UBS Americas

Perspectives

Contents
• When It Comes to Inflation, All Markets are Local
• Geopolitics: The Blind Side
• Integrating Solutions to Meet Complex Client Needs
• Evolving Defined Contribution Retirement Plan
Design: New Ways to Manage 401(k) Plans
• Investing in US Energy: De-carbonization
Moves Forward, But Will It Move Markets?
• Bringing Alive a Commitment
to High Performance
The Cube, New York, NY

• Creating a Mining Equipment

Company With Unmatched
Product Range
• The A-B-Cs of Literacy

Q2 2011
 “At UBS, two areas where
we continue to focus are
ongoing investment in the
communities in which we
live and work…and our
unrelenting commitment
to providing clients with
integrated solutions.”
— Philip J. Lofts and Robert Wolf

B
Welcome
Change is, and always has been, at the very core of business. And so it should be.
Change drives opportunity. The pace at which the current business landscape is
evolving is unprecedented, however, and this velocity of change is driving greater and
greater demand for insight as businesses and individuals focus on investment decisions.
In this issue of UBS Americas Perspectives, we are therefore pleased to offer our perspective on a variety
of topics of global and regional relevance. Paul Donovan, UBS’s Director of Global Economics, addresses
inflationary trends around the world and the degree to which they are influenced by commodities pricing.

We also take a look at the manner in which major geopolitical events, such as those unfolding in the Middle
East and North Africa, are reflected in the financial markets. In parallel, on a longer timescale, employment
trends are also changing, with maturation in the defined contribution and defined benefit retirement
landscapes affecting participants and sponsors alike.

An area that is seeing less change than anticipated is US energy. Despite widespread discussion recently on
clean energy and energy independence, energy use in the US has actually remained relatively stable over the
past several decades, a critical consideration for those investing in energy and environmental markets.

These topics, among others covered, are as widely varied as the issues facing our clients today. We hope you
will find the content in this issue of UBS Americas Perspectives insightful and relevant.

At UBS, two areas where we continue to focus are ongoing investment in the communities in which we
live and work, as outlined in a piece on literacy, and our unrelenting commitment to providing clients with
integrated solutions. As a UBS Americas client, you have access to the full spectrum of our capabilities across
Wealth Management Americas, Investment Banking and Global Asset Management, with services tailored
to your priorities. Nothing matters to us more than consistently surpassing your expectations through truth,
clarity and performance.

We hope you enjoy the latest installment in the UBS Americas Perspectives series. After reading it and
thinking over your relationship with us, there is one question we hope you will help us answer:

How can we serve you better?

Email us directly at chair-ceo-ubs-amer@ubs.com to let us know.

Philip J. Lofts Robert Wolf

CEO, UBS Americas Chairman, UBS Americas

1
 In a climate like this, central banks have to
preserve financial system integrity and support
growth. The best way for the US Federal Reserve
to stimulate growth and provide support and
liquidity to the banking system is to leave interest
rates alone. However, the European Central Bank
(ECB) is grappling with much thornier issues.

When It Comes to Inflation,

All Markets Are Local
Although conventional wisdom may point to something called “global
inflation,” there are very few things in the world that are actually
global in price. Commodities happen to be one of them, and their
prices are rising relative to other prices. But the impact of these rising
commodity prices is different depending on the market.

In a mature economy, like the US or In between emerging markets and

Paul Donovan is the
Managing Director, Global
Economics at UBS Investment
Bank and co-author of the
forthcoming book, From
Red to Green: How the
Financial Credit Crunch Could
Bankrupt the Environment.
Germany, commodities are not very
important at all. Commodities themselves
account for only 8% to 10% of consumer
spending. The price of food that is
bought in well-developed economies,
for example, isn’t actually based on the
food (commodity) itself. It’s a function
of the labor costs that are involved with
processing, distributing, advertising and
retailing food. Currently, most developed
countries have excess capacity in the labor
markets, which makes labor costs low,
which means that food is cheap.
In an emerging market, however,
commodities have a very different impact
because the food that is purchased here
is less processed—and thus has a lower
labor cost. While a developed economy
consumer might buy a box of rice (carefully
packaged and advertised, from a fully
staffed supermarket), an emerging market
consumer might purchase a bag of rice
from a local vendor.
developed countries are fringe economies:
Ireland, Portugal, Spain and Greece.
Inflation matters in a completely different
way in these economies. Right now,
Ireland has barely emerged from
deflation, and excluding food and energy
it remains in deflation. Where there are
price increases in fringe economies,
inflation, where it exists, is having
a very negative impact on growth.
In Portugal, where inflation is only 2.4%,
it “feels” worse. Because the average
Portuguese consumer’s income growth is
almost nil, even a small increase in food
prices is painful. And if people there feel
their living standards are declining, they
will rein in spending. This may cause
a downward spiral and negatively
impact growth.
This same sort of pattern is being repeated
around the periphery of Europe. Ireland is
experiencing very little consumer demand.
Unemployment has gone up, and the
Irish economy needs to experience falling
wages and prices in order to restore the
country’s competitiveness.

2
Temporary inflation in the UK
Inflation in the United States and the
United Kingdom, as well as the rest of
the developed world, is unlikely to be an
issue until at least 2013. However, the
recent one-off increase in the British Value
Added Tax, or VAT, makes the UK inflation
number temporarily look very high. Once
the VAT tax is backed out, inflation in
the UK drops to 2.4% (the same as the
average for the Euro area). In fact, most
economists would say that an inflation
rate of 2% is actually desirable.
The impact of interest rates
In a climate like this, central banks have
to preserve financial system integrity and
support growth. The best way for the
US Federal Reserve to stimulate growth
and provide support and liquidity to the
banking system is to leave interest rates
alone this year. This would help banks in
the US recover from the financial crisis.
However, the European Central Bank
(ECB) is grappling with much thornier
issues. It is proving almost impossible to
set monetary rates for economies like
Germany, which is showing 4% growth
currently, and for Greece, which has
-6.6% growth. The ECB may raise interest
rates a little for Germany, which needs
a tighter monetary policy, but if it raises
interest rates aggressively it will aggravate
the economic weakness of fringe
countries—and maybe even economies
like France.
German inflation could well be above the
Euro Zone average for the next few years
because it has less excess labor capacity
than its peers. The ECB’s problem is that
if it sets an interest rate for Europe as a
whole, it is almost certain to be too low
for the German economy.
Demystifying China
Contrary to popular belief, the export
side of the Chinese economy is too small
to cause inflation globally. The internal
domestic labor cost of any given economy
is what causes inflation for that market.
If wages remain under control, then
inflation won’t exist.
Even if all commodities were to rise in
price by 10%, it would only add around
1% to the inflation rate. Inflation is largely
a domestic phenomenon and is not
generally communicable from one country
to another. It is correlated from one
country to another, but not communicable.
Playing the commodities game
Investors should treat commodities with
a great deal of caution because there
is so much political interference in the
commodities markets. Russia and Ukraine
are forbidding the export of wheat and
corn because they want to keep those
prices low domestically. Europe has
effectively imposed a poultry embargo on
the United States. The United States has
increased the regulation of commodity
investments. Politicians in emerging
markets regulate commodity prices to
prevent political unrest. Commodities
have become intensely politicized over
the last year and a half.
The inflation variable
What drives price inflation varies
dramatically from country to country. In
the UK, it’s the VAT sales tax. In China,
it’s domestic labor costs. In India, it’s
onions. In Egypt, it’s wheat. It tends to
vary from country to country.
While many believe oil plays a large role
in inflation, it actually represents only 4%
to 7% of inflation’s total in developed
economies. But people are acutely aware
of it.
This leads us to another truth about
inflation, aside from the fact that
it is largely an internal, domestic
phenomenon. Perception, or the way
people feel about the price of any given
product, has an enormous impact on the
way they will behave as consumers. And
that behavior has enormous consequences
for growth or the lack of it, and subsequent
inflation or deflation.
3
Geopolitics: The Blind Side
Kurt E. Reiman is Head of
Thematic Research Wealth
Management Americas.
The end of the Cold War
fundamentally altered the
course of history. The relaxation
of geopolitical tension in the
1990s coincided with the spread
of globalization, quantum leaps
in technology and privatization of
state-owned industries. However,
in recent years economic activity
and financial market performance
have grown increasingly turbulent
as geopolitical upheavals leave
their mark.
Current events in the Middle East and
North Africa illustrate just how quickly
localized domestic tensions can boil over
into broader geopolitical instability.
• Although hostilities and power
vacuums may pose little immediate
threat to economies and financial
markets outside these regions, the
potential disruption to oil and natural
gas supplies could short-circuit a still
tenuous economic recovery.
• While at first glance these conflicts
may appear purely regional in nature—
particularly among those states that
are ruled by unpopular dictators—the
political upheaval appears to be part of
a much larger global trend.
4
In this issue of UBS Americas Perspectives,
we seek to provide a useful framework
for understanding how geopolitical
events are reflected in the financial
markets and to illustrate how investors
can preemptively protect their portfolios,
as well as how to react when events arise.
Why geopolitics is important
to investors
In the years following the end of the
Cold War, market participants focused
primarily on macroeconomic trends when
attempting to determine financial market
outcomes. Geopolitical risk was treated
as an afterthought, a mere blip on the
radar screen. Now, however, geopolitics
is a much more potent force that can
undermine global financial markets—
not only can events shape the economic
environment and fundamental investment
outlook, driving economic growth
and asset returns, they can potentially
blindside an investment portfolio.
In this environment, understanding
geopolitical risk is important to
determining outcomes for the economy
and financial markets. The type of
geopolitical event can determine how
Different events, countries and outcomes
Real equity return over selected periods, in %
100%
World War I (1914–18)
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
-100%
France Germany Japan
Source: Dimson, Marsh and Staunton (2008)
financial markets behave and whether the
reaction is temporary or sustained, localized
or global. But since probability, causality,
timing, magnitude and impact are difficult
to assess, market participants rarely give
geopolitics the full attention it deserves.
Geopolitical events should be
evaluated in their own context
Geopolitical risk refers to low-probability,
high-impact events. They are the pro-
verbial “bolts out of the blue” and are
unpredictable and highly uncertain. The
9/11 terrorist attacks and the global credit
crunch took nearly everyone by surprise.
While geopolitical events can heavily
influence economic growth and asset
returns, each has to be understood in
its own context. For example, unlike
the broad global markets, US equities
generated modest but positive inflation-
adjusted returns during World War II,
leading many to conclude that this period
was an extension of the economic recovery
that followed the Great Depression. But
it was the large mobilization of labor and
resources toward supplying the war effort
that benefited equities, despite the high
rates of inflation that emerged.
World War II (1939–48) Oil shock (1973–74)
UK US World World ex-US
Geopolitical conflict will play a bigger role in shaping investment outcomes
during the next decade. Such conflict will likely keep risk premiums
elevated—primarily for stocks but also for bonds—and may induce bouts
of weakness in risk assets, as well as demand for safe havens.
Understanding where geopolitics
intersects with finance
Geopolitics should be understood as a
type of risk that interacts with other
sources of risk in an investment portfolio.
A negative event will tend to increase the
risk premium and alter the direction of
asset prices. One that depresses economic
growth and changes the course of inflation
is likely to have a sustained effect.
Meanwhile, the direction of the impact
will depend on the asset in question, and
the magnitude will depend on the severity
and resolution of the incident.
The key to assessing the investment
implications of geopolitics lies in under-
standing how it affects the main drivers of
investment returns. Fortunately, the same
variables that are relevant in any generic
investment context are relevant here.
To illustrate, assume a conflict erupts
between two neighboring states,
diplomatic solutions are exhausted
and military action looms. Such news,
if unexpected, is likely to affect the
following market drivers:
The main drivers of investment returns
Impact on financial markets assuming an increase in each variable
Variable
Real interest rates
Inflation expectations
Risk premium
Growth expectations (economic, earnings)
Credit trends
Liquidity premium
Source: UBS WMR
• Flight to quality flows, as well as
heightened liquidity preferences and
risk aversion, would tend to depress
real interest rates.
• Prospects for increased defense
spending would likely push inflation
expectations higher.
• Increased uncertainty would be expected
to increase the risk premium, at least
among the affected countries.
Meanwhile, a sustained military offensive
could lead to:
• A decline in trade, labor and investment
flows, which would reduce economic
growth prospects in more than just the
affected countries.
• Higher commodity prices (for example,
energy), which would weigh on
economic growth and increase inflation
expectations, potentially across the
global economy.
• A diversion of resources (including
labor) to military use would also likely
drive up the cost of goods and wages.
Stocks Bonds
– –
– –
– –
+ neutral
? + (corporate bonds)
– –
Different geopolitical stresses
pose different threats
We see four broad categories of
geopolitical tension—natural resource
needs, national strategic ambitions,
non-state ideological ambitions and
income inequality—each with unique
threats leading to different financial
market outcomes.
Preventive steps, such as diversification
and ongoing risk assessment, are important
precautionary measures to help limit losses,
but how one reacts to the shock of a
geopolitical event can be just as important.
• The impact of an event that causes
minimal shock to the broader economy
may be only temporary, and the cost of
hedging these fleeting risks would likely
outweigh the benefit.
• When investing during prolonged
periods of heightened geopolitical risk,
one might target assets that would
be expected to perform well both in a
baseline scenario and when tensions
boil over. Another, is to seek natural
hedges—commodities would stand
to gain from conflict in the Middle
East, and allocations to higher-quality
government bonds can offset declines
when uncertainties surge.
5
Understanding the financial
implications of specific shocks
Even the most astute observers of
geopolitical events will not be able to
completely insulate their portfolios from
geopolitical risk, since events are often
unanticipated. Hence, it is important that
investors consider the possible economic
and financial market outcomes of the
various hot spots were they to erupt into
a major crisis.
Natural resource needs. Endowment of
critical natural resources confers a strong
geopolitical advantage to exporting
countries. Russia could seek to leverage
its position as Europe’s natural gas supplier
through an embargo. Iran could disrupt
oil supplies in reaction to economic
sanctions aimed at curbing its nuclear
program or a preventive strike by Israel.
Actions that restrict the supply of natural
resources will most likely constrain
economic activity and raise inflation, at
least in the short term, which would be
a positive scenario for certain commodity
subsectors. However, not all clashes over
resources lead to stagflation. Importing
countries will do everything in their power
to secure access to natural resources.
A military standoff would likely trigger
heightened risk aversion and an increase
in the risk premium.
6
Few terrorist attacks with statistical significance
40%
Colombia
30%
20%
10%
0%
1-day
Note: Share of terrorist attacks that led to statistically significant negative equity returns on the day of
the attack and after 6 and 11 days.
Source: Carrera and Musslo (2009)
National strategic ambitions. Initially,
when countries build new strategic
capabilities or attempt to exert influence
over others, we see a flight to safety.
Eventually, however, these developments
can lead to armed conflict. Geopolitical
events that involve strategic ambitions
tend to be negative for growth and fairly
neutral for inflation, assuming they do
not escalate into a multicountry war or
nuclear attack. The typical reaction in
these more muted scenarios, especially if
the potential fallout is large but the event
is short-lived, is to park money in safe
haven assets, which currently include
US Treasuries and gold. However, other
strategic pursuits, such as a full-scale
nuclear attack or sustained armed conflict,
could lead to extreme economic outcomes,
such as hyperinflation or deflation.
India Spain Thailand UK US
6-day 11-day
Non-state ideological ambitions.
Fundamentalist views and ideological
ambitions become geopolitical events
when they erupt in the form of terrorist
attacks. According to a recent study,
terrorist attacks usually only have a
fleeting impact on equity returns. Only a
small share of the 1,312 recorded attacks
in 2001 through 2006 had a statistically
significant negative effect on stock prices
on that day, and this usually faded soon
thereafter. Unsurprisingly, the magnitude
of the effect was substantial for
statistically significant events, and only the
9/11 attacks had a structural impact on
equity market fundamentals. If future
terrorist incidents undermine vital infra-
structure, such as a nuclear or biological
attack, they will likely have a persistent
and damaging effect on equities.
Range of negative impact from terrorist attacks can be quite large Income inequality. Protectionism is
a greater risk when labor markets are
1-day 6-day 11-day weak, as is the case now. Trade wars and
currency crises are usually the by-products
Min Max Min Max Min Max of income inequality among countries
Colombia -1.0 -12.4 -3.0 -24.8 -6.0 -14.2
and the consequences are usually
deflationary, as reduced trade flows
India -1.4 -6.0 -2.6 -5.0 -2.4 -5.8 would likely depress overall economic
activity. They also carry the potential for
Spain -1.5 -4.1 -6.4 -8.4 -8.3 -9.2 a wider escalation of conflict. At its most
Thailand -1.9 -16.8 -5.2 -11.1 -3.8 -16.1 basic level, the present crisis within the
EMU stems from income inequality and
UK -1.6 -1.9 -1.7 -1.7 -3.8 -3.8 differences in competitiveness among
member states. Recall that the EMU
US -1.3 -3.0 -4.0 -5.1 na na
developed as an effort to reduce the
potential for war within Europe after the
Note: Share of terrorist attacks that led to statistically significant negative equity returns on the day of devastation wrought during the twentieth
the attack and after 6 and 11 days. century, hence the importance attached
Source: Carrera and Musslo (2009) to maintaining the currency union.

Geopolitical Events Impact on Assets

Sources of Stress Geopolitical Events Specific Shock or Trigger Asset Consequences

• Resource supply shock • Russian energy embargo Stagflation

• Oil supply disruption • Government bond prices down
• Stocks mixed
Natural • Gold up
Resource • Commodities mixed
Needs
• Conflict over resources • Standoff over resource access between China and India Flight to safety
• Coup in Saudi Arabia • Government bond prices up
• Disputed water access rights • Stocks down

• Access to nuclear weapons • Iran/North Korea develop nuclear capabilities • Gold up

•Border/territory dispute • Taiwan/China escalation • Reserve currency up
National • Commodities mixed
Strategic
Ambitions • Sustained global war* • Broad escalation of military conflict Depression/deflation
• Nuclear attack • Use of nuclear first-strike capabilities • Government bond prices mixed
• Stocks down
• Gold mixed
Non-State • Terrorist attack (systemic) • Nuclear or biological attack
• Commodities down
Ideological
Ambitions OR

• Trade protectionism • US/China trade war Hyperinflation

Income • Currency crisis • Euro collapse • Paper assets down
Inequality
• US dollar collapse • Hard assets up

*Historical experience shows that hyperinflation results after sustained global wars.
Source: UBS WMR

7
Incorporating geopolitics into
an investment process
All too often, investors spend their time
incorporating quantifiable variables
into their investment process when
deciding which assets to own and in
which proportion. Typically, geopolitical
risk only enters the discussion as a sort
of catch-all caveat to things that can go
wrong. Rarely do investors reflect upon
geopolitical risk at the outset of the
investment process, along with all the
other quantifiable variables, to create a
view of the investment environment and
the associated level of risk that is priced
into financial markets.
A look at recent hot spots
In our view, geopolitical risk is on the rise amid high rates of unemployment,
increased government involvement in economic matters and widespread income
inequality. In addition to political unrest in the Middle East and North Africa, the
past year has seen its fair share of geopolitical hot spots emerge:
• Tensions on the Korean peninsula escalated when North Korea allegedly
torpedoed a South Korean warship.
• An attempted car bombing in New York’s Times Square was defused without
casualty but raised fresh concerns about the risks of terrorism.
• The future of the Euro was called into question amid mounting sovereign debt
pressures among member states.
• The US and China faced off over currency practices and also engaged in a larger
number of trade disputes.

The difficulty for investors is that it is

not easy to distinguish between noise
and an unfolding game-changing event.
Full-blown geopolitical conflicts can take
a while to play out. At each stage of the
investment process, it is not necessarily
clear whether further escalation is
avoidable, a peaceful resolution is
possible or outright confrontation
will result.
An outburst of geopolitical conflict will
typically prove negative for stocks and,
with the exception of a natural resource
supply shock and an international
liquidation of US Treasury securities,
would tend to support government bond
prices. Heightened geopolitical risk would
also imply periodic and significant bouts
of weakness in stocks, and perhaps even
episodes of sustained high volatility.
That said, our view that geopolitical risk
will increase over the coming decade
does not preclude a material advance in
stocks, nor does it imply that a portfolio
should be heavily skewed in the direction
of government bonds. It should simply
moderate an otherwise overtly optimistic
outlook for assets such as stocks,
when the macroeconomic outlook and
valuations are both favorable.
Investors need to remain aware of the
critical and ever changing geopolitical
landscape, understand how these shocks
can impact various assets within a portfolio
and regard geopolitics as central to the
investment decision, rather than simply as
an afterthought. We believe that investors
are better served by following a more
pragmatic approach based on diversification
across countries and assets, ongoing risk
assessment, actively managing exposure
and tactical investing.
For more detailed information on this
subject, please see the complete UBS
research focus entitled “Geopolitics:
The Blind Side,” dated June 2010.

8
FOCUS ON CLIENTS
Integrating Solutions to Meet
Complex Client Needs
Today’s investors and businesses are looking for more than just a wide range of financial services and solutions.
Central to their needs are how those services and solutions can be personalized to help build a company or
find personal financial security. Often professional endeavors can impact personal financial needs and goals,
and vice versa. But these needs and the solutions that satisfy them are vastly different. Integrating wealth
management, investment banking and asset management solutions can provide a holistic approach to
addressing business as well as personal financial ambitions.
Case in Point: A private client is
looking to generate liquidity by
selling a privately held business.
Affluent investors are often the owners
of successful businesses and the day
may come when they look to plan an
exit strategy. The advice of an investment
banker can help position their business,
perhaps well in advance of the IPO or
sale, to capture the best opportunity and
execute a smooth transaction. Once the
deal is closed, a personal financial advisor
can help manage the newly liquid assets,
from estate planning and charitable
giving to monetizing a potentially
concentrated position.
Case in Point: A corporation needs
to shore up an under-funded pension
while meeting the daily financial
needs of the business.
All too often, public-company pension
plans find themselves under-funded and
the plan liability close to or exceeding
the company market cap. Proper risk
management is a Chief Financial Officer-
level concern in addition to addressing
the daily financial needs of the business.
Prudent investment management and
fiduciary oversight are critical in today’s
economic and regulatory environments.
An asset manager can deliver a high level
of accountability, reduced risk, diversified
sources of return, and strategic and
tactical asset allocation solutions.
Case in Point: The sale of a business
results in changes to the company
retirement plan, as well as the
financial status of key executives.
The sale of a company for cash and stock
leaves many senior executives flush with
newly acquired liquidity. In addition, the
corporate retirement plan may need
changes to its plan design, investment
options and compliance procedures.
Bringing in diverse professionals with
the appropriate skill sets can help solve
the company’s needs as well as those
of its key executives.
Big company resources,
boutique-level attention
While the benefits of integration are
clear, achieving them can be challenging,
even for the most sophisticated of
organizations: big companies with the
resources to touch diverse client needs
can be hard to navigate. UBS has created
a centralized framework to integrate
resources for our clients and their advisors
and bankers. This allows us to deliver
the extensive resources of a world-class
financial services firm with the personal
and focused approach of a boutique firm.
Clients from all UBS business areas can
access our full range of banking, asset
management and wealth management
expertise. Clients work with specialists
who deliver timely and actionable insights
and opportunities. These specialists
work in tandem to ensure a smooth
client experience and share insights and
coordinate services and solutions, where
appropriate. Even if you are not ready
to move forward with a strategy today,
our advisors and bankers will advise and
guide you, positioning you to capitalize
on opportunity when those important
milestones arise.
How can we better serve
your needs?
The financial advisors at Wealth
Management Americas deliver a fully
integrated set of products and services
to address the needs of affluent
individuals and families. Our size and
strength enable us to develop and
execute unique wealth management
strategies drawn from a substantial
suite of offerings, including investing,
financing, banking as well as services
for your business.
One of the world’s premier advisory
and securities businesses, the
Investment Bank provides expert
advice, innovative solutions, out-
standing execution and comprehensive
access to the world’s capital markets.
Whether our clients require investment
banking, equities, fixed income or
foreign exchange services, our
intelligence, market insight and
global coverage can help capture
opportunities and manage risk.
Global Asset Management offers
investment capabilities and investment
styles across all major traditional and
alternative asset classes. These include
equity, fixed income, currency, hedge
fund, real estate and infrastructure
investment capabilities that can also
be combined in multi-asset strategies.
9
Evolving Defined Contribution Retirement
Plan Design: New Ways to Manage 401(k) Plans
Interview with Drew Carrington,
Managing Director and Head of
the Defined Contribution and
Retirement Solutions Group at
UBS Global Asset Management.
Increasingly for corporations,
defined contribution (DC)
plans are the primary—even
exclusive—retirement benefit
for their employees. These plans
are commonly referred to as
401(k) plans. As traditional
defined benefit (DB) pension
plans recede from the corporate
landscape, DC plans are evolving
to bring more DB features to
participants. Drew Carrington
describes the way forward for
sponsors and participants in the
defined contribution world.
What has caused the shift away
from defined benefit plans?
There are really two reasons. First, as a
wave of regulatory and accounting changes
were introduced, the costs of sponsoring
a DB plan became more transparently
sensitive to market conditions: companies
were required to reflect changes in value
of their liabilities based on interest rate
changes, to fund that liability more quickly,
and to reduce smoothing periods, making
the plans more volatile for the corporate
balance sheet, income statement and
cash flow. DC plans shift those risks and
volatility to participants.
10
The other is that the mobility of today’s
workforce reduces the perceived value of
DB plans as an employee retention tool
because they tend to benefit workers
who are long tenured. Further, the actual
“benefit” of a DB plan is viewed as
complicated and participants may not
value it appropriately. In comparison, the
portability and clarity of DC plans are
attractive attributes for participants.
The Pension Protection Act of
2006 introduced rules to help DC
plans better meet the needs of
sponsors and employees. Can
you talk about the impact of
these rules, and what other
changes we might expect?
Regulation often gets a bad name for
constraining commerce. In the case of
DC plans it has actually been the enabler
of better practices. DC plans were not
designed as retirement plans and, thus,
haven’t always addressed the retirement
issues that people face. In fact, many
employees did not take advantage of
their DC plans—they didn’t enroll, or
didn’t save enough, or invested sub-
optimally. The Pension Protection Act
opened the door for important plan
design changes—such as automatic
enrollment, automatic escalation and
default investment options—designed to
improve the probability that employees
will fully benefit from their DC plan.
For example, the ability to automatically
enroll a new employee harnesses the
power of inertia—and puts employees
on the right track, right from the start.
No longer does a 401(k) plan simply
offer a line-up of mutual funds where
Many of the changes
we are seeing are
effectively bringing the
best of defined benefit
plans to the defined
contribution market.
participants have to build their own
portfolios. Plan sponsors can now
provide their full participant base with a
well-constructed starter kit with highly
diversified investments built with best-
in-class tools and techniques in a simple
and straightforward way. A sponsor can
implement automatic escalation, which
regularly increases the contribution rate
over time, as well as default options,
which can help ensure diversification.
Interestingly, up to now, regulatory
changes were all about accumulation—
building assets. Today the focus is on
how savings can be turned into income
during retirement. Right now there is
a bill in front of Congress, the Lifetime
Income Disclosure Act, which will require
plan sponsors to tell participants, in
addition to how much savings they have
accumulated, the amount of monthly
income they can expect that balance to
provide throughout retirement—similar
to how your Social Security statement
estimates benefits based on your current
income. The conversation is being
reframed, moving away from a savings
balance toward an income flow. This is
very similar to how DB pension plans are
understood and appreciated.
Is the recent surge in the
popularity and design of target
date funds directly connected
to these changes?
Absolutely. Target date funds are the most
widely used default investment options.
As they are maturing, we are starting
to see some important enhancements,
particularly within very large DC plans. The
evolution of target date funds parallels the
changes in regulation. They are the natural
strategies for a plan sponsor and participant
to employ holistic investment thinking.
The first generation of these funds came
about prior to default approaches—an
individual had to select them from a list of
investment choices. So they were generally
limited to mutual funds, which were very
familiar to participants, and to simple
portfolio construction for fear they would

be too complex for the average participant
to understand. With default options, it
is now the plan sponsor who selects the
strategies and they have begun to demand
improved investment thinking and more
cost-sensitive vehicles. Sponsors are looking
to build target date solutions that are
relevant to their particular workforce,
that are institutionally priced, and that are
more diversified. By moving away from
mutual funds to institutional collective
funds and separate accounts, the
sponsor can gain economies of scale in
pricing, delivering lower costs and better
investment results to participants.
Perhaps most important is how the thinking
behind asset class selections is changing.
Sponsors are looking for solutions that are
appropriate for their employee demo-
graphics. For example, if the company is
in a volatile industry, less risk in the asset
allocation of the default option combined
with automatic escalation may balance
less stable inputs such as job security,
compensation and company match.
They are looking for broader diversification.
Originally, target date funds just held
domestic equity and bonds, maybe with
some international equity thrown in. Now
we are seeing a more modern institutional
approach, including, for example, emerging
market debt and equity or REITs and high
yield bonds. Some sponsors are considering
Treasury Inflation Protected Securities (TIPS),
or other inflation-hedging asset classes
(such as commodities) or alternative asset
classes for their default offering. These asset
categories may not make sense as stand-
alone options on a line-up where participants
could select them directly, but they are
appropriate for a properly structured, pro-
fessionally managed institutional portfolio.
Sponsors are also revisiting the glide
path to better address all the little, but
important, decisions along the way. How
much should we invest in this asset class?
Do we make strategic or tactical asset
allocation moves? How rapidly should
allocation changes be made along the
path? Is the glide path linear or curved as
you near retirement? As employees near
Sponsors and regulators are beginning
to focus on lifetime income designs
that can ensure that participants will
have the income they need late in life.
retirement, what is the most appropriate
risk-free asset? Which securities best
protect against inflation to help retirees
maintain their standard of living?
It sounds like an attempt to bring
the best of DB to DC plans. What
remains to be done?
One of the things DB plans do well that
we still need to work on is the payout in
retirement. The risk that your savings will
not generate enough income in retirement
to last your entire life is referred to as
longevity risk. Longevity risk is a significant
issue that is being tackled around the
world, with examples being Australia’s
industry pooled super-annuation funds
and New Zealand‘s KiwiSaver funds.
The next step is helping participants turn
their 401(k) plan balance into a “paycheck”
during retirement. This might include hybrid
investment solutions that incorporate
insurance concepts, which would not only
suggest what a participant’s income may
be in retirement but would actually provide
some peace of mind about the specific
income they would receive.
The conundrum for plan sponsors
often is, to what extent should and can
we educate employees on their post-
retirement decisions? You have to realize
that, thanks to target date funds, default
options and automatic features, we are
raising a generation of participants who
may have never made a decision about
their plan. What constitutes education
and advice? Employers want to know
that the assistance they provide won’t
trigger some new fiduciary responsibility.
So the industry leaders and regulators
are engaging in discussions about the
definition of fiduciary and advice.
It sounds very complicated. How
do plan sponsors and participants
stay informed?
Let’s start with the participant. For them
it is actually less complicated; after all,
most key decisions are automated. We
spent 20 years trying to turn every 401(k)
eligible participant into their own Chief
Investment Officer. As we all know, the
results were mediocre. Prior to automatic
enrollment, participation rates were
typically only 70% of eligible employees:
under auto-designs, we are seeing 95%
participation rates. Participant portfolios
now contain eight to 10 asset classes
(in their default option), where before
one or two funds was typical.
For sponsors, the reverse has happened.
Things are definitely more complex.
Sponsors are looking for guidance in
helping their participants. We are seeing
the finance department, which used to
be involved in DB decisions, cooperating
with human resource professionals to
make DC plan decisions. And we are
seeing the industry step up to bring their
best thinking to the sponsor.
What are the primary catalysts
driving DC plan discussions?
Right now, much is being said and written
about the historical shortcomings of DC
plans. There is not yet enough emphasis
on the strengths and possibilities of DC
plans to provide secure retirements.
There are opportunities to use behavioral
finance to reframe the conversation to
encourage better solutions and better
decisions, and therefore, better outcomes.
It has only been in the last five years that
we have begun to fully take advantage of
automation to turn DC plans into proper
retirement plans—and the best that DC
plans can do is still in the future.
DC plans will play an increasingly larger
role in the retirement of Americans, and
delivering on their promise is important
and personally motivating. We are at
another crucial policy inflection point and
the industry needs to proactively move
things forward with policy makers because
there is always the danger of counter-
productive regulations. I believe we need
to move quickly to continue to embed
best practices in DC plans as broadly as
possible. As long as we remain focused
on improving retirement outcomes for
participants, everybody wins. 11
Investing in US Energy: De-carbonization
Moves Forward, But Will It Move Markets?
Despite talk of clean energy and energy independence, energy use in
the US has changed very little in the past four decades. Comparing
total energy consumed in 1970 with 2010:
• Fossil fuels declined from 87% to 84%.
• Nuclear power now provides 9% of total energy.
• Oil imports have risen from 11% to 21%.
It is also worth noting that we have seen ongoing efficiency gains—it
now takes about half as much energy to generate a dollar of GDP as
Jon Anda is UBS’s Vice
Chairman and Head of
it did in 1970.
Environmental Markets.

Unfortunately, with the policies that are Moving to de-carbonization could significantly impact portfolios
in place today, change will be limited.
The US Energy Information Administration Compound Annual
2035 Growth Rate
(EIA) forecasts that fossil fuels will provide
82%, and oil imports 17%, of total energy Current Policies 450ppm Policy % Change 450ppm vs 2008 Actual
consumption in 2035. Further, this “no Fossil Fuel 72 48 -33% -1.7% p.a.
new policy” scenario forecasts more
incremental energy from natural gas + Non-Fossil 22 35 +60% +3.6% p.a.
coal than from renewables + biomass.
Total Demand 94 83 -12% -0.5% p.a.
Hardly the clean energy revolution one
might imagine.
International Energy Agency (IEA) data (in quadrillion BTU’s, ”quads”) from World Energy Outlook,
November 2010.
This brief history sheds some light on
how investors in US energy stocks
fared over the past five years and how The energy landscape under of any policy shift and consider specific
challenging cleantech investment has climate policy change technologies and companies that might
been in the absence of national climate be best positioned for de-carbonization
Policies that de-carbonize the energy
and energy policy. policies. Success in picking non-fossil
system would have a profound impact for
winners (such as wind, solar, nuclear,
investors, particularly in light of the large
efficiency, biofuels and clean coal) is
weighting of fossil fuel securities in most
Energy Sector Performance not just a function of the cheapest
portfolios. At present, sectors directly
Total return 6/27/06 through 3/10/11 technology, but also of policy design,
related to fossil fuel production comprise
80% financing and liability.
62% 12.7% of the S&P 500® index. Consider
60% what could happen if the US moved from Policy adoption could kick off a
40% current policies to those consistent with
21% 23% 16% rebalancing of energy portfolios fairly
20% limits of 450 parts per million (ppm) in quickly. Several conclusions can be drawn
0% atmospheric CO2 concentration and a from a cursory look at a single possible
-20%
2ºC increase in temperature (from pre- scenario. Remember this is just one
-40%
-45% industrial). It is worth noting that although projection in an industry that is under-
-60%
Oil E&P Coal Electric S&P 500 Cleantech the Copenhagen and Cancun UNFCCC going significant technological change.
*S&P 500® Index Groups from Bloomberg (6/27/05
conferences did not achieve firm emission
reductions, 450ppm and 2°C as targets • Coal would decline significantly (unless
to date, total return: S5OILP, S5CCSF, S5ELUT,
and PBW Cleantech ETF) for climate stability are accepted by all clean coal develops more rapidly than
major countries. anticipated).
• Oil would suffer less but would be
Given the magnitude of these potential
pressured by biofuels, PEVs and
changes, investors need to be cognizant
12 efficient vehicles.
• Natural gas (about half the emissions of
coal in electricity generation) will likely
Policies that de-carbonize the energy system would
grow over the next decade—before have a profound impact for investors, particularly
ultimately losing some market share
to zero-emission sources. in light of the large weighting of fossil fuel securities
• Nuclear would expand, particularly if in most portfolios.
technologies such as modular reactors
with fuel recycling find public acceptance.
• Biofuels and renewables will grow Rebalancing portfolios for policy change
significantly off a small base (and
15
could be much bigger with technology
10.9
breakthroughs). 10

Interestingly for investors, the reduction in 5 3.3

4.8 5.0
coal (which has the highest CO2 intensity)
0.1
is almost fully covered by efficiency gains. 0
Some of this will be realized regardless
of policy since the cost of early CO2 -5 -4.4
mitigation by this means is quite low. The -8.5
-10
smart grid, smart meters, batteries, LED -11.2
bulbs, hybrid vehicles, window coatings, -15
insulation, and combined heat and power Coal Oil Gas Hydro Nuclear Renewable Bio-waste Efficiency
are just a few efficiency technologies that
merit consideration by investors today. Source: IEA World Energy Outlook 2010 (difference in 2035 quads)

Focus on the US electric power sector
The largest sector affected by EPA regulation is electric power
(including tighter limits on hazardous air pollutants). Further,
the President’s “80% clean power by 2035” is targeted
exclusively at electric power.1 It is, therefore, worth outlining
key challenges and opportunities for that sector.
US electricity is a legacy system that worked fine in a century
when energy was the thing to waste in the pursuit of growth.
But since the end of the 20th century, the thing to waste
has been data (gathering, processing and transmitting).
The electricity sector needs to embrace data in the form of
smart grid—while also managing CO2 pollution costs that
won’t be zero for much longer. Addressing legacy industry
characteristics, like the four listed below, may bring as much
opportunity as challenge (EIA 2008 data, rounded):
• Inefficient: Of our 100 quads of consumed primary energy,
40 provide the four trillion kilowatt hours of electricity we
use. Of this, electricity-related losses, such as wasted steam
heat and line losses, account for 27—meaning only 13 quads
are actually delivered as electricity.
Note, however, that an 80% reduction by 2035 in CO2 from electric power, assuming full carbon accounting for natural gas if included in a low
1
• Carbon-intensive: The sector emits 186 million tons of CO2
per quad of delivered energy, while non-electricity sectors
emit just 58. Cap and trade is expected to have its biggest
impact on utilities for this reason. Though recent rulings,
notably by FERC, are helping to level the playing field—
utilities still earn more selling clean kilowatts than reducing
kilowatt hours through efficiency. As a result, CO2 Capture
and Storage (CCS) and nuclear are important to the industry.
• Under-utilized: We have just under a thousand gigawatts
of generating capacity that could provide more than double
the kilowatt hours we currently use. Less than a third of that
capacity is coal-fired.
• Economically small: Since we spend roughly 3% of GDP on
electricity, if de-carbonizing increased this cost by half, GDP
in, say 2035 might be 1.5% below what it would have been
otherwise (i.e., a few basis points reduction in GDP growth)
—arguably far cheaper than the risk-adjusted economic
damage from climate change.
Even from these brief overview points, investors can envision
an electric power industry that could be far more dynamic than
it has been historically.

carbon energy standard for utilities, would achieve roughly a 25% reduction in total US greenhouse gas emissions by 2035 relative to 2008 levels.
This modest reduction, of course, comes from the proposals’ exclusion of non-electric energy and non-energy greenhouse gases. 13
Making a bet on policy change
Shifting portfolio allocations from
traditional energy to new technologies
is highly dependent on credible long-
term energy policies. To date, public
market investment in anticipation of
policy has been a risky and money-losing
endeavor. Nonetheless, understanding
the policy context can help guide future
re-weightings.
To what degree can investors bet that
de-carbonization policy is either likely
or unlikely given current facts and
circumstances? To help answer this
question, there are a few conclusions
an investor might draw from history.
(For further insight, please explore the
Climate and Energy Timeline.)
1. The path of scientific conclusions on
greenhouse gas warming of the planet
is long and consistent.
2. Policy-driven mitigation of CO2
emissions, after several decades of
consideration, is still on the table.
3. EPA regulation of CO2, though less
efficient than a cap or carbon tax, is
now four years in the works.
4. While “80% Clean Power by 2035”
(or other legislation) could replace it,
EPA is the near term de-carbonization
policy mechanism.
5. International pressure (competitive or
geopolitical) may ultimately impact
US policy decisions.
6. Cap and trade, ironically, is a Republican
solution that is now supported mostly
by Democrats (and may yet be revived
as a market-friendly alternative to EPA
plant-by-plant regulation).
Climate policy is about
risk management
There has been no shortage of noise and
emotion around whether greenhouse gas
emissions need to be reduced at all and, if
so, over what time frame and by whom.
At UBS, we think of potential damages
from climate change as analogous to the
risk management challenges we face in
the securities business.
The financial crisis exposed understated
fat-tail risks and ignored feedback
loops—and today serves as a useful
analogy to climate policy analytics.
• Climate change has the same kind of
fat-tailed risk distribution, with the
exception that it is largely irreversible
(for centuries). This irreversibility makes
decisions on climate policy critically
important for future generations.
• Regardless of how much we study the
science, the shape of anthropogenic
climate risk isn’t likely to change.
And the odds are decidedly against
us. Feedback loops (such as melting
permafrost and ice sheets) make it so.
• The biggest climate hoax is denying
the need to hedge the risk we already
perceive. Thanks to the financial crisis,
the notion of public policy as a hedge
against an uncertain future risk is no
longer foreign.
Proceeding immediately with climate
policy and making adjustments (or
dynamically hedging) over time keeps
open a valuable option on the asset of
a stable climate.

Climate and energy timeline—science, economics, global policy and EPA regulation

1827 1896 1954 1956 1958 1960 1988 1990 1997 2003
Fourier Arrhenius Samuelson: if Plass predicts Kealing begins Coase UN IPCC President Kyoto McCain-
calculates that theorizes that price=marginal 1900 to measuring theorem sets formed (first H. W. Bush Protocol Lieberman
the earth’s the level of cost and 2000: 1ºC atmospheric CO2 an economic IPCC report amended adopted (never bill brought
temperature is carbon dioxide in marginal warmer, 30% concentrations framework for on climate the Clean Air presented for a to the Senate
warmer than the atmosphere cost=0, then more CO2 (for Scripps) “avoiding the change Act of 1970, vote in the US floor proposing
the distance creates a freeriding (i.e., and climate at Mauna Loa, more serious released authorizing cap Senate). economy-wide
from the sun greenhouse pollution) is sensitivity Hawaii. harm” in free in1990). and trade for cap and trade.
would indicate. effect. rational. of 3.6ºC. goods. acid rain.

14
 Basic conclusions for all investors
Climate and energy are complicated and
nuanced topics. However, there are a
few rational conclusions for all investors,
regardless of bias and belief.
• Investing in clean technology without
a national cap or tax on carbon needs
to be done cautiously. EPA regulation is
likely to be the biggest factor in energy
transformation over the near term.
Additionally, state regulations, voluntary
actions, cheap efficiency, or the trend
towards natural gas over coal are all
potential alpha generators for investors,
even without national policy.
• A stable climate and clean energy have
been in the works for many decades.
The science has very deep roots; what
grows out of those roots, whether
in carbon taxes or cleantech, is more
likely to survive and flourish than to
die off. Investors should recognize that
defaulting to a full-weighting of fossil
fuel stocks, without exposure to clean
energy, could well be a losing strategy
over the medium-to-long-term.
UBS looks to help clients in this dynamic
area for years to come. Our research,
advisory services and investment products
will be increasingly focused on helping
our clients profit from clean energy and
a sustainable future.

2007 2007 2007 2009 2010 2010 2011 2011 2011 2012
UN IPCC USCAP: US Supreme ACES, the APA, the NASA released EPA begins President EPA will EPA will
says 1900 to corporations, Court, in Waxman- Kerry-Lieberman that the regulation of Obama’s propose issue final
2000: 0.7º across an array Massachusetts Markey economy-wide 12-month CO2 for new State of the performance performance
warmer, 37% of industries, vs. EPA, defines economy-wide cap and trade running sources under Union proposes standards standards
more CO2 advocate CO2 as an air cap and trade bill, fails to get global mean the Clean Air legislation for for power for power
and climate economy-wide pollutant under bill, passes in traction in the temperature Act (January 1, 80% clean plants (July) plants (May)
sensitivity cap and trade. the Clean Air Act. the US House. US Senate. reached a 2011). electric power and refineries and refineries
of 2–4.5º. record in 2010. by 2035. (December). (November).

15
Bringing Alive a Commitment
to High Performance
Formula 1™ has roots in the European Grand Prix Motor™ Racing of the Unmatched client experiences
1920s and 1930s. The first FIA Formula One World Drivers’ Championship™ A Formula 1 season consists of a series
was held in 1950. Today, it is the highest class of single-seater auto racing. of races, known as Grand Prix, held on
Sanctioned by the Fédération Internationale de l’Automobile (FIA), it is purpose-built circuits and public roads.
The results of each race are combined
the most advanced and most competitive of the FIA’s racing formulae to determine two annual World
(thus the use of the term “formula” in its name). Championships, one for drivers and one
for constructors. This year, the FORMULA 1
GRAND PRIX DU CANADA 2011 will
Formula 1 travels to 19 countries, staging A shared passion to perfect be held in Montreal in June and the
19 races with drivers from 15 different what is good FORMULA 1 GRANDE PRÊMIO DO BRASIL
nationalities. The sport enjoys a massive
In the most technologically advanced of 2011 in São Paulo in November. We are
following; in 2010 it attracted more than
motor sports, Formula 1 drivers strive for a also pleased to announce that the
527 million viewers in 187 countries—
perfection that is measured in hundredths FORMULA 1 UNITED STATES GRAND PRIX
making it the most-watched annual sport
of seconds. The attitude that drives is returning in 2012, hosted in Austin, Texas.
in the world.
Formula 1 teams aligns with the focus
at UBS: to continually create and identify Formula 1 offers one of the most exciting
Recognizing that Formula 1 is one of the
innovative solutions to achieve our client entertainment opportunities in
world’s most popular and prestigious
clients’ financial goals. This partnership sports. The UBS hospitality Paddock Club
annual sporting series, UBS engaged in
with Formula 1 underscores these shared enables guests to be part of the action.
a sponsorship program with the organ-
values and brings alive our commitment Seated above team garages, clients enjoy
ization beginning in 2010. Formula 1
to high performance and success a direct view of tires being changed
offers an exceptional platform that is
through teamwork. during qualifying rounds and races.
aligned with the UBS brand, providing
Between events, clients can walk around
benefits for clients and delivering a local,
the pit for a behind-the-scenes look at
as well as a global, presence.
the cars, drivers and their team.

16
A global reach with
local relevance
As one of the most prestigious sporting
events in the world, a select number
of leading blue-chip corporations
benefit from associating themselves
with Formula 1. This program gives the
UBS brand a stature and visibility that is
hard to achieve elsewhere. UBS enjoys
guaranteed brand exposure during
all races, so whether fans are at the
racetrack or watching on television, UBS
is visible at a time when they are engaged
and interested. As a Global Partner of
Formula 1, UBS is in a unique position to
demonstrate the strength of a global firm
in a local and personally relevant way.
Did you know…?
• A Formula 1 car is made up of
80,000 components. If it were
assembled 99.9% correctly, it would
start the race with 80 things wrong.
• A Formula 1 car can go from zero to
100 mph (160 km/h) and back in
four seconds.
• When a driver hits the brakes
he experiences retardation or
deceleration comparable to a
regular car driving through a brick
wall at 186 mph (300 km/h).
• An average Formula 1 driver loses
about eight pounds (4 kgs) of
weight after just one race due to
prolonged exposure to high G
forces and temperatures.
• Formula 1 refuelers supply over
three gallons (12 liters) of fuel per
second. This means it would take
just four seconds to fill the tank of
an average family car.

“UBS is a global company where performance, teamwork and

superior execution are integral to their clients’ success. These
values complement those of Formula 1 and I’m delighted to
welcome UBS to Formula 1.”
— Bernie Ecclestone, Group CEO of Formula 1

In 2011, races will be

held in Montreal (June)
and Brazil (November).
2012 marks the return of
the FORMULA ONE UNITED
STATES GRAND PRIX, to be
held in Austin, Texas.

17
DEAL SPOTLIGHT

Creating a Mining Equipment Company

With Unmatched Product Range
UBS has acted as a financial advisor to Bucyrus International Inc., one of the world’s largest manufacturers
of mining machinery, on its $8.6 billion sale to Caterpillar Inc. Bucyrus shareholders will receive $92 per
share, representing a 32% premium to Bucyrus’ closing price of $69.62 on 11/12/10 and a 16% premium
to its all-time high.

The acquisition positions Caterpillar as Bucyrus share price performance since IPO [07/22/20041]
a preeminent global mining equipment
Share Volume
company with an unmatched product Price ($) (000s)
range, one of Caterpillar’s key 100 40,000
strategic initiatives. Caterpillar Offer: $92.00 per share
• Purchasing US-based Bucyrus enables
Prem. to All-Time High 15.7%
Caterpillar to expand its leadership
80 Prem. to LTM High 21.2%
in the industry by offering the widest
Prem. to LTM Low 104.3% 30,000
range of mining equipment of any
global manufacturer.
• Caterpillar may also benefit from 60
Bucyrus’ reputation with coal miners in
China where it has a strong presence. 20,000

• Caterpillar’s financing business will 40

help clients purchase Bucyrus products
cheaper and easier than previously.
10,000
• The deal provides miners with one- 20
stop shopping, allowing them to
simplify their supply chain for improved
scale and cost efficiencies and enjoy
improved service and support. 0 0
2004 2005 2006 2007 2008 2009 2010
Volume (000s) Share Price ($)

Source: Company press release. Company investor presentation, Company filings, and Bloomberg
and FactSet as of 11/12/2010.
1
Share prices and volume adjusted to reflect the two-for-one split of Bucyrus’ common stock on
05/27/2008.

18
Mining equipment

Surface Mining Equipment Underground Mining Equipment

Surface Belt Systems

Dozers and Graders

Continuous Miners
Trucks and Loaders
Hydraulic Shovels

Highwall Miners

Diesel Transport
Wheel Loaders

Mining Trucks2

Roof Supports

Armored Face
Rope Shovels
Surface Drills

Belt Systems

Conveyors
Draglines

Shearers

Drills
Company
Bucyrus

Caterpillar
Joy Global
Komatsu

Hitachi

Liebherr

Bucyrus participates in the electric drive mining truck market; Caterpillar participates in the mechanical drive mining truck market.
2

Caterpillar estimates more than $400

million in annual synergies by 2015
from their combined financial strength
and complementary product offerings.

The Financial Times* reports that while

the purchase surprised the markets (the
deal was stitched together in just 60
days) it has generally been viewed in
the industry as a sensible long-term bet
on commodity markets and emerging
economies. Across the sector, capital
expenditures are forecasted to increase
by at least 15% next year. It is indicative
of booming commodities activity as
demand in China and other emerging
countries tightens mining markets from
copper to iron ore. The acquisition
positions Caterpillar to capitalize on
the robust long-term outlook for
commodities in emerging markets
which are improving infrastructure,
rapidly developing urban areas and
industrializing their economies.

*Financial Times, Tuesday, November 15, 2010 19

UBS IN THE COMMUNITY
The A-B-Cs of Literacy
A central theme of community
affairs at UBS is “empowerment
through education” and it is
present on many levels of our
organization. In one of our
longest standing programs,
Power Lunch, UBS employees
work one-on-one with low-
income students at nearby
elementary schools reading
aloud, sharing favorite stories
and talking about books. By
reading to children, we can
arouse their curiosity, reassure
and inspire them, and motivate
them to read by themselves.
20
One mentor, one child, Program evaluation has proved that
one book at a time Power Lunch students gain literacy skills,
Power Lunch is a lunchtime literacy and improve reading attitudes, increase
mentoring program proven to improve reading confidence and score higher
on standardized tests. Children listen
reading skills, and develop a love of
on a higher level than they read, and
reading. The simple equation—one
mentor, one child, one book at a listening to readers stimulates growth
time—works. The purpose of literature and understanding of vocabulary and
is to enrich and provide meaning in our language. Not only do these weekly
meetings foster strong academic and
lives and through Power Lunch we’re
hoping to create lifetime readers by social development in students, they
provide volunteers with a rewarding way
serving as role models.
to spend their lunch hour.
“My daughter loves Power Lunch and in the past
two months has jumped reading levels. This is
a child who struggled with reading in first and
second grade and now finds it a joy. When I asked
her to describe Power Lunch in one word, she
said enthusiastically, ‘Awesome!’ and we agree.”
– Mother of a Power Lunch student
 “T here is no better way to spend an hour than reading with a student.
The program has meant so much to everyone involved, bringing together
UBS colleagues at every level, and I am very proud to be a part of it.
“It truly makes my day to see the face of my reading buddy light up when
I walk through the door every Monday.” 
– Maryellen Frank, Executive Director, FX, Investment Bank, and a Power Lunch reader for 10 years

Employees volunteer on a weekly basis

to read with their assigned student,
or partner with another employee
volunteer to alternate weeks. Over the
past 11 years, over 1,400 UBS Americas
employees have read aloud to over
1,600 students—sharing nearly 50,000
volunteer hours. In addition to readers,
UBS has executives on the boards of our
partner organizations, participates in their
fundraising activities, funds scholarships
and grants, and hosts holiday parties
for the children. But it is the readers
who perhaps have the biggest and most
personal impact over time.

We also commend our partners—

Working in the Schools in Chicago, IL,
Everybody Wins! Foundation in New
York City, and Stamford Public Education
Foundation in Stamford, CT—for their Power Lunch gives at-risk children…
commitment to developing a love of • Greater enthusiasm for reading.
reading in children and showing them
the opportunities available through books • Increased confidence and ability to speak and read English.
and learning. We hope to continue to
• Encouragement and motivation to succeed in school.
make an impact.
• Support and friendship from their reading mentor.

• Greater appreciation for their own cultural backgrounds

through the sharing of their culture with their mentor.
21
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X3097 Q2 2011 UBS Americas Perspectives