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UBS UK Equity Income Fund

UBS UK Equity Income Fund

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UBS UK Equity Income Fund

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  1. UBS UK Equity Income Fund February 2007 This document is for institutional investors and intermediaries only. It is not to be distributed to private customers under any circumstances. The contents are confidential and may not be reproduced or distributed in whole or part without permission. The document is for information purposes only and should not be construed as a recommendation to buy or sell securities. It represents the views of UBS Global Asset Management and is subject to change without notice. It does not create any legal or contractual obligation with UBS Global Asset Management. Care has been taken to ensure the accuracy of its content, but no responsibility is accepted for any errors or omissions herein. This material supports the presentation(s) given. It is not intended to be read in isolation and may not provide a full explanation of all the topics that were presented and discussed. Please note that past performance is not a guide to the future. The value of investments and the income from them may go down as well as up, and investors may not get back the original amount invested. Authorised and regulated by the Financial Services Authority: UBS Global Asset Management (UK) Ltd, UBS Global Asset Management Funds Ltd, UBS Global Asset Management Life Ltd. Telephone calls may be recorded. Confidentiality Notice:The recipient agrees that this information shall remain strictly confidential where it relates to the Investment Manager's business. The prior consent of UBS Global Asset Management (UK) Ltd should be obtained prior to the disclosure of commercially sensitive information to a third party (excluding the professional advisors of the recipient).

  2. Aims and objectives • To provide a combination of income and capital growth, through a balanced approach to investment. The fund manager aims to: • outperform the FTSE All-Share +4% p.a. • deliver a yield of 120% of the FTSE All-Share • achieve real year-on-year dividend growth • Balanced but high conviction portfolio of undervalued stocks • Typical ex-ante active risk up to 10%¹ • Aims to deliver consistent and repeatable outperformance in all market conditions • Quarterly distributions 1 Typical active risk data is indicative only. The actual risk level will vary according to market conditions and out views. Active risk is the ex-ante forecast calculated by Barra or other suitable system based on final valuations of the last working day of each month. 15323

  3. UBS – a natural home for equity income investing • All securities have an intrinsic value which we calculate based on future cash flows • Discrepancies between price and intrinsic value combine with market behaviour to provide opportunities to add value • An investment thesis is developed which identifies the key drivers to realise intrinsic value for each security we purchase • This thesis is continually monitored in light of developments and is a vital component of our sell discipline Sell candidate (M&S) Price Intrinsic Value (Drax) Undervalued (HSBC) Time A core philosophy for UBS and Equity Income investing 15323

  4. Benefiting from UBS’ depth and breadth of resources UK Equity Income Portfolio Construction Brian Gallagher Portfolio Construction Risk/Value system GIS UK portfolio managers Value Added Analysis Company meetings, competitors, suppliers, industry experts, corporate governance, in-house fixed income, UK and Global equity analysts Ideas / Fundamental research Screening, broker research, newsflow, market tracking Stock Universe FTSE 100, Mid Cap / Small Cap and select European stocks 15323

  5. 1 Track record of success Brian Gallagher – an outstanding track record Gartmore High Income Trust PLC Total Return (after expenses) since July 2000 Equity Portfolio Performance March 2000 - 30 September 2006 Gartmore High Income Trust 75.60% FTSE All-Share 32.50% Source: For both sets of performance: Gartmore Investment Management, based on Ordinary Income Share Price and total return to 30 September 2006. 1 Brian Gallagher held a Citywire A rating while at Gartmore Investment Management. He was no longer eligible for a rating from the 16 December 2006 when Citywire reviewed the sector and he was not currently managing funds. He will become eligible for a rating again on 30 March 2007 when the UBS UK Equity Income Fund launches. 15323

  6. UK Equity Income… the game has changed 15bn 5bn 1.75bn Mkt cap £ 1.25bn 750mn 250mn 5 3 4 6 2 Yield Source: UBS Global Asset Management. 15323

  7. UBS UK Equity Income Fund – positioned differently Total Return Barbell Barbell Balanced Approach P/E High Yield Yield 15323

  8. Model portfolio as at January 2007 (subject to change) 3.5% 100% • Expected yield of portfolio 3.5% vs. FTSE All Share 2.9%¹ • Estimated dividend growth 8% Source: UBS Global Asset Management. UBS Global Asset Management have expressed their own views and these may change. 1 Source: FT 31 Jan 2007 15323

  9. 5 building blocks of equity income at UBS Traditional but balanced approach UBS Resources Tactical Mid/Small Cap/Europe Derivatives Market awareness Frank Manduca/UBS’ Aim to reduce risk, not Traditional value based approach the bedrock of the Fund important - especially outstanding long-term increase it Fund benefits from extensive global resources up/downgrades track record Strong support network Enhance income Dividend growth an important part of buying process Potential to deliver Track record in dealing Value exists across Each FTSE stock has an strong capital returns in derivatives intrinsic value FTSE All-Share Will be active, no Only where Dividend growth often Input into portfolio Only where opportunities exist “capped upside”  ignored opportunities exist management and the writing of options 40-50 holdings 0-5 holdings 0-10 positions 0-10 holdings 5 years’ audited history Source: UBS Global Asset Management as at 31 December 2006 15323

  10. UCITS III – opportunity knocks? Rel. Strength Index (10 days)From 30 Oct 2006 to 30 Jan 2007 daily 80 2 1 75 70 1 65 1 60 1 55 50 45 40 35 30 Jan Oct Nov Dec Source: Datastream • Example of International Power in December • 1 – Director selling 2 – all time high share price • RSI – Relative Strength Indicator – tool to assist with market timing Source: UBS Global Asset Management 15323

  11. Outlook for UK Equities Source: UBS Global Asset Management. UBS Global Asset Management have expressed their own views and these may change 15323

  12. UK Equities look good value…. • We expect Corporate Earnings growth to be solid, if unspectacular, 7-8% • UK market has been DE-RATED for the past six years • Long-term valuations look attractive • M&A activity remains UK 12-month forward P/E multiple Source: Source IBES, Cazenove estimates 15323

  13. Mega-caps represent good value P/E Curr Yr P/E Nxt Yr DY Curr Yr DY Nxt Yr % FTSE All - Share Mkt Cap (£m) Shell 8.8 9.9 3.9 3.8 111,740 6.0 HSBC 12.3 11.6 4.4 4.6 108,724 5.8 BP 10.1 9.8 3.8 3.9 106,676 5.7 Glaxo SmithKline 14.7 14.0 3.4 3.5 81,280 4.4 Vodafone 13.5 12.8 4.6 4.4 78,529 4.2 RBS 10.7 9.9 3.8 4.5 64,759 3.5 Barclays 11.5 10.6 3.7 4.4 48,959 2.6 AstraZeneca 14.5 13.9 1.8 3.1 48,959 2.6 HBOS 11.4 10.4 3.4 4.0 41,833 2.2 Lloyds 12.5 11.4 5.9 6.0 43,763 2.3 Tesco 18.9 16.8 2.1 2.3 32,876 1.8 BAT 15.3 14.1 3.2 3.8 30,996 1.7 Di ageo 17.7 15.9 3.2 3.3 27,193 1.5 BT 14.2 13.7 4.1 4.5 25,833 1.4 Aviva 10.1 9.6 3.4 3.8 21,621 1.2 873,741 Wgt Av 12.4 11.8 3.8 4.1 46.8 Source: UBS Global Asset Management 15323

  14. The de-equitisation trend continues • Non-Financial UK Equities free cashflow yield now the same as corporate bond yield • UK equity market – actually reduced in size by 3% during 2006 • UK PLC returning cash via dividends or buy backs £50bn in 2006; bids = £60bn • Capital discipline helping to deliver value Royal Dutch removed Source: IBES, Cazenove estimates 15323

  15. 10 12-month forward earnings yield 10-yeargilt yield 9 8 7 6 5 4 Jan 96 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 3 Equity valuations – theoretically very cheap % Source: Datastream/UBS, May 2006 15323

  16. Return projections for UK Equity Income – still highly attractive Source: UBS Global Asset Management. UBS Global Asset Management have expressed their own views and these may change 15323

  17. Summary • The UK Equity market is attractive • UK Equity Income remains a smart way to play this space • UK Equity Income funds need to respond to different market scenarios • UBS is the place to do this 15323

  18. Appendix

  19. Key facts • Standard initial charge: 4.0% • Annual management charge: 1.5% • Initial commission: 3.0% • Trail commission: 0.5% • Quarterly payment dates: February, May, August, November • Annual management charge taken from capital • Minimum initial investment amount: £1,000 • Monthly savings amount: £50 month • ISA/PEP qualifying: Yes • Available through: Cofunds/FundsNetwork/Transact¹ 1Subject to final agreement 15323

  20. Fund Manager Biography – Brian Gallagher • UBS UK Equity Income Fund Manager. Joined UBS in January 2007 • Prior to joining UBS, Brian was a Senior Investment Manager at Gartmore from July 2000 to November 2006. He managed Gartmore High Income Investment Trust Plc, and co-managed Gartmore UK Equity Income and Gartmore Cautious Managed alongside Chris Burvill. From June 2002 until his departure Brian was a member of the UK Alpha and UK Alpha Plus portfolio construction teams • In 1999, he joined Murray Johnstone. There he managed the successful turnaround of Murray Equity Income and the £100m split capital investment trust, Murray Extra Return • Brian started his investment management career in 1993 as an investment analyst at CIN Management, the fund manager for British Coal’s pension funds, where he worked for three years. He then moved in 1996 to become a fund manager co-managing several income funds at Prolific Asset Management between 1996 and 1998 • He started his career as a management consultant at PA Cambridge Economic Consultants • Read Economics at Birmingham University graduating in 1992 ¹ Source: UBS Global Asset Management. 1 Brian Gallagher held a Citywire A rating while at Gartmore Investment Management. He was no longer eligible for a rating from the 16th of December 2006 when Citywire reviewed the sector and he was not currently managing funds. He will become eligible for a rating again on 30th March 2007 when the UBS UK Equity Income Fund launches 15323

  21. Gartmore UK Equity Income Fund ¹ 1 Year 3 Years 5 Years 2005 2004 2003 Fund 20.3 66.0 53.0 21.8 15.9 20.6 FTSE All-Share 21.5 62.5 52.7 22.0 12.8 20.9 Relative -1.2 +3.5 +0.3 -0.2 +3.1 -0.3 Source: Lipper Hindsight. Based on NAV prices, net of fees and basic rate tax with income reinvested in sterling terms to 31 October 2006 A rising dividend stream: Source: Gartmore Investment Management. 1 Brian Gallagher held a Citywire A rating while at Gartmore Investment Management. He was no longer eligible for a rating from the 16 December 2006 when Citywire reviewed the sector and he was not currently managing funds. He will become eligible for a rating again on 30 March 2007 when the UBS UK Equity Income Fund launches. 15323

  22. UK Equity Income – long-term success story Consistent outperformance over the medium and longer term¹ 3 years to 31 December 2006 20 years to 31 December 2006 64% 716% 59% 638% • Valuation disciplines • encourages contrarian approach - focussed on cheap valuation • stable, cash generative companies tend to perform well over time • simple maths of compounding effect • dividend yield is a strong reference point • often durable franchises with opportunity to leverage balance sheets 1 Source: Lipper Hindsight. Performance is based on NAV prices with income reinvested net of basic rate tax and in sterling terms to 31 December 2006. 15323

  23. What if…?

  24. What if scenarios? FTSE 7000 FTSE 6200 FTSE 5000 • UK Equity Income will STILL work • UBS UK Equity Income Fund will be able to adapt to outperform NB for illustrative purposes only Source: Datastream, to 31 January 2007 15323

  25. What if the FTSE 100 stays at 6200? • Interest rates flat – stock selection critical • FTSE 250 v FTSE 100 the key – M&A activity more selective • Mega-caps earnings growth kicks in to deliver superior outperformance • Overweight mega-caps, Life Assurance, Banks • Underweight UK Consumer, Property, Beverages Mkt Cap versus the FTSE 100 – time to buy large caps 12 m forward EPS of top 15 stocks vs Mkt Source: Datastream to 31 January 2007 FTSE 100 vs FTSE 250 15323

  26. Recovery at British Telecom • BT management re-invigorated franchise in all business areas • Focus on core competence and cash generation • Re-rating and rehabilitation of business model – classic Equity Income • Dividend yield 4%, growing at 10% British Telecom relative to FTSE All-Share index (2 years) Source: Datastream, 2 years to 23 January 2007 15323

  27. What if the FTSE 100 climbs to 7000? • Outlook on interest rates becomes benign/potential for a rate cut • Focus on global growth rates • Overweight Miners, Media, and a selection of High Beta/growth stocks • Underweight Food retailers, Health Care, Oil • M&A likely to continue in this environment – ICI, Go Ahead, St Ives, Rentokil? 15323

  28. B Sky B – Growth stock with yield to come • Equity market obsessed with P/E valuation yet no peer in UK economy due to brand/market position • Currently at peak of investment in broadband/programming/infrastructure • Yet over last 18 months generating £1bn of free cash per annum • Scope to distribute this and maintain financial ratios B Sky B relative to FTSE All-Share (2 years) Source: Datastream, 2 years to 22 January 2007 15323

  29. What if the FTSE 100 falls to 5000? • Interest rates rise and are forecast to keep on rising • Defensives take centre stage – overweight Utilities, Telcos, Life Assurance • UK consumer and Banks take brunt of underperformance • Megacaps provide relative protection, as does yield premium of portfolio • BETA on portfolio 0.97 but volatility kicks in – value of Options increase Utilities do what they say on the tin in tough times NB for illustrative purposes only. Source: Datastream 15323

  30. Defensive growth - self help at Cable & Wireless • Underlying growth rather than just a cost-cutting story • Management incentives ONLY kick in on full, not partial, delivery of targets • Tax losses of £3bn at FD disposal = 70% of market cap • Shares performed well but still expect to see increasing cash repatriation via dividends • Remains a likely acquisition target Cable & Wireless relative to FTSE All-Share index (2 years) Source: Datastream, 2 years to 22 January 2007 15323

  31. Man Group – a stock for all markets • Man Group doubled in absolute terms during the bear market of 2000-2003.. • … and strong relative performance since 2003 • Largest provider of alternative asset investment funds • Potential for performance fees to fund buy backs Price Return Source: Datastream, March 2000 – March 2003 Source: Datastream, March 2000 – March 2003. Rebased to 100. 15323

  32. ING – Global Financial Southern Cross – Small Cap play • P/E 21x with a yield of 1.9% • Dividend growth forecast at 25% • Dominant franchise in UK • Core holding in Small Cap funds • P/E 9.6x with a yield of 3.5% • Dividend growth forecast at 14% • Dividend cover 2.9x • Consolidation in European financials? • Example of cheap mega-cap Price Price Source: Datastream to 31 January 2007 Source: Datastream to 31 January 2007 15323

  33. Dividend growth – the key over the longer term The importance of dividend growth Look at what dividend growth can do • Balance sheets and cash flows in robust shape • Capital discipline strong within UK PLC in place • Payout ratios have actually fallen over the last two years • Since 1970 dividend growth contributed 25% of the total return in the UK (source DKW) Source: Citigroup Investment Research Source: Citigroup Investment Research 15323

  34. UCITS III – a real example – BT in July/August 2006 BT price Source: Datastream, 5 July 2006 – 1 September 2006 • 05 Jul 190 BT 240p August Calls sold 8.1p 15,385 • 09 Aug 190 BT 240p August calls bought 5.4p 10,208 Income 5,177 15323

  35. GHIT Investments Limited Derivative Positions at 30 September 2006 Note: Open option premiums are recognised as income on a daily basis. Where the option is called, the stock is transferred from the Parent to the Subsidiary, at market value, for delivery at the strike price, thereby realising a trading loss in the Subsidiary. The parent gets market value for its investment in the cover stock 15323

  36. GHIT Investments Limited Derivative Positions at 31 March 2003 Note: 1 Differential between market price and strike price Option premiums are being recognised as income on a daily basis. Where the option is called, the stock is transferred from the Parent to the Subsidiary, at market value, for delivery at the strike price, thereby realising a trading loss in the Subsidiary. The parent gets market value for its investment in the cover stock 15323

  37. Above average yielding shares taken over since Feb ‘04 Source: UBS Global Asset Management 15323

  38. This document is for intermediaries only and should not be distributed to or relied upon by private investors. This document is a proposal for the UBS UK Equity Income Fund that has not been launched. The content represents UBS’ current expectations as to how the Fund will be constructed and managed. Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. Investors may not get back the amount originally invested.Neither the sector performance nor the yield target quoted are part of the Fund’s investment objective and are indicative only.As the annual management fee of the Fund is charged to capital, the potential capital growth of the Fund will be reduced. All expressions of opinion may be subject to change without notice and do not constitute recommendations. The data contained in this document has been sourced by UBS and should be independently verified before further publication or use. The relative performance data is based on arithmetic methodology. Telephone calls may be recorded. Issued in February 2007 by UBS Global Asset Management (UK) Ltd, a subsidiary of UBS AG, 21 Lombard Street, London EC3V 9AH. Authorised and regulated by the Financial Services Authority. 21 Lombard Street London EC3V 9AH www.ubs.com/ifa | 0800 587 2111 15323