November 1, 2007
By Evelyn Juan
Dow Jones Newswires
Breaking up is hard to do – but not, apparently, for UBS, which last Friday axed some outside managers for its separately managed accounts.
UBS Wealth Management US has terminated three outside money managers under ACCESS, in which professional money managers handle clients’ portfolios for a fee.
The UBS AG (UBS) unit is expected to fire two more managers in December after terminating several others since the summer. It has also put some money managers “on hold,” blocking them from receiving new money.
The pruning is being done as UBS incorporates outside money managers acquired from Piper Jaffray & Co. (PJC) and KeyCorp (KEY). UBS absorbed the retail brokerage business of Piper in 2005 and KeyCorp’s McDonald Investments brokerage in September last year. Since then, the Swiss bank has been culling managers.
In some cases, the changes have apparently allowed the Swiss bank to move client assets into separately managed accounts that would be difficult for brokers to recreate should they leave the company and try to bring their clients with them. As brokerage firms have gotten into a recruiting arms race, defensive moves to make client assets more sticky have become more common.
Moreover, investments like SMAs show the shift in emphasis in the brokerage industry toward fee-generating businesses, rather than commission-generating transactions.
At UBS, some of the assets from the terminated managers are being automatically switched into the hands of several default managers whose combination is exclusive to UBS.
Also, some brokers are moving assets into the hands of UBS’s in-house money managers, allowing the firm to keep the money-management fee to itself rather than splitting it with an outside manager. Brokers are picking in-house managers when there is a lack of a better options among outside managers in a particular investment strategy, a broker said.
Kris Kagel, a UBS spokesman, declined to comment on the rationale behind the firings.
A person familiar with the terminations said the rationale behind them varies.
M&I Small Cap Growth Let Go
The Swiss bank fired M&I Small Cap Growth, which had been an outside manager brought in from Piper Jaffray, after losing a seasoned strategist and some analysts, posing a risk to the investment team’s performance, according to a UBS memo sent to the brokers.The contents of the memo were described to Dow Jones. A spokeswoman from M&I declined to comment on the UBS move.
UBS will also cut two strategies offered by Victory Capital Management, which had been a money manager used by McDonald. UBS will stop offering the firm’s Intrinsic Value and Deep Value strategies in December due to a lack of depth in the investment team and lackluster absolute and risk-adjusted performance, according to thememo.
Greg River, senior managing director and head of equities for Victory Capital Management, said the strategies will be terminated by UBS due to the small amount of assets they gathered at UBS, which made them inefficient to oversee.
In terms of performance, River said, Victory Intrinsic Value composite has returned 11.20% this year through Nov. 30, and the Deep Value strategy has returned 9.64%. Both beat the 5.7% total return on the Vanguard Value Index year to date, a broad measure of the performance of value stocks. “It’s not a performance issue,” River said.
The UBS memo to brokers said other money-management firms were terminated or restricted from receiving new money due to lackluster performance, failure to generate enough asset flows, and for risk-management considerations.
Meanwhile, UBS has added into ACCESS two dozen investment strategies, though not all of them are from new money managers. For clients with money handled by some of the terminated managers, default managers were also named; some defaults comprise several managers whose combination is not available to other brokerage firms.
For instance, clients with more than $275,000 invested in Intrepid Capital Management Large Cap Core and Balanced strategies, managed by a firm Piper Jaffray had used, will be moved into Nuveen Multiple Style Account. Nuveen has instituted a preset asset allocation that is proprietary to UBS and has formed a combination of managers that is exclusive to the Swiss bank.
“They’ve created some uniqueness that partially locks in the client,” said a broker who has some clients under ACCESS. “It’s one more barrier for me to bring that portfolio if I move out.”
UBS terminated the two Intrepid Capital strategies due to a pricing disagreement and lack of assets, said Mark Travis, chief executive of Intrepid Capital Management. Travis said he had “no love lost” for UBS and was “frankly happy not to be there any longer.”
To avoid the headache of getting to know the new managers and choosing the right ones for their clients, the UBS broker said some colleagues have opted to put clients’ money into PACE, the Swiss bank’s mutual fund program. “It’s a lot easier to just go to PACE and many teams here have gone that route,” the broker said.
Hiring the right professional manager is crucial for separately managed accounts, in which clients turn to third-party managers to handle their portfolio.
These accounts, which have become prominent on Wall Street with the rise of fee-based programs, are popular among clients with sizable assets. In the case of UBS, its ACCESS program is typically for those with at least $100,000 to invest.
Generally, clients under SMA programs pay a maximum of 3% annually for managing their portfolio; from that sum, the firms pay around a quarter to half a percentage point to the outside managers. Financial advisors maintain the client relationship and help in choosing the right manager for the clients.
Jeffrey Strange, a senior analyst at Cerulli Associates, said that a quarterly survey of 100 money managers found there had been 38 terminations among them in the past 12 months. Still, “there were more additions than deletions per manager,” Strange said.
UBS, with around 8,000 brokers, increased its managers from around 100 to 170 after acquiring Piper Jaffray and KeyCorp.
Laurence Klayman, a securities lawyer who was represented some clients that sued UBS in the past, said manager firings related to disagreements about splitting commissions and administration of fees could compromise clients’ interests if an SMA manager is fired despite strong performance.
ACCESS is an advisory account that requires fiduciary duty to clients, he said, and “so whatever they are doing, they better be sure that it is in the best interest of their clients and not the firm.”