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Yield & Income Cross asset ideas for Yield Monthly –– September 2019 Chief Investment Office GWM
Good-bye Goldilocks? Most of 2019 has seen economic growth driving profits without incurring tighter monetary policy
The US-China trade dispute has been the potentially disruptive wildcard
Trade tension escalation raises the risk of a retaliatory cycle and leads us to underweight equities
ab
This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosuresbegin 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 Good-bye Goldilocks? ....................................................................... 3
Asset Allocation Commentary Lowering risk in portfolios on rising trade tensions ............................ 4
Fixed Income Sector Reviews
US Gov't Bonds Interest rates: Changing sentiment .................................................... 5
US Municipal Bonds Strong Treasury rally extends to munis ............................................... 6
US Investment Grade Credit IG yields near historic lows ................................................................. 7
US High Yield Credit Neutral on high yield ......................................................................... 8
Emerging Market Debt Selectively picking up carry in the emerging world ............................. 9
Equity Sector Reviews
US Equity S&P 500 EPS: Slower for longer ....................................................... 10
International Developed Market Equity A month to forget ........................................................................... 11
Emerging Market Equity Not enough growth, too much uncertainty ..................................... 12
Yield Asset Reviews
Preferreds Use a fine-tooth comb for fixed-to-floats ......................................... 13
REITs REITs, CRE and interest rates ............................................................ 14
MLPs Fundamentals remain supportive ..................................................... 15
Closed-End Fund Highlight Cohen & Steers Limited Duration Preferred Income Fund (LDP)
A preferred securities fund at a discount.......................................... 16
House View Yield-Focused Portfolios
Yield Monitor .................................................................................. 17
Strategic Asset Allocations (SAAs) .................................................... 18
About this report The objective of this report is to provide an analysis of various income-generating securi-ties – sovereign, municipal and corporate bonds, equities, master limited partnerships (MLP), preferred securities, senior loans, real estate investment trusts and closed-end funds, – in the context of current economic, fixed in-come and equity market conditions.
This report represents a compendium of previously-published views from UBS CIO Global Wealth Management. These publica-tions are referenced in each section in order to obtain more information.
This report will be published approximately every four weeks. Please note that the views in this report may change with market con-ditions at some point between publications. Updates to the views in this report can be found in the referenced sections of the Online Services Research website. Lead authors Jason Draho Frank Sileo Authors (in alphabetical order) Alejo Czerwonko Jay Dobson Leslie Falconio Michael Gourd Daniel Kelsh David Lefkowitz Sangeeta Marfatia Barry McAlinden Kathleen McNamara Edmund Tran Justin Waring Jonathan Woloshin Xingchen Yu Jeremy Zirin
CIO GWM 28 August 2019 2
Market Commentary Frank Sileo, CFA
Good-bye Goldilocks?
The narrative driving risk assets higher for most of 2019 had
been that economic growth was strong enough to support
corporate profits, but not so strong as to spark inflation and
more restrictive monetary policy from the Fed. Investors were
confident that the central bank would continue supporting this
"Goldilocks" backdrop and that it would not go too far in cur-
tailing growth nor fall behind and risk a sharp inflation spike.
Although economic data from earlier in the year had begun
painting a less consistent growth picture, this was still inter-
preted positively by investors. Markets cheered economic "bad
news" as "good news" as it encouraged a dovish shift in cen-
tral bank policy. The key to sustaining the Goldilocks environ-
ment would be for economic and earnings growth to return to
trend1. The US-China trade dispute however, has been the wild
card and in August tensions escalated rapidly. On 1 August,
President Trump announced a new 10% tariff on the remain-
ing USD 300bn of Chinese imports that were not already being
taxed. The implementation will be staggered with some tariffs
taking effect in September and the rest in December. On 23
August, China and the US announced further tariff increases.
With trade tensions heating up, equity prices have fallen and
credit spreads have widened. Investors sought safe haven assets
and rates dropped, with the 10-year Treasury yield falling be-
low 1.5% from 2.0% at the start of August. The 30-year
Treasury yield fell below 2% for the first time ever and the 2yr –
10yr Treasury yield curve became inverted. US government
bonds are on track to post their best monthly return in more
than 10 years. For many other fixed income assets, however,
wider credit spreads have offset the supportive benefit of lower
interest rates. High yield (page 8) and emerging market bonds
(page 9) have been under pressure.
Against the backdrop of escalating trade hostilities, business
investment is declining and global manufacturing is slowing.
Although the risk of recession has risen, we at CIO believe the
US expansion can continue and avoid recession in 2020. A
strong job market continues to support consumers, as evi-
denced by the latest retail sales data. Additionally, while Presi-
dent Trump has shown a willingness to escalate the trade battle
with China, the effect on business sentiment and market condi-
tions appear to be considerations. Finally, monetary policy is
becoming more supportive. As highlighted in last month's Yield
& Income, the era of global monetary policy "normalization"
has ended as the Fed and other central banks move toward
policy easing. Nonetheless, given the heightened risks to the
global economy and markets, we at CIO have moved to an
underweight in equities, including a neutral view on US and
underweight to emerging markets (see page 4 for details).
Most risk assets were out of favor in August Mar-19Mar-19Mar-19Mar-19 Apr-19Apr-19Apr-19Apr-19 May-19May-19May-19May-19 Jun-19Jun-19Jun-19Jun-19 Jul-19Jul-19Jul-19Jul-19 Aug-19Aug-19Aug-19Aug-19MLPs
3.4%
US Lg Cap
Growth 4.5%
US Gov't
2.3%
US Lg Cap
Value 7.2%
US Lg Cap
Growth 2.3%
US Gov't
3.1%REITs
3.3%
US Lg Cap
Value 3.5%
IG Corps
1.5%
US Lg Cap
Growth 6.9%
Preferreds
2.1%
IG Corps
2.9%US Lg Cap
Growth 2.8%
Int'l DM
Value 2.3%
Muni Bond
1.4%
Emerging
Mkts 6.2%
REITs
1.3%
REITs
1.5%IG Corps
2.4%
Emerging
Mkts 2.1%
EM USD
Bond 0.6%
Int'l DM
Value '5.3%
Sr Loans
1.0%
Muni Bond
1.4%US Gov't
1.9%
Sr Loans
2.1%
Preferreds
0.5%
EM Loc Bond
4.4%
EM USD Bond
1.0%
Preferreds
0.7%Muni Bond
1.6%
High Yield
1.4%
REITs
0.2%
EM USD
Bond 2.7%
EM Loc Bond
1.0%
EM USD Bond
0.1%EM USD
Bond 1.4%
Preferreds
0.9%
EM Loc Bond
0.0%
MLPs
2.6%
US Lg Cap
Value 0.8%
High Yield
-0.1%Preferreds
1.2%
IG Corps
0.5%
Sr Loans
-0.7%
High Yield
2.3%
Muni Bond
0.8%
Sr Loans
-0.5%High Yield
0.9%
EM USD
Bond 0.4%
MLPs
-1.1%
IG Corps
2.3%
High Yield
0.6%
EM Loc Bond
-1.5%Emerging
Mkts 0.8%
Muni Bond
0.4%
High Yield
-1.2%
REITs
1.3%
IG Corps
0.5%
US Lg Cap
Growth -3.4%US Lg Cap
Value 0.6%
REITs
-0.2%
Int'l DM
Value '-5.8%
Preferreds
1.2%
US Gov't
-0.1%
Int'l DM Value
'-5.0%EM Loc Bond
-0.4%
US Gov't
-0.3%
US Lg Cap
Growth -
US Gov't
0.9%
MLPs
-0.2%
US Lg Cap
Value -5.5%Sr Loans
-0.5%
EM Loc Bond
-0.9%
US Lg Cap
Value -6.4%
Muni Bond
0.4%
Emerging Mkts
-1.2%
Emerging
Mkts -6.0%Int'l DM
Value -0.5%
MLPs
-1.3%
Emerging
Mkts -7.3%
Sr Loans
0.2%
Int'l DM Value
'--2.2%
MLPs
-8.1% Source: Bloomberg, BAML, UBS. Returns as of 23 Aug 2019
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 Yield – Bloomberg Barclays US Corp High Yield Index; EM USD Bond - Bloomberg 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 Equity REIT Index; MLPs – Alerian MLP Index; Preferreds – ICE BofAML Core Plus 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 Value USD Index; Emerging Markets – MSCI Emerging Market Index.
1 "De-risking on growth concerns," Draho, J., Yield & Income, 27 Mar 2019
CIO GWM 28 August 2019 3
Asset Allocation Commentary Jason Draho, PhD, Jeremy Zirin, CFA
The 30-year Treasury yield fell to an all-time low
In %
A domestic and defensive bias in the US sector update
US equity sector allocation
0
2
4
6
8
10
12
14
16
1977 1983 1989 1995 2001 2007 2013 2019
30-year Treasury yield
Communication services
Consumer discretionary
Consumer staples
Financials
Health care
Materials
Real estate
Utilities
Energy
Industrials
Technology
new oldunderweight overweight
– – – – – – + ++ +++n
Source: Bloomberg, UBS, as of 21 August 2019 Source: UBS, as of 22 August 2019
Lowering risk in portfolios on rising trade tensions
The US-China trade dispute has escalated in recent days,
raising the risk of a cycle of retaliation that undermines
global growth and equity markets. That justifies a reduction
in risk in our portfolios in order to lower our exposure to an
uncertain political environment.
We still believe the US can avoid a recession in 2020, helped
by additional Federal Reserve easing and strong consumer
spending. We estimate the direct impact of all the additional
tariffs will represent only a marginal drag on the US econo-
my. But downside risks are increasing for both the global
economy and markets.
As a result, we are reducing risk in our portfolios by moving
to an underweight in equities to lower our exposure to polit-
ical uncertainty. We continue to favor carry strategies in
credit and foreign exchange markets, which benefit from
central bank easing in a low-growth environment.
While some economic data has deteriorated, such as global
manufacturing and trade activity, the US economy appears
fundamentally sound. Consumer spending remains healthy
and the typical pre-conditions and catalysts of recession
aren't yet present. Job growth has also slowed—a natural
result of an unemployment rate of just 3.7%. Growth falling
to the long-term trend rate of 1.5-2% isn't a negative, ra-
ther a "soft landing" that could last for a while given the
lack of economic or financial imbalances.
The escalation in trade tensions has raised the risk of a cycle
of retaliation that undermines global growth and equity
markets. Investors will need to be responsive to evolving
events. In particular, we will be monitoring the following
factors to assess the need for further changes: Signals from
the White House; China's policy response to the US tariffs
announced on 23 August; and the Fed’s policy response if
trade tensions worsen, including more aggressive easing.
In light of these heightened tensions, we have modestly re-
duced our total equity allocation by shifting from overweight
to neutral on US equities and having slight underweights to
emerging market and international developed market equi-
ties. We are not outright bearish on equities, rather trade
and global growth concerns likely limit their near-term up-
side. Global policy easing and potential fiscal stimulus should
provide a floor for equities not too far below current levels.
With this reduction in the equity allocation and after the
sharp drop in interest rates over the past month we have
also closed our allocation to long-duration Treasury bonds
(20y+) in conservative to moderate risk portfolios. We think
yields stabilize near current levels in the near term. However,
we continue to recommend these Treasuries for portfolios
with higher equity allocations as a counter-cyclical hedge.
Within US equity sectors we shifted to a modestly defensive
and domestic bias from one that was more pro-cyclical by
going overweight consumer staples (adding to existing
overweights in consumer discretionary and communication
services) and underweight sectors most exposed to the
global cycle (tech, energy, industrials).
CIO GWM 28 August 2019 4
US Gov't Bonds Leslie Falconio
Interest rates: Changing sentiment
In just the past few weeks investor sentiment has fundamen-
tally changed. Since the 31 July FOMC meeting, 10-year
yields have plummeted close to 65bp (with a 1.44% yield
the intra-day low), and interest rate volatility has spiked. Af-
ter the Fed cut interest rates for the first time in 10-years,
US-China trade disputes have intensified, negative yields
abroad have increased, and US 10-year real yields have
turned negative for the first time since 2017. Although eco-
nomic fundamentals in the US remain solid, the parts of the
US yield curve inverted to levels not witnessed since 2007,
due to the continued demand for longer-term Treasuries.
The US 30-year Treasury reached its historic intra-day low in
yield of 1.92%. On 26 August, the 10-year Treasury yield fell
to the year-to-date low of 1.44%, a mere 12bps from the
historic all-time low in US 10-year Treasury yields. And yet,
core CPI inflation is at 2.2%, real GDP grew at a 2.1% pace
in 2Q19, the unemployment rate is near a 50-year low, and
US equities are a mere 6% from their historical high. Interest
rates are not focusing on domestic data, but are capitulating
to the prospect of heightened trade tensions, a negative
GDP print in Germany and the prospect of slowing growth
ahead.
The mortgage headwind
Although US 30-year mortgage rates are substantially lower
than the 2018 peak of 4.70%, they have not fully kept up
with the decline in 10-year Treasury yields. As MBS spreads
have widened, (given the spike in volatility), the 30-year
Mortgage rate has stayed elevated given the 1.52% 10-year
yield. Historically, with this level of 10-year yield, consumers
could expect a 30-year mortgage rate of ~3.25%. Today,
the rate sits between 3.6%-4.0%. Although this level re-
mains well below the 2018 peak, if the 10-year yield were to
break the post Brexit low yield of 1.32%, we would antici-
pate another large spike in refi activity and continued buying
in longer end Treasuries. The sharp rally in long-term interest
rates in the US has led to increasing refinance risk for US
residential mortgage backed securities. At of the start of
2019, according to GS, only 5% of outstanding conventional
30-year agency mortgage borrowers were in-the-money for
refinancing - in terms of having mortgage rates high enough
to benefit from refinancing - but the share has risen to 65%.
RECOMMENDATIONS AND PREFERENCES
• Treasuries: Neutral with a gradual rise in rates.
• Agency debt: Neutral with a preference for step up cou-
pons or MBS.
• Mortgage-backed securities (MBS): Neutral with a prefer-
ence to 4.5% coupons
• Treasury inflation-protected securities (TIPs): Overweight
US 10yr Tsy yield: 1.5% House View: Neutral Treasury; Overweight TIPs (Neutral on Agency debt and MBS**)
The 10-year Treasury yield reaches a yearly low as volatili-ty spikes
lhs: Treasury volatility rhs: 10-year yield (%)
1.3
1.5
1.8
2.0
2.3
2.5
2.8
3.0
3.3
3.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19
Treasury volatility US 10-year Treasury yield
Source: UBS; Bloomberg, ICE BAML as of 26 August 2019 The mortgage refi index has spiked since July month end
Lhs: Mortgage refi index rhs:10yr yield, MBS duration and 30-yr mortgage rate
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
750
1,000
1,250
1,500
1,750
2,000
2,250
2,500
2,750
3,000
3,250
3,500
Dec-18 Feb-19 Apr-19 Jun-19 Aug-19
Mtg Refi Index 30yr Mortgage Rate
10-year yield MBS index effective duration
Source: Bloomberg, UBS, as of 23 August 2019
** Agency MBS
For details, please see the Fixed Income Strategist., Falconio, L., et al., 07-Aug-2019, UBS CIO. For updates, see the Fixed Income section of the UBS Online Services research for individuals' website
CIO GWM 28 August 2019 5
US Municipal Bonds Kathleen McNamara, CFA, CFP Strong Treasury rally extends to munis Treasury yields have fallen significantly in August. The 10-year rate plunged by more than 50bps (to under 1.50% from 2.02%).The yield on the 30-year US Treasury bond fell to an all-time low (see page 5). As one might expect, munic-ipal yields also moved lower but at less magnitude (about 30bps). Munis are now on pace to post positive returns for ten straight months (see chart); including 1.4% so far this month, lifting the sector's YTD return to 7.6%.
Muni curve retains steeper slope Muni yield curves retain a steeper slope compared to their taxable counterpart (see chart). As a point of reference, the 2s/30s on the AA muni curve is now about 107bps. At the same time, the yield difference between the same points on the Treasury curve is hovering around only 50bps. Following the Fed's recent shift to an easier monetary policy, we be-lieve longer-date munis (15-year to 20-years versus 10-year to 15-years previously) offer better value for new money investments. Generally speaking, for investors intent on posi-tioning at the front part of the curve, better values may be found in the taxable fixed income markets after-tax.
RECOMMENDATIONS AND PREFERENCES • 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 Municipal Brief, Airport Obligors: Risk Assessment Frame-work, 5 September 2018).
• Turn to toll roads for strong credit characteristics. We be-lieve that toll roads when owned and operated by the public sector, exhibit relatively strong credit characteristics. (see our Municipal Brief, Toll Road and Bridge Obligors: Risk Assessment Framework, 2 October 2018).
• Be selective in private higher education sector. For credit selection guidance, see Municipal Brief, Private Higher Ed-ucation: Risk Assessment Framework, 14 November 2018
• Exercise caution in health care area. This sector is undergo-ing substantial transformation and consolidation with sig-nificant implications for credit quality. See Municipal Brief, Not for profit hospitals: Risk Assessment Framework, 4 February 2019 for our examination of the top 86 obligors with the most debt outstanding.
• Add electric utility bonds to diversify holdings. CIO's framework results broadly reflect the favorable risk charac-teristics of the sector (see Municipal Brief, Municipal Elec-tric Utilities: Risk Assessment Framework, 6 June 2019).
• Examine exposure to 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 Government Obligors: Risk Assessment Framework, 26 June 2019).
Average yield: 1.7%* House View: Neutral
Monthly muni total returns, Aug 2018 – Aug 2019 Total return in %
Source: ICE BofAML, UBS, as of 23 August 2019
Yield curves: AAA muni GO, AA muni GO, and US Treasury In %
Source: MMD, ICE, UBS, as of 23 August 2019 * Based on the Bloomberg Barclays US Municipal Bond Index
For details, please see the Municipal Market Guide., McLoughlin, T., et al., 15-Aug -19, UBS CIO. For updates see the Fixed Income section of the UBS Online Services research for individuals' website.
0.2
-0.6 -0.7
1.1 1.20.8
0.6
1.6
0.4
1.5
0.40.8
1.4
-2
-1
0
1
2
Aug
-18
Sep-
18
Oct
-18
Nov
-18
Dec
-18
Jan-
19
Feb-
19
Mar
-19
Apr
-19
May
-19
Jun-
19
Jul-1
9
Aug
-19
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
AAA muni GO AA muni GO US Treasury
CIO GWM 28 August 2019 6
US Investment Grade Credit Barry McAlinden, CFA; Daniel Kelsh IG yields near historic lows The substantial fall in US Treasury yields has more than offset the 10bps of spread widening that's occurred for investment grade (IG) credit in August. IG's average yield of 2.8% sits only slightly above the historic 2.7% low that was witnessed in 2016. Still, the large quantity of negative-yielding bonds overseas makes US IG an attractive alternative for foreign investors. With US interest rates likely to remain low and the US economy able to avoid a recession, we see the environ-ment as being mostly benign for IG credit. IG during Fed easing cycles Periods of past Fed easing have generally been satisfactory environments for investment grade credit, with the excep-tion of the global financial crisis. Excluding this outlier peri-od, IG's excess return over Treasuries was positive during the full duration of the easing cycles that began in 1989, 1995, 1998, and 2001. IG spreads moved wider during the shorter easing cycles in the 1990s that amounted to "insurance cuts," but only by a small amount. In 1998, when the Fed was reacting to concerns about the LTCM hedge fund crisis, spreads had already moved wider before the first cut. Things stand differently today, with IG index spreads of 125bps hovering only slightly above the 2019 tight of 113bps. The average coupon of the asset class is hovering near a historic low of 4.1% and the effective duration of 7.4 years is at an all-time high. This increased price sensitivity of the IG asset class is a reason we keep a neutral allocation to IG despite the positive technical and fundamental observations we have witnessed.
From 2Q19 earnings reports, we have observed a continued deleveraging commitment from larger well-known BBB issu-ers that assumed larger debt loads for M&A purposes. Some issuers are able to do this from a position of strength by pro-actively paying down debt, while others have had to resort to selling assets and cutting dividends. Either way, these is-suers have thus far been able to defend their IG ratings.
RECOMMENDATIONS AND PREFERENCES • Financials (US banks) over non-financials: We continue to
see value in financial bonds over non-financials, with a 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.
Average yield: 2.8%* House View: Neutral IG's yield is very close to the historic low of 2016 Yield, in %
Source: ICE BAML, UBS, as of 23 August 2019
Highlighted corporate bonds
Company CUSIP Coupon (%)
Maturity S&P rating
YTW (%)
Price (USD)
ALTRIA GROUP INC
02209SAS2 4.00 01/31/24 BBB 2.4 106.5
AT&T INC 00206RDC3 4.45 04/01/24 BBB 2.4 108.6 COMCAST 20030NBX8 3.00 02/01/24 A- 2.1 103.9 FORD MOTOR CREDIT
345397WW9 3.66 09/08/24 BBB 3.6 100.4
GOLDMAN SACHS
38148LAE6 3.75 05/22/25 BBB+ 2.6 106.4
Source: Bloomberg, UBS, as of 26 August 2019. Note: pricing is indicative based on Bloomberg Valuation Service (BVAL) and is subject to change.
* Based on the Bloomberg Barclays US Credit Index
For details, please see the Fixed Income Strategist., Falconio, L., et al., 7-Aug-19, UBS CIO. For updates, see the Fixed Income section of the UBS Online Services research for individuals' website.
2.0
2.5
3.0
3.5
4.0
4.5
Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19
CIO GWM 28 August 2019 7
High Yield Credit Daniel Kelsh; Barry McAlinden, CFA High Yield Bonds Year-to-date, the US high yield (HY) market has produced a 10.6% return. During August, HY performance has been largely flat. The earliest days of August experienced a drag on returns as geopolitical tensions weighed on investors. In the background, interest rates declined notably with the US 10-year Treasury declining to under 1.50% from approxi-mately 2.0% at the start of the month (see page 5).
A recurring theme of 2019 was on display again in August, with meaningful differentiation in the tiers of HY. BB credit continues to be the segment of choice with investors as spreads remained flat during August, absorbing the decline in the Treasury yields. B and CCC credit experienced spread widening, with the mag-nitude correlated to the decline in credit quality. Trade tensions were the primary driver of performance in lower rated credit, but there were other related factors. A portion of the perfor-mance discrepancy can be explained by the relative weighting of energy in the B and CCC indices. Crude oil prices continue to fluctuate, with concerns over a global economic slowdown weighing on demand expectations. Additionally, HY mutual funds experienced notable outflows with the month-to-date figure aggregating to greater than USD 5bn, a notable draw-down from the year-to-date inflows.
We cited multiple factors for intra-month weakness in HY, but trade concerns were the linchpin. Trade concerns are also likely to be a driver of Fed rate cuts in coming months. The mix of trade concerns, Fed policy actions, and market forces will influence HY spreads, but investors need to recall that year-to-date returns reflect the attractive spread levels that existed at the start of the year. Spreads have failed to achieve the tights registered in 2018, making 2019's return less newsworthy. While BB-rated credit has outperformed, it has limited capacity to further carry HY returns, and B and CCC- rated remain susceptible to trade-related uncertainty. Investors need to be wary of the credit quality in individual names and realize that tariff impacts, in addition to tariff tensions, may carry very real economic impacts on certain issuers and weaken credit quality.
RECOMMENDATIONS AND PREFERENCES • We remain Neutral on HY as a whole and are alert for fu-
ture 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 be-lieve that existing investors in the asset class should hold current positions.
Average HY yield: 5.8%* House View: Neutral 3Q19 experienced notable differentiation in HY returns Daily year-to-date returns, in %
Source: BAML, UBS, as of 27 August 2019
HY fund outflows rose in August Year-to-date aggregate inflows into HY funds, in USD mn
Source: BAML, UBS, as of 27 August 2019 * Based on the Bloomberg Barclays US Corporate High Yield Index
For details, please see the Fixed Income Strategist., Falconio, L., et al., 7-Aug-19, UBS CIO. For updates, see the Fixed Income section of the UBS Online Services research for individuals' website.
--
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2-Jan 16-Feb 2-Apr 17-May 1-Jul 15-AugBB Index B Index CCC Index
0
3,000
6,000
9,000
12,000
15,000
31-Dec 31-Jan 28-Feb 31-Mar 30-Apr 31-May 30-Jun 31-Jul
High Yield
CIO GWM 28 August 2019 8
Emerging Market Debt Alejo Czerwonko, PhD Selectively picking up carry in the emerging world About USD 16 trillion worth of government bonds globally are now trading with a negative yield, and Germany recently is-sued a 30-year zero-coupon bond at a price above par, guar-anteeing a loss to investors holding it to maturity. In this envi-ronment, we see tactical and strategic value in emerging mar-ket sovereign bonds denominated in US dollars. The asset class is currently yielding nearly 5%, comparing favorably to that of other fixed income segments, and it has historically delivered attractive risk-adjusted returns. To be sure, their spreads to benchmark US government bonds would widen if trade tensions continue to escalate, but this would be partially offset by a likely decline in US Treasury rates. We therefore think an overweight to USD-denominated emerging market bonds is warranted in this low-yield, low-growth environment. Emerging market currencies remain vulnerable to any escala-tion in US-China relations, but investors can collect a healthy interest rate carry via positions in select high-yielding curren-cies against lower-yielding but similarly growth-sensitive ones. In our FX strategy, we do so through long positions in the Indonesian rupiah and the Indian rupee, financed with the Australian and Taiwan dollars. The Russian ruble is an-other high carry currency worthy of consideration, given the country's healthy balance-of-payments position. For a deeper reading of these themes and more, please refer to our latest Investment in Emerging Markets flagship, "One foot on the gas, another on the brake," published on 28 August. RECOMMENDATIONS AND PREFERENCES • We initiate an overweight in US-dollar-denominated emerg-
ing market sovereign bonds. The spreads of the asset class have recently widened slightly above their five- and 10-year averages. With central banks easing, higher quality credit should remain 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.
• We remain neutral in EM corporate bonds in USD in glob-ally diversified portfolios. We expect spreads to trend sideways over the next six months.
• We remain neutral in EM sovereign bonds in local curren-cies as valuations adequately compensate investors for the risks involved.
The current environment is supportive of carry strategies. We therefore maintain our overweight on a basket of equally weighted high-yielding emerging market curren-cies (Indonesian rupiah and Indian rupee) against a basket of lower-yielding currencies (Australian and Taiwan dollars) to harvest the interest rate advantage without being too strongly exposed to US-China trade tensions.
EM hard currency (USD) average yield: 4.9%* House View: Overweight EM local currency average yield: 3.9%** House View: Neutral Spread of EM sovereign bonds in USD Sovereign credit spreads, in bps*
Source: Bloomberg, UBS, as of 26 August 2019 Yield of EM sovereign bonds in local currencies Bond yields, in %**
Source: Bloomberg, UBS, as of 26 August 2019 * Based on the Bloomberg Barclays EM USD Hard Currency Agg Index ** Based on the Bloomberg Barclays EM Local Currency Liquid Gov Index 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.
200
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CIO GWM 28 August 2019 9
US Equity Jeremy Zirin, CFA; David Lefkowitz, CFA; Jeffrey Hans; Christopher Shea, CFA; Edmund Tran, CFA S&P 500 EPS: slower for longer The trade dispute between the US and China ratcheted up on 1 August after President Trump threatened to impose 10% tariffs on all remaining un-tariffed Chinese imports. In our base case, we assume that these tariffs are implemented as currently scheduled. The drag from tariffs is always hard to pinpoint with precision because it is never clear who bears the burden of the higher costs: consumers, exporters, or importers. Foreign currency fluctuations can also have an impact. But because there are few, if any, alternative suppli-ers for this basket of imports, we have assumed that US im-porters (i.e. shareholders) bear the cost of the new tariffs. This clips annual earnings growth by about 1%. Outside of macro uncertainties, corporate earnings funda-mentals have been sluggish. Interest rates have fallen and our fixed income team expects them to only rise modestly from current levels. In addition, we now expect the Fed to cut interest rates by another 0.75% over the next year. The lower interest rate outlook, especially Fed rate cuts, has neg-ative implications for bank profitability. In the last few weeks, our economists have also trimmed their growth ex-pectations for both Europe and China which could weigh on profits for US multinationals. Lower global growth is also negative for the oil price outlook, which prompts us to lower our expectations for US energy sector earnings. As a result, we reduced our S&P 500 EPS estimates, with the majority of the revisions in 2020. For 2019, our estimate falls from USD 165 to USD 164. On a rounded basis, the y/y growth rate of 1% remains unchanged. Our estimate for 2020 falls from USD 176 to USD 173 (now 5% growth, y/y). Despite our lower estimates, based on still supportive leading indicators, particularly low borrowing costs and ample access to capital, we believe the economy will continue to expand and the profit cycle has more room to advance. Model portfolio updates • Dividend Ruler: We did not make any changes to the Divi-
dend Ruler in our most recent update (2 August). Though we don't foresee an end to the cycle, risks have increased amid escalating US-China trade tensions. While Dividend Ruler will not be immune to market drawdowns, we be-lieve the portfolio's focus on high-quality companies should offer some downside protection—particularly when compared to the broader market.
• Opportunistic Equity Income: In our most recent OEI model portfolio update (23 August), we increased the portfolio weights in Walmart (WMT) from 2.1% to 4.1% and Procter & Gamble (PG) from 2.5% to 3.5%. To fund the increases, we trimmed portfolio weights in Cisco Systems (CSCO) from 2.7% to 1.7% and Broadcom (AVGO) from 3.2% to 2.2%. In addition, we reduced the weight in Tar-get (TGT) from 3.9% to 2.9%.
House View: Neutral
Dividend Ruler model portfolio yield: 2.2% LINK Opportunistic Equity Income (OEI) model portfo-lio yield: 3.0% LINK
For details, please see Dividend Ruler Stocks: Monthly Update, Zirin, J. et al., 2-Aug-19. Opportunistic Equity Income, Zirin, J. et al., 23-Aug-19. For updates, see the Equities section of the UBS Online Services research for individuals' website.
CIO GWM 28 August 2019 10
Int'l Developed Market Equity Michael Gourd A month to forget International developed market stocks had a difficult month in August, now down 6% from the recent high hit in early July, and 16% lower than the peak reached back in 1Q18. Ongoing trade tensions stemming from the US-China dis-pute continue to dampen the outlook for European manu-facturers, with the Eurozone composite manufacturing PMI at 46.5, well below the 50 mark that separates expansion from contraction. This reflects the ongoing manufacturing weakness in Germany – the largest manufacturer in the re-gion – where the July PMI came in at just 43.2.
Political risks also remain in the fore throughout Europe, with continued uncertainty around Brexit, Italian elections, and possible US tariffs on European autos later this year.
Additionally, the ECB and Bank of Japan already have sub-zero policy rates, meaning they have less ability to use mone-tary policy to help boost growth in the event of a downturn.
With the backdrop of ongoing global trade tensions and manufacturing weakness, unclear political risks, and central banks with less ability to boost growth, international devel-oped market equities and the Eurozone in particular remain unattractive. Other regions offer better value, in our view.
RECOMMENDATIONS AND PREFERENCES • We are underweight Eurozone equities. Economic activity in
the region has weakened. 2Q earnings were mixed at best, with earnings growth expected to be at -3% this year. Eu-rozone equities, however, have rallied strongly since the be-ginning of the year and now appear to be priced for an overly optimistic macro scenario. At the same time, external risks remain elevated. The US-China trade conflict is unre-solved, Italy could face elections and the UK government is threatening with hard Brexit. Our most preferred Eurozone sectors are energy, information technology, and utilities.
• We are underweight UK equities. On a 6-12 month basis, we have a 'neutral' outlook on UK stocks, but on a 1-4 year basis we recommend an underweight position. UK stocks remain attractively valued, and earnings may grow low single-digits in 2019, but Brexit risks and uncertainties around the pound, oil, and global growth could become downside catalysts.
• We are neutral Swiss equities. Swiss stocks have an attrac-tive dividend yield and falling yields on franc-denominated bonds support the defensive market.
• Within international developed equities, we have a prefer-ence for Japanese equities. The deterioration in trade and the global growth outlook likely limit near-term upside po-tential. However, the market has lagged other cyclical markets this year, limiting downside risks and providing re-rating potential should global data improve from here.
Average yield: 5.5%* House View: Underweight**
Trade tensions and geopolitical frictions remain key risks to international developed market eq-uities.
Giving up ground Total return for select international developed markets
Source: Bloomberg, UBS, as of 22 August 2019 * Based on the MSCI EAFE Value Index ** We have a preference for Japanese equities within international devel-oped markets. Please see the all equity and all income yield-focused asset allo-cation tables at the end of this report or the full detailed asset allocation tables.
-6.7%
-4.7%
-5.7%
-2.8%
-1.6%
2.08%
11.04%
5.95%
5.54%
16.33%
-8.55%
-4.21%
-5.89%
-5.31%
8.37%
Int'l dev value(MSCI EAFE Value)
Europe(EuroStoxx)
UK(FTSE 100)
Japan(MSCI Japan)
Switzerland(SMI)
1 month YTD Last 12 months
CIO GWM 28 August 2019 11
Emerging Market Equity Xingchen Yu Not enough growth, too much uncertainty Emerging market (EM) equities are once again under pres-sure from US-China trade tensions. After the US unexpected-ly announced 10% tariffs on the remaining USD 300bn of Chinese goods it imports, China halted purchases of US farm goods and the yuan depreciated further against the US dol-lar. On 23 August, China and the US again announced fur-ther increases in tariffs on each other’s imports. A weak global backdrop has also dimmed the outlook: Chinese activ-ity in July again softened; the outlook for Europe is worri-some, with the German economy shrinking in 2Q19; and, for the first time since 2007, the 2-year/10-year US Treasury yield curve recently inverted, typically a sign of rising reces-sion risks. Finally, growing domestic political concerns have hurt investor sentiment. In Argentina, asset prices slumped after the opposition surprisingly defeated President Mauricio Macri in the primary elections.
At 11.5x 12-month forward earnings, MSCI Emerging Mar-kets (EM) equities are trading at a discount to their five-year average; their discounts to developed market and US stocks have also exceeded their respective historical averages. That said, the relative cheapness of EM valuations is not sufficient for a potential outperformance. On the earnings front, the outlook is concerning. About a half of MSCI EM constituents by market cap have reported 2Q19 earnings, and despite beating forecasts by an average of 3%, they reported low-double-digit declines in net income. Considering the rising uncertainty from trade and little sign of improvement in economic activity, we see further downgrades in consensus earnings growth.
RECOMMENDATIONS AND PREFERENCES • We moved emerging market equities to underweight in
response to the escalation of the US-China trade conflict and increasing signs of a global slowdown. Within Asia, we continue to favor China over Hong Kong and Malaysia over Thailand. Within the region, we like financials and se-lect internet and technology stocks, and stocks with sus-tainable cash flow generation and high dividend yields.
• In Latin America, we are overweight Brazilian equities ver-sus Mexican stocks. In Brazil we prefer a balanced selec-tion of high-quality domestic cyclical names (financials, consumer discretionary, industrials) and some cheap do-mestic defensives (consumer staples, healthcare, telecom). In Mexico we pick companies that have resilient earnings and USD inflows, compelling valuations, and low regulato-ry risk and interest-rate sensitivity combined with high div-idend yields.
Average yield: 3.1%* House View: Underweight
We are moving emerging market equities to underweight in response to the escalation of the US-China trade conflict and increasing signs of a global slowdown. Emerging markets geographic preferences All positions are relative to the MSCI EM
Source: Bloomberg, UBS, as of 26 August 2019
* Based on the MSCI Emerging Markets Index; Hong Kong is not a constitu-ent of MSCI EM. 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.
China
India
Indonesia
South Korea
Malaysia
Philippines
Taiwan
Thailand
Hong Kong*
Brazil
Chile
Colombia
Mexico
Peru
Czech Republic
Hungary
Poland
Russia
South Africa
Turkey
Asi
aLa
tAm
EMEA
new old
neutralunderweight overweight
CIO GWM 28 August 2019 12
Preferred Securities Frank Sileo, CFA Use a fine-tooth comb for fixed-to-floats We have always taken a highly selective approach to fixed-to-floating rate preferred (F2F) recommendations. However two developments have recently led us to view this segment of the preferred market with even greater scrutiny. First, there is now an increased potential for Libor rates to fall fur-ther from here and second, there is lingering uncertainty regarding the discontinuation of Libor in 2022 or soon after. After 2021, UK regulators will no longer require banks to submit Libor quotes. This could impact F2Fs since they use Libor as the reference rate to calculate their floating-rate coupons beyond the first call date. Among our recommendations, we consider each security's prospectus language regarding the floating-rate calculation in the absence of Libor. An additional consideration is expec-tations for interest rates (both short-term and long-term), as well as credit spreads. The fourth quarter 2018 demonstrat-ed that floaters and near-term call dated F2Fs can face dual headwinds from economic slowdown fears. As credit spreads widen and short-term rate expectations drop, they face a "double-whammy" with the potential that coupons may decline just as yield demand rises.
At its 31 July meeting, the Fed cut rates for the first time in more than 10 years. At CIO, we expect three additional rate cuts and forecast Libor to fall to about 1.6% in 2020. Unless the Fed abruptly reverses course, Libor could stay at those levels at the time of proposed discontinuation. This could re-sult in coupons that, rather than floating, are reset at lower, fixed levels. At this point, it does not appear that the market is discounting this possibility. It may be prudent to act before the market does. Investors should consider swapping out of fixed-to-floating rate preferreds with low reset spreads, particularly those with near-term first call dates. While Attractive-list fixed-to-floats may also be reset at fixed coupons, their higher reset spreads would generally produce higher coupons.
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 to an increase in interest rates or credit spreads.
• For fixed-to-floating rate preferreds, we take a highly selec-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 ex-posure 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.
Average yield: 4.2%* House View: Neutral
Libor may be discontinued in 2022. If that oc-curs, rather than paying a floating-coupon, many F2Fs may have coupons set at a fixed rate. 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. (see "LIBOR phase-out could cause coupon conundrum," 24 Sept 2018) Highlighted Attractive List selections **
Security Name Symbol/ Last Next YTW
CUSIP Price Call Date (%)1
Bank of America 6.25% fixed to call date then 3m L+ 370.5bps
060505EH3 $108.80 9/05/2024 4.3%
Bank of America 6.10% fixed to call date then 3m L+ 389.8bps
060505EN0 $109.70 3/17/2025 4.1%
Citigroup 6.25% fixed to call date; then 3mo L +451.7bps 172967KM2 $111.50 8/15/2026 4.3%
Goldman Sachs 5.30% fixed to call date; then 3m L+ +383.4bps
38148BAC2 $105.00 11/10/2026 4.4%
Source: UBS, Bloomberg, as of 27 August 2019 1YTW = Yield-to-worst is the lowest estimated yield among possible redemp-tion date scenarios *Based on the adjusted yield-to-worst / current yield of the BofAML Core Plus Fixed Rate Preferred Index **Prices and yields are indicative and subject to change
For details, please see the Preferred Securities Valuation Weekly and Preferred Securities Overview and Preferences, Sileo, F., 7-Aug-19, UBS CIO. For updates, see the Preferred Securities section of the UBS Online Services research for individuals' website.
CIO GWM 28 August 2019 13
Real Estate Investment Trusts (REITs) Jonathan Woloshin, CFA REITs, CRE and falling interest rates REITs have performed well in 2019 due, in large part, to the sizeable drop in interest rates this year. REIT and commercial real estate (CRE) values historically have had an inverse rela-tionship with interest rates. In addition, we believe the shape of the yield curve (and the driver of that yield curve shape) has a significant impact on REIT/CRE performance.
A benefit of falling interest rates for CRE is the spread be-tween interest rates and cap rates. Currently spreads are well above long-term averages and widening spreads could help act as a buffer against future interest rate increases.
As with rising interest rates however, the drivers of falling interest rates are essential in evaluating their impact. Given the economically sensitive nature of CRE, we believe, all else being equal, a drop in rates attributable to a significantly slowing economy would likely be a negative for REIT/CRE values, particularly if we were to experience a recession. Ad-ditionally very low interest rates could lead investors to en-gage in riskier deal behavior as they search for higher yields.
On the other hand, lower financing costs and the ability to refinance existing fixed obligations is a positive. Furthermore, yield-oriented investors should increasingly be drawn to CRE given the spread between interest rates and cap rates. Simi-larly, low / negative yields outside the US should help keep capital flowing into US REITs/CRE. Declining interest rates should also lead to higher discounted cash flow valuations of CRE investments and could lead to lower exit cap rates, thus enhancing CRE values.
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 pro-vides 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 diversi-fied across strong job growth markets. In addition, many of these markets have significant affordability challenges, making them attractive from a rental perspective. INVH's average monthly rent compares very favorably to in-market multifamily rents. The maturation of the oldest mil-lennial cohort provides a strong demand runway.
• Alexandria Real Estate (ARE) – ARE has a very strong bal-ance 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 strong-ly preleased and has a well-diversified tenant base with 50%+ of revenue derived from investment grade tenants.
Average yield: 3.9%* House View: Neutral**
The drop in interest rates continued to support REITs in August. Highlighted REIT recommendations
Company
Ticker
Last Price (USD)
Dividend Yield
Prologis Inc PLD $82.63 2.6%
Invitation Homes INVH $29.02 1.8%
Alexandria Real Estate ARE $147.24 2.7%
Source: UBS, Bloomberg, as of 26 Aug 2019 * Based on the FTSE NAREIT Equity REIT Index
For details, please see recent US REITs: Equity preferences publi-cations. For updates, please see the Real Estate section of the UBS Online Services research for individuals' website.
The "Highlighted REIT recommendations" are extracted from US REITs: Equity preferences, published on 19-Jun-2019.
CIO GWM 28 August 2019 14
Master Limited Partnerships (MLPs) Jay Dobson Fundamentals remain supportive Though we emphasize a selective approach to MLPs and en-ergy infrastructure companies, we continue to have a con-structive outlook on the sector. MLPs with infrastructure ex-posure closer to the wellhead and in the most prolific on-shore production basins continue to see rising volumes and stable margins. Diversified MLPs, gathering and processing MLPs, and liquids transportation MLPs appear best posi-tioned, particularly those with exposure to the Permian basin.
Fundamentals in the MLP & energy infrastructure sector con-tinue to slowly improve, including stronger balance sheets, greater internal funding of capital spending and more disci-plined managements. As cash flow continues to grow, we expect valuations to continue to improve.
We have a favorable view of the MLP sector. Year to date, MLPs are up 7% on a total return basis, underperforming the S&P 500 by 9%. Crude oil is up about 18% over the same period. Despite the solid sector performance year to date, this only takes valuations back to where they were in the second half of 2018. With improving fundamentals, we expect the sector to moderately outperform the S&P 500 over the balance of 2019.
Keys issues to watch over the next six months include new pipeline construction progress in the Permian (crude oil, nat-ural gas and NGL pipes), any potential export bottlenecks at Corpus Christi, and ongoing legal challenges to pipeline con-struction in the US generally, particularly in the Northeast.
RECOMMENDATIONS AND PREFERENCES • Our Top Picks in the MLP and energy infrastructure sector
are Enterprise Products Partners (EPD), Energy Transfer (ET) and Plains All American (PAA).
• We prefer larger MLPs with asset diversity and exposure to the Permian basin. In addition to the larger diversified MLPs, we like the natural gas gathering and processing MLPs given our outlook for growing supply of and grow-ing demand for natural gas and natural gas liquids (NGLs).
• MLP investment-grade (IG) bonds are also attractive. MLPs and midstream energy companies rank among the widest-trading IG corporate sectors among those with the most influential index weights. We continue to recommend the bonds of midstream issuers that fit the category as offer-ing both above-average credit spreads and solid funda-mentals. See MLP bonds: Attractive coupon "stream" up-date, McAlinden, B., 22-May-2019 for additional details.
Average yield: 8.7%* House View: Neutral Yields: MLPs compared to other income-oriented securities Yield, in %
Source: UBS, FactSet, as of 26 August 2019
Highlighted MLPs for yield
Company
Ticker
Last Price USD
Distrib'n Yield
DCP Midstream LP DCP $23.70 13.2%
Western Midstream Partners LP WES $22.30 10.9%
MPLX LP MPLX $27.40 9.5%
Energy Transfer LP ET $13.19 9.3%
Source: UBS, Bloomberg, as of 26 August 2019
* Based on the Alerian MLP Total Return Index
For background on the MLP sector, please see the Master Lim-ited Partnership (MLP) Primer Dobson, J., 26-Jan-2018
For details, please see US MLPs & Energy Infrastructure: Equity preferences, Dobson, J., 5-Jun-2019. For updates, see the Equi-ties section of the UBS Online Services research for individual’s website.
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S&P Utilities High Yield Bonds
S&P 500 10 Year US Treasury
CIO GWM 28 August 2019 15
Closed-end funds Sangeeta Marfatia, CPA Preferred securities fund at a discount The Cohen and Steers Limited Duration Preferred Income Fund (LDP) primarily invests in capital securities. The fund is composed of fixed-to-floating rate securities (74%), which in our view provide desirable interest rate protection when rates rise. In addition, approximately 86% of the borrowing is at a fixed rate, hedged via interest rate swaps; ensuring stability of the distribution. The fund currently pays 3.2% on its debt. This has helped provide a stable distribution stream so far. As rates have fallen, fixed income sectors including floating rate preferreds have rallied this year. As such the fund is up 20% YTD; more than its net asset value (NAV) increase of 15%, and thus narrowing the discount. In 2018, 80% of the distribution was qualified dividend income (QDI) and hence taxed at lower rates.
As of June 2019, LDP remains focused on US firms, with 47% of investments US domiciled, followed by the UK, with 13% of assets, France 8% and Japan 6% to name a few. The fund also has relatively low concentrations of sin-gle issues, with its top 10 holdings comprising 20% of as-sets as of June 2019.
• Other preferred funds with exposure to fixed to floating rate securities include Cohen & Steers Select preferred and Income Fund (PSF) trading at a premium and Nuveen Preferred and Income Fund (JPS) which trades at a 1% discount. For additional information on the Preferred Sec-tor, please see page 13.
• Please refer to Closed-End Fund Coverage Universe for additional information.
Key Facts
Ticker symbol LDP
UBS rating Hold
Share price USD 25.21
Net asset value USD 25.47
Discount 1.0%
Distribution Rate* 7.4%
Total Net Assets USD 1.0bn
Leverage / Duration 30% / 3.9 years
Source: UBS, Bloomberg, as of 27 August 2019 * Distribution Rate: Annualized based on most recent monthly/quarterly 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.
Security Type
Source: Cohen and Steers, UBS, as of 30 June 2019
Credit Quality
Source: Cohen and Steers, UBS, as of 30 June 2019
Top 5 sectors
Source: Cohen and Steers, UBS, as of 30 June 2019 Please see recent Closed End Fund Universe publications, as well as the Closed-end Fund section of the UBS Online Services re-search for individuals' website for more information.
74%
8%18%
Institutional Preferred(Fixed to Float)
RetailPreferred
Floating RatePreferred
4%
10%
45%
25%
9%7%A-
BBB+
BBB/BBB-
BB/BB+/BB-
Not rated
B/B+/Cash
55%
18%
5% 5% 3%0%
20%
40%
60%
Bank
ing
Insu
ran
ce Util
ity
Pipe
line
Util
ities
CIO GWM 28 August 2019 16
Portfolio yield monitor For House View Yield-focused portfolio Trailing 12-month indicated yields by asset class**
* Moderate (tax-exempt) SAA, yield-focused Source: UBS, Bloomberg, as of 30 July 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.
Asset ClassYield as of 31
July 2019
Percentile rank (since December
2007)
Yield change from 1 month
ago (bps)
Yield change from 12
months ago (bps)
Portfolio* 4.6% 78% 2 36
Cash 2.1% 85% 2 91
Fixed Income
US Government 1.7% 55% 0 2
US Gov't 10-year 2.4% 61% -2 37
US MBS 2.8% 53% 4 16
US Municipals 2.1% 31% -1 19
US Inv Grade 3.6% 49% 0 47
US High Yield 5.4% 30% 0 33
EM FI Local 6.4% 85% -4 153
EM FI USD 5.8% 85% -4 138
Equities
US Large-cap Growth 0.9% 3% -1 -27
US Large-cap Value 2.4% 65% -1 22
US Mid Cap 1.6% 79% 0 20
US Small Cap 1.5% 68% 2 9
Int'l Dev Equity 3.1% 54% 3 35
Int'l Dev Equity Value 4.2% 65% 4 43
EM Equity 2.1% 62% 2 14
Yield Assets
Senior Loans 5.0% 80% 5 78
Preferreds 5.7% 17% -2 4
MLPs 10.1% 86% 18 -7
US Real Estate 4.2% 64% 1 -24
CIO GWM 28 August 2019 17
CIO Global Wealth ManagementDetailed asset allocation, taxable, yield-focused
Investor risk profile
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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 +1.0 66.0 56.0 +1.5 +1.5 57.5 43.0 +2.0 +2.0 45.0 30.0 +2.0 +2.0 32.0 12.0 +2.0 +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 +1.0 5.0 8.0 +1.5 +1.5 9.5 11.0 +2.0 +2.0 13.0 8.0 +2.0 +2.0 10.0 2.0 +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 +1.0 5.0 5.0 +1.5 +1.5 6.5 5.0 +2.0 +2.0 7.0 2.0 +2.0 +2.0 4.0 0.0 +2.0 +2.0 2.0
Equity 12.0 -1.0 -1.0 11.0 21.0 -1.5 -1.5 19.5 34.0 -2.0 -2.0 32.0 47.0 -2.0 -2.0 45.0 62.0 -2.0 -2.0 60.0
Global Equity 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 Equity 6.0 +0.0 -1.0 6.0 11.0 +0.0 -1.5 11.0 16.0 +0.0 -2.0 16.0 21.0 +0.0 -2.0 21.0 24.0 +0.0 -2.0 24.0
US All cap 0.0 +0.0 -1.0 0.0 0.0 +0.0 -1.5 0.0 0.0 +0.0 -2.0 0.0 0.0 +0.0 -2.0 0.0 0.0 +0.0 -2.0 0.0
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 +1.0 14.0 21.0 -1.0 +1.0 20.0 29.0 -1.0 +1.0 28.0
Japan 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
Emerging Markets 0.0 +0.0 0.0 0.0 +0.0 0.0 3.0 -1.0 -1.0 2.0 5.0 -1.0 -1.0 4.0 9.0 -1.0 -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 profile1 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 August 2019. See the Portfolio Analytics, Performance Measurement, and Appendix sections for performancemeasurement details and information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretationof the suggested tactical deviations from the strategic asset allocations.
ConservativeModerate
conservative ModerateModerateaggressive Aggressive
CIO GWM 28 August 2019 18
CIO Global Wealth ManagementDetailed asset allocation, tax-exempt, yield-focused
Investor risk profile
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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 +1.0 66.0 56.0 +1.5 +1.5 57.5 43.0 +2.0 +2.0 45.0 30.0 +2.0 +2.0 32.0 12.0 +2.0 +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 +1.0 6.0 10.0 +1.5 +1.5 11.5 11.0 +2.0 +2.0 13.0 8.0 +2.0 +2.0 10.0 2.0 +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 +1.0 4.0 5.0 +1.5 +1.5 6.5 5.0 +2.0 +2.0 7.0 2.0 +2.0 +2.0 4.0 0.0 +2.0 +2.0 2.0
Equity 12.0 -1.0 -1.0 11.0 21.0 -1.5 -1.5 19.5 34.0 -2.0 -2.0 32.0 47.0 -2.0 -2.0 45.0 62.0 -2.0 -2.0 60.0
Global Equity 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 Equity 6.0 +0.0 -1.0 6.0 10.0 +0.0 -1.5 10.0 15.0 +0.0 -2.0 15.0 19.0 +0.0 -2.0 19.0 24.0 +0.0 -2.0 24.0
US All cap 0.0 +0.0 -1.0 0.0 0.0 +0.0 -1.5 0.0 0.0 +0.0 -2.0 0.0 0.0 +0.0 -2.0 0.0 0.0 +0.0 -2.0 0.0
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 +1.0 15.0 22.0 -1.0 +1.0 21.0 29.0 -1.0 +1.0 28.0
Japan 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
Emerging Markets 0.0 +0.0 0.0 0.0 +0.0 0.0 3.0 -1.0 -1.0 2.0 6.0 -1.0 -1.0 5.0 9.0 -1.0 -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 profile1 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 August 2019. See the Portfolio Analytics, Performance Measurement, and Appendix sections for performancemeasurement details and information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretationof the suggested tactical deviations from the strategic asset allocations.
ConservativeModerate
conservative ModerateModerateaggressive Aggressive
CIO GWM 28 August 2019 19
CIO Global Wealth ManagementDetailed asset allocation, all equity and all income, yield-focused
All figures in %
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Cash 3.0 +2.0 +2.0 5.0 3.0 +0.0 3.0 3.0 +0.0 3.0
Fixed Income 0.0 +0.0 0.0 77.0 +0.0 77.0 77.0 +0.0 77.0
US Fixed Income 0.0 +0.0 0.0 58.0 +0.0 58.0 58.0 +0.0 58.0
US Gov't FI 0.0 +0.0 0.0 13.0 -4.0 9.0 18.0 -4.0 14.0
US MBS 0.0 +0.0 0.0 0.0 +0.0 0.0 5.0 +0.0 5.0
US TIPS 0.0 +0.0 0.0 0.0 +4.0 4.0 0.0 +4.0 4.0
US Treasuries (long) 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0
US Municipal FI 0.0 +0.0 0.0 30.0 +0.0 30.0 0.0 +0.0 0.0
US IG Corp FI 0.0 +0.0 0.0 0.0 +0.0 0.0 20.0 +0.0 20.0
US HY Corp FI 0.0 +0.0 0.0 15.0 +0.0 15.0 15.0 +0.0 15.0
Int'l Fixed Income 0.0 +0.0 0.0 19.0 +0.0 19.0 19.0 +0.0 19.0
EM FI - Local Currency 0.0 +0.0 0.0 10.0 +0.0 10.0 11.0 +0.0 11.0
EM FI - Hard Currency 0.0 +0.0 0.0 9.0 +0.0 9.0 8.0 +0.0 8.0
Equity 77.0 -2.0 -2.0 75.0 0.0 +0.0 0.0 0.0 +0.0 0.0
US Equity 39.0 +0.0 -2.0 39.0 0.0 +0.0 0.0 0.0 +0.0 0.0
US All cap 0.0 +0.0 -2.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0
US Large cap Growth 7.0 +0.0 7.0 0.0 +0.0 0.0 0.0 +0.0 0.0
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 +2.0 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 -2.0 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 profile1 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 August 2019. See the Portfolio Analytics, Performance Measurement,and Appendix sections for performance measurement details and information regardingsources of strategic asset allocations and their suitability, investor risk profiles, and theinterpretation of the suggested tactical deviations from the strategic asset allocations.
All equity All fixed income, taxableAll fixed income,non-
taxablePublication noteThe All Equity and All Income portfolios complement our balanced portfolios and offer more granular implementation of our House 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 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 portfolio (moderate risk profile, taxable yield-focused). The amount of cash in the All Equity portfolio will vary one-for-one with the overall overweight/underweight on equities in the balanced portfolio, subject to a 1% maximum tilt from the 3% cash allocation. This allows us to use the cash allocation to express a tactical preference between stocks and fixed income. A special feature of the All Equity portfolio is that it includes “carveouts”: 3%allocations to our preferred sectors within US large-caps as well as our preferred countries within both international developed markets and the emerging markets. A maximum of two sectors/countries of each type may be selected for carve-outs.
The All Income portfolios include both taxable and non-taxable versions. In addition to the fixed income asset classes in the balanced portfolios, the non-taxable version incorporates an additional allocation to Mortgage Backed Securities. Tactical tilts will be based on the corresponding tilts to the Fixed Income asset classes in our balanced portfolios (moderate risk profile yield-focused, taxable or non-taxable respectively), but only when there is a preference between the fixed income asset classes. For example, an overweight on high yield corporate bonds offset by an underweight on government bonds in the balanced portfolio would be applied to the All Income portfolios. However, an overweight on US equities versus US government bonds in the balanced portfolio would not be reflected in the All Income portfolios. Further, the tilts in the All Income portfolios will typically be scaled up to twice the size of the tilts in the balanced portfolio.
CIO GWM 28 August 2019 20
APPENDIX
Global Investment Process and Committee descriptionThe UBS investment process is designed to achieve replica-ble, high-quality results through applying intellectual rigor, strong process governance, clear responsibility, and a culture of challenge.
Based on the analyses and assessments conducted and vet-ted throughout the investment process, the Chief Investment Officer (CIO) formulates the UBS Wealth Management Invest-ment House View (e.g., overweight, neutral, underweight stances for asset classes and market segments relative to their benchmark allocation) at the Global Investment Committee (GIC). Senior investment professionals from across UBS, com-plemented by selected external experts, debate and rigorously challenge the investment strategy to ensure consistency and risk control.
Global Investment Committee compositionThe GIC comprises nine members, representing top market and investment expertise from across all divisions of UBS:
• Mark Haefele (Chair)• Jorge Mariscal• Mike Ryan• Simon Smiles• Min Lan Tan• Themis Themistocleous• Paul Donovan• Bruno Marxer (*)• Andreas Koester
Investment committeeWMA Asset Allocation Committee descriptionWe recognize that a globally derived house view is most effective when complemented by local perspective and ap-plication. As such, UBS has formed a Wealth Management Americas Asset Allocation Committee (WMA AAC). WMA AAC is responsible for the development and monitoring of UBS WMA’s strategic asset allocation models and capital market assumptions. The WMA AAC sets parameters for the CIO Americas, WM Investment Strategy Group to follow dur-ing the translation process of the GIC’s House Views and the incorporation of US-specific asset class views into the US-spe-cific tactical asset allocation models.
WMA Asset Allocation Committee compositionThe WMA Asset Allocation Committee comprises nine members:
• Mike Ryan• Michael Crook• Brian Rose• Jeremy Zirin• Jason Draho• Tom McLoughlin• Leslie Falconio• Laura Kane• David Lefkowitz
*Business area outside of the Chief Investment Office
Explanations about asset classesSources of strategic asset allocations and investor risk profilesStrategic asset allocations represent the longer-term allocation of assets that is deemed suitable for a particular investor. The strategic asset alloca-tion models discussed in this publication, and the capital market assump-tions used for the strategic asset allocations, were developed and ap-proved by the WMA AAC.
The strategic asset allocations are provided for illustrative purposes only and were designed by the WMA AAC for hypothetical US investors with a total return objective under five different Investor Risk Profiles ranging from conservative to aggressive. In general, strategic asset allocations will differ among investors according to their individual circumstances, risk tolerance, return objectives and time horizon. Therefore, the strategic as-set allocations in this publication may not be suitable for all investors or investment goals and should not be used as the sole basis of any invest-ment decision. Minimum net worth requirements may apply to allocations to non-traditional assets. As always, please consult your UBS Financial Advisor to see how these weightings should be applied or modified ac-cording to your individual profile and investment goals.
The process by which the strategic asset allocations were derived is de-scribed in detail in the publication entitled “Strategic Asset Allocation (SAA) Methodology and Portfolios.” Your Financial Advisor can provide you with a copy.
Deviations from strategic asset allocation or benchmark allocationThe recommended tactical deviations from the strategic asset allocation or benchmark allocation are provided by the Global Investment Committee and the Investment Strategy Group within CIO Americas, Wealth Management. They reflect the short- to medium-term assessment of market opportunities and risks in the respective asset classes and market segments. Positive/zero/negative tactical deviations correspond to an overweight/neutral/under-weight stance for each respective asset class and market segment relative to their strategic allocation. The current allocation is the sum of the strategic asset allocation and the tactical deviation.
Note that the regional allocations on the Equities and Bonds pages in UBS House View are provided on an unhedged basis (i.e., it is assumed that inves-tors carry the underlying currency risk of such investments) unless otherwise stated. Thus, the deviations from the strategic asset allocation reflect the views of the underlying equity and bond markets in combination with the assessment of the associated currencies. The detailed asset allocation tables integrate the country preferences within each asset class with the asset class preferences in UBS House View.
Asset allocation does not assure profits or prevent against losses from an investment portfolio or accounts in a declining market.
CIO GWM 28 August 2019 21
APPENDIX
Nontraditional AssetsNontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and man-aged futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative invest-ment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other specula-tive investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments; there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically 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
AppendixEmerging Market InvestmentsInvestors should be aware that Emerging Market assets are subject to, among others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and sociopolitical risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. CIO Americas, WM generally recom-mends only those securities it believes have been registered under Federal US registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration rules (commonly known as “Blue Sky” laws). Prospective investors should be aware that to the extent permitted under US law, CIO Americas, WM may from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws.
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 sover-eign 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.
may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.
Interests in alternative investment funds are not deposits or obliga-tions of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund, and should consider an alternative investment fund as a supplement to an overall investment program.
In addition to the risks that apply to alternative investments gener-ally, the following are additional risks related to an investment in these strategies:
• Real Estate: There are risks specifically associated with investingin real estate products and real estate investment trusts. Theyinvolve risks associated with debt, adverse changes in generaleconomic or local market conditions, changes in governmental,tax, real estate and zoning laws or regulations, risks associatedwith capital calls and, for some real estate products, the risksassociated with the ability to qualify for favorable treatment un-der the federal tax laws.
• Foreign Exchange/Currency Risk: Investors in securities of is-suers located outside of the United States should be aware thateven for securities denominated in US dollars, changes in theexchange rate between the US dollar and the issuer’s “home”currency can have unexpected effects on the market value andliquidity of those securities. Those securities may also be affectedby other risks (such as political, economic or regulatory changes)that may not be readily known to a US investor.
CIO GWM 28 August 2019 22
Appendix
Statement of Risk
Municipal bonds - Although historical default rates are very low, all municipal bonds carry credit risk, with the degree ofrisk largely following the particular bond’s sector. Additionally, all municipal bonds feature valuation, return, and liquidityrisk. Valuation tends to follow internal and external factors, including the level of interest rates, bond ratings, supplyfactors, and media reporting. These can be difficult or impossible to project accurately. Also, most municipal bonds arecallable and/or subject to earlier than expected redemption, which can reduce an investor’s total return. Because of thelarge 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 ratingsagencies such as Standard & Poor's. Reproduction and distribution of third party content in any form is prohibited exceptwith 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 oromissions (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 CONTENTPROVIDERS 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 ORPROFITS AND OPPORTUNITY COSTS) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Creditratings 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 notbe 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 thatthe 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 creditrisk, interest rate risk, liquidity risk, and event risk. Though historical default rates are low on investment grade corporatebonds, perceived adverse changes in the credit quality of an issuer may negatively affect the market value of securities. Asinterest 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 consequencesof 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, andnon-U.S. tax consequences of owning preferred stocks. Preferred stocks are subject to market value fluctuations, givenchanges in the level of interest rates. For example, if interest rates rise, the value of these securities could decline. Ifpreferred stocks are sold prior to maturity, price and yield may vary. Adverse changes in the credit quality of the issuer maynegatively affect the market value of the securities. Most preferred securities may be redeemed at par after five years. Ifthis occurs, holders of the securities may be faced with a reinvestment decision at lower future rates. Preferred stocks arealso 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 withrespect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflecthis 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 researchreport.
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Companies mentioned in this report (28 August 2019):Alexandria Real Estate Equities (ARE - Most Preferred, $146.24), Broadcom Corp. (AVGO - Bellwether, $275.57), Bankof America (BAC - Bellwether, $26.47), Citigroup (C - Bellwether, $61.66), Comcast Corp. (Cl A) (CMCSA - Bellwether,$43.60), Cisco Systems Inc. (CSCO - Most Preferred, $46.79), DCP Midstream Partners LP (DCP - Most Preferred,$23.49), Enterprise Products Partners LP (EPD - Most Preferred, $27.98), Energy Transfer LP (ET - Most Preferred,$13.02), Ford Motor Co (F - Not Rated, $8.76), Goldman Sachs (GS - Bellwether, $198.07), Invitation Homes Inc (INVH -Most Preferred, $29.06), Cohen & Steers Limited Duration Preferred and Income (LDP - , $25.21), Altria Group Inc. (MO- Not Rated, $45.25), MPLX LP (MPLX - Most Preferred, $27.26), Plains All American Pipeline LP (PAA - Most Preferred,$20.85), Procter & Gamble Co. (PG - Not Rated, $120.55), ProLogis (PLD - Most Preferred, $82.01), AT&T Inc. (T - MostPreferred, $34.72), Western Midstream Partners LP (WES - Most Preferred, $22.12), Walmart Inc. (WMT - Not Rated,$112.42)
Issuer credit risk rating definitionsThe UBS CIO issuer credit risk rating reflects the opinion of the relevant UBS CIO analyst regarding an issuer's risk of anear- 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 likelihoodof a near- to intermediate-term dividend deferral, and/or issuer payment default. The issuer's securities are of generallyhigh quality.Medium Risk: The issuer is considered to be in adequate financial condition with satisfactory credit fundamentals relativeto the near- to intermediate-term dividend deferral, and / or issuer payment default. The issuer's securities are of mediumto weaker credit quality and may have higher volatility than those of Low Risk issuers. These instruments should thereforeonly be held by risk tolerant investors.High Risk: The issuer is considered to be in weak financial condition with deteriorating credit fundamentals or the stateof the issuer's financial condition and credit fundamentals may be uncertain due to volatile market conditions. Sectorconsiderations 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 creditreports, as applicable. In regions outside the United States, the UBS CIO office will map these distinctions to security-level risk flags.
Issuer credit outlook definitionsThe UBS CIO issuer credit outlook reflects the opinion of the relevant CIO analyst regarding an issuer's credit qualityoutlook over the succeeding 12 months. For rated securities, this may include the likelihood of a change in the publishedrating 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 oreven multi-notch credit rating downgrades by rating agencies.
CIO Americas, Wealth Management equity selection systemEquity sector strategists provide three equity selections: Most Preferred (MP), Least Preferred (LP) and Bellwetherdesignation.
Rating definitionsMost Preferred*: The equity sector strategist expects the stock to outperform the relevant benchmark in the next 12months.Least Preferred*: The equity sector strategist expects the stock to underperform the relevant benchmark in the next12 months.Bellwether: Stocks that are of high importance or relevance to the sector and which the equity sector strategist expectsthe stock to perform broadly in line with the sector benchmark in the next 12 months.*A stock cannot be selected as Most Preferred if UBS Investment Research rates it a Sell, while a UBS Investment ResearchBuy rated stock cannot be selected as Least Preferred.
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Restricted: Issuing of research on a company by CIO Americas, WM can be restricted due to legal, regulatory, contractualor best business practice obligations which are normally caused by UBS Investment Bank’s involvement in an investmentbanking transaction in regard to the concerned company.
Equity selection: An assessment relative to a benchmarkEquity selections in Equity Preferences lists (EPLs) are relative assessments versus a sector/industry, country/regional orthematic 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 LeastPreferred, but not both simultaneously. As benchmarks differ between lists, stocks need not be included on every list towhich 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 arequest 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 DefinitionsFor 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, pleasevisit www.ubs.com/disclosures.Global Equity 12-Month Rating DefinitionsBuy: FSR is > 6% above the MRA. Neutral: FSR is between -6% and 6% of the MRA. Sell: FSR is > 6% below the MRA.Key DefinitionsForecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over thenext 12 months.
Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and nota 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 ratingare subject to possible change in the near term, usually in response to an event that may affect the investment case orvaluation.
Exceptions and Special CasesCore Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment ReviewCommittee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respectivecompany's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as theyrelate to the rating. When such exceptions apply, they will be identified the Companies Mentioned or Company Disclosuretable in the relevant research piece.
Disclosures (28 August 2019)Alexandria Real Estate Equities 1, Altria Group Inc. 1, 11, 12, AT&T Inc. 1, 2, 5, 6, 7, 11, 12, Bank of America 1, 2, 3,4, 5, 6, 7, 8, 9, 10, 11, 12, Broadcom Corp. 1, Cisco Systems Inc. 1, 5, 9, 11, 12, Citigroup 1, 2, 3, 5, 6, 8, 9, 10, 11,12, 13, 17; Comcast Corp. (Cl A) 1, 14, 15, DCP Midstream Partners LP 1, 4, Energy Transfer LP 1, 4, Enterprise ProductsPartners LP 1, 3, 16, Ford Motor Co 1, 5, Goldman Sachs 1, 2, 4, 5, 8, 9, 11, 12, Invitation Homes Inc 1, MPLX LP 1, 4,5, Plains All American Pipeline LP 1, 3, 4, 16, Procter & Gamble Co. 1, 11, 12, ProLogis 1, Target Corp. 1, Walmart Inc.1, 11, 12, Western Midstream Partners LP 1, 4, 10, 16,
1. UBS Securities LLC makes a market in the securities and/or ADRs of this company.2. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment bankingservices from this company/entity or one of its affiliates.3. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securitiesof this company/entity or one of its affiliates within the past 12 months.4. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company's common equitysecurities as of last month's end (or the prior month's end if this report is dated less than 10 days after the most recentmonth's end).5. Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products andservices other than investment banking services from this company/entity.
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6. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investmentbanking services are being, or have been, provided.7. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking servicesfrom this company/entity within the next three months.8. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securitiesservices are being, or have been, provided.9. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investmentbanking securities-related services are being, or have been, provided.10. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of lastmonth's end (or the prior month's end if this report is dated less than 10 working days after the most recent month'send).11. 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.12. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services otherthan investment banking services from this company.13. The fixed income analyst covering this company, a member of his or her team, or one of their household membershas a long common stock position in this company.14. The equity analyst covering this company, a member of his or her team, or one of their household members has along 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 along common stock position in this company.16. UBS Financial Services Inc., its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issuedshare capital of this company.17. Frank Sileo, or one of his/her household members has a long common stock position in Citigroup.
Preferred Securities Ratings Definitions
Rating Definition
AttractivePreferred securities on the Attractive List are those that we view favorably based on (1) fundamentalcredit quality, (2) valuation and (3) structure (security characteristics).
NeutralWe believe that issuers of preferreds on the Neutral List are likely to meet the coupon payment but wedo not deem the preferreds to fit the definition of our Attractive or Unattractive Lists.
Unattractive
We may deem these preferred securities to be Unattractive for fundamental reasons, for valuationreasons, or because of their structure. In the case of fundamental drivers, we have concerns that thecredit profile may deteriorate. Sector considerations may also be a factor. In the case of valuation, webelieve 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 Managementbusiness 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 independenceof 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 sellany investment or other specific product. The analysis contained herein does not constitute a personal recommendation ortake into account the particular investment objectives, investment strategies, financial situation and needs of any specificrecipient. It is based on numerous assumptions. Different assumptions could result in materially different results. 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UBS and any of its directors oremployees may be entitled at any time to hold long or short positions in investment instruments referred to herein, carryout transactions involving relevant investment instruments in the capacity of principal or agent, or provide any otherservices or have officers, who serve as directors, either to/for the issuer, the investment instrument itself or to/for anycompany commercially or financially affiliated to such issuers. At any time, investment decisions (including whether tobuy, sell or hold securities) made by UBS and its employees may differ from or be contrary to the opinions expressed inUBS research publications. Some investments may not be readily realizable since the market in the securities is illiquid andtherefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relieson information barriers to control the flow of information contained in one or more areas within UBS, into other areas,units, divisions or affiliates of UBS. Futures and options trading is not suitable for every investor as there is a substantialrisk of loss, and losses in excess of an initial investment may occur. Past performance of an investment is no guarantee forits future performance. Additional information will be made available upon request. Some investments may be subjectto sudden and large falls in value and on realization you may receive back less than you invested or may be required topay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment.The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel andother constituencies for the purpose of gathering, synthesizing and interpreting market information.Research publications from CIO are written by UBS Global Wealth Management. UBS Global Research is written by UBSInvestment Bank. Except for economic forecasts, the research process of CIO is independent of UBS Global Research.As a consequence research methodologies applied and assumptions made by CIO and UBS Global Research maydiffer, for example, in terms of investment horizon, model assumptions, and valuation methods. Therefore investmentrecommendations independently provided by the two UBS research organizations can be different. The compensation ofthe analyst(s) who prepared this report is determined exclusively by research management and senior management (notincluding investment banking). Analyst compensation is not based on investment banking, sales and trading or principaltrading revenues, however, compensation may relate to the revenues of UBS as a whole, of which investment banking,sales and trading and principal trading are a part.Tax treatment depends on the individual circumstances and may be subject to change in the future. UBS does not providelegal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both ingeneral or with reference to specific client's circumstances and needs. We are of necessity unable to take into account the
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particular investment objectives, financial situation and needs of our individual clients and we would recommend that youtake 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 inwriting UBS expressly prohibits the distribution and transfer of this material to third parties for any reason. UBS acceptsno 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 theways in which CIO manages conflicts and maintains independence of its investment views and publication offering, andresearch and rating methodologies, please visit www.ubs.com/research. Additional information on the relevant authorsof this publication and other CIO publication(s) referenced in this report; and copies of any past reports on this topic; areavailable 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 certaininvestment opportunities that otherwise would be consistent with its investment objective and other principal investmentstrategies. The returns on a portfolio consisting primarily of ESG or sustainable investments may be lower than aportfolio where such factors are not considered by the portfolio manager. Because sustainability criteria can excludesome investments, investors may not be able to take advantage of the same opportunities or market trends as investorsthat do not use such criteria. Companies may not necessarily meet high performance standards on all aspects of ESGor sustainable investing issues; there is also no guarantee that any company will meet expectations in connection withcorporate 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 ServicesInc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reportsto US persons. All transactions by a US person in the securities mentioned in this report should be effectedthrough a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contentsof this report have not been and will not be approved by any securities or investment authority in the UnitedStates or elsewhere. UBS Financial Services Inc. is not acting as a municipal advisor to any municipal entity orobligated person within the meaning of Section 15B of the Securities Exchange Act (the "Municipal AdvisorRule") and the opinions or views contained herein are not intended to be, and do not constitute, advice withinthe meaning of the Municipal Advisor Rule.External Asset Managers / External Financial Consultants: In case this research or publication is provided to anExternal Asset Manager or an External Financial Consultant, UBS expressly prohibits that it is redistributed by the ExternalAsset Manager or the External Financial Consultant and is made available to their clients and/or third parties. For countrydisclosures, 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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