[MUSIC] Hello, everyone. My name is Heinz Schumacher and I'm the head of the Stock Selection Team within Investment Management of UBS Wealth Management. My focus today will be how we approach portfolio construction via bottom-up. But before we go into the details of my topic, it is important to get an understanding of the different approaches, meaning top down versus bottom up, and how to identify what securities or stocks to pick. The purpose of bottom up and top down approaches is the same, which is to identify what security or stocks to purchase. But the big question is where to start. Top down investing involves analyzing the big picture, meaning analyzing the broader economy, both domestic and international. These are factors such as GDP, interest rates, inflation, commodity prices, or exchange rates. Consequently, the investor then narrows his scope to analysis of different sectors and their characteristics. An example of a top down investor approach would be if you were to realize that he European Union might be in difficulties which might potentially affect European stocks. You furthermore consider that the growth in Asia is lowering and realize that US stocks should outperform in the near future. Accordingly you decide to invest in US stocks. Furthermore, you assume that future globalization, the electronic and software industry will stay strong and likely to outgrow other industries in the following years. Consequently, you might choose the best-performing stock in that sector, which might, for example, be Apple. Conversely, a bottom-up investor neglects the broad macro-economic analysis and focuses on merely on selecting a specific stock based on its individual qualities. Supporters of the bottom up approach simply seek fundamentally healthy companies regardless of sector or macroeconomic factors. What stocks to choose however can differ from investor to investor and include value, growth, or income investing. In the long run, we believe that the focus on companies with above average quality characteristics, and lower than average valuation levels, offer superior opportunities. Such companies usually also have a lower risk profile. On an aggregated basis this should result in a portfolio with good risk adjusted return characteristics. A bottom up approach requires a thorough research to get an understanding of the company's business and its products. Hence, it might be hard to know where to start. However a very useful tool is to use a stock screener to easily filter out the companies that match the criteria, and which you want to own, in a portfolio. Our work also starts with a quantitative stock screener, filtering out the stocks with below average risk within each of the ten NSCI sectors from the respective countries. Such sectors are, for example, information technology, consumer staples, telecommunications, or utilities, each of which behaves differently. Risk is measured by volatility, beta, and the open sets core. Beta indicates whether the investment is more or less volatile than the market. With a beta of less than one indicating that the investment is less volatile than the market. The is a formula which may be used to predict the probability that a company will go into bankruptcy within two years. The reason why you split the market into the ten sectors is that you want to have companies from all sectors to choose from when you ultimately construct the portfolio. Not splitting up the market could lead to a situation in which you would end up with undiversified and potentially heavily sector or country biased portfolio. Which you do not want to own. As the next step, we filter out stocks. Again, we think the ten individual sectors, with below average valuation levels, as measured by price earnings. Price sales, dividend yield. And economic value to abitiate. We are following the traditional valuation metrics, as for example, discounted cashflow models consume many assumptions over a long period of time which ultimately might prove not 100% correct. The valuation screen is then followed by quality criteria like below average that levels, superior return on equity figures, and historically above average earning stability. Momentum indicators, which measure the strength of price movement, are also the strength of operational trends within the company, round up the quantitative screening of the investment universe. Such indicators include a preferably positive 12 month price momentum relative to the respective markets, or positive margin trends within a company on an operational level. This leaves you, still, with a considerable number of companies to choose from to ultimately construct a portfolio. A qualitative assessment of a company is the next step, and an essential part of portfolio construction by the bottom up. In our work we regularly meet with company managements in order to discuss the strategic picture of the company. Which products does the company want to grow in which region? At what margin levels are typical questions? How does the company manage underperforming businesses? What cost cutting opportunities are there? How does the company renew their rate management? How shareholder friendly are they? This is just a small selection of discussion points of such meetings. Efficient consulting, leading analysts or reading financial statements are also essential elements to come to a thorough qualitative assessment of a company. When we ultimately construct a portfolio, we have narrowed down the investments universe to a selection of companies with the following criteria. Below average risk and valuation, above average quality, and some positive momentum, which in our belief should, over medium to long term horizon, result in a portfolio with a superior risk adjusted return profile. We construct the portfolio with the goal to have it broad and diversified and limit sector, country, or factor risks as much as possible. The majority of the risk comes from stock-specific risks. In our view, risk management is an essential part of constructing, and thereafter, managing a bottom up portfolio. On a portfolio level, we use metric such as tracking arrow, and beta ranges, and on a single stock level, we have made the observation that it is beneficial to have rules as well. Like monitoring stocks with strong deviations from markets. Such portfolio health checks are best executed on a daily basis. Now you see, that a lot of passion and discipline is involved in creating and managing portfolios with a bottom up approach. Thank you very much.
