Asian Local Currency Bond Fund, data as of end August 2011
Review

Outlook & Strategy

At the fundamental level, Asian economies continue to compare

favourably versus western economies when looking at measures
such as debt/GDP, debt/reserve ratios and GDP growth. However,
concerns surrounding the global economy and European debt
situation have obviously created volatility and impacted on
Asian markets as fundamentals have given way to general risk
aversion.

Asian government bond yields have fallen sharply despite

ongoing inflation pressures and central banks that remain
biased more to tightening policy than easing.

Credit spreads and risk premiums have widened sharply despite

the solid fundamentals. We maintain a view that there is a
strong case for spread tightening from current levels for Asian
credits over medium to long term. However, in the short term, it
is difficult to expect significant tightening given the still
unresolved European public sector debt crisis and economic
uncertainty.

We expect the market to remain volatile in the near term and

have taken steps to reduce some credit risk in the fund until
uncertainties reduce, in order to limit further negative impact on
performance.

For Asian currencies, risk positions reduced significantly in early

August as the Fund took profit from overweight in certain Asian
currencies. Positions are now relatively neutral except for
retaining the long CNH position. Based on the market on-going
risk aversion and de-leveraging fears, Asian currencies may
undergo a period of correction after recent strong performance.

The Asian local currency bond market benchmark delivered a

positive return in August, driven predominantly by sharp falls in
yields across most markets. Asian currencies on average
weakened slightly versus the USD which detracted from the
overall market return. The key influence driving the yield
movements were the global macro events which drove global
yields lower, including the US rating downgrade, questions
about a potential US recession on the back of continued weak
economic data readings, stress in European bank liquidity, and
Greeces potential default. Poor market sentiment during the
month therefore led to a bull flattening of Asian rates curves as
long term bonds outperformed.

Asian currencies were relatively resilient during the global

volatility with the Asia dollar index (ADXY) falling by only by
0.27%.

Under the global risk averse market environment, high yield

bonds underperformed investment grade bonds and corporate
bonds underperformed sovereign bonds. The funds overweight
in corporate and high yield therefore impacted performance.

The Fund underperformed the benchmark significantly in

August. The active overweight position in credit had a large
negative impact, while the underweight in duration also
impacted performance. Active currency positioning was also a
small negative after being strongly positive in recent months and
were mostly closed in early August.

40

Peer Comparison (% Growth vs. AUM)

Gross return

UBS Asian Local Currency Bond Fund

Asian local currency bond fund

10%
HSBC ALBI

8%

UBS Asian Local

Currency Bond

6%

4%

2%
0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

AUM (in USD mn)

HSBC ALBI = HSBC Asian Local Currency Bond Index
Note: AUM data based on latest available information. Certain peer AUM data may range from end Jun to end Aug 2011 due to limited data availability. For indicative
purposes only. Past performance is no guarantee of future results. Return calculated from Jan 28, 2011 to August 31, 2011. Return is gross of fees.
Source: Bloomberg (Data as of end August 2011)

41

Fund structure
UBS Full Cycle Asian Bond Fund
Credit Structure

Currency Exposure

40%

34.4%

35%

34.2%
30.9%

29.3%

30%
25%

19.1%

20%

10.7%

CNY

17.8%

15%

PHP

0.0%

THB

0.0%

KRW

0.0%

10.0%

10%
5%

0.0%

SGD

6.2%
1.6%
0.0%

5.5%

0.6%

6.9%
3.5%

89.3%

USD

0%
AAA

AA

A
Fund

BBB
BB
Benchmark

Others*

Sector Exposure
Others
Utilities

4.9%
2.4%

Oil & Gas

5.1%
3.8%

China
21.0%

South Korea
13.4%

18.0%

Financials

29.9%
25.1%

Industrials
10%
Fund

20%

Malaysia
6.7%

Singapore
3.9%

23.6%

7.3%

0%

80%

Philippines
9.9%

20.5%

9.8%

Sovereign

40%

Country Exposure

3.0%
5.0%

Quasi Sovereign

0%

30%
Benchmark

41.7%
40%

50%

Others
13.1%

Indonesia
14.6%

* Represents cash or CCC or below rated instruments.

Past performance is not indicative of future results
Source: UBS Global Asset Management, Bloomberg (Data as of end Aug 2011)

Hong Kong
17.5%

42

Review and outlook

UBS Full Cycle Asian Bond Fund, data as of end August 2011
Review

Outlook & Strategy

At the fundamental level, Asian economies continue to compare

favourably versus western economies when looking at measures
such as debt/GDP, debt/reserve ratios and GDP growth. However,
concerns surrounding the global economy and European debt
situation have obviously created volatility and impacted on
Asian markets as fundamentals have given way to general risk
aversion.

Credit spreads and risk premiums have widened sharply despite

the solid fundamentals. We maintain a view that there is a
strong case for spread tightening from current levels for Asian
credits over the medium to long term. However, in the short
term, it is difficult to expect significant tightening given the still
unresolved European public sector debt crisis and economic
uncertainty.

We expect the market to remain volatile in the near term and

have reduced some credit risk in the fund until uncertainties
reduce, in order to limit further negative impact on
performance.

For Asian currencies, risk positions were reduced in early August

as the Fund took profit from overweight in certain Asian
currencies. The only remaining exposure is a long CNH position.
Based on the market on-going risk aversion and de-leveraging
fears, Asian currencies may undergo a period of correction after
recent strong performance.

The Asian USD bond market delivered slight negative returns in

August, with high volatility during the month. The key
influences driving the volatility were the global macro events
which caused significant risk aversion, including the US rating
downgrade, questions about a potential US recession on the
back of continued weak economic data, stress in European bank
liquidity, and Greeces potential default. Poor market sentiment
during the month therefore resulted in a dramatic widening in
credit spreads. Credit spread widening more than offset the
sharp fall in US Treasury yields over the month, meaning returns
overall were negative.
During this risk averse market environment, corporate bonds
significantly underperformed sovereign bonds. Within the
corporate space, high yield bonds were significantly impacted
and underperformed investment grade bonds sharply. The credit
spread versus Treasuries on the overall benchmark index
widened by around 64 basis points in the month. Investment
grade corporate spreads widened on average 48 bp while the
HY corporate spread widened a massive 187bp.
The Fund sharply underperformed against the benchmark in
August. Our overweight in corporate bonds in general, and high
yield credit in particular had a material impact given the spread
widening. An underweight in duration also had a negative
impact.

43

Morningstar Peer Universe Comparison (% Growth vs. AUM)

UBS Full Cycle Asian Bond Fund, peer comparison universe: 9 peers
UBS Full Cycle Asian Bond Fund

Annualized Return

Asian credit bond fund

12%
UBS Full Cycle
Asia Bond

10%

JACI: 8.8%

8%
6%
4%
2%
0

500

1,000

1,500

2,000

2,500

3,000

AUM (in USD mn)

* JACI = JP Morgan Asia Credit Index
Note: AUM data based on latest available information. Certain peer AUM data may range from end May to end August 2011 due to limited data availability. For indicative purposes
only. Past performance is no guarantee of future results. Return calculated from Jan 28, 2010 to August 31, 2011. Return is annualized and gross of fees.
Source: Morningstar, LIM, Bloomberg (Data as of end August 2011)

44

Disclaimer
UBS Global Asset Management (UK) Ltd is a subsidiary of UBS AG.
Registered in England, authorised and regulated by the Financial Services Authority: UBS Global Asset Management (UK) Ltd, UBS Global Asset
Management Funds Ltd, UBS Global Asset Management Life Ltd.
Telephone calls may be recorded.
UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
This document is for Professional Clients only. It is not to be distributed to or relied upon by Retail Clients under any circumstances.
This material supports the presentation(s) given. It is not intended to be read in isolation and may not provide a full explanation of all the topics that were
presented and discussed. Care has been taken to ensure the accuracy of the content, but no responsibility is accepted for any errors or omissions.
Please note that past performance is not a guide to the future. The value of investments and the income from them may go down as well as up, and
investors may not get back the original amount invested.
This document is a marketing communication. Any market or investment views expressed are not intended to be investment research. The document has
not been prepared in line with the FSA requirements designed to promote the independence of investment research and is not subject to
any prohibition on dealing ahead of the dissemination of investment research.
The information contained in this document should not be considered a recommendation to purchase or sell any particular security and the opinions
expressed are those of UBS Global Asset Management and are subject to change without notice. Furthermore, there can be no assurance that any trends
described in this document will continue or that forecasts will occur because economic and market conditions change frequently.
This document does not create any legal or contractual obligation with UBS Global Asset Management.
The recipient agrees that this information shall remain strictly confidential where it relates to the Investment Manager's business. The prior consent of UBS
Global Asset Management (UK) Ltd should be obtained prior to the disclosure of commercially sensitive information to a third party (excluding the
professional advisors of the recipient).
Information reasonably deemed to be commercially sensitive and obtained from UBS Global Asset Management (UK) Ltd should not be disclosed.
This information is supplied with a reasonable expectation that it will not be made public. If you receive a request under the Freedom of Information Act
2000 for information obtained from UBS Global Asset Management (UK) Ltd we ask that you consult with us. We also request that any information
obtained from UBS Global Asset Management (UK) Ltd in your possession is destroyed as soon as it is no longer required.

45