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What does our new Equity Sector Strategy approach mean for you? 22 July 2015
CIO WM Research
Jonathan Woloshin, CFA, Co-Head Fundamental Research, [email protected]
Sally Dessloch, Equity Sector Strategist, [email protected]
• Longer term equity-based thematic research designed to meet
evolving client needs
• In depth views on sector and sub-sector drivers
• Enhanced focus on small & mid-cap, cross-sector and crossasset class ideas
• A more dynamic approach to identifying preferred equity
investments for populating client portfolios
• New Equity Preference Lists reflecting sector, subsector, and
thematic views
"We are positioning to deliver
expanded thematic investment
ideas within and across
sectors…"
Introducing the "Next Generation" of the CIO Wealth
Management Research Americas Equity Sector Strategy
offering
On August 17, CIO Wealth Management Research Americas
(CIO WMRA) will launch the "Next Generation" of its Equity
Sector Strategy offering. The new offering has been designed
to address the evolving needs of our clients, specifically the
increasing emphasis on inter- and intra-sector dynamics and
thematic implications in evaluating equity investments. Under this
model, we will be enhancing our work to include more detailed
subsector views, including relative preferences within each sector.
In doing so, we are positioning to deliver expanded thematic
investment ideas within and across sectors while also enhancing our
focus on small & mid-cap opportunities.
To complement this more robust equity sector analysis, each Sector
Strategist will publish a sector Equity Preference List (EPL) which will
include Most and Least Preferred stocks reflecting his/her sector,
subsector and thematic views. Each Sector Strategist will also
maintain a concentrated list of "Sector Bellwether" stocks that may
not currently meet the "Most" or "Least" Preferred criteria but
are strategically important to the relevant sector benchmark and/
or represent significant client holdings. The bellwether list will be
included in each Sector Strategist's EPL publication.
This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and
disclosures that begin on page 4.
US equities
Why are we making these changes?
Our goal is to provide a more comprehensive equity offering designed
to identify investment opportunities such as cross-sector thematic
ideas, broad sector by sector overviews, detailed subsector views and
preferences, and individual stock selections. The new model provides
our Sector Strategists the flexibility to allocate more resources to identifying investment opportunities across the capitalization spectrum
within a more robust sector and thematic context.
"The new model provides our Sector Strategists the flexibility to allocate more resources to identifying
investment opportunities…"
What are the criteria for including stocks on the Preference and
Bellwether lists?
In creating their preference lists, our Equity Sector Strategists will utilize multiple research sources including the work of the UBS Investment Bank research team. Stocks designated as Most Preferred or
Least Preferred may or may not be covered by UBS Investment Bank
Research. Most Preferred stocks are those viewed as having the best
relative performance profile within their respective sector over the
next 12 months, while those designated as Least Preferred are seen
as having the poorest relative return potential within the sector over
that same period. The Sector Strategist's selection is based on factors
such as an assessment of the company's fundamental outlook, valuation (both absolute & relative), risk/reward profile and competitive
positioning, among others. Stocks that are viewed as the most important and/or highest market capitalization within a will be classified as
"Bellwethers." Any Bellwether stock that is not placed on the Most
Preferred or Least Preferred list is assigned to the Bellwether list.
Stocks may be added or removed from the EPL when, in the Sector Strategist's judgment, the investment case supporting the stock's
selection has changed. Also, as a matter of policy, a stock will not be
selected as Most Preferred if the UBS Investment Bank rating is Sell;
similarly, a UBS Investment Bank Buy-rated stock will not be selected
as Least Preferred. In the event that a ratings change by UBS Investment Bank results in a two-notch difference in opinion for a particular
stock, the Equity Sector Strategist will review his or her investment
case and remove the stock from the EPL if warranted.
What is the process for selecting stocks for our lists?
In deciding which stocks qualify as Most Preferred and Least Preferred,
Sector Strategists must conduct sufficient due diligence to have a
reasonable basis to support their views. In developing their investment cases, Sector Strategists can use a variety of resources including
company filings; third party industry and company research reports;
financial models; consensus forecasts; and other company or industry
information obtained from reliable third party sources. Due diligence
need not require all the steps described below in each case, but may
include:
"Selection is based on factors such
as an assessment of the company's
fundamental outlook, valuation,
risk/reward profile and competitive
positioning, among others…"
• Sector/subsector review: a top-down analysis of an industry
or subsector within a larger sector classification. Sources may
include direct contact with companies, sell-side analysts, industry
consultants, brokers, and UBS colleagues. The Sector Strategist
uses the review to identify key drivers of earnings and stock per-
UBS CIO WM Research 22 July 2015
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US equities
formance within the sector and subsectors, and to identify any
relevant themes.
• Company due diligence: The Sector Strategist may attend group
presentations in person or via webcast; visit company headquarters; tour plants; or conduct interviews of the company's investor
relations or management teams. The Sector Strategist may also
interview customers, suppliers, and competitors.
• SEC filings review: an analysis of public filings of the subject company. The Sector Strategist assesses historical performance and
the most recent information to establish a basis for evaluating
future financial prospects.
How will the lists be vetted?
A core principle in CIO WMRA is the constructive challenging of each
other's ideas and investment theses. We will continue to vet Sector
Strategist's conclusions via an investment committee known as the
Research Review Committee (RRC). The RRC is a forum of investment
professionals from within CIO WMRA who collectively possess a broad
range of experience and knowledge in conducting research across a
spectrum of corporate securities. A primary objective of the RRC is to
enhance the performance, quality, and communication of the Equity Sector Strategist's views. When research is brought to the RRC,
the RRC must determine whether the research has a reasonable basis
and is thus suitable for publication. Also, in situations where a ratings change by UBS Investment Bank triggers a review of the Sector
Strategist's investment thesis, the RRC will vet the conclusion of the
review.
"A core principle in CIO WMRA
is the constructive challenging of
each other's ideas and investment
theses."
Discontinuation of ratings and price targets
On August 14th, prior to the launch of the "Next Generation" equity
offering, we will be discontinuing our relative Outperform, Marketperform and Underperform ratings, and our 12-month price targets.
Under the new framework, we will not be assigning relative or absolute stock ratings or price targets to individual securities. Instead, our
goal is to deliver a more top-down and thematic approach to stock
selection within each sector and identify lists of stocks which we consider to be Most or Least Preferred on this basis.
It is our hope that these changes will better position our equity offering to meet the developing needs of our clients. We look forward to
your continued feedback as we refine this new offering.
UBS CIO WM Research 22 July 2015
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Appendix
Terms and Abbreviations
Term / Abbreviation
Description / Definition
Term / Abbreviation
Description / Definition
A
CIO
actual i.e. 2010A
UBS Chief Investment Office
Shares o/s
Shares outstanding
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Version as per April 2015.
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