Wealth Management Research

19 December 2011

Portfolio principles
The financial instruments landscape
This report provides an introduction or refresher to the world of
financial instruments. We describe the generic instruments equities, bonds and derivatives, discuss their relatives and combinations and give an overview on the size of markets.
Rolf Thomas Bni, UBS AG rolf-thomas.boeni@ubs.com Gesche Niggemann, economist, UBS AG gesche.niggemann@ubs.com Casper Wilbers, UBS AG casper.wilbers@ubs.com

The vast amount of financial innovation in the last 25 years spawned

many new investment instruments. However, they can all be traced back to only a few generic instrument categories.

Knowing the basics of the financial instruments landscape facilitates

understanding of more complex instruments, enabling investors to take informed investment decisions. Back to basics Investors are often utterly surprised by investment outcomes. In some cases, this could be due to incomplete understanding of the financial instruments they employed. Indeed, proliferate financial innovation since the mid-1980s has lengthened the lists of financial instruments both of categories and of proprietary names. The "zoo" of instruments comprises "lions," "tigers," "bullspreads" and other strange animals. Here we go back to basics, and show that there are very few different generic classes of financial assets the wealth of instruments stems from variations or combinations of particular elements of those generic instruments. Thus, deconstructing financial instruments into the simple classes can help investors understand the broader investment universe and the major risks involved. Deep in the basics there are only two "generic" financial instruments: "owner" assets, the best example being an equity security, and "IOUs," (read: I owe you) or debt instruments, best exemplified by bonds. A basic difference is that the debt instruments usually have a defined maturity. "Cash" (or money market instruments), often treated as another core category of financial instrument, is in this regard nothing else than an "IOU" with short maturity.

Source: terranova_17 - fotolia.com

This report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 11. Past performance is no indication of future performance. The market prices provided are closing prices on the respective principal stock exchange. This applies to all performance charts and tables in this publication.

Portfolio principles

In addition to these two generic instruments, there are two "generic" derivatives; one is the "forward" (individual contracts, traded between two parties) or "future" (standardized contracts, traded on exchanges), while the other is the "option." We suggest that with these four basic constructions, we could describe essentially all available financial instruments. Here we examine the basic categorization of the main financial market instruments and show the geography of the major markets by region, currency and debtors. Fig. 1: The three different markets Primary, secondary and over-the-counter markets
investors issuer
capital instrument capital instrument

investors seller
capital instrument

1. Generic financial instruments and important "relatives"

1.1 Equities Equities, also known as shares or stocks, keep many investors alert around the globe. Equities allow investors to participate in an enterprise and thus become a co-owner. Most equity markets are highly liquid and stocks can be bought and sold easily. However, equities are risky investments. Equities are issued by joint stock companies Joint stock (or public) companies divide their capital into units of equal denomination, called shares. These shares are traded on the stock market. In order to become a listed joint stock company, firms need to be of a certain size and fulfil some other conditions. By acquiring shares a shareholder obtains ownership in the firm. This ownership enables participation in the company's financial performance. Thereby the investor can receive dividends and takes part in the appreciation (as well as the depreciation) of the value of the firm. Alongside participation in the company's performance, shareholders are authorized to vote on important business decisions. The price of a share is determined by investors' expectations about the future performance of the firm. If market expectations about a company are optimistic, a shareholder will be able to sell his share for a higher price than otherwise. Equities prices can fluctuate significantly. This is mainly due to a constantly changing environment in which a firm operates, as well as market participants' constantly changing expectations about the profitability of the firm. Factors that have an influence on the company's profitability and will thus be highly relevant for the share price are: the overall economic environment, expected demand for the company's product, capability of the firm's management, etc. Valuation Valuation of shares and determining whether a share is "cheap" or "expensive" is difficult, because future earnings and dividend payments are unknown and need to be forecast. Joint stock companies are required to publish annual reports. These provide an overview of companies' finances. There are three key financial statements included in the annual reports: The balance sheet, which compares a company's assets with its liabilities and shareholders' equity; an income statement, which gives an overview of all income and expenses; and thirdly, a cash flow statement. "Growth" vs. "value" Growth stocks are those that have either historically grown faster than the market, or are expected to do so over the coming years. Because of this, they will typically be expensive compared to their peers, as investors are willing to pay a premium for stocks they believe have less risk of experiencing future problems with earnings.

buyer

prim ary m arket

secondary m arket

otc m arket non-standardized instruments

standardized instruments
Source: UBS WMR

Different markets Generally speaking, there are three different markets. Emissions of new stocks or bonds are carried out on the primary market . Here the flow of capital takes place directly between the issuer and the investor. Trading of existing, well standardized instruments occurs on the secondary market, the largest of these markets. Here trading is done through financial intermediaries, so there is no direct contact between a seller and a buyer. On the third market, the so called over- the- counter market (OTC), non-standardized products are traded. The deals closed on this OTC market are made bilaterally between two specific parties. This is also what makes this market risky. Because these are bilateral contracts, there is a counterparty risk.

Wealth Management Research 19 December 2011

Portfolio principles

Wealth Management Research 19 December 2011

Portfolio principles

Value stocks are those that are perceived to be cheap based on (for example) their expected earnings, compared with their peers. These stocks are often cheap for a reason and have higher risks associated with their earnings or balance sheets. For this reason, value stocks will perform best when investors are more willing to accept risk and volatility in their equity portfolio. Equity sectors The equity universe can be split into different sectors. These sectors differ in their dependency on economic cycles. In booming phases the cyclical consumption sector, raw material, industry and energy sectors tend to outperform, whereas in downturns the health care sector, basic consumption, utilities and the financial sector tend to outperform. The latter group is also referred to as defensive sectors. This is due to the fact that in a downturn, some sectors will likely suffer more than others: The overall demand for luxury goods, for example, is usually expected to be more responsive to a downturn than the demand for basic consumption goods. Stock market indices Some sections of the stock market are summarized by a stock market index. A stock market index gives an overview on how a particular subsection of the equity market is developing and serves as a benchmark: performance of a single share can be evaluated against the overall development of a market. A distinction needs to be drawn between price indices and performance indices. Performance indices also take account of the dividends that have been distributed and correct the actual price by the amount of the distribution. Important indices are: - The S&P 500 index, which was created in 1957 (historical data were reconstructed as far back as 1800) and composes prices of the 500 largest firms by market capitalization actively traded in the United States. The stocks included in the S&P 500 are those of large, publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ. - The MSCI World Index includes a collection of 1,600 stocks from all the developed markets in the world (24 countries). - Frequently quoted regional equity market indices are: The Euro Stoxx 50 which comprises the 50 largest listed European companies, the Swiss Market Index (SMI), the German Deutscher Aktienindex (DAX), the British FTSE 100 Index or the Japanese Nikkei Index. 1.2 Bonds Bonds are securitized loans. They belong to the category of debt instruments or "IOUs" (read: I owe you). Bonds as well as equities are securities traded on the capital market. In contrast to equities, however, bonds are a debt for the issuer. The bond holder (creditor) thus has no ownership rights; instead, the bond holder can claim the issuer's assets. A bond issue creates a debt that has to be paid back to the creditor after a contractually agreed term. Usually, the creditor receives regular interest payments, called coupons, and at maturity the debtor redeems the principal. The size of the coupon payments depends, among other factors, on the credibility of the issuer. The lower the credibility of a debtor, the higher the risk premium is, and the higher the coupon. The vast bulk of bond issues are made by sovereigns followed by subsovereigns and agencies, supranational organizations (e.g., the World
Wealth Management Research 19 December 2011 4

Portfolio principles

Bank) and enterprises. Bonds issued by enterprises to fund investment projects are called corporate bonds. Bonds issued by sovereigns are referred to as government or sovereign bonds. The credibility of issuers is rated by specialized agencies and other institutions. Bonds issued by creditors with a high credit rating (BBB or better) are called investment-grade bonds. High-yield bonds (or junk bonds) are bonds issued by creditors with a higher credit risk, which normally pay a higher interest. A domestic bond is a bond issued in the emitter's country and its currency. All bonds which do not meet those two features are referred to as international bonds. These are less common (about 30% of all bonds issued). There are numerous types of bonds, of which we highlight the most prevalent: Straight bond: These bonds are also known as "normal bonds." Maturity, interest rate and interest payment dates are all fixed in advance. The repayment of the bond amount at maturity is unconditional. Zero bond: Because this bond makes no interest payments during its lifetime, it is issued at a discount. At maturity the full amount, i.e. the principal is repaid. These bonds are also commonly used instruments to create structured products (e.g., capital protection products). Floating rate notes: Here, interest payments vary during the duration and are linked to an economic variable. In most cases this is a short-term interest rate like 3-month LIBOR (London Interbank Offered Rate). Inflation-linked bonds: The interest rate of this bond type is fixed in real terms. Real interest rates (nominal interest rate minus rate of inflation) will always be the same and the repayment of debt at maturity is adjusted by inflation as well. In this way an investor can protect his assets from inflation. 1.3 Cash Bonds are capital market securities that have original maturities in excess of one year. Bonds with an original maturity of less than one year belong to the category of cash and are called money market instruments. They are traded on the money market. These instruments are commonly used for liquidity management reasons. Because of the highly liquid market and the high rating treasury bills (TBills) issued by the US government enjoy, they are probably the best known money market instruments. Other well known instruments are certificates of deposit, where the counterparties are banks, and commercial paper, issued by enterprises. The most common instruments in Europe are time deposits and fiduciary deposits. In both cases, banks are the counterparty, though in the latter case the bank acts as fiduciary, to whom the client gives the order to deposit the investment at a foreign bank. Thus the counterparty risk will be with the foreign bank, since the first just acts as fiduciary. Another well known instrument is the call deposit, which enables transactions to be made on a regular basis (the period until a transaction is processed is usually two business days). There are various ways of investing on the money market. A basic distinction can be drawn between interest and discount instruments. In contrast to interest instruments, discount instruments do not yield any interest. Instead they are issued at a discount.

Wealth Management Research 19 December 2011

Portfolio principles

1.4 NTAC (Non-traditional asset classes) Equity, bonds and cash are also referred to as traditional asset classes. An asset class is a group of different investment instruments that have the same risk and return characteristics, and behave in a similar way in response to various macroeconomic factors such as interest rates and the economic growth outlook. So far we have discussed the main and traditional asset classes of equities, bonds and cash. However, there also exist so-called nontraditional asset classes. Non-traditional asset classes (also called alternative investments) comprising hedge funds, private equity, real estate, and commodities. Due to improved investability, these have gained attractiveness for private investors in the recent past.

2. Basics about derivatives

The derivatives industry has produced an impressively wide range of innovations in the past 20 years, which may make it very difficult for the layman to see through to the basic principles on which they essentially rely. Literally, a derivative takes its name because its value "derives," or takes its origin, from another asset. And there are just two basic construction elements even for the most exotic ones namely one called "forward" (or "future," if it concerns a standardized contract traded on an official exchange), and one called "option." A forward contract is probably the simplest derivative instrument. It is a contract to buy (or to sell) a specific asset at a specified price on a specified date in the future. Underlying assets could be "anything," but foremost securities, commodities, precious metals or currencies. The purpose of this instrument could best be explained in the case of the producers of agricultural goods rice, wheat, corn, etc. who want to get more financial certainty about the price for the goods they produce and so sell them at a forward price. Or, an exporter who expects payment of foreign currency at a future date can hedge this cash flow from a possible foreign exchange loss. Everything that can be used as a hedge, could, of course also be used for "speculative" purposes, i.e., to invest money into an expectation that would yield additional returns. For instance, an investor who expects the gold price to decline significantly in the future could sell gold now with a future contract and if his expectation turns out right could buy the gold at a lower price at the settlement day to settle the contract and make a profit. The capital needs for such a transaction are much lower than with spot transactions conversely, the risk in terms of the capital involved is much higher. The difference between the forward (future) and an option is simply that the option buyer just has a "right," instead of the obligation, to buy ("call option") or sell ("put option") a certain asset at a specified price ("strike price") on a specified date (in the case of a so-called "European option") or until a specified date (in the case of an "American option"). The value of that "right" (without obligation) is difficult to assess. Since the 1970s the so called Black/Scholes model (named after Fischer Black and Myron Scholes) is used to determine the value of options. Again, options can be used for hedging, or for leveraging investments. In the simple case of hedging, this financial instrument reveals its characteristic as being an "insurance." Thus, for instance, the exporter expecting a future income stream of foreign exchange could buy an option to ensure that the foreign currency is not worth less than the specified value (strike price). On the other hand, he would not use the option, if the foreign cur-

Wealth Management Research 19 December 2011

Portfolio principles

rency would be higher in value than the strike price, thus he would not lose the upside gain in contrast to the holder of a forward or a future. The elements, as shown, are very simple, and it helps considerably to have a basic understanding of what certain products involve in terms of risks and investment costs. Yet, as with the difference between understanding the working of transistors and understanding the building of computer chips, the knowledge and experience required for financial engineers to construct complex portfolios of derivative instruments should not be underestimated.

3. The mixed forms How they fit together

We have given an overview on the generic financial instruments equities, bonds and cash, as well as derivatives. In this section we introduce some mixed forms. Characteristics of financial instruments can be mixed, and thus new forms of instruments can be created. The classic example for this financial innovation is the convertible bond, which mixes debt and equity characteristics. Actually, it could also be described as the combination of a bond plus an equity call option, i.e., a bond combined with the right to buy an equity security at a future date at a predetermined price. Other mixed forms are abundantly available in the area of derivatives, where for specific purposes, option combinations are constructed to serve specific hedging needs or investment ideas. While the mixed forms described above represent essentially new financial instruments, there are also "combinations" of financial assets put together into a portfolio: These present a mutual fund. A mutual fund is a portfolio of financial instruments put together by an investment manager and sold to investors. Essentially, the value of a fund participation is equal to the percentage claim on the fund's content. Investing in a fund is particularly valuable from the standpoint of diversification, as it can also be achieved with a small amount of investment. Another investment instrument derived from mutual funds are exchange-traded funds (ETF). These funds offer the same diversification effect as mutual funds, but are equipped with the trading characteristics of equities, which means that ETFs can be bought and sold any time during the trading day.

4. Location and size comparison of major markets

4.1 Equity markets The global market capitalization, which represents the current market value of all companies listed globally, now stands at USD 44 trillion. As Fig. 2 illustrates, market capitalization, though exhibiting an upward trend, fluctuates significantly over time, reaching lows during the financial market crisis in 2008/2009. Between October 2007 and February 2009, the value of market capitalization slumped by over 50%. The map in Fig. 3 shows the major equity markets: the US, Japan, China, UK, Hong Kong and Canada, while Fig. 4 gives an overview of the equity market sizes per continent. We note that due to strong economic growth the Asian equity market has grown significantly over the last couple of years.

Fig. 2: Global equity market capitalization in USD tn

Global Market Capitalisation

USD trillion

70 60 50 40 30 20 10 0 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11

Source: Bloomberg, UBS WMR

Wealth Management Research 19 December 2011

Portfolio principles

Fig. 3: Global equity market capitalization by country Bubble indicates the size of countries' market capitalization as of December 2010

Source: The World Bank, UBS WMR

Fig. 4: Global equity market capitalization by continent Bubble indicates the size of continents' market capitalization as of December 2010

Source: The World Bank, UBS WMR

4.2 Bond markets The size of the total bond market worldwide is USD 95 trillion. Of all bonds issues, 70% are issued in domestic markets and 30% in foreign markets (Fig. 5). While the governments issue only 6% of their bonds in a foreign currency or on a foreign market, the financial sector (including official monetary authorities) issues nearly half of the instruments internationally (corporates issues 34% internationally). The market size for corporate bonds is USD 10 trillion, that for government bonds is USD 40 trillion, and the market size for financial institutions is USD 42 trillion. Fig. 6 shows the size of bond markets for a group of major countries by type of issuer. Comparing government bonds, Japan has the highest amount of securitized debt with USD 11.6 trillion followed by the United States (USD 11.2 trillion). Accordingly, these countries' debt-to-GDP ratios with about 220 and 90 stand at very high levels.

Fig. 5: Size of global bond market by issuer type in USD tn

USD trillion

100 90 80 70 60 50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Governments Financials Corporates

Source: BIS Quarterly Review, UBS WMR

Wealth Management Research 19 December 2011

Portfolio principles

Fig. 6: Bond market size per country and issuer type in USD tn, as of December 2010
USD trillion
18 16 14 12 10 8 6 4 2 0 United States Japan Germany France United Kingdom Italy China Canada Australia Brazil Switzerland South Africa

Governments
Source: UBS WMR, BIS Quarterly Review, September 2001 and 2011

Financials

Corporates

4.3 Derivatives market Derivatives are either traded over-the-counter (OTC) or they are listed in the form of options and futures. The total notional value (nominal or face amount that is used to calculate payments made on an instrument) of derivatives that are traded OTC is USD 601 trillion. The notional value of futures contracts amounts to USD 22 trillion and the notional value of options currently stands at about USD 45.5 trillion. Fig. 7 gives information about the underlying instruments. The gross market value of OTC derivatives is roughly USD 21 trillion. 4.4 Foreign exchange market In terms of turnover, the foreign exchange market is by far the largest market. Daily turnover in the foreign exchange market is USD 1.5 trillion. The currency pair most traded is EUR/USD. Total daily turnover of the USD currency is 1.2 trillion. Fig. 8 shows the share of average turnover per currency. 4.5 Mutual funds Back in 2004, the total net assets of mutual funds amounted to USD 16.2 trillion. Of these, USD 309.8bn were invested in ETFs, which makes a share of roughly 2%. During the last six years, the amount invested in mutual funds grew by about 50% to an extent of USD 24.7 trillion as of December 2010. This remarkably rapid growth reflects investors' need for diversified, uncomplicated and relatively transparent products. But what investors sought even more are ETFs. Here we can see a growth of 423% (respective total assets of USD 1.3 trillion as of December 2010). To meet investor needs, providers increased the number of products; especially the number of ETFs grew at an amazing pace. The number of available mutual funds worldwide amounted to 55,523 (ETF 336) in 2004, reaching 65,519 different mutual funds (ETFs 2,459) in December 2010.1 2
1 2

Fig. 7: Derivative contracts Notional amounts and gross market values, in USD bn
Notional amounts outstanding Dec 1998 Total contracts Foreign exchange contr. Interest rate contr. Equity-linked contr. Commodity contr. CDS Unallocated 80,318 18,011 50,015 1,488 415 --10,389 Dec 2010 601,048 57,798 465,260 5,635 2,922 29,898 39,536 Gross market values Dec 1998 3,231 786 1,675 236 43 --492 Dec 2010 21,148 2,482 14,608 648 526 1,351 1,532

Source: UBS WMR, BIS Quarterly Review, September 2001 and 2011

Fig. 8: The foreign exchange market Daily turnover by currency (in %)

Currency US dollar Euro Deutsche mark French franc ECU and other EMS currencies Japanese yen Pound sterling Swiss franc Canadian dollar Singapore dollar Indian rupee Russian rouble Chinese renminbi South African rand Brazilian real All currencies 1998 43.4 ... 15.2 2.5 8.4 10.9 5.5 3.5 1.8 0.6 0.0 0.2 0.0 0.2 0.1 100.0 2001 44.9 19.0 ... ... ... 11.8 6.5 3.0 2.2 0.5 0.1 0.2 0.0 0.5 0.2 100.0 2004 44.0 18.7 ... ... ... 10.4 8.2 3.0 2.1 0.5 0.2 0.3 0.0 0.4 0.1 100.0 2007 42.8 18.5 ... ... ... 8.6 7.4 3.4 2.1 0.6 0.4 0.4 0.2 0.5 0.2 100.0 2010 42.4 19.5 ... ... ... 9.5 6.4 3.2 2.6 0.7 0.5 0.5 0.4 0.4 0.3 100.0

Investment Company Institute (ICI), 2011 Investment Company Fact Book, 51st edition www.icifactbook.org BlackRock, ETF Landscape, Industry Highlights, Year End 2010 Source; BIS, Global foreign exchange market and OTC derivatives turnover in April 2010, final summary tables, 1. September 2010, UBS WMR

Wealth Management Research 19 December 2011

Portfolio principles

Conclusions
This report surveys the financial instruments landscape. We explained the basic characteristics of the generic financial instruments equities, bonds, cash and the generic derivatives futures, forwards and options, and gave a broad overview on their respective markets. In addition we introduced mixed forms and showed how these were closely related to the generic financial instruments. The information provided here enables investors to gain a good overview of international financial markets; investors will thus find it easier to assess markets and to take informed decisions about those instruments in which they wish to invest. This can also promote better understanding of investment outcomes.

Wealth Management Research 19 December 2011

10

Portfolio principles

Appendix
Global Disclaimer
Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. 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 is based on numerous assumptions. Different assumptions could result in materially different results. 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 current 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 UBS AG and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer. 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. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein. This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distribution only under such circumstances as may be permitted by applicable law. Australia: 1) Clients of UBS Wealth Management Australia Ltd: This notice is distributed to clients of UBS Wealth Management Australia Ltd ABN 50 005 311 937 (Holder of Australian Financial Services Licence No. 231127), Chifley Tower, 2 Chifley Square, Sydney, New South Wales, NSW 2000, by UBS Wealth Management Australia Ltd.: This Document contains general information and/or general advice only and does not constitute personal financial product advice. As such the content of the Document was prepared without taking into account the objectives, financial situation or needs of any specific recipient. Prior to making any investment decision, a recipient should obtain personal financial product advice from an independent adviser and consider any relevant offer documents (including any product disclosure statement) where the acquisition of financial products is being considered. 2) Clients of UBS AG: This notice is issued by UBS AG ABN 47 088 129 613 (Holder of Australian Financial Services Licence No 231087): This Document is issued and distributed by UBS AG. This is the case despite anything to the contrary in the Document. The Document is intended for use only by Wholesale Clients as defined in section 761G (Wholesale Clients) of the Corporations Act 2001 (Cth) (Corporations Act). In no circumstances may the Document be made available by UBS AG to a Retail Client as defined in section 761G of the Corporations Act. UBS AGs research services are only available to Wholesale Clients. The Document is general information only and does not take into account any persons investment objectives, financial and taxation situation or particular needs. Austria: This publication is not intended to constitute a public offer or a comparable solicitation under Austrian law and will only be used under circumstances which will not be equivalent to a public offering of securities in Austria. The document may only be used by the direct recipient of this information and may under no circumstances be passed on to any other investor. Bahamas: This publication is distributed to private clients of UBS (Bahamas) Ltd and is not intended for distribution to persons designated as a Bahamian citizen or resident under the Bahamas Exchange Control Regulations. Bahrain: UBS AG is a Swiss bank not licensed, supervised or regulated in Bahrain by the Central Bank of Bahrain and does not undertake banking or investment business activities in Bahrain. Therefore, Clients have no protection under local banking and investment services laws and regulations. Belgium: This publication is not intended to constitute a public offering or a comparable solicitation under Belgian law, but might be made available for information purposes to clients of UBS Belgium NV/SA, a regulated bank under the "Commission Bancaire, Financire et des Assurances", to which this publication has not been submitted for approval. Canada: In Canada, this publication is distributed to clients of UBS Wealth Management Canada by UBS Investment Management Canada Inc.. Dubai: Research is issued by UBS AG Dubai Branch within the DIFC, is intended for professional clients only and is not for onward distribution within the United Arab Emirates. France: This publication is distributed by UBS (France) S.A., French "socit anonyme" with share capital of 125.726.944, 69, boulevard Haussmann F-75008 Paris, R.C.S. Paris B 421 255 670, to its clients and prospects. UBS (France) S.A. is a provider of investment services duly authorized according to the terms of the "Code Montaire et Financier", regulated by French banking and financial authorities as the "Banque de France" and the "Autorit des Marchs Financiers". Germany: The issuer under German Law is UBS Deutschland AG, Bockenheimer Landstrasse 2-4, 60306 Frankfurt am Main. UBS Deutschland AG is authorized and regulated by the "Bundesanstalt fr Finanzdienstleistungsaufsicht". Hong Kong: This publication is distributed to clients of UBS AG Hong Kong Branch by UBS AG Hong Kong Branch, a licensed bank under the Hong Kong Banking Ordinance and a registered institution under the Securities and Futures Ordinance. Indonesia: This research or publication is not intended and not prepared for purposes of public offering of securities under the Indonesian Capital Market Law and its implementing regulations. Securities mentioned in this material have not been, and will not be, registered under the Indonesian Capital Market Law and Regulations. Italy: This publication is distributed to the clients of UBS (Italia) S.p.A., via del vecchio politecnico 3, Milano, an Italian bank duly authorized by Bank of Italy to the provision of financial services and supervised by "Consob" and Bank of Italy. Jersey: UBS AG, Jersey Branch, is regulated and authorized by the Jersey Financial Services Commission for the conduct of banking, funds and investment business. Luxembourg: This publication is not intended to constitute a public offer under Luxembourg law, but might be made available for information purposes to clients of UBS (Luxembourg) S.A., a regulated bank under the supervision of the "Commission de Surveillance du Secteur Financier" (CSSF), to which this publication has not been submitted for approval. Mexico: This document has been distributed by UBS Asesores Mxico, S.A. de C.V., a company which is not subject to supervision by the National Banking and Securities Commission of Mexico and is not part of UBS Grupo Financiero, S.A. de C.V. or of any other Mexican financial group and whose obligations are not guaranteed by any third party. UBS Asesores Mxico, S.A. de C.V. does not guarantee any yield whatsoever. Singapore: Please contact UBS AG Singapore branch, an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with, the analysis or report. Spain: This publication is distributed to clients of UBS Bank, S.A. by UBS Bank, S.A., a bank registered with the Bank of Spain. UAE: This research report is not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates (UAE). The contents of this report have not been and will not be approved by any authority in the United Arab Emirates including the UAE Central Bank or Dubai Financial Authorities, the Emirates Securities and Commodities Authority, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAE exchange. UK: Approved by UBS AG, authorized and regulated in the UK by the Financial Services Authority. A member of the London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. Where products or services are provided from outside the UK, they will not be covered by the UK regulatory regime or the Financial Services Compensation Scheme. USA: 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 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. Version 05/2011. UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

Wealth Management Research 19 December 2011

11