Global Asset Management (let’s call it Gam) was founded in 1983 by Gilbert de Botton to cater to high net worth Europeans. UBS bought it in 1999 and moved it from Bermuda to Zurich. Today Gam’s management is based in London, which is somewhat misleading since, true to its Swiss origins, Gam’s investment management is thoroughly cantonized.
‘From an investment standpoint, what makes us unique is we have no house style,’ says David Anderson, Gam’s managing director. The company functions without a chief investment officer: ‘There is no buy list because every manager has the independence and flexibility to set up their own.’
With ten offices stretching from Hong Kong to New York, ‘Our managers take a global view, rather than a London-based view,’ says Anderson. In other words, portfolios do not show a ‘home team bias’ and with the firm still depending heavily on the private asset management base that it began with, it can tailor portfolios to local sensitivities. For instance, the minimum investment Gam accepts from a client ‘depends on the market,’ and across ten different jurisdictions it ranges from $2 mn to $5 mn.
The potpourri approach to portfolio management smells good to clients, who have been flocking in steadily; Gam’s overall assets under management now approach $19 bn. About 50 percent is in what’s known as ‘the fund distribution business’, with Gam acting as intermediary; the rest of the assets are split evenly between private clients and institutional investors.
In addition, Anderson adds, ‘We use a lot of external managers who run funds for us on a fee basis.’ Usually, everything the firm does is on a discretionary basis, he says: ‘If you are a private client, we agree how often you want to hear from us.’ In markets like the current one, Anderson admits there is a lot of handholding: ‘We reassure them this is not a time to run, but a time when you start inching in.’
Meeting of minds
Gam has regular investment manager meetings. However, ‘These are really more of an information exchange – between hedge fund managers, management teams and private asset managers,’ according to Anderson. ‘And the intention is not in fact to come up with a consensus view. A debate may be too strong a word, but clearly different views are expressed.’
Showing the vagaries of global investing, the London office alternates the timing of the meeting – either 9.30 am UK time or 10 am New York time – so Hong Kong and New York can participate every other week. The minutes of the meeting are available in playback or written form. ‘Again, it’s not that Gam decides to do x or y; there isn’t a consensus view, but it’s a very good way for us to share information with clients about our insights and markets on a weekly basis.’
Compared with past practice, this is almost tantamount to centralization for Gam. ‘Until recently we really were a collection of investment boutiques operating autonomously but under the Gam umbrella,’ notes Anderson. ‘We shared resources such as technology and a fund balancing and deal placement system, but that was the infrastructure side. We can all still tap into the IT system, but our investment views are idiosyncratic.’
It was this loose collective view that allowed Gam to avoid the worst trauma of the last few years, believes Anderson. ‘We had very little technology exposure and we were very light in the US market. So in our portfolios we are currently running under 30 percent exposure to the US.’
Knocking on doors
Any company seeking an investment from Gam ‘will have to knock on a number of different doors,’ Anderson apologizes. Similarly, the degree of attention a portfolio company gets can vary from a call from one solo manager to the third degree from a team of analysts. It all depends on which particular fund is on your trail.
James Abate, investment director for the US at Gam, manages the Gam American Focus Fund and works on the front line of investor relations with target companies. He says he goes looking for companies rather than waiting for alert IROs to come knocking at his door.
‘We tend not to like it when they come to us,’ Abate confesses. ‘We operate in a large-cap universe, so you don’t usually get $10 bn or $50 bn market cap companies ringing our doorbell looking for interest. We identify them through our own work and approach them.’
His team’s methods are eclectic, using all sources of information including the media, third-party sources, in-depth financial analysis and face-to-face meetings. Indeed, Abate grins, ‘There are people who work with me who trained as professional librarians before they took on finance.’
Old school fundamentals
Abate has firm views on what gets him to risk clients’ cash, and from one perspective it looks like the type of fundamental analysis that went out of fashion during the bubble market. ‘The thing we look at first is a company’s capability to increase its return on capital. We look at the underlying businesses it operates within and try to correlate what’s going on in terms of the balance sheet and cash flow to see whether the company is actually adding value for the equity holders – or destroying it.’
Instead of cheering acquisitions and growth, he says, ‘We try to assess whether a company can invest money in projects that can earn a rate of return above their cost of capital and whether it will take the prudent step of divesting businesses that won’t be able to do that.’
Abate tries to avoid companies that grow for growth’s sake – at all costs: ‘That’s one area of avoidance that allows you to do best in the marketplace.’
Abate suspects his early career in corporate finance helps explain his investment strategy. ‘The way we look at companies is very akin to how a bond manager looks at them,’ he says. ‘It always struck me as odd that bond managers would sit there and argue for weeks about whether a company was a single A credit or a double B, while equity managers never really took into account the underlying component of risk and the volatility of the cash flows associated with the company.’
DIY bond rating
Abate’s team assigns its own proprietary, bond-style ratings using metrics of cash flow volatility, balance sheet, size, market position and industry: ‘We do this to get an assessment of the fundamental risk of the underlying business, and to come up with what we call a fundamental cost of capital.’ From that they determine whether, in Gam’s view, the company might grow or shrink given the associated returns on capital.
However, the metrics do not give illusions of invulnerability. ‘It would be great to find companies that have improving returns on capital and low risk,’ says Abate. ‘Maybe if I was Warren Buffet and people gave me a 30-year time horizon, that’s all I’d have to do.’
Abate cites the example of Coca-Cola, which he thinks ‘was a great company back in 1997-1998 when it was around $85 a share.’ Today, at around $37 a share, Abate concedes that it’s still a good stock but says the market expectations of future growth and free cash flow are radically lower.
Too late for the IRO
The hype around whisper numbers and quarterly earnings surprises doesn’t affect Abate’s decision process. Earnings estimates are not good indicators of a company’s financial health, he claims.
‘A couple of years ago Enron had dramatically improving earnings estimates from the sell side and a revenue growth that was off the charts. But it had declining returns on capital and an increasing risk profile. And you know how that movie ended,’ he says.
While Abate had no idea of the scale of fraud going on at Enron, he never suggested investing in it because he was not comfortable with the stock. He is similarly wary of companies that grant a lot of stock options, describing options as a ‘way of looting equity holders.’
According to Abate, senior executives at public companies often find Gam refreshing to talk to because it takes a long-term, big picture approach to investing rather than focusing on the next quarter’s EPS estimates. Once in Gam’s portfolios, however, the penalty for displeasing this institution is severe. ‘If we see a significant deviation from what was expected, what was discussed and what was in our framework, then we will automatically exit the name,’ Abate states. Would Gam call up to remonstrate? ‘No,’ says Abate. ‘We’ll simply exit – vote with our money.’
How would he react if the IRO or CFO called about impending blips? ‘It all depends,’ he ponders. ‘Say we are investing in a company whose entire thesis is driven by shrinking, investing and restructuring, and paying down debt. Then it suddenly goes out making significant acquisitions and re-leveraging the balance sheet. That would make it tough for us to achieve a comfort level. In most cases, it is highly unlikely it was doing much of that maximizing in the past, so it could be a symptom that it was reverting to a value destruction mode.’ His final warning: ‘Clearly there’d be very little to discuss this time.’
