Ask Alexander Friedman what was the most important thing he learnt from the richest man in the world, and his response is surprisingly succinct.
“No matter how senior you are, no matter how important the rest of the world thinks you are, the ability to roll up your sleeves and still do the homework and make sure you understand any kind of big bet is imperative,’’ Friedman says.
“I certainly saw that up close. Bill Gates still did his own homework and analysis to confirm what the experts advised him on.’’
Friedman is reflecting on his three years from 2007-10 as chief financial officer of the $US37bn ($39.4bn) Bill & Melinda Gates Foundation.
It is a lesson he now puts into practice in his own global enterprise as the Zurich-based chief investment officer of UBS Wealth Management, a group that invests more than $US1.7 trillion across every asset class.
“The mantra I have is one that every kid knows. Do your homework. I want to be able to explain every position, why we have taken it. I need to understand it myself personally. While we have this huge structured process, everyone on my team needs to be responsible for every position,’’ he says from UBS’s London offices.
That “huge structured process’’ was a watershed for the Swiss bank when it was established in February 2011.
Never before had the secretive bank publicly taken a house view on investment positions. But with the establishment of the chief investment office UBS began producing a unified view on every asset class, across all regions of the world.
In doing so, Friedman relies each month on the support of 900 analysts across all UBS divisions as well as intelligence from billionaires, sovereign wealth funds and recommendations from rivals.
One of his proudest achievements has been the introduction of what he calls “the virtual whiteboard’’.
“One of the challenges in investing is that people are intimidated by hierarchy and by the people who sit at the top,’’ he says.
“One of the ways you can get around that is with this whiteboard. Every position we have identifies the owner of our position, the logic used and the assumptions used to make it and the data that supports those assumptions.
“Anyone in our team can go on this virtual whiteboard and they can click on a position and see how the latest data tracks, whether it raises questions or is against the position. Then they can send a query to the sponsor of that position and to me.
“It is almost like crowd-sourcing in a big institution. There is no hierarchy. And it forces a market into an investment process. It allows us to be really disciplined. So we are never emotionally attached to a position.’’
It is an approach that is paying dividends for the bank’s clients.
One of his bravest calls since taking the top job has been to go long on US assets while many global investors were shunning the world’s biggest economy.
The move instantly drew suspicion from the bank’s European-based staff as they saw their new CIO — a Native American who got his first degree at Princeton University — betting big on his home market. But the move to go overweight in US high-yield investments last year produced about 135 basis points of alpha for the bank on its tactical positioning (that is, positioning portfolios within a tactical risk allocation framework) alone.
“We shoot for 50-100, so it was a great year for us,’’ Friedman says.
So far this year global equity markets are up by less than half a point, but Friedman says UBS clients are up about 2 per cent.
He maintains his bullishness on the US and believes the key to maintaining momentum will be private capital expenditure as chief executives start investing the cash accumulated on their balance sheets in recent years.
On China, Friedman takes a contrary view to the doomsayers and says growth will be 7.5 per cent this year, while acknowledging that over the longer term growth “has to slow’’.
Last week’s March China trade data fell well short of forecasts as the value of imports fell 11.3 per cent year-on-year.
On the flip side iron ore shipments jumped 19.2 per cent over the month, meaning demand is still robust and analysts expect demand for commodities is likely to increase over the medium term as China looks to pick up its slowing economy. “You have to step back and remind yourself that China doesn’t have a social safety net like more developed economies,’’ Friedman says. “Its social safety net has been job creation. As it moves huge blocks of the economy from the agrarian rural to the cities, it needs to create jobs. It probably needs in the order of 7-7.2 per cent growth this year not to have a problem in that framework.’’
Friedman also played down concerns about the high debt levels of local Chinese government entities and the problems of China’s shadow banking sector.
And even if China has to do a wholesale trillion-dollar recapitalisation of its banks, he’s not worried. “Do they have the resources and what would be the effect on the global financial system? The reason we are overweight China is that they do have the resources and the effect would be quite limiting. The simplest way to describe that is that because of where China is at in its evolution, it is not yet integrated fully into the global financial system. That limits the challenges you see rippling through other economies,’’ he says.
While Friedman says Australia will inevitably be affected as the Chinese buy less commodities and look to be more vertically integrated domestically in some key industries, Friedman sees no imminent “crisis’’ here. “We are looking essentially for a rebalancing of the economy/export part of the economy to more competitive industries. We don’t expect a hard landing in China so I don’t think you will see any type of crisis hitting Australia,’’ he says.
But he does have concerns about real estate prices. “Residential real estate looks expensive from where we sit, just on a simple purchase to rent analysis,’’ he says.
Ironically, it is Chinese investors that have been pushing up Australian residential prices. Mike Chisholm, the head of UBS Wealth Management Australia, says the firm’s local operations will continue to benefit from the growth of self-managed superannuation funds (SMSF).
“Wealthy investors are looking for flexibility in managing their own superannuation investments and they can achieve this via a SMSF structure combined with professional advice from a firm like UBS to assist them in making the right investment decisions,’’ he says.
“Our business in Australia has the capacity to grow further — we are actively recruiting advisers as we can provide clients with access to capital markets deals and a global range of product not available elsewhere.’’
But Friedman has a warning on self-managed super. He calls it the “weekend pilot problem’’.
“I took some flying lessons and I realised that I better not become a pilot because I don’t do it enough. This flight instructor was telling me how many lawyers, doctors and bankers crash on weekends because they think they are smart so they will make a good pilot,’’ he says. “Investing in my experience is very similar.
“I am not a genius, I am not Warren Buffet, but I look at the dials all the time and I have a team that does that as their job. So it tends to minimise the basic mistakes that people make.’’
Because he is constantly looking at the dials, and given the recent history of other parts of UBS with the $2bn rogue-trading scandal and a $1.5bn settlement with US and British regulators over its role in the manipulation of the London interbank offered rate, does Friedman ever lie awake at night waiting for a bomb to explode in his business?
His response borrows from his American heritage, and perhaps from working with Gates.
“This is like playing in the NFL. It is just a matter of time before something goes wrong — you either get injured or have a bad season. So the question is, can you have a good career within the time frame we all get,’’ he says with a smile.
“It doesn’t keep me awake because I know all professional athletes have an end to their career.’’