How has UBP changed in the wake of the financial crisis?
We have not changed as much as some of our competitors. Since it was founded in 1969, UBP has been owned by the de Picciotto family and the crisis has not affected corporate governance. That said, we have reorganised. Instead of a regional structure, we now have divisional executives who are responsible for Treasury, Operations, Private Banking and Asset Management, i.e. wealth management services for private and institutional clients. Asset Management has been headed up by two Co-CEOs since the end of 2012: Michaël Lok, who was previously the Chief Investment Officer (CIO) at Crédit Agricole, is responsible for management and investment strategy, while I deal with sales, marketing and operations.
How does the cooperation between Asset Management and Private Banking work?
Michaël Lok is CIO for the entire bank; he also oversees asset management mandates and the investment strategy side for private clients.
What plans does UBP have to further develop the two business areas? How has that changed since the crisis?
The bank has a total of CHF 120 billion in assets under management. The Private Banking division accounts for the bulk of those assets, and acquisitions have accelerated the pace of Private Banking growth. Since 2010, we have acquired ABN Amro Private Bank as well as the international businesses of Santander, Lloyds and Coutts. We intend to maintain our approach, because it facilitates rapid growth and there is no shortage of acquisition opportunities. With the new regulations, experts estimate that a Swiss private bank now needs CHF 15-20 billion in assets under management in order to achieve reasonable growth. Just CHF 5 billion was enough a few years ago.
What about Asset Management?
We firmly believe that acquisitions in this segment tend to destroy value. Nearly all Swiss asset managers have dedicated teams for Swiss equities, European equities and fixed income products. It is often not possible to maintain both teams after a takeover, and the inevitable consequence is a loss of client assets. Acquisitions are only worthwhile in the case of highly specialised asset managers who offer access to an attractive asset class or a new market. But we prefer to recruit new talent and investment experts with a specific area of expertise, or alternatively to set up partnerships. We think that the European market as a whole, including Switzerland, still contains a lot of potential. In Asia, we are growing mainly in Japan, Hong Kong, Shanghai and Taipei. Recently we have begun making more inroads into Latin America and the Middle East, where we are working with the whole spectrum of institutional clients. There is currently a lot of potential among insurance companies: they are having to outsource their asset management activities in response to regulatory changes
and low interest rates. The activities mainly involve international bond portfolios. Our Asset Management division currently manages CHF 30 billion for Swiss and international institutional clients, together with CHF 5 billion for our own private clients. Our organic growth is stronger than the Private Banking division’s, as we do not make acquisitions.
Do you worry about UBP's reputation among institutional clients when the Private Banking division is involved in acquisitions? There have been lots of problems on the market.
I don't worry, because we carry out rigorous checks and turn down a lot of offers. We also prefer to acquire assets than a whole bank: it makes it easier to establish what you are buying and what is not included. It costs a little more, but pays off in the medium term. As a general rule, you usually only pay part of the purchase price up front. If a client suddenly leaves the bank or it emerges later that they are a problem, the price will be reduced.
What problems are you encountering with the low interest rates?
The negative interest rates have so far only really hurt the private banks. UBP only passes on part of the negative rates to clients – and only for clients who hold the majority of their assets in Swiss francs. Fortunately, our assets under management are mainly in US dollars, because many of our clients are based in Latin America and the Middle East. We offer a range of solutions for these clients, such as a liquid Swiss bond fund that invests in credit default swaps rather than actual bonds, or currency-hedged funds for foreign currency bonds like US corporates.
What constitutes critical mass for an asset manager nowadays?
It depends on the strategy. If you are focused as we are, then you don't need to be a giant. We are more than profitable with the CHF 35 billion we have under management. Highly specialised asset managers can be even smaller. By contrast, if you want to cover all the bases, you need to have at least CHF 100 billion under management to allow for the drag on capacity from underperforming funds. Only then will you be able to succeed – and you still need a good reputation.
Don't clients expect a broad product range from a broadly diversified asset manager?
That has changed massively since the financial crisis. Now the winner takes all: the top few products in a given investment segment attract all new capital, while the others haemorrhage clients. Before the crisis, sales of run-of-the-mill products were relatively good. Average market performance was so buoyant that it wasn't obvious if fund performance was lagging. Then during the crisis, investors noticed that weaker products could do damage. Quite a few asset managers with broad product ranges found themselves trapped: fund fees have fallen, while cost pressures are increasing. No one is buying into average funds now, but they tie up staff and financial capacities, which are then not available for high-growth products.
How does UBP avoid falling into that trap?
We have always had a clear focus and think long and hard about how and whether to move into new investment segments. This has now become even more important. We launch an average of two products each year. We currently have in-house teams for European and Swiss equities, for fixed income products, and emerging markets. We also have regional partnerships with three US equity investment specialists and one in Japan. We provide the international distribution activities for these specialists; in return, products in the markets
that we manage are sold under a single brand. Only two of our funds currently have less than CHF 100 million in assets under management. One is about to break through that ceiling and we are considering merging the other one. In the past, we have regularly closed or merged funds once it became clear that we were not going to be able to break into the top rankings.
You mentioned falling fees. When will they stop falling?
It is only logical that they should fall. Competition is fierce and only a limited number of good products are outperforming the benchmark. Low interest rates are another factor: if the prevailing interest rates are zero or less, bond funds can't expect to charge management fees of 0.5%. Many managers only sought to match market performance, rather than investing on their own convictions. These products are competing against inexpensive exchange-traded funds, which track a market index.
Many experts say that for every investor who beats the market, there is another who loses. If all fund managers with active investment strategies are doing well, who is losing out?
Within the sector, the fund managers who are carried along by market developments outnumber the managers who use their own convictions to generate returns. Our European and Swiss equity teams have been regularly outperforming the market for years. So it can be done. But you do need the right people and the right strategy. Our strategy involves always outperforming the market as a whole. Other fund managers prefer to take big gambles. Of course, gambles don't always pay off, which is why there are often too many asset managers and too many products.
Will the people who take those big gambles ever die out?
No. If someone is good, clients will forgive them for having a bad year. The problems start when there are too many bad years. I don't think there will ever come a time when everyone invests passively, simply tracking market indices. At the end of the day, that is merely delegating decision-making and risk to the client. There is room for active managers, but few are really good.
What do you think of Switzerland as a hub for asset management for institutional clients?
Switzerland is too self-effacing. We could be the number three in Europe, after London and Paris, given the amount of talent in the labour force and the tradition of investment within the private banking sector. Switzerland is a better location than Germany. But in the past, there was too much emphasis on private banking. The strong Swiss franc is also hiking up costs at the moment, which is benefiting London. Many of the Swiss private banks are already struggling with costs and are therefore unable to move into asset management. It is expensive to build up an asset management business and lead times are long. Institutional clients nowadays want to monitor asset managers over more than one market phase before entrusting them with their capital.
How much are Swiss providers being constrained by EU regulations that complicate market access? You haven't mentioned that.
It is true that cross-border business based in Switzerland is more complex than business within the EU. That is why we have opened offices in Austria, Belgium, Italy and Spain, in addition to the existing ones in Paris and London. It has cost us some money, but that is not
an insurmountable problem. If my sales people were based in Zurich I would still have to pay them – with the added cost of the strong Swiss franc. Besides, it is always a good thing for your sales team to be physically close to the clients.
Co-CEO Asset Management