LATEST BAER SET-UP SHIFTS GAM TO CENTRE

That Julius Baer has changed beyond recognition during the past three years, there is no doubt. In 2005, the Zurich-based family-owned organisation acquired three independent private banks – Ferrier Lullin, Ehinger and Armand von Ernst and Banco di Lugano. In the same year, it bought London-based Global Asset Management (GAM) from UBS, soon to become the jewel in its private client management crown. These acquisitions meant the former staid institution has become the third largest Swiss wealth manager behind UBS and Credit Suisse. Its financial success has also pushed it out of acquisition range from all but the richest and most ambitious wealth management predators. And while both UBS and Credit Suisse have recently suffered heavy write-downs due to large exposures to sub-prime assets, the restructured Julius Baer has made progress in its three key channels – private banking, asset management and manufacturing bespoke investment products, leaving analysts queuing up to thank the company’s board for their prudent stewardship of this “pure play” wealth management company. The next hurdle, however, following smooth mergers and restructures, may well be the most challenging one of all: how to convince previously independent private bankers to follow the new direction dictated by their bosses – one of selling group products for maximum effect. Of the larger wealth management institutions, Julius Baer has been one of the few to always talk about health and wealth of customers above productivity and returns on equity. In fact, only minutes after announcing annual profits up by a third to e700m, reduced costs and earnings per share up 40 per cent at the recent annual results press conference, the group’s president, Johannes de Gier, restated the bank’s long-term philosophy: “We don’t want to be a product-push business, but a client-facing one.” But how can this long-standing and noble ideology survive against the background of an increasingly factory-led mentality of product creation, and a new distribution strategy, which calls into question the private bank’s well-known commitment to open architecture? Bringing in the profits One of the key drivers of the new Baer is David Solo, chief executive of the group’s asset management division, who was bought into the group together with his GAM multi-management boutique, which made its name particularly in running hedge funds for private clients and institutions. Mr Solo’s asset management unit brought in SFr17bn (e10.5bn)of net new money in 2007, despite difficult markets, which restricted inflows in the second half of the year. In fact the hedge fund performance fees attracted by GAM’s fund managers last year formed the lion’s share of profits. It is Mr Solo’s future plans, however, which are even more interesting than his undoubted past achievements. His aim is to inject the bank’s asset management arm with “better marketing and distribution skills”. Much of this will be done internally through closer co-operation with the private bank. Meanwhile, the “de-emphasising of securities-centric portfolios of private banking clients” means the wealth manager’s loyal customers will increasingly be fed group-manufactured, fund based solutions. “Only eight per cent of our assets come from private banking,” says Mr Solo, who currently oversees funds worth more than SFr170bn, split evenly between the GAM business, whose independence and unique culture he stresses, and the Julius Baer Investment Management (JBIM) arm. “The majority of these are money market funds, so there is huge potential once we properly distribute products through our private bank.” At the same time, Mr Solo contrasts his business with the asset management divisions of rival banks, which he says rely purely on sales of proprietary products. “We have to compete with other brands to get third party distribution,” he says. He also reveals, however, that much of the inflows of GAM have come from the ultra high net worth clients of UBS, the boutique fund house’s previous owner. Even though Baer bought back a substantial UBS stake in its shares last year, UBS officially remains a preferential client, and will clearly be serviced as one. UBS, says Mr Solo, remains his group’s “key client, our single biggest client in terms of assets, with a huge amount of coverage focussed on them. We are working extremely hard to keep those assets,” he says. There have been no significant outflows from UBS clients, and if anything, the relationship is “slightly more positive”. However, with UBS’s own famous commitment to an open platform policy, particularly in the highly influential Hedge Fund Solutions unit, run by Hansjoerg Borutta, an unsentimental German with a suspicion of getting too close to partners in a volatile alternatives market, it clearly makes sense for internal channels to be prioritised. Mr Solo reveals that one year ago, GAM received six per cent of its assets from Julius Baer’s private bank, and that today that cut has grown to nine per cent. “We don’t take our private bank for granted,” says Mr Solo. There is no notion of a captive bank being forced to buy proprietary strategies. “But we make it easier for client advisers to sell our products,” he adds. One former Baer private banker claims there were often stark differences of opinion between Mr Solo and the private bank’s fund selectors. “David Solo is a one-off, he is like a machine,” says the banker. “He would always say that GAM has all the best products for private banking.” But Baer’s behaviour in reality is far from that of a wholesale bank, where perhaps 60 per cent of assets might come from an internal provider. Yet references to increased cross-selling of products across the bank in the group’s 2007 business review means there is at least a nod to the wholesale model. Mr Solo reveals he wants to push his current eight per cent take of private banking assets closer to 20 per cent. “We are taking private bankers seriously as clients,” he says. Internal v external This philosophy is publicly backed by Alex Widmer, chief executive of Bank Julius Baer, who has been responsible for hiring 94 new private bankers – more than expected in 2007, many of them outside Europe. “We are absolutely committed to open architecture at the private bank,” said Mr Widmer in response to a question from PWM, although the absoluteness of this commitment may depend on the quality and scope of the internally manufactured product range. “We have a luxury brands fund, for instance. If that’s what they want and it’s performing, then this is the product we will show to our client. If the products are not performing well, then we will look to the market.” This is a relatively new development, with the private bank not previously offering any support to the asset management arm, in the “strange history” of the group, according to Mr Widmer. However, it is this history of independence which has given the bank its strength, he believes, rather than failing because it cannot always sell the fund unit’s products. January 2007 saw the management buy-out of the group’s London-based asset management arm, which made its name running fixed income and currency mandates for UK institutions. This did not fit into the group’s wider strategy. It also looks likely that the US funds business, JBIM LLC, which accounts for $73bn (e49.9bn) of Mr Solo’s assets, will be spun off in an initial public offering during 2008. While Mr Solo does not want to lose any asset management business, he is not sorry to wave goodbye to some of the index-based portfolios of Swiss pension funds. It seems he would rather substitute them with a lower volume of actively-managed assets, but operating at higher margins. He concedes that 2007 saw relatively slow asset growth, with people not exactly rushing to invest. But he is clearly a fan of this slow, steady growth, particularly from the beloved hedge fund products he developed at GAM, which are ideal for sales to private clients. “There won’t be an institutional business,” Mr Solo told PWM. “We are selling to other banks. The future is distribution.”

David Solo, Julius Baer