UBS Absolute Return Bond

10 December 2007, 9:24 AM

KMG has been made aware this morning of a price adjustment to the UBS Absolute Return Bond Fund. If you hold the fund in your investment portfolio please note the following information and bear in mind that we are not yet in receipt of all the details. We will update this information as more becomes available.

UBS has revised the value of its Absolute Return Bond Fund downwards by 3%, with effect from this morning. This has resulted from the discovery of an error at UBS in the pricing mechanism for some of the fund's assets. It does not appear at this stage to represent a markdown in the actual value of the underlying assets.

Before this was discovered, KMG had already taken the decision to recommend our clients switch out of this fund, owing to difficulties posed by the so-called 'credit crunch'. You may already have been contacted by your KMG adviser in this regard and if not you will be contacted shortly. By way of summary, the fund holds a proportion of its assets in asset-backed securities – a common and acceptable practice for this type of fund. While only a very small amount have been even indirectly exposed to the US sub-prime market, the creeping nature of the credit crunch to affect even high quality asset-backed securities and the consequent potential for the fund to experience further headwinds has persuaded us of the merits of this advice.

The discovery of a pricing error in the fund is a most unfortunate event but apparently unrelated to the credit crunch itself. It also appears unrelated directly to the losses announced this morning by the investment banking arm of UBS, which is a separate part of the UBS group of companies. An internal investigation is currently under way at UBS to establish how such an error could have occurred.

KMG has already notified UBS of its intention to make a claim on behalf of our clients, for the inconvenience and concern this will cause. Although it is not possible to make a claim for poor fund performance per se, we believe UBS should make a goodwill payment in acknowledgment of their error. We will contact our clients affected by this situation if we have any success.

In the meantime, we will update this bulletin should further relevant information come to light, but should you wish to discuss the situation with your adviser please do not hesitate to contact your usual support team for further assistance.

KMG.