Uneconomic, unsustainable business models have been blamed for the corporate activity, alongside regulatory issues and a reluctance by banks such as Intesa - which sanctioned the sale of Nextra, Italy’s highest profile fund house, to Credit Agricole in France - to invest in asset management as a core business.
Citigroup has made a strategic disposal of its funds business to Legg Mason, worried that the close proximity of brokerage and manufacturing could lead to further reputational risks. And the troubled UK wing of Deutsche Asset Management, has finally been taken over by Aberdeen, which has made a remarkable recovery from its own problems. The auction also reportedly included strong bids from BNP Paribas and Schroders.
While acknowledging that many asset management groups are finding it tough to make profits, John Fraser, CEO of UBS Global Asset Management and one of the highest profile speakers at Fund Forum, believes fund groups which swallow up their rivals in order to boost profits, end up doing a lousy job. He prefers a root and branch job on the inside.
When he took over the top post in 2001, Mr Fraser was given responsibility for 14 different businesses and is understandably reluctant to repeat the time-consuming integration experience. That is not to say he is opposed to “lifting out” whole teams from rivals who are doing better in specific asset classes, and signing joint ventures where necessary.
One of the key challenges he faced was to diversify the range of strategies available to clients, increasingly demanding a holistic set of long-only and alternative solutions. He has an existing UBS O’Connor platform, offering single strategy equity hedge funds, and a healthy fund of funds business. But rather than building a new alternative fixed income and real estate capability, Mr Fraser has pulled off something of a coup by convincing John Costas, a personal friend of his and head of investment banking at UBS, to step across to asset management, and bring his proprietary trading desk with him.
Mr Fraser is apparently “over the moon” about the creation of this new hedge fund boutique, known as Dillon Read Capital Management. The unit’s 120 staff will transfer from the investment bank to Mr Fraser’s authority. They will start running $4bn (€3.3bn) in internal money from New York. But funds for third parties will also be developed, as marketing efforts are stepped up in London, Hong Kong and Tokyo.
Continue rebuilding
There appears little danger of Mr Fraser resting on his laurels. Despite the latest initiative, he knows the three challenges he faced in 2001 have yet to be fully resolved. Firstly, he must continue to rebuild the relationship with his bank’s Wealth Management arm, which should be a key client for the new division, because its Investment Solutions unit now has a default allocation of 10 per cent into alternative instruments for the typical private client.
It is no secret that UBS Wealth Management lost confidence with its “cousins” in asset management during the late-1990s due to poor performance, but bridges have been rebuilt, and the two arms of the business have been co-operating on product launches. Today, in disciplines such as plain vanilla fixed income, client advisers at UBS Wealth Management in Zurich would be very unlikely to put clients into external strategies.
Officially, UBS GAM and the group’s private banking channel deal with each other on an “open architecture” basis, but representatives from both sides of the business say clients are showing an increasing preference for the house brand, which they believe the bank will stand behind. This means UBS GAM is increasingly likely to acquire assets internally, although Mr Fraser acknowledges there is no room for complacency.
Secondly, there is a move away from the old staples to the new diversified model. In the late-1990s, the business was centred around an already fading core value approach to asset management. This now discredited business model has been totally transformed. But Mr Fraser hopes diversification will continue, encompassing economic trends such as the shift from developed to emerging markets. Currently, UBS GAM makes just 9 per cent of its income from the Asia Pacific region, but the medium-term target is closer to 15 per cent.
Thirdly, there is much work to be done on transforming the group’s account managers from purveyors of particular products, to a broader role as investment advisers, skilled in asset allocation techniques. If anything, this is the weak link.
Mr Fraser knows these are the types of structures increasingly demanded by big schemes such as ABP in the Netherlands, and the funds run by the Middle Eastern governments, whose assets are growing as oil prices rise.
Many funds are now reluctant to outsource unless they can be convinced that their assets can be managed by a firm whose structure encourages co-operation, and utilisation of the group’s entire skill set to boost performance, and to allow their pensioners to live comfortably.
Ironically, July’s most dramatic events – the terrorist atrocities against passengers using the London transport system, which have caused more than 50 deaths, over 700 injuries and countless personal tragedies - are likely to have the least lasting effect on the worlds of investment and capital markets, whose workers these fanatical perpetrators are clearly targeting.
Yuri Bender, editor-in-chief
yuri.bender@FT.com
