Capital Preservation Funds: An opportunistic investment or a strategic component of your portfolio?

Dr. José Antonio Blanco, Regional CIO EMEA

International Investment Italian Forum

November 8th, 2007

2International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-25% -15% -5% 5% 15% 25% 35%0.0

0.5

1.0

1.5

2.0

2.5

3.0

-25% -15% -5% 5% 15% 25% 35%

Should you hedge yourself?Protection doesn’t come for free

12

Risk reduction

Impact on expected return

Note: For illustration purposes onlySource: UBS Global Asset Management

3International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Should you hedge yourself?Even a successful allocation cannot avoid drawbacks

Note: For illustration purposes only. Based on estimated monthly gross asset allocation contributions for the GSP composite, Jan 2000 – Aug 2007

Source: UBS Global Asset Management

Normal Distribution

Monthly Asset Allocation Contributions

Median 0.06%Average 0.14%Std. Deviation 0.44%

4International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Should you hedge yourself?

The decision to hedge depends mainly on your current views:– How do you rate the market?

Expected Return

– How expensive is protection? Volatility

You should always consider all of the available alternatives. For example, if you expect a market correction, you can:

Implication if marketcorrects does not move rallies

Reduce weight smaller loss no impact smaller gain

Buy protection loss = premium loss = premium smaller gain

Short the market gain no impact loss

Tactical view

5International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Should you hedge yourself?

The strategic decision to go for a capital protection strategy will depend on the risk aversion of the investor

Capital protection strategies are especially suitable for investors willing to take some risk in order to get an attractive return but only if the maximum loss over a given period is known in advanced

Such strategies, therefore, increase the number of options available to investors who would otherwise invest only in very low-risk strategies

Capital protection strategies can be implemented in two main ways:– Static Capital Protection: The portfolio structure is defined at the beginning of

the investment period and, in principle, not changed until expiration. The return is a function of market developments only

– Active Capital Protection: The portfolio is actively invested in a changing combination of risky and risk-free assets. The return will depend both on market developments and on the investment decisions of the fund manager

Strategic View

6International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Static Capital ProtectionPay-off diagram for 95% protection (1 year)

Market

Note: For illustration purposes onlySource: UBS Global Asset Management

Low volatility,high int. rates

High volatility,low int. rates

Current

80

90

100

110

120

80 90 100 110 120

7International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Static vs. Active Capital Protection

Static Capital Protection

Easy implementation, no need for continuous risk monitoring

Not very flexible:– Needs working option markets

– Passive, cannot exploit opportunities as they arise

Performance is very dependent on the performance of the underlying market and on the volatility environment

Active Capital Protection

Implementation is demanding and relies heavily on risk management

Very flexible:– Technique can be used to hedge

assets even if options do not exist

– Well suited for active management, can exploit opportunities as they arise

Performance depends significantly on the active investment decisions and on the volatility environment (but less so than for a static protection strategy)

A comparison

8International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Active Capital PreservationDynamic Hedging Strategy: Core and Opportunity Portfolio

UBS Dynamic Floor Funds

Systematic daily management of overall portfolio

Core Portfolio

Fixed income investments in base currency (Immunization of interest

rate risk)

Opportunity Portfolio

Participation in the performance of underlying bonds and equities

Floor: Capital preservation is aimed at protecting the invested capital at the end of a defined hedging period to an extent agreed in advanced.

Source: UBS Global Asset Management

These funds do not provide any capital guarantee, meaning there is no guaranteed redemption price per unit.

9International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Active Capital Preservation Systematic, constant regrouping of investments between Core Portfolio and Opportunity Portfolio

The proportion of capital allocated to the Opportunity Portfolio increases when the markets are rising and decreases when the markets are falling.

Rising markets

Falling markets

Core Portfolio

Opportunity Portfolio

Source: UBS Global Asset Management

Core Portfolio

Opportunity Portfolio

10International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Active Capital PreservationInvestment Process

Investment Strategy

Asset Allocation

EquityAllocation

RatesAllocation

CurrencyAllocation V

ola

tility

Researc

h /

In

pu

ts

Allocation of risk-budget

Source: UBS Global Asset Management

Risk Management

Risk Budget

- Performance- Discount Rate- Present value

Size of risk budget

Risk Mgt.

- Stress Test

Portfolio

Investment

Core Portfolio

• Bonds

OpportunityPortfolio

• Investments in various asset classes and markets

• Derivatives

11International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Active Capital Preservation

If the value of the NAV increases, the capital preservation value will be systematically revised upwards to lock in the capital gains achieved. There will be no reduction of the capital preservation value.

This means that you are aware of the maximum loss in value at the end of the capital preservation period on the basis of the latest high point of the NAV at any time.

Investment Process: Floor Adjustment

Capital Preservation value (as at the end of the

capital preservation periodof x years)

Net asset value (NAV)

Time

Value

5% cushion

100%

95%

Profit-taking in

These funds do not provide any capital guarantee, meaning there is no guaranteed redemption price per unit.

12International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Active Capital Preservation Important Parameters

Universe of underlying

Preservation period

Base Currency Reference currency of investor (for example EUR)

Broadly diversified portfolios

One calendar year

Floor adjustment With systematic floor adjustment

Preservation level High or low preservation level (for example 95%)

Source: UBS Global AM – Asymmetric Portfolio Solutions

Parameter Example

These funds do not provide any capital guarantee, meaning there is no guaranteed redemption price per unit.

13International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Historical Performance

UBS (Lux) Dynamic Floor Funds – (EUR) 95%

Past performance is no guarantee of future trends. The performance shown does not take account of any commissions and costs charged when subscribing and redeeming units. Source: UBS Global Asset Management

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

140.0

01.0

4.9

810.0

7.9

818.1

0.9

826.0

1.9

906.0

5.9

914.0

8.9

922.1

1.9

901.0

3.0

009.0

6.0

017.0

9.0

026.1

2.0

005.0

4.0

114.0

7.0

122.1

0.0

130.0

1.0

210.0

5.0

218.0

8.0

226.1

1.0

206.0

3.0

314.0

6.0

322.0

9.0

331.1

2.0

309.0

4.0

418.0

7.0

426.1

0.0

403.0

2.0

514.0

5.0

522.0

8.0

530.1

1.0

510.0

3.0

618.0

6.0

626.0

9.0

604.0

1.0

714.0

4.0

723.0

7.0

7

FundFloor

This fund does not provide any capital guarantee, meaning there is no guaranteed redemption price per unit.

14International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

A comparison of different alternativesTrading flexibility with protection

Relative Return Strategies

Absolute Return Strategies

CPPI Products UBS Dynamic Floor Funds

+

+

++

++

- / 0 / +

- / 0

- / +

+ / ++

++

Flexibility

Correlation with market cycle

Capital preservation

-

++

--

Source: UBS Global Asset Management

15International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Summary and Conclusions

Capital protection strategies allow investors to take calculated risks in order to achieve better return opportunities than other low-risk investments

They represent therefore a very interesting core strategy for risk-averse individuals, family offices and institutions

These strategies can also be used as a temporary refuge in uncertain times

However, they are no panacea: – Reducing risk also reduces the long-term return potential relative to non-protected

strategies

– In certain market environments (high volatility / low interest rates) these strategies do not work very well

Our approach, however, mitigates these problems, by applying a flexible approach exploiting active management and rigorous risk management

The current environment makes these strategies interesting even for less risk-adverse investors, especially as many markets are vulnerable after a long and sustained period of excellent performance

Appendix

17International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

UBS Dynamic Floor Funds Dati salienti

Domicilio e tipo di fondo: Lussemburgo, fondo di tipo aperto, OICVM III

Denominazione legale: UBS (Lux) Dynamic Floor Fund – (EUR) 100%

ISIN number: LU0062983464

Portfolio Management: UBS Global Asset Management

Moneta di conto: EUR

Classi azionarie: Tranche B: reinvestibile

Tassazione UE degli interessi: applicabile

Data di lancio: 12 luglio 1996

All-in fee: 0,96% p.a.

This fund does not provide any capital guarantee, meaning there is no guaranteed redemption price per unit.

18International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

UBS Dynamic Floor Funds Dati salienti

Domicilio e tipo di fondo: Lussemburgo, fondo di tipo aperto, OICVM III

Denominazione legale: UBS (Lux) Dynamic Floor Fund – (EUR) 95%

ISIN number: LU0082941609

Portfolio Management: UBS Global Asset Management

Moneta di conto: EUR

Classi azionarie: Tranche B: reinvestibile

Tassazione UE degli interessi: applicabile

Data di lancio: 31 marzo 1998

All-in fee: 1,20% p.a.

This fund does not provide any capital guarantee, meaning there is no guaranteed redemption price per unit.

19International Investment Italian Forum – Milan, 8th November 2007This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered.

Disclaimer For marketing and information purposes by UBS.

The information above is not intended to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not a reliable indicator of future results. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming units. Commissions and costs have a negative impact on performance. If the currency of a financial product or financial service is different from your reference currency, the return can increase or decrease as a result of currency fluctuations. This information pays no regard to the specific or future investment objectives, financial or tax situation or particular needs of any specific recipient.

The information and opinions contained in this document have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. Past performance of investments (whether simulated or actual) is not necessarily a guide to future performance. All such information and opinions are subject to change without notice. UBS AG and / or other members of the UBS Group may have a position in and may make a purchase and / or sale of any of the securities or other financial instruments mentioned in this document. This document may not be reproduced, redistributed or republished for any purpose without the written permission of UBS.

© UBS 2007. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

November 2007