CIO Wealth Management Research

November 2014 issue Monthly



This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosures
begin on page 15. 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.
Yield & Income

Introduction ...................................... 3 Yield & Income groups weathered October's sharp volatility fairly well.
Special Feature ................................. 4 With its US-centric assets and reasonably strong operating fundamen-
Equities ............................................. 5 tals for the majority of property sectors, REITs were October's best per-
forming group. CIO WMR REIT analyst Jon Woloshin favors select US
Taxable fixed income ....................... 6 REITs, while closed-end fund analyst Sangeeta Marfatia recommends
Preferred securities .......................... 8 a global REIT fund which invests in preferred regions such as US, UK,
Closed-end funds ............................. 9 Japan and Singapore. The risk sell-off in October made for more at-
tractive valuations in high yield, providing an opportunity which we at
REITs ................................................ 10 CIO WMR took advantage of by increasing the overweight. See our
Alternative Asset Managers.......... 12 Special Feature article for details. Overall, we expect US economic
MLPs ................................................ 13 growth and rising corporate profits to provide a supportive environ-
ment for all Yield & Income sectors. Still, Fed policy transition will like-
Highlighted selections ................... 14 ly contribute to future bouts of market volatility, especially as central
bankers overseas continue to ease monetary policy in the face of con-
This chart helps to categorize ideas within a
tinued economic stagnation.
portfolio context based on the House View:
Equities
 Our CIO WMR House view is overweight equities, with a six
month S&P 500 price target of 2050. Our equity strategy
team prefers stocks with high dividend growth over stocks
with high yields.
Taxable Fixed income
 In the rates markets, we favor mortgages over Treasuries and
agencies, with a preference toward higher coupon pass-
throughs. We favor credit over government bonds, with an
emphasis on high yield debt.
This report has been prepared by Preferreds
UBS Financial Services Inc.
Please see important disclaimer and dis-  We maintain a neutral outlook on preferreds given the YTD
closures at the end of the document. gains and potential for rate volatility. To limit duration risk,
we continue to favor preferreds with floating-rate or fixed-to-
About this report floating rate structures, particularly those with high back-end
The objective of this report is to provide an spreads.
analysis of various income-generating securi-
ties – corporate bonds, closed-end funds, eq- Closed-end funds
uities, master limited partnerships (MLP), pre-
ferred securities and real estate investment  We highlight the CBRE Clarion Global Real Estate Income
trusts – in the context of current economic, Fund (IGR) as an attractive fund for investors looking to play
fixed income and equity market conditions. our call on global REITs from preferred regions.

This report represents previously published REITs

views in publications from CIO Wealth  Although we believe REIT operating fundamentals should
Management Research (WMR) and UBS In- benefit from an improving economy, we remain cautious on
vestment Research, whose analysts contrib-
the sector and believe that more selectivity is warranted.
ute the content for the MLP section. These
Similarly, the environment has been supportive for the mort-
publications are referenced in each section
in order to obtain more information. gage REITs in 2014. These trends may continue, however, we
remain cautious longer-term as conditions can change quickly.
This report will be published approximately
every four weeks. Please note that the views MLPs
in this report may change with market con-  Our colleagues at UBS Investment Research outline the latest
ditions at some point between publications. trends in the MLP space, including recent volatility and chang-
Updates to the views in this report can be es to the Top Picks list.
found in the referenced sections of the
Online Services Research website.

CIO WM Research 17 November 2014 2

Yield & Income

Whiplash
Yield & Income groups weathered October's sharp volatility fairly Stocks and bonds were whipsawed in October
well. A growth scare emanated from overseas after the release of 1550 2050
Treasury Index (left index) S&P 500 (right axis)
weaker economic data. Low levels of market liquidity, as well as 2025
program trading appear to have exacerbated the sell-off, while 1525
2000
1975
steady news flow regarding new Ebola cases in the US added to the
1950
sour mood. The S&P 500 had a drawdown of over 7% in 19 days 1925
1500
before bottoming on 15 Oct; the same day that saw a 35bp intra- 1900
day drop in 10-year Treasury yields (the second largest since 1989).1 1875
1475 1850
However, in recent weeks sentiment has clearly shifted amidst a Aug-14 Sep-14 Oct-14 Nov-14
wave of positive earnings reports and economic releases, reaffirm-
Source: Bloomberg, UBS CIO WMR
ing that US growth remains on firm footing. According to CIO
WMR equity strategists, of the roughly 90% of S&P 500 companies
that have reported 3Q earnings so far, nearly 3/4 have beaten ex-
pectations, and profits are on pace to rise over 10% – the fastest Returns over the past 6 months
May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14
growth in three years (see page 5). On the economic front, we've MLPs MLPs Equity REITs MLPs Dividend Equity REITs
seen record strength in employment data, industrial production 3.4% 5.9% 0.0% 8.2% Stocks - 9.0%
Equity REITs Mtge REITs IG Corps Mtge REITs Preferreds Mtge REITs
and household wealth. Better economic data and positive earn- 2.9% 1.6% -0.1% 4.6% -1.0% 5.1%
ings reports as well as containment of the US Ebola scare, led to Mtge REITs Dividend Preferreds Dividend IG Corps Dividend
2.4% Stocks 1.4 % -0.3% Stocks 4.0 % -1.2% Stocks 4.4 %
market whiplash with a sharp rebound in risk assets and rates. CEFs CEFs CEFs Equity REITs MLPs Preferreds
2.0% 1.2% -2.1% 3.3% -1.6% 1.6%
With its US-centric assets and reasonably strong operating funda- Dividend Equity REITs Mtge REITs CEFs CEFs IG Corps
mentals for the majority of property sectors, REITs were October's Stocks 1.6% 1.1% -2.4% 2.0% -2.5% 0.9%
IG Corps Preferreds Dividend Preferreds Equity REITs CEFs
best performing group. However, WMR REIT analyst Jon Woloshin 1.5% 0.6% Stocks - 1.6% -5.6% 0.8%
notes that overall group valuations are looking stretched so he rec- Preferreds IG Corps MLPs IG Corps Mtge REITs MLPs
1.5% 0.2% -3.5% 1.4% -6.2% -4.6%
ommends taking a selective approach (see page 10). Alternatively
Source: Bloomberg, UBS CIO WMR
on page 9, we highlight a global REIT closed-end fund that's "Buy-
rated" by WMR CEF analyst, Sangeeta Marfatia. In our Special Fea-
ture article this month, we highlight the high yield (HY) space. We CIO WMR interest rate forecasts
remain constructive on credit fundamentals, and last month's risk 11-Nov in 3 in 6 in 12
months months months
sell-off led to more attractive valuations, providing an opportunity
3-month Libor 0.2 0.4 0.5 1.2
which we at WMR took advantage of by increasing the overweight.
One sector that continues to struggle is MLPs, and UBS Investment 2-year Treasury 0.5 0.8 1.0 1.6

Research analyst Shneur Gershuni comments on page 13. 5-year Treasury 1.6 1.8 2.0 2.3
10-year Treasury 2.4 2.5 2.6 2.8
We expect US economic growth and rising corporate profits to pro-
30-Year Treasury 3.1 3.2 3.3 3.4
vide a supportive environment for all Yield & Income sectors. To be
Source: UBS CIO WMR, as of 11 Nov 2014
sure, last month's conclusion of the Fed's QE program officially re-
moves policy accommodation, leading us closer to an eventual
Note: Dividend Stocks - S&P 500 Dividend Aristocrats TR Index; Equity
tightening. However, we expect the Fed to take a tempered and REITs – FTSE NAREIT All Equity REIT TR Index; Mortgage REITs – FTSE
pragmatic approach, with a more limited impact on long-term rates NAREIT Mortgage REIT TR Index; CEFs – S-Network Comp CEF TR Index;
MLPs – Alerian MLP TR Index; Preferreds – BofAML Fixed Rate Preferred;
(note: we recently lowered our Treasury yield forecasts). Still, Fed IG Corporates – BofAML Corporate Master; High Yield – BofAML US High
policy transition will likely contribute to future bouts of market vola- Yield Constrained
tility, especially as central bankers overseas continue to ease mone-
tary policy in the face of continued economic stagnation.
Frank Sileo, CFA, strategist UBS CIO WMR

1 "Half full or half empty?," Haefele, M., et al., House View, UBS CIO WMR, 24 October 2014

CIO WM Research 17 November 2014 3

Yield & Income

Last month, high yield (HY) bonds suffered their worst setback in Wider credit spreads make HY appear more at-
over a year as weaker economic data raised doubts about the sus- tractive
tainability of global growth. In addition, the sharp plunge in Option adjusted spreads
commodity prices weighed particularly on related sectors such as 550
energy and metals & mining. We view the recent sell-off as over- 500
done and think investment in US high yield has become more at-
tractive, especially in relation to other risk assets and higher-rated 450
bonds. At an average yield-to-worst of roughly 6%, US HY is 400
again offering decent income in a low-interest rate environment. 350
We therefore increased our tactical overweight on US high yield
against government bonds on 15 October. US company funda- 300
mentals remain solid in most sectors, and our US growth outlook,
assumes higher earnings and low default rates.
Source: Bloomberg, BofAML, as of 12 Nov 2014
Our outlook for US growth provides the first reason for why we
see the recent HY sell-off as overdone. Rising corporate earnings HY yields have approached 6%
should support a low default rate. Second, persistently low infla- Yields in %
tion and a lack of clarity on long-term growth prospects should 6.50
keep the Fed on the cautious side, which would further support 6.25
6.00
risk assets. Third, lending conditions for US companies have re- 5.75
mained favorable even through the latest period of volatility, with 5.50
easing lending standards for small and medium companies and a 5.25
robust new issue HY market. 5.00
4.75
Additionally, HY corporate balance sheets are still in good shape. 4.50
While leverage has picked up toward pre-crisis levels from the
lows of 2011, recent quarters saw earnings growth matching net
debt growth again, stabilizing leverage ratios. Additionally, corpo- Source: Bloomberg, BofAML, as of 12 Nov 2014
rations are refinancing debt at historically low rates, while US cor-
Net tightening of C&I loans (left) and HY spread
porate earnings have been growing by more than 9% over the
(right, in %)
last year. The coverage ratio of earnings over interest expenses – A value below zero indicates a net easing of lending standards.
measuring HY issuers' ability to meet interest obligations – has 80 18
risen from a low of 2.9x in 2009 to 3.6x today. 16
60
14
There are, of course, risks that need to be diligently monitored. 40 12
Secondary market volatility and liquidity are important factors to 10
consider. Given the relatively low liquidity of the secondary HY 20
8
market in times of market distress, quick shifts out of HY by many 0 6
investors at a time would aggravate price declines and make trad- 4
(20)
ing temporarily difficult, if not impossible. We would therefore 2
consider liquidity needs when investing in HY and only allocate a (40) 0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
reasonable portion of our portfolio to the asset class (currently, a Senior loan officer survey (left) HY spread (right)
9% HY allocation in a balanced risk profile). Further commodity
Source: Bloomberg, Barclays, CIO WMR, as of 29 Oct 2014
price weakness, poses another risk as it may pressure credit fun-
For more details, please see More attractive again, Schoettler,
damentals of relevant high yield issuers in the energy and mining P., et. al, High yield bonds, 23-Oct-14, UBS CIO WMR. For
space. Other factors include a surprise deceleration in US eco- updates, see the Fixed Income section of the UBS Online Ser-
nomic growth leading to higher defaults, more aggressive corpo- vices research for individuals website.
rate actions, a disorderly rise in interest rates, and / or Fed policy Leslie Falconio, strategist, UBS CIO WMR
missteps.
Barry McAlinden,CFA strategist, UBS CIO WMR
Philip Schoettler, Strategist, UBS AG

CIO WM Research 17 November 2014 4

Yield & Income

Outlook for stocks remains favorable

The S&P 500 recently reached a new all-time high driven by solid
earnings growth, a broadening of the economic expansion, still
reasonable valuation and tame inflation. Consider the following:
3Q earnings are on pace to rise over 10% – the fastest growth in
three years. Job gains are accelerating – an average of 238,000
new jobs per month has been added this year, up from 183,000
and 194,000 in 2012 and 2013, respectively. And inflation re-
mains low which gives the Fed plenty of scope to continue to
support the recovery. The recent plunge in oil prices likely gives
the Fed even more flexibility to stay "looser for longer." Leading
indicators also remain supportive. Consumer confidence is trend- Dividend ruler stocks
ing higher, business sentiment is strong and banks are lending to U.S. Ticker Price
Dividend
Yield
businesses on increasingly favorable terms. As a result, we expect
AFLAC AFL 59.14 2.6%
continued earnings growth to power further gains in the equity Boeing BA 128.53 2.3%
market. Healthy corporate fundamentals are also driving solid div- Coca-Cola KO 42.79 2.9%
idend growth, which is the cornerstone of our Dividend Ruler Colgate-Palmolive CL 68.29 2.1%
strategy. Dominion Resources D 72.26 3.3%
Emerson Electric EMR 63.52 3.0%
Dividend Rulers well-positioned… Illinois Tool Works ITW 92.66 2.1%
Our Dividend Ruler stock list is comprised of fundamentally well- Intel INTC 33.68 2.7%
Invesco IVZ 40.69 2.5%
positioned companies with attractive current dividend yields that
Johnson & Johnson JNJ 109.07 2.6%
consistently grow their dividend over time. To be included on this Medtronic Inc. MDT 69.38 1.8%
list, we require that companies have a 10-year compounded an- Microsoft MSFT 49.61 2.5%
nual growth rate of dividends per share of at least 4%. Addition- NextEra Energy NEE 102.27 2.8%
Nordstrom JWN 73.25 1.8%
ally, we expect these companies to continue to grow their divi-
Northeast Utilities NU 49.27 3.2%
dends by at least that rate over the next 3-5 years. Focusing on Occidental Petroleum OXY 86.29 3.3%
these companies rather than those that simply have high current QUALCOMM QCOM 70.65 2.4%
dividend yields, should attractively position Dividend Ruler stocks Stanley Black & Decker + SWK 95.86 2.2%
Travelers TRV 103.23 2.1%
ahead of an expected rise in rates. High yielding stocks still ap-
Union Pacific UNP 120.25 1.7%
pear expensive and therefore vulnerable in a rising interest rate United Parcel Service UPS 107.79 2.5%
environment. United Technologies UTX 108.14 2.2%
V.F. Corp. VFC 71.34 1.8%
…and offers attractive risk-adjusted returns YUM! Brands YUM 75.39 2.2%
October was turbulent for equity investors – the S&P 500 fell 7% Dividend
International ADR Price
from its high in September only to reverse course and surge 9% Yield
to a new all-time high. The volatility of the Dividend Ruler stock British American Tobacco + BTI 115.70 4.0%
Diageo + DEO 118.67 2.7%
list was somewhat lower than that of the overall US equity market
Novartis + NVS 94.38 2.7%
during this period. As a result, the Dividend Ruler stock list outper- Pearson + PSO 18.89 4.0%
formed during the selloff but lagged during the market's sharp Roche+ RHHBY 37.02 2.8%
snapback. Our list should continue to offer favorable downside Toronto-Dominion Bank+ TD 50.18 3.3%
protection when equity markets are choppy. Historically the Divi- Average 2.7%
Note: "+" = stocks are only covered by UBS Investment Research. See
dend Ruler list has generated attractive risk-adjusted returns. Description and Methodology in “Dividend Ruler Stocks: Monthly Update.”(page 6)
Source: UBS CIO WMR, closing prices as of 13 Nov 2014
Jeremy Zirin, CFA, strategist, UBS CIO WMR *Based on the CIO WMR Dividend ruler stock list. For more details, please
David Lefkowitz, CFA, strategist, UBS CIO WMR see Dividend Ruler Stocks: Monthly Update, Zirin, J. et al., 10-Nov-14. For
Manish Bangard, CFA, strategist, UBS CIO WMR updates, see the Equity Recommendation Lists section of the UBS Online
Services research for individuals website.

CIO WM Research 17 November 2014 5

Yield & Income

It's not just a job. It's an adventure! **

The importance of the monthly nonfarm payroll report to bond
market investors should not be underestimated. It clearly matters **
for several reasons, not the least of which is the fact that the ge-
neric interest rates market should now be trading as though one
of the more important inflection points in a generation is poten-
tially just around the corner. With QE (sort of) fading into the
sunset, we may now be only a handful of strong jobs reports
away from the Fed sharpening its proverbial forward guidance
pen. We've argued before that the Treasury market should trade
in a fashion that makes it increasingly more data sensitive, in par-
ticular with respect to data that sheds light on the health of the
domestic labor market.
We expect the rates market to become more sen-
For this reason, every month we refresh the results of our regres- sitive to economic data…
sion that compares the interest rate sensitivity of short, belly and Treasury yield change versus nonfarm payroll report miss
long end Treasury rates to nonfarm payroll reports (i.e., empirical 15
Linear (2yr Tsy sensitivity)
daily changes in 2yr, 5yr and 10yr on-the-run Treasury yields per 10
1,000 miss in headline nonfarm payrolls). As the figures show, it's 5
Linear (5yr Tsy sensitivity)
Yield change (bps)

the belly of the curve that displays the greatest interest rate sensi- Linear (10yr Tsy sensitivity)
0
tivity, which makes sense intuitively, considering that's the part of
(5)
the yield curve that we would expect to be most leveraged to a
(10)
change in Fed policy sometime next year. For example, using data
since June 2013 (i.e., since the "taper tantrum"), we find that (15)
-150 -100 -50 0 50 100
every 100k miss has on average been worth a 10.5bps change in Headline miss versus consensus forecast (1,000s)

5yr Treasury rates (see middle chart). Source: UBS CIO WMR, Bloomberg

In a related fashion, we track how that rate sensitivity is evolving

… particularly in the belly and at the short end of
over time by updating one-year trailing "betas" (i.e., amount of the Treasury yield curve.
responsiveness of Treasury rates to the jobs miss) every month. Treasury yield change in bps per 1,000 headline miss
The chart seems to confirm our hypothesis that 5yrs are more sen- 16
14
sitive than 10yrs, and it also suggests that 2yrs are becoming more
12
Rolling beta (bps/1000 miss)

sensitive as well. Using the past couple hiking cycles as a guide, 10

we expect short end rates to begin to rise in a more motivated 8
fashion about nine months before the first rate hike. So looking 6
4
forward, we expect the 2yr betas to narrow the gap with 10yrs,
2
perhaps even to surpass them. 0

The presumption here, of course, is that the next big move in 2yr Tsy sensitivity 5yr Tsy sensitivity 10yr Tsy sensitivity
rates will be toward higher levels, consistent with UBS CIO WMR Source: UBS CIO WMR, Bloomberg
forecasts. However, if this year has proven anything, it's that in-
**Within the TFI component of a portfolio
vestors should also keep an eye on the continuing spectre of geo-
For more details, please see recent Interest rates and bond
political risk, as well as international bond markets, which have so markets publications, as well as the Fixed Income section of the
far kept a lid on the rising rate environment so many expect. UBS Online Services research for individuals website.

Jim Rhodes, strategist, UBS CIO WMR

Leslie Falconio, Senior Strategist, UBS CIO WMR

CIO WM Research 17 November 2014 6

Yield & Income

Investment grade resilience

Investment grade (IG) corporate bonds held up well through the **
market turmoil in October, while spread divergence between Eu-
rope and the US continued. Spreads in Europe moved sideways at
relatively tight levels, partly due to the announced asset purchases
by the ECB. Meanwhile, US IG spreads widened moderately, but
the significant fall in Treasury rates more than compensated for
that. In October, spreads widened by about 7 basis points (bps),
yet the sector had a total return of just under 1%. This brings the
year-to-date return through 31 October to 7.0%. An overall de-
cline in interest rates since June has helped the sector absorb wid-
er spreads, which are now at about 122 bps from a post-cycle low
of 97 bps reached in late June. We expect spreads to re-trace this IG Corp bond spreads have recently widened
from post-crisis tights
move and tighten as the US economic and profit backdrop re- Option-adjusted spreads in basis points
mains supportive. We favor IG corporates over government bonds
as the yield carry as well as modest expected spread tightening 300
should lead to better performance of IG. 250

Recent trends 200

Financials:
The Big Six banks have reported 3Q14 earnings that, by and large, 150
exceeded expectations and continue many of the trends we've 100
seen in earlier quarters. For the banks with large investment units,
better market volumes in trading and solid revenues in investment 50
Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
banking helped offset some of the weakness in the quarter in Barclays Aggregate Corporate OAS
terms of loan and security portfolio margin pressure, as well as
lower year-over-year mortgage volumes. The banks continue to Source: Bloomberg, Barclays, UBS CIO WMR, as of 14 Nov 2014
fine-tune their balance sheets for regulatory requirements being
Highlighted Corporate Bonds
phased in. We see credit quality as very sound, and recommend From Corporate Bond Valuation Report - Attractive List
holders of shorter-dated and lower yielding senior issues extend Bond description Price***
out and reach down the capital structure for incremental yield. Moody's/S&P/Fitch Cusip YTM
Morgan Stanley 4.875% 2022 ^ $105.75
Telecommunications: Baa3 / BBB+ / BBB+ 6174824M3 4.0%
Goldman Sachs Group Inc5.375% 2020 $112.16
On 10 November, President Obama issued a statement that asked Baa1 / A- / A 38141EA58 2.9%
the FCC to implement the strongest possible rules to protect net Verizon Communications 4.6% 2021 $109.85
neutrality. He also said that the FCC should forebear from rate Baa1 / BBB+ / A- 92343VAX2 2.9%

regulation and other provisions less relevant to broadband ser- Source: Bloomberg, UBS CIO WMR, as of 13 Nov 2014
^this is a subordinated bond
vices. We do not expect the FCC's pending net neutrality order to
have any meaningful impact on AT&T's or Verizon's fundamen- *Based on the BofAML US Corporate Master Index
tals. Both these carriers have peering deals with Netflix, but if due **Investment grade corporates are modestly overweight in tax-exempt
portfolios but modestly underweight in taxable portfolios
to the new net neutrality order, these revenues were eliminated ***Prices and yields are indicative and subject to change
(and we're not sure they would be), we don't think these reve- For more details, please see Corporate Bond Valuation Report,
nues are meaningful compared to these carriers' respective total Clarke, R., et al., 4-Nov-2014, UBS CIO WMR. For updates, see
the Credit section of the UBS Online Services research for indi-
company revenues. viduals website.

Rebecca Clarke, strategist, UBS CIO WMR

David Wang, strategist, UBS CIO WMR

CIO WM Research 17 November 2014 7

Yield & Income

Rate environment & financials exposure benefits preferreds

Preferred spreads fully recovered from the mid-October selloff and **
finished tighter for the month. From a credit perspective, solid US
bank earnings and the European bank stress test results paved the
way for preferred spreads to improve. The European bank exercise
identified capital needs mainly among small and non-listed banks,
while large-cap listed banks had solid results. In addition, a sharp
drop in rates from mid-Sept through mid-Oct helped sustain pre-
ferred prices even amidst market volatility. Consequently, it was
the longer duration segments of the preferred market that fared
best last month, with REITs leading the way and floaters showing
only a modestly positive return due to their shorter duration.
Highlighted Preferred Securities***
Within our US fixed income asset allocation, we maintain a neutral Preferred Securities Valuation Report - Attractive List
CY*
weighting in preferreds, keeping in mind the year-to-date gains Security description CUSIP / Price
Moody's/S&P/Fitch Symbol Call date YTC
already achieved and our expectation for a choppy rate environ- Bk of America 8.0% fixed to call; then 060505DR2 $107.50 4.2%
ment as the Fed pivots its policy stance. Preferreds are holding on 3mo L+363bps Ba3 / BB / BB n/a 1/30/2018 5.4%

to impressive year-to-date 2014 gains of roughly 14% for $25 par Citigroup 7.125% fixed to call date; then 172967358 $27.01 6.6%
3mo L+404 bps Ba3 / BB / BB+ C pr J 9/30/2023 5.9%
and 9% for $1000 pars. With the Fed having completed the ta- GE Capital Corp. 7.125% fixed to call; then369622SN6 $117.50 5.1%
pering of its QE asset purchase program, the interest rate envi- 3mo L+529.6 bps Baa1 / A+ / NR n/a 6/15/2022 4.4%
Goldman Sachs 6.375% fixed to call; then 38148B108 $25.59 6.2%
ronment will likely be prone to choppiness as the market adjusts
3mo L+355bps Ba2 / BB / BB+ GS pr K 5/10/2024 6.0%
to the next phase of Fed policy. While we do not expect a repeat J.P. Morgan. 6.75% fixed to call date; then46625HJQ4 $108.65 4.7%
of the sharp rate increases of last year, investor uneasiness about 3mo L+378bps Ba1 / BBB- / BBB- n/a 2/1/2024 5.5%

assuming duration risk would likely lead to investor outflows Morgan Stanley 7.125% fixed to call; then61762V200 $27.15 6.6%
3mo L+432bps Ba3 / BB / BB MS pr E 10/15/2023 5.8%
which could negatively impact the sector.
Source: Bloomberg, UBS CIO WMR, as of 14 Nov 2014
Consequently, we continue to position defensively with low dura-
tion preferred structures and favor preferreds with floating rate or *Based on yield-to-worst of BofAML Core Plus Fixed Rate Preferred Index
**Within the TFI component of a portfolio
fixed-to-floating rate structures, especially those with high back- ***Prices and yields are indicative and subject to change
end spreads, or those that pay high fixed coupons. The $25 par
For more details and preferred securities recommendations, please
floaters with LIBOR floors did not benefit from the overall decline see recent Preferred Securities Valuation Report publications as well
in rates during October, with just a 0.3% return for the month. as the Preferred Securities section of the UBS Online Services research
Still, on a year-to-date basis, the group has a gain of 13.4%, for individuals website.

which is comparable to fixed rate index return of 13.9%, but pre-

sumably with less rate-driven volatility. For the most part, the
yield curve has flattened this year and this has been good for
floaters. A more gradual rise in rates would likely favor the fixed-
to-float segment of the market that offers a greater income com-
ponent during the fixed leg of the coupon. Our Attractive List re-
mains populated with both $25 par floaters and select $25 par
and $1000 par fixed-to-floats that have more defensive structures.

Barry McAlinden, CFA, strategist, UBS CIO WMR

Frank Sileo, CFA, strategist, UBS CIO WMR

CIO WM Research 17 November 2014 8

Yield & Income

Investment thesis Key Facts

Ticker symbol IGR
CBRE Clarion Global Real Estate Income Fund (IGR) is an attractive
WMR rating Buy
fund for investors looking to play UBS CIO's call on global REITs Share price USD 8.70
from preferred regions such as US, UK, Japan and Singapore and Net asset value (NAV) USD 9.97
receive monthly income. IGR trades at a double digit discount of Discount 12.7%
13% to its net asset value, which is attractive from a valuation Distribution Rate 6.2%
Total Assets USD 1,203 mm
standpoint and is cheaper than the 11.8% 52-week average. It Leverage 8%
offers a 6.2% distribution rate with minimal leverage (8%). Source: UBS CIO WMR, Bloomberg, as of 13 Nov 2014
Monthly estimates may include some return of capital, but we
emphasize that full year amounts were minimal and are a result of IGR: Top Sectors
some pass-through return of capital from the REITs that the fund
invests in. The fund has had a steady pay-out since November
2008 and we expect it to remain at current levels.
Following a loss in September, the fund has recouped the losses
and YTD (through November 13) the fund is up nearly 16% in
terms of market return, in line with the move up in its net asset
value. In 2013 the fund was down 5%, given the decline in REITS
due to concerns about rising rates. We could see weakness again
when rates begin to rise.
UBS CIO WMR sector views
Source: CBRE Clarion, UBS CIO WMR, as of 30 Sept 2014
The direct real estate market recovery is well underway, with capi-
IGR: Discount to NAV
talization rates that have already compressed significantly and a
shortage of high quality properties. Corporate occupier sentiment
is improving with growing leasing volumes. New supply remains
constrained. Vacancy rates are diminishing and rental incomes are
growing moderately. We favor Japanese properties and JREITs on
emerging rental growth, Singapore REITs on yield, the UK for
strong fundamentals and the US after the recent price correction.
See the REIT section on page 10 for additional views.
Risks
There exists both credit risk as well as interest rate risk for the
fund. There also exists market risk since closed-end funds can and Source: Bloomberg, UBS CIO WMR, as of 13 Nov 2014
do trade above or below their NAV. In addition, some securities in IGR: Geographic Breakdown
the fund portfolio may be subject to risks such as illiquidity and
reinvestment. REIT valuations are at risk of contracting should the
macroeconomic backdrop normalize. Given the use of leverage,
the fund’s borrowing costs will increase as interest rates move up.
Sangeeta Marfatia, analyst, UBS CIO WMR
* Distribution Rate: Annualized based on most recent monthly/quarterly distribu-
tion rate, as declared by the fund, divided by the current price. The rate may in-
clude investment income, short term capital gain, long term gain and/or return of
capital.
For more details, please see recent Closed End Fund Universe publications, as well
as the Closed-end Fund section of the UBS Online Services research for individuals Source: CBRE Clarion, UBS CIO WMR, as of 30 Sept 2014
website.

CIO WM Research 17 November 2014 9

Yield & Income

REITs – Well that did not last long

The weakness we saw in REIT shares last month has completely re-
versed itself as REITs benefitted from the "fear" trade surrounding
slowing global economic growth and the increased media coverage
of Ebola. REITs significantly benefitted from investors re-allocating
funds away from more globally exposed investments as investors
sought more defensive, domestically-focused, yield-oriented oppor-
tunities. This, combined with reasonably strong operating funda-
mentals for the majority of property sectors, has allowed REITs to
more than recoup the early October losses.
However, REIT valuations and the prospect for rising interest rates
lead us to maintain our more selective approach to the sector. Our
relative caution is also driven by concerns of further equity issuance
Equities vs. REIT LTM total return performance
by the REITs. As for interest rates, the Fed has ceased asset pur- Cumulative Total Return, in USD, index 31 Oct 2013 = 100
chases under its QE3 program and the ultimate decision to move on
25
interest rates is predicated on improving economic data and labor 20
markets. 15
10
As 2014 enters the home stretch, we believe REIT operating fun-
5
damentals, particularly for multifamily, portions of retail, and indus-
0
trial, remain generally healthy. As such we believe it is crucial for -5
investors to focus on those REITs with strong fundamentals, solid -10
balance sheets and capital access, reasonable valuations and attrac- -15
tive dividend yields with the ability to grow dividends. Nov-13 Feb-14 May-14 Aug-14 Nov-14
S&P 500 REITs
Selected REIT recommendations Source: Bloomberg, UBS CIO WMR, as of 12 Nov 2014
W.P. Carey (WPC – Outperform / High Conviction Call) - We like the
combination of asset management and property ownership with Highlighted equity REITs
significant recurring revenues. The recently-completed merger with Company Ticker Last Price Divd
(USD) Yield
Corporate Property Associates (CPA) 16 should be very accretive to
FFO and dividends. We believe the lack of Street coverage and lack W.P. Carey WPC $66.05 5.7%
Home Properties HME $62.73 4.6%
of dedicated REIT ownership provides the path to close the valua-
Simon Properties SPG $178.03 2.9%
tion gap with its triple net large cap peers.
Source: UBS CIO WMR, closing prices as of 14 Nov 2014
Home Properties (HME – Outperform) - HME trades at a significant Note: Companies in BOLD represent High Conviction Calls. Please see the
Appendix for definition.
multiple and cap rate discounts to the multifamily group despite
having the highest dividend yield, the lowest tenant turnover and *Based on dividend yield of FTSE NAREIT All Equity REIT TR Index
highest full cycle same store NOI growth in the group.
For more details, please see recent US Equities Financials: REITs
Simon Properties (SPG – Outperform) – SPG has a best-in-class publications. For updates, see the Real Estate section of the
UBS Online Services research for individuals website.
property portfolio and management team that continues to
demonstrate its market acumen and shareholder-friendly orienta- Jonathan Woloshin, analyst, UBS CIO WMR
tion. SPG recently spun-off of its strip centers and slower-growing
malls. The transaction increased SPG’s total dividend by 10% and
should better highlight the growth potential and value of its core
franchise.

CIO WM Research 17 November 2014 10

Yield & Income

Valuations rebound
Mortgage REIT operating results were stable in 3Q 2014. Book val-
ues, on average, declined 1%, as option-adjusted spreads widened
a bit during the quarter and MBS prices declined modestly. This
appears to have reversed so far in 4Q, with higher MBS prices and
tighter spreads. In addition, valuations, which we had become more
attractive in early October at 0.85x of book value, have re-bounded
to 0.91x, which is still relatively attractive, but in the trading range
that has prevailed since the tapering process began in 2013.
The environment for mortgage REIT performance continues to be
decent. The combination of lower overall interest rates, the sharp
drop in new mortgage originations, and the Fed's continued activity
in the market post-tapering (i.e., replacing portfolio runoff), along
Equity & Mortgage REIT trailing 12m total return
with underweight positions among money managers suggests that Cumulative Total Return, in USD, index 31 Oct 2013 = 100
MBS prices could remain stable.
25
However, we remain cautious longer-term (i.e., over a 1 year plus) 20
time horizon. We note that the returns on new investments are not 15
that attractive, which could lead to modest dividend pressure down 10
the road. In addition, nominal spreads remain very tight, partly due 5

to low volatility. If volatility picks up (i.e., when the Fed stops rein- 0

vesting) spreads could widen, putting pressure on book value. -5

-10
We maintain an Outperform rating on Two Harbors (TWO). TWO is -15
a hybrid-REIT that invests in non-agency as well as agency MBS. We Nov-13 Feb-14 May-14 Aug-14 Nov-14
view TWO as among the defensive-minded risk with diversified as- Mortgage REITs Equity REITs

sets and a comparable dividend yields to peers that are taking more Source: Bloomberg, UBS CIO WMR, as of 12 Nov 2014
risk. See our recent note on TWO, dated November 5, for more
information. Highlighted Mortgage REITs
Company Ticker Last Price Divd Yield
We also have an Outperform rating on Home Loan Servicing Solu- (USD)
tions (HLSS). In our view, HLSS has relatively low interest rate and Two Harbors Inv. TWO $10.29 10.2%
credit risk and should have lower volatility in its book value than a Home Loan Servicing Sol'ns HLSS $18.92 11.5%
typical mortgage REIT. We think of HLSS as a way to add diversifica- Source: UBS CIO WMR, closing price as of 14 Nov 2014
tion to a high yield portfolio. HLSS shares were adversely impacted *Based on the FTSE NAREIT Mortgage REIT TR Index
by regulatory issues at an affiliated company, but we continue to **This is the CIO WMR tactical recommendation for the total real estate
believe those issues will ultimately be resolved. For more, see our sector, which is comprised primarily of non-mortgage REITs

note on HLSS dated October 29. For more details, please see recent US Equities Financials: REITs
publications. For updates, see the Real Estate section of the
Dean Ungar, analyst, UBS CIO WMR UBS Online Services research for individuals website.

CIO WM Research 17 November 2014 11

Yield & Income

Solid earnings and distributions in 3Q14

The alternative asset managers bounced back over the last month
as the equity market resumed its march higher after a brief but
sharp correction in October. The solid performance was bolstered
by earnings and distributions that, while impacted by overall market
activity in 3Q14 that was more volatile and less robust than the first
half of the year, still demonstrated the ability of the alternatives to
deliver amidst the market uncertainty after the high yield blowout.
Investors' concerns that overall market weakness (especially among
small/mid-cap stocks) will impact valuations of portfolio companies
in the various funds of the private equity companies were valid but
overblown. These investments get marked-to-market quarterly, and
comparisons were more difficult when compared to last quarter or
S&P 500 vs. Diversified Financials LTM total return
to 3Q13, when the overall equity market performance was much
Cumulative Total Return, in USD, index 31 Oct 2013 = 100
stronger. But since many companies currently owned by the alter- 25
natives are privately-held, market volatility can have less valuation 20
impact than for public companies. And fears that there would a 15
drop in monetization activity because of the 3Q14 market softness
10
were largely proven false.
5
The PE firms discussed hot topic issues on their earnings conference 0
calls including lower energy prices (a recent area of PE investment -5
focus), a slower IPO market, wider high yield bond spreads and po- -10
tentially higher interest rates in 2015 (making the cost of leverage Nov-13 Feb-14 May-14 Aug-14 Nov-14

higher and theoretically hurting portfolio returns). Outside the US, S&P 500 S&P 500 Diversified Financials
slower growth could impact PE investments made abroad, which Source: Bloomberg, UBS CIO WMR, as of 12 Nov 2014
has been an increased focus over the last few years.
Highlighted Alternative Asset Managers
However investor concerns that the current private equity cycle is Company Ticker Last Price Divd Yield
long in the tooth will have to be overcome for the group to move (USD)
Apollo Global Management APO $22.88 12.8%
higher form here absent a broader market rally, as asset valuations
Blackstone Group BX $31.86 5.6%
are not as cheap, deployment levels for the PE firms are not as ro-
Source: UBS CIO WMR, closing price as of 14 Nov 2014
bust, and earnings have come close to peak levels, meaning likely
downside from here.
**This is the CIO WMR tactical recommendation for Diversified Finan-
The two alternatives we currently recommend are Apollo Global cials, which include Alternative Asset Managers
Management (APO) and Blackstone Group (BX); both rated Outper-
For more details, please see US Equities Financials
form. Apollo's earnings declined in 3Q14 due to weaker returns,
Monthly, Dion, M., 28-Oct-2014, UBS CIO WMR. For
but distributions were still robust. And this momentum should con- updates, see the Equities section of the UBS Online
tinue in 4Q14 based on deals announced to date. APO will hold an Services research for individuals website.
investor day in December. Blackstone again benefitted from its
large PE fund BCP V moving into cash carry mode in 2Q14, as BX
captured additional performance fees in 3Q14. It also recently an-
nounced a disposition of its advisory business, which we view as
positive. It will likely be earnings accretive given it will likely receive
a higher valuation than BX receives currently.
Michael Dion,CFA, analyst, UBS CIO WMR

CIO WM Research 17 November 2014 12

Yield & Income

Top Picks
The latest sector trends
Company Ticker Last Price Distrib'n
The MLP space remains volatile as earnings season comes to a close. (USD) Yield
Investors have generally focused on upstream names and G&Ps, $29.53 6.9%
Regency Energy Partners LP RGP
with specific interest in OKS, NGLS and MWE, reflecting heightened $49.74 3.1%
Sunoco Logistics Partners L.P. SXL
risk sensitivity in the wake of recent commodity price declines. With
Rose Rock Midstream LP RRMS $54.26 4.3%
a focus on liquidity, yield, yield growth and balance sheet strength,
Energy Transfer Partners LP ETP $65.37 6.0%
investors appear to be trimming exposure to riskier MLPs while add- Semgroup Corp. SEMG $77.64 1.6%
ing to quality names which, in our view, include EPD and ETP. Williams Cos. Inc WMB $54.71 4.1%
While the commodity weakness is widely known, consensus likely Source: UBS Securities, LLC., closing prices as of 10 Nov 2014
hasn’t had a chance to reset. Therefore the volatility may continue
as the refresh of models results in portfolio adjustments. * Distribution Yield: Annualized based on most recent monthly/quarterly
distribution rate, as declared by the company, divided by the current price.
Distribution trends A significant portion of this distribution may be considered a return of
capital.
With all 3Q distributions announced, growth of 3.4% QoQ and
10.6% YoY was roughly in-line with our estimates (3.5% & 10.8%, For more details, please see recent MLP Hydrocarbon Express
publications from UBS Investment Research, as well as the
respectively). Upside surprises included SE, MMLP, ETE & SUN, while Master Limited Partnerships section of the UBS Online Services
MEMP, LGCY and SEMG missed estimates. research for institutions website.

Top Picks: Add SXL & Remove MEMP

MEMP had an uncharacteristically weak quarter and we are remov- Top Picks
ing it from our Top Picks list due to the greater volatility of com- With recent declines in crude and NGL pricing we
modity sensitive names. We added SXL to our Top Picks given the expect MLPs with a higher percentage of fee-based
recently announced NGL pipeline expansion project (Mariner East 2 revenue streams will likely outperform. We contin-
(ME2)) and the expanding growth options. SXL has consistently ue to like RGP, SXL, RRMS and ETP on the partner-
demonstrated an ability to identify capex opportunities before most, ship side and our Top C-Corp Picks are SEMG and
as illustrated by its USD 2.5bn ME2. SXL has been able to grow its WMB.
distribution at a 5% qtly growth rate (+20% YoY) while sporting a
3.2x Debt/EBITDA ratio. SXL currently has a 1.5x DCF coverage ratio
providing plenty of retained DCF to be reinvested in capital growth
programs. We expect SXL will be able to maintain its DCF growth
rate while also being able to fund its expanded capital program.
SXL currently trades at 17.5x 2015 P/DCF versus the peer average of
24.3x with a revised 3-year distribution CAGR of 20.5% vs a peer
average of 15.6% a clear discount to peers.
Alpha Preferences: Add TRGP & OKS / Remove RGP & NKA
We added TRGP to our Most Preferred list given the announced
acquisition of ATLS’s midstream business and the significant accre-
tion. We removed RGP from Most Preferreds as we see opportu-
nities for greater alpha generation elsewhere, but, it remains
on the MLP Top Picks list. We also made changes to our Least Pre-
ferreds, adding OKS primarily due to its commodity exposure. NKA
was removed from Least Preferreds with the passing of our ex-
pected catalyst, i.e. management's announcement that it was re-
viewing the distribution with a possible cut or complete elimination.
Shneur Gershuni, analyst, UBS Investment Research

CIO WM Research 17 November 2014 13

Yield & Income

Page Name Identifier Yield

US Equity
Dividend-paying stocks
5 AFLAC AFL 2.7%
5 Boeing BA 2.3%
5 Coca-Cola KO 2.8%
5 Colgate-Palmolive CL 2.1%
5 Dominion Resources D 3.4%
5 Emerson Electric EMR 3.0%
5 Illinois Tool Works ITW 2.1%
5 Intel INTC 2.7%
5 Invesco IVZ 2.5%
5 Johnson & Johnson JNJ 2.6%
5 Medtronic Inc. MDT 1.8%
5 Microsoft MSFT 2.5%
5 NextEra Energy NEE 2.8%
5 Nordstrom JWN 1.8%
5 Northeast Utilities NU 3.2%
5 Occidental Petroleum OXY 3.4%
5 QUALCOMM QCOM 2.4%
5 Stanley Black & Decker + SWK 2.2%
5 Travellers TRV 2.1%
5 Union Pacific UNP 1.7%
5 United Parcel Service UPS 2.5%
5 United Technologies UTX 2.2%
5 V.F. Corp. VFC 1.8%
5 YUM! Brands YUM 2.2%
REITs
10 W.P. Carey WPC 5.7%
10 Home Properties HME 4.6%
10 Simon Properties SPG 2.9%
11 Two Harbors Inv. TWO 10.2%
11 Home Loan Servicing Sol'ns HLSS 11.5%
MLPs
13 Rose Rock Midstream LP RRMS 4.5%
13 Sunoco Logistics Partners LP SXL 3.0%
13 Regency Energy Partners LP RGP 6.8%
13 Energy Transfer Partners ETP 5.9%
Equity Avg 3.5%

US Fixed Income
Corporate Bonds
7 Morgan Stanley (subordinated) 6174824M3 3.7%
7 Goldman Sachs Group Inc 38141EA58 3.0%
7 Verizon Communications 92343VAX2 3.1%
Preferreds
8 Bank of America 8.0% fixed to float 060505DR2 4.2%
8 Citigroup 7.125% fixed to float C pr J 6.6%
8 GE Capital 7.125% fixed to float 369622SN6 5.1%
8 Goldman Sachs 6.375% fixed to float GS pr K 6.2%
8 JP Morgan 6.75% fixed to float 46625HJQ4 4.7%
8 Morgan Stanley 7.125% fixed to float MS pr E 6.6%
Closed-End Funds
9 CBRE Clarion Global RE Inc Fd IGR 6.2%
Fixed Income Avg 4.9%
TOTAL AVG 3.7%

CIO WM Research 17 November 2014 14

Yield & Income

Appendix
Required Disclosures
For a complete set of required disclosures relating to the companies that are the subject of this report, please mail a
request to UBS CIO Wealth Management Research Business Management, 1285 Avenue of the Americas, 20th Floor,
Avenue of the Americas, New York, NY 10019.
Disclosures (17 November 2014)
AFLAC Inc. 2, 7, 14, 15, Apollo Global Management LLC 2, 6, 7, 9, 11, 14, 15, 16, 27, Bank of America Corp. 6, 7, 9,
11, 12, 13, 14, 15, 16, 27, BAT UK 1, 5, 11, 14, 16, 24, 26, 27, Blackstone Group L.P. 2, 6, 7, 9, 11, 14, 15, 16, 27,
Boeing Co. 6, 12, 13, 14, 24, Citigroup Inc 6, 7, 9, 11, 12, 13, 14, 15, 16, 23, 27, Coca-Cola Co. 6, 7, 9, 12, 13, 14,
15, 18, 27, Colgate-Palmolive 6, 11, 12, 13, 14, 16, 27, CVS Health 12, 13, 14, DCP Midstream Partners LP 2, 7, 14, 15,
17, Diageo 11, 14, 16, 27, Dominion Resources 6, 7, 9, 11, 12, 13, 14, 15, 16, 27, Emerson Electric Co. 6, 9, 11, 14,
15, Energy Transfer Equity L.P. 6, 7, 14, 15, 17, 27, Energy Transfer Partners LP 2, 6, 8, 11, 14, 17, 27, General Electric
Capital 11, 14, 16, 27, Goldman Sachs Group Inc. 7, 9, 12, 13, 14, 15, 16, 27, Home Loan Servicing Corp 11, 14, Home
Properties, Inc. 14, Illinois Tool Works 2, 14, 20, 21, Intel Corp. 3, 7, 9, 12, 13, 14, 15, 24, 28; Invesco Ltd. 2, 7, 9, 11,
12, 13, 14, 15, Johnson & Johnson 6, 7, 11, 12, 13, 14, 15, 27, JPMorgan Chase & Co. 6, 7, 9, 11, 12, 13, 14, 15, 16,
17, 22, 27, JPMorgan Chase & Co. 6, 7, 9, 11, 12, 13, 14, 15, 16, 17, 22, 27, Kinder Morgan Energy Partners 2, 6, 7, 11,
14, 15, 16, 17, 27, KINDER MORGAN INC/DE 2, 6, 11, 14, 17, 27, KKR 6, 11, 14, 27, Martin Midstream 2, 6, 14, 16, 27,
Medtronic, Inc. 6, 7, 9, 11, 12, 13, 14, 15, 16, 27, Memorial Production Partners LP 6, 11, 14, 16, 27, Microsoft Corp.
6, 7, 9, 11, 12, 13, 14, 15, 27, Morgan Stanley 6, 7, 9, 11, 12, 13, 14, 15, 16, 27, Morgan Stanley 6, 7, 9, 11, 12, 13,
14, 15, 16, 27, Morgan Stanley 6, 7, 9, 11, 12, 13, 14, 15, 16, 27, Nextera Energy Inc. 6, 14, 16, 27, Nordstrom Inc. 2,
12, 13, 14, Northeast Utilities 2, 14, Novartis 2, 6, 10, 11, 14, 16, 17, 24, 27, Occidental Petroleum Corp. 2, 6, 11, 14,
Pearson 2, 12, 13, 14, PNC Financial Serv Grp 7, 9, 12, 13, 14, 15, PNC Financial Serv Grp 7, 9, 12, 13, 14, 15, Qualcomm
Inc. 7, 12, 13, 14, 15, Regency Energy Partners 2, 6, 11, 14, 16, 17, 27, Roche 11, 17, 24, Rose Rock Midstream, L.P.
6, 11, 14, 27, SemGroup Corporation 14, Simon Property Group 6, 11, 12, 13, 14, 16, 27, Stanley Black & Decker 2, 6,
11, 12, 13, 14, 17, 27, Sunoco Inc. 11, 14, 16, 27, Sunoco Logistics Partners L.P. 2, 6, 7, 8, 11, 14, 15, 16, 17, 27, TD
Bank Financial Group 4, 7, 9, 14, 15, 17, Travelers Companies 2, 7, 12, 13, 14, 15, Two Harbors Investment Corp 14,
U.S. Bancorp 6, 7, 11, 12, 13, 14, 15, 16, 27, U.S. Bancorp 6, 7, 11, 12, 13, 14, 15, 16, 27, Union Pacific Corp. 12, 13,
14, United Parcel Service 7, 9, 11, 12, 13, 14, 15, 27, United Technologies Corp. 12, 13, 14, 24, V.F. Corp. 2, 14, 25,
Verizon Communications 6, 12, 13, 14, 16, 27, Westlake Chemical 11, 14, Williams Cos Inc. 2, 6, 11, 14, 16, 17, 19,
27, WP Carey 2, 14, Yum! Brands Inc. 2, 14,
1. UBS Limited acts as broker to this company.
2. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company's common equity
securities as of last month's end (or the prior month's end if this report is dated less than 10 days after the most recent
month's end).
3. A U.S.-based global equity strategist, a member of his team, or one of their household members has a long common
stock position in Intel.
4. UBS Securities Canada Inc or an affiliate expect to receive or intend to seek compensation for investment banking
services from this company/entity within the next three months.
5. UBS South Africa (Pty) Limited acts as JSE sponsor to this company.
6. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking
services are being, or have been, provided.
7. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment
banking securities-related services are being, or have been, provided.
8. UBS Securities LLC is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering
of securities of this company/entity or one of its affiliates.
9. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services
are being, or have been, provided.
10. UBS AG is acting as agent in regard to Novartis AG's announced share buyback programme.
11. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services
from this company/entity within the next three months.
12. 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.
13. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services other
than investment banking services from this company.
14. UBS Securities LLC makes a market in the securities and/or ADRs of this company.
15. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than
investment banking services from this company/entity.
16. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities
of this company/entity or one of its affiliates within the past 12 months.

CIO WM Research 17 November 2014 15

Yield & Income

Appendix
17. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month's
end (or the prior month's end if this report is dated less than 10 working days after the most recent month's end).
18. UBS AG, Australia Branch is acting as financial adviser to Coca-Cola Amatil Limited on the proposed agreement with
The Coca-Cola Company to accelerate growth in Indonesia, and will receive a fee for acting in this capacity.
19. UBS Securities LLC is acting as advisor to Williams Companies on its completed agreement to acquire Global
Infrastucture Partners' GP and LP units of Access Midstream Partners and the announced agreement to merge Williams
Partners with Access Midstream Partners.
20. UBS Securities LLC is a named advisor to Clayton, Dubilier & Rice for its announced agreement to acquire Wilsonart
International from Illinois Tool Works and is also providing financing.
21. A U.S.-based global equity strategist, a member of his team, or one of their household members has a long common
stock position in Illinois Tool Works Inc.
22. A U.S.-based global equity strategist, a member of his team, or one of their household members has a long common
stock position in JPMorgan Chase & Co.
23. A U.S.-based global equity strategist, a member of his team, or one of their household members has a long common
stock position in Citigroup.
24. The equity analyst covering this company, a member of his or her team, or one of their household members has a
long common stock position in this company.
25. A U.S.-based global equity strategist, a member of his team, or one of their household members has a long common
stock position in VF Corp.
26. UBS Limited is advising BAT on discussions regarding the potential acquisition by its associate company Reynolds
American International of Lorillard Inc.
27. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking
services from this company/entity.
28. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock
position in Intel Corp.
Analyst certification
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with
respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his
or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly
or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

Statement of Risk
Stock market returns are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical
conditions and other important variables.
Bond market returns are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical
conditions and other important variables. Corporate bonds are subject to a number of risks, including credit risk, interest
rate risk, liquidity risk, and event risk. Though historical default rates are low on investment grade corporate bonds,
perceived adverse changes in the credit quality of an issuer may negatively affect the market value of securities. As interest
rates rise, the value of a fixed coupon security will likely decline. Bonds are subject to market value fluctuations, given
changes in the level of risk-free interest rates. Not all bonds can be sold quickly or easily on the open market. Prospective
investors should consult their tax advisors concerning the federal, state, local, and non-U.S. tax consequences of owning
any securities referenced in this report.
Prospective investors should consult their tax advisors concerning the federal, state, local, and non-U.S. tax consequences
of owning preferred stocks. Preferred stocks are subject to market value fluctuations, given changes in the level of interest
rates. For example, if interest rates rise, the value of these securities could decline. If preferred stocks are sold prior to
maturity, price and yield may vary. Adverse changes in the credit quality of the issuer may negatively affect the market
value of the securities. Most preferred securities may be redeemed at par after five years. If this occurs, holders of the
securities may be faced with a reinvestment decision at lower future rates. Preferred stocks are also subject to other risks,
including illiquidity and certain special redemption provisions.
Investment Risk: Performance results reflect past performance and is no assurance that a Fund will meet its investment
objective. Market Risk: The market value, net asset value (NAV) and distribution rate of a fund’s shares will fluctuate with
market conditions. Leverage Risk: Each Fund’s use of leverage (borrowing to increase investments) creates the possibility
of higher volatility and greater risk for the Fund’s per share NAV, market price, distributions and returns. Credit Risk:
Refers to the possibility that the issuer of the bond will not be able to make principal and interest payments (default).
Prepayment Risk: Issuers may exercise their option to prepay principal earlier than scheduled, forcing the Fund to reinvest

CIO WM Research 17 November 2014 16

Yield & Income

Appendix
in lower-yielding securities. Interest Rate Risk: Fixed-income securities will decline in value if market interest rates rise.
Reinvestment Risk: If market interest rates decline, income earned from the Fund’s portfolio may be reinvested at rates
below that of the original bond that generated the income. Liquidity Risk: This is the risk that the fund may not be able
to sell securities in its portfolio at the time or price desired by the Fund. Below Investment Grade Risk: Investments
rated below investment grade (typically referred to as “junk”) are generally subject to greater price volatility and illiquidity
than higher rated investments. Adjustable Rate Loan Risk: Some of the adjustable rate loans in which the Fund may
invest will be unsecured or insufficiently collateralized, thereby increasing the risk of loss to the Fund in the event of issuer
default. Non-U.S. Securities Risk: Investments in non-U.S. securities involve special risks not typically associated with
domestic investments including currency risk and adverse political, social and economic development. These risks often
are magnified in emerging markets. Management risk: The risk that investment management decisions may not produce
the desired results.

Terms and Definitions

Closed-End Fund
A closed-end fund (CEF) is a publicly traded investment company registered under the SEC Investment Company Act
of 1940. Capital is raised through an IPO and the proceeds are invested in securities as determined by the investment
objectives set by the particular fund’s prospectus. The shares of a CEF trade on major exchanges such as NYSE and AMEX.
Net Asset Value
Net Asset Value (NAV) = (total assets – total liabilities)/shares outstanding. The NAV of a CEF fluctuates as the value of
the underlying portfolio changes.
Market Price
As CEFs are publicly traded securities, the market price of a CEF fluctuates depending on the supply and demand in the
market.
Discount/Premium
When demand exceeds supply, CEFs trade at a premium to the NAV. When supply exceeds demand, the shares of the CEF
may trade at a discount to its NAV (i.e., the share price will be less than the fund’s NAV).
Example:
Market Price: $9, NAV: $10, Discount: 10%
Premium/discount = (market price/NAV) -1
Leverage
Many funds use leverage to enhance income and returns to shareholders by borrowing capital at a lower rate (possibly by
issuing senior securities such as preferred stock or debentures) than the fund’s earnings on investments.
Leveraged Adjusted Duration
Duration is a rough measure of a bond’s sensitivity to changes in interest rates. It is adjusted for the effect of leverage
by increasing the duration by leverage percentage.
Qualified dividend income (QDI)
Some or all of the fund's dividend income qualifies for the reduced dividend tax rates to individuals.
CIO WMR Closed-End Funds Rating Definitions
Buy
Higher stability of principal and higher stability of distribution.
Hold
Potential loss of principal, lower degree of distribution stability.
Sell
High potential for loss of principal and distribution risk.
Restricted
Issuing of research on a company by WMR can be restricted due to legal, regulatory, contractual or best business practice
obligations which are normally caused by UBS Investment Bank’s involvement in an investment banking transaction in
regard to the concerned company.

CIO WMR Preferred Securities Ratings Definitions

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Rating Definition
We regard preferred securities on the Attractive List as representing the best relative value opportunities
in the preferred market among the issuers that are included in our credit or preferred securities reports.
This assessment takes a credit centric approach that emphasizes the fundamentals of the issuer/
industry and likelihood of security coupon deferral. We also incorporate other key metrics such as
Attractive security valuation, duration, and specific features that are unique to each type of preferred. Given our
assessment of these key return variables, we believe the preferreds on the Attractive List may offer a
higher total return over the holding period relative to the preferreds of other similarly-rated issuers.
Investors should review the security-specific comments in light of their risk tolerance profile and in the
context of their overall portfolio.
We regard preferred securities on the Core List as appropriate for investors looking to maintain an
allocation to preferreds. We expect the prices and yields of preferreds issued by these companies to
move primarily as a result of overall cyclical market trends and changes in underlying Treasury rates,
rather than issuer-specific credit developments. This assessment takes a credit centric approach that
Core
emphasizes the fundamentals of the issuer/industry and likelihood of security coupon deferral. We also
incorporate other key metrics such as valuation, duration, and specific features unique to each type of
preferred. We populate the list among the issuers that are included in our credit or preferred securities
reports.
We deem preferredsecurities to be Unattractive for fundamental reasons based either on ananticipated
deterioration in an issuer's credit profile or valuation reasonsbased on the preferred security's price/
yield, as well as other structuralconsiderations. In the case of fundamentals, the valuation may be cheap
but wehave concerns that the credit profile may deteriorate, causing price/yieldlevels to cheapen further
Unattractive
or a deferred or missed coupon payment to potentiallyoccur. In the case of valuation, we believe that
price/yield levels do notadequately compensate investors for the risks inherent in the preferredsecurities.
The rationale for placing preferred securities on the UnattractiveList will be detailed in the issuer-specific
comments, in coordination with theissuer's credit quality indicator.

CIO WMR Corporate Bond Ratings Definitions

Rating Definition
Given our view of credit risk and valuation, we believe the bonds of these issuers may offer higher total
return over the holding period relative to the bonds of other similarly-rated issuers. This performance
may be driven by the bond’s coupon income and potential for credit spread tightening. We regard
Attractive securities on the Attractive List as appropriate for investors with a moderate to high tolerance for credit
risk due to the possibility of somewhat greater credit spread volatility relative to other investment grade
corporate bonds. Investors should review the issuer-specific comments in light of their risk tolerance
profile and in the context of their overall portfolio.
Issuers we deem to be Core Holdings offer relatively liquid bond curves and comparatively stable credit
profiles. We generally expect bonds of these issuers to perform in line with their benchmarks as spreads
Core are unlikely to tighten or widen more materially than peers. We regard securities on the Core List as
most appropriate for fixed income investors with a low-to-moderate credit risk tolerance and a hold-
to-maturity strategy.
We deem bonds to be Unattractive for fundamental reasons based either on an anticipated
deterioration in an issuer’s credit profile or valuation reasons based on the bond’s rich credit spread
level. In the case of fundamentals, bond valuations may be cheap but we have concerns that credit
fundamentals may deteriorate, causing spreads to widen further. In the case of valuation, we believe
Unattractive
that spread levels do not adequately compensate investors for the credit risk inherent in the bonds.
In this case, we believe credit spreads are rich and have potential to widen. The rationale for placing
bonds on the Unattractive List will be detailed in the issuer-specific comments, in coordination with the
issuer’s credit quality indicator.

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CIO WMR Credit Quality Indicator Definitions

Rating Definition
The issuer demonstrates credit metrics that are in line or better than peers. We believe bonds are likely
High
to exhibit average to below-average credit spread volatility.
The issuer demonstrates credit metrics that are in line to slightly weaker than peers. We believe bonds
Medium have potential to exhibit above-average credit spread volatility. These securities should therefore only
be held in diversified portfolios of risk tolerant investors.
The issuer demonstrates credit metrics that are weaker than peers. We believe above-average credit
Low spread volatility is likely to occur. These securities should therefore only be held in diversified portfolios
of the most risk tolerant investors.

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CIO Wealth Management Research Stock recommendation system
Analysts provide a relative rating, which is based on the stock’s total return potential against the total estimated return
of the appropriate sector benchmark over the next 12 months.
Industry sector relative stock view system
Outperform (OUT) Expected to outperform the sector benchmark over the next 12 months.
Marketperform (MKT) Expected to perform in line with the sector benchmark over the next 12 months.
Underperform (UND) Expected to underperform the sector benchmark over the next 12 months.
Under review
Upon special events that require further analysis, the stock rating may be flagged as “Under review” by the analyst.
Suspended
An outperform or underperform rating may be suspended when the stock's performance materially diverges from the
performance of its respective benchmark.
Restricted
Issuing of research on a company by WMR can be restricted due to legal, regulatory, contractual or best business practice
obligations which are normally caused by UBS Investment Bank’s involvement in an investment banking transaction in
regard to the concerned company.
UBS Investment Research Stock Recommendation System
For information on the ways in which UBS manages conflicts and maintains independence of its research product;
historical performance information; and certain additional disclosures concerning UBS research recommendations, please
visit www.ubs.com/disclosures.
Global Equity Rating Definitions
UBS 12-Month Rating Definition
Buy FSR is > 6% above the MRA.
Neutral FSR is between -6% and 6% of the MRA.
Sell FSR is > 6% below the MRA.

UBS Investment Research: Global Equity Rating Definitions

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information;
and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures.
Global Equity 12-Month Rating Definitions
Buy: FSR is > 6% above the MRA. Neutral: FSR is between -6% and 6% of the MRA. Sell: FSR is > 6% below the MRA.
Key Definitions

Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months.

Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity
risk premium).

Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change
in the near term, usually in response to an event that may affect the investment case or valuation.

Exceptions and Special Cases

Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors
considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high
or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified the Companies
Mentioned or Company Disclosure table in the relevant research piece.

Investors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatility, abrupt
changes in the cost of capital and the economic growth outlook, as well as regulatory and socio-political risk, interest rate risk and higher credit
risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. WMR generally recommends only those securities it
believes have been registered under Federal U.S. 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,

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Appendix
WMR 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 WMR Education Notes, "Emerging Market Bonds: Understanding Emerging
Market Bonds," 12 August 2009 and "Emerging Markets Bonds: Understanding Sovereign Risk," 17 December 2009.
Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in
the investment grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign
has defaulted. Sub-investment grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher yielding
bonds for shorter periods only.
Please note that these bonds may not necessarily be registered with the US Securities and Exchange Commission nor blue-skyed in the US.

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Disclaimer
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a solicitation of an offer, to buy or sell any investment or other specific product. It does not constitute a personal recommendation or take
into account the particular investment objectives, financial situation and needs of any specific recipient. We recommend that recipients take
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contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Other than disclosures
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statement or summary of the securities, markets or developments referred to in the report. Opinions may differ or be contrary to those expressed
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