Significant reforms are under way at UBS to revive the Swiss bank’s asset management business and stem the tide of outflows it has suffered over the past decade.
UBS now oversees SFr656bn ($653bn) of assets, trailing the trillions of dollars of assets run by faster-growing rivals such as BlackRock and Vanguard, the world’s two largest fund companies.
Amin Rajan, chief executive of Create Research, the consultancy, says UBS has not fully recovered from a “massive haemorrhaging” of assets during the 2008 financial crisis.
“Sub-par performance and rising costs are the key culprits,” says Mr Rajan, adding that these problems have proved hard to fix due to the complexity created by the size and reach of the business.
The Swiss bank has registered withdrawals from institutional investors in four of the last five years. Net outflows jumped to SFr22.5bn ($22.2bn) in 2016, bringing total redemptions to SFr179bn over the past decade.
UBS is in the process of applying extensive changes to its asset management division to counter the chronic underperformance of the unit.
In an effort to control costs, UBS has reduced employee numbers in the asset management unit to 2,308, down by almost a third since 2006. But this has failed to improve the division’s cost to income ratio, which has swollen to 71.4 per cent from 56.8 per cent over the same period because of a sharp decline in profits.
Ulrich Koerner, who was appointed president of UBS Asset Management in late 2014 to revive the business, has launched 90 separate initiatives to improve its front-, middle- and back-office operations since he took charge.
Three-quarters of those initiatives have been completed, including the combination of the infrastructure and property businesses into a single unit. UBS also sold its alternative fund services business to Mitsubishi UFJ, the Japanese financial services provider, in 2015.
It is in the process of selling its fund-servicing units in Switzerland and Luxembourg to Northern Trust, the US financial services company.
Some big tasks, such as replacing the company’s portfolio accounting system — which will equip its fund managers with new analytical tools — will not be completed until next year. Other initiatives that are under way include expansion in China, where UBS is planning to hire portfolio managers and traders along with a support team.
“These changes are not something that can be accomplished in a couple of months. It is like changing the engine of an aeroplane while still flying,” says Mr Koerner.
He adds that UBS retains a strong conviction that its asset management business will return to inflows due to its international client base and expertise.
“The demands of clients have become more global over the past 10 or 15 years. While clients in different markets historically had different needs, the requirements of our Japanese pension fund clients, for example, are not so different now as those of a large pension fund in Munich. Local requirements still matter of course, but the broad themes are the same,” he says.
But Dick Bove, a veteran analyst at Rafferty Capital Markets in New York, says UBS faces rising competition in Asia, where there has been a shift of money from US and European managers to local rivals.
He adds that outside Asia, UBS must also respond to growing competition from rival banks that are investing heavily in their asset management arms, as these businesses have low capital requirements and are more profitable than traditional investment banking operations.
“Competition has increased dramatically,” says Mr Bove. He adds that UBS will face “a difficult fight” to hold on to its assets unless there is a marked improvement in the performance of its actively managed funds.
Only a fifth of the bank’s multi-asset funds, and only a third of the bank’s equity funds, matched or beat their benchmarks last year. Longer-term performance is better, with 62 per cent of equity funds and 80 per cent of multi-asset funds matching or beating their benchmarks over five years.
“Recent performance has not been good,” says Mr Bove.
The current tidal wave of money moving into passive strategies also appears to be bypassing UBS, even though it has a sizeable index-tracking business, according to Mr Rajan.
Investor inflows into UBS’s exchange traded funds dropped 64 per cent to just over $3bn in 2016, a year in which both BlackRock and Vanguard registered record-breaking ETF inflows.
In light of these challenges, Mr Amin says the operational changes being undertaken by UBS are welcome, but these are “more a matter of baby steps than giant leaps”. “It is too soon to say whether the asset management business has turned a corner,” he says.
Other observers question whether UBS is doing enough to distinguish itself from its competitors. The bank slipped to 18th from 16th place in a coveted list of the most important asset management brands in Europe this year.
Diana Mackay, co-chief executive of MackayWilliams, the London-based consultancy that compiled the ranking, says UBS does not stand out for having a distinctive strategy or for having expertise in any one area when compared with its rivals.
Despite such criticisms, Mr Koerner remains upbeat. He says 2016 was “a challenging environment” for all active managers, but that the changes now under way should deliver “consistently strong risk-adjusted investment performance” for the bank’s clients.
“To that end, we have moved from a boutique-like structure to a globally integrated team that seeks to leverage the best of our investment talent and processes for our clients,” he says.
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