Setting a new benchmark
Michaël Lok, Co-CEO Asset Management at Union Bancaire Privée comprehensively discusses the bank’s investment strategies in manoeuvring through challenging times.
Can you describe UBP as well as the Bank’s growth strategy over the past few years?
As a family-owned and therefore independent Swiss financial institution, UBP is particularly well-placed to look after the diverse needs of its global client base. Through organic growth and successful acquisitions, UBP has built on our specific areas of expertise to offer a comprehensive service to understand and then meet the complex needs of both private and institutional clients. With our long history of careful risk and balance sheet management, we have maintained a strong capital base with a Tier 1 Ratio of 24.3 per cent (as at 31 December 2016). This strength underpins a bank that is innovative, responsive and driven by the clear objective of preserving clients' capital while still delivering returns and growing assets under management.
UBP has consistently understood that standing still is never an option. Since the early 1990s, we have progressively expanded through a proactive acquisition policy. With the private banking market undergoing such rapid change, the ability to identify acquisition targets, complete the deals, manage the risks and then integrate the acquired companies and clients into UBP’s existing investment platform is vital for success. A key focus at the heart of this expansion is the commitment to ensure that quality client service is the absolute priority throughout. The continuing high levels of client retention are a clear indicator that UBP knows how to manage change and yet deliver consistently high standards of service.
Major structural changes provide the constant backdrop to today's international private banking and asset management markets. UBP's history has always involved the early anticipation of change rather than simply the reaction to it. To achieve significant long-term growth in these markets, providers simply have to be agile at all times and capable of adjusting their business models rapidly. UBP’s governance is ideally suited to such an environment as the owning family are closely involved in its commercial development and risk management, and together with its highly entrepreneurial managers and specialist staff the Bank can quickly adjust to market movements. These are now UBP’s main strengths, and they have helped to deliver one of the fastest growth rates of any private bank over the last five years.
Where does asset allocation fit into UBP’s offering?
The ways in which UBP structures its investment platform have also undergone major change over the years. The shock of the 2008 crisis altered the way in which private banks go about their core investment management business. The traditional "open architecture" model for providing investment solutions to clients had clearly reached its limits. The main drawback of this method was that it led to a loss of control over assets, which were no longer held directly by the client’s bank, but instead by third parties.
UBP’s response was to create its own model to combine in-house capabilities with a refined open-architecture structure. However, from a client point of view, nothing is ‘off the shelf’ and UBP offers the ability to select from various investment models and frameworks. As an essential part of this, UBP has put asset allocation strategy back at the heart of its investment platform, as the main source of value creation. The main objectives of this approach are to define risk levels within the private banking business and to ensure the liquidity, transparency and clear ownership of assets under management.
In the wake of the 2008 crisis, UBP has recruited and retained investment teams covering institutional and private banking clients. These specialists and experts have worked to develop innovative funds and mandates that deliver strong returns and make the most of UBP’s investment skills. UBP is perfectly prepared to ignore the trend and follow its own independent judgement. A clear example of this was the pre-crisis asset allocation switch to cash and the early adoption of alternative investment strategies as far back as the 1970s.
One major development in today's markets is the increasing interaction between private banking and asset management activities, particularly for clients in the strategically important UHNWI segment. At UBP, UHNWIs can talk regularly to dedicated specialists and experts, and so benefit directly from their expertise and asset management capabilities. As a result, UBP does not merely distribute products to these clients but instead takes the time to create customised solutions matched to meet their specific requirements.
How extensive is the range of investment options available from UBP?
As a company that looks to the future, UBP has developed comprehensive expertise spanning all sorts of asset classes. The active bond management business has grown rapidly in the last few years, particularly in the high-yield and emerging debt segments. In equities, there has also been impressive growth in assets under management, with our team in Geneva covering Switzerland and the London office taking care of the rest of Europe.
In convertible bonds, where market conditions have been difficult since 2015, UBP's Paris team is a market-leader in Europe. In addition, UBP maintains a leading position in alternative investments with a particular expertise in developing customised mandates. By providing a compelling offering in the alternatives space it has been possible to bring about a significant change in client asset allocations. With interest rates at low or negative levels, it is essential to consider the full range of options to protect and grow client wealth.
How does UBP balance expansion with regulation and risk?
Overall, UBP has adjusted well to the major structural changes that have taken place in the last few years. Our private banking business has grown significantly taking full advantage of market consolidation by making acquisitions of varying sizes. The 2015 acquisition of Coutts International showed that UBP is more than capable of handling large deals and enabled the Bank to take its strategy to the next level in Asia and beyond. In international private banking, entry barriers are changing. Banks previously based their business on banking secrecy, but must now be much more competitive in terms of investments and risk management. Innovation, including the design of ‘blue sky’ investment solutions, has become vital to win new clients and thereby expand assets under management.
Transparency and compliance with ever more stringent and proactive regulations have to take priority and we also make efforts to ensure that risk levels are fully aligned with client profiles. UBP takes a comprehensive approach, with a wide-ranging investment platform that enables all clients to benefit from the same high quality of products and advice wherever they live. We put clients in touch with our specialists and experts in our various locations around the world, believing strongly that forging these close links creates value.
How does UBP apply its business model in the Gulf region?
Naturally, the same approach is used in the Gulf region. Using our overall investment strategy as the starting point, UBP can develop investment solutions specifically for clients in the Middle East. We have a particularly well-developed business in structured products, with solutions and risk profiles that are well suited to clients in this region.
The business has grown, especially since 2015, while keeping sound risk management at the centre of the investment process. Individual mandates are also one of UBP’s strengths for clients in the Middle East. With these customised mandates, private and institutional clients can gain privileged access to UBP’s entire investment platform. Depending on the areas of expertise involved, they may be managed by institutional asset management teams or private banking investment teams.
The GCC countries are therefore a particularly attractive market for UBP. With an agile and responsive global investment team which includes staff based in Dubai, UBP can be quickly on hand to address specific client needs in these countries. The GCC market is highly competitive but offers real opportunities, particularly in forex, direct bond investments, single hedge fund allocation and direct investments in private equity projects. UHNWI clients can have regular and direct access to the UBP Advisory team and receive individual recommendations in real time.
What should private and institutional clients make of the prospects for the rest of 2017 and thereafter?
It is clear that the overall economic environment looks much more positive and is certainly better than things appeared at the start of 2016. Back then, recession fears fed turbulence in the markets and there was also political uncertainty with the emergence of an aggressive populism. Oil prices, which are so important for the Gulf countries, fell sharply as a result of these macroeconomic concerns. However, at UBP, we maintained our positions, expressing the view that investors should ride out the volatility as 2016 offered the potential to be a transitional year.
In 2017, there is growing evidence that economic growth is becoming more synchronised around the world. In fact, for the first time since the 2008 crisis, all regions should see growth, particularly across emerging-market countries. Growth seems robust in the US, is accelerating in Europe and Japan, and recovering strongly in emerging markets. Earnings forecasts are buoyant and valuation levels are fair, except in the US where they have risen to historic highs following the election of President Trump. Central banks are maintaining a light touch on the accelerator and their proactivity and support remain crucial in the current environment.
Describe some of the risk factors and challenges facing markets today. How should investors consider positioning themselves?
Overall, financial markets have welcomed the brighter outlook, and have rallied strongly in the first few months of 2017. The two main risks were that faster US growth would lead to rapid interest rate hikes and an excessively strong dollar. Those risks have not yet materialised and markets seem to have priced in most of the good news arising from the stronger growth outlook for national economies and individual companies.
It is reasonable to assume that we have entered a trading range potentially limiting the short-term upside. To drive additional returns, particularly in the second half of the year, the improvement in the European and Japanese economies, and the recovery in emerging markets, will have to keep going. A slight slowdown in growth would not necessarily be bad news, since it would avoid stress on yield curves and the US dollar. The credit market, however, is showing a build-up of risk and appears relatively expensive after several years of repricing and strong returns. Spreads are now at historic lows, and there is a strong case to take profits in this segment of the bond market. Carry strategies remain justified, but there is merit in unwinding them gradually over the next few months.
In the equity market, investors may choose to consider reducing positions after the recent rally, but any consolidation is likely to be limited as the fundamentals are currently strong. UBP advises maintaining exposure to risk, along with cash reserves in order to seize on tactical opportunities as they arise. Oil prices are unlikely to be as volatile as they were in 2016, and a range of $45–$60 seems fair given the fundamentals. The gold price rose sharply in early 2017 but has recently seen a significant correction because political risk in the Euro zone has diminished: Europe’s Franco-German core has been strengthened by Emmanuel Macron’s election victory in France, despite the UK triggering the Brexit process.
All of these "house" views are adopted by UBP’s asset management and advisory teams. They are applied locally, in line with our clients’ requirements. Risk management and comprehensive compliance are key priorities for UBP. It is central to the investment process, to ensure that investments are suited to clients’ risk profiles as the regulators require. Real transparency and close ties with clients play a crucial role in our governance and business model, and represent values and qualities that are displayed by all of our people as they work to deliver the personal service that clients expect.