This approach does not try to cover too much, rather it focuses purely on those aspects that it knows how to do well. In addition, it is working with other asset management companies to cover those market niches in which it does not specialise. The Co-CEO of Asset Management, Nicolas Faller, is looking to generate sustainable growth independently of market trends. This approach relies on a highly diversified regional, product and client base, and a failsafe, namely a reliance on professional experts. As Faller explains, “This is a business which stands or falls by people, one hundred percent.”
Few industry professionals have such a clear and holistic vision of asset management as Faller. He joined UBP in 2010 and has been co-CEO of UBP’s Asset Management division since 2015. Other fields in which the Swiss bank specialises include Investment Management, Alternative Investments and Institutional Clients. Constantly on the move between Europe, Asia and America, Faller gains a very broad perspective on major events and trends in the industry at global level, and a firm grasp of investors’ requirements. This stands him in good stead for devising a sound strategy for UBP’s development as a global asset manager.
From its beginnings, UBP has positioned itself alongside the providers of “genuinely active” management. Some hard-line commentators view the subject in black-and-white terms but, despite growing polarisation, there is still going to be room for shades of grey. “Many people see the world in either-or terms: active or passive management. Passive investment has greatly expanded, buoyed by strong returns from the derivatives markets as central banks injected liquidity. Meanwhile, close correlations between underlying asset classes have made it more difficult to boost value through active management, since value enhancement, by definition, comes from a looser or no correlation.” Faller believes the market probably peaked during the second half of 2016, following the US presidential elections, by which time these correlations had reached record levels (60% on floating-rate investments). He now believes that we are returning to more normal levels of 50% to 20%, as anticipated last year.
“In this scenario, we cannot expect passive management to go it alone; active management can play a big role”
Last year, and in early 2018, he noted that active management was making a comeback. Results have been good, thanks to stock-picking, which distinguishes between good and bad securities: strategies which track all-encompassing indices cannot do that.
However, given the gulf between banks like UBP, which opt for active management, and those who have settled for a passive approach, he sees room for midfielders – those banks operating in a space that might be called “smart beta”. “We are an industry which is constantly reinventing itself and is anything but boring. We have to keep an eye on new market conditions, liquidity and client demands. To date, the market has appeared more polarised between genuinely active and passive management, but I believe there could be a middle way which allows certain managers to find their niche and grow,” he explains. He uses the phrase “genuinely active” because he believes that bad active management is on the way out. By this, he means management that takes a stake in active management and charges commissions commensurate with this service, but ends up offering products which, once these commissions are deducted, end up with yields which only match the benchmark.
This contrasts starkly with UBP’s approach to asset management. Committed to being “genuinely active”, meaning clients can expect a range of products which add real value to their portfolios, UBP sets itself apart from others, who claim to provide all-in active management, but do not do it well. UBP adds solid value, but in a high-quality way. “As time went by, many asset management companies tried to do it all, and there were many things they did not do well. That is something our model seeks to avoid. If we’re going to do something, then we have to do it well: if we can’t really do it well, we simply don’t do it at all.”
This means that the UBP offering centres on specific investment capabilities. For example, in fixed income, it provides a full range of products, from global fixed income to convertible bonds and emerging fixed income. Floating-rate investments are also available and UBP plays an active role on the European, Swiss, Asian, Chinese and global markets.
More agreements further down the line
In those areas in which it has no in-house management capabilities, such as US and Japanese equities, UBP has sought out specialist partners who are based in those markets but who lack the capacity to sell outside them. This is where UBP comes in: it brings their products to regions such as Europe, Asia, the Middle East and, to a lesser extent, Latin America. “We create unbranded funds under the UBP brand and sell them all around the world,” explains Faller. This has meant entering into agreements with asset managers such as SCOR, which specialises in catastrophe bonds or European loans, and SEB, a specialist in mortgage bonds, global equities with an emphasis on ESG, UCITS CTAs and Eastern European stock markets. UBP helps them to sell to the wider world through exclusive agreements in certain markets and with certain clients. In return, they gain access to skills which a Swiss asset management company is not able to offer.
As an innovative example of these partnership policies, Faller highlights the agreement with Partners Group: UBP has helped create a fund which combines private debt held by Partners Group and public debt. The fund is jointly managed by both companies and offers access to the private debt market, but with liquidity from the sovereign debt element in the portfolio. “We are now known for our ability to enter into agreements with specialists, and some clients come to us for that reason. As for ourselves, we try to take a broader view for when we come up with ideas worth selling,” he adds.
A growth market
This model is UBP’s response to a business environment that continues to grow, despite extensive consolidation (especially in Europe, where there are players holding assets worth between EUR 30 and EUR 200 billion, and which have no strategy for future growth and are incurring heavy costs). This environment will require asset management companies to showcase excellent products which stand out from a mediocre crowd.
“The market is growing because institutional clients have more needs, while regulation is making their lives more complicated. Twenty years ago, institutions could handle many things in-house, but nowadays regulation is complicating the situation and prompting them to seek more sophisticated management capabilities outside their own organisations.” Faller predicts increasing fund inflows from institutional clients to specialist asset managers.
There is also an opportunity to serve private clients looking for more sophisticated products. This means that the Bank, which cannot provide everything, has to adopt a more open structure. On top of this opportunity is the ageing generation of baby boomers in markets such as the USA, Europe and Japan – the countries which still hold most of the world’s wealth. They need to move into products which enable them to enhance and preserve incomes with a view to retirement, beyond simply investing in pure equity products. This is something which will not always be easy to achieve and it leaves this generation more dependent on asset managers, who can help them meet their objectives.
In view of this, Faller argues that the market is going to continue to grow.
“The market is growing in terms of both institutional and more sophisticated private clients."
This is why it’s simply not enough to offer them a mediocre product. Years ago, even an average product could draw in money, but nowadays it’s a ‘winner takes all’ market: winning products will attract inflows and if you don’t have an excellent product, you won’t achieve anything,” he explains. Even with an innovative approach, “…we were the first to expose ourselves to the high-yield segment with CDS, at very low cost and with high liquidity. We were also the first to mix private and public debt.
"The only way to carry on growing is to have good and innovative products.”
Regulation as a business driver
Along with greater client demands, there is the challenge of regulation, which also offers an opportunity, as explained above. “There are two ways of looking at this. On the one hand, it’s a headache for our clients and for us because it imposes a strict framework and dictates what you can or cannot do. On the other hand, it offers an opportunity for institutional clients to outsource certain functions,” he explains, citing regulations such as Basel III.
With regard to MiFID II, the opportunity lies in the impetus it lends to funds, “For banks, it’s an opportunity to channel their advisory business towards solutions with a fund format.” This sort of investment vehicle offers greater diversification and more professional management than traditional, direct investments in bonds and equities. They are therefore better suited to fulfil the mandate of investor protection which is written into MiFID II’s DNA. “Banks are going to have to give more advice about funds if they are going to comply with a directive for which the key will be to seek the right solutions, tailored to the client,” he tells us. This is why this market will offer greater potential.
This is even going to happen in Spain, where we have recently seen a major outflow of capital from deposits to funds. This will open up greater opportunities for asset management companies which offer good value propositions – especially international ones. More generally, clients stand to benefit because MiFID II “…is going to improve the quality of what the market has to offer,” claims Faller. He is convinced that asset managers will only survive in the industry if they are “good or very good,” in an environment where fund pickers will be more discriminating, due to their fiduciary obligations and to the pressure on fees. This means that they will only be able to afford to pay for funds which add real value.
Indeed, the Directive will be positive for the end-client, but this will not reduce the costs of buying into funds. The reason is not that MiFID II will increase prices if management companies decide not to absorb the costs of external analyses and pass them on to clients (very few companies are actually doing this, and UBP has rejected this as an option, deciding to meet these costs in full). Rather, the reason is that the service providing access to funds listed at banks, which used to be free, will now have to form part of an advisory package at an additional fee, on top of the fund management charge. “The service won’t be free, so the client will pay no less for investing in funds. However, in return, they will receive better advice,” asserts Faller.
Adapting to MiFID II
Given this new environment, UBP’s Asset Management division has been working for some time to adapt to the Directive. The first step is to provide clean share classes (which it is doing in other markets, such as the UK and the Netherlands) and to define a target market for each fund (which it did in the third quarter of last year).
Despite this environment, there have been no major changes in relations with distributors, apart from discussions of prices and charges, and the need to offer the best possible products. Distributors do not want to make these services more expensive (although they are now obliged to charge for them).
As for technological adjustments resulting from the Directive, these, too, have not been significant, because UBP does not approach the end-client directly and does not have the same needs as other organisations. “We’re using digital in two ways: to improve our reporting and our clients’ access to it, with the aim of making ourselves totally transparent; and, secondly, by analysing big data,” he says. Technology, he adds, makes it possible to digest the available information – a very useful skill in active management, and something which can only be done by either increasing staff levels (a more expensive method) or by using digital tools (Faller’s own preference).
Working with institutional clients
Indeed, the Asset Management division works with institutional clients, such as insurance companies, pension funds, foundations and sovereign funds, as well as with distributors, basically banks with an open architecture. However, it never makes direct contact with the retail customer.
Faller acknowledges that needs differ according to segment or to each company’s specific needs. For example, insurance companies need to hold a lot of fixed-income products to meet their obligations should they have to, whereas pension funds usually follow their own asset placement strategies, which normally means a greater percentage of floating-rate investments. Nevertheless, Faller refers to a common framework and trends associated with regulations. “Regulation is incredibly beneficial to the fixed-income space,” he explains. He says that clients look for as many solutions as possible so that they can use up their budgets earmarked for this asset. “Public debt, investment-grade corporate debt, high-yield, emerging, private debt, catastrophe bonds, mortgage-backed debt, loans – these are all things which clients look for, especially in an environment in which yields are so low that it becomes inevitable to seek out alternatives to conventional fixed-income products.”
While this trend might seem self-destructive in light of the forthcoming return to monetary normality, Faller denies that this is the case. He warns that this process will take a very long time. “Central banks have such large balance sheets that they will have to be very careful about how they reduce them. That includes the Fed, which is ahead of Europe and Japan, but the pace is very slow.” Faller believes that this process will take five to ten years and will not simply be a matter of months.
Strong demand for fixed income
This means that demand for fixed-income products remains very strong, even in Spain, which tends towards absolute return and low volatility. “There is a need for everything relating to low-volatility fixed-income products because, in the context of a major trend of withdrawals from deposits in search of higher returns, investors are looking for funds with controlled risk exposure,” says Faller. The reality is that investors are switching from one extreme to another, and UBP offers solutions for this. When it comes to managing fixed-income assets, Faller believes that what matters this year is being more active, “For the last eight years, you could rest assured that a long-term view of duration and credit risk was right. Nowadays, ‘buy and hold’ positions are no use. They have to be more tactical and change more rapidly, especially if the spread across sectors is increasing, as it is this year. In 2018 those who stay invested will reap the rewards, but there is a need to be tactically mobile,” he adds.
In fact, clients are still very cautious about floating-rate products. Apart from fixed income, one intermediate response to this caution could be convertible bonds. “In Spain, the pension fund model is closer to defined benefit, in which the fixed-interest element is important, than to defined contribution, in which floating-rate positions are usually larger. Convertibles lie midway between these two worlds.” This is a good situation to be in because, unlike what is happening on the stock markets, these assets are now more attractively valued, after suffering in recent years from a rally by floating- and fixed-interest investments. Convertibles offer attractive yields to anyone looking for a little more risk than pure fixed-income instruments – which in any case sometimes entails more risk than one might think–- without investing in the stock market. “They are a good way of adding a little risk while still offering protection.” Furthermore, any increase in volatility, which Faller is in no doubt will ultimately occur, will benefit these assets.
UBP’s Asset Management division also operates in the field of alternative assets, for which it still finds there is some demand. It has an alternative UCITS platform with four managers, and is planning to increase their number to 10 by the end of 2019 at latest. This demand is most apparent in hedge funds because, in an environment of high prices for floating-rate and fixed-income products, and a return to normal liquidity, they can generate better levels of profitability, which are also decorrelated, than the beta options, “In recent years, investors have spurned hedge funds, but they are beginning to win back trust and recover in value.” On his company’s non-liquid offering, Faller explains that they are seeking to extend their range of private equity, real-estate and infrastructure products, but are most likely to do so through external partners.
Sustainable growth plans
UBP’s Asset Management division has grown at an enviable rate in recent years. Nevertheless, it sees the key to its growth not as speed, but as quality, in other words: steady growth. “We’ve attracted EUR 3 billion in each of the last six years.” This is a mouthwatering figure for a bank which has CHF 125.3 billion in assets under management, of which CHF 39.4 billion is with Asset Management, including CHF 9.1 billion that it manages on behalf of UBP Group’s Private Banking division.
Setting pointless targets forms no part of Faller’s mission, he explains. Rather, he seeks, “…to devise a strategy of sustainable growth,” based on a wide diversification of clients, markets and products, which he has been implementing over the last seven years, unlike other models which depend on only one product, market or client. “We’ve achieved growth through excellent diversification, in every respect. The most I can do is try to grow every year and buck the market trends,” he tells us.
Within the diversification of geographical areas, he explains that the best markets in recent years have been Switzerland, Japan and Spain – depending on the year – and always with different products. All this means he wants to continue to increase his company’s presence in other regions. Two-thirds of its business is generated in Europe, and one-third in Asia, in particular in Japan, South Korea, Taiwan, China and Hong Kong. It also carries out a small proportion of its business in the Middle East and Latin America, and these are the two markets which it is going to tap most in 2018. “Latin America is a very open market with easy access, driven mainly by pension funds in Chile, Peru and Colombia. However, we are also keeping a watchful eye on Mexico as it begins to open up,” he reports. He describes the Middle East as a “promising” market.
The key to this growth is the search for local presence. In Europe, for example, alongside the company’s investment offices in Zurich, Geneva, London and Paris, it also has sales teams in Spain, Italy, Switzerland, France, Belgium, Luxembourg, the United Kingdom and Austria. “We need to maintain a local base. Many competitors try to establish a single centre from which they can manage various markets, but that’s not my strategy. If you want to demonstrate your local commitment and rely on access to market intelligence, you have to establish a local base,” he points out. In Spain, his company’s office will move from Barcelona to Madrid this year, but not for political reasons, he explains, “This is something we’ve been thinking about for a while. The office was set up in Barcelona, but Madrid has gradually won over clients and is Spain’s financial centre, and we want to be closer to those clients,” he asserts, adding that the team – headed by Felipe Leria – is set to expand.
If he were to make a wish for 2018, it would be to continue building this sustainable growth, with innovative ideas which can bring it to fruition. The environment remains one of greater consolidation of players, in which reliance on skilled professionals will be key for active asset management companies. To attract these people, it is important to demonstrate a commitment to joint business development,
“If you’re an active manager, you can only survive with really good people. This is a people business, irrespective of brand or size – you stand or fall by people, one hundred percent,”
Co-CEO Asset Management