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Our Positioning is Not Yet Perfect

Wednesday, December 2, 2015

Alexander Friedman, CEO of GAM, aims for growth through acquisitions to expand the reach of the Swiss-listed asset manager. He plans to retain the current share repurchase programme alongside the company’s growth ambitions, as he explains in his interview to Swiss newspaper Finanz und Wirtschaft.

Q: Mr Friedman, what are GAM’s expectations for the markets?
The market is still characterised by a low-yield environment and deleveraging dynamics. The problems have merely been transferred from the private to the public sector. Growth is slow and central bank policy is diverging. For investors this means that markets will be volatile and there will be no indiscriminate outperformance of a particular asset class.

"Markets will be volatile. No asset class will show indiscriminate outperformance".

Q: What’s your view of equity markets?
Equity valuations will be range-bound. Europe currently offers slightly more interesting prospects than the US, which is to do with monetary policy on the one hand, and also low oil prices, which are providing additional stimulus. On the other hand, terrorism and immigration are creating new uncertainties for European markets.

Q: What do you expect from the bond markets?
In fixed income, traditional allocations to sovereign bonds hardly offer any returns and some are even showing negative yields. It is not so much a question of growing capital but rather of preserving it. This is increasingly driving investors towards alternative fixed income instruments and strategies. Our fixed income capabilities at GAM are not so much focussed on commoditised products but rather on those specialised strategies.

Q: You don’t fear a rise in interest rates?
We are protected in terms of our broadly diversified offering, which includes also market-neutral strategies that aim for consistent returns regardless of market developments.

Q: In autumn you brought in Larry Hatheway, former chief economist at UBS Investment Bank. Why does GAM need a chief economist?
There are three reasons to employ a chief economist. In our industry, it is important to share our thinking and knowledge; it builds trust in our expertise and our brand. Secondly, the chief economist is an important contributor to our internal pool of expertise. He is a resource for our fund managers, even if their decision-making remains independent and they are therefore not required to follow his views. Thirdly, he is directly in charge of our multi-asset capability, the only area in our offering where we do apply a centralised macro view.

Q: And he doesn’t set any other guidelines?
No, we do not have a ‘house view.’ We are like a good Chinese restaurant with a distinct menu. The head chef may have his favourites but the sous-chefs use their own recipes to cook their particular specialities, and we let the guest – or the client – make the final choice.

Q: What are your favourite dishes?
My preferences are not relevant, and our clients choose based on market conditions. Our team in Lugano follows a European equities strategy that achieves excellent returns with low volatility, independently of the political environment. They take long and short positions in stocks based on their expectations for consensus earnings revisions for individual companies. In fixed income, clients look for specialty products, such as catastrophe bonds, mortgage securitisations and alternative strategies. In terms of geography, it is a good time to look at emerging markets. Bonds in local currencies are widely disliked, a good reason and time to consider entering the asset class.

Q: European equities are widely recommended. Is this your biggest area of inflows?
It’s not the biggest. Our fund for Japanese equities is seeing particularly strong inflows. Our macro global rates strategy is also highly successful – that is quite exceptional, as a number of competitors had to give up in this area.

Q: How does GAM adjust the product offering to market changes?
This is the main challenge for every asset manager. The most successful fund can suddenly become the biggest failure if investor interest shifts to other asset classes. That’s why our offering, while it is focussed on active investing, is well diversified in terms of themes, asset classes and styles. But our positioning is not yet perfect.

Q: Where do you see the need to optimise?
On one hand, we are streamlining our product range and have closed a number of funds this year. On the other hand, in 2015 we made an acquisition and are looking to add further specialist capabilities, either by acquiring them or developing them internally.

"A good acquisition is much more accretive to shareholder returns than a share repurchase programme."

Q: How much surplus capital does GAM have?
We do not disclose that information. Our balance sheet shows around CHF 500 million in capital, but some of it needs to be retained for regulatory reasons. We are not undercapitalised or limited in our ability to act on opportunities. However, we do not want to acquire at any cost, just to put the capital to work. We have a disciplined approach.

Q: What criteria do you set for an acquisition?
We have three criteria. An acquisition target must be complementary, covering an area that we do not already offer and one we could be successful in. Secondly, the team we acquire must have a successful track record. Thirdly, the deal must be beneficial to our shareholders.

Q: Which investment strategies interest you?
We acquired the real estate debt finance team from Renshaw Bay. And we want to further expand our line-up of credit strategies, which offer attractive returns in a low-yield environment, such as distressed debt. Internally we will be developing further products in the areas of absolute return and multi-asset.

Q: Which countries do you intend to grow in?
In the US and certain parts of Asia. We are strongly established in Europe and the UK. About 30% of our employees work in Switzerland and 30% of the profits are made here, from where we manage 40% of client assets, and we are listed on the Swiss stock exchange. That’s our core – but as a market, it is highly developed. The growth we are striving for cannot be achieved in Switzerland.

Q: Will acquisitions be at the cost of dividends?
We have always been very shareholder-friendly and over the past five years have returned all our profits to shareholders in the form of dividends and share repurchases.

Q: Are you promising to continue this in the future?
We will be paying stable dividends and increase them if we feel a higher level is sustainable over the long term. Share repurchases are a complementary instrument to return capital to our shareholders in a flexible fashion, provided there are no attractive opportunities to invest it. However, I am convinced that such opportunities exist, and it is my duty as the CEO to identify them. In the long term, a good acquisition is much more accretive to shareholder returns than a share repurchase programme.

Q: Are you considering stopping the share repurchase programme if need be in order to finance acquisitions?
We can afford to do both or more precisely three things: dividends, share repurchases and acquisitions. Only one third of the current share repurchase programme has been used so far, and we do not have any plans to stop it. Our business generates strong cash flows. And if we grow, income will grow further.

Anticipating new momentum at GAM

Business has been slowing due to the market environment, but the share price has been supported by buy-backs.

Business has been slower at GAM. The half-year profit was eroded by the strong Swiss franc. In autumn, negative market performance in the core investment management business caused a 1.5% decline in assets under management to CHF 72 billion. In the lower-margin private labelling unit the loss of one mandate caused a 7% drop in assets to CHF 47 billion.

Despite this, GAM CEO Alexander Friedman confirms his growth targets: "I expect an average annual EPS growth in excess of 10% over a business cycle of five to seven years. I remain committed to this growth target," he emphasised in the interview. However, there may be some years where profits will grow less. "The transition starts with additional costs. We are investing in order to build our business, rather than worrying about individual quarterly profits." Over the next 18 months the company will be repositioning itself: strengthening the brand, integrating and streamlining its operational structure, and trimming costs. "Once this exercise is complete, our business model will be much more efficient and powerful," Friedman assures.

Current scepticism

For the time being analysts remain sceptical. Michael Kunz, an analyst at Zürcher Kantonalbank (ZKB), has an underweight recommendation for the stock. After a good start to the year, he fears that GAM will experience a downturn in performance fees in the second half, he told "Finanz und Wirtschaft".

Friedman points out, however, that GAM's performance fees are derived from diversified sources. "Many of the strategies did well in this year's volatile environment and will accordingly make a good contribution to our results", he said with respect to the full year.

Kunz is concerned that net inflows will not materialise as expected, and refers to increasing pressure on margins. The latter view is shared by Vontobel analyst Andreas Venditti, who said he does not currently see a trigger for the GAM stock that would result in a buy recommendation. The expectations created in spring of a substantial acquisition have so far not been met. "By acquiring at least CHF 5 billion in client assets for a reasonable price, GAM could invest the surplus capital in a meaningful way, expand its revenue stream and therefore improve the return on equity, which could give the shares new momentum", said Venditti in the interview.

Looking for a revival

Friedman is indeed on the look-out for suitable deals, something which he confirmed in the interview with "Finanz und Wirtschaft". However he also sees an upturn in business due to macroeconomic factors. "Across major currencies, there has been an unprecedented alignment in monetary policy since 2009. This has started to change roughly a year ago," he says. This divergence has also been affecting markets. The US is considering an interest rate hike, while Europe is looking at further monetary easing. "While active managers have been losing assets to passive providers in recent years, we are now moving into a market environment that is creating opportunities for good active fund managers and where active investing could once again make a difference," said Friedman.

GAM's share price is closely correlated to general financial market developments. In a buoyant environment, new fund flows for asset managers are generally better, improving their profitability. Moreover, such markets increase risk appetite, driving investors into higher-margin products. Rising valuations also have a positive impact on fees. Finally, positive market sentiment benefits flows from retail investors who generally pay a higher margin on investment funds than institutions. For the time being, such an upswing in market conditions remains out of sight. Until then GAM’s share buy-back programme provides support to its share price.

This is the English translation of an interview with Alexander Friedman conducted by Finanz und Wirtschaft and originally published in German, in the newspaper’s edition of 2 December 2015.

The full coverage in German can be found in the original article.

Source: GAM unless otherwise stated. Nothing contained herein constitutes investment, legal, tax or other advice, nor is it to be solely relied on in making an investment or other decision. It is not an invitation to subscribe and is by way of information only. The views expressed herein are those of the manager at the time and are subject to change.