Asset Managers Must Adapt to Survive; Flexibility is Key, Says UBS Global Asset Management.

CHICAGO -- We can look to Charles Darwin for some guidance as to who will survive for the long term in the asset management industry, according to Brian Singer, Regional Chief Investment Officer for the Americas and Head of the Global Investment Solutions (GIS) team for UBS Global Asset Management.

However, the world of survival and extinction is not black and white. And over short periods, Singer says that it is virtually impossible to know if the "survival" of a strategy or fund has to do with the manager of the fund - or some underlying event or prevailing market environment. The time horizon over which most investors evaluate success or failure of investment strategies is usually far too short.

"A false sense of success has led to smug satisfaction among many in the asset management industry," Singer said. "How do we know that a successful strategy is based on inherent skill or unique insights of the manager? And who is to say that the failure of another manager or strategy is based on an inherent flaw? Ultimately, we may never know the true reason for a strategy's survival or extinction."

In The Origin of Species, Darwin says that survivors are those who are best at adapting to changing environments. As such, Singer says that delivery of sustainable superior performance requires possession of the ability to thrive in the current environment and the flexibility to adapt and survive in new environments.

To ensure this flexibility, Singer says that an ongoing investment evaluation process with four forward-looking steps is necessary:

1. Specify a risk "budget" to survive external shocks.

2. Calibrate risks incurred with available opportunities.

3. Recognize that the environment is vulnerable to rapid shifts and precipitous unwinding of crowded strategies.

4. Employ qualitative considerations to the output of risk systems and models.

"At any given point in time, the attributes a survivor possesses may seem distinctly disadvantageous and their survival gravely uncertain," says Singer. "More important, attributes that appear advantageous and that are clearly being rewarded in the current environment may mislead the casual observer to infer long-term superiority."

"Similarly, the prevailing capital markets environment may lead to inappropriate conclusions about the inferiority or superiority of particular asset managers and strategies." Singer's advice: "Think long term, look for managers that have the fundamental survival attributes - sound philosophy, repeatable processes and discipline - but that also demonstrate the flexibility required to adapt and survive."

The views of Brian Singer and the GIS team are contained in the latest issue of "Current Perspectives," a quarterly publication of UBS Global Asset Management. The document may be found at www.ubs.com/globalam-us.

UBS is one of the world's leading financial firms, serving a discerning client base. As an organization, it combines financial strength with a culture that embraces change.

UBS is the world's largest wealth manager, a top-tier investment banking and securities firm, and a key global asset manager. In Switzerland, UBS is the market leader in retail and commercial banking.

UBS, headquartered in Zurich and Basel, is present in all major financial centers worldwide. It has offices in 50 countries, with 39% of its employees working in the Americas, 37% in Switzerland, 16% in Europe and 8% in the Asia Pacific time zone. UBS's financial businesses employ over 70,000 people worldwide.

The views expressed in Current Perspectives are as of June 30, 2006, and are those of UBS Global Asset Management. These views are subject to change at any time in response to changing circumstances in the markets, and are not intended to predict or guarantee the future performance of any individual security, asset class, the markets generally, nor are they intended to predict the future performance of any UBS Global Asset Management account, portfolio or fund.