As responsible stewards of our clients’ assets and as a cornerstone of our approach to investment analysis, GAM’s in-house equity investment managers all engage with investee companies on a regular basis. It is through this engagement that we obtain a better understanding of the value drivers in a business, enhance both quantitative and qualitative analysis, and formulate sound investment decisions on behalf of our clients.
GAM's Investment Management business has £49bn of assets under management as at the end of December 2015. This is comprised of segregated mandates and funds which span all major asset classes. Our long-only equity business accounts for £9bn of AUM and within this, our holdings of UK-listed investments by in-house fund managers amount to £313mn. Given the Code’s focus on UK listed equities, this document will primarily concentrate on the activities of the investment team responsible for the funds, UK Diversified and Global Diversified, which account for approximately 92% of the £313mn. The investment approach adopted by this investment team will typically involve performing technical analysis on a stock to find undervalued, neglected areas of the market with strong potential. In depth fundamental analysis is then applied and this will be complemented by meetings with the company in order to deepen understanding and fine-tune valuation estimates.
In 2015, the team held almost 100 meetings with UK-listed companies. The discussions are typically focussed on what the team consider to be the most pertinent issues affecting the business at that time, and this can span a wide range of topics, including financial performance, corporate strategy, corporate governance, capital allocation, remuneration, succession issues, and any topical media stories or concerns. Some examples of our engagement with management over the past year are discussed below.
An example of typical engagement
In late 2015, after weak Q3 results and a severe price correction, we were considering adding to our position in a large UK media company. We performed some very detailed analysis and put together a comprehensive presentation which we sent to the company along with a valuation. Between Q4 2015 and Q1 2016, we had several meetings with the company in order to deepen our understanding of the business and industry and refine our analysis. As a result, we decided to add to our holding and shared the presentation and findings with other investors by presenting it to a Value Investing Forum.
Sponsoring a fundraising
We are one of the largest shareholders of a biotech company which has developed a potentially market leading cough and cold remedy. The key differentiator for the medication is that it contains an extended release ingredient, so it stays at a more constant level throughout the day, providing more consistent relief of symptoms. Having been a cornerstone investor in the initial fundraising, the company sought to consult us on a further placing of new shares where they needed to raise additional funds to support their expansion into the lucrative US market. After several discussions with the CEO, we agreed that the opportunity was still compelling, and decided to fully support the fundraising, working closely with management and the investment banks in order to help shape the investment thesis and successfully complete the transaction. The deal closed in April 2016 and we hope to see the results of the fundraising through a successful expansion in the years ahead.
Convincing management to adopt firmer cost control
As an investor in a budget airline, we saw significant long-term growth potential in the company, but also viewed their growth plans as optimistic and their financial position weakened due to their cost base. We arranged several meetings with management to discuss these issues and their strategy, and prepared some analysis for the CEO showing the levels of revenue required to break even for similar companies at an equivalent stage of development. The company subsequently issued amended growth plans and tightened cost control.
Reassurance on management quality and financial strength
We have had a long track record of engagement with a diversified industrial which is a core holding and has a long history of paying regular dividends. Following the sharp moves in the oil price and some changes to the executive team, we met with the new Finance Director and discussed a range of issues in order to (a) seek assurance on the quality of the new appointments and (b) understand the impact that the recent movement in the oil price would have on the business. We left feeling satisfied that free cash flow would be sufficient to cover both dividend payments and potential growth opportunities, and felt reassured that the new team were competent leaders with a clear focus on enhancing shareholder value.
Advising on the strategic response to external shocks
During 2015 we had several meetings with a UK mining company to better understand their response to significant commodity price deflation and slower growth in China. We focussed the discussion on the impact this would have both on development projects and on the financials (earnings, balance sheet, and cash flows) while also recommending they cut the dividend to protect the balance sheet. The company took up this suggestion while also deciding to focus resource on their most profitable assets. The share price rebounded substantially over the next few months.
Whilst the focus of this report has been on the team managing the GAM UK Diversified and GAM Global Diversified funds, our approach of actively engaging with the management of companies in which we invest applies to all of our equity products. Two examples are provided below from the GAM Technology Strategy and GAM Star Japan Fund respectively.
Engagement in IPOs by the investment team of our Technology Fund
We are often involved in advising UK and US IT companies looking to come to market. Recent examples include a software developer and an IT services company where we met with management several months beforehand to gain a greater understanding of their business models, and advise them on potential investor appetite. We then worked with the investment banks to help formulate valuations using our experience of analysing subscription models in the software industry and their impact on pricing. Both offerings were fully subscribed, and at prices which represented a good balance between the needs of the vendors and the incoming new shareholders. Company management will only likely go to market with an IPO once in their lives whereas we see tens of IPO opportunities. The company bias is often towards getting the highest price for their shares but we explain that such an outcome would not be good for new investors and would therefore not be good for them either. Poorly performing IPOs place management under intense pressure, and may make it harder for the company to raise capital in the future. We frequently play a role in preventing this outcome to the benefit of all stakeholders.
Advising on reducing cross shareholdings by the investment team of the GAM Star Japan Fund
Over the past 2 years, we have actively sought to persuade management of an automotive company to unwind the cross-shareholdings between themselves and two subsidiaries in order to enhance earnings, cash flow and shareholder value. We wrote a detailed letter to management explaining how we believed value could be unlocked, and continue to engage with the company on an on-going basis in order to try to persuade them to implement the changes.
Analysis of Voting
Our fund managers take their fiduciary responsibility to their clients extremely seriously and all investment decisions and votes cast are always made solely with a view to optimising the risk-adjusted returns of the portfolio.
Summary of Voting Activity for 2015
Summary of Voting Activity by region: votes cast and not cast
All global voted resolutions
Summary of votes against by resolution category
Compliance with UK Stewardship Code