Six years ago UBS Global Asset Management, the asset management arm of the Swiss banking giant UBS, set out to transform itself from an under-performing conglomerate to a leading global investment manager.
Senior management had identified a number of problems with UBS Global AM: it had below-median investment performance in core asset classes; it was highly dependent on a single investment style; and it lacked a strong marketing and distribution culture.
Within three years UBS Global AM had turned this situation round. It achieved this on the institutional side of the business by creating a globally integrated investment platform and expanding its product range and geographic coverage. On the wholesale side of the business it developed new distribution channels.
The aim was to develop a broad range of investment capabilities and achieve a good balance of wholesale and institutional business.
Today the transformation has paid off handsomely. At the end of June UBS Global AM’s invested assets stood at CHF686bn (€442bn) up from CHF 635bn at the end of March, reflecting strong net new money inflows and positive market performance. The total of net new money in the institutional business during the first half of the year was CHF7.8bn, (€5bn), largely in the form of fixed income mandates and alternative investments.
Net new money in the wholesale Intermediary business in the first half was CHF10.9bn (€7bn). The main drivers here were strong inflows into equity funds and asset allocation funds in Europe and the Americas.
Gabriel Herrera, head of UBS Global AM’s Europe, Middle East and Africa (EMEA) says the flow of new business is largely due to the success of UBS AM’s business model, which combines global expertise with a local presence: “The CIO of a very large continental European investor who has just awarded us a very sizeable equity mandate told me he had looked at all the leading global managers, including the local ones in his market place, and he felt that our local presence and our global platform was the most convincing combination.
“He thought that many of the global managers did not have the kind of local presence that we had in his market, and that a lot of his local providers did not have the global reach.
Building this business model has taken some time, Herrera says. “I’ve been in this business for more than 12 years and I’ve gone through phases where the global aspects were over-arching and dominant, and phases where our local system was dominant without a significant global leverage.
“It has taken five or six years to come up with a business model in which there is an interaction between state-of-the-art global investment techniques and truly down to earth local evaluation of needs and services in the cultural, regulatory and language situation. This is not something you can create overnight.”
The combination of global know-how and local presence is something other international asset manager’s promise but do not necessarily deliver, he suggests. “It takes more than international offices to run a global business and it takes more than a local presence to be able to truly deliver local service.
“Our value proposition is really twofold. On the one hand we regard ourselves - and we present ourselves to clients - as global investment solution providers. This means we have the ability to construct portfolio solutions that are tailored to individual risk and return objectives.
“The second part of our value proposition is that we have access to a very broad set of first-class investment capabilities at the specialist level.
“We have the capacity to combine these investment capabilities to create a meaningful solution for clients.”
One area where UBS Global AM has pushed ahead in the past six years has been in the development of proprietary, state-of-the-art risk management tools. “This allows us to separate very different risk types whether these are alpha or beta risks or more specific risks,” explains Herrera.
The importance UBS Global AM attaches to risk management has enabled it to broaden its role as an asset manager significantly, he says. “Increasingly, we are approaching problems as risk allocators rather than just asset allocators.” In this context, the new interest that financial regulators and supervisors in Europe are showing in risk management is welcome, he says, but it has its dangers.
“Risk management has become much more important both for asset managers and institutional investors, and that’s good in that it plays to our natural strengths. So we’re very happy about that and we can fully leverage that strength.
“What I’m sometimes a little concerned about is when, particularly on the institutional investor side, regulations or risk management considerations might occasionally lead to sub-optimal, pro-cyclical behaviour. If regulations force or facilitate entering into equities at higher valuations and getting out of equities at lower valuations, that is not exactly helpful.
“So there is a positive side to the focus on risk management, but there are some potential negative aspects and these concern me a little.”
Regulatory and accounting pressures and the growing demand for liability-driven and absolute return investment strategies have meant that institutional clients are now demanding more of their asset managers in terms off asset liability modelling and risk budgeting. Herrera welcomes this development.
“It makes the relationship much more intense and more interesting for both sides. Today, we are in the business of understanding problems and working out different options on how to resolve them, rather than the business of selling a product with a given historic performance and a given investment process.
“That opens an entirely new dimension of how you can build relationships with clients. It’s not a one-product sales event. It’s a true relationship where you understand what the risk appetite is and what the risk concerns are.”
UBS Global AM’s relationships with clients, actual and potential, differ throughout the EMEA region, depending on country and line of business, says Herrera. “In the wholesale business we are perceived across the region as one of the large fund providers by third party clients.
“On the institutional side, we’re known for the combination of our local presence and the global set-up. In Switzerland we are clearly
perceived as a Swiss manager with strong global platforms, and you would probably find the same
perception in the UK.
“In markets where we have limited operational and historical presence, such as Portugal, we would probably be perceived as a leading global manager without any meaningful local asset management presence. However, given that the UBS group is expanding in Europe, the perception of being a local brand is increasing month by month.”
Within the EMEA region, Germany is a key market for UBS Global AM, which manages some €10bn of German assets. “We are seeing phenomenal opportunities and actual business flow in Germany,” Herrera says. “We are very well positioned to capture market share in the institutional market in Germany and we are doing so.
“We are also substantially expanding our business within the Nordic countries where we have been probably under-represented over the past few years. We are catching up quickly there.”
Even UBS Global AM’s home market, Switzerland, offers growth opportunities, he says. “Despite our large market presence in Switzerland we are constantly seeing new business flows.”
The nature of the new business flows depends on the line of business. “On the wholesale side we are seeing a substantial increased demand for absolute returns type strategies and we have seen rapid inflows in those types of capabilities. There is also a high demand for tactical asset allocation (TAA).
Herrera suggests that the appetite for TAA is a result of the downturn in the equity markets at the beginning of the 21st century. “In the bull markets of the 1990s it was less important to have the tactical asset allocation right. The perception among clients over the last couple of years is that tactical choices between asset classes has become much more important.”
Institutional business flows have been driven by the demand for particular asset classes, he says. “We have seen record inflows on the institutional side for more than a year, with very strong flows on the equity side in European equities, US equities and Asia ex Japan equities.
There is also a demand for more tactical asset allocation and absolute oriented capabilities, particularly fixed income and alternative products. “Hedge fund investment has been a constant theme over the past two years and I believe it is here to stay. We also see substantial interest in real estate, particularly in direct real estate and in real estate that has some developmental nature attached to it.”
As the largest mutual fund manager in Switzerland and the second largest mutual fund manager in Europe, UBS Global AM is positioned to capitalise on the growing interest in institutional mutual funds as an alternative to specialist segregated fund mandates, says Herrera.
“We have seen an increased acceptance of fund structures both on the retail and the institutional side for a variety of reasons. It’s a very well controlled investment portfolio. It’s very well regulated. It’s effectively a representation of the flagship capabilities of most managers. So it has gained an acceptance across the board.”
Looking ahead, Herrera says he is bullish about prospects for the EMEA region, he says.
“Clearly the opportunities for a firm that has global, well performing capabilities will be better than for others. There is the cachet of a globally operating boutique capability which is totally backed by the financial power of UBS.”