John Fraser is no quitter, although he could be forgiven for having second thoughts about the matter. Two years ago the head of UBS Global Asset Management agreed to postpone his planned year-end 2007 retirement at the urging of UBS’s then-CEO Peter Wuffli in order to steer the big money manager through through the downturn and a rough patch of subpar performance. Since then, the fortunes of Switzerland’s largest bank, and its asset management division, have taken a nosedive that is breathtaking even amidst the mayhem that prevails in today’s global banking system.
UBS ramped up its exposure to the U.S. mortgage market just before the housing crisis erupted, and it has paid a steep price: The bank posted a record Sf19.7 billion ($16.8 billion) loss in 2008 and was forced to turn to the Swiss National Bank for a $6 billion capital injection. It also had to off-load as much as $60 billion in illiquid securities into a fund set up by the central bank. Compounding the damage to its reputation, UBS last month admitted to having helped hundreds of wealthy Americans evade U.S. income taxes by setting up private banking accounts in Switzerland. The bank agreed to pay $780 million in fines and turn over details of roughly 250 American clients suspected of tax fraud to U.S. authorities in a settlement with the U.S. Department of Justice and the Securities and Exchange Commission.
In a dramatic attempt to put those historic mistakes behind the bank, the UBS board late last month drafted Oswald Gruebel, a veteran Swiss banker and former CEO of crosstown rival Credit Suisse Group, to take over as chief executive from Marcel Rohner, who resigned after only 19 months on the job. And early this month chairman Peter Kurer said he would not stand for reelection after only one year at the helm; UBS proposed Kaspar Villiger, a former Swiss Finance minister, as his successor.
The changes were the latest in a series of major management shake-ups at the bank as a result of the losses, including the July 2007 departure of Wuffli, who had presided over the disastrous expansion of the bank’s U.S. mortgage exposure, and the April 2008 resignation of chairman Marcel Ospel, who had overseen the rise of UBS as a global investment banking and wealth management powerhouse over the previous 15 years.
In a statement to the bank’s staff, Gruebel promised to work diligently to regain the trust of clients but warned that “further substantial cost reductions will be inevitable” to restore profitability. The investment banking division alone has already slashed 6,000 jobs, or about one quarter of its workforce. “We will have to continue to adapt the business model to the changing environment, return to an adequate profit level in the investment bank as well as further enhance profitability in other areas,” he said.
Investors welcomed Gruebel’s appointment and bid up UBS’s shares 16 percent on the day of the announcement. The executive is untarnished by UBS’s woes and comes with a proven track record as a turnaround artist, having helped restore Credit Suisse’s profitability as co-CEO and then as sole chief executive from 2003 to 2007. “It’s all about confidence,” says Adrian Darley, head of European equities at £75 billion ($105 billion)-in-assets Ignis Asset Management in London, part of life insurer Pearl Group. “If UBS can get through the year without big outflows and without further holes in its balance sheet, investors will be more willing to buy the stock.” Darley says he has recently started adding UBS shares to his portfolio but is still underweight the stock.
But the challenges Gruebel faces at UBS are far more daunting than anything he has confronted before. The group’s investment banking and wealth and asset management franchises have been badly tarnished by its subprime losses and U.S. regulatory troubles, and the latter issue is far from resolved. Just one day after UBS reached a settlement with the Department of Justice and the SEC involving the 250 clients, the DoJ asked a U.S. judge to compel the bank to disclose the names of 52,000 additional American clients suspected of using UBS accounts to hide income from U.S. tax authorities. The request lands Gruebel in a diplomatic minefield. UBS has vowed to fight the request, arguing that compliance would oblige it to violate Swiss laws on banking privacy — and further erode its private banking franchise. But Gruebel realizes that his bank must be seen as a responsible corporate citizen to revive its business. “It is indispensable that we strictly comply with all laws and regulations in every business area and market in which we operate,” he said in his letter to bank staff.
Gruebel is also trying to restore the bank’s profitability in the midst of the worst financial panic since the Great Depression, and he must do so under unprecedented public scrutiny that constrains his room to maneuver. Outrage over the bank’s losses has forced UBS not only to sharply curtail executive bonuses, as most rivals have done, but also to adopt a system whereby the bank can claw back previously agreed bonuses if risk-taking leads to losses in subsequent years. It is not surprising, then, that Gruebel told a Swiss newspaper that it was likely to take two to three years to return the bank to sustainable profitability.
That timetable comes as no surprise to Fraser. The asset management CEO was already struggling with poor investment performance in many portfolios before the crisis hit. Now UBS’s subprime losses and regulatory difficulties have compounded his woes by undermining what had been one of the group’s greatest strengths: a reputation as one of the premier global brands in financial services. “It will be a tough few years for the industry — and for us,” Fraser tells Institutional Investor. “The UBS reputational issues in the U.S. continue to be a negative factor. It’s not an easy time.”
But Fraser, a former deputy secretary of the Australian Treasury, vows to see a turnaround through. “I have never walked away from a fight,” he says during an interview in his modern London office close to the Bank of England. Fraser has met with scores of clients in recent months to persuade them to keep their money with the firm. Last month he visited the division’s offices in Singapore, the Asia-Pacific region and the Americas to bolster morale. “People want to see strong leadership,” he explains. “I want to reassure the staff that I have total confidence in the firm.”
The plight of UBS GAM shows how far the bank has fallen, and how much Fraser — and Gruebel — must overcome to get UBS back on track. After taking over as head of the division at the end of 2001, Fraser built UBS GAM into one of Europe’s leading institutional money managers by selling a range of funds, from value and growth equities to alternative investments like hedge funds and real estate. Like many others, he rode rising global stock markets. He also profited from managing roughly one sixth of the massive assets of UBS’s private bank, one of the world’s largest. UBS GAM’s assets under management soared to Sf891 billion at the end of 2007.
The past year has seen a dramatic retrenchment, as market losses and subpar returns in key areas of global equities and fixed income caused assets to shrink and led many clients to walk out the door. Outflows from UBS’s private banking business stemming from the group’s U.S. regulatory problems have been a big blow. Roughly 45 percent of UBS GAM’s assets come from the private bank, which had net outflows of Sf123 billion in 2008, leaving total assets at Sf1.6 trillion, 30 percent lower than a year earlier.
Raoul Weil, the former head of UBS’s wealth management division, which includes the private bank, relinquished his duties in November pending the resolution of the matter after he was indicted on charges of aiding tax evasion as head of U.S. private banking from 2002 to 2007. Weil, who denies any wrongdoing, was declared a fugitive from justice by U.S. authorities in January. There is speculation that the U.S. investigation may also have played a role in CEO Rohner’s departure. Although he has not been charged in the case, Rohner led the wealth management division and was Weil’s boss from 2002 to 2007, when the alleged tax evasion took place. In a statement UBS denied that Rohner knew about the offshore structures that were used to commit tax fraud. The Swiss Financial Market Supervisory Authority last month said its investigation “did not find any indications that the bank’s top management had any knowledge of violations” of U.S. law.
Altogether UBS GAM suffered a whopping Sf103 billion in net outflows last year; total assets fell to Sf575 billion at the end of 2008, down 35 percent for the year. “The outflows were very bad,” says Fraser. He estimates that the damage to UBS’s banking reputation from subprime losses and U.S. legal issues were a “substantial factor” in perhaps 60 percent of third-party client defections last year.
That was certainly the case for Western Investment. The Salt Lake City–based activist investment firm sought to oust UBS GAM as adviser to the closed-end Investment Grade Municipal Income Fund early this year. Arthur Lipson, head of the $250 million-in-assets firm, cited concerns about the adviser and the fund’s steep 17.5 percent discount to net asset value. The proxy vote at the fund’s annual general meeting in January was contradictory: Holders voted to approve a new advisory contract between the fund and UBS GAM but also to prohibit UBS from acting as the investment manager. The $134 million fund underperformed the Barclays Capital municipal bond index by 12.4 percentage points last year, posting a loss of 14.9 percent, according to Morningstar.
In September the £3.7 billion ($6.67 billion)-in-assets London Pensions Fund Authority terminated a £219 million absolute-return mandate with UBS GAM after it underperformed its benchmark, the U.K. retail price index, by 8.7 percentage points in 12 months through March 2008. “We were not convinced the product we had could deliver the performance we wanted,” explains Mike Taylor, chief executive of the LPFA.
UBS GAM posted an 8 percent decline in pretax profit last year, to Sf1.3 billion. The results would have been worse but for a Sf168 million gain from the sale of a minority stake in private equity firm Adams Street Partners in the third quarter, and were also supported by fees from profitable alternative investments that accounted for 9 percent of assets under management. The performance was much better than the Sf1.1 billion pretax loss reported by Credit Suisse’s asset management business, which had Sf411.5 billion in assets. The UBS wealth management division reported a 32 percent drop in pretax income, to Sf6.3 billion.
Still, the deteriorating performance has put a cloud over UBS GAM. Some observers believe the bank might be forced to sell all or part of the asset manager to raise capital. They note that Credit Suisse agreed in December to sell its long-only asset management business to the U.K.’s Aberdeen Asset Management for Sf381 million so it could focus on more-profitable alternative investments as well as its Swiss clientele. “There is a question mark over the UBS asset management business in terms of its strategic direction,” says Kian Abouhossein, a banking analyst at JPMorgan Chase & Co. in London. “It would be the easiest business to sell.”
Asked about that possibility, Fraser says, “We must always be flexible,” but he notes that his business remains profitable and consumes relatively little capital. “The bank has stressed that asset management remains a key part of its strategy,” he adds.
Gruebel also provided some initial reassurance. “At the moment I see no reason to sell something,” he told the Swiss newspaper Finanz und Wirtschaft after his appointment. At Credit Suisse, Gruebel was the architect of the so-called one-bank strategy that integrated the group’s investment banking, private banking and asset management businesses, suggesting he may pursue a similar goal at UBS. “The expectation is that the Credit Suisse model of an integrated bank with investment banking and asset management will be the model going forward for UBS,” says Peter Thorne, a London-based financial analyst at Swiss brokerage Helvea.
Gruebel has his work cut out for him. UBS shares have fallen by 68 percent since May, to Sf11.06 at the end of last month, as investors have grown nervous about the bank’s regulatory troubles, investment banking losses and weakness in the once-unassailable wealth and asset management franchises. Standard & Poor’s lowered the bank’s credit rating by one notch, to A+ from AA–, in December, citing concerns about its earning power. “The reputation issues, the outflows and the investment performance will take some time to turn around,” says Richard Barnes, an analyst at S&P in London.
The indictment of Weil, a Swiss national, is highly embarrassing for UBS. U.S. prosecutors allege that he referred to the cross-border private banking business as “toxic waste” yet chose to continue it because of its profitability. American clients generated about $200 million in revenue for the Swiss bank, prosecutors claim. UBS bankers routinely traveled to the U.S. to market Swiss banking secrecy to Americans looking to dodge their taxes by using subterfuge such as encrypted laptops and numbered accounts, the U.S. Department of Justice says.
In a statement, an attorney for Weil said it was “extremely disappointing” that his client’s indictment was not dismissed as part of UBS’s settlement with the U.S. authorities. “Mr. Weil is an innocent victim of a political dispute between the United States and Switzerland over Swiss bank secrecy,” added the lawyer, Aaron Marcu of Freshfields Bruckhaus Deringer.
Last month UBS announced a reorganization of the wealth management division to separate the Americas unit from the rest of the private bank. Marten Hoekstra, a former broker at Paine Webber Group, which UBS acquired in 2000, will lead the Americas business; Franco Morra, former head of the private bank in Europe, will run the Swiss wealth management business; and Juerg Zeltner, a former regional manager in northern Europe, is heading the private bank outside Switzerland and the Americas.
At UBS GAM, Fraser has made a dizzying number of personnel changes in a bid to turn around its poor performance. Since 2001 he has replaced 14 members of the 16-person executive board, leaving only himself and Gabriel Herrera, head of the European business, in place.
Fraser has also sought to return UBS GAM to its roots by creating independently run units, almost like boutiques, to manage areas such as global equities, fixed income and alternatives. In effect, he has reversed some of the work he did earlier this decade when he integrated asset management into a single, global platform and eliminated two of the business’s key nameplates, Chicago-based Brinson Partners and London-based Phillips & Drew.
Fraser has no plans to revive the old brands but will try to position UBS GAM’s Growth Investors unit, which focuses on U.S. and global growth stocks, as a more distinct division to distinguish it from the group’s value portfolios. He contends that it is easier to compensate, motivate and monitor performance at boutique-like operations. “I wanted to give individual businesses the discretion to be entrepreneurial,” he says.
It’s too soon to judge the success of the changes, but the early signs are encouraging. UBS’s global equity funds, with about Sf11.1 billion in assets, outperformed their benchmark, gross of fees, by 0.21 percentage point in 2008, according to UBS, posting a loss of 40.5 percent. For the three years through December, the funds trailed the benchmark, showing an annual average loss of 9.39 percent compared with an 8.1 percent loss for the benchmark. European equity funds, with Sf11.3 billion in assets at the end of December, declined 42.21 percent in 2008 and beat their benchmark, gross of fees, by 1.08 percentage points. Over three years, however, they underperformed, with an annual average loss of 12.56 percent, compared with the benchmark’s 11.07 percent decline.
Overall, UBS GAM gets 52 percent of its assets from clients in Europe, the Middle East and Africa, 38 percent from the Americas and 10 percent from the Asia-Pacific region. Some 21 percent of assets are invested in fixed income, 20 percent in equities, 21 percent in money market funds, 22 percent in asset allocation, currency and risk management products, 9 percent in alternatives and 7 percent in real estate.
UBS was formed by the $25 billion merger of Union Bank of Switzerland, based in Zurich, and Swiss Bank Corp., based in Basel, in December 1997. Union Bank of Switzerland ran an asset management business out of Zurich and acquired the London-based brokerage and value-style asset manager Phillips & Drew in 1985. SBC grew rapidly in the 1990s by acquisition: One was the $750 million purchase of Chicago-based value-oriented asset manager Brinson Partners in 1995.
After the merger UBS initially maintained Brinson, Phillips & Drew and UBS Asset Management as autonomous units. But the value-style fund managers suffered by steering clear of the technology sector, which they regarded as a bubble. UBS saw mandates worth $21 billion head out the door in the first quarter of 2000. Wuffli, who then ran asset management, responded by drawing up a plan to bring the businesses together and ditch the Brinson and Phillips & Drew names. Before he could execute the plan, he was tapped as CEO of the UBS group in December 2001 and named Fraser as CEO of UBS GAM.
Fraser was not one to shirk a challenge. The descendant of farmers who lost their wheat farm in the drought and depression at the end of the 1920s, Fraser grew up in Melbourne, where his father worked as an accountant for a family-owned construction firm. Frustrated by his inability to rise in a small, closely held company, Fraser’s father encouraged his son to start a career in the civil service.
Fraser took his first flight on an airplane at 18 to Canberra to apply for a cadetship to the Australian Treasury. He was accepted and went off to study economics at Australia’s Monash University, graduating with a first-class honors degree in 1972. On returning to the Australian civil service, he was posted to Washington, first at the International Monetary Fund and then as economic minister at the Australian Embassy. In 1990, at 38, he became the youngest-ever deputy secretary of the Australian Treasury.
In 1993, Fraser made his move into the private sector when Wayne Peters, then head of Swiss Bank’s Australian investment banking unit, and Clive Standish, then head of its securities operations in Australia, recruited him to the investment bank, SBC Dominguez Barry. A year later, Standish asked Fraser to turn around the struggling SBC Australia Funds Management unit. After restructuring the investment teams, including recruiting a new Australian equities unit, and moving into wholesale fund management for the first time, Fraser returned the unit to profitability within a couple of years.
In 1998, Fraser was named head of UBS Brinson’s business in the Asia-Pacific region. He expanded into Taiwan and set up, with Mitsubishi Corp., the first real estate investment trust in Japan.
When Fraser succeeded Wuffli as head of UBS GAM, he inherited a tarnished franchise. The division suffered net outflows of Sf66.1 billion in 2000 because of its adherence to a then-out-of-style value philosophy; it had pretax profits of Sf322 million that year. His appointment, combined with the decision to integrate into one global platform, triggered the departure of two marquee managers: Brinson founder Gary Brinson and Phillips & Drew chief investment officer Tony Dye.
“You can’t have someone running an investment organization without the appropriate investment skills,” says Brinson, who today manages his own personal wealth as president of GP Brinson Investments in Chicago. “John knew nothing about investments.”
Fraser completed the reorganization of UBS GAM, and for several years the integrated strategy worked. By 2004 the three-year performance of the firm’s global equity portfolios ranked in the top quartile of their institutional peers, while U.S. equities, European equities and global fixed-income managers all beat their benchmark indexes for the period.
Performance tumbled again, however, in 2006, in the key areas of global equities, European equities and global fixed income.
Fraser responded over the past two years by making wholesale changes, beginning by recruiting Nicholas Melhuish, former head of global equities at Nicholas-Applegate Capital Management, to take charge of global equities in October 2007. “The numbers were poor in 2006 and deteriorated rapidly through 2007,” says Melhuish.
Melhuish hired Nicholas Irish, a former senior portfolio manager at HSBC Asset Management, to work alongside him as the “gatekeeper for picking stocks” for the global equity portfolios. He also centralized the management of all major global equity strategies, which had been shared between Chicago and London, in London. As Melhuish explains it, decentralized decision making was “an accident waiting to happen” because portfolio managers were not communicating enough with each other about stock selection. He gave portfolio managers responsibilities for specific sectors as well as for regions, which they did not have before, and set up daily stock meetings between portfolio managers and research analysts. “The value-style investment approach remains the same,” he says, “but the new regime has more rigor.”
In 2006, Fraser recruited Rob Gambi, a former head of fixed income at Henderson Global Investors in London, as deputy head of fixed income at UBS GAM, and promoted him to global head of the business at the end of last year after the departure of his co-head, John Penicook. Gambi, a 50-year-old Australian and an experienced mountain climber who has scaled Mount Everest, has overhauled his team of managers and bolstered his ranks of analysts. In December he hired John Dugenske as head of fixed income for the U.S. and Canada, based in Chicago. Dugenske, a former head of European and Middle East fixed income at Neuberger Berman, then part of Lehman Brothers Holdings, had restructured Neuberger’s investment process in Europe. Working under Dugenske is Michael Dow, head of U.S. bonds, who Gambi hired from Indiana-based Reams Asset Management Co. in February 2007 to add more top-down macroeconomic analysis to the unit’s portfolios.
More recently Gambi expanded the number of analysts covering U.S. securitized debt to five from two and introduced a new quantitative screen for analyzing securities. The firm now covers roughly 800 individual securities, up from 200 previously. Worldwide, UBS GAM has 23 credit analysts researching some 900 issuers, which Gambi regards as a big advantage in competing for business to manage investment-grade corporate credit funds. “We’ve seen a huge surge of interest in corporate credit,” he says. “We are working on more than 12 inquiries for new mandates.”
In global fixed income, Gambi hired Robert Jolly, former head of currency at Gartmore Investment Management in London, in March 2007 as a senior portfolio manager focusing on currency strategy, a new post. “We are beginning to see some positive results from our changes in U.S. and global fixed income,” Gambi says.
Even as he has sought to fix traditional business lines, Fraser has been expanding into such areas as private equity and infrastructure investment. UBS GAM launched its first infrastructure fund in October and raised $1.5 billion from institutional investors, who committed to the fund for 15 years. Fraser plans to launch a second such fund this year.
Last spring Fraser poached an active quantitative equities team based in New York from Credit Suisse, led by portfolio manager William Weng. The new team will manage long-only and market-neutral funds as well as short-extension, or 130/30 funds. The team has won no new mandates yet but has three in the pipeline for 2009 and will be “an important part of the business,” says Fraser.
Adding new products remains one way for UBS GAM to reduce its dependency on the group’s wealth management business. In 2004 about 50 percent of the division’s assets came from the private bank; that figure stood at 45 percent at the end of last year.
Fraser admittedly faces an uphill struggle in trying to generate new revenues. UBS GAM, like all money managers, confronts a slowdown in demand for products that command high fees, such as hedge funds; severe market declines and the global economic downturn make all funds a tough sell. Fraser acknowledges that the growth in profitability of the past ten years is unlikely to be repeated anytime soon. “One of the problems is that everyone sobered up a little after the technology bubble but didn’t make substantial changes to their business models,” he says, referring to the exuberance of investors, governments and central banks over the past eight years. “Now the party is over.”
Still, over the long term UBS GAM should be able to generate 10 percent of the group’s overall profits. For new CEO Gruebel, that would be a welcome start.
