Sophisticated risk mangement for wealthy private clients. What does my risk profile look like above and beyond all my banking relationships? How do alternative investments, such as properties or art collections,affect the expected return on my portfolio? Is the risk in my concentrated equity position (e.g. participation in the family company) increased or reduced by my other assets? To respond to these complex issues which concern the high end of the wealth management segment, a specialist team at UBS has developed a four-step risk analysis and management instrument - the Active Asset Analyser ("AAA").

Analysis The first step is to conduct a detailed analysis of the client's requirements and expectations as well as the current portfolio. Future investment objectives or financial commitments, together with the client's risk tolerance, will define his or her return expectations. The reference currency is determined together with the client, depending on which currency he/she requires in future. Understanding investment restrictions, e.g. if part of the client's assets are to remain invested in the private business, is always more important for both family entrepreneurs and family offices.

Risk attribution As wealthy private clients generally have several bank accounts, the first step is to aggregate all the portfolios in order to gain a complete picture of their assets. The total assets are broken down into the different investment categories - e.g. hedge funds according to investment strategies, private equity into venture capital or buy out, real estate according to sector (office, apartment, industry), etc. A comprehensive risk model allows us to build up a picture of all these different asset classes and incorporate them into the risk analysis. Clients require simple, transparent risk management tools, and the Active Asset Analyser responds to this need by showing the risks involved in the different investments as both relative and absolute components of the overall portfolio risk.

Value-at-risk and stress testing The AAA allows us to quantify and control the portfolio risk. The first stage involves statistical methods, such as the value-at-risk concept. The analysis addresses the question of how great the maximum portfolio loss is over a specified period of time with a particular level of certainty (e.g. a probability of 99%). To examine the behaviour of the portfolio in the event of extreme situations, the value-at-risk approach is complemented by historical stress tests. These tests show how a portfolio would behave in exceptional circumstances.

Optimisation The results of the comprehensive analysis carried out show whether the client's return expectations are fulfilled and whether the risk structure of the portfolio actually corresponds to the client's risk profile. If a discrepancy is identified, the portfolio is optimised (second stage), and suggestions for improvement are drawn up together with the client. Taking into account the varying liquidity of the individual investment categories (in particular for alternative investment forms and real estate compared with traditional asset classes), the second stage of the process aims to optimise the weighting within the existing asset classes, and to check whether the addition of other asset classes could improve the overall risk of the portfolio.

Implementation The third phase of the Active Asset Analyser involves implementing the proposed portfolio changes. As part of the open architecture (i.e. access to third-party providers) which is demanded by wealthy private clients, we select the best managers for the individual asset classes. Among the quantitative criteria are parameters such as the information ratio, Jensen's Alpha, the Beta ratio and the UBS momentum score. The qualitative analysis comprises the quality of the managers (training, track record, etc.), the organisation, the turn-over of specialists, the investment process and the corporate philosophy. The results of the screening process form the basis for selecting the individual asset managers.

Monitoring The last stage is to ensure that the guidelines defined by the client - the maximum volatility or the maximum weighting per asset class - are observed. The client receives a consolidated overview the assets. This process is supported by the extensive, sophisticated UBS offering in the area of global custody, and enables the client to aggregate the assets managed by different managers and to control them together. The client has online global access to detailed reports tailored to his or her requirements. The challenge for financial institutions lies in developing sophisticated tools and at the same time ensuring they are consistently applied and implemented by interdisciplinary teams. Clear, continuous dialogue with the client is necessary in order to produce a portfolio which optimally reflects his or her needs over the long term.

Contact Details:-

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