Yield & Income

Yield & Income Cross asset ideas for Yield Monthly –– Octo ber 2019 Chief Investment Office GWM

Division and discord Divisions have emerged or deepened within trade talks, Fed policy and national politics We remain cautiously optimistic that the US can avoid recession in 2020

We underweight equities overall; neutral US but favor over developed market and EM stocks

This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosures begin on page 23. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Contents

Market Commentary About this report Division and discord ...... 3 The objective of this report is to provide an analysis of various income-generating securities – sovereign, municipal and corporate Asset Allocation Commentary bonds, equities, master limited partnerships Waiting for direction...... 4 (MLP), preferred securities, senior loans, real estate investment trusts and closed-end funds, Fixed Income Sector Reviews – in the context of current economic, fixed income and equity market conditions. US Gov't Bonds Raging repo ...... 5 This report represents a compendium of previously-published views from UBS CIO US Municipal Bonds Global Wealth Management. These publica- Bout of volatility ...... 6 tions are referenced in each section in order to obtain more information. US Investment Grade Credit Spreads stay firm as yields rise from the lows ...... 7 This report will be published approximately every four weeks. Please note that the views US High Yield Credit in this report may change with market con- Neutral on high yield ...... 8 ditions at some point between publications. Emerging Market Debt Updates to the views in this report can be Preference for carry assets in emerging markets ...... 9 found in the referenced sections of the Online Services Research website. Equity Sector Reviews US Equity Lead authors Expect range-bound markets ...... 10 Jason Draho Frank Sileo International Developed Market Equity Bouncing back ...... 11 Authors (in alphabetical order) Emerging Market Equity Alejo Czerwonko Limited upside, massive uncertainty ...... 12 Jay Dobson Leslie Falconio Michael Gourd Yield Asset Reviews Daniel Kelsh Preferreds David Lefkowitz So far, so good ...... 13 Sangeeta Marfatia Barry McAlinden REITs Kathleen McNamara Falling rates keep lifting REITs ...... 14 Edmund Tran MLPs Justin Waring Focus on quality ...... 15 Jonathan Woloshin Xingchen Yu Jeremy Zirin Closed-End Fund Highlight Nuveen Preferred Securities Income Fund (JPS) A preferred securities fund ...... 16

House View Yield-Focused Portfolios

Yield Monitor ...... 17 Strategic Asset Allocations (SAAs) ...... 18

CIO GWM 30 September 2019 2

Market Commentary Frank Sileo, CFA

Division and discord Investors are focused on whether and how divisions might be More rate-sensitive sectors underperformed in September reconciled within three key areas of interest: Federal Reserve Apr-19 May-19 Jun-19 Jul-19Jul-19Jul-19 Aug-19 Sep-19 policy, US-China trade talks, and national politics. Over the past US Lg Cap US Gov't US Lg Cap US Lg Cap REITs Int'l DM Value several weeks, division within each of these spheres seems to Growth 4.5% 2.3% Value 7.2 % Growth 2.3% 3.4% '5.2 % US Lg Cap IG Corps US Lg Cap Preferreds US Gov't US Lg Cap have deepened. The US trade war with China escalated in Au- Value 3.5 % 1.5% Growth 6.9% 2.1% 3.4% Value 3.3 % gust with a series of incrementally higher, reciprocating tariffs. Int'l DM Muni Bond Emerging REITs IG Corps REITs Value 2.3 % 1.4% Mkts 6.2% 1.3% 3.1% 2.9% Among Fed policymakers, divisions became apparent following Emerging EM USD Int'l DM Sr Loans Muni Bond Emerging their 18 September meeting , during which the central bank cut Mkts 2.1% Bond 0.6% Value '5.3 % 1.0% 1.6% Mkts 2.0% its fed funds rate by 25 basis points. Three members dissented Sr Loans Preferreds EM Loc Bond EM USD Bond Preferreds Preferreds 2.1% 0.5% 4.4% 1.0% 0.8% 0.9% against that decision: one dovish voter wanted a deeper cut, High Yield REITs EM USD EM Loc Bond High Yield Sr Loans while two hawkish voters called for no cut. Further, the latest 1.4% 0.2% Bond 2.7% 1.0% 0.4% 0.7% projections from the 17 members showed that eight expect the Preferreds EM Loc Bond MLPs US Lg Cap EM USD Bond EM Loc Bond fed funds rate to be lower by the end of next year, while seven 0.9% 0.0% 2.6% Value 0.8 % 0.2% 0.6% IG Corps Sr Loans High Yield Muni Bond Sr Loans High Yield 1 expect it to be higher (two are calling for flat rates). 0.5% -0.7% 2.3% 0.8% -0.4% 0.4% EM USD MLPs IG Corps High Yield US Lg Cap MLPs Meanwhile in Washington, DC, political discord, which has Bond 0.4% -1.1% 2.3% 0.6% Growth -0.8% 0.3% been acrimonious for several years, entered a new phase with Muni Bond High Yield REITs IG Corps EM Loc Bond EM USD Bond the launch of a formal impeachment inquiry into President 0.4% -1.2% 1.3% 0.5% -2.0% 0.0% Trump. While the market reaction has been minimal so far, it REITs Int'l DM Preferreds US Gov't US Lg Cap IG Corps -0.2% Value '-5.8 % 1.2% -0.1% Value -2.9 % -0.7% could capture more investor attention if upcoming hearings US Gov't US Lg Cap US Gov't MLPs Int'l DM Value US Lg Cap uncover more damaging evidence against the president. -0.3% Growth - 0.9% -0.2% '-4.1 % Growth -0.7% EM Loc Bond US Lg Cap Muni Bond Emerging Mkts Emerging Muni Bond For the most part, investors have taken these events in stride. -0.9% Value -6.4 % 0.4% -1.2% Mkts -4.9% -0.8% To be sure, interest rates have been more volatile. Escalating MLPs Emerging Sr Loans Int'l DM Value MLPs US Gov't trade tensions in August led investors to seek out safe-haven -1.3% Mkts -7.3% 0.2% '--2.2 % -5.5% -0.9% Source: Bloomberg, BAML, UBS. Returns as of 27 September 2019 assets, driving Treasury yields lower. The 10-year Treasury yield fell to a low of 1.46% in early September. But a series of Note: US Gov't – Bloomberg Barclays US Govt Index; Muni Bond – Bloomberg Bar- clays Muni Bond Index; IG Corporates – Bloomberg Barclays US Credit Index; High goodwill gestures between the US and China calmed investor Yield – Bloomberg Barclays US Corp High Yield Index; EM USD Bond - Bloomberg nerves and the Treasury yield snapped back to 1.9%, before Barclays EM USD Agg Index; EM Local Bond - Bloomberg Barclays EM Local Currency Gov't Index; Sr Loan – S&P / LSTA US Leveraged Loan 100 Index; REITs – FTSE NAREIT settling toward the 1.7% level. The conciliatory trade news Equity REIT Index; MLPs – Alerian MLP Index; Preferreds – ICE BofAML Core Plus helped drive stocks higher, although there were mixed signals Fixed Rate Preferred; US Large Cap Value – Russell 1000 Value Index; US Large Cap Growth – Russell 1000 Growth Index; Int'l Developed Market Value – MSCI EAFE in the final week of September. Still, stocks ended the month Value USD Index; Emerging Markets – MSCI Emerging Market Index. higher. Similarly, equity-based Yield & Income sectors per- formed well including value stocks and emerging market (EM) equity, while municipal and corporate bonds were weaker. At CIO, we are cautiously optimistic and believe that, while risks have risen, the US can avoid recession in 2020. Trade policy could dampen the outlook if it were to include further escalation and more aggressive measures. Given the heightened risks to the global economy and markets, we are underweight equities, including a neutral view on US stocks. We favor US over international developed and EM stocks (see pages 10–12 for details). Importantly, we are not bearish and see cash as less attractive than other choices like Treasury Inflation Protected Securities (TIPS) and USD-denominated EM sovereign bonds (page 9). Overall, investors should remain fully engaged and invested. While we may have division and discord, the economy and markets could still advance as long as proceedings avoid disruption and disorder.

1 "Fed cuts rates amid lack of consensus," Rose, B., CIO Blog, 18 September 2019

CIO GWM 30 September 2019 3

Asset Allocation Commentary Jason Draho, PhD

Waiting for direction As we assess what could happen to markets over the com- substantive in details. ing months, memories of what transpired in the final quarter The markets could look past the trade and political risks if of 2018 are still fresh. In late September 2018 the S&P 500 economic growth clearly started to accelerate, especially reached a new all-time high of 2,930 before the wheels outside the US. But that's unlikely as long as trade uncer- came off (Fig. 1). By 24 December the index was down tainty, which has already weighed heavily on manufacturing 20%, with only a post-Christmas rally limiting the damage activity, lingers. Last September manufacturing sentiment to a 14% decline for the fourth quarter. Since that 2018 was running at full steam based on the Institute for Supply high the S&P 500 has only returned 4% on a total return Management (ISM) survey (Fig. 2). But from a level of 60— basis, a far cry from the 21% year-to-date return. about the 95 th percentile for the past 60 years—it fell just This leads to two observations. First, evaluating portfolio below 50 in August, or contractionary territory. In contrast, performance based on the calendar year is misleading, since services are holding steady, growing at a moderate pace—a most of the return is just a rebound from last year's sell-off. good thing since services account for nearly 80% of US eco- Second, US equities have effectively been directionles s for at nomic activity. least the past year, not just the past two weeks. They're It feels odd to place the Fed as third on any list of market stuck in a range, buffeted by both good and bad news on drivers, but its ability to substantially move markets seems to the economy and trade. decline with each rate cut. This is part of a wider global Looking ahead the next few months we see three factors problem for central banks in that monetary policy is losing driving markets, though none may be sufficient to give mar- effectiveness at such low rates. Still, the Fed is prepared to kets a clear direction. In declining order of importance they cut rates again in the fourth quarter judging by the newly are: politics, geopolitics and trade; economic data; and the updated FOMC dot plot, indicating nearly half of FOMC Fed. US-China trade negotiations are the clear drivers in our participants see rates lower by the end of the year. view, as the outcomes of escalating tariffs versus a partial Proceeding with caution deal have very different economic implications. Yet it's hard For now it looks like equity markets will continue to be to have much conviction on any particular scenario because range-bound as trade and growth risks linger. It's certainly prior negotiations also looked promising until new tariffs possible that hopes for a partial trade deal could be fulfilled were suddenly announced. US domestic politics complicate in a matter of weeks. But risk assets already appear to be this assessment because it's uncertain how the impeach- pricing in such an outcome with high probability, limiting ment inquiry and Democratic leadership race could alter the potential upside. At the sam e time, the prospect of more President Trump's approach to the negotiations. Even if a aggressive central bank easing in response to growth risks partial deal is announced in October, it may do little to im- should provide the markets with support, at least for now. prove business and investor sentiment unless it's actually

YTD vs. 1-year equity returns: a study in contrasts Manufacturing in contraction, services holding steady S&P 500 index level since 1. Jan 2018 ISM manufacturing and services sector surveys

3300 65

3100 60

2900 55 2700

2500 50

2300 45 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 S&P 500 S&P 500 peak on 20 September 2018 (2,930) 40 Sep-10 Mar-12 Sep-13 Mar-15 Sep-16 Mar-18 ISM Manufacturing Index ISM Services Index Source: Bloomberg, UBS, as of 25 September 2019 Source: UBS, as of 25 September 2019

CIO GWM 30 September 2019 4

US Gov't Bonds Leslie Falconio

Raging repo US 10yr Tsy yield: 1.7% The repo market witnessed some severe stress in September , House View: Neutral Treasury; Overweight TIPs with the repo rate climbing close to 9% intraday as demand overshadowed supply. This short-term "squeeze" has caught (Neutral on Agency debt and MBS ** ) the eye of many market participants, with the concern that it will have longer-term consequences such as potential delev- The repo rate spiked in September due to short term de- eraging or position unwinds. mand/supply imbalance lhs: repo rate (%) CIO does not believe this recent spike in the repo rate will force liquidations, nor is there any evidence, at this time, of 7 credit stress within the marketplace. 6 What is repo? The repurchase agreement (repo) market is a core part of the 5 financial system, helping to ensure banks have liquidity to meet their daily operational needs and maintain sufficient 4 reserves. Currently, the outstanding repo market for primary dealers is around USD 2.6 trillion. These securities currently 3 represent outstanding repo, and as shown, the majority is represented in the US Treasury market, followed by mort- 2 gage-backed securities (MBS). 1 Repo is a mechanism for short-term borrowing where mar- Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 ket participants, mainly primary dealers, lend securities such Repo rate as Treasuries (collateral) overnight in exchange for cash. This cash is then used to pay trade settlements or commercial Source: UBS; Bloomberg, ICE BAML as of 25 September 2019 lending activities. When the demand for cash overwhelms the supply, the repo rate rises. Money market assets have reached levels not witnessed since 2009 A shifting marketplace Lhs: Assets, in USD tn Compared to the current size of the repo market, the amount of Treasuries outstanding is five times larger, at USD 4.2 13 trillion. With the number of primary dealers only half of 4.0 what it used to be (23 today versus 46 in 1988), the remain- 3.8 ing dealers have been forced to go to other institutions for 3.6 their cash needs, i.e., money market funds. 3.4 3.2 As shown in the figure, the amount of assets held is at levels 3.0 not witnessed since 2009. Today, money market funds fi- nance USD 1.28 trillion of dealer collateral, an increase of 2.8 USD 332 billion from a year ago. Although the mechanics of 2.6 the repo market have remained the same, the players have 2.4 shifted since the crisis 2.2 2.0 RECOMMENDATIONS AND PREFERENCES 2007 2009 2011 2013 2015 2017 2019 • Treasuries: Neutral with a gradual rise in rates. Money Market assets (tn) Average • Agency debt: Neutral with a preference for step up coupons or MBS. Source: Bloomberg, UBS, as of 18 September 2019

• Mortgage-backed securities (MBS): Neutral with a preference to 4.5% coupons ** Agency MBS • Treasury inflation-protected securities (TIPs): Overweight For details, please see the Fixed Income Strategist ., Falconio, L., et al., 07-Sep-2019, UBS CIO. For updates, see the Fixed Income section of the UBS Online Services research for individuals' website

CIO GWM 30 September 2019 5

US Municipal Bonds Kathleen McNamara, CFA, CFP

Bout of volatility Average yield: 1.9%* Municipal bond yields bottomed out toward the end of Au- House View: Neutral gust before reversing course in the early part of September. As a point of reference, 10-year and 30-year AAA muni yields sat at only 1.21%, and 1.83%, respectively, on 28 August 2019. Volatility returned just as the Labor Day holi- Monthly muni total returns, Sep 2018 – Sept 2019 day signaled the end of summer. Munis have lost about Total return in % 0.7% in September (see chart), reducing their year-to-date total return to 7.1%. 2 1.6 1.5 1.6 1.1 1.2 0.8 0.8 Technicals soften 1 0.6 The pace of muni bond redemptions has slowed, as is often 0.4 0.4 the case this time of year. At the same time, new issue vol- 0 ume has increased, representing a modest headwind for the market. Muni-to-Treasury yield ratios have been volatile, re- -1 -0.6 flecting the lag effect of the muni market vis-à-vis taxable -0.7 -0.7 debt (see chart). In the fourth quarter, we would view a back-up in muni yields based on temporary supply pressure -2

as a buying opportunity. Security selection remains im-

Jul-19

Jan-19

Jun-19

Oct-18 Feb-19

Apr-19 Sep-19

portant based on tight credit quality spreads. Sep-18

Dec-18

Nov-18

Mar-19 Aug-19 May-19 RECOMMENDATIONS AND PREFERENCES Source: ICE, UBS, as of 25 September 2019  Seek value in general airport revenue bonds. Airports are better insulated from challenges posed by unfunded pen- sion liabilities than most types of municipal bonds (see AAA muni-to-Treasury yield ratios year-to-date Municipal Brief, Airport Obligors: Risk Assessment Frame- In % work, 5 September 2018). 120  Turn to toll roads for strong credit characteristics. We be- 110 lieve that toll roads when owned and operated by the public sector, exhibit relatively strong credit characteristics. 100 (see our Municipal Brief, Toll Road and Bridge Obligors: Risk Assessment Framework, 2 October 2018). 90  Be selective in private higher education sector. For credit selection guidance, see Municipal Brief, Private Higher Ed- 80 ucation: Risk Assessment Framework, 14 November 2018 70  Exercise caution in health care area. This sector is undergo- ing substantial transformation and consolidation with sig- 60 nificant implications for credit quality. See Municipal Brief, Jan-19 Mar-19 May-19 Jul-19 Sep-19 Not for profit hospitals: Risk Assessment Framework, 4 5 yr 10 yr 30 yr February 2019 for our examination of the top 86 obligors with the most debt outstanding. Source: MMD, UBS, as of 25 September 2019

 Add electric utility bonds to diversify holdings. CIO's * Based on the Bloomberg Barclays US Municipal Bond Index framework results broadly reflect the favorable risk characteristics of the sector (see Municipal Brief, Municipal Elec- For details, please see the Municipal Market Guide., McLoughlin, T., et al., tric Utilities: Risk Assessment Framework, 6 June 2019). 18-Sep-19, UBS CIO. For updates see the Fixed Income section of the UBS Online Services research for individuals' website.

 Assess state government credits. CIO's framework placed 47 of the 51 obligors in categories 1 and 2, reflecting the sector's low risk profile (see Municipal Brief, State Gov- ernment Obligors: Risk Assessment Framework, 26 June 2019).

CIO GWM 30 September 2019 6

US Investment Grade Credit Barry McAlinden, CFA; Daniel Kelsh

Spreads stay firm as yields ascend from their lows Average yield: 2.9%* Month to date, fixed income assets with larger interest rate House View: Neutral exposure have been dragged down by the rise in rates since the end of August. But despite the adverse movement in rates, credit spreads narrowed on the improvement in the trade outlook, a stronger consumer, and rising demand from IG spreads have stayed in a 20bps range since 1Q19 foreign investors. IG corporates have returned 12.5% year to Spread (right), in bps and yield (left), in % date, due to declining yields and compressing spreads. 125 2.80

2.60 Heavy supply met with strong demand 120 While the amount of new bond deals always picks up after 2.40 Labor Day, the decline in Treasury yields has incentivized a 115 2.20 large amount of companies to issue debt opportunistically to 2.00 refinance longer maturity bonds. In fact, over 100 different 110 1.80 companies have issued bonds in the USD IG market during 1.60 the first half of the month. New bond volume now trails last 105 1.40 year's tally by about 3%, after having trailed by 12% during 1H19. Against the pick-up in supply, the relative appeal of IG 100 1.20 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 bonds has persisted, with increased demand being reported 10-yr Treasury yield (right) IG credit spread (left) from overseas investors. We see these supportive conditions continuing on the heels Source: ICE BAML, UBS, as of 25 September 2019 of dovish central bank action. On 12 September, the ECB announced a new open-ended "quantitative easing" (QE) Highlighted corporate bonds program of EUR 20bn per month, beginning on 1 Novem- Coupon S&P YTW Price ber. While there were no details on the types of assets, mar- Company CUSIP Maturity (%) rating (%) (USD) ket participants expect the same types of purchases that oc- ALTRIA GROUP 02209SAS2 4.00 01/31/24 BBB 2.7 105.3 curred during the QE efforts that ran from 2016 to 2018. INC This included ECB purchases of corporate bonds from EUR AT&T INC 00206RDC3 4.45 04/01/24 BBB 2.5 108.1 domiciled non-financial companies. While this directly bene- COMCAST 20030NBX8 3.00 02/01/24 A- 2.1 103.5 FORD MOTOR 345397WW9 3.66 09/08/24 BBB 4.0 98.3 fited EUR corporate debt, it also had a powerful positive CREDIT** feedthrough into the broad credit markets. Back at home, GOLDMAN 38148LAE6 3.75 05/22/25 BBB+ 2.6 105.8 SACHS the Federal Reserve has been keen to extend the economic Source: Bloomberg, UBS, as of 26 September 2019. Note: pricing is indicative expansion, with the market expecting another 75-100bps based on Bloomberg Valuation Service (BVAL) and is subject to change. over the next 12 months. We believe that CIO's base case for modest growth in the macro economy and corporate * Based on the Bloomberg Barclays US Credit Index profits should be a satisfactory environment for credit over ** Bond has a Ba1 (high yield) rating by Moody's with a stable outlook the next 6-12 months.

RECOMMENDATIONS AND PREFERENCES  Financials (US banks) over non-financials: We continue to For details, please see the Fixed Income Strategist., Falconio, L., see value in financial bonds over non-financials, with a et al., 6-Sep-19, UBS CIO. For updates, see the Fixed Income section of the UBS Online Services research for individuals' website. preference for the Big 6 US universal banks. Banks are less susceptible to event risk and shareholder friendly activity that is prevalent among Industrial companies.  Midstream issuers: We favor select energy infrastructure companies with strong balance sheets and a focus on maintaining IG credit ratings. As the sector moves closer to a self-funding model, MLP leverage has been trending lower and coverage ratios have been trading higher.  1–3yr maturities: Short-end IG has an average yield of 2.1%. This is 60bps more than the 10-year Treasury yield but with much shorter duration risk.

CIO GWM 30 September 2019 7

High Yield Credit Daniel Kelsh; Barry McAlinden, CFA

High Yield Bonds Average HY yield: 5.7%* Year-to-date, the US high yield (HY) market has produced an House View: Neutral 11.6% return. During September, HY performance ground tighter enhancing returns from what was published in the last publication of Yield & Income. News of easing trade tensions between the US and China benefited higher beta asset 3Q19 experienced notable differentiation in HY returns classes with tighter spreads more than offsetting an increase Daily year-to-date returns, in % in Treasury yields during the month. 2019 HY returns have given investors sufficient reason to be 15.0% enthusiastic, but we remind readers that the favorable start- 12.0% ing point in 2019 is a key driver of returns. To illustrate this point we note that BBB credit has delivered stronger returns 9.0% year-to-date than HY despite its lower relative credit risk. The strong rally in Treasury rates and two rate cuts by the Fed 6.0% prompted overall strength in credit and are key drivers of the outperformance in the BB index. BB credit also benefits from 3.0% being viewed as a relatively "safer" segment of risk, attracting crossover buyers. While the fear of rising rates has faded, -- there is risk that market expectations for further rate cuts will 2-Jan 2-Mar 2-May 2-Jul 2-Sep BB Index B Index CCC Index not materialize and leaves open the potential for softness in the segment that has been the driver behind HY returns. Source: BAML, UBS, as of 27 September 2019

We believe this point is helpful to raise because for HY investors to enhance returns they either need to step down in credit quality or extend duration. The credit component is sensitive to economic strength and the duration component is sensitive to interest rate risk. Given the performance of CCC credit and the reduced upside potential in BB, we can't say which of these we would favor as a source of incremen- * Based on the Bloomberg Barclays US Corporate High Yield Index tal returns. B rated credit may offer a sweet spot that is an acceptable amount of risk on both fronts, but buyers do need to be wary of individual credit stores. CCC and unrated credit is likely to demonstrate weakness as we don't believe For details, please see the Fixed Income Strategist., Falconio, L., these markets are attracting investors given broad market et al., 6-Sep-19, UBS CIO. For updates, see the Fixed Income concern over where we sit in the credit cycle. section of the UBS Online Services research for individuals' website.

RECOMMENDATIONS AND PREFERENCES  We remain Neutral on HY as a whole and are alert for future sources of market disruption as we advance toward late stages of the economic and credit cycles.  Following its rapid recovery in 1Q19, we are now equal weight B-rated HY credit (vs BB-rated). Investors need to be wary of increased credit and idiosyncratic risks in lower rated buckets.  We remain cautiously optimistic on senior loans and believe that investors should hold current positions.

CIO GWM 30 September 2019 8

Emerging Market Debt Alejo Czerwonko, PhD

Preference for carry assets in emerging markets EM hard currency (USD) average yield: 5.0%* Emerging market USD-denominated bonds posted further House View: Overweight gains in the last month, bringing this year's performance to the low double-digit range. The yield carry, with price gains from lower US Treasury yields and tighter credit spreads, has EM local currency average yield: 3.9%** contributed almost equally to performance. The external House View: Neutral backdrop for EM USD-denominated bonds has improved somewhat, supported by additional easing measures by the Federal Reserve and the European Central Bank, a marginal Spread of EM sovereign bonds in USD de-escalation in US-China trade tensions, and more policy Sovereign credit spreads, in bps* stimulus out of China. Global growth continues to slow, but 500 an imminent recession seems unlikely for now, as domestic consumption and the service sector remain resilient. In 450 emerging markets, growth is showing tentative signs of sta- bilization at mediocre levels, and monetary policy easing 400 continues. Against a backdrop of record-high shares of negative-yielding debt, inflows into EM have made a return. 350 Near-term positive momentum is likely to continue given the strong demand for yield. Bouts of volatility are likely, howev- 300 er, amid an uncertain geopolitical environment. 250 Emerging market currencies have been reacting strongly to the frequent outlook changes for global trade, monetary 200 policy and growth over the past months. We expect trade

and growth uncertainty to continue, but also think global

Oct-14 Oct-15 Oct-16 Oct-17 Oct-18

Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 monetary conditions will remain accommodating. We con- EM sovereign bonds in USD tinue to prefer selected high yielding currencies in this envi- Source: Bloomberg, UBS, as of 26 September 2019 ronment.

For a deeper reading of these themes and more, please refer Yield of EM sovereign bonds in local currencies to our latest Investment in Emerging Markets flagship report. Bond yields, in %** RECOMMENDATIONS AND PREFERENCES 6.0  We maintain an overweight in US-dollar-denominated emerging market sovereign bonds. The spreads of the as- 5.5 set class remain above their five- and 10-year averages. With central banks easing, higher quality credit should re- 5.0 main supported as growth slows. Spreads may widen further if trade tensions continue to escalate, but that will be partly offset by Treasury rates likely falling. 4.5

 We remain neutral in EM corporate bonds in USD in glob- 4.0 ally diversified portfolios. We expect spreads to trend sideways to slightly wider over the next six months. 3.5  We remain neutral in EM sovereign bonds in local curren-

cies as valuations adequately compensate investors for the

Oct-18 Oct-14 Oct-15 Oct-16 Oct-17

Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 risks involved. EM sovereign bonds in local currencies  The current environment is supportive of carry strategies. Source: Bloomberg, UBS, as of 26 September 2019 We therefore maintain our overweight on a basket of * Based on the Bloomberg Barclays EM USD Hard Currency Agg Index equally weighted high-yielding emerging market curren- ** Based on the Bloomberg Barclays EM Local Currency Liquid Gov Index cies (Indonesian rupiah and Indian rupee) against a basket of lower-yielding currencies (Australian and Taiwan dollars) For details, please see the latest Investing in Emerging Markets to harvest the interest rate advantage without being too monthly report. For updates, see the Emerging Markets section of the UBS Online Services research for individuals' website. strongly exposed to US-China trade tensions.

CIO GWM 30 September 2019 9

US Equity Jeremy Zirin, CFA; David Lefkowitz, CFA; Jeffrey Hans; Christopher Shea, CFA; Edmund Tran, CFA

Expect range-bound markets House View: Neutral Stocks rebounded in September with the S&P 500 close to its all-time high. Resilient consumer spending and signs of de-escalating US-China trade tensions have pushed stocks higher after a volatile August. We remain neutral on US equities. Corporate earnings growth has slowed to the low single-digits and the outlook is not encouraging over the next few quarters. Additionally, at 17 times forward 12 months earnings, valuations are near the high end of their 10-year range and unlikely to materially rise. Downside should be limited, however; lower interest rates help cushion the blow to both the real economy and to markets. We favor US sectors with exposure to still-healthy consumer spending and we recommended lower exposure to econom- ically-sensitive sectors leveraged to global growth. The com- munication services industry also appears well-positioned in the current environment. This sector includes the mega-cap internet software companies that should continue to benefit from the strong secular growth in digital advertising. We are underweight energy, industrials, and technology. These sectors may disappoint investor expectations should global growth downshift into a lower gear as tariffs take a bigger bite out of economic growth.

Model portfolio updates  Dividend Ruler: In our most recent update (6 September), Dividend Ruler model portfolio yield: 2.3% we reduced the exposure in the Dividend Ruler model LINK portfolio to technology, industrials, and energy—sectors most exposed to the ongoing trade tensions—and in- Opportunistic Equity Income (OEI) model portfo- creased our exposure to higher quality, more stable market lio yield: 3.1% segments and stocks. We added American Electric Power (AEP) to the portfolio, and increased the weights in Procter LINK

& Gamble, Novartis (NVS), and V.F. Corp (VFC). To fund these trades, we decreased the weights of Accenture For details, please see Dividend Ruler Stocks: Monthly Update, Zirin, J. et (ACN), Texas Instruments (TXN), Chevron (CVX), and Un- al., 6-Sep-19. Opportunistic Equity Income, Zirin, J. et al., 27-Sep-19. For updates, see the Equities section of the UBS Online Services research for ion Pacific (UNP). individuals' website.  Opportunistic Equity Income: In our most recent OEI report update (27 September), we added Norfolk Southern (NSC)

with a 2% weight and Dominion Resources (D) with a 1.5% weight to the model portfolio. In addition, we increased the portfolio weight in American Express by 0.5%. To fund these trades, we trimmed the portfolio weights in Merck (MRK), Novartis (NVS), Lockheed Martin (LMT), and AT&T (T) by 1% each.

CIO GWM 30 September 2019 10

Int'l Developed Market Equity Michael Gourd

Bouncing back Average yield: 5.2%* International developed market stocks fared better this House View: Underweight** month than the prior, gaining back nearly all they lost. Per- formance wasn't uniform across markets, with Japan leading the way on the back of rising optimism around US-China trade. However, European manufacturers continue to weak- Trade tensions and geopolitical frictions remain en as a result of trade tensions, with the Eurozone manufac- key risks to international developed market eq- turing PMI at 45.6, a far cry from the 60.6 level hit at the uities. beginning of 2018, and clearly in contractionary territory. Much of this weakness is concentrated in Germany – the largest manufacturer in the region – where the September PMI is expected to come in at just 41.4. Giving up ground Total return for select international developed markets Political risks also remain in the fore throughout Europe, with continued uncertainty around Brexit and possible US 5.9% tariffs on European autos later this year. Int'l dev value 7.67% Additionally, the ECB and Bank of Japan already have sub- (MSCI EAFE Value) zero policy rates, meaning they have less ability to use mone- -6.09% tary policy to help boost growth in the event of a downturn. With the backdrop of ongoing global trade tensions and 4.3% manufacturing weakness, unclear political risks, and central Europe 15.83% banks with less ability to boost growth, international devel- (EuroStoxx) oped market equities and the Eurozone in particular remain -0.43% unattractive. Other regions offer better value, in our view. RECOMMENDATIONS AND PREFERENCES 3.7% UK  We are underweight Eurozone equities. Economic activity in 9.26% the region is weak. We expect 2019 earnings growth of - (FTSE 100) 4% and -3% in 2020. Eurozone equities, however, have ral- -2.14% lied strongly since the beginning of the year and now appear to be priced for an overly optimistic macro scenario. At 7.1% the same time, external risks remain elevated. Additionally, Japan 12.98% the region's valuation is not attractive, with the 12-month (MSCI Japan) forward P/E ratio in line with its 20-year average. -3.62%  We are underweight UK equities. On a 6-12 month basis, we have a 'neutral' outlook on UK stocks, but on a 1-4 2.3% year basis we recommend an underweight position. UK Switzerland 18.76% stocks remain attractively valued, and earnings may grow (SMI) low single-digits in 2019, but Brexit risks and uncertainties 10.25% around the pound, oil, and global growth could become downside catalysts. 1 month YTD Last 12 months  We are neutral Swiss equities. Swiss stocks have an attractive dividend yield and falling yields on franc-denominated Source: Bloomberg, UBS, as of 26 September 2019 bonds support the defensive market. * Based on the MSCI EAFE Value Index  We are overweight Japanese equities (within international ** Within international developed markets we prefer Japanese equities over developed equities). The deterioration in trade and the Eurozone stocks. global growth outlook likely limit near-term upside poten- For updates, see the Equities section of the UBS Online Services tial. However, the market has lagged other cyclical mar- research for individuals' website. kets this year, limiting downside risks and providing rerat- ing potential should global data improve from here.

CIO GWM 30 September 2019 11

Emerging Market Equity Xingchen Yu

Limited upside, massive uncertainty Average yield: 3.0%* Emerging market (EM) equities rebounded around 5% from House View: Underweight their August lows (as of 26 September) as US-China trade tensions eased and global central banks became consistently dovish. On the back of this development, equity funds saw Amid the uncertain and delicate global envi- inflows for the first time in four months. ronment, we foresee high volatility on EM equi- We, however, do not see the recent rally as an inflection ties in the near term. point to an imminent growth recovery. The global macro backdrop is still not favorable to emerging markets, though Emerging markets geographic preferences easing measures led by China should, to a degree, cushion All positions are relative to the MSCI EM the deceleration in activity. Valuations are at a premium to underweight neutral overweight their historical average, and the discount to developed markets valuations is no longer attractive. Despite collecting bet- China ter-than-expected 2Q earnings reports, we see downside India risks in consensus earnings forecasts owing to the substantial Indonesia uncertainty in trade policy and a general slowdown in South Korea

growth. Geopolitical events in the region also grabbed head- Malaysia Asia lines, with oil prices surging 19% within a day of the attacks Philippines on Saudi Arabian oil facilities on 14 September. Amid the Taiwan uncertain and delicate global environment, we foresee high Thailand volatility on EM equities in the near term and advise investors Hong Kong* to avoid adding exposure to EM equities. Brazil RECOMMENDATIONS AND PREFERENCES Chile • We remain underweight EM equities in our global portfo- Colombia lio. Within Asia, we continue to favor China over Hong LatAm Mexico Kong and Malaysia over Thailand. Within the region, we Peru like financials and select internet and technology stocks, Czech Republic and stocks with sustainable cash flow generation and high Hungary dividend yields. Poland Russia • In Latin America, we are overweight Brazilian equities ver- EMEA South Africa sus Mexican stocks. In Brazil we prefer a balanced selec- Turkey tion of high-quality domestic cyclical names (financials, consumer discretionary, industrials) and some cheap do- new old mestic defensives (consumer staples, healthcare, telecom). Source: Bloomberg, UBS, as of 24 September 2019 In Mexico we pick companies that have resilient earnings and USD inflows, compelling valuations, and low regulato- * Based on the MSCI Emerging Markets Index; Hong Kong is not a constitu- ent of MSCI EM. ry risk and interest-rate sensitivity combined with high dividend yields. For details, please see the latest Investing in Emerging Markets monthly report. For updates, see the Emerging Markets section of the UBS Online Services research for individuals' website.

CIO GWM 30 September 2019 12

Preferred Securities Frank Sileo, CFA

So far, so good Average yield: 3.9%* Preferreds are "firing on all cylinders" in 2019. After rebound- House View: Neutral ing strongly in January (USD 25 par preferreds were up 5.7%) from a difficult fourth quarter 2018, preferreds have steadily added to gains each month. The sector posted its ninth con- secutive month of gains in September. Preferred investors owe Libor may be discontinued in 2022. If that oc- their success to a number of supporting factors; first among curs, rather than paying a floating-coupon, them is this year's sharp decline in interest rates. many F2Fs may have coupons set at a fixed rate. The interest rate backdrop, as expressed through Treasury Investors seeking ultra-short duration yield and yields, has been highly supportive of preferreds (and fixed in- floating-rate asset exposure could consider F2Fs come more broadly) through 2019. The yield on the 10-year callable in 12–18 months with high back-end Treasury dropped from 2.8% in January to below 1.5% in September. It has since moved up but remains well below 2%. reset spreads. Otherwise, we favor F2Fs with 4 years of call protection that have high back-end The decline in Treasury yields drove investors into higher yield- spreads and strong prospectus language in the ing assets including preferreds. There are about a dozen ETFs that focus on the sector, and strong asset flows into these absence of LIBOR. ETFs reflect positive sentiment. But because these ETFs are (see "LIBOR phase-out could cause coupon conundrum," 24 mostly designed to track indexes, the flows can also reflect Sept 2018) demand for a broad selection of securities. Demand reflected in ETF flows can be meaningful especially since preferred ETF assets total about USD 32bn while the entire USD 25 par pre- Highlighted Attractive List selections ** ferred sector totals about USD 150–175bn. Security Name Symbol/ Last Next YTW 1 Flows into preferred ETFs, and the potential for "forced buy- CUSIP Price Call Date (%) Apollo Global Mgt 6.375% ing" due to indexing, can lead to overvaluation at times. But APO pr B $26.50 3/15/2023 4.5% perpetual the relative value of preferreds has remained reasonable this Brighthouse Financial Inc BHFAL $26.80 9/15/2023 4.2% year. Even as Treasury yields fell and preferred yields declined 6.25% due 9/15/2058 along with them (and prices rose), the difference between the Digital Realty Trust 5.85% DLR pr K $26.70 3/13/2024 4.1% two has remained more range-bound. Price gains have been perpetual moderate but not excessive, so the yield spread of preferreds Brighthouse Financial Inc BHFAP $27.10 3/25/2024 4.5% relative to Treasuries remains in-line with historical averages. 6.60% perpetual

With yields falling against a backdrop of high demand, a Source: UBS, Bloomberg, as of 27 September 2019 number of preferred issuers took the opportunity to refinance. 1YTW = Yield-to-worst is the lowest estimated yield among possible redemp- For example, Bank of America called a 6.625% coupon and tion date scenarios launched a 5.0% issue. This continues a multi-year trend to- *Based on the adjusted yield-to-worst / current yield of the BofAML Core ward lower average coupons in the sector. Lower coupons Plus Fixed Rate Preferred Index could make preferreds more vulnerable to a spike in yields. **Prices and yields are indicative and subject to change RECOMMENDATIONS AND PREFERENCES

 Among fixed-rate preferreds, we continue to favor those

with above-average coupons (> 5.8%) which retain call probability, and could mitigate relative price volatility due For details, please see the Preferred Securities Valuation Weekly and to an increase in interest rates or credit spreads. Preferred Securities Overview and Preferences, Sileo, F., 19-Sep-19, UBS CIO. For updates, see the Preferred Securities section of the  For fixed-to-floating rate preferreds, we take a highly selec- UBS Online Services research for individuals' website. tive approach given the increased likelihood of lower Libor rates and possible Libor discontinuation in 2022. Investors seeking ultra-short duration yield and floating-rate asset exposure could consider F2Fs callable in 12–18 months with high back-end reset spreads. Otherwise, we favor F2Fs with 4 years of call protection that have high back-end spreads and strong prospectus language in the absence of LIBOR.

CIO GWM 30 September 2019 13

Real Estate Investment Trusts (REITs) Jonathan Woloshin, CFA

Falling rates keep lifting REITs Average yield: 3.8%* Falling rates are a REIT's best friend. The contraction in 10- year yields has been a significant tailwind for the REIT sector House View: Neutral so far in 2019. After peaking at 2.78% earlier in the year, 10-year yields dropped as low as 1.46% before rebounding to a recent level of about 1.70%. Year to date through 27 The drop in interest rates continued to support September 2019, REITs (as measured by the FTSE NAREIT REITs in September. Equity REIT Index) are up 27% vs. 20% for the S&P 500.

In addition to falling bond yields there have been several other contributors to this strong performance including a solid 1H 2019 earnings season, a reasonably good outlook for 2019 sector fundamentals, consensus projected sector FFO growth rates roughly in line with the broad market and Highlighted REIT recommendations steady dividend increases across much of the sector. Last Price Dividend We continue to believe multifamily and industrial are best Company Ticker (USD) Yield positioned to capitalize on strong operating fundamentals, Prologis Inc PLD $85.78 2.5% demographic and secular growth trends. The main drivers of Invitation Homes INVH $29.61 1.8% the multifamily sector are demand from millennials, housing Alexandria Real Estate ARE $153.11 2.6%

affordability and lending standards. The industrial sector is Source: UBS, Bloomberg, as of 27 September 2019 supported by e-commerce, global trade and sifting supply chain dynamics. Additional drivers include the widening of the Panama Canal and legalization of marijuana for recrea- * Based on the FTSE NAREIT Equity REIT Index tional use in a number of states. We are also constructive on towers, data centers and select office markets.

RECOMMENDATIONS AND PREFERENCES

 Prologis Inc. (PLD) - Fundamentals in the industrial sector remain strong and PLD is the largest owner of industrial properties in the world, PLD has a three-prong operating model consisting of owned and operated real estate, de-

velopment, and strategic capital management that provides multiple avenues of value-creation potential.  Invitation Homes (INVH) – INVH is the largest owner of homes for rent in the US with 80,000+ homes well diversified across strong job growth markets. In addition, many For details, please see recent US REITs: Equity preferences publi- of these markets have significant affordability challenges, cations. For updates, please see the Real Estate section of the making them attractive from a rental perspective. INVH's UBS Online Services research for individuals' website. average monthly rent compares very favorably to in-

market multifamily rents. The maturation of the oldest mil- lennial cohort provides a strong demand runway. The "Highlighted REIT recommendations" are extracted from US REITs: Equity preferences, published on 20-Sep-2019.  Alexandria Real Estate (ARE) – ARE has a very strong balance sheet with limited near-term debt maturities, a well- covered dividend and broad access to capital. ARE has a demonstrated history of developing assets that are strongly preleased and has a well-diversified tenant base with 50%+ of revenue derived from investment grade tenants.

CIO GWM 30 September 2019 14

Master Limited Partnerships (MLPs) Jay Dobson

Focus on quality Average yield: 8.5%* MLPs and midstream energy infrastructure companies have House View: Neutral underperformed the S&P 500 since late July when rising concerns about more muted growth in the broader economy and risks of slowing oil and gas production growth in the US combined to worry energy investors. This has led to more Yields: MLPs compared to other income-oriented securities attractive MLP valuations and our continued focus on high Yield, in % quality midstream energy companies. 14

Balance sheets continue a trend of improvement, with some 12 companies targeting financial leverage below 4.0x net debt to cash flow (measured by EBITDA). 2Q19 results showed a 10 continued improvement in volumes with steady margins. 8 With capital spending likely to slow in 2020, we expect improving free cash flow metrics for the industry. 6

The political and regulatory environment at the Federal level 4 has been supportive of the energy industry recently. Howev- er, state-level support has been sporadic, and legal action to 2 delay pipeline construction, particularly in the Northeast, has 0

slowed the pace of development. Permian infrastructure is

Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 advancing and remains the focus of industry activity. Dec-13 MLPs REITs Key issues to watch over the next six months include crude S&P Utilities High Yield Bonds oil flows to Corpus Christi and any resulting export bottle- S&P 500 10 Year US Treasury necks, ongoing legal action to advance the construction of natural gas pipelines in the Northeast, any hints about up- Source: UBS, FactSet, as of 26 September 2019 stream capital spending plans for 2020 from producers, and continued balance sheet improvement and lower capital spending for 2020 in the midstream. Highlighted MLPs for yield RECOMMENDATIONS AND PREFERENCES Last Price Distrib'n Company Ticker USD Yield  Our Top Picks in the MLP and energy infrastructure sector DCP Midstream LP DCP $26.47 11.6% are Enterprise Products Partners (EPD), Kinder Morgan Western Midstream Partners LP WES $24.85 10.3% (KMI) and Plains All American (PAA). MPLX LP MPLX $28.45 9.8%  We prefer larger MLPs with asset diversity and exposure to Energy Transfer LP ET $13.10 9.5%

the Permian basin. In addition to the larger diversified Source: UBS, Bloomberg, as of 26 September 2019 MLPs, we like the natural gas gathering and processing

MLPs given our outlook for growing supply of and grow- * Based on the Alerian MLP Total Return Index ing demand for natural gas and natural gas liquids (NGLs).  MLP investment-grade (IG) bonds are also attractive. MLPs For background on the MLP sector, please see the Master Lim- and midstream energy companies rank among the widest- ited Partnership (MLP) Primer Dobson, J., 26-Jan-2018 trading IG corporate sectors among those with the most For details, please see US MLPs & Energy Infrastructure: Equity influential index weights. We continue to recommend the preferences, Dobson, J., 17-Sep-2019. For updates, see the bonds of midstream issuers that fit the category as offer- Equities section of the UBS Online Services research for individu- ing both above-average credit spreads and solid funda- al’s website. mentals. See MLP bonds: Attractive coupon "stream" update, McAlinden, B., 22-May-2019 for additional details.

CIO GWM 30 September 2019 15

Closed-end funds Sangeeta Marfatia, CPA

Preferred securities fund Discount to NAV Nuveen Preferred Securities Income Fund (JPS) offers a way 5% to get exposure to the preferred securities sector, at a discount, while receiving a stable distribution. The fund's assets 0% are split among coupon types (i.e. fixed- and floating-rate -5% securities) as shown in the chart. Also, about 35% of the portfolio is in contingent capital securities (CoCos). The fund -10% is currently trading at a slight discount to net asset value -15% (NAV), and is paying a monthly distribution at a rate of 6.8%. On a year-to-date basis, the fund is up 25% in terms -20%

of market price, much more than its NAV return which is up Jul-18

17%. In 2018 roughly 83% of the fund’s distribution was Jul-19

Jan-18 Jan-19

Sep-18 Sep-19

Nov-18

Mar-18 Mar-19 May-18 treated as qualified dividend income (QDI) and hence taxed May-19 Source: Bloomberg, UBS, as of 27 Sept 2019 at lower rates than ordinary income.

JPS is rated Hold due to its valuation, in light of strong per- Credit Quality formance in the sector this year. This can be attributed to the low interest rate environment. This is a leveraged fund; how- 0.5% ever 55% of the total leverage is hedged using interest rate A 25% swaps for the next few years. As of 30 Aug 2019 the aver- 8% age cost of leverage is 2.91%. The fund has leverage- BBB adjusted effective duration of 4 years. This is the largest preferred fund in our coverage universe with managed assets of BB over $3.1 billion and hence provides better trading liquidity in the fund. B  We are neutral on Preferreds (see page 13 for addi- 67% tional information on the sector).

 Other funds we cover include John Hancock Funds and Source: Nuveen, UBS, as of 30 Aug 2019 Cohen and Steers funds. Please refer to the Closed-end

Fund Coverage Universe. Security types

Key Facts Fixed-Rate Ticker symbol JPS 8% 3% UBS rating Hold Fixed-to-Fixed Rate 31% Share price USD 9.85 14% Net asset value USD 9.89 Fixed-to-Floating Discount 0.4% Distribution Rate* 6.8% Floating Rate Total Managed Assets USD 3,100 mm Leverage 36% Other/Cash 45%

Source: UBS, Bloomberg, as of 27 Sept 2019

* Distribution Rate: Annualized based on most recent monthly/quarterly Source: Nuveen, UBS, as of 30 Aug 2019 distribution rate, as declared by the fund, divided by the current price. The rate may include investment income, short term capital gain, long term gain and/or return of capital. Please see recent Closed End Fund Universe publications, as well as the Closed-end Fund section of the UBS Online Services research for individuals' website for more information.

CIO GWM 30 September 2019 16

Portfolio yield monitor For House View Yield-focused portfolio

Trailing 12-month indicated yields by asset class**

Percentile Yield change rank (since Yield change from 12 Yield as of 31 December from 1 month months ago Asset Class August 2019 2007) ago (bps) (bps) Portfolio* 4.6% 79% 3 39 Cash 2.2% 85% 3 86 Fixed Income US Government 1.7% 55% 0 1 US Gov't 10-year 2.3% 60% -3 28 US MBS 2.8% 54% 2 16 US Municipals 2.1% 31% -1 15 US Inv Grade 3.6% 49% -2 41 US High Yield 5.4% 29% 0 32 EM FI Local 6.3% 85% -6 144 EM FI USD 5.7% 85% -5 130 Equities US Large-cap Growth 0.9% 3% 0 -25 US Large-cap Value 2.4% 66% 0 24 US Mid Cap 1.6% 79% 0 19 US Small Cap 1.5% 70% 3 11 Int'l Dev Equity 3.1% 55% 3 31 Int'l Dev Equity Value 4.2% 65% 4 37 EM Equity 2.1% 63% 2 12 Yield Assets Senior Loans 5.0% 81% 3 75 Preferreds 5.7% 17% 0 4 MLPs 10.4% 87% 27 39 US Real Estate 4.2% 65% 1 -21

* Moderate (tax-exempt) SAA, yield-focused Source: UBS, Bloomberg, as of 31 August 2019 ** Based on 12-month trailing average indicated yield of specific fund proxies that we believe are representative of the asset class. While the yield statistics used in the rest of the report are appropriate for the individual asset classes, the Yield Monitor uses fund proxies that we believe are representative of the asset class. These fund yields (12-month trailing average indicated yield) enable cross-asset comparisons, and we believe they more accurately reflect the actual investor experience. For details, please see the Ap- pendix 1: Yield Estimation section of "Yield-Focused Portfolios: Efficiently generating income and returns," Draho, J., et al., Invest- ment Insights, UBS, 21 Mar 2018.

CIO GWM 30 September 2019 17 CIO Global Wealth Management Detailed asset allocation, taxable, yield-focused Moderate Moderate Investor risk profile Conservative conservative Moderate aggressive Aggressive All figures in % 2 2 2 2 2 1 1 1 1 1 e g Directional chan Strategic asset Strategic allocation Tactical deviation Change Tactical asset allocation asset Strategic allocation Tactical deviation Change Tactical asset allocation asset Strategic allocation Tactical deviation Change Tactical asset allocation asset Strategic allocation Tactical deviation Change Tactical asset allocation asset Strategic allocation Tactical deviation Change Tactical asset allocation Cash 3.0 +0.0 3.0 3.0 +0.0 3.0 3.0 +0.0 3.0 3.0 +0.0 3.0 3.0 +0.0 3.0 Fixed Income 65.0 +1.0 66.0 56.0 +1.5 57.5 43.0 +2.0 45.0 30.0 +2.0 32.0 12.0 +2.0 14.0 US Fixed Income 61.0 +0.0 61.0 48.0 +0.0 48.0 32.0 +0.0 32.0 22.0 +0.0 22.0 10.0 +0.0 10.0 US Gov't FI 25.0 -1.0 24.0 15.0 -1.5 13.5 6.0 -2.0 4.0 3.0 -3.0 0.0 3.0 -3.0 0.0 US TIPS 0.0 +1.0 1.0 0.0 +1.5 1.5 0.0 +2.0 2.0 0.0 +2.0 2.0 0.0 +2.0 2.0 US Treasuries (long) 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +2.0 2.0 0.0 +2.0 2.0 US Municipal FI 23.0 +0.0 23.0 14.0 +0.0 14.0 6.0 +0.0 6.0 3.0 -1.0 2.0 3.0 -1.0 2.0 US IG Corp FI 4.0 +0.0 4.0 4.0 +0.0 4.0 4.0 +0.0 4.0 0.0 +0.0 0.0 0.0 +0.0 0.0 US HY Corp FI 9.0 +0.0 9.0 15.0 +0.0 15.0 16.0 +0.0 16.0 16.0 +0.0 16.0 4.0 +0.0 4.0 Int'l Fixed Income 4.0 +1.0 5.0 8.0 +1.5 9.5 11.0 +2.0 13.0 8.0 +2.0 10.0 2.0 +2.0 4.0 EM FI - Local Currency 0.0 +0.0 0.0 3.0 +0.0 3.0 6.0 +0.0 6.0 6.0 +0.0 6.0 2.0 +0.0 2.0 EM FI - Hard Currency 4.0 +1.0 5.0 5.0 +1.5 6.5 5.0 +2.0 7.0 2.0 +2.0 4.0 0.0 +2.0 2.0 Equity 12.0 -1.0 11.0 21.0 -1.5 19.5 34.0 -2.0 32.0 47.0 -2.0 45.0 62.0 -2.0 60.0 US Equity 6.0 +0.0 6.0 11.0 +0.0 11.0 16.0 +0.0 16.0 21.0 +0.0 21.0 24.0 +0.0 24.0 US Large cap Growth 2.0 +0.0 2.0 3.0 +0.0 3.0 4.0 +0.0 4.0 6.0 +0.0 6.0 6.0 +0.0 6.0 US Large cap Value 4.0 +0.0 4.0 8.0 +0.0 8.0 12.0 +0.0 12.0 15.0 +0.0 15.0 18.0 +0.0 18.0 International Equity 6.0 -1.0 5.0 10.0 -1.5 8.5 18.0 -2.0 16.0 26.0 -2.0 24.0 38.0 -2.0 36.0 Int'l Developed Markets Value 6.0 -1.0 5.0 10.0 -1.5 8.5 15.0 -1.0 14.0 21.0 -1.0 20.0 29.0 -1.0 28.0 Emerging Markets 0.0 +0.0 0.0 0.0 +0.0 0.0 3.0 -1.0 2.0 5.0 -1.0 4.0 9.0 -1.0 8.0 Yield Assets 20.0 +0.0 20.0 20.0 +0.0 20.0 20.0 +0.0 20.0 20.0 +0.0 20.0 23.0 +0.0 23.0 Senior Loans 6.0 +0.0 6.0 4.0 +0.0 4.0 2.0 +0.0 2.0 0.0 +0.0 0.0 0.0 +0.0 0.0 Preferreds 10.0 +0.0 10.0 7.0 +0.0 7.0 7.0 +0.0 7.0 5.0 +0.0 5.0 2.0 +0.0 2.0 MLPs 4.0 +0.0 4.0 7.0 +0.0 7.0 9.0 +0.0 9.0 12.0 +0.0 12.0 16.0 +0.0 16.0 US Real Estate 0.0 +0.0 0.0 2.0 +0.0 2.0 2.0 +0.0 2.0 3.0 +0.0 3.0 5.0 +0.0 5.0 CIO GWM tactical deviation legend: Overweight Underweight Neutral. Change legend:  Upgrade  Downgrade for moderate risk profile 1 The change in the tactical deviation since our previous report. 2 The sum of the strategic asset allocation and the tactical deviation columns. Source: UBS and WMA AAC, 26 September 2019. See the Portfolio Analytics, Performance Measurement, and Appendix sections for performance measurement details and information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretation of the suggested tactical deviations from the strategic asset allocations.

CIO GWM 30 September 2019 18 CIO Global Wealth Management Detailed asset allocation, tax-exempt, yield-focused Moderate Moderate Investor risk profile Conservative conservative Moderate aggressive Aggressive All figures in % 2 2 2 2 2 1 1 1 1 1 e g Directional chan Strategic asset Strategic allocation Tactical deviation Change Tactical asset allocation asset Strategic allocation Tactical deviation Change Tactical asset allocation asset Strategic allocation Tactical deviation Change Tactical asset allocation asset Strategic allocation Tactical deviation Change Tactical asset allocation asset Strategic allocation Tactical deviation Change Tactical asset allocation Cash 3.0 +0.0 3.0 3.0 +0.0 3.0 3.0 +0.0 3.0 3.0 +0.0 3.0 3.0 +0.0 3.0 Fixed Income 65.0 +1.0 66.0 56.0 +1.5 57.5 43.0 +2.0 45.0 30.0 +2.0 32.0 12.0 +2.0 14.0 US Fixed Income 60.0 +0.0 60.0 46.0 +0.0 46.0 32.0 +0.0 32.0 22.0 +0.0 22.0 10.0 +0.0 10.0 US Gov't FI 30.0 -1.0 29.0 16.0 -1.5 14.5 10.0 -2.0 8.0 5.0 -4.0 1.0 5.0 -4.0 1.0 US TIPS 0.0 +1.0 1.0 0.0 +1.5 1.5 0.0 +2.0 2.0 0.0 +2.0 2.0 0.0 +2.0 2.0 US Treasuries (long) 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +2.0 2.0 0.0 +2.0 2.0 US Municipal FI 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 US IG Corp FI 18.0 +0.0 18.0 16.0 +0.0 16.0 6.0 +0.0 6.0 2.0 +0.0 2.0 0.0 +0.0 0.0 US HY Corp FI 12.0 +0.0 12.0 14.0 +0.0 14.0 16.0 +0.0 16.0 15.0 +0.0 15.0 5.0 +0.0 5.0 Int'l Fixed Income 5.0 +1.0 6.0 10.0 +1.5 11.5 11.0 +2.0 13.0 8.0 +2.0 10.0 2.0 +2.0 4.0 EM FI - Local Currency 2.0 +0.0 2.0 5.0 +0.0 5.0 6.0 +0.0 6.0 6.0 +0.0 6.0 2.0 +0.0 2.0 EM FI - Hard Currency 3.0 +1.0 4.0 5.0 +1.5 6.5 5.0 +2.0 7.0 2.0 +2.0 4.0 0.0 +2.0 2.0 Equity 12.0 -1.0 11.0 21.0 -1.5 19.5 34.0 -2.0 32.0 47.0 -2.0 45.0 62.0 -2.0 60.0 US Equity 6.0 +0.0 6.0 10.0 +0.0 10.0 15.0 +0.0 15.0 19.0 +0.0 19.0 24.0 +0.0 24.0 US Large cap Growth 2.0 +0.0 2.0 3.0 +0.0 3.0 4.0 +0.0 4.0 5.0 +0.0 5.0 6.0 +0.0 6.0 US Large cap Value 4.0 +0.0 4.0 7.0 +0.0 7.0 11.0 +0.0 11.0 14.0 +0.0 14.0 18.0 +0.0 18.0 International Equity 6.0 -1.0 5.0 11.0 -1.5 9.5 19.0 -2.0 17.0 28.0 -2.0 26.0 38.0 -2.0 36.0 Int'l Developed Markets Value 6.0 -1.0 5.0 11.0 -1.5 9.5 16.0 -1.0 15.0 22.0 -1.0 21.0 29.0 -1.0 28.0 Emerging Markets 0.0 +0.0 0.0 0.0 +0.0 0.0 3.0 -1.0 2.0 6.0 -1.0 5.0 9.0 -1.0 8.0 Yield Assets 20.0 +0.0 20.0 20.0 +0.0 20.0 20.0 +0.0 20.0 20.0 +0.0 20.0 23.0 +0.0 23.0 Senior Loans 6.0 +0.0 6.0 4.0 +0.0 4.0 2.0 +0.0 2.0 0.0 +0.0 0.0 0.0 +0.0 0.0 Preferreds 10.0 +0.0 10.0 7.0 +0.0 7.0 6.0 +0.0 6.0 4.0 +0.0 4.0 2.0 +0.0 2.0 MLPs 4.0 +0.0 4.0 7.0 +0.0 7.0 10.0 +0.0 10.0 13.0 +0.0 13.0 16.0 +0.0 16.0 US Real Estate 0.0 +0.0 0.0 2.0 +0.0 2.0 2.0 +0.0 2.0 3.0 +0.0 3.0 5.0 +0.0 5.0 CIO GWM tactical deviation legend: Overweight Underweight Neutral. Change legend:  Upgrade  Downgrade for moderate risk profile 1 The change in the tactical deviation since our previous report. 2 The sum of the strategic asset allocation and the tactical deviation columns. Source: UBS and WMA AAC, 26 September 2019. See the Portfolio Analytics, Performance Measurement, and Appendix sections for performance measurement details and information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretation of the suggested tactical deviations from the strategic asset allocations.

CIO GWM 30 September 2019 19 CIO Global Wealth Management Detailed asset allocation, all equity and all income, yield-focused All fixed income,non- Publication note All equity All fixed income, taxable taxable The All Equity and All Income portfolios complement our balanced portfolios and offer more granular implementation of our House All figures in % View yield-focused portfolios. While we generally do not recommend that investors hold portfolios consisting of only stocks or only bonds, the All Equity and All Income portfolios can be used 2 2 2

1 1 1 by investors who want to complement their existing holdings.

In the All Equity portfolio, tactical tilts will be based on the corresponding tilts to the Equity asset classes in our balanced Strategic asset allocation Tactical deviation Change Tactical asset allocation Strategic asset allocation Tactical deviation Change Tactical asset allocation Strategic asset allocation Tactical deviation Change Tactical asset allocation portfolio (moderate risk profile, taxable yield-focused). The amount Cash 3.0 +2.0 5.0 3.0 +0.0 3.0 3.0 +0.0 3.0 of cash in the All Equity portfolio will vary one-for-one with the Fixed Income 0.0 +0.0 0.0 77.0 +0.0 77.0 77.0 +0.0 77.0 overall overweight/underweight on equities in the balanced portfolio, subject to a 1% maximum tilt from the 3% cash US Fixed Income 0.0 +0.0 0.0 58.0 +0.0 58.0 58.0 +0.0 58.0 allocation. This allows us to use the cash allocation to express a US Gov't FI 0.0 +0.0 0.0 13.0 -4.0 9.0 18.0 -4.0 14.0 tactical preference between stocks and fixed income. A special feature of the All Equity portfolio is that it includes “carveouts”: 3% US MBS 0.0 +0.0 0.0 0.0 +0.0 0.0 5.0 +0.0 5.0 allocations to our preferred sectors within US large-caps as well as our preferred countries within both international developed markets 0.0 +0.0 0.0 0.0 +4.0 4.0 0.0 +4.0 4.0 US TIPS and the emerging markets. A maximum of two sectors/countries of US Treasuries (long) 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 each type may be selected for carve-outs.

US Municipal FI 0.0 +0.0 0.0 30.0 +0.0 30.0 0.0 +0.0 0.0 The All Income portfolios include both taxable and non-taxable versions. In addition to the fixed income asset classes in the US IG Corp FI 0.0 +0.0 0.0 0.0 +0.0 0.0 20.0 +0.0 20.0 balanced portfolios, the non-taxable version incorporates an US HY Corp FI 0.0 +0.0 0.0 15.0 +0.0 15.0 15.0 +0.0 15.0 additional allocation to Mortgage Backed Securities. Tactical tilts will be based on the corresponding tilts to the Fixed Income asset Int'l Fixed Income 0.0 +0.0 0.0 19.0 +0.0 19.0 19.0 +0.0 19.0 classes in our balanced portfolios (moderate risk profile yield- EM FI - Local Currency 0.0 +0.0 0.0 10.0 +0.0 10.0 11.0 +0.0 11.0 focused, taxable or non-taxable respectively), but only when there is a preference between the fixed income asset classes. For example, EM FI - Hard Currency 0.0 +0.0 0.0 9.0 +0.0 9.0 8.0 +0.0 8.0 an overweight on high yield corporate bonds offset by an underweight on government bonds in the balanced portfolio would 77.0 -2.0 75.0 0.0 +0.0 0.0 0.0 +0.0 0.0 Equity be applied to the All Income portfolios. However, an overweight on US Equity 39.0 +0.0 39.0 0.0 +0.0 0.0 0.0 +0.0 0.0 US equities versus US government bonds in the balanced portfolio would not be reflected in the All Income portfolios. Further, the tilts US Large cap Growth 7.0 +0.0 7.0 0.0 +0.0 0.0 0.0 +0.0 0.0 in the All Income portfolios will typically be scaled up to twice the size of the tilts in the balanced portfolio. US Large cap Value 32.0 +0.0 32.0 0.0 +0.0 0.0 0.0 +0.0 0.0 International Equity 38.0 -2.0 36.0 0.0 +0.0 0.0 0.0 +0.0 0.0 Int'l Developed Markets Value 28.0 -3.0 25.0 0.0 +0.0 0.0 0.0 +0.0 0.0 Japan 0.0 +3.0 3.0 0.0 +0.0 0.0 0.0 +0.0 0.0 Emerging Markets 10.0 -6.0 4.0 0.0 +0.0 0.0 0.0 +0.0 0.0 China 0.0 +2.0 2.0 0.0 +0.0 0.0 0.0 +0.0 0.0 Brazil 0.0 +2.0 2.0 0.0 +0.0 0.0 0.0 +0.0 0.0 Yield Assets 20.0 +0.0 20.0 20.0 +0.0 20.0 20.0 +0.0 20.0 Senior Loans 0.0 +0.0 0.0 15.0 +0.0 15.0 15.0 +0.0 15.0 Preferreds 0.0 +0.0 0.0 5.0 +0.0 5.0 5.0 +0.0 5.0 MLPs 16.0 +0.0 16.0 0.0 +0.0 0.0 0.0 +0.0 0.0 US Real Estate 4.0 +0.0 4.0 0.0 +0.0 0.0 0.0 +0.0 0.0 CIO GWM tactical deviation legend: Overweight Underweight Neutral. Change legend:  Upgrade  Downgrade for moderate risk profile 1 The change in the tactical deviation since our previous report. 2 The sum of the strategic asset allocation and the tactical deviation columns. Source: UBS and WMA AAC, 26 September 2019. See the Portfolio Analytics, Performance Measurement, and Appendix sections for performance measurement details and information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretation of the suggested tactical deviations from the strategic asset allocations.

CIO GWM 30 September 2019 20 APPENDIX

Investment committee Global Investment Process and Committee description WMA Asset Allocation Committee description The UBS investment process is designed to achieve replica- We recognize that a globally derived house view is most ble, high-quality results through applying intellectual rigor, effective when complemented by local perspective and ap- strong process governance, clear responsibility, and a culture plication. As such, UBS has formed a Wealth Management of challenge. Americas Asset Allocation Committee (WMA AAC). WMA AAC is responsible for the development and monitoring of Based on the analyses and assessments conducted and vet- UBS WMA’s strategic asset allocation models and capital ted throughout the investment process, the Chief Investment market assumptions. The WMA AAC sets parameters for the Officer (CIO) formulates the UBS Wealth Management Invest- CIO Americas, WM Investment Strategy Group to follow dur- ment House View (e.g., overweight, neutral, underweight ing the translation process of the GIC’s House Views and the stances for asset classes and market segments relative to their incorporation of US-specific asset class views into the US-spe- benchmark allocation) at the Global Investment Committee cific tactical asset allocation models. (GIC). Senior investment professionals from across UBS, complemented by selected external experts, debate and rigorously WMA Asset Allocation Committee composition challenge the investment strategy to ensure consistency and The WMA Asset Allocation Committee comprises nine risk control. members:

Global Investment Committee composition • Mike Ryan The GIC comprises nine members, representing top market • Michael Crook and investment expertise from across all divisions of UBS: • Brian Rose • Jeremy Zirin • Mark Haefele (Chair) • Jason Draho • Jorge Mariscal • Tom McLoughlin • Mike Ryan • Leslie Falconio • Simon Smiles • Laura Kane • Min Lan Tan • David Lefkowitz • Themis Themistocleous • Paul Donovan • Bruno Marxer (*) • Andreas Koester *Business area outside of the Chief Investment Office Explanations about asset classes

Sources of strategic asset allocations and investor risk profiles Deviations from strategic asset allocation or benchmark allocation Strategic asset allocations represent the longer-term allocation of assets The recommended tactical deviations from the strategic asset allocation or that is deemed suitable for a particular investor. The strategic asset alloca- benchmark allocation are provided by the Global Investment Committee and tion models discussed in this publication, and the capital market assump- the Investment Strategy Group within CIO Americas, Wealth Management. tions used for the strategic asset allocations, were developed and ap- They reflect the short- to medium-term assessment of market opportunities proved by the WMA AAC. and risks in the respective asset classes and market segments. Positive/zero/ negative tactical deviations correspond to an overweight/neutral/under- The strategic asset allocations are provided for illustrative purposes only weight stance for each respective asset class and market segment relative and were designed by the WMA AAC for hypothetical US investors with a to their strategic allocation. The current allocation is the sum of the strategic total return objective under five different Investor Risk Profiles ranging asset allocation and the tactical deviation. from conservative to aggressive. In general, strategic asset allocations will differ among investors according to their individual circumstances, risk Note that the regional allocations on the Equities and Bonds pages in UBS tolerance, return objectives and time horizon. Therefore, the strategic as- House View are provided on an unhedged basis (i.e., it is assumed that inves- set allocations in this publication may not be suitable for all investors or tors carry the underlying currency risk of such investments) unless otherwise investment goals and should not be used as the sole basis of any invest- stated. Thus, the deviations from the strategic asset allocation reflect the ment decision. Minimum net worth requirements may apply to allocations views of the underlying equity and bond markets in combination with the to non-traditional assets. As always, please consult your UBS Financial assessment of the associated currencies. The detailed asset allocation tables Advisor to see how these weightings should be applied or modified ac- integrate the country preferences within each asset class with the asset class cording to your individual profile and investment goals. preferences in UBS House View.

The process by which the strategic asset allocations were derived is de- Asset allocation does not assure profits or prevent against losses from an scribed in detail in the publication entitled “Strategic Asset Allocation investment portfolio or accounts in a declining market. (SAA) Methodology and Portfolios.” Your Financial Advisor can provide you with a copy. CIO GWM 30 September 2019 21 APPENDIX

Appendix

Emerging Market Investments may be delays in distributing tax information to investors; (8) are Investors should be aware that Emerging Market assets are subject subject to high fees, including management fees and other fees and to, among others, potential risks linked to currency volatility, abrupt expenses, all of which will reduce profits. changes in the cost of capital and the economic growth outlook, as well as regulatory and sociopolitical risk, interest rate risk and Interests in alternative investment funds are not deposits or obliga- higher credit risk. Assets can sometimes be very illiquid and liquidity tions of, or guaranteed or endorsed by, any bank or other insured conditions can abruptly worsen. CIO Americas, WM generally recom- depository institution, and are not federally insured by the Federal mends only those securities it believes have been registered under Deposit Insurance Corporation, the Federal Reserve Board, or any Federal US registration rules (Section 12 of the Securities Exchange other governmental agency. Prospective investors should understand Act of 1934) and individual State registration rules (commonly known these risks and have the financial ability and willingness to accept as “Blue Sky” laws). Prospective investors should be aware that to them for an extended period of time before making an investment the extent permitted under US law, CIO Americas, WM may from in an alternative investment fund, and should consider an alternative time to time recommend bonds that are not registered under US investment fund as a supplement to an overall investment program. or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not In addition to the risks that apply to alternative investments gener- as frequent or complete as that required by US laws. ally, the following are additional risks related to an investment in these strategies: For more background on emerging markets generally, see the CIO Americas, WM Education Notes “Investing in Emerging Markets (Part 1): Equities,” 27 August 2007, “Emerging Market Bonds: Under- standing Emerging Market Bonds,” 12 August 2009 and “Emerging Markets Bonds: Understanding Sovereign Risk,” 17 December 2009.

Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment-grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Subinvestment-grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher-yielding bonds for shorter periods only.

Nontraditional Assets Nontraditional asset classes are alternative investments that • Real Estate: There are risks specifically associated with investing include hedge funds, private equity, real estate, and man- in real estate products and real estate investment trusts. They aged futures (collectively, alternative investments). Interests involve risks associated with debt, adverse changes in general of alternative investment funds are sold only to qualified investors, economic or local market conditions, changes in governmental, and only by means of offering documents that include information tax, real estate and zoning laws or regulations, risks associated about the risks, performance and expenses of alternative invest- with capital calls and, for some real estate products, the risks ment funds, and which clients are urged to read carefully before associated with the ability to qualify for favorable treatment un- subscribing and retain. An investment in an alternative investment der the federal tax laws. fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same • Foreign Exchange/Currency Risk: Investors in securities of is- regulatory requirements as mutual funds; (2) may have performance suers located outside of the United States should be aware that that is volatile, and investors may lose all or a substantial amount even for securities denominated in US dollars, changes in the of their investment; (3) may engage in leverage and other specula- exchange rate between the US dollar and the issuer’s “home” tive investment practices that may increase the risk of investment currency can have unexpected effects on the market value and loss; (4) are long-term, illiquid investments; there is generally no liquidity of those securities. Those securities may also be affected secondary market for the interests of a fund, and none is expected by other risks (such as political, economic or regulatory changes) to develop; (5) interests of alternative investment funds typically that may not be readily known to a US investor. will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there

CIO GWM 30 September 2019 22 Appendix

Statement of Risk Municipal bonds - Although historical default rates are very low, all municipal bonds carry credit risk, with the degree of risk largely following the particular bond’s sector. Additionally, all municipal bonds feature valuation, return, and liquidity risk. Valuation tends to follow internal and external factors, including the level of interest rates, bond ratings, supply factors, and media reporting. These can be difficult or impossible to project accurately. Also, most municipal bonds are callable and/or subject to earlier than expected redemption, which can reduce an investor’s total return. Because of the large number of municipal issuers and credit structures, not all bonds can be easily or quickly sold on the open market. Disclaimer of Liability - This may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor's. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. UBS does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of UBS research reports. Fixed income - Bond market returns are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical conditions and other important variables. Corporate bonds are subject to a number of risks, including credit risk, interest rate risk, liquidity risk, and event risk. Though historical default rates are low on investment grade corporate bonds, perceived adverse changes in the credit quality of an issuer may negatively affect the market value of securities. As interest rates rise, the value of a fixed coupon security will likely decline. Bonds are subject to market value fluctuations, given changes in the level of risk-free interest rates. Not all bonds can be sold quickly or easily on the open market. Prospective investors should consult their tax advisors concerning the federal, state, local, and non-U.S. tax consequences of owning any securities referenced in this report.

Equities - Stock market returns are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical conditions and other important variables.

Preferred securities - Prospective investors should consult their tax advisors concerning the federal, state, local, and non-U.S. tax consequences of owning preferred stocks. Preferred stocks are subject to market value fluctuations, given changes in the level of interest rates. For example, if interest rates rise, the value of these securities could decline. If preferred stocks are sold prior to maturity, price and yield may vary. Adverse changes in the credit quality of the issuer may negatively affect the market value of the securities. Most preferred securities may be redeemed at par after five years. If this occurs, holders of the securities may be faced with a reinvestment decision at lower future rates. Preferred stocks are also subject to other risks, including illiquidity and certain special redemption provisions.

Required Disclosures

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

CIO GWM 30 September 2019 23 Appendix

Companies mentioned in this report (30 September 2019): Accenture Plc (ACN - Most Preferred, $191.38), American Electric Power (AEP - Most Preferred, $94.20), Apollo Global Management (APO - Not Rated, $25.62), Alexandria Real Estate Equities (ARE - Most Preferred, $153.11), American Express (AXP - Most Preferred, $118.59), Bank of America (BAC - Bellwether, $29.35), Brighthouse Financial Inc (BHF US - Not Rated, $44.00), Comcast Corp. (Cl A) (CMCSA - Bellwether, $44.81), Cisco Systems Inc. (CSCO - Most Preferred, $48.84), Chevron (CVX - Most Preferred, $118.60), Dominion Energy (D - Most Preferred, $80.99), DCP Midstream Partners LP (DCP - Most Preferred, $26.06), Digital Realty Trust Inc. (DLR - Not Rated, $128.85), Enterprise Products Partners LP (EPD - Most Preferred, $28.64), Energy Transfer LP (ET - Most Preferred, $13.10), Ford Motor Co (F - Not Rated, $9.08), Goldman Sachs (GS - Bellwether, $208.97), Invitation Homes Inc (INVH - Most Preferred, $29.61), Nuveen Quality Preferred Income II (JPS - , $9.85), Lockheed Martin Corp. (LMT - Most Preferred, $387.87), Altria Group Inc. (MO - Not Rated, $40.13), MPLX LP (MPLX - Most Preferred, $27.74), Merck and Co Inc (MRK - Not Rated, $82.91), Norfolk Southern (NSC - Bellwether, $180.87), Plains All American Pipeline LP (PAA - Most Preferred, $20.96), Procter & Gamble Co. (PG - Not Rated, $124.57), ProLogis (PLD - Most Preferred, $85.78), AT&T Inc. (T - Most Preferred, $37.43), Texas Instruments Inc. (TXN - Bellwether, $127.14), Union Pacific (UNP - Most Preferred, $162.69), VF Corp (VFC - Bellwether, $88.79), Western Midstream Partners LP (WES - Most Preferred, $24.49)

Issuer credit risk rating definitions The UBS CIO issuer credit risk rating reflects the opinion of the relevant UBS CIO analyst regarding an issuer's risk of a near- to intermediate-term dividend deferral on preferred securities, and/or issuer payment default on debt obligations. Low Risk: The issuer is considered to be in solid financial condition with strong credit fundamentals and low likelihood of a near- to intermediate-term dividend deferral, and/or issuer payment default. The issuer's securities are of generally high quality. Medium Risk: The issuer is considered to be in adequate financial condition with satisfactory credit fundamentals relative to the near- to intermediate-term dividend deferral, and / or issuer payment default. The issuer's securities are of medium to weaker credit quality and may have higher volatility than those of Low Risk issuers. These instruments should therefore only be held by risk tolerant investors. High Risk: The issuer is considered to be in weak financial condition with deteriorating credit fundamentals or the state of the issuer's financial condition and credit fundamentals may be uncertain due to volatile market conditions. Sector considerations may be a dominating factor. There is a high likelihood of a near- to intermediate-term dividend deferral, and / or issuer payment default. The issuer's securities are speculative. Note: Distinctions in the credit quality of individual security instruments may vary based on the maturity of the instrument, as well as the relative priority within an issuer's capital structure. These distinctions will be discussed in our future credit reports, as applicable. In regions outside the United States, the UBS CIO office will map these distinctions to security- level risk flags. Issuer credit outlook definitions The UBS CIO issuer credit outlook reflects the opinion of the relevant CIO analyst regarding an issuer's credit quality outlook over the succeeding 12 months. For rated securities, this may include the likelihood of a change in the published rating by a nationally recognized credit rating agency/statistical rating organization. Improving: We expect the credit profile of the issuer to improve, to an extent that may justify upgrades by rating agencies. Stable: We do not expect the credit profile of the issuer to change meaningfully. Deteriorating: We expect the credit profile of the issuer to deteriorate, to an extent that may result in single-notch or even multi-notch credit rating downgrades by rating agencies. CIO Americas, Wealth Management equity selection system Equity sector strategists provide three equity selections: Most Preferred (MP), Least Preferred (LP) and Bellwether designation. Rating definitions Most Preferred*: The equity sector strategist expects the stock to outperform the relevant benchmark in the next 12 months. Least Preferred*: The equity sector strategist expects the stock to underperform the relevant benchmark in the next 12 months. Bellwether: Stocks that are of high importance or relevance to the sector and which the equity sector strategist expects the stock to perform broadly in line with the sector benchmark in the next 12 months.

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*A stock cannot be selected as Most Preferred if UBS Investment Research rates it a Sell, while a UBS Investment Research Buy rated stock cannot be selected as Least Preferred. Restricted: Issuing of research on a company by CIO Americas, WM can be restricted due to legal, regulatory, contractual or best business practice obligations which are normally caused by UBS Investment Bank’s involvement in an investment banking transaction in regard to the concerned company. Equity selection: An assessment relative to a benchmark Equity selections in Equity Preferences lists (EPLs) are relative assessments versus a sector/industry, country/regional or thematic benchmark. The chosen benchmark is disclosed on the front page of each EPL. Stocks can be selected for several EPLs. To keep consistency, a stock can only be selected as either Most Preferred or Least Preferred, but not both simultaneously. As benchmarks differ between lists, stocks need not be included on every list to which they could theoretically be added.

For a complete set of required disclosures relating to the companies that are the subject of this report, please mail a request to UBS CIO Global Wealth Management Business Management, 1285 Avenue of the Americas, 20th Floor, Avenue of the Americas, New York, NY 10019. UBS Investment Research: Global Equity Rating Definitions For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. Global Equity 12-Month Rating Definitions Buy: FSR is > 6% above the MRA. Neutral: FSR is between -6% and 6% of the MRA. Sell: FSR is > 6% below the MRA. Key Definitions Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Exceptions and Special Cases Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified the Companies Mentioned or Company Disclosure table in the relevant research piece. Disclosures (30 September 2019) Accenture Plc 1, 2, 3, 4, 5, Alexandria Real Estate Equities 2, Altria Group Inc. 2, 3, 4, American Electric Power 1, 2, 3, 4, 5, 6, American Express 2, 3, 4, 6, 11, Apollo Global Management 1, 2, 6, 7, 8, 9, 10, 11, AT&T Inc. 2, 3, 4, 6, 7, 8, 9, Bank of America 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 12, 13, Brighthouse Financial Inc 1, 2, 6, 7, 8, 12, Chevron 2, 3, 4, 6, 11, Cisco Systems Inc. 2, 3, 4, 6, 11, Comcast Corp. (Cl A) 2, 14, 15, DCP Midstream Partners LP 1, 2, Digital Realty Trust Inc. 1, 2, Dominion Energy 2, 3, 4, 6, Energy Transfer LP 1, 2, Enterprise Products Partners LP 2, 5, Ford Motor Co 2, 6, Goldman Sachs 2, 3, 4, 6, 7, 10, 11, Invitation Homes Inc 2, Lockheed Martin Corp. 1, 2, 3, 4, 5, 6, 11, Merck and Co Inc 2, 3, 4, 6, 10, 14, 16; MPLX LP 1, 2, 6, Norfolk Southern 2, 3, 4, Nuveen Quality Preferred Income II 1, 2, 3, 4, Plains All American Pipeline LP 1, 2, 5, Procter & Gamble Co. 2, 3, 4, ProLogis 2, Texas Instruments Inc. 2, 3, 4, Union Pacific 2, 3, 4, 6, VF Corp 1, 2, 5, Western Midstream Partners LP 1, 2, 5, 1. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company's common equity securities as of last month's end (or the prior month's end if this report is dated less than 10 days after the most recent month's end). 2. UBS Securities LLC makes a market in the securities and/or ADRs of this company.

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3. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non- investment banking securities-related services are being, or have been, provided. 4. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services other than investment banking services from this company. 5. UBS Financial Services Inc., its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issued share capital of this company. 6. Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products and services other than investment banking services from this company/entity. 7. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity or one of its affiliates. 8. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. 9. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 10. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided. 11. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided. 12. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. 13. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month's end (or the prior month's end if this report is dated less than 10 working days after the most recent month's end). 14. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company. 15. The UBS Wealth Management strategist, a member of his or her team, or one of their household members has a long common stock position in this company. 16. A household member of the equity analyst covering this company was an employee of the company during the past 12 months and received compensation from the company during that employment.

Preferred Securities Ratings Definitions Rating Definition Preferred securities on the Attractive List are those that we view favorably based on (1) fundamental Attractive credit quality, (2) valuation and (3) structure (security characteristics). We believe that issuers of preferreds on the Neutral List are likely to meet the coupon payment but we Neutral do not deem the preferreds to fit the definition of our Attractive or Unattractive Lists. We may deem these preferred securities to be Unattractive for fundamental reasons, for valuation reasons, or because of their structure. In the case of fundamental drivers, we have concerns that the Unattractive credit profile may deteriorate. Sector considerations may also be a factor. In the case of valuation, we believe that price/yield levels do not adequately compensate investors for the risks.

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Disclaimer

UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Management business of UBS Switzerland AG (regulated by FINMA in Switzerland) or its affiliates ("UBS"). The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. Instrument/issuer-specific investment research – Risk information: 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. 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CIO GWM 30 September 2019 27 Appendix 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 material may not be reproduced or copies circulated without prior authority of UBS. Unless otherwise agreed in writing UBS expressly prohibits the distribution and transfer of this material to third parties for any reason. UBS accepts no liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this material. This report is for distribution only under such circumstances as may be permitted by applicable law. For information on the ways in which CIO manages conflicts and maintains independence of its investment views and publication offering, and research and rating methodologies, please visit www.ubs.com/research. Additional information on the relevant authors of this publication and other CIO publication(s) referenced in this report; and copies of any past reports on this topic; are available upon request from your client advisor. Important Information About Sustainable Investing Strategies: Incorporating environmental, social and governance (ESG) factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. The returns on a portfolio consisting primarily of ESG or sustainable investments may be lower than a portfolio where such factors are not considered by the portfolio manager. Because sustainability criteria can exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. Companies may not necessarily meet high performance standards on all aspects of ESG or sustainable investing issues; there is also no guarantee that any company will meet expectations in connection with corporate responsibility, sustainability, and/or impact performance. Distributed to US persons by UBS Financial Services Inc. or UBS Securities LLC, subsidiaries of UBS AG. UBS Switzerland AG, UBS Europe SE, UBS Bank, S.A., UBS Brasil Administradora de Valores Mobiliarios Ltda, UBS Asesores Mexico, S.A. de C.V., UBS Securities Japan Co., Ltd, UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliates of UBS AG. 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 Financial Services Inc. is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the "Municipal Advisor Rule") and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule. External Asset Managers / External Financial Consultants: In case this research or publication is provided to an External Asset Manager or an External Financial Consultant, UBS expressly prohibits that it is redistributed by the External Asset Manager or the External Financial Consultant and is made available to their clients and/or third parties. For country disclosures, click here. Version 04/2019. CIO82652744 © UBS 2019. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

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