Longtime UBS O’Connor leader Dawn Fitzpatrick has recently been tasked with heading a newly revamped group within the asset manager. With the new title of “Head of Equities, Multi-Asset and O’Connor at UBS Asset Management” firmly in hand, she sat with CIO’s Editor-in-Chief Kip McDaniel to discuss how asset management is evolving—and how her firm is too.
Q CIO: Your firm is streamlining operations within asset management. What is the impetus for this? How does this better serve the end user, the allocators of the world?
Fitzpatrick: It is less about streamlining and more about strategically positioning the business to create better processes and levers to deliver superior returns for investors.
We made it explicit that we plan on tearing down walls—both literally and figuratively—between our alternative and traditional businesses. Look at some of the most progressive allocators out there—they’ve made a thoughtful decision to do this, and we are as well.
Of course it is all about delivering results. When you think about what a hedge fund is trying to deliver, it is positive return against benchmarks. When you’re a long-only investor, you might have a different benchmark, but the objective is the same. Taking the best practices from both sides, and leveraging those best practices, should result in better outcomes.
Q CIO: In general, what are one (or some) of the biggest changes you have seen over the years in this industry and how have they influenced your thinking and leadership?
Fitzpatrick: Clients have become more sophisticated, and they ask a lot more questions. They are demanding more for their money.
As an asset manager, we must demonstrate clear added value or you won’t keep a mandate for long. A simple return number is not good enough. Clients want to know the risks taken to get to that return and how that return stream will perform in different market environments. They want to understand their liquidity risk, and they want access to thought leadership from their managers. They ask a lot more about factor exposures, for example, and they weren’t thinking about that five years ago, by and large. It speaks to the sophistication.
With hedge funds, the demand for transparency to the underlying portfolio has increased, and clients want to understand what the drivers are. They also want institutionalized platforms—that’s a really important thing. Part of what you have seen in the asset management industry, and in the hedge fund industry, is that the big have gotten bigger. People always talked about emerging managers and boutique asset managers, but the truth is investors have favored the big, process-oriented, institutional platforms—and rightly so.
Q CIO: So when did this change start? A CIO today was likely a CIO before the financial crisis—so what forced them to become sharper?
Fitzpatrick: There is no doubt that the largest catalyst for that sophistication was the financial crisis. Because more questions were asked of them, in terms of positioning and target returns and portfolio performance, CIOs really stepped up. “Necessity is the mother of invention” is a very true statement; that horrible moment in time drove a huge leap forward in terms of what is being demanded by our clients. It is great for the industry.
Q CIO: Given that you believe we’ve learned our lessons well as an industry, what do you think the future holds?
Fitzpatrick: I think the price action that we have seen in markets to start the year is an overreaction. I think we are more likely than not to continue in a slow growth regime. I am not in the “doom and gloom and heading back to the 2008 crisis” camp—the data doesn’t support that. China definitively has some issues to contend with a command economy and they have an enormous number of tools to effectively manage that economy. In our view, we won’t see, or feel, a hard landing in China.
However, I don’t think the returns you have seen in the equity and credit markets are repeatable. Regulators have taken out an extraordinary amount of capital markets liquidity by reducing bank balance sheets. So we are very prone to bouts of volatility, like we saw in January or in August 2015. I believe those events are going to become more frequent, and I actually think it is another reason to combine traditional and absolute return investment teams.
Q CIO: So should expectations therefore be tempered—at least for those allocators with aggressive bogies?
Fitzpatrick: They’ll need to be.
Where investors have the flexibility, I think you will see an uptick in alternative allocations. When you look at the market backdrop, because of the liquidity removed and price action we have seen, there are interesting opportunities.
You just have to be nimble. I will use the example of US high yield, excluding energy and mining. It is trading at a 7.5% yield—attractive if you don’t think the US is going into recession. But you need to be more nimble than you had to be in 2009 through 2015 to take advantage of opportunities like that.
Q CIO: When you say “nimble,” I think “governance”. But in your mind, what are the hallmarks of investors who are nimble?
Fitzpatrick: Building that nimbleness into your investment committee is important. And if you can’t do that, delegating to a manager who is explicitly meant to take advantage of market dislocations in the short term is important.
Q CIO: One thing I hear a lot about in futuristic discussions is “solutions.” I don’t love the term—but it clearly is a driving force behind change in this industry.
Fitzpatrick: Solutions are going to be a big strategic focus for us. We have a really strong set of building blocks to create those solutions for clients. When you look at the breadth of our capabilities, we have traditional solutions, our own hedge funds, as well as great multi-manager capabilities, both on the long-only and alternatives sides. Those building blocks—and the knowledge that goes with having that breadth—put us in a position to provide customized and innovative solutions. It will be a focus—actually, I would say I believe it will be an area of significant success.
Q CIO: What are the trends that UBS is positioning for that haven’t occurred yet for you?
Fitzpatrick: Those big strategic relationships—those are something we are setting ourselves up to excel at.
Q CIO: Like what Texas Teachers and some other pensions have done with large private equity firms?
Fitzpatrick: Yes. Those are going to be increasingly valuable for both sides—allocators and asset managers—because of the opportunistic trades that develop in this new market regime. Some of those trades demand that you be both big and quick, so it doesn’t necessarily lend itself to a commingled, pre-raised asset pool. Those are incredibly attractive and could be very good for the client. It is absolutely a goal of ours, and with this new structure, I like our chances.
Disclosure
The views expressed are as of February 1, 2016 and are a general guide to the views of UBS Asset Management. The information and opinions contained in this document are based on current expectations and are considered “forward-looking statements.” No part of this presentation may be reproduced or redistributed in any form, or referred to in any publication, without express written permission of UBS Asset Management.
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