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John Fraser, a native Australian, is the firmÆs London-based global chairman and CEO, as well as a member of the UBS Group executive board. The groupÆs executive board and board of directors is convening this week in Hong Kong û the first time the boards have met in this city. Fraser and Christof Kutscher, UBS Global Asset ManagementÆs head of Asia-Pacific in Hong Kong, took time out to speak with AsianInvestor about the asset managerÆs more recent string of successes and upcoming deals.
UBS Global Asset Management has come a long way from its parlous state in the late 1990s, but how do you now go from being competitive to becoming a default brand name?
John Fraser: ItÆs a job very much in progress. At the turn of the century we were still 14 different firms brought together because of investment-banking transactions, most notably the merger of Union Bank of Switzerland and Swiss Banking Corporation in 1998. We were too dependent upon value equities management in the traditional space, a style that suffered in the late 1990s tech boom. And we werenÆt organised properly on a global level. As a result we lost the confidence of our clients and of the UBSÆ wealth management business, which operates in an open-architecture environment.
Over the past four or five years we have totally restructured the firm. WeÆve recognised that a firm this large needs a range of investment capabilities, including equities, fixed income, alternative investments and real estate. WeÆve realised the need to bring these together in order to provide more holistic advice to clients, and help institutional investors, wholesale groups and third-party wealth managers.
What is the result?
Fraser: WeÆve had success by being hard-nosed and delivering to clients what they need at the appropriate price. WeÆve now got 33 offices in 21 countries, and we do things globally that make sense and locally where that is more appropriate. We run operations, IT, HR and financial controls at the global level. WeÆre moving toward integrating distribution at the three regional levels: the Americas, Europe including the Middle East and Africa, and the Asia-Pacific. And, unlike the in 1990s when we tried to organise ourselves as one great big pyramid, we now recognise the need to have a model that ensures consistency of philosophy and process, but allows individuals to lead their particular areas, investment or otherwise, with a focus on client needs.
So the organisation now looks more like multiple pyramids of varying size, to foster the characteristics of a boutique, without our managers having to worry about support functions or distribution. Our portfolio managers can weather tough periods when their style is out of market favour, or if itÆs not performing for other reasons. That gives the firm a diverse source of profitability, and our people donÆt have to worry about their bonus if they have a bad year or two.
What other changes to the organisation are you overseeing?
Fraser: WeÆve now established Dillon Read Capital Management out of New York to manage hedge-fund strategies. WeÆve set up an infrastructure investment business with our investment bank in Sydney, and that will now be co-based from London. The future of infrastructure investments is increasingly outside of Australia.
There is a perception in the market that asset managers tied to investment banks lack focus or independence. How do you get around that bias?
Fraser: Our policy is clear-cut: I brook zero interference from the investment bank in our asset management business; and IÆve never been asked by the bank to compromise. That sounds hairy-chested but there are many ways we can work together. There are clearly opportunities to do things on the structured-products side, although we can, and do, also work with external banks. The experience of the 1990s made us work harder to regain the confidence of UBS Wealth Management.
I understand the perception of our lacking independence; there have been cases where investment banks have shown less than total support for their asset management firm, or where the asset manager sat as the poor cousin within the firm. We are not. WeÆre now 10% of the total profits within the group, four times more than in 2002, which has given us credibility. Thanks to the investment bank, we have the wherewithal to invest heavily in risk, legal and compliance, and we have access to much wider talent pools; our key-man risk is far less than a boutiqueÆs.
Is your relationship with UBS Wealth Management now back to normal?
Fraser: The worst thing any of our managers can do is have a sense of entitlement. In some countries weÆre delighted with the results of rebuilding our relationship. In Asia-Pacific, Christof [Kutscher] and his team have come a long way in the past two years. ItÆs a work in progress but the trend is in the right direction.
You have recently said Asia accounts for around 9% of AUM and revenues, but should account for 15% over the next few years. How do you get there?
Fraser: We expect to announce soon a major expansion in Korea. China is a major area we want to develop: weÆve opened a joint venture in Shenzhen [with the State Development Investment Corporation] in the first quarter and weÆre looking to do a joint venture for real estate, although thatÆs been tough. WeÆre rebuilding our domestic capabilities in Japanese equities and fixed income. If we do all three of these things and continue to penetrate distribution and wealth management, weÆll be in good shape.
The Korea deal: is this the acquisition of a 51% stake of Daehan Investment Trust Management that has been rumoured since last year? [Daehan ITM is wholly owned by Daehan Investment & Securities, itself a unit of Hana Bank, which is reportedly keen to sell the asset management business. Daehan ITM manages W21 trillion ($22 billion)]
Fraser: We never comment on these kinds of rumours.
What is the attraction in Korea?
Christof Kutscher: We are planning to go in because of positive regulatory reform, because the market practice has adjusted to international norms, and because of pension reform and the establishment of a funded pension system. Some foreign players prefer a greenfield operation, others a joint venture; neither way is better or worse, so long as you have senior management in place to bring together local market expertise and global best practices. WeÆve done that in something like 20 markets.
Fraser: We gained Korea experience in 2000 with a relationship with Korea Investment Trust Company. It was a good experience but we simply didnÆt want to buy it.
WhatÆs the strategy for this market?
Fraser: Product innovation is key. Our partner has a distribution machine. The government has opened the market for international products. Pure domestic players will have a hard time in that environment. We can now introduce a full range of products, including hedge funds.
What are your other priorities in the region?
Fraser: WeÆre open-minded about our approach to China. WeÆve got six years of experience doing JVs in China; we had a cooperation agreement with Guotai Fund Management, but we couldnÆt come to an agreement with the shareholders. If we see the chance for another acquisition, thatÆs OK. ItÆs a long-term play. We think our new JV will need five years before itÆs a profitable contributor to our business.
Kutscher: ItÆs hard to say. If we assume the same success and level of asset growth from our JVÆs first fund launch this spring, and we launch a second fund in the fourth quarter and a third product next year, we can be profitable within a year or so. But China is volatile, you never know what can happen.
What about distribution?
Kutscher: WeÆve done well on the institutional investor side in Asia in the last two years. Now weÆre pushing the wholesale third-party channel. Five, seven years ago, we didnÆt have the products or a track record. Now we have those and we have a brand name. But distribution depends on each market. In terms of size, the biggest business now comes from Japan, where we have agreements with Japanese brokerage firms.
Is Japan your biggest market in the region?
Kutscher: From a size point of view, the Japanese market is huge. Our recent product launches raised a billion dollars after just a few months, and thatÆs not unusual. Foreign sub-advisors with a reputable name have a good chance in this market.
The Japanese institutional market has shrunk, outside of the public funds, and only a handful of global players have done well. How do you break into this small pool?
Kutscher: Yes, the corporate pension market has moved assets to the public sector. But we also see a broadening of investment guidelines within the pensions industry. The government wants pension funds to invest 5-7% in private equity. Hedge funds, private equity and real estate will become part of institutionsÆ portfolios, and thatÆs an opportunity. Financial intermediariesÆ appetite for risk is rising substantially; theyÆre not looking to give out mandates, but to find solutions. But the wholesale market will probably remain the most important for us.
What about India and Australia?
Fraser: ItÆs a matter of priorities. The landscape in Korea has changed so we must be there. But we also have to eventually be in Eastern Europe, in Russia; we recently entered Brazil with the acquisition of Pactual.
Kutscher: India is the next priority for Asia-Pacific. The market size is similar to ChinaÆs but itÆs very well managed, so itÆs harder for a newcomer to be better than the incumbents. Australia offers only limited upside; itÆs very competitive and already penetrated.
Staffing is a big headache for many players in Asia. What is your priority in this regard?
Fraser: IÆd love to be recruiting more people in Asia-Pacific. Staffing is one reason why some of our initiatives have been delayed. The people born here, or who move here, have an entrepreneurial zest about them.
What are the areas you need to add people?
Fraser: In many Asian markets, you can find good graduates, and you can find very senior people at the MD level. The gap is in middle management, itÆs hard to find people with five-to-seven yearsÆ experience. The number of people available is fewer than the number of jobs.
Why: because the local funds industries have been so discredited?
Fraser: ThatÆs possible. IÆm going to make a massive generalisation here, and argue that in Asia, proportionally more than other parts of the world, people have such an entrepreneurial spirit that they want to run their own businesses. In the US and Europe, asset management is an industry that prizes stability and longevity. Consultants and institutions all want to see that. IÆm not so sure itÆs always a good thing. In Asia, the industryÆs had a rapid expansion. People who may have entered asset management have left to do other things. ItÆs a problem in Japan, too.
Another thing in short supply û and this is global û is innovative knowledge. I'd like to see more people go into product development, because only product innovation can keep you ahead.
YouÆre here for meetings with the executive boards and the board of directors. What do you hope to achieve?
Fraser: ItÆs an opportunity for each of the three business groups to talk strategy and performance. Each is more successful in different markets. I want to ensure the senior managers are aware of the cultural considerations in Asia. It annoys me how unaware people in the US and Europe can be of the difficulty of travel and communication within Asia, and with logistical arrangements such as conference calls and meetings. IÆm trying to let Christof and his crew get meetings at civilised hours. And the meetings are about ensuring weÆre resourcing the region properly.
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