UBS unit rebounds from years of struggle

After years of performance struggles, staff turnover and, more recently, rapidly dwindling assets, UBS Global Asset Management has turned a corner with strong performance in 2009, according to its chief executive.

Outperformance in the first three quarters across asset classes — with some strategies topping their benchmarks by more than 10 percentage points — proves that restructuring efforts that began as far back as 2002 are paying off, John A. Fraser, chairman and CEO of the money management arm, said in an interview.

“I can’t say, hand on heart, I expected [performance] to be this good,” he said.

Mr. Fraser predicted in August 2008 that the firm would emerge stronger from restructuring in mid-2009. Although his projection was off by a quarter, he said institutional inflows — in addition to performance — have surpassed his expectations. He said UBS Global Asset Management will report net positive institutional inflows when the company delivers third-quarter earnings Nov. 3.

Industry sources said there is some doubt that three quarters of good performance will change the minds of investors and their consultants, following years of spotty performance, high turnover and a damaged reputation. “It will take a while — their name is tarnished,” said one consultant, who asked not to be identified.

Others, who also asked not to be identified, said they believe that UBS is heading in the right direction.

“It’s a slow road back, but they’re on the road back,” one industry source said.

According to data provided by UBS, new institutional business won in the third quarter included a $1.7 billion global balanced mandate from a U.S. pension fund, $1.2 billion in stock and bond subadvisory mandates for a Japanese bank and $1.2 billion in Asia ex-Japan equity mandates for Middle Eastern sovereign-wealth funds.

Other institutional inflows included $2 billion in various corporate-credit mandates, a $1.5 billion cash mandate from a U.S. hedge fund, $298 million in European small- and mid-cap equities for a Middle Eastern sovereign-wealth fund and a $223 million inflation-linked-bond mandate for a German utility company. UBS officials declined to provide client names.

Third-party institutional inflows have “been quite broad-based,” Mr. Fraser said, noting that third-quarter inflows were spread across all geographies and client types.

However, UBS Global Asset Management continued to lose institutional clients in the third quarter of 2009. U.S. and U.K. pension funds terminated their relationships with UBS for portfolios worth more than $1.6 billion in the third quarter, following lost accounts worth $1.2 billion in the first half, according to reported search and hire data.

3Q TERMINATIONS

Notable third-quarter terminations included a $616 million core bond mandate by the $17.8 billion Mississippi Public Employees’ Retirement System. System officials cited performance reasons. A UBS spokeswoman wrote in an e-mail: “We believe we lost this mandate due to a combination of performance and, very importantly, the restructuring of [Mississippi’s] fixed-income allocation within their plan.”

Also, UBS’ relationship with two London pension funds was terminated as part of restructuring: the $1.13 billion London Borough of Camden Pension Fund dropped UBS from an active balanced mandate in which it ran $485 million, and the $391 million Royal Borough of Kingston upon Thames Pension Fund cut UBS from a passive multiasset mandate in which it ran all of the fund’s assets.

Positive net inflows for the third quarter would break a streak of nine consecutive quarters of outflows totaling nearly $147 billion. The money management arm’s assets under management had plunged 32.8% as a result of outflows and market movements since March 30, 2007.

However, performance is turning around. UBS Global Asset Management registered solid outperformance in stock, bond and global-investment-solutions strategies in the nine-month period ended Sept. 30, according to preliminary data provided by the firm.

Standouts were U.S. small-cap equity at 39.92%, 17.49 percentage points better than its Russell 2000 benchmark; global equity at 37.03%, 12.13 percentage points ahead of its Morgan Stanley Capital International All Country World (Net) Index benchmark; and emerging-markets debt at 36.33%, 13.81 percentage points in excess of its custom benchmark made up of half J.P. Morgan Emerging Markets Bond Index Global and half J.P. Morgan GBI-EM Global Diversified index.

The global-securities portfolio returned 29.86%, outperforming its custom benchmark by 8.18 percentage points.

Strong outperformance in the first three quarters also came in European, Asian and emerging-markets core equities, and in U.S. large-cap-growth equities. International-equity and U.S. small-cap-growth-equity strategies trailed their benchmarks in the period, though. Nearly all bond strategies outperformed.

SOME REBOUND

Some strategies are rebounding from rough times over the past three calendar years. As of Dec. 31, annualized three-year returns for the U.S. small-cap-equity, global-equity, emerging-markets-debt and both global-investment-solutions strategies trailed their benchmarks by between 1.22 percentage points and 9.87 percentage points.

And performance hasn’t been the only problem. UBS has waved goodbye to many senior-level investment professionals in recent years and has been hurt by U.S. tax and legal issues with its wealth management business.

There has also been speculation that the parent company, UBS AG, would need to sell the money management business to boost capital.

UBS Global Asset Management officials have distanced themselves from the wealth management unit’s tax issues when talking with clients, a source familiar with UBS said. And UBS will not sell its asset management unit, Mr. Fraser said. That issue was put to rest when Oswald J. Grübel was made CEO of UBS AG in February, he said. Mr. Grübel “has been supportive of us in every way,” he said. “That’s been a very welcome change.”

But staff departures continue. On Oct. 13, Gabriel Herrera stepped down as head of Europe, Middle East and Africa, while Scott C. Hazen said Oct. 9 that he would leave UBS Global Asset Management as executive director and North American equity strategist. Tim Blackwell was named to replace Mr. Herrera on an acting basis. There are no immediate plans to replace Mr. Hazen, a spokesman said.

In September, a three-person U.K. real estate team left for Prudential Real Estate Investors; in April, Alexander Ineichen resigned as managing director and head of industry research for alternative and quantitative investments.

However, staff turnover has declined, according to data provided by UBS.

Among investment professionals, turnover fell to 7% in the first half of 2009, down from 10% in the first half of 2007.

Mr. Fraser said most departures in recent years have been driven by his efforts to restructure the business. “Voluntary turnover has been lower this year than in previous years, and we really haven’t lost many people that we regret,” he said.

Drew Carter is a reporter for sister publication Pensions & Investments.