For professional investors only November 2015 Jeremy Raccio An overview of Smart Beta strategies UBS Asset Management Portfolio Manager
For professional investors only
November 2015
Jeremy Raccio
An overview of Smart Beta strategiesUBS Asset Management
Portfolio Manager
What is alternative / "smart" betaSection 1
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Harvesting factor premia: Is it alpha or beta?
Alpha
Alternative Beta
Beta
Cost
Capacity
• Skill based• Specialized processes
• Scale based• Commoditized processes
• Skill with scale• Differentiated processes
Evolving market segmentation
Market cap weighted indices are the only true beta, or passive market portfolio, as they are the only reference for a truly passive, buy and hold investment strategy as they aim to capture the long term equity risk premium with low turnover, high liquidity, and high capacity. (MSCI )In finance, the beta (β) of an investment is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors. The market portfolio of all investable assets has a beta of exactly 1. (Investopedia)
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Current Alternative Beta indicesA growing landscape of products and indices
Source: UBS Asset Management, EDHEC-Risk Institute, FTSE, MSCI, Research Affiliates, Russell, S&P DJI, STOXX. Data as of September 2014.
• FTSE RAFI
• Russell Fundamental
• FTSE GWA
• MSCI Enhanced Value
• MSCI Value Weighted
• FTSE Value Factor
• Russell High Efficiency Value
• EDHEC Value Multi-Strategy
• S&P Dividend Aristocrats
• S&P Dividend Opportunities
• S&P Buyback
• Dow Jones Select Dividend
• MSCI Dividend Masters
• FTSE High Dividend Yield
• EDHEC High Dividend Yield Multi-Strategy
• Russell High Dividend Yield
• STOXX Select Dividend
• STOXX Maximum Dividend
Low Volatility Hybrid / Index Blends
• MSCI Quality Mix
• MSCI Multi-Factor
• MSCI High Dividend Yield
• FTSE Diversified Factor
• S&P Global Intrinsic Value
• S&P Low Volatility High Dividend
• Russell Stability
• Russell High Efficiency Defensive
• EDHEC Multi-Beta Multi-Strategy
Size
• MSCI Equal Weighted
• FTSE Size Factor
• Russell Equal Weight
• S&P Equal Weight
• STOXX Equal Weight
• EDHEC Maximum Deconcentration
• EDHEC Mid Cap Multi Strategy
• MSCI Minimum Volatility
• MSCI Risk Weighted
• MSCI Volatility Tilt
• FTSE RAFI Low Volatility
• FTSE Global Minimum Variance
• FTSE Volatility Factor
• S&P Low Volatility
• STOXX Minimum Variance
• EDHEC Low Volatility Multi Strategy
• Russell High Efficiency Low Volatility
• Russell-Axioma Factor
• MSCI Quality
• MSCI Quality Tilt
• S&P Quality
• FTSE Quality Factor
• Russell High Efficiency Quality
• STOXX Strong Quality
• STOXX Strong Balance Sheet
• MSCI Momentum
• MSCI Momentum Tilt
• FTSE Momentum Factor
• S&P Momentum
• Russell High Efficiency Momentum
• EDHEC High Momentum Multi Strategy
Quality
Momentum
Value
Diversification Strategies
• FTSE TOBAM Max Diversification
• FTSE Diversification Based Investing
• MSCI Defensive
• MSCI Cyclical
• FTSE EDHEC-Risk Efficient
• FTSE Equal Risk Contribution
• EDHEC Diversified Risk Parity
• EDHEC Max Decorrelation
• EDHEC Efficient Min Volatility
• EDHEC Efficient Max Sharpe Ratio
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Limitations of simple ways of factor investingPotential pitfalls
• Factors are oftenapplied indiscriminately to entire universe
• Cyclicality of factors could lead to long periods of underperformance versus broad market
• Correlationsbetween factors are not stable which impedes effective combination
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Dez 93 Dez 95 Dez 97 Dez 99 Dez 01 Dez 03 Dez 05 Dez 07 Dez 09 Dez 11 Dez 13
MSC
I Val
ue/
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alit
y p
erfo
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Growth industries lead economic
growth
Burst of Tech/Telecom
bubble
Tech/Telecom bubble
Financial crisis
Value outperforms
Quality outperforms
Source: MSCI, UBS Asset Management. For illustrative purposes only. MSCI Quality is the USA Quality Standard (Large+Mid cap) index and MSCI Value is the USA Value Weighted Standard (Large+Mid cap) index from the Risk Premia family of MSCI Factor Indices.
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An active quantitative approach for smarter solutions
Section 2
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A multifactor approach to harvest factor premiaReturn drivers exploit fundamental and behavioral investment themes
Source: UBS Asset Management. For illustrative purposes only.
Valuation Capital Usage Profitability Growth Market Behavior
Determines the expensiveness (cheapness) of a stock based on traditional valuation multiples
Evaluates a company’s reinvestment behavior, likelihood of financial distress and management confidence
Measures the level and change in a firm’s profit margins, as well as its return on capital employed
Captures the realized growth of a company and its future growth prospects
Gauges the trend in a stock’s market price and earnings stream
Return Drivers
Use sector/industry specific multifactor model to identify securities with favorable characteristics
• Factors should be applied with economic rationale and based on empirical evidence
• Example: Price to Cash-flow is useful for IT stocks, but not for Financials
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Sector group specific modelingConstruction of return drivers considers sector group specific dynamics
For illustrative purposes only
Cyclicals Stable Growth
Health CareConsumer Staples
ConsumerDiscretionary
Industrials
Materials
Return Drivers
Valuation
Capital Usage
Profitability
Growth
Market Behavior
Price to cash flow
Capex to depreciation
ROE
Debt to equity
Price momentum
Book yield
Change in shares outstanding
ROA
R&D to sales
3-month earnings revisions
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Example proprietary Value Premia factorValue Premia simulated performance (in USD) – Dec 31, 2005 to Dec 31, 2014
Source: UBS Asset Management. Note: Figures are gross of fees and in USD. Returns are simulated. Past performance, whether simulated or actual, is not a guide to the future. Return figures are based on currently available information and are subject to revision. Please see attached disclosure information.
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Dec-05 Aug-06 Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 Apr-13 Dec-13 Aug-14
UBS Global Value MSCI World Value Weighted (net) MSCI World (net)
UBS Global Value Simulation
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Reduce cyclicality of relative returnsIsolate specific components of return drivers – create refined return drivers
Source: UBS Asset Management. For illustrative purposes only.
Problem: Raw return drivers have both specific and systematic (beta) components and may overlap
Solution: Create refined return drivers to identify the specific component
Valuation returndriver
Systematic risks
Other 4 return drivers
RefinedValuationreturn
driver
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-0.4-0.20.00.20.40.60.81.0Valuation
Capital Usage
Profitability
Growth
Market Behaviour
Beta
Size
Size non-linear
Refinement methodologyUtilize optimization to construct refined return drivers
Source: UBS Asset Management. Information based on US Quantitative Equity model; as of 31 Dec 2014. For illustrative purposes only. The information should not be considered a recommendation to purchase or sell any particular security.
Refined return driver: Valuation's exposures
-0.4-0.20.00.20.40.60.81.0Valuation
Capital Usage
Profitability
Growth
Market Behaviour
Beta
Size
Size non-linear
Raw return driver: Valuation's exposures
Varying degrees of exposures to other return drivers and to systematic risk components
No ex-ante exposures to other return drivers and to systematic risk components leading to lower and more stable correlations and thus robust return contributions
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Refinement creates lower and more stable correlationsImproving the risk allocation process
Ex ante correlation of Profitability and Market Behavior
Source: Factset, Barra, UBS Asset Management. For illustrative purposes only. Based on refined return drivers of the Global model.Note: Refined return drivers represent a pure exposure to a specific return signal while maintaining zero exposure to other signals and selected risk factors. Data from July 2011 to May 2015. Portfolios are rebalanced weekly. Returns of refined return drivers are simulated. Please see additional disclosures regarding refined return drivers at the end of the presentation.
Predicted correlation of raw Profitability and Market Behavior drivers has been unstable and volatile
Predicted correlation of refined return drivers has been stable and close to zero
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Correlation raw Profitability and Market Behavior return drivers
Correlation refined Profitability and Market Behavior return drivers
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0%
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100%
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Valuation Capital Usage Profitability Growth Market Behavior
Optimally combine distinct refined return drivers …… for creation of broad-based portfolio
Five refinedreturn drivers
Stock level risk-adjusted expected returns
Growth
Capital Usage
ProfitabilityMarket Behavior
Valuation
optimally combinedrefinedreturn drivers
Implied weights of refined return drivers (resp. contribution to active risk): Aug 2008 – May 2015
Source: UBS Asset Management. For illustrative purposes only.Implied weights of refined return drivers: Aug 2008 – May 2015, daily data, US model
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Refinement produced higher return per unit of risk
Valuation
Refined versus raw combined return driver risk-adjusted return ratio
3 year rolling information ratio
Source: Factset, Barra, UBS Asset Management. For illustrative purposes only. Note: Refined return drivers represent a pure exposure to a specific return signal while maintaining zero exposure to other signals and selected risk factors. Return drivers represent exposure to an return signal but also exposure to other signals and aggregate risk factors. Daily returns from 8 Dec 2009 to 1 May 2015. Portfolios are rebalanced weekly. Returns of refined return drivers and return drivers are simulated. Please see additional disclosures regarding refined return drivers at the end of the presentation.Return is 1 year rolling return from period 8 Dec 2009 to 30 June 2014. Risk is defined as volatility measured as one standard deviation. Information ratio is defined as Return / Risk.
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combined refined return driver combined raw return driver
Average combined refined return driver: 1.89
Average combined raw return driver: 1.48
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Observations and conclusions
• How risk premia are measured matters attention to industry specific dynamics appears merited
• How risk premia are combined is important risk adjusted returns will vary depending on the approach employed
• Risk premia pay-offs are time-varying a process that incorporates the dynamic nature of their relative returns merits consideration
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General information and disclosuresAppendix
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Refined return driver disclosures
Returns of refined return drivers are simulated.
Refined return drivers represent a pure exposure to a specific return signal while maintaining zero exposure to other signals and selected risk factors. Refined return drivers are long-short, beta-neutral, and dollar-neutral portfolios constructed via a mean-variance optimization process. The optimally combined refined return driver is constructed based on the correlations between the refined return drivers and their risk and risk-adjusted expected return assumptions. The risk-adjusted expected return assumptions are set by the portfolio management team based on long-term relationships and expectations of the current and future market environment. As such, these assumptions can vary from time-to-time.
The refined return drivers are presented for illustrative purposes only and are not based on the results of any actual strategy managed by UBS Asset Management. No representation is being made that any strategy will achieve results similar to the simulated performance of the refined return drivers shown in this presentation. The actual results may differ materially from the performance of the refined return drivers shown in this presentation for various reasons including, but not limited to, investment restrictions and guidelines, fees, timing of trade execution and fluctuations in the market.
The simulated performance of the refined return drivers reflects the application of models and does not represent the results of actual trading using client assets. The models may not reflect the impact that material economic and market factors might have had on UBS Asset Management’s decision-making if UBS Asset Management were actually managing clients’ assets during the period portrayed.
The simulated performance of the refined return drivers are presented gross of investment management fees and reflect the reinvestment of dividends or other earnings. The results do not reflect other costs or fees such as advisory fees, custody fees, brokerage or other commissions, or other expenses that a client would have paid. A client’s return will be reduced by advisory fees and other expenses incurred by the client.
Actual gross and net-of-fee performance for strategies presented herein will differ from the performance of the refined return drivers. Actual fees will vary based upon factors including, but not limited to, client relationship, asset size, and vehicle used.
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Disclaimer
For marketing and information purposes by UBS. For professional and semi-professional investors in accordance with the German Capital Investment Code (Kapitalanlagegesetzbuch) only. UBS funds under German, EU- and foreign law. Before investing in this product please read the latest sales prospectus and key investor information thoroughly. Both, sales prospectus and keyinvestor information can be requested in writing and free of charge at UBS Deutschland AG (paying agent / proxy agent and as the circumstances require representative agent for UBS fundsunder EU- or foreign law) respectively at UBS Asset Management (Deutschland) GmbH Bockenheimer Landstraße 2-3, 60306 Frankfurt am Main or could be downloaded underwww.ubs.com/deutschlandfonds. Key investor information are published on the Internet in German and/or English whereas the German language is binding. Sales prospectusses of the fundswhich are not domicilied in Germany are published in German and/or English. Annual- as well as semi-annual reports can also be downloaded on the internet free of charge. Limts of the riskmanagement of the funds, risk management methods and the latest developments of risks and income returns of the most important categories of the funds assests are nearly described in thesales prospectus. Units of UBS funds mentioned herein may not be offered, sold or delivered in the United States. The information mentioned herein is not intended to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not a reliable indicator of future results. The performance shown does not take accountof any fees and costs charged when subscribing to and redeeming units. Fees and costs have a negative impact on performance. If the currency of a financial product or financial service isdifferent from your reference currency, the return can increase or decrease as a result of currency fluctuations. This information pays no regard to the specific or future investment objectives, financial or tax situation or particular needs of any specific recipient. The details and opinions contained in this document are provided by UBS without any guarantee or warranty and are forthe recipient's personal use and information purposes only. Source for all data and charts (if not indicated otherwise): UBS Asset Management (a business unit whithin the UBS-group). © UBS 2015. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
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Ihr Ansprechpartner in DeutschlandUBS Asset Management – Distribution Partners
Lothar TraubDirector
UBS Deutschland AGBockenheimer Landstraße 2-460306 Frankfurt am Main
Tel.: +49-89-206 095114Fax: +49-89-206 095 200E-Mail: [email protected]
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