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US equities 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 2 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 3 US equities 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 Disclaimer Chief Investment Office (CIO) Wealth Management (WM) Research is published by UBS Wealth Management and UBS Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. CIO WM Research reports published outside the US are branded as Chief Investment Office WM. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) of investing in the manner described or in any of the products mentioned herein. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/ or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions as well as any prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time, investment decisions (including whether to buy, sell or hold securities) made by UBS AG, its affiliates, subsidiaries and employees may differ from or be contrary to the opinions expressed in UBS research publications. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. This report is for distribution only under such circumstances as may be permitted by applicable law. Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc. UBS Financial Services Incorporated of Puerto Rico is a subsidiary of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. Version as per April 2015. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. © UBS 2015. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. UBS CIO WM Research 22 July 2015 4