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Fund Manager Focus - October 2010

James McLellan, UBS Global Asset Management - Zurich

UBS Global Asset Management in Zurich is the institutional investment management division of UBS and manages approximately $530 billion. UBS was founded in 1998 as a result of the merger between Union Bank of Switzerland and Swiss Bank Corporation. UBS also owns Chicagobased Brinson Partners and has major offices in London, Chicago and Geneva as well as Zurich. UBS group, as a whole, has total assets under management in the group of nearly $2 trillion.

James McLellan runs a U.S. mid cap fund worth $390 million which invests in U.S. stocks with market capitalizations between $500 million and $10 billion. He also runs a global materials and a global energy fund with a combined value of $250 million. Before joining UBS, James, an Englishman, worked at Insight Investment Management in London.

How does your Zurich office work with your offices in London, New York and Chicago when it comes to stock selection?

“There’s not much overlap on the mid cap fund as the regional offices tend to focus on large or small cap but there is some overlap where the analyst coverage comes down to the mid cap space, so maybe 10 – 20% of what we do is covered by an analyst in Chicago.”

So do you work from a recommended list?

“No, not on the mid cap fund.”

How do you use UBS sell-side research in your process?

“There’s no particular bias because it’s UBS. We treat them like any other sell-side firm”.

How does working in Zurich compare with London (given that you used to work in London)?

“Corporate access is better in Zurich as there’s not so much competition and UBS is #1. Not every roadshow that comes to Europe comes to Zurich while every roadshow that comes to Europe probably goes to London - but that’s more than compensated for by the fact that whenever a company comes to Zurich UBS is one of the first ports of call.”

Can you tell us a bit about UBS Global Asset Management and UBS Wealth Management. Are they separate?

“We do upon occasion share meetings where it makes sense. UBS Wealth Management is one of UBS Global Asset Mangement’s most important clients (i.e. they invest in our mutual funds), and both are part of UBS AG whose strategy is one of an integrated bank, so there is linkage between the two divisions on many levels. Operationally we are separate though, and both capable of operating on a stand-alone basis.”

How would you describe your investment style?

“We are style agnostic. We are not value investors but we pay very close attention to valuation.”

How do you know if you want to meet a company?

“We look at what companies do and see if it holds inherent interest. Most companies that come through we try and see as they can all provide information and insight that is useful even if they may ultimately lack merit as potential investments.”

Is there anything you won’t invest in?

“No. We are open to ideas.”

Typically how many US positions will you hold, what’s your average position size and what is the value of your largest position?

“60–70 positions. The benchmark we use is fairly flat with no large benchmark positions so that doesn’t distort the holdings list like it might if it was benchmarked to the S&P 500 where companies like Exxon or Apple may represent over 2–2.5% of that index. Our positions in absolute terms would be from 1– 3% with an active weighting varying between 1–2%.”

Which benchmark do you use?

“The S&P 400.”

What is your average holding period?

“18 – 24 months.”

What’s your active share? (how much will you bet against the index?)

“Our active positions are typically from 1-2% and we invest 50% outside the benchmark so our overall aggregate active position has got to be around 80%.”

What’s the average market cap of your U.S. holdings?

“Currently it’s about $3.5 billion which is quite similar to the benchmark.”

Are you constrained from investing in any sectors?


What do you think about the US market at the moment?

“We expect volatility to continue. Equities are attractively valued but we’re going through an uncertain period. Removing the stimulus and dealing with fiscal deficits will result in uncertainty and swings in sentiment leading to sustained volatility - so more of what we’ve had so far this year really.”

Favored sectors?

“None as we tend to be bottom-up. Everything we do tends to be a fall out from that bottom-up view. Our top-down view will colour our perception and the assumptions we are prepared to make about certain companies. For example, we feel consumers are under pressure in the U.S. and with the fiscal situation, we think the consumer is going to remain subdued and this impacts the assumptions we use in our forecast models. Relative to our expectations, we find valuations too high in the consumer sector so consequently we are underweight that sector. Financials also. We are still unconvinced about the banking sector, believing credit problems will take longer to work through relative to implied market expectations so we’re also underweight there.”

Favored themes?

“We are finding opportunities in biotech and industrials. Utilities too.”

Favored companies?

“Within industrials we favour companies with strong management, attractive end markets and the ability to drive returns on investment higher – examples of such companies would be Roper Industries and Pall Corporation.”

Recent sales?

“M&A activity has been a feature of the markets this year, and we have benefitted from this action. We recently sold positions in NBTY (a health and vitamin supplements company) and Hewitt Associates (a consulting business) both of which were the subject of takeover bids.”

Do you have a target price in mind when you buy a stock?

“We look for 20% upside. We do our valuation work. We go into a position knowing how undervalued we think the stock is and then we constantly review and revise it as the holding matures. Quite often that initial expectation is revised through the life of the holding. Ideally the expectation moves up and up and you end up holding it much longer than you thought. In other instances where it’s more a valuation call from a deeply oversold position our time frame may be shorter and our target price is a bit more fixed. Volatility often impacts how long the holding is in the portfolio. If you buy and three months later the stock’s gone up 25% there’s less chance that the story will have materially altered so you are more likely to sell – thus volatility can drive a shorter holding period.”

Can you invest in Canadian companies?

“We don’t. We restrict ourselves to companies with their primary listing and primary operations in the U.S. It provides clarity for investors and clarity for us. We’re hard and fast with our market cap bands too. We don’t put new money into companies below the $500 million market cap threshold, though we do hold some below $500 million because of market performance. We don’t hold any above $10 billion unless they are a benchmark constituent. If they are above $10 billion and nonbenchmark we have to sell. Currently the largest benchmark market cap is $8 billion so anything above $10 billion we sell within a month.”

Do you vote your proxy?

“UBS manages proxy voting through a centralised process.”

Are SRI considerations important to you?

“We have a team that manages global SRI funds. We share ideas and NBTY was an idea that came from our SRI team so there is some crossover. We don’t have any such restrictions though (i.e. can invest in defense and tobacco stocks for example).”

How do you measure your performance?

“Against benchmark (S&P400) and against peer groups within addressable markets.”

Talking about your materials and energy funds – exactly what type of companies do you invest in?

“There are no size constraints. On the energy side – it’s oil, gas, coal and uranium focused and includes service companies, resource owners and developers and product transporters and processors. So companies like Schlumberger, Chevron, EOG, Tullow, Transcanda, Valero and Cameco are all potential investments. Typically we would follow the MSCI classifications but can play tangential themes as well. We are not purely restricted to the MSCI classification. On the materials side that includes metals & mining, pulp & paper, packaging, chemicals and building materials so companies like Monsanto, Potash, BASF, Dow, Rio, BHP, Goldcorp and Lafarge might be typical investments.”

How important is it to meet management?

“It’s very important but it’s not a condition to investing. We do like to meet management. It does help. It helps raise conviction in a story when you’ve met management.”

Who do you prefer to meet?

“CEO, COO, CFO. Probably in that order. For mid caps it is usually the CEO or CFO that we see. Access within the mid cap space is generally to that level. We don’t often see just IR. Some ultra large caps send high operating group managing level rather than board level. It can be interesting to meet the guys in charge of the individual businesses. If we are meeting management once or twice a year and it’s a mid cap company, we do like to meet CEO or CFO though.”

Which U.S. names who stand out in terms of IR?

“There are a large number that do a good job in terms of travelling and getting out. Any company that’s getting senior management on the road regularly- and management is prepared to talk openly, in detail and not just to script - is doing a good job in terms of investor relations.”

How many companies do you see a year?

“In Zurich I see 100–150 managements a year and I supplement that with trips to the U.S. and Europe or another region if there’s a conference. I try and get to the U.S. at least once a year.”

Any tips for US companies visiting Zurich? Should it be a different message/delivery style?

“Not really. In London I was focused more on larger caps. I like the access and the approach I get here. I like management who are happy to do Q&A or walk you through a story. That flexible approach is good, particularly when management are prepared to talk openly and in detail. In mid cap, our universe is 1500 companies and we don’t know them all. Part of what we use company visits for is to find out about a company so while we’ll do work before they come so that we have an idea, it is useful as a means of discovery and not just to discuss the finer points on our model or the last quarter’s results. We often take a more strategic high level view and want a wide ranging conversation. I do generally find management quite flexible, and appreciate that.”

Where’s the S&P 400 going to end the year?

"I’m somewhat cautious and we expect this volatility to continue so I don’t necessarily expect it to break out of its current range. I believe it’s moving more to the top of its range now, but has room to run a little further before testing this range. It could end the year up to 5% ahead of where it is now.”

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