COVER STORY: Tough Times at UBS

UBS’s asset management business has had a difficult few months. But there are signs of support from its critical Swiss investor base, finds Nick Fitzpatrick


Missing from the quarterly trading statement of UBS, the beleaguered Swiss bank, last month was a figure that Gabriel Herrera, the bank’s European asset management chief since 2000, would have been proud to show off.
He says that Swiss pension funds and corporate clients made a “significant” positive net contribution with new asset flows into UBS Global Asset Management in the first three months of the year.

UBS does not disclose net flows by country and so declined to reveal the figure, but the importance of the gain was acutely felt at UBS Global Asset Management, which had to announce Q1 outflows amounting to CHF16.5bn (£8.059bn) globally.

Although these losses are more likely to do with struggling investment performance, concerns about the sub-prime damage to its parent UBS group have been a key theme for the asset management division in meetings with investors lately.

Herrera takes some comfort, therefore, that the first-quarter figures suggest that Swiss clients are supporting UBS Global Asset Management during the most difficult phase of UBS’s history.

Herrera stresses also that all of the Swiss inflows came from external clients and not through the distribution arm of UBS bank.

“It takes courage for professional clients to convince their boards that we should get net new money now and it makes me proud that they have done so,” Herrera says. “Swiss clients are probably our most critical. UBS has about 30% of the market share in Switzerland,” he adds.

Of the two issues facing UBS Global Asset Management at the moment, Herrera feels that clients are more concerned with performance – which caused a management re-shuffle in recent months – and less concerned with the sub-prime issues that have affected UBS bank. 

It may not be fair at all that any of UBS bank’s failings in the sub-prime crisis should reflect on its in-house asset management division. But unfortunately for UBS Global Asset Management, reputational damage caused by sub-prime has shot much further through the whole UBS organisation than just its bank. 
A Swiss-based investment consultant, who did not want to be named, says: “We are asked by our customers, ‘Why should we let [UBS] look after our money when their bank cannot even look after its own money?”

A pension fund trustee, who also declined to be named, says: “UBS is a marvellous bank for institutional investors. They do a good job at excellent prices. But what they’ve done in their investment bank has bad implications. 

“In the past we had to be with them. Now that the brand is weakened, why should I be with them any longer?”

Herrera says: “Clients have reasons to make comments or feel some reservations about us at the moment. Just over the last few months I’ve seen hundreds of clients myself.” He adds: “Our brand and reputation a year ago was at a much higher level than it is now and it will take some time to restore both.”

Lack of confidence
Even if UBS Global Asset Management has found a degree of support from local investors, the Swiss are not exactly short of asset manager alternatives if they want them, and the consultant says that confidence in Switerland’s two main investment bank-owned asset managers – the other being Credit Suisse – is at an all-time low exactly because of their attachment to banks that played the sub-prime market so badly.

Prior to the sub-prime episode, UBS was positioning itself as a world-leading investment bank, while UBS Global Asset Management, headed by John Fraser, similarly sought to be a big international force. Yet this strategy for the asset management division is untouched by recent events, according to Herrera, who heads Middle East and Africa as well as Europe.

“Without downplaying the effect of sub-prime on UBS, I do not think that the group’s plans to have leading positions in investment banking and asset management have been set back that much.”

The UBS growth story, led by wealth management, is a strong one, says Herrera. “UBS is unique in that it participates in a global mega-trend, the growth in global wealth, from three different angles: investment banking, wealth management and asset management.”

Most recently UBS Global Asset Management tapped deeper into this mega-trend with an acquisition in France of Caisse Centrale de Réescompte Group in order to bulk up its market share which was below 1% in France before the deal. 

“France offers us tremendous growth opportunities. But it is not exactly an emerging market, so the way to deliver growth in a market like that is to be able to give good service for clients, which will then lead to greater volumes of business.”

Herrera says the acquisition represented the second stage in building UBS Global Asset Management’s presence in mainland Europe. “We’ve built continental businesses outside of the UK and Switzerland over the last 10 years and this success has led us to become a leading foreign asset manager in those markets.”

Past performance
When UBS started to build out its asset management ten years ago, its performance was struggling then too, and the business sought to diversify revenues in terms of products and geography.

Herrera says: “Eight to ten years ago we experienced a very difficult performance situation and it was at that time that the strategy to build our business was created.”

The strategy was to build a multiple range of capabilities, including quant, real estate, alternatives and fund services. “A diversified business is important. In markets where we have one type of client with two 
or three main products, if performance is difficult then you are exposed to the ‘undiversified’ phenomenon.”

He adds: “The result is that today, although we face performance challenges in some of our core activities, in those markets where we have a very diversified offering, we are still seeing more money coming in.”

It is the active area of UBS Global Asset Management that is hampered by underperformance. The pension fund trustee says: “If I start a fund then I would go to UBS and ask for an offer for passive. But not active.” 

In March the asset manager announced management changes designed to address underperformance. Herrera says: “The management changes were the result of an assessment – the most difficult type of assessment to do in our business – which is to ask whether underperformance is part of a normal cycle of underperformance, or because there is difficulty with teams, markets or processes that have to be changed.

“In the first case, that call is simply part of the discipline to allow for a certain amount of underperformance. This is part of the business of active management. In the second case, it is part of realising that a team or process needs to be fixed.”

Herrera says that in Switzerland many institutional clients have shifted into passive and alternatives, away from active. But he indicates that it was a diversified product offering that enabled many clients to be retained. But is product diversification enough in other locations? Herrera says: “In the UK we could do more in terms of diversification.

In Switzerland we are more diversified, and we have seen many institutional clients shift into passive and alternatives away from active.

“Outside of Switzerland, we will have to build a reputation for being a leading passive and alternative provider, but I think we can do that in the UK, France and Germany.” He also says: “We will build new opportunities and markets organically. But we will keep our eyes open for small to mid-size buying opportunities in markets where we can accelerate our growth. 

“I think the growth opportunities in this business are almost around every corner.”

There are dangers around every corner too, and UBS Global Asset Management has run into its fair share lately. But if Herrera is right and the new money from Swiss clients is a sign of support – and if it can be sustained – then perhaps UBS has turned yet another corner.

© funds europe 2008 



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