UBS Asset Management is trying to overcome a legacy of poor performance and client defections. Can it get the job done?
By Rich Blake
September 2001
Institutional Investor Magazine
As an old-school value manager, Gary Brinson liked to uncover solid stocks that had unaccountably fallen out of favor. Brinson walked away from the money management business last year, but if he were still trying to find a battered firm poised for a comeback, he might look no further than his former employer, UBS Asset Management.
With $370 billion under management and 3,000 employees in 15 countries, the Swiss bank’s asset management group boasts truly global scale; its worldwide private banking operation reports an unrivaled $1 trillion in assets.
But UBS AM has proved to be no small headache for its Swiss parent. Institutional assets have fallen from a peak of $227 billion in 1999, to a recent $177 billion. Asset management, with a strong bias toward value investing, accounted for 4 percent of UBS’s 2000 earnings. “In asset management we’ve had performance and client losses,” said Luqman Arnold, the bank’s CEO, at an April conference.
But now that value is resurgent, UBS AM may be as well. With a low-key leadership style, new global chief investment officer Jeff Diermeier has restructured equity teams along global sectors. It seems to be working: Through June 30 the flagship U.S. equity portfolio is up 12.5 percent, versus a decline of 14.8 percent for the Standard & Poor’s 500 index. Net new institutional assets in the first half of 2001 reached $7.3 billion, with the first quarter marking the first inflow since 1998.
“This is a firm that over the past few years has had just about everything bad that can happen to a money management firm happen, and it persevered,” says Robert LeClercq, a former Merrill Lynch Asset Management sales executive who recently joined UBS AM as an institutional sales executive covering the central region. This is a classic turnaround situation, and it’s exciting.”
Spearheading that turnaround along with Diermeier is Peter Wuffli, formerly CFO of UBS, who took over as CEO of the asset management operation in September 1999, when Brinson stepped aside from day-to-day responsibilities. Wuffli’s task was to create a single global investment platform, which he began working on in March 2000 with the integration of Brinson Partners and Phillips & Drew, the U.K.-based money manager acquired by UBS in 1986.
“We are dedicated to a business model of global investment capabilities and specialized local client service,” Wuffli says. “I think our efforts are starting to pay off.” His staff seems convinced: The firm has suffered remarkably little turnover despite the upheaval.
UBS’s asset management arm was patched together out of several fund firms acquired by UBS or its predecessors over the past 15 years, most notably Brinson Partners, Phillips & Drew and Mitchell Hutchins (courtesy of last year’s acquisition of PaineWebber Group). Since the mid-1990s all have been plagued by lackluster performance, client defections and staff departures.
In the late ‘90s Brinson and P&D stuck with value investing even as growth stocks soared. By the time the bubble burst, many clients had bailed out, costing Brinson alone $13 billion in withdrawn assets. Most of the hemorrhaging came after founder Brinson left amid a restructuring. Brinson, 57, insists that the reorganization merely gave him the opportunity to do what he wanted to do all along - take an early retirement.
In March 2001 UBS AM reorganized to create a more unified global brand. Along with the institutional wing, combining Brinson and P&D and known as Brinson Partners (the Phillips & Drew brand name survives in the U.K.), UBS has added a second asset management wing, Brinson Advisors, the retail distribution group encompassing the old Mitchell Hutchins.
“We had to harmonize the philosophies and approaches globally,” says Wuffli. “What is now in place is a powerful platform we can build upon.”
“Time passes, and wounds heal,” adds CIO Diermeier, who took over for Brinson in January. “We’ve stabilized outflows, and many of the U.S. clients who stayed with us are starting to add new money.”
UBS first made asset management a growth priority back in 1991, when the bank acquired New York-based Chase Investors, with about $17 billion in assets, from what was then Chase Manhattan Corp. The firm became UBS’s U.S. investment management division. Still, by the beginning of 1997, UBS reported assets of just $22 billion in its U.S. money management group. Hoping to spur growth, it spun the division out into a wholly owned but legally separate unit, UBS Asset Management.
But UBS’s effort to crack the U.S. money management business sputtered, and it wasn’t until UBS merged with Swiss Bank Corp. in June 1998 that UBS obtained a front-row ticket to the U.S. institutional arena. With SBC came Brinson Partners, the high-profile institutional player purchased by the Swiss bank in 1995.
Brinson, the son of a Chicago bus driver, who went on to receive his MBA from Washington State University and to build a leading money management shop, took charge of the new $340 billion operation, renamed UBS Brinson. Brinson defiantly clung to value investing, and the decision cost: In 1999 Brinson’s core equity portfolio trailed the S&P 500 by 25 percentage points.
P&D, which claimed $150 billion in 1997, also suffered from its commitment to value investing. It lost more than 50 U.K. pension clients with assets totaling $12 billion between 1999 and 2000. At the end of 1999, P&D’s 11.5 percent five-year equity returns ranked last among 58 peer funds.
In March 2000 UBS established a single global investment platform for its myriad money management operations. The clear goal was to boost performance. The unstated assumption: A shift to growth stocks was in order. The timing could not have been worse.
Within a week of the March 10 Nasdaq composite index peak, Brinson and Tony Dye, P&D’s investment chief, both announced their retirements. Industry observers suspected that Dye was forced out.
In the U.S. many pension clients who had stuck with Brinson for years, despite subpar performance, saw his departure as a good reason to pull their money en masse. Between March 2000 and the end of that year, pension clients yanked $12.8 billion, or almost half of the Brinson large-cap value equity portfolios.
In November 2000 UBS picked up another struggling asset management operation when it acquired PaineWebber and its Mitchell Hutchins Asset Management.
Not long before the deal closed, Mitchell Hutchins’s mediocre performance had provoked PaineWebber into dismantling much of its portfolio management operation and parceling the money out to a dozen outside firms, including Alliance Capital Management and Wellington Management Co.
Faced with a sprawling organization, earlier this year UBS Asset Management reorganized again, adding a second business for retail distribution. Brinson Partners remains the institutional distribution arm, and Brinson Advisors, absorbing the old Mitchell Hutchins, became the retail distribution arm. In August UBS added a third piece with its acquisition of RT Capital Management in Toronto, a firm with $20 billion under management. It will operate under the name Brinson Canada.
Brian Storms, the former head of PaineWebber’s asset management group, took the job as CEO of Brinson Advisors; Benjamin Lenhardt, the Brinson Partners director of marketing and client relations since 1995, became CEO of Brinson Partners.
Of UBS’s $370 billion in total assets, $177 billion are institutional and $193 billion are retail. Brinson Advisors is now embarking on a major effort to sell its retail mutual funds and other products through banks and other intermediaries. Brinson Partners, meanwhile, hopes that stronger performance will help recapture some of the old magic.
Still, even with stronger returns, distribution remains critical as the industrywide competition for shelf space grows ever more intense. UBS has the size, certainly, but can such a large, disparate organization effectively focus?
“I don’t know if they’ve righted the ship,” says Michael Flynn, president of Stratford Advisory Group, a pension consulting firm in Chicago that terminated Brinson from a number of assignments two years ago.
“Bigger does not always mean better in asset management,” says H. Bruce McEver, president of Berkshire Capital, an investment bank specializing in the asset management industry. “What you may have here is just a bigger, struggling colossus.”
