February 25, 2021

DealBook: UBS Profit Falls 39 Percent After Trading Scandal

UBS offices in downtown Zurich.Peter Frommenwiler/Bloomberg NewsUBS offices in downtown Zurich.

UBS said on Tuesday that profit fell 39 percent in the third quarter from the period a year earlier after a rogue-trading scandal had cost it $2.3 billion.

Profit fell to 1.02 billion Swiss francs ($1.2 billion) in the three months ended Sept. 30 from 1.66 billion francs in the period a year earlier. The trading loss and charges linked to a cost-cutting plan were partly offset by an accounting gain on the bank’s own credit of 1.8 billion francs and the sale of some investments.

“Current market conditions and trading activity are unlikely to improve materially, potentially creating headwinds for growth in revenues and net new money,” UBS said in a letter to shareholders. But it added that a plan to reduce costs and scale back its investment banking operation meant “we have every reason to remain confident about our future.”

UBS and other European banks are under pressure to cut costs and consider abandoning some investment banking products and services to comply with stricter capital rules.

In addition, UBS was shook by a trading scandal in its equities division last month that prompted the resignation of Oswald J. Grübel as chief executive. A former UBS trader, Kweku M. Adoboli, is facing charges of fraud and false accounting in London, and investigations into the incident continue.

Sergio P. Ermotti, the interim chief executive, is now scaling back the struggling investment banking operation, which makes up a large part of the bank’s costs, and free up capital to invest in its more successful wealth management unit. UBS is expected to present its new strategy for the unit to investors in New York on Nov. 17. The bank said its plan to reduce costs, which include the elimination of 3,500 jobs, was on track.

“We are finalizing the plans essential to implementing the investment bank’s client-centric strategy, which will strengthen our wealth management offering, reduce the firm’s risks and improve returns to shareholders,” Mr. Ermotti said in a statement.

The pretax loss at the investment banking unit widened to 650 million francs from 406 million francs because of the trading loss, while earnings at the wealth management unit rose; net new money in that operation was 7.8 billion francs in the third quarter compared with 8.2 billion francs in the second quarter.

UBS also said it had filed a document with the Securities and Exchange Commission, as required by United States rules, identifying problems with its internal controls.

One problem was an ineffective system to confirm counterparties of certain trades, while another was a weakness in internal controls to ensure that trades were accurately recorded in the bank’s own books. The bank said it was addressing these issues.

Article source: http://dealbook.nytimes.com/2011/10/25/ubs-profits-fall-after-trading-scandal/?partner=rss&emc=rss

DealBook: Some Hedge Funds Are Saying No to New Investors

Minh Uong

Since the financial crisis, big hedge funds like Paulson Company, Millennium Management and Och-Ziff Capital Management Group have not turned away money, eagerly collecting billions of dollars from investors who have tended to stick with the industry’s marquee firms.

The situation makes Anthony Bozza all the more unusual. With assets swelling, the hedge fund manager is closing the door to new investors at his four-year-old firm, Lakewood Capital Management. In a little more than a year, his fund has grown from $200 million to $900 million, according to investors in the fund.

Small hedge funds were supposed to be the big losers in after the crisis, hampered by costly regulation and investors who flocked to the seeming safety of larger institutions.

But three years later, some small and midsize managers are flourishing, attracting assets at a rapid rate. Rather than risk their returns, they are just saying no to new investors.

RouteOne Partners and Point Lobos Capital, started by alumni of the approximately $21 billion fund Farallon Capital Management, stopped accepting new money. Brenner West Capital Advisors, which tripled its size to about $480 million in less than a year, did the same this month, according to people with knowledge of the fund. Jericho Capital and the Redmile Group raised hundreds of millions of dollars before turning away new clients.

“There was a period where the bulk of the money was flowing to the very largest players, and now it’s trickling down,” said Dean C. Backer, global head of sales and capital introduction at Goldman Sachs in prime brokerage. “From the manager’s perspective, there are folks who really just want to be disciplined in terms of how they build their business.”

Lakewood, RouteOne, Point Lobos and Brenner West declined to comment. Redmile and Jericho did not respond to requests for comment.

Their discipline stands in contrast to the hedge fund math. Most portfolios charge a management fee of 2 percent on the total assets, an incentive to welcome new investors.

But the credit crisis taught managers the perils of growing too quickly. Amid major redemptions, some hedge funds were forced to scale back their operations. Others suffered lackluster returns because of a dearth of good investment opportunities.

Chastened by recent history, some newer hedge funds are trying to temper their growth.

The allure of smaller funds is their nimbleness. They can dart in and out of investments with speed that some of their larger competitors struggle to mimic. They can also concentrate on their best ideas, experts say.

“What you see with small or newer managers is they are engaging in strategies that are different and new and haven’t been seen before,” said Meredith Jones, a director at Barclays Capital’s strategic consulting group. “In many cases, that’s where a lot of the innovation comes from and that’s what keeps the industry from becoming homogenized.”

The start-ups that tend to gain traction have two main characteristics: pedigree and performance.

Mr. Bozza of Lakewood worked at the hedge fund SAB Capital Management and as an analyst at the buyout shop Kohlberg Kravis Roberts. RouteOne was started by William Duhamel, a former partner at Farallon. The Brenner West co-founders Craig Nerenberg and Josh Kaufman spent time at MSD Capital, Michael Dell’s family office. Josh Resnick, the head of Jericho Capital, was a managing director at TCS Capital Management, a hedge fund.

The recent returns of these managers have also caught the attention of investors.

After a rough 2008, where the firm lost nearly 20 percent, Lakewood notched gains of 70 percent return in 2009 and 16 percent last year, according to investors in the fund. Its bets against stocks, known as short positions, have been particularly successful, earning the fund about 20 percent a year on average since inception in 2007, according to a person with knowledge of the fund who spoke anonymously because the information was private.

To assuage anxious investors, many start-ups are hiring white-shoe law firms, and top firms for prime brokerage, legal work, auditing and administration. Brenner West, for instance, uses Goldman Sachs for its prime brokerage and Citco for its fund administration, two of the industry leaders.

“Those kinds of things make the guys with the money feel a lot more comfortable now,” said Karl D’Cunha, a senior managing director at Madison Street Capital, an investment bank.

Smaller funds have a tougher time attracting institutional investors like pensions and endowments, which represent the majority of new money being plowed into hedge funds. These investors typically invest big chunks of money, sometimes as much as $200 million, and do not want to account for a large percentage of any single fund.

But many big investors are finding new ways to work around that issue. So-called seeding funds have proliferated in the last year. These firms come up with the initial capital to individual hedge funds that are just getting started in exchange for a piece of the business. Often, such investments serve as a marketing tool for funds, enticing other investors.

The Blackstone Group, Reservoir Capital and Goldman Sachs have all raised money to invest with start-up managers. Reservoir Capital, for instance, made a seed investment with Lakewood. Brenner West was seeded by Protégé Partners, another investor in start-up hedge funds. Major institutions like the Ohio Public Employee Retirement System and the California Public Employees’ Retirement System have started their own portfolios focused on emerging managers.

Still, the amount of money dedicated to small funds remains modest by industry standards. Gone are the heady days when unproven firms could raise $1 billion before making a single investment.

Now, success is limited to a more select group of managers with the returns and experience to back their business.

“You’ve had a very fast growing, entrepreneurial industry that needed to go through the Laundromat a little bit,” said Drew Chapman, a partner at Cadwalader, Wicksham Taft. “The crisis weeded out the weak.”

Article source: http://feeds.nytimes.com/click.phdo?i=af378be18b3dbfb5f4686c7ef562f81e

Fundamentally: Emerging-Market Funds Tweak Their Strategy

IN a global slowdown, it’s only natural for investors to focus on parts of the world where economic growth remains strong — for instance, the rapidly expanding emerging markets.

Yet so far this year, bets on stocks in developing nations like China, India and Brazil have produced far greater losses than those in the domestic market. The Morgan Stanley Capital International Emerging Markets index has plummeted more than 10 percent, versus a 6.7 percent decline for the Standard Poor’s 500 index of domestic stocks.

So have investors thrown in the towel on the emerging markets? Not in the least. In fact, between January and July, they plowed more than $12 billion in net new money into mutual funds that focus on developing-market stocks.

As investors stuck with this asset class, though, they also tweaked their strategies.

Throughout much of the last decade, the way to win in emerging markets was to bet on producers. For instance, industrial companies throughout the developing world experienced a huge wave of growth as manufacturing left mature economies in the West.

So investors focused on parts of the industrial sector that benefited from the manufacturing boom. They bet on energy companies that powered factories and on commodity producers that met the rising demand for the raw materials needed to supply those factories and construction.

This year, though, the market has shifted. Industrial-oriented stocks have fallen 17 percent, or about seven percentage points more than the broad emerging markets.

Consumer-oriented companies, meanwhile, many of which are catering to the fast-growing middle class in places like China, have held up remarkably well. Shares of companies in emerging markets that make nonessential, or discretionary, consumer products are up around 3 percent this year.

“An overarching theme that’s occurring across the emerging markets is that the consumer base is blossoming into an income level that allows them to spend money on things beyond the necessities,” said Mark D. Luschini, chief investment strategist at Janney Montgomery Scott.

China, for example, is on track this year to overtake Japan in the number of vehicles it has on the road, putting it second behind the United States.

Arjun Jayaraman, a portfolio manager for emerging markets at Causeway Capital Management, said it was not surprising that some consumer companies had held up better than industrial ones.

“Let’s face it: this slowdown is based in the developed world,” Mr. Jayaraman said. While companies that make and export goods to Europe and the United States will be hurt by slowing demand in the West, he said, “a consumer company in India or China that’s more dependent on the local markets will be more insulated from the global slowdown.”

To be sure, consumer companies aren’t a huge segment of the emerging markets. Combined, consumer discretionary stocks and shares of consumer staples companies — which make essential goods like food or toothpaste — make up just 16.5 percent of the Standard Poor’s Emerging Broad Market index.

But Alec Young, international equity strategist at S. P. Equity Research, said that these consumer-oriented companies could serve “as a port in the storm for investors who want exposure to the emerging markets but want to achieve it in a more conservative way.”

Investors must still be careful, though, with this group of stocks.

“Stocks that are less sensitive to the global economy and that target local consumer demand have performed better, but as a result they’ve gotten more expensive,” said Jeffrey A. Urbina, co-portfolio manager of the William Blair Emerging Markets Growth fund.

The average price-to-earnings ratio for consumer discretionary stocks in the MSCI Emerging Markets index, for instance, is 13.4, based on the last 12 months of earnings. By comparison, the ratio for the broad emerging markets stands at 10.9.

As a result, many strategists say a cheaper — and less volatile — way to gain exposure to emerging-market consumers is through shares of large domestic and European multinational companies that generate a sizable portion of their revenue from those regions.

As examples, Simon Hallett, chief investment officer at Harding Loevner, an asset management firm, points to McDonald’s, whose shares are up 19 percent this year, and Colgate-Palmolive, up 12 percent.

These stocks have performed so well in this volatile market “not just because they’re defensive stocks,” he said. “It also has to do with their long-term growth opportunities in emerging economies.”

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

Article source: http://feeds.nytimes.com/click.phdo?i=da5b061b10acc6fcf6b4be7f4bde034b

DealBook: Net Inflows Help UBS Beat Expectations

10:01 a.m. | Updated

UBS, the biggest Swiss bank, on Tuesday reported strong growth this year in its core wealth management business, welcoming what it said were signs that it was regaining the trust of clients who deserted the bank during the financial crisis.

Net inflows of new money came in at 11.1 billion Swiss francs ($12.7 billion) in the first quarter, compared with “very small inflows” in the final quarter of 2010, UBS said, “providing a sign of client confidence in our business.” In the first quarter of 2010, UBS had net outflows of 18 billion francs.

The bank, based in Zurich, said net profit fell 18 percent, to 1.8 billion francs, from 2.2 billion francs in the period a year earlier. But that was still better than the average estimate of 1.7 billion francs among analysts surveyed by Bloomberg. The bank said profit declined as lower market activity weighed on trading volume and as the dollar weakened against the Swiss currency.

“I thought overall it was a pretty reassuring set of numbers, but mainly it was that net new money figure,” said Matthew Czepliewicz, a banking analyst at Collins Stewart in London. “Investors had been looking for an indication that client confidence was returning, and that was probably the sign they needed.”

Shares of UBS rose 5.7 percent in Zurich trading on Tuesday; they have gained more than 14 percent since the start of the year.

“I am satisfied with our result, considering market activity during the first quarter,” Oswald J. Grübel, the bank’s chief executive, said in a statement, “and I am particularly pleased by the increase in net new money, confirming the return of client trust and confidence.”

Clients withdrew an estimated 200 billion francs from UBS after the bank got a government rescue in October 2008 following huge losses on its United States mortgage business, and after it settled an investigation of suspected tax evasion by some of its American clients.

Over the three years through the end of 2009, UBS posted combined net losses of more than 29 billion francs.

Regulators in Switzerland have taken a harder line on bank solvency than in virtually every other major developed economy, putting pressure on UBS and its crosstown rival, Credit Suisse, to increase capital buffers against financial shocks.

UBS reiterated that it had decided not to pay dividends “for some time to come, in order to accumulate earnings that will augment our capital base.”

UBS said its Tier 1 capital ratio rose to 17.9 percent on March 31 from 17.8 percent at the end of December. The bank also cut its balance sheet to 1.29 trillion francs, down 26 billion francs from the end of 2010.

Despite the evidence of overall improvement, questions remain about the future of UBS’s investment bank, where first-quarter pretax profit fell to 835 million francs from 1.2 billion francs in the first three months of 2010.

Mr. Czepliewicz of Collins Stewart said the investment banking business — particularly the area focused on fixed-income, currency and commodities — would most likely be downsized eventually. After sharply cutting the business during the financial crisis, he said, UBS had probably moved too late to start rebuilding the operation, leaving it with a cost structure that was out of line with its profitability.

A final decision on that business will have to wait until the shape of the international regulatory environment is clearer, Mr. Czepliewicz said.

Article source: http://feeds.nytimes.com/click.phdo?i=2260af7a0154cd9fe96ea3e52e99928e