                                                                                                    Global Equity Rese...
U.S. Small Cap Strategy 8 September 2011UBS Strategy & Economics Teams                                                    ...
U.S. Small Cap Strategy 8 September 2011Table of ContentsOutlook   ▪ Market Outlook ……...……………………………….………………..……………..     ...
U.S. Small Cap Strategy 8 September 2011Market OutlookOutlook Small Caps Down Big In August. In August, the Russell 2000 ...
U.S. Small Cap Strategy 8 September 2011Market OutlookLeadership A Cyclical Sector Bias. Based on our medium-term outlook...
U.S. Small Cap Strategy 8 September 2011Fiscal ImbalancesFederal Budget Deficit (US$ Trillions)           1.4           1....
U.S. Small Cap Strategy 8 September 2011Fiscal ImbalancesCDS Spreads 1600                                                 ...
U.S. Small Cap Strategy 8 September 2011Tactical ReviewSmall Caps > 200-Day Moving Average 100%                           ...
U.S. Small Cap Strategy 8 September 2011Tactical ReviewRussell 2000 Implied vs. Realized Volatility (1M) 90 80            ...
U.S. Small Cap Strategy 8 September 2011Economic OutlookRussell 2000 vs. LEI 900                                          ...
U.S. Small Cap Strategy 8 September 2011Economic OutlookRussell 2000 v. ISM New Orders 900                                ...
U.S. Small Cap Strategy 8 September 2011Economic OutlookInterbank Lending Spreads 350                                     ...
U.S. Small Cap Strategy 8 September 2011Economic OutlookISM Manufacturing & Non-Manufacturing         >50 is Expansionary ...
U.S. Small Cap Strategy 8 September 2011Leading IndicatorsSmall Business Optimism Index 110                               ...
U.S. Small Cap Strategy 8 September 2011Leading Indicators10-Year Treasury Yield 4.0                                      ...
U.S. Small Cap Strategy 8 September 2011Consensus Earnings GrowthConsensus Earnings Growth — Index Level                  ...
U.S. Small Cap Strategy 8 September 2011Consensus Earnings GrowthS&P 600 Bottom-Up Consensus 35%                          ...
U.S. Small Cap Strategy 8 September 2011Earnings — RevenueRevenue Growth vs. Nominal GDP Growth  25%                      ...
U.S. Small Cap Strategy 8 September 2011Earnings — Operating MarginsOperating Margin vs. Capacity Utilization 10%         ...
U.S. Small Cap Strategy 8 September 2011Balance SheetsNet Debt vs. Interest Coverage 40%                                  ...
U.S. Small Cap Strategy 8 September 2011Cash FlowsFree Cash Flow ($Bn) – Sources                                  2Q09    ...
U.S. Small Cap Strategy 8 September 2011Earnings AnalysisRussell 2000 — Earnings Summary — 2Q11E                          ...
U.S. Small Cap Strategy 8 September 2011Earnings AnalysisS&P 600 — Earnings Summary — 2Q11E                               ...
U.S. Small Cap Strategy 8 September 2011Earnings AnalysisEarnings Surprises — Small vs. Large                    19       ...
U.S. Small Cap Strategy 8 September 2011Earnings Analysis2Q11E Price Response – S&P 600 vs. S&P 500                     Sm...
U.S. Small Cap Strategy 8 September 2011M&ANumber of Deals – $250M to $2.5B                                           637 ...
U.S. Small Cap Strategy 8 September 2011M&ADeals by Sector – 2010 and 2011 YTD   114        112                           ...
U.S. Small Cap Strategy 8 September 2011Dividends & BuybacksPayout Ratio 125% 100%                                        ...
U.S. Small Cap Strategy 8 September 2011Cash & Working CapitalCash & Inventories (% Total Assets) 18%                     ...
U.S. Small Cap Strategy 8 September 2011U.S. Equity ReturnsU.S. Equity Indices  Index                                Aug-1...
U.S. Small Cap Strategy 8 September 2011Sector ReturnsRussell 2000 SectorsIndex                                      Aug-1...
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
Financial Pacific - Volatility to Remain Elevated (third party)
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Financial Pacific - Volatility to Remain Elevated (third party)

  1. 1.  Global Equity Research Americas UBS Investment Research Equity Strategy U.S. Small Cap Strategy Investment Strategy Small Cap Navigator — September 2011 8 September 2011  Welcome to the Small-Cap Navigator www.ubs.com/investmentresearch This monthly guide provides a summary of the UBS U.S. small-cap equity market outlook, including proprietary analytics and other useful information on market returns, company profits, valuation, sectors, and the economy. Chip Miller, CFA  Volatility to Remain Elevated Strategist We continue to believe that a recession will be avoided. However, recent events chip.miller@ubs.com +1-203-719 3720 have most likely caused some contraction in underlying business and consumer activity that will lead to mixed economic readings over near-term. Additionally, Jonathan Golub, CFA the European sovereign debt situation remains tenuous. We expect volatility to Strategist remain elevated until incoming data begins to stabilize, and it becomes apparent jonathan.golub@ubs.com +1-212-713 8673 that a negative credit event will be averted.  Earnings Results Should Be Decent in the Second Half Despite anemic growth in the first half of the year, Russell 2000 companies have posted earnings growth of 33% and an aggregate beat of almost 5% thus far in 2Q reports. We expect decent 3Q and 4Q earnings results relative to lowered expectations. However, 2012 earnings forecasts appear stretched.  Long-Term Concerns Are Driving Company and Investor Behavior We believe that fiscal imbalances and long-term growth concerns are driving companies to keep balance sheets fortified, remain very tight on expenses, and issue overly conservative guidance. Our sense is that these same issues will likely keep investors intently focused on companies posting the best top-line results, and those with the cheapest valuations relative to medium-term earnings prospects. This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 58. 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.
  2. 2. U.S. Small Cap Strategy 8 September 2011UBS Strategy & Economics Teams U.S. Equity StrategyJonathan Golub Chief Strategist jonathan.golub@ubs.com Chip Miller Small-Cap Strategist chip.miller@ubs.comManish Bangard Strategist manish.bangard@ubs.com Tom Doerflinger Strategist tom.doerflinger@ubs.comVishal Patel Associate vishal-a.patel@ubs.com Natalie Garner Strategist natalie.garner@ubs.comU.S. Economics Global Economics & StrategyMaury Harris Chief Economist maury.harris@ubs.com Chief Economist Larry Hatheway larry.hatheway@ubs.comDrew Matus Economist drew.matus@ubs.com & StrategistSamuel Coffin Economist samuel.coffin@ubs.com Paul Donovan Economist paul.donovan@ubs.comKevin Cummins Economist kevin.cummins@ubs.com Andrew Cates Economist andrew.cates@ubs.comU.S. Accounting George Magnus Senior Advisor george.magnus@ubs.comJanet Pegg Analyst janet.pegg@ubs.com Jonathan Anderson Emg Markets jonathan.anderson@ubs.comU.S. Derivatives Sunil Kapadia Asset Allocation sunil.kapadia@ubs.comMitchell Revsine Strategist mitchell.revsine@ubs.com Global Equity StrategyU.S. Sector Heads Jeffrey Palma Chief Strategist jeffrey.palma@ubs.comAndrew Kligerman Financials andrew.kligerman@ubs.com Chris Ferrarone Strategist christopher.ferrarone@ubs.comN. Theodosopoulos Technology nikos.theodosopoulos@ubs.com Jerry McGuire Associate jerry.mcguire@ubs.comDavid Strauss Industrials david.strauss@ubs.com Global Emerging Markets StrategyDavid Palmer Consumer david-s.palmer@ubs.com Nicholas Smithie Strategist nicholas.smithie@ubs.comJohn Hodulik Telecom john.hodulik@ubs.com Jennifer Delaney Strategist jennifer.delaney@ubs.comBill Featherston Energy william.featherston@ubs.com Stephen Mo Strategist stephen.mo@ubs.comRon Barone Energy ronald.barone@ubs.com Regional EconomicsJustin Lake Health Care justin.lake@ubs.com Stephane Deo Europe stephane.deo@ubs.comRegional Strategy Amit Kara UK amit.kara@ubs.comNick Nelson Europe nick.nelson@ubs.com Duncan Wooldridge Asia duncan.wooldridge@ubs.comKaren Olney Europe karen.olney@ubs.com Scott Haslem Australia scott.haslem@ubssecurities.comNeil Cherry UK neil.cherry@ubs.com Tao Wang China wang.tao@ubssecurities.comGeorge Vasic Canada george.vasic@ubs.com Credit, Rates & Currency StrategyShoji Hirakawa Japan shoji.hirakawa@ubs.com George Bory Credit george.bory@ubs.comNiall MacLeod Asia x-Japan niall.macleod@ubs.com Mansoor Mohi-Uddin Currency mansoor.mohi-uddin@ubs.comDavid Cassidy Australia david.cassidy@ubs.com Michael Schumacher Rates michael.schumacher@ubs.comJohn Tang China john.tang@ubs.com Bhanu Baweja EM FICC bhanu.baweja@ubs.comTomas Lajous Mexico tomas.lajous@ubs.com Quantitative Strategy David Jessop Global Head david.jessop@ubs.com Berry Cox US berry.cox@ubs.comUBS Small Cap Sales & TradingTrading SalesStephen Roney TMT stephen.roney@ubs.com Albert Aguiar Specialist albert.aguiar@ubs.comAlphonso Diaz Health Care alphonso.diaz@ubs.comKevin Mullane Financials/Consumer kevin.mullane@ubs.comRichard Ryan Industrials richard.ryan@ubs.com UBS 2
  3. 3. U.S. Small Cap Strategy 8 September 2011Table of ContentsOutlook ▪ Market Outlook ……...……………………………….………………..…………….. 4-5 Highlights ▪ Fiscal Imbalances ...…………………..…………….…………….…..…………….. 6-7 ▪ Tactical Review .…….……………………………………….……………………… 8-9 ▪ Economic Outlook .…….…………………………………….……………………… 10-13 • Market Outlook — ▪ Leading Indicators .…………………………………….……………………………. 14-15 Pages 4-5Fundamentals ▪ Consensus Earnings Growth …..…….………………………….………..……….. 16-17 ▪ Earnings — Revenue ….………………...…………………………………………. 18 • Earnings Analysis — ▪ Earnings — Operating Margins ………..………………………………………….. 19 Pages 22-25 ▪ Balance Sheets & Cash Flows .……………….…………………………………... 20-21 ▪ Earnings Analysis ………………..………………….………………………………. 22-25 ▪ M&A ……………………………..………………………..………………….……….. 26-27 ▪ Dividends & Buybacks and Cash & Working Capital ..………………………..… 28-29 • Sector Recommendations — Pages 32-35Market Leadership ▪ U.S. Equity & Sector Returns ….……………..……………………………………. 30-31 ▪ Sector Recommendations...…………………..……………………………………. 32-35 ▪ UBS Return Drivers — Summary….……..………..………...……………………. 36-37 • UBS Return Drivers — ▪ UBS Return Drivers — Revenue Growth & PEG ……………….………..……… 38-39 Pages 36-41 ▪ UBS Return Drivers — Market Cap, Op Leverage & Valuation ..………………. 40-41 ▪ Small vs. Large ……………………………………………………………………… 42-43 ▪ Growth vs. Value ……………………………………………………………………. 44-45 ▪ Fund Positions ………………………………………………………………………. 46-47 • Investment Regimes — Pages 48-49Valuation ▪ Investment Regimes ………………………..………………………………………. 48-49 ▪ Russell 2000 …………………………………………………………………………. 50-51 ▪ Russell 2000 Inter-Sector Relative Valuation ……………………………………. 52-53Appendix ▪ UBS Return Drivers .…………….………………….………………..…………….. 54-55 ▪ Inter-Sector Valuation ….………………….………………..……………………… 56-57All data as of August 31, 2011 unless otherwise noted. UBS 3
  4. 4. U.S. Small Cap Strategy 8 September 2011Market OutlookOutlook Small Caps Down Big In August. In August, the Russell 2000 We expect volatility to remain sold off by 8.7% into weak economic readings, rising double dip elevated into mixed economic concerns, an increasingly tenuous European sovereign debt readings and sovereign situation, and S&P’s downgrade of U.S. debt. Small caps concerns underperformed large caps by almost 300bps. Cyclical sectors, including Energy, Discretionary, and Tech, were hit the hardest. Volatility Should Remain Elevated. We believe that recent events have caused a contraction in underlying business and consumer activity. This should lead to very mixed economic readings over the next several weeks. Additionally, the situation in Europe continues to deteriorate. We expect volatility to remain elevated until incoming data begins to stabilize. A Credit Shock Is the Biggest Risk. In our view, the biggest Over the near term, U.S. small risk to the economy and small-cap stock performance is the caps may be driven by the potential for a global credit shock. While we continue to situation in Europe believe this is a low probability event, we are closely monitoring interbank lending markets. Over the near term, U.S. small-cap performance may be driven by the situation in Europe. Slow Growth Not Recession. We believe that recent economic readings are more consistent with slow growth, not recession. Once it becomes clear that a recession will be avoided, we expect small cap stocks to rebound, potentially sharply. Solid Earnings Results. Despite anemic GDP growth in the We believe a recession will be first half of the year, small companies reported very solid 2Q avoided, and companies will earnings results. With roughly 90% of the universe reported, continue to surpass Russell 2000 companies have posted year-over-year earnings expectations in 2H11 growth of 33% (20% ex-Financials), with an aggregate earnings beat of 4.9% (4.8% ex-Financials). Earnings Probably OK in 2H; 2012 Looks Like a Stretch. However, 2012 bottom-up Company guidance has remained very conservative, and earnings forecasts appear analysts have been modestly revising down 2H11 earnings stretched expectations. As such, we expect modest earnings beats to continue over the next two quarters. However, 2012 expectations look stretched if GDP growth remains muted. Attractive Valuations. At 16.7x, the Russell 2000 appears cheap relative to its five- and ten-year averages of 20.3x and 21.4x, respectively. The Russell 2000 is trading at a 46% premium to the Russell 1000, toward the high end of the historical range. However, the relative valuation appears reasonable, adjusting for easy comps. UBS 4
  5. 5. U.S. Small Cap Strategy 8 September 2011Market OutlookLeadership A Cyclical Sector Bias. Based on our medium-term outlook, Based on our medium-term we have a cyclical bias. We’re overweight Tech, Industrials, outlook, we maintain a cyclical Discretionary, and Health Care. We’re underweight Financials, sector bias and the most defensive areas, Staples, Telecom and Utilities. However, over the near-term, defensive sectors and characteristics could continue to outperform. Overriding Investment Themes. Given investors’ longer-term growth concerns, we see three key investment themes playing out over the next several quarters:  All Eyes on Revenue Growth. On a sector-neutral basis, We expect companies posting companies posting the highest revenue growth were winners the highest top-line growth and during both the strong run from September to March and the those with the best PEG ratios more recent defensive rotation that began in April. We to continue to outperform expect this to continue.  Buy Undervalued Earnings Growth. We also expect companies with the most attractive near-term PEG ratios to continue to outperform in the current environment.  A Robust M&A Cycle. We expect a significant pickup in deal activity as macro concerns fade, and companies look to buy growth and capture outsized deal synergies.Risks European Sovereign Debt. We believe that the biggest risk to There are significant risks to U.S. small-caps is a credit disruption emanating from Europe. our relatively optimistic Economic Weakness. Further deterioration in the economic outlook outlook poses a serious threat to small caps. Recent weak economic readings are particularly concerning given limited policy responses in the event of a recession. Negative Feedback Loop. In our view, there is the potential for a negative feedback loop to develop, consisting of (1) weakening economic fundamentals; (2) rising sovereign concerns and bank funding stress; (3) spikes in market volatility; and (4) a further contraction in underlying economic activity. Note: In our charts and tables, we use either the S&P 600 or the Russell 2000 to represent the small-cap universe. Refer to the footnote beneath each exhibit to determine which index is being used. UBS 5
  6. 6. U.S. Small Cap Strategy 8 September 2011Fiscal ImbalancesFederal Budget Deficit (US$ Trillions) 1.4 1.4 1.3 The debt ceiling deal is a modest first step in 1.1 addressing America’s fiscal imbalances 0.7 0.7 0.7 0.6 0.7 0.6 0.6 0.5 0.5 0.5 08 09 10 11 12 13 14 15 16 17 18 19 20 21Source: CBO, Haver and UBSFederal Budget Breakdown $5.9 Trillion OMB projects that interest 5% Interest 16% and entitlements will go from 45% of the budget to 62%… 18% Mandatory 13% over 75% of tax receipts $3.5 Trillion 40% Entitlements 46% 14% Discretionary 9% 23% Security 17% 2011 2021Source: Office of Management & Budget and UBS UBS 6
  7. 7. U.S. Small Cap Strategy 8 September 2011Fiscal ImbalancesCDS Spreads 1600 Portugal, Ireland & ► Portuguese, Irish, and Greek 1400 Greece CDS Basket CDS spreads remain wide 1200 1000 800 600 400 200 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11Source: Bloomberg and UBSNote: European CDS basket is the 5-day moving average of Portugal, Ireland and Greece CDS through Sept. 5, 201110-Year Spreads 4.0 3.5 Increased pressure on Italy and Spain as well 3.0 Italy - Germany▼ 2.5 2.0 1.5 1.0 Spain - Germany▲ 0.5 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11Source: Bloomberg and UBS UBS 7
  8. 8. U.S. Small Cap Strategy 8 September 2011Tactical ReviewSmall Caps > 200-Day Moving Average 100% 460 S&P 600 ► Small caps have room to run 80% 400 if economic data begins to stabilize 60% 340 40% 280 20% 220 ◄ % of Stocks > 200-Day MA 0% 160 01/08 07/08 01/09 07/09 01/10 07/10 01/11 07/11Source: Standard & Poor’s, FactSet and UBS Note: Data as of Sept. 2, 2011Mutual Fund Flows (4-Wk Moving Avg.) 2.0 $B ◄ Small Small- and mid-cap flows 1.0 have recently turned more Mid ▼ negative 0.0 -1.0 -2.0 ◄ Large -3.0 -4.0 4/10 8/10 11/10 3/11 6/11Source: Lipper and UBS UBS 8
  9. 9. U.S. Small Cap Strategy 8 September 2011Tactical ReviewRussell 2000 Implied vs. Realized Volatility (1M) 90 80 Volatility has risen sharply 70 60 50 Implied Vol ▼ 40 30 20 10 Realized Vol ▲ 0 08 09 10 11Source: CBOE, Russell and UBS Note: Data through Sept. 2, 2011S&P 600 Industry Group Correlation (30D) 1.0 92% 89% 0.9 Stock correlations are very high, making alpha 0.8 generation difficult 0.7 0.6 0.5 0.4 0.3 05 06 07 08 09 10 11Source: Standard & Poor’s, FactSet and UBS UBS 9
  10. 10. U.S. Small Cap Strategy 8 September 2011Economic OutlookRussell 2000 vs. LEI 900 117 825 LEI ► 112 Small caps tend to trade in- line with the economic 750 107 outlook 675 102 600 Russell 97 ◄ 2000 525 92 450 87 375 82 300 77 98 99 00 01 02 03 04 05 06 07 08 09 10 11Source: Russell, Conference Board, Bloomberg and UBSSmall Cap Relative Performance vs. LEI 1.17 117 Small caps generally ◄ Sm v Lg ▼ outperform when the 1.02 107 economy is growing LEI ► 0.87 97 0.72 87 0.57 77 98 99 00 01 02 03 04 05 06 07 08 09 10 11Source: Russell, Conference Board, Bloomberg and UBS UBS 10
  11. 11. U.S. Small Cap Strategy 8 September 2011Economic OutlookRussell 2000 v. ISM New Orders 900 80 The key is whether or not ◄ Russell 2000 economic indicators begin to 769 65 signal a substantial slowdown or recession 638 50 Is the current environment like late 2006 or early 2008? New Orders ► 506 35 375 20 03 04 05 06 07 08 09 10Source: Russell, Institute for Supply Management, Bloomberg and UBSU.S. Economic Surprise Index 3 > 0 represents Positive Surprise Economic data has recently 2 started to surprise to the upside into lowered 1 expectations 0 -1 -2 -3 < 0 represents Negative Surprise -4 06 07 08 09 10 11Source: Bloomberg and UBS Global Economics Team UBS 11
  12. 12. U.S. Small Cap Strategy 8 September 2011Economic OutlookInterbank Lending Spreads 350 210 300 180 Recessions are normally caused by credit 250 150 contractions ◄ TED Spread ▼ 200 120 European interbank spreads 150 90 are showing signs of stress Euribor Spread ► 100 60 The TED spread has recently 50 30 risen, but remains at low levels 0 0 06 07 08 09 10 11Source: Bloomberg and UBS Note: Data through Sept. 6, 2011Baa Spread 650 High quality corporate spreads have been relatively 550 stable 450 350 250 150 06 07 08 09 10 11Source: Moody’s, Bloomberg and UBS Note: Data through Sept. 6, 2011 UBS 12
  13. 13. U.S. Small Cap Strategy 8 September 2011Economic OutlookISM Manufacturing & Non-Manufacturing >50 is Expansionary 54.6 ◄ ISM Non-Mfg 60 Recent economic data is consistent with slow growth, 55 not recession, in our view 50 50.6 45 ◄ ISM Mfg 40 35 <50 is Contractionary 98 00 02 04 06 08 10Source: Institute of Supply Chain Management, FactSet and UBS Note: ISM Mfg represents Aug. 2011Weekly Unemployment Claims 650 600 550 500 450 400 4-week 350 avg. 410k 300 250 90 92 94 96 98 00 02 04 06 08 10Source: US Department of Labor, FactSet and UBS UBS 13
  14. 14. U.S. Small Cap Strategy 8 September 2011Leading IndicatorsSmall Business Optimism Index 110 Confidence is the key going 105 forward 100 95 90 85 80 01 02 03 04 05 06 07 08 09 10 11Source: NFIB, Bloomberg and UBS Note: Data through July 2011Small-Cap Cyclicals vs. Non-Cyclicals 1.75 3/31: 1.70 A reemergence of cyclical 1.67 leadership would be a positive signal — we’re not there yet 1.59 1.51 6/17: 1.52 1.43 9/6: 1.44 1.35 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11Source: Standard & Poor’s, Bloomberg and UBSNotes: Cyclicals represent and equal-weighted index of Discretionary, Tech, Industrials, Financials, Energy andMaterials. Non-cyclicals represent an equal-weighted index of Health Care, Staples, Telecom and Utilities. Datathrough Sept. 6, 2011 UBS 14
  15. 15. U.S. Small Cap Strategy 8 September 2011Leading Indicators10-Year Treasury Yield 4.0 We attribute a majority of the 3.7 4/11: 3.58 move down in the 10-year yield to falling growth 3.4 expectations 3.1 2.8 6/24: 2.86 2.5 2.2 9/6: 1.97 1.9 1/10 4/10 7/10 10/10 1/11 4/11 7/11Source: Bloomberg and UBS Note: Data through Sept. 6, 2011CRB US Spot Raw Industrials 650 4/12: 638 Industrial commodities may be stabilizing 600 9/2: 571 550 500 450 1/10 4/10 7/10 10/10 1/11 4/11 7/11Source: CRB, Reuters, Bloomberg and UBS Note: Data through Sept. 2, 2011 UBS 15
  16. 16. U.S. Small Cap Strategy 8 September 2011Consensus Earnings GrowthConsensus Earnings Growth — Index Level 2011 Earnings Growth 2012 Earnings Growth R2000 S&P 600 R2000 S&P 600Cyclicals C. Discretionary 7.4 % 20.0 % 45.6 % 28.7 % Largely due to easy comps, Industrials 30.7 28.5 36.4 24.5 Russell 2000 earnings Technology 11.2 11.2 25.0 17.4 Energy 100+ 26.8 100+ 52.5 growth is expected to be 62% Materials 48.8 23.5 27.0 25.7 in 2011 and 45% in 2012Non-Cyclicals C. Staples -3.3 9.2 72.7 22.7 Health Care 100+ 3.2 100+ 19.9 Telecom Svcs 71.6 -5.3 100+ 32.9 Utilities -0.1 3.5 8.4 7.3Index ex-Fin 40.6 15.6 45.0 23.4 Financials 100+ 35.4 46.5 34.4Index 62.1 18.2 45.3 25.2Source: Russell, Standard & Poor’s, Thomson Financial, Compustat, FactSet and UBSNote: Analysis based on constituents as of August 31, 2011. Analysis excludes FBPConsensus Earnings Growth — Median Company 2011 Earnings Growth 2012 Earnings Growth R2000 S&P 600 R2000 S&P 600Cyclicals Growth rates appear more C. Discretionary 15.6 % 15.4 % 21.7 % 18.6 % reasonable looking at Industrials 30.1 22.0 25.6 21.6 median estimates Technology 16.9 15.8 21.2 17.3 Energy 52.9 42.9 70.5 56.1 Materials 19.4 16.5 21.5 19.5Non-Cyclicals Easy comps are distorting C. Staples 14.1 10.1 17.3 15.8 overall earnings growth Health Care 10.7 10.7 18.9 15.8 estimates Telecom Svcs 0.4 -2.6 44.4 59.9 Utilities 3.0 3.0 6.2 6.7Index ex-Fin 17.8 14.6 22.6 18.3 Financials 23.3 17.8 20.6 22.0Index 18.7 15.4 22.1 19.0Source: Russell, Standard & Poor’s, Thomson Financial, Compustat, FactSet and UBSNote: Analysis based on constituents as of August 31, 2011. Analysis excludes FBP UBS 16
  17. 17. U.S. Small Cap Strategy 8 September 2011Consensus Earnings GrowthS&P 600 Bottom-Up Consensus 35% Analysts have been revising 30% 2011 ▼ down 2011 earnings expectations 25% 2012 ▼ However, 2012 expectations have remained largely 20% unchanged 15% 10% 01/10 04/10 07/10 10/10 01/11 04/11 07/11Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBSS&P 600 Forward PE vs. EPS 29 19.0 $28 ◄ Fwd EPS ▼ Buy-side expectations have fallen much faster than sell- 26 17.5 side forecasts 23 16.0 20 Fwd P/E ► 14.5 14.1x 17 13.0 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS UBS 17
  18. 18. U.S. Small Cap Strategy 8 September 2011Earnings — RevenueRevenue Growth vs. Nominal GDP Growth 25% 9% Y/Y Y/Y 18% 7% Small-cap revenue growth 11% 5% and nominal GDP are highly correlated 4% 3% GDP ► -3% ◄ Revenue 1% -10% -1% -17% -3% -24% -5% 00 01 02 03 04 05 06 07 08 09 10 11Source: Standard & Poor’s, BEA, Compustat, FactSet and UBS Note: Analysis excludes FinancialsRevenue Surprises — Small vs. Large Small Caps 3.0 2.9 Top-line beats have been Large Caps 2.62.7 surprisingly strong over the 2.3 2.0 past three quarters 1.7 1.8 1.3 1.4 1.0 0.4 0.5 0.4 0.2 -0.1 -0.9 -2.0 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11ESource: Standard & Poor’s, Compustat, Thomson Financial and UBSNote: Analysis excludes Financials and certain other companies with missing data. UBS 18
  19. 19. U.S. Small Cap Strategy 8 September 2011Earnings — Operating MarginsOperating Margin vs. Capacity Utilization 10% 85 8.9% 9% Small-cap margins tend to ◄ Small-Cap Margins 80 mirror capacity utilization 8% 7.1% We see margin expansion 7% 75 opportunities across the small-cap universe 6% Cap. Util. ► 70 5% 4.8% 4% 65 00 01 02 03 04 05 06 07 08 09 10 11Source: Standard & Poor’s, Federal Reserve, Compustat, FactSet and UBSNote: Margins have been adjusted to reflect a trailing 4-quarter basis. Capacity Utilization shows quarterly averagesCurrent & Peak Operating Margins 26 24 Peak 21 2Q11 18 17 15 15 13 14 12 13 13 11 12 12 9 10 9 10 9 8 9 9 9 9 8 8 8 7 8 7 6 6 5 5 5 5 5 2 2 Comm Svcs Food Bev Cons Svcs HC Svcs Software Telecom Transports Media HH Prod Pharma Hardware Retail Food Retail Cap Goods Energy Materials Autos Durables Semis Utilities Peak 4Q01 1Q07 1Q98 4Q98 3Q07 3Q99 1Q06 4Q02 3Q04 3Q02 2Q06 3Q10 1Q07 2Q04 1Q03 2Q05 3Q00 4Q00 3Q04 3Q98Source: Standard & Poor’s, Compustat, FactSet and UBS Note: Margins reflect a trailing 4-quarter basis. Peak quarter is listed below chart UBS 19
  20. 20. U.S. Small Cap Strategy 8 September 2011Balance SheetsNet Debt vs. Interest Coverage 40% 8.0x  Net Debt Ratio 35% deleveraging 7.0x Small-cap balance sheets Interest Cov ► remain solid 6.3x 30% 6.0x 25% 5.0x 20% 16.5% 4.0x 15% 10% 3.0x 99 00 01 02 03 04 05 06 07 08 09 10Source: Standard & Poor’s, Compustat, FactSet and UBS Note: Analysis excludes FinancialsCapex & R&D 9.5% 5.5% 9.0% Capex / Sales ► 5.0% (Rolling 12M) 8.5% 4.5% R&D / Sales 7.7% 8.0% 4.0% ◄ (Rolling 12M) 7.5% 3.5% 3.6% 7.0% 3.0% 01 02 03 04 05 06 07 08 09 10 11Source: Standard & Poor’s, Compustat, FactSet and UBS Note: Analysis excludes Financials UBS 20
  21. 21. U.S. Small Cap Strategy 8 September 2011Cash FlowsFree Cash Flow ($Bn) – Sources 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11Net Income 1.3 3.5 2.6 3.9 4.0 4.6 4.4 4.5 4.6Depreciation 4.4 4.4 4.4 4.3 4.2 4.3 4.4 4.5 4.1Working Capital 2.9 0.6 1.0 (1.2) (2.2) (2.9) (0.9) (3.4) (1.6)Other Op Items 3.4 2.7 3.8 1.6 2.4 2.5 3.1 1.1 1.5CF From Ops 12.1 11.1 11.8 8.6 8.4 8.4 11.0 6.6 8.5- Capex (net) 4.0 3.8 4.0 3.3 4.1 4.4 4.7 4.7 4.4Free Cash Flow 8.1 7.3 7.8 5.3 4.3 4.1 6.4 1.9 4.1Source: Standard & Poor’s, Compustat, FactSet and UBS Note: Universe excludes FinancialsCompanies focused on cash generation during the downturnWorking capital being replenished, but plenty of cash left overFree Cash Flow ($Bn) – Uses 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11Free Cash Flow 8.1 7.3 7.8 5.3 4.3 4.1 6.4 1.9 4.1- Dividends 0.6 0.7 0.6 0.8 0.7 0.7 1.7 0.8 0.7- Buybacks, net (0.8) (1.6) (0.6) (0.6) 0.6 0.6 (0.3) (0.7) 0.7- Acquisitions, net 1.1 0.9 2.4 2.4 2.5 3.6 7.3 3.0 3.8Debt Iss/(Repay) (4.4) (3.2) (2.5) (2.0) 0.1 2.7 4.8 0.7 2.2L/T Investments (0.3) (0.7) (0.7) (0.4) (0.5) 0.3 (0.9) (0.3) (0.2)Other Investing 0.4 0.2 (0.0) 0.6 0.5 (0.0) 0.4 (0.3) 0.3Other Financing (0.1) (0.3) 1.4 0.0 (1.1) 0.2 (1.1) 0.4 (0.3)Chg-Cash & ST Inv 2.7 3.3 3.6 1.0 (0.4) 2.3 0.9 (0.7) 0.9Source: Standard & Poor’s, Compustat, FactSet and UBS Note: Universe excludes FinancialsM&A activity has picked up. We expect this to continueDividends and buybacks should gradually increase as well UBS 21
  22. 22. U.S. Small Cap Strategy 8 September 2011Earnings AnalysisRussell 2000 — Earnings Summary — 2Q11E Revenue Earnings Growth Surprise Growth Surprise Rptd Total YoY (%) Pct (%) Beat Miss YoY (%) Pct (%) Beat MissCyclicals ex-Finls 959 1068 15.7 2.6 558 297 29.4 4.9 572 347 Cons. Discretionary 238 269 6.3 1.2 122 82 23.0 10.5 140 90 Autos 18 18 20.4 5.3 11 5 51.7 10.9 8 10 Dur. & Apparel 49 56 0.9 1.6 33 15 <-100 <-100 31 17 Cons. Services 66 74 4.7 0.9 33 21 23.5 7.5 40 23 Media 31 38 6.8 4.2 13 12 >100 20.2 15 14 Retailing 74 83 5.7 -0.4 32 29 9.9 23.3 46 26 Industrials 250 278 15.6 2.0 154 75 23.1 7.3 152 85 Capital Goods 142 161 17.1 2.3 85 50 33.8 3.2 74 59 Services 70 79 12.4 1.9 44 17 36.7 9.1 48 20 Transportation 38 38 16.1 1.5 25 8 -1.2 15.0 30 6 Technology 313 334 14.1 1.4 190 84 16.2 6.0 202 98 Software 140 150 16.4 1.0 88 33 23.0 6.9 96 38 Hardware 104 115 13.1 1.8 64 33 14.6 3.0 60 41 Semiconductors 69 69 12.1 1.0 38 18 11.0 8.2 46 19 Energy 95 115 48.4 9.6 57 35 >100 -4.5 47 44 Materials 63 72 19.7 2.3 35 21 27.3 -5.2 31 30Non-Cyclicals 352 397 9.9 1.7 189 127 -29.6 3.9 193 141 Cons. Staples 43 62 10.9 2.4 28 9 -29.7 -9.0 25 17 Food & Stpls Retail 9 15 9.5 1.9 7 1 75.8 >100 7 2 Food Bev. & Tob. 22 33 12.9 3.1 14 6 -59.7 -44.4 10 11 Hhld Products 12 14 12.1 2.1 7 2 16.1 9.6 8 4 Health Care 256 278 8.6 1.1 131 100 -29.9 83.2 139 102 Equip. & Services 131 137 9.0 0.4 66 50 21.2 6.0 72 47 Pharma/Biotech 125 141 6.1 6.7 65 50 -84.5 11.5 67 55 Telecom 21 23 12.1 0.4 9 8 <-100 <-100 9 10 Utilities 32 34 10.2 2.4 21 10 -21.1 -9.7 20 12Russell 2000 ex-Finls 1311 1465 14.3 2.4 747 424 20.3 4.8 765 488 Financials 352 385 -28.2 0.7 201 118 82.9 5.1 206 130 Banks 164 177 5.6 2.5 91 53 >100 22.9 111 49 Diversified Finls 59 68 -68.6 -3.0 34 22 46.8 -7.2 34 22 Insurance 38 43 2.2 1.3 23 13 -53.8 -8.8 18 20 Real Estate 91 97 14.9 1.0 53 30 40.1 4.9 43 39Russell 2000 1663 1850 8.6 2.2 948 542 33.3 4.9 971 618Source: Russell, Compustat, Thomson Financial, FactSet and UBSNote: Analysis excludes companies with no analyst coverage or that are missing data in applicable databases. Results contain some UBS estimates UBS 22
  23. 23. U.S. Small Cap Strategy 8 September 2011Earnings AnalysisS&P 600 — Earnings Summary — 2Q11E Revenue Earnings Growth Surprise Growth Surprise Rptd Total YoY (%) Pct (%) Beat Miss YoY (%) Pct (%) Beat MissCyclicals ex-Finls 360 382 17.4 2.8 205 105 16.8 3.9 224 121 Cons. Discretionary 100 107 6.9 2.4 55 28 7.1 10.5 64 32 Autos 5 5 2.8 0.3 2 2 -6.2 3.3 2 3 Dur. & Apparel 27 29 6.7 3.7 20 5 -5.2 10.8 18 8 Cons. Services 27 30 4.0 0.9 13 6 5.6 2.3 17 10 Media 3 3 19.0 16.3 2 1 >100 >100 2 1 Retailing 38 40 6.9 0.9 18 14 3.6 15.7 25 10 Industrials 83 90 13.2 1.4 47 25 16.5 4.6 50 27 Capital Goods 53 58 10.1 1.7 30 16 11.0 1.7 27 21 Services 22 24 11.7 0.8 12 6 35.6 7.9 15 6 Transportation 8 8 35.3 1.4 5 3 23.8 19.8 8 0 Technology 125 130 17.4 1.2 72 37 11.8 1.5 79 43 Software 45 46 19.2 0.0 27 11 -1.3 -0.1 31 14 Hardware 49 53 17.5 1.7 28 18 23.8 1.6 28 20 Semiconductors 31 31 14.2 0.8 17 8 12.4 2.8 20 9 Energy 19 21 61.2 10.1 13 5 70.1 5.7 12 6 Materials 33 34 17.7 1.6 18 10 17.8 -3.0 19 13Non-Cyclicals 104 114 15.4 2.3 52 35 -11.2 -7.0 51 43 Cons. Staples 19 23 18.3 4.1 9 3 -24.0 -6.8 8 8 Food & Stpls Retail 3 5 19.6 7.2 2 0 50.1 28.3 2 1 Food Bev. & Tob. 11 13 19.7 2.7 7 1 -44.3 -21.0 5 4 Hhld Products 5 5 8.6 -0.7 0 2 -14.6 -5.6 1 3 Health Care 65 70 14.9 0.5 33 25 -7.7 -9.0 35 24 Equip. & Services 51 53 15.7 0.5 25 20 6.0 2.2 27 18 Pharma/Biotech 14 17 7.9 0.9 8 5 -82.3 -80.1 8 6 Telecom 7 7 10.7 1.0 2 3 -39.8 -20.3 1 5 Utilities 13 14 13.2 7.2 8 4 10.7 6.9 7 6S&P 600 ex-Finls 464 496 17.0 2.7 257 140 9.9 1.5 275 164 Financials 100 102 8.2 1.1 56 26 33.1 3.2 52 40 Banks 41 41 3.6 1.4 22 11 >100 29.5 28 10 Diversified Finls 13 13 15.2 -0.4 6 6 24.0 -1.5 8 4 Insurance 16 17 8.8 1.8 10 3 -36.6 3.6 6 10 Real Estate 30 31 7.2 0.9 18 6 4.2 -10.4 10 16S&P 600 564 598 16.3 2.6 313 166 14.2 1.9 327 204Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBSNote: Analysis excludes companies with no analyst coverage or that are missing data in applicable databases. Results contain some UBS estimates UBS 23
  24. 24. U.S. Small Cap Strategy 8 September 2011Earnings AnalysisEarnings Surprises — Small vs. Large 19 Small Caps Large Caps Large-cap beats have been 14 higher in 2Q reports 13 12 12 10 9 9 9 8 8 7 7 6 6 5 5 2 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11ESource: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBSNote: Analysis excludes Financials and certain other companies with missing dataEarnings Surprises — Cyclicals vs. Non-Cyclicals Cyclicals 21 18 19 Cyclical sectors posted Non-Cyclicals 15 much better results relative 14 to expectations 12 10 9 8 8 8 7 5 6 5 4 3 -7 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11ESource: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBSNote: Analysis excludes Financials and certain other companies with missing data UBS 24
  25. 25. U.S. Small Cap Strategy 8 September 2011Earnings Analysis2Q11E Price Response – S&P 600 vs. S&P 500 Small Cap Large Cap Revenue Surprise Revenue Surprise Beats Misses Beats Misses Misses Beats Misses Beats EPS Surprise EPS Surprise 4.20 -0.47 2.73 0.86 -0.24 0.55 -4.20 -6.25 -5.50 -2.84 -4.64 -3.89 2.18 -4.11 0.27 -2.24Source: Standard & Poor’s, Thomson Financial, FactSet and UBS1Q11 Price Response – S&P 600 vs. S&P 500 Small Cap Large Cap Revenue Surprise Revenue Surprise Beats Misses Beats Misses Misses Beats Misses Beats EPS Surprise EPS Surprise 3.21 -0.87 2.11 0.79 -0.60 0.30 -2.96 -4.10 -3.49 -1.46 -2.54 -2.04 1.73 -2.87 0.20 -1.29Source: Standard & Poor’s, Thomson Financial, FactSet and UBS4Q10 Price Response – S&P 600 vs. S&P 500 Small Cap Large Cap Revenue Surprise Revenue Surprise Beats Misses Beats Misses Misses Beats Misses Beats EPS Surprise EPS Surprise 4.27 0.96 3.10 1.49 -0.49 0.75 -2.47 -3.30 -2.86 -2.31 -2.48 -2.35 2.43 -1.18 0.81 -2.06Source: Standard & Poor’s, Thomson Financial, FactSet and UBS UBS 25
  26. 26. U.S. Small Cap Strategy 8 September 2011M&ANumber of Deals – $250M to $2.5B 637 549 557 550 Deal activity picks up post 463 444 449 recessions 414 410 390 329 283 288291 289 229 232 190 108 88 92 95 98 01 04 07 10Source: Mergerstat, FactSet and UBS Note: 2011 estimated based on deals through JulyNumber of Deals – $250M and $2.5B 50 We believe macro concerns 42 41 have been holding back 40 40 37 transaction volumes 35 36 3435 32 32 30 28 2829 28 28 26 2627 24 22 22 20 1515 15 12 10 02/09 05/09 08/09 11/09 02/10 05/10 08/10 11/10 02/11 05/11Source: Mergerstat, FactSet and UBS Note: Data through July 2011 UBS 26
  27. 27. U.S. Small Cap Strategy 8 September 2011M&ADeals by Sector – 2010 and 2011 YTD 114 112 Financials and Tech have seen the biggest pickup in 79 deal activity 71 70 68 55 39 29 10 Fin Tech Discr H Care Ind En Mat Stpls Util TelcmSource: Mergerstat, FactSet and UBS Note: Data through July 2011Large vs. Small Operating Margins 10% 15% Large Caps ► The difference between 9% 14% small- and large-cap margins is close to an all-time high 8% 13% 7% 12% We believe that CEOs put more credence in cost synergies than potential 6% 11% revenue opportunities 5% 10% ◄ Small Caps ▲ 4% 9% 99 00 01 02 03 04 05 06 07 08 09 10Source: Standard & Poor’s, Compustat, FactSet and UBS Note: Analysis excludes Financials UBS 27
  28. 28. U.S. Small Cap Strategy 8 September 2011Dividends & BuybacksPayout Ratio 125% 100% Total payout is way below ◄ Dividends + Buybacks prior peaks 75% 50% 43% 25% 11% 0% Dividends ▲ -25% 94 96 98 00 02 04 06 08 10Source: Standard & Poor’s, Compustat, FactSet and UBS Note: Analysis excludes Financials and UtilitiesPayout Ratios by Sector 401 Peak 201 278 Room to return cash across 2Q11 164 sectors 131 127 93 87 69 64 69 46 47 37 40 38 31 30 600 x- Ind Discr Mat En Tech H Care Stpls Telcm Fin & Util Pk Qtr 4Q08 1Q08 3Q08 4Q00 4Q10 2Q02 3Q07 2Q06 3Q05Source: Standard & Poor’s, Compustat, FactSet and UBS Note: Analysis excludes Financials and Utilities UBS 28
  29. 29. U.S. Small Cap Strategy 8 September 2011Cash & Working CapitalCash & Inventories (% Total Assets) 18% ◄ Inventories Cash balances remain high 15% 13.5% 12% 12.2% Cash ► 9% 6% 00 01 02 03 04 05 06 07 08 09 10 11Source: Standard & Poor’s, Compustat, FactSet and UBS Note: Analysis excludes FinancialsWorking Capital (% of Sales) 10% Working capital management 9% has been stellar over the past few years 8% 7.1% 7% 6% 99 00 01 02 03 04 05 06 07 08 09 10Source: Standard & Poor’s, Compustat, FactSet and UBS Note: Analysis excludes Financials UBS 29
  30. 30. U.S. Small Cap Strategy 8 September 2011U.S. Equity ReturnsU.S. Equity Indices Index Aug-11 QTD YTD 1 Yr 3 Yr 5 Yr 7 Yr 10 Yr R. 2000 (8.7) (12.0) (6.5) 22.2 0.8 1.5 5.5 5.8 R. 2000 Value (8.8) (11.8) (8.5) 16.9 (0.6) (0.6) 4.3 6.5 R. 2000 Growth (8.6) (12.1) (4.6) 27.5 2.1 3.6 6.6 4.9 R. Mid-Cap (6.9) (10.3) (3.0) 21.3 2.9 3.0 7.0 7.2 R. Mid-Cap Value (6.9) (10.2) (4.2) 17.5 2.0 1.4 6.4 7.5 R. Mid-Cap Growth (6.8) (10.3) (1.7) 25.6 3.8 4.3 7.4 5.9 R. 1000 (5.8) (7.8) (1.9) 19.1 0.8 1.1 4.0 3.2 R. 1000 Value (6.2) (9.4) (4.0) 14.4 (1.4) (1.6) 3.0 3.4 R. 1000 Growth (5.3) (6.2) 0.2 24.0 3.1 3.7 4.9 2.7 S&P 600 (7.7) (10.6) (3.9) 24.4 2.1 2.7 6.4 7.0 S&P 400 (7.1) (10.4) (2.7) 22.9 4.0 4.6 7.6 7.3 S&P 500 (5.4) (7.4) (1.8) 18.5 0.5 0.8 3.5 2.7 Dow (4.4) (6.5) 0.3 16.0 0.2 0.4 1.9 1.6 Nasdaq (6.4) (7.0) (2.8) 22.0 2.9 3.4 5.0 3.6 Index Value 2010 2009 2008 2007 2006 2005 2004 R. 2000 727 26.9 27.2 (33.8) (1.6) 18.4 4.6 18.3 R. 2000 Value 956 24.5 20.6 (28.9) (9.8) 23.5 4.7 22.2 R. 2000 Growth 419 29.1 34.5 (38.5) 7.0 13.3 4.2 14.3 R. Mid-Cap 25.5 40.5 (41.5) 5.6 15.3 12.7 20.2 R. Mid-Cap Value 24.8 34.2 (38.4) (1.4) 20.2 12.6 23.7 R. Mid-Cap Growth 26.4 46.3 (44.3) 11.4 10.7 12.1 15.5 R. 1000 16.1 28.4 (37.6) 5.8 15.5 6.3 11.4 R. 1000 Value 15.5 19.7 (36.8) (0.2) 22.2 7.1 16.5 R. 1000 Growth 16.7 37.2 (38.4) 11.8 9.1 5.3 6.3 S&P 600 26.3 25.6 (31.1) (0.3) 15.1 7.7 22.6 S&P 400 26.6 37.4 (36.2) 8.0 10.3 12.6 16.5 S&P 500 1,219 15.1 26.5 (37.0) 5.5 15.8 4.9 10.9 Dow 11,614 11.0 18.8 (33.8) 6.4 16.3 (0.6) 3.1 Nasdaq 2,579 16.9 43.9 (40.5) 9.8 9.5 1.4 8.6Source: Russell, Standard & Poor’s, Dow Jones, NASDAQ, FactSet and UBS Note: All returns include dividends except the Dow and NASDAQ UBS 30
  31. 31. U.S. Small Cap Strategy 8 September 2011Sector ReturnsRussell 2000 SectorsIndex Aug-11 QTD YTD 1 Yr 3 Yr 5 Yr 7 Yr Financials (6.9) (8.8) (8.1) 11.7 (3.8) (6.2) (0.9) Technology (9.3) (16.6) (10.0) 23.4 6.2 4.1 6.7 Industrials (8.6) (12.5) (9.5) 22.6 (3.9) 2.0 7.3 Consumer Discret. (10.1) (12.8) (8.4) 23.4 5.0 0.0 2.1 Healthcare (8.9) (12.1) (0.6) 25.2 2.0 4.0 6.3 Energy (16.9) (14.4) (5.0) 41.1 (10.2) 0.8 11.8 Materials (9.0) (12.3) (7.5) 27.2 6.1 12.9 15.6 Utilities 2.2 0.5 9.5 21.8 8.1 5.8 8.4 Consumer Staples (3.2) (6.2) 4.4 23.9 9.2 7.9 9.9 Telecom Svcs. (8.2) (16.3) (1.1) 23.8 (3.3) (4.2) 3.5Russell 2000 (8.7) (12.0) (6.5) 22.2 0.8 1.5 5.5Index Weights 2010 2009 2008 2007 2006 2005 Financials 21.7 20.7 (1.4) (23.4) (19.6) 19.4 2.0 Technology 16.9 34.4 59.9 (43.8) 3.6 13.6 (1.9) Industrials 15.5 29.7 13.9 (29.9) 6.2 22.0 9.4 Consumer Discret. 13.3 32.1 60.8 (47.6) (15.0) 14.6 (2.0) Healthcare 12.5 17.2 22.6 (29.3) 13.6 8.6 5.5 Energy 7.0 33.3 41.0 (50.3) 14.3 16.5 47.3 Materials 4.9 34.0 60.9 (39.1) 26.3 41.5 4.5 Utilities 3.7 17.5 7.9 (11.0) (0.1) 26.4 0.7 Consumer Staples 3.6 19.7 23.7 (18.8) 4.2 29.1 (0.3) Telecom Svcs. 1.0 11.6 24.1 (49.7) 3.5 40.7 2.0Russell 2000 100.0 26.9 27.2 (33.8) (1.6) 18.4 4.6Source: Russell, FactSet and UBS Note: All returns include dividends UBS 31

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