Global Asset Management

One of the world’s leading asset managers, Global Asset Management provides investment capabilities and services to private clients, financial intermediaries and institutional investors.

Business

This business division offers a wide range of investment capabilities and services across all major asset classes including equities, fixed income, asset allocation, currency, risk management, hedge funds, real estate, infrastructure, private equity and fund administration. Invested assets totaled CHF 575 billion on 31 December 2008, making Global Asset Management one of the largest institutional asset managers and hedge fund of funds managers in the world. This business division is also one of the largest mutual fund managers in Europe and the largest in Switzerland.

Revenues and key performance indicators are reported according to two principal asset management client segments: institutional (for example, corporate and public pension plans, governments and their central banks) and wholesale intermediary (for example, financial intermediaries, including Wealth Management, and selected third parties).

Strategy

The financial crisis of 2008 is likely to have a major adverse impact on the immediate growth prospects of the asset management industry. A key change that could depress future growth in certain areas but provide opportunities in others is increased aversion to risk among investors. Investors are considering risk not only in terms of volatility and the possibility of underperformance in asset classes but also in terms of the liquidity constraints related to the ability to redeem investments as well as counterparty risks.

In the longer term, however the industry outlook remains strong as fundamental drivers over the past two decades have not changed and, indeed, have now been reinforced. Strong growth has been driven by the recognition, both within government and outside, of the need for increased retirement savings as median populations age and pressures on public finances correspondingly increase. This has created a growing industry in both established markets and, more recently, the new markets of the Middle East, South America and Asia Pacific.

Global Asset Management's diversified business model will allow it to continue to service growth segments by offering a wide range of products from boutique-like capabilities to various markets and distribution channels. Global Asset Management's wide spectrum of investment capabilities puts it in a strong position to further develop a holistic range of investment solutions including liability-driven investment and retirement products. This business division is well positioned to capture opportunities with the move towards more tangible asset classes such as infrastructure, real estate and private equity. It will also continue to drive its third-party wholesale initiative forward, particularly in Europe and the Americas.

Organizational structure

This business division is headquartered in London, with other main offices in Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Rio de Janeiro, Sydney, Tokyo, Toronto and Zurich, and employs around 3,800 persons in 25 countries.

Significant recent acquisitions and business transfers

- In December 2006, UBS completed its acquisition of Banco Pactual and renamed the asset management business UBS Pactual Asset Management. It is currently the seventh largest asset manager in Brazil with invested assets of approximately CHF 19 billion on 31 December 2008.

- In May 2007, UBS announced the closure of Dillon Read Capital Management (DRCM). The business was formed in June 2005 and officially launched in June 2006. The business had two arms - one managing existing proprietary assets transferred from UBS Investment Bank, the other established to manage outside investor assets. As the development of the business did not meet original expectations, it was closed in May 2007.

- In July 2007, UBS purchased a 51% stake in Daehan Investment Trust Management Company Ltd. (DIMCO) from Hana Daetoo Securities (formerly Daehan Investment & Securities Company Ltd.), a wholly owned subsidiary of Hana Financial Group. DIMCO was renamed UBS Hana Asset Management Company Ltd. internationally and Hana UBS Asset Management in Korea and is one of the market leaders in the Korean asset management industry, with invested assets of CHF 13 billion on 31 December 2008.

- In February 2008, UBS acquired 100% of the Caisse Centrale de Réescompte (CCR) Group in France from Commerzbank. The businesses of the CCR Group are being combined into the asset management and wealth management businesses of UBS in France. CCR Group had invested assets of CHF 4 billion on 31 December 2008.

- In August 2008, UBS sold its 24.9% stake in Adams Street Partners to its remaining shareholders. The transaction closed on 6 August 2008.

Competitors

Global Asset Management's competitors range from global competitors in active investments (such as Fidelity Investments, AllianceBernstein Investments, BlackRock, JP Morgan Asset Management, Deutsche Asset Management and Goldman Sachs Asset Management) to those managed on a regional or local basis or specializing in particular asset classes. In the real estate, hedge fund, infrastructure and regional private equity investment areas, competitors tend to be specialist niche players who focus mainly on one asset class.

It is likely that the current market turmoil will alter the composition of the asset management industry and its participants. Successful competitors are expected to be well-diversified, large asset managers - structured as either multi-boutiques or with a more traditional structure that can benefit from economies of scale - with access to a wide range of asset classes and a broad global distribution.

Products and services

Investment management products and services are offered in the form of segregated, pooled and advisory mandates along with a range of more than 500 registered investment funds, exchange-traded funds and other investment vehicles across all major asset classes.

- Equities offers a full spectrum of investment styles with varying risk and return objectives. It has three investment pillars with distinct strategies - core / value (portfolios managed according to a price to intrinsic value philosophy), growth investors (a quality global growth manager) and structured equities (strategies that employ proprietary analytics and quantitative methods).

- Fixed income offers a diverse range of global, regional and local market-based investment strategies that cover a wide range of benchmarks. Its capabilities include "core" government and corporate bond strategies, complemented by extended strategies such as high-yield and emerging market debt.

- Alternative and quantitative investments has two primary business lines - multi-manager (or fund of funds) and single manager. The former constructs portfolios of hedge funds and other alternative investments operated by third-party managers, allowing clients diversified exposure to a range of hedge funds, private equity and infrastructure strategies. O'Connor is a key provider of single manager global hedge funds.

- Global real estate actively manages real estate investments in Asia, Europe and the US across all major sectors. Its capabilities include core, value-added and opportunistic strategies on a global, regional and country basis, and are offered through open and closed-end private funds, funds of funds, individually managed accounts and publicly traded real estate securities globally.

- Global investment solutions offers asset allocation, currency, risk management and advisory services. It manages a wide array of domestic, regional and global balanced portfolios, currency mandates, structured portfolios and absolute return strategies which invest in internal and external portfolios.

- Infrastructure and private equity is involved in the origination and management of specialist funds that invest in infrastructure and other private assets globally.

- Fund services, the global fund administration business, provides professional services, including legal set up, reporting and accounting for retail and institutional investment funds, for hedge funds and for other alternative funds.

Investment performance full-year 2008

The decline in almost all financial markets that began in the latter half of 2007 continued in 2008 and accelerated towards the end of the year. Investors became increasingly risk averse and sensitive to news flow thus creating very volatile market conditions, even in perceived lower risk sectors such as money markets. Across the asset management industry, this difficult environment led to a wide dispersion of investment performance.

Among equity strategies, a higher proportion equaled or exceeded their benchmark for 2008 than for 2007, with most strategies also improving their relative standings compared with peers. This notable improvement in relative performance followed the leadership and broader personnel changes initiated during 2007. In core / value equities, the strongest performance for the year was seen in European and in Canadian and Australian equities. European equities performance was particularly strong in the second half of the year and, overall, sector positioning contributed positively, especially overweights to telecoms and pharmaceuticals and an underweight to materials. Global equity strategies showed distinct performance improvement during the year, despite some setbacks in the fourth quarter where a range of positive contributors were insufficient to fully offset the drag on performance of only modest overweights to banks and diversified financials. US equity strategies had a very difficult first half, followed by a strong third quarter and a weaker fourth quarter. Contributors to performance varied quarter by quarter but, over the year as a whole, underweights to energy and materials were the largest detractors. Overweights to utilities and telecoms were positives, although the latter was offset by weak stock selection in the sector.

Growth equities strategies posted mixed performance results with the US large cap growth and US mid cap growth strategies marginally outperforming their benchmarks while other strategies underperformed for the year. The first and second halves of the year delivered markedly different results. At the end of the second quarter, all major strategies were outperforming their respective benchmarks for the year to date. The accelerated deleveraging of the second half of the year saw an indiscriminate and broad-based sell-off in the global equity markets that put significant pressure on growth stocks and more than erased the outperformance of the first half of the year. Longer-term returns from growth strategies generally remain strong.

2008 was another dramatic year for global bond markets. Some easing of financial market stress was evident towards the end of the first quarter but this was soon reversed as the economic outlook deteriorated. Levels of stress in money markets, government and corporate bond markets increased dramatically during the third quarter, culminating with the Lehman bankruptcy in September. Despite historic levels of government and central bank intervention globally, the third quarter saw a substantial flight to quality in fixed income markets. Corporate bond yield spreads (the difference in yield versus government bonds) increased substantially. In the fourth quarter, central banks cut rates aggressively and combined with falling inflation expectations, this led to substantial falls in yield in developed government bond markets. Despite the announced bank bail-out plans, yield spreads on financial sector bonds widened to record levels. A combination of these factors and our portfolio positioning led to significant underperformance of US, UK, global aggregate and absolute return strategies. The structured credit exposure in some of these strategies was a factor, although less so as the year progressed as a result of exposures being reduced. In contrast, European aggregate, Australian, US municipal and high yield strategies outperformed. Money market funds continued to achieve their capital preservation objectives and Global Asset Management did not need to support its large funds, including its US 2a7, Swiss or Luxembourg money market funds. Refer to the disscusion on other types of support in the "Off-balance sheet" section of this report for more information on UBS's support to non-consolidated funds in its wealth and asset management businesses.

Multi-asset strategies, including the global securities composite, underperformed their benchmarks in 2008, largely as a result of asset allocation and bond selection in some of the underlying portfolios. Equity selection was mixed and currency management was strongly positive. At the beginning of 2008, the asset allocation position in equities was neutral. As equity valuations became more favorable and there were clear signals that the authorities were seeking to support the financial system, exposure to equities was gradually increased at the expense of government bonds. This market positioning detracted from performance for the year but is expected to contribute positively in the long term. Dynamic alpha strategies posted significantly negative returns in 2008 due to the overall long exposure in equities built up over the course of the year. Positive contributions came from the positioning within equity markets. Currency strategy performed very strongly across all strategies for the year. Currency strategy had been quite aggressively positioned against the large exchange rate misevaluations that had resulted from the popularity of carry trades (borrowing in a lower yielding currency to invest in a high yielding currency). The unwinding of carry trades in more risk-averse markets meant that this strategy paid off.

In alternative and quantitative investments, hedge fund performance in 2008 reflected the unprecedented market dislocations and asset price destruction that occurred globally. In the multi-manager business, the vast majority of funds of funds posted losses in absolute terms as most hedge fund strategies were affected by the extreme market conditions. Among the O'Connor single manager hedge funds, performance was mixed: multi-strategy alpha was negative (but out performed many peers), while fundamental long / short neutral and currency and rates strategies were notably positive for the year.

Overall, invested assets in the global real estate business declined moderately against a background of falling property values and investor risk aversion. Investment performance for some of our direct real estate funds subsequently came under pressure, notably in the UK and US. In contrast, funds in certain markets, notably Germany and Switzerland, achieved positive absolute returns. Global real estate securities strategies suffered in absolute terms over the year but their long-term relative performance against benchmark began to see some recovery.

2008 was a significant year for the infrastructure and private equity business. The core global direct investment infrastructure fund (the UBS International Infrastructure Fund) reached its final close in October, raising USD 1.52 billion. The underlying investments are performing well, benefiting from their defensive attributes and strong underlying cash flows from operating companies. The fund itself is delivering positive absolute returns. In contrast, global infrastructure securities strategies suffered negative performance for the year, in line with the wider equities markets. The launches of complementary, regionally-focused infrastructure and private equity fund initiatives were announced during 2008 with joint venture partners Abu Dhabi Investment Company and MerchantBridge respectively.