Julius Baer Could Do Without This Bear Market

(Bloomberg Opinion) -- Julius Baer Group Ltd. just enjoyed its second most successful year ever in persuading its wealthy customers to allot more of their cash into its stewardship. Yet its shares have dropped by more than a third since the start of 2018.

If the Swiss wealth manager is to buck that trend, it needs this year’s equity market rally to continue and revive client confidence in how their investments will perform. And that is something out of the firm’s control.

Julius Baer Could Do Without This Bear Market

Full-year figures released on Monday show the firm attracted 17.4 billion Swiss francs ($17.4 billion) in net new money last year, a figure about which Chief Executive Officer Bernhard Hodler says he is proud. Given the rest of the asset management industry’s dismal performance, he has every right to boast.

But less pleasing was the market performance. Declining equity markets slashed more than 22 billion francs from the firm’s assets under management, leading to a drop in the total last year.

In an industry where size is deemed to be increasingly important, Baer is largely dependent on market performance for its asset base. Hodler told Bloomberg Television that while client trading has picked up this month from the subdued levels seen in November and December, it still hasn’t returned the level seen in the first half of last year.

The 4.5 percent increase in net new money in 2018 is below the mid-point of the firm’s target range of 4 percent to 6 percent. That may account for the drop of as much as 5 percent in the company’s stock price on Monday. Some of that fall may also reflect disappointment that the company didn’t announce a share buyback program. Even so, the firm seems well positioned for the future.

In the past decade, Baer has more than doubled the number of relationship managers it employs, adding a further 105 last year to expand its roster to more than 1,500. A 5 percent increase in personnel expenses last year saw its cost-income ratio jump to 70.6 percent, the highest in at least six years.

Upgrading client documentation has also come at a cost, but in today’s regulatory environment it is more essential than ever for asset managers to know where their customers’ money comes from. When Hodler referred in a conference call on Monday to “the rewards and risks inherent in our business,” he probably had in mind the decision to close the firm’s Panama office after a former wealth manager there was charged with laundering money embezzled from Venezuela’s state-owned oil company. In truth, any wealth management firm has to spend whatever it takes on compliance; if you think it’s expensive, try litigation and the ensuing fines for comparison.

Recognizing that some of those increased expenses are here to stay, Baer has eased its target for its cost-income ratio to 68 percent, from a previous range that went as low as 64 percent. That isn’t out of line with many peers, including Standard Life Aberdeen Plc and DWS Group GmbH, though it’s way behind the 53 percent achieved by Amundi SA, Europe’s biggest fund manager.

Looking ahead, Hodler says he’s “comfortable” maintaining the company’s target for inflows, and expects investments the firm has made in Asia to start to pay off by attracting money in the coming year.

Julius Baer Could Do Without This Bear Market

About a quarter of its business comes from the region, which is expected to be one of the fastest-growing regions for asset managers. But servicing wealthy individuals is largely a people business. In Thailand, for example, the firm has hired 15 relationship managers to target high-net worth individuals it estimates have about $300 billion to invest.

Hodler therefore needs to be careful with its cost cuts – he is preparing to reduce headcount by about 2 percent by the end of this year. The risk is he loses well-connected staff who can take clients with them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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