(Bloomberg News) UBS AG Chief Investment Officer Alexander Friedman is masterminding a push by Switzerland's biggest bank to develop a performance track record that will attract rich clients as Swiss secrecy erodes.
"There used to be this moat that created a great business model for Swiss banks -- it's gone," said Friedman, who was hired into the newly-created CIO position by former UBS Chief Executive Officer Oswald Gruebel in March 2011. "The core of this place is wealth management. So unless we outperform as investment managers, the business model has to come up with something new."
Friedman, 41, aims to build an investment management business that's "better than any other" for the $1.58 trillion of assets that wealthy clients entrusted UBS, he said in an interview at the bank's headquarters in Zurich. Investment performance is "a deep moat -- that's a sustainable moat if you build it right," he said.
He is relying on the support of 900 analysts across UBS divisions, intelligence from billionaires and even recommendations from rivals to achieve this goal, and the bank, which saw a 28 percent drop in assets under management since the end of 2007, needs him to succeed. While his efforts have yet to boost money-management revenue, Friedman said he hopes some of his most successful calls, such as last October's advice to buy U.S. junk bonds, will help build the trust of clients spooked by Europe's debt crisis.
"They're trying to get that premium fee-earning capacity by providing advice rather than by just providing investment," said Christopher Wheeler, a London-based analyst at Mediobanca SpA. "It's all about relationships, quality of the advice and the quality of the bank. That's what you need as a wealth manager."Positive Returns
Credit Suisse Group AG, UBS's biggest Swiss competitor, has taken a similar approach. It appointed Stefan Keitel in 2009 to a newly-created role of CIO for private banking and asset management globally. Keitel, 43, chairs the global investment committee that combines experts from the CIO office and the research department for private banking and asset management. Zurich-based Credit Suisse doesn't disclose portfolio- performance figures for its wealth management business.
At UBS, about 90 percent of wealth customers outside the Americas saw positive returns on their portfolios after fees in the first seven months of this year, Friedman said. The average performance among 80,000 portfolios the bank manages on a discretionary basis was positive in all strategies and in some cases as high as 12 percent, according to UBS. The bank didn't provide performance data for previous years, saying it wouldn't have been comparable.Lower Revenue
Revenue in wealth management excluding the Americas fell 7.4 percent to 3.5 billion francs ($3.6 billion) in the first half of this year from a year earlier as clients remained reluctant to trade amid Europe's sovereign debt crisis. Still, the division is the single biggest earnings contributor at UBS, which is scaling down its investment bank, and pretax profit was little changed at 1.31 billion francs.
Revenue in wealth management Americas gained 11 percent and pretax profit rose 55 percent to 390 million francs over the same period. UBS reports data separately for the wealth management unit, run by Juerg Zeltner, and Robert McCann's wealth management Americas division, which includes the former Paine Webber brokerage business the Swiss bank acquired in 2000.
UBS's wealth units attracted 24.1 billion francs of net new assets in the first half of this year, the highest six-month total since the subprime crisis and a U.S. tax-evasion probe shook the business in 2008. Clients pulled a net 239.2 billion francs in nine quarters through June 2010 and assets under management at the two units are down from 2.13 trillion francs at the end of 2007.Capital Appeal
Inflows this year reflect UBS's capital strength, Chief Financial Officer Tom Naratil said in a July 31 interview. UBS had the highest core Tier 1 capital ratio at the end of June of the 24 biggest European banks by assets, data compiled by Bloomberg show.
Most of the funds from clients are going directly into cash, said Naratil, 50. UBS wealth management clients outside of the Americas who make investment decisions themselves rather than letting the bank manage their assets on a discretionary basis held almost 31 percent in cash at the end of the quarter.
Translating those holdings into higher bank revenue will take time and better markets, UBS said last month.
A "modest return of client risk appetite" may add about 6 basis points to the gross margin in wealth management, or the amount of revenue the bank makes on assets under management, UBS said. Another 2 to 5 basis points may come from initiatives the bank is taking, including improving investment advice, it said.'Take Time'
The unit aims to boost margins to 95 to 105 basis points, from the 89 basis points reported in the second quarter. A basis point is one hundredth of a percentage point.
"The chief investment office has to prove and differentiate itself in terms of providing superior asset performance to its clients," said Andrew Lim, a London-based analyst at Espirito Santo Investment Bank. "That would be one of the ways to maintain or increase margins, but it's going to take time."
The introduction of the CIO office hasn't paid off yet because of fragile markets, Naratil told reporters last month.
"In a very troubled market, a lot of the time the advice that you're giving your clients is holding their hand and actually talking to them about maintaining positions, which isn't something that's generating revenues in the short run," he said.M&A Banker
Friedman was a mergers and acquisitions banker at Lazard Ltd. in New York before he was hired as the CFO of the Bill & Melinda Gates Foundation in 2007. At the foundation in Seattle, he created and managed a $400 million program-related investment effort. After leaving in March 2010, he managed a private investment vehicle, Asymmetry LLC. He holds a bachelor's degree from Princeton University in Princeton, New Jersey, an MBA from Columbia Business School and a law degree from Columbia Law School in New York.
Now Zurich-based Friedman, who was promoted to global CIO in June from the same position in wealth management outside the Americas, said he wants to avoid UBS becoming reliant on star fund managers.
"The problem with most investment processes is that they look like an inverted pyramid, where you have some brilliant fund manager and everything kind of rests on him," he said. "That's very unstable by definition."Solid Thesis
UBS investment recommendations are the result of ideas from analysts, regional investment officers, investment professionals at companies such as Pacific Investment Management Co. and Fidelity Investments, quantitative models and the bank's own billionaire clients, Friedman said. The bank's investment products and services unit then picks out the best products to match the CIO views.
"In this environment you've got to have a really solid base -- your thesis of where the world is going," he said. "Then you've got to have a really solid tactical asset allocation and you have to have themes that outperform and be able to attach products to those themes. And it can't just be your products."
The bank manages about $100 billion for wealth management clients on a discretionary basis and another $25 billion for asset management's strategy funds.
About $60 billion of the money is in two of 10 strategies, said Mads Pedersen, 40, the head of asset allocation for discretionary mandates. Pedersen headed asset allocation for Barclays Plc's wealth unit before joining UBS in February 2011.Fund Rivals
Those two strategies returned between 3.3 percent and 11.5 percent in the first seven months after taxes and before fees, depending on the currency and level of risk the clients selected. Most pick the "conservative" or "moderate" risk brackets within those strategies, Pedersen said, which produced returns between 4 percent and 7.3 percent in the period.
The MSCI World Index rose 5.8 percent in the same period, while the 10-year Treasury future gained 3.7 percent. The Pimco Total Return Fund, the world's biggest mutual fund with $270 billion in assets and at least 65 percent allocated to investment-grade fixed-income instruments, gained 5.5 percent and the Vanguard Balanced Index fund, which tracks U.S. stocks with 60 percent of its assets and bonds with the rest, rose 6.8 percent in the period. Those returns are after fees.
The biggest macro hedge funds, which Friedman views as his competitors along with the mutual-fund managers like Pimco and BlackRock Inc., experienced difficulties this year as government intervention and declining trading volumes limited their ability to make large bets. Such funds trade in global equity, bond, currency and commodities markets.U.S. Bias
Ray Dalio, who runs Bridgewater Associates LP, lost 2 percent in his $54 billion macro fund through July 20, according to investors. Bridgewater, based in Westport, Connecticut, reported a 25 percent gain in the fund last year and a 45 percent jump in 2010. Hedge funds overall climbed 1.9 percent this year through July, according to data compiled by Bloomberg.
Some of Friedman's first asset allocation calls favored the U.S. versus euro-area equities, the U.S. dollar versus the euro and U.S. junk bonds, he said. The bets were viewed as risky at the time, as the U.S.'s credit rating had been cut from AAA by Standard & Poor's for the first time and there was speculation the economy would experience a double-dip recession, he said.
"People accused me of being a biased American," Friedman said. Still, UBS was "very successful" in convincing clients there was value in U.S. junk bonds, which was the bank's biggest overweight tactical asset allocation, he said. Since making the recommendation last October, that call brought a 14 percent total return, according to Friedman.Pizza Man
The calls on equities and currencies produced returns of about 9 percent and 10 percent, respectively, since he started the investment process at UBS, Friedman said.
Some calls were wrong, he said. The bank had to correct its underweight recommendation on commodities because of its erroneous assessment of the drought in the U.S. The overweight recommendation on emerging markets produced losses because of risk aversion and a weaker economic performance, he said.
Still, he hopes wealthy UBS clients will eventually come to trust the investment office's picks and move out of cash.
"I kind of view my job as making a pizza, and I want the pizza to be the same every time: good sauce, good dough and good cheese," said Friedman. "And then depending on what part of the world they live in, if you want spicy stuff, we'll put spicy sausage on there and we'll get the best sausage. If you want vegetables, we'll get the best vegetables."