UBS hopes blockbuster funds bring star quality

From Wealth Management / Profiles 28 November 2011

Rob Lay, UBS Global Asset Management

By Elisa Trovato

UBS Global Asset Management plans to identify core areas in which it can build up flagship funds, according to its new regional head of distribution, Rob Lay

Having built a strategically important wealth management arm and a strong institutional division, UBS is now determined to strengthen its brand in the wholesale fund business in Europe.

The appointment, early this year, of Rob Lay as the first ever dedicated regional head of distribution partners for Europe and the Middle East at UBS Global Asset Management (GAM) follows the firm’s strategic decision to follow in the steps of the Fidelities and Templetons of this world.

With only SFr12bn (€9.7bn) of assets under management for third-parties in Europe and Middle East – which represent 12 per cent of total assets distributed in the region – UBS GAM clearly lags behind some of the juggernauts that dominate the distribution landscape in the old continent. “Third-party distribution has always been there but it has not really been a major strategic priority as it is now,” explains Mr Lay, adding that having an internal client the size of UBS WM has certainly provided little incentive to open up other relationships. “This decision has been a pull from clients as much as a push from UBS GAM.”

The focus at UBS GAM, which manages SFr524bn (€431bn) in total assets, has been on identifying core areas of expertise that can be translated into blockbuster funds. “We are looking to define our brand more in our wholesale space, and in order to do that, it is important to have flagship funds. We are looking to identify our brand-driven skills,” he says. The aim is to get distributors to associate UBS with specific products or strengths, the way they associate BlackRock with its gold and mining fund and Templeton with emerging markets.

One of the first tasks undertaken by Mr Lay was to define UBS’s lead product offering. This was split into four areas: debt and yield, thematic funds (including US growth equities), Asian equities and multi-asset. These were the areas mainly responsible for attracting new money over the past 12 months, says Mr Lay.

“UBS GAM has more than 250 funds in Europe, but we are now going to focus on 22 funds where we think we are best of class. We have kind of hidden our light, so far,” he adds. “The wholesale world doesn’t know we have SFr33bn in emerging markets or SFr100bn in multi-assets. These are undiscovered gems, used by our institutional and wealth management clients, which we are now taking to the wholesale market.”

But blockbuster funds cannot be built overnight. A flagship has to have a strong and consistent investment performance in all time periods. Also, it has to be in a big enough sector, where it has to prove it is amongst the very best, and must be built around a very strong and consistent team, such as for example the team managing the US growth fund that has been together for 10 years, he adds.

“To a degree, you need to be able to build your marketing story around the profile you have got and the brand you are building.” That involves for example, getting the fund rated, winning awards, getting on platforms, giving marketing support and gaining visibility through conferences to reach out to the big fund selectors.

The selection of the potential blockbuster funds followed a scientific process and was done on the basis of performance, as “it is performance that sells funds,” he explains.

“We have given much greater visibility to the lead offering, and much greater support to the fund managers to be more outgoing in terms of the exposure they are getting,” says Mr Lay, adding that internal goals have been built around benchmarks and quartile rankings.

Asked whether pressure on generating performance, and particularly short-term returns, may affect fund managers and their investment process, he responds that three and five year numbers are more important in the wholesale business. “It is difficult to build a blockbuster with anything less than a three year track record. Once methodology and process are proven, and fund selectors can see the durability, then they are much more likely to invest.”

The “fund life cycle” programme currently under way is likely to streamline the sprawling product range, but that does not prevent innovation. “There is always scope for innovation and the really big innovative themes remain about population growth, infrastructure, energy, feeding the world and basic materials.”

For example, the agriculture theme is not a new concept, but most of the products available focus on just one aspect of the value chain, such as farming improvements, or logistics. A fund encompassing the entire value chain which goes from “feed to fork” would be very innovative, he says.

“We are looking to provide solutions based on client feedback, which are necessarily medium to long-term solutions. What we won’t do is overpromise and underdeliver,” he says.

That means being honest and open with clients and admitting there are areas where UBS has not developed its expertise yet. For example, the firm cannot meet distributors’ current demand for guaranteed or absolute return products. “A product has to be right for the end clients. If it doesn’t work and affects your clients, there is a reputational risk, which we are not prepared to take.”

With a team of around 30 sales people, UBS GAM has local offices in Europe’s major cities. The UK, France, Germany and Italy account for more than 80 per cent of assets sourced from third-parties. The firm already has very strong relationships with the bulk of the major distributors across Europe, he claims, with banks and bank platforms representing the biggest channels. But there is more to do on the discretionary side, including wealth managers and in the pure advisory space, says Mr Lay.

“Distribution in Europe is dominated by a relatively small number of distributors who control very large pools of money. We have to be extremely competitive in order to be able to work with those major distributors,” says Mr Lay. The trend to guided architecture, does not make things easier.

“It is not about fund push anymore, it is much more about having a two-way conversation, and the distributors themselves are much more demanding and sophisticated,” he says.

Managing segregated mandates on behalf of third-parties is a space Mr Lay is looking to grow from its current base of around SFr4bn. “Sub-advisory allows you to get much closer to your clients, because it allows you to understand their needs.”

Table: Performance to 22/11/2011 - UBS Cross-border funds (CLICK TO VIEW)

If the majority of the conversations with distributors are about active funds, ETFs are also part of the lead product offering. “UBS is the fastest growing ETF house in Europe, and I think the houses that will be best positioned going forward are those that can offer a combination of very strong active management and very strong ETF and passive offering.”

To meet all these ambitious plans, the strategy is to grow the number of people on the ground. “We are looking to selectively hire the best people we can find in the market, who have strong relationships and experience to bring on board. We will ensure that as the business grows, we grow our team.”