Asset management Strictly Confidential Minimum Volatility Index Strategies Tacoma Employees' Retirement System Mary Allen Saunders, CFA, Product Specialist Betsy Sanders, CAIA, Client Advisor October 24, 2013 UBS Global Asset Management UBS Global Asset Management is one of the five business divisions of UBS, the other four being Wealth Management, Wealth Management Americas, Investment Bank and Retail & Corporate. The asset management division was formed through the merger of Union Bank of Switzerland and Swiss Bank Corporation in 1998. In July 2000, the merger culminated in the integration of the investment teams of the respective asset management businesses: UBS Asset Management, Brinson Partners (whose Chicago origins date back to the early 1970s) and Phillips & Drew (established in London in 1895). In April 2002, with the integration completed, we re-branded as UBS Global Asset Management, reflecting the truly global nature of our business. Services to U.S. persons are provided by UBS Global Asset Management (Americas) Inc. or UBS Global Asset Management Trust Company. Assets under management/advisement for UBS Global Asset Management (Americas) Inc. were $155 billion, as of June 30, 2013, which includes $2.0 billion for UBS Global Asset Management Trust Company. UBS Global Asset Management (Americas) Inc., a Delaware corporation, is a member of the UBS Global Asset Management business division of UBS AG, a publicly traded Swiss bank (NYSE: UBS). UBS Global Asset Management (Americas) Inc. is a wholly-owned subsidiary of UBS AG and registered as an investment adviser pursuant to the Investment Advisers Act of 1940, as amended1. 1 An investment adviser does not have to demonstrate or meet any minimum level of skill or training to register with the U.S. Securities and Exchange Commission. Not intended for redistribution. For important additional information, please see the Additional Disclosures at the end of the presentation. US-I 1 mszalri [printed: ____] [saved: August 5, 2013 9:52 AM] \\DCHIC009PN1.CHI.SWISSBANK.COM\_mszalri$\Desktop\Disclosure Statement.ppt Table of contents Section 1 Overview Section 2 Investment Process Section 3 Minimum Volatility Indices Section 4 Appendix 2 Section 1 Overview This image cannot currently be displayed. Organized for institutional client success Global presence Assets by client type and investment mandate Around 3,800 employees across 24 countries USD 621 billion in assets under management worldwide Headquartered in London, our other main offices By client type are in Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Sydney, Tokyo, Toronto and Institutional Zurich. USD 366 billion (59%) Integrated and independent Wholesale intermediary investment solutions USD 255 billion (41%) Investment model is built around collaboration By asset class1 among six distinct investment centers designed to Multi Asset deliver leading investment Infrastructure 18% capabilities across asset classes & Private Equity Equities 1% 31% Global Investment Solutions Global Real Global Equities, with US & Growth Estate Global Fixed Income 7% Alternative & Quantitative Investments Alternative & Global Real Estate Quantitative 5% Infrastructure & Private Equity Fixed Income Money 25% Market Data as of June 30, 2013. 13% Figures are representative of UBS Global Asset Management business division worldwide. Assets under management for UBS Global Asset Management (Americas) Inc. were $155 billion as of June 30, 2013. Totals may not add due to rounding. 1 Equities, Fixed Income, Money Market and Multi-asset are part of the Traditional Investments business line. A&Q (Alternative and Quantitative Investments), GRE (Global Real Estate) and Infrastructure are separate business lines. 2 Multi-asset includes asset allocation, currency and risk management (all part of Global Investment Solutions) and some alternative investments not managed by A&Q, GRE or Infrastructure. US-I (RU) 4 Structured Beta & Indexing Average 13 years investment experience, 6 years with team Structured Beta & Indexing Ian Ashment Zurich London Sydney Product Specialists / Research Urs von Gunten Stuart Newman, ASIP Chris Wolak, CFA, CAIA Mary Allen Saunders, CFA Lori Boomgaardt John Byrne, CFA Michael Fanning Boriana Iordanova, CFA Bea Hausheer Ian Clarke, CFA Joe Milner Ben Faulkner, CFA Teresa Yeo Ray Fuller, CFA Zahid Jamil James Manning-Coe1 Kaushik Patel, CFA Supported by global resources of UBS Global Asset Management Local equity trading Currency specialists Independent Risk Management Applied Research Over 20 equity dealers in London, 7 experienced FX traders plus 4 12 professionals utilizing Quantitative and Fundamental Zurich, Chicago, Singapore spot order generators in London proprietary Global Risk System in research analysts in London, Zurich, London, Zurich, NY, Chicago NY, Chicago, Tokyo Note: As at 14 October 2013. May not reflect reporting lines. 1 Intern; not included in years experience and years with team averages. 5 Assets under management UBS Global Asset Management Index AuM – SB&I AuM1 – USD 124.4bn – by Region by Asset Class (USD 160.3bn) Swiss Other Asia Pacific Emerging 12% Fixed Income 2% 7% USD 35.9bn Structured Beta Markets & Indexing 4% Pan-Europe UK USD 124.4bn 15% 6% North America 20% Global 35% Index AuM growth (period end) SB&I AuM1 – USD 124.4bn – by Vehicle 160 140 UBS Pooled Index Fund 120 25% 100 80 ETF Segregated 10% USD bn 60 Mandates 40 61% White Label Index Funds 20 Structured 5% 0 Funds <1% 2006 2007 2008 2009 2010 2011 2012 Jun-13 Source: UBS Global Asset Management. Data as at 30 June 2013 and for the UBS Global Asset Management Division worldwide. Note: 1. Includes $0.5bn of index assets managed by Real Estate team. Excludes $1.9bn of non-index assets managed by SB&I. 6 mszalri [printed: ____] [saved: August 5, 2013 9:52 AM] \\DCHIC009PN1.CHI.SWISSBANK.COM\_mszalri$\Desktop\Disclosure Statement.ppt Minimum volatility indexing Improving risk-adjusted returns • Highly experienced, stable and well resourced team – Over 30 years experience of managing passive assets – Proven expertise in managing portfolios tracking non-market cap weighted indices for over 2 years and with AUM of USD 6.9 billion – Strong collaboration with MSCI • Consistent investment process – Consistent, long-term track record – Portfolios benchmarked to: . MSCI Developed World Minimum Volatility Index . MSCI US Minimum Volatility Index . MSCI Emerging Markets Minimum Volatility Index . MSCI World ex US Minimum Volatility Index • Rigorous risk control – Multi-layer independent monitoring • Strong technology platform – State of the art proprietary portfolio management system As at June 30, 2013. US-I 7 Section 2 Investment Process Passive investment management process Risk and added-value are balanced effectively Controlling risk Maximizing value • Full replication where index composition • Minimizing trading costs and size allow • Avoiding price distortions caused by index • Leading proprietary indexation and risk changes systems • Adding value in corporate events • Independent monitoring and review • Active corporate governance Efficient passive portfolio The resulting portfolio is optimally constructed and implemented in a low cost manner Portfolio closely tracks the underlying benchmark US-I 9 Passive Investment Management System Facilitating full replication or stratified sampling, if necessary Relative position Risk Transaction cost information diagnostics estimation • Our proprietary software application: Portfolio Optimization Platform (POP) – POP contains sophisticated quantitative analytics which combine the objectives, risk and transaction cost elements, allowing different possible scenarios to be analysed • Comprehensive characteristics including estimated tracking errors, risk decomposition, transaction costs and portfolio deviations allows for in depth analysis Note: For illustrative purposes only US-I 10 Passive portfolio construction • Full replication starting position • Maximum permitted deviations set at: – Stock – Industry & sector – Country & currency – Size levels • Cash and turnover levels constrained • Within confines of set deviations, optimization finds best possible balance between risk and trading costs • Liquidity considerations and trading costs integral to the portfolio construction process leading to lower implementation costs Note: For illustrative purposes only US-I 11 Passive daily portfolio management process Portfolio Monitoring Process Tracking Error Analysis Review portfolio and evaluate anomalies • Risk diagnostics facilitate review of individual stock positions, industry/sector exposures, risk factor exposures, country and currency exposures Cash Exposure Evaluation Monitor cash daily to ensure correct equity exposure • Manage foreign currency balances • Invest cash from dividends • Manage corporate action activities Portfolio Rebalancing Conduct rebalancing transactions while minimizing cost • Index composition changes • Cash requirements • Minimize tracking error • Minimize transaction costs • Conduct pre-trade analysis • Trading strategy determined, executed and evaluated US-I 12 Index change trading Price behaviour of a stock added to MSCI index: historically and at present Analyse every day before and in the MSCI analysis window and estimate probability of a stock being added to or deleted from the index MSCI analysis window Announcement Effective date date Relative Price Time At present Historically Hedge funds, Quant funds, Prop trading desks Index funds Source: UBS Global Asset