UBP intent on a return to fund of funds summit

Richard Wohanka, CEO of asset management and alternative investments at Swiss private bank Union Bancaire Privée (UBP), has a practical problem. His clients, most of whom are still suffering from the financial crisis, which badly dented the group’s asset base, are coming back into the market.

That may sound like good news. But wealthy individuals are now wiser than in 2008, when many were handing money over to Madoff-related vehicles almost without thinking. Not only do they expect top-drawer due diligence, but they also need downside protection and liquidity.

Of these three current preconditions, the third is possibly the toughest to achieve. By the time Mr Wohanka’s team finishes restructuring its multi-strategy fund of hedge funds at the end of the year, he hopes to offer four versions promising weekly, monthly, quarterly and twice-yearly access. “Some institutions, such as pension funds, don’t need liquidity; they will give it up for a higher yield,” says Mr Wohanka, who’s client base is split evenly between institutions and private clients. “Others, particularly private individuals, want it, as they want to get out when they need to.”

In order to achieve this Holy Grail, Mr Wohanka must locate 30 new fund managers for his clients to buy into, aiming for a total of 150 on the approved list. “We need to find the managers,” he sighs, resigned to the hard slog ahead and all the painstaking research and due diligence his teams must embark on.

Since 2008, UBP has made some simple yet vital changes to how it does business, he says, adding that the Madoff fraud and unexpected decline in value of hedge fund assets were of equal concern to investors who voted with their feet and struggled to withdraw funds. Mr Wohanka had no responsibility for the Madoff-related problems at UBP, as a result of which clients lost $700m (€570m), aggregated across discretionary portfolios and fund of hedge fund products.

In fact he was recruited in October 2009 from an eight-year stint at Fortis, where he was chief executive of asset management until the merger with BNP Paribas, to help re-adjust the post-Madoff client offer. He says “substantial resources” have been invested by UBP to fix its problems and he has bought several key colleagues with him from his ex-employer. The bank plans to hire a further 70 people for its asset management team by the end of 2011.

“The recruitment market is very strong at the moment, and we are attracting candidates from lots of different houses, all with good brand names and strong track records,” says Mr Wohanka.

“If you make a mistake you learn from it and we learned some very clear lessons,” he says. One of these is to work with third party managers only if valuation, custody and management of assets are separated. The “basic error” had been made of working with a fund manager, which handled all three internally, he says. Operational risk management procedures (ORM) have also been “beefed up.”

The new-look ORM process puts managers through 75-100 risk checks including transaction testing of the fund’s books, records and asset performance verification. Crucially, the ORM team head has been given full “veto power” over any suspicious manager.

Mr Wohanka describes himself as a big fan of Ucits III regulated vehicles, so-called “hedge funds lite”. When historical problems were discovered in the Ucits III fund managed by Newcastle and offered by UBP to its clients, the matter was swiftly dealt with. “What Ucits III should do, and in this case certainly did, is to ensure a high degree of liquidity. Investors got out the next day and there were no losses for our private clients. But Ucits III doesn’t mean there is no risk in the fund.”

He is particularly proud of how the bank handled this latest problem and that the product’s structure, offering daily liquidity, was totally appropriate to the large cap nature of the fund. Having learned the lessons of Madoff, UBP took full control of the assets before launch, with the external fund house employed only as an adviser to the Swiss bank. “We are getting wiser as we get older,” says Mr Wohanka.

Despite UBP’s assets under management having shrunk from $60bn (€48bn) in 2008, when the Swiss bank was the world’s largest fund of hedge funds player, to $25bn today, with an accompanying fall in profits, Mr Wohanka remains a firm disciple of the fund of funds model.

His argument runs that picking hedge fund managers is more complex than choosing stocks and private clients are typically more comfortable buying a fund of funds, which performs above stockmarket indices, but below the average single strategy fund. “If you want to pick them yourself and have the time and resources to do so, then be my guest,” he smiles. “But very few people have that luxury. The risk of getting it wrong, for most investors, by far outweighs the extra performance you might get.”

In parallel to this focus on trying to get his bank back to the pinnacle of the hedge funds world, is further development of UBP’s long-only business, particularly emerging market bonds and equities. Mr Wohanka aims to get his asset management operation handling $60bn once more by 2013. “It’s no longer sensible to see emerging markets as a tactical play for relatively small parts of a portfolio,” he says, pointing to a permanent, strategic allocation to developing economies.

He dismisses London Business School research showing lack of correlation between GDP growth and stock prices as applying only to developed economies and calls for private banks to offer their clients a “gutsy” allocation to emerging markets, in line with those countries’ superior growth prospects. Currently, there is in-house capability in the East European sphere, but much Far Eastern investment needs to be outsourced. Value Partners, for example, manages Chinese equities for UBP. There is certainly a case for a future acquisition of a modest pan-Asian manager, bearing in mind that UBP is recommending 25 per cent allocations to developing economies in client portfolios.

The feeling of Mr Wohanka is that in 2008 and 2009, advisers from private banks failed their clients, who had predominantly given them flexibility and room for movement in asset allocation decisions. But for a number of reasons, advisers did not see the crisis coming and tended to stick close to their benchmarks, not using the flexibility their clients had allowed them. This meant they failed to prevent huge shifts in the market value of private portfolios.

“Banks did not give clients protection on the way down or catch the rally on the way up,” he says. This was less of a problem for institutions, which tend to conduct an allocation exercise, linked to liabilities, together with their consultants.

He recognises asset allocation processes must be reformed, with a wider variety of classes to be included in portfolios, but rejects the notion, currently being floated by many Swiss banks, that clients have lost faith in their wealth managers and want to conduct their own business through more of an advisory, rather than discretionary, arrangement.

“There is no evidence of a move to the advisory model,” suggests Mr Wohanka. “Clients may be annoyed, but there is no sign of them wanting to make the calls themselves and take our mandates away. They don’t feel any more confident [to take the decisions].”

He has no reservations about what the UBP brand proposition should mean to private clients during his tenure. “The image, look and feel of the brand going forward is that of a nimble asset allocator,” he says, spreading the belief “that you as a client should be investing in emerging markets for a large part of your wealth and secondly that alternatives are an important tool to use in your portfolio.”

There is some scepticism in the Swiss private banking community about whether Mr Wohanka, a veteran of the asset management industry, will stay long enough to implement his strident aims. Geneva gossips say he will serve a two-year stint before finding the challenges insurmountable and move to more attractive pastures.

But he is keen to silence the critics. “I can tell you, categorically, that this will be my last job in the industry,” he says. “I am 57, and though I am not going to work here until I am 90, it will take a couple of years to get everything on stream, and then a few years to recoup the fruits of that work, which will take me close to retirement age.”