In April 2004, Swiss fund manager GAM Holding AG launched one of the first unconstrained fixed-income strategies for investors. It seemed to go OK for the next decade or so. Clients appreciated “the stability of the team, which since inception has remained largely unchanged under the leadership of Tim Haywood,” GAM said in its 2016 annual report.
Not any more, they don’t.
As of June 30, GAM had about 11 billion Swiss francs ($11.1 billion) in total allocated to its unconstrained absolute return bond category, with about 7.3 billion francs of funds and the rest in institutional mandates. Tuesday’s announcement of Haywood’s suspension, after his risk management and record-keeping were found wanting, prompted investors to request redemptions worth more than 10 percent of those funds. So that same day, GAM decided to freeze the funds. It said on Thursday that liquidating those holdings “would lead to a disproportional shift in their portfolio composition, which could compromise the interests of remaining investors.”
To meet those redemption requests, GAM would doubtless have had to carry out a fire-sale of the securities owned by the funds, beginning with the most liquid and easiest to offload. Presumably that would lave left other investments that are, shall we say, not quite as liquid and not as easy to find buyers for – at least not at prices that GAM would be willing to accept.
The clue to all the anxiety around GAM is in the bond fund’s name: “Unconstrained.” Investors basically gave Haywood permission to invest in anything and everything that he felt could deliver returns within the broad category of fixed income. GAM, for its part, recognized that the more esoteric the products it offered, the higher the fees it could charge. As it said in its 2017 earnings release:
There is significant opportunity for active managers to innovate, differentiating themselves to capture market share in specialist ‘new active’ products that are growing in demand. Innovative products investing in private debt, specialist fixed income and multi asset have been able to buck the trend of margin pressure and command higher fees over the past few years.
In various presentations to investors in recent years, GAM’s chief executive Alex Friedman championed the push into new investment categories, including trade finance. As banks cut the proportion of their balance sheets they were prepared to commit to funding cross-border goods and services via letters of credit, bills of exchange and other short-term loans, non-bank lenders such as investment firms and pension funds have stepped in.
And while the credit profile of such investments looks great, with low default rates in both trade finance and private debt, the returns come with a risk attached: The lack of an efficient, liquid secondary market when the holder needs to sell.
Friedman is looking at a stock-market meltdown, with GAM shares losing almost half of their value this year.
The stock dropped more than 15 percent in the middle of last month after GAM issued a profit warning because of worse-than expected results from Cantab Capital Partners, a quant firm it bought in October 2017. That was followed by a 13 percent decline earlier this week when it suspended Haywood and published lackluster investment performance in its first-half results. Thursday’s morning trading saw another 13 percent wiped off the value. Small wonder that its fund investors are twitchy.
For now, this is a GAM problem rather than one for the broader market. And it’s entirely proper that it should halt redemptions rather than sacrifice values by dumping assets at whatever prices it can get. But it’s a reminder to investors everywhere that – as the financial crisis a decade ago proved – when everyone rushes for the exit at once, values can get trampled swiftly and irredeemably.