Was GAM right to stop investors from taking money out of their funds?

Swiss fund manager GAM has acted swiftly to prevent investors from withdrawing money from their contested absolute return investment strategies this month. But industry commentators wonder if the bold decision was premature.

On the morning of July 31, GAM announced that it had suspended one of its top portfolio managers, Tim Haywood, holding the $ 11 billion (EUR 9.5 billion) unrestricted / absolute return bond strategy known as ARBF supervised. The company's share price fell by a fifth in the news.

Within hours, investors who held more than 10 percent of the fund's assets were demanding their money back. Two days later, the company announced that the boards supervising the ARBF funds have suspended trading in and out of them and that investors who had already reclaimed their money would have to wait.

"It seems they made that decision very early on for a fund strategy that required fairly high liquidity," said Jonathan Miller, head of UK Manager Research at Morningstar, the data provider.

After a weekend of speculation about the size of the outflows and why the company acted so quickly to restrict it, GAM issued a statement that justified its actions. It said the funds had enough liquidity to meet the redemption requests, but this would "lead to a disproportionate shift in portfolio composition" that would affect the remaining investors.

The company said to FTfm, "The decision to suspend funds was made by the respective fund boards to ensure equal treatment of all investors."

David Regli, an analyst covering GAM for the MainFirst Group, says that many of those who would have fled the fund would have been institutional investors with guidelines on where to eliminate funds with governance issues. The suspension of Mr Haywood would have triggered these payments.

He adds that others who try to leave have considered leaving for a while. "The performance has been disappointing in the last two years," he says. "This was the last stone in the water that overflowed the glass."

So-called "redemption gates," where managers prevent investors from taking money from funds, are a security measure common to most investment products to prevent them from collapsing under significant stress. However, the tools are typically used only as a last resort and usually in response to market conditions rather than isolated problems for the manager.

Several hedge funds opened fire during the financial crisis as the less liquid vehicles struggled to cope with hordes of fleeing investors. But while most funds can introduce them, few companies have done so because they damage their relationship with customers. Those who have brought in them often suffer from it.

In December 2015, Third Avenue Management, a New York-based investment firm, prevented investors from taking their money out of their $ 788 million Focused Credit Fund. The manager of the high-yield bond fund said he could not meet the redemption requirements without having to raise bonds at fire sale prices.

This was at a time when investors were pulling back from high-yield debt in droves, pushing down bond prices. As these riskier securities, often referred to as junk bonds, tend to be harder to sell, Third Avenue wanted to spend more time selling assets and repaying investors without compromising returns for other investors.

Investors had pulled money out of the fund over the past 18 months. In July 2014, it had shrunk from $ 3.6 billion and recorded a loss of nearly 30 percent in 2015. Third Avenue and its founder Martin Whitman reached an agreement in March 2017 on a lawsuit filed by investors in the fund, while the company's financial statements made the liquidation of the fund this year, the last payment to investors in June.

Immediately after the UK voted to leave the EU in the summer of 2016, stocks of real estate companies plummeted and investors fled funds holding commercial buildings. To stop the onslaught, several managers have built redemption gates. At some point, more than half of the £ 25 billion in commercial real estate held by UK retail investors was blocked by fund managers such as Aviva, Columbia Threadneedle, Henderson, M & G and Standard Life.

The funds were gradually reopened between July and December 2016 and most have increased their cash holdings significantly. But the fund's reputation has been hit hard, and commentators doubted that products that provide investors with daily business hold illiquid assets, such as commercial buildings, that take a long time to sell.

As a result, the UK regulator Financial Conduct Authority has initiated a review of real estate funds and their liquidity risks. First of all, although the restrictions were able to limit the escalation of market uncertainty, managers were better able to pass the problems on to investors. It has not yet published its final feedback.

On Friday afternoon, GAM informed customers that the fund committees have decided to liquidate the ARBF offering and create new vehicles for investors who wish to stay with the manager. GAM said it would not be able to say how long this would take, as it needed the approval of the regulators and shareholders of the fund.

In a statement, Tim Rainsford, Group Sales and Distribution Manager, said GAM supported the move, adding, "Despite the short-term impact of these liquidations on GAM, our decisions continue to be guided by what's best for our clients."

Mr Regli says this is one of two options open to GAM, adding that this would lead to a faster solution but with a higher risk of losing investors.

The ARBF strategies followed a so-called "go anywhere" approach, giving portfolio managers the freedom to choose securities from a variety of structures and regions. The Fund's annual report contains more than 150 pages listing the investments that range from government bonds, corporate bonds and emerging market debt to more exotic assets such as mortgage-backed securities, collateralized loan obligations and credit default swaps.

"The most noticeable thing for me is how many swaps and derivatives there are," says a senior industry commentator. "The execution of all hedges or direct derivative positions would require an absolute age – if you only sell the liquid assets to pay the redemptions, you could fill the remaining shareholders with all the illiquid 'toxic' stuff.

"It would also be poisonous because all traders around the world are likely to look at the same GAM annual report where they sell a lot and write off their prices, so under these circumstances closing the doors was just a good business practice," said the industry expert ,

Jake Moeller, head of British and Irish research at Thompson Reuters Lipper, the data company, says that GAM has prioritized the interests of investors who have decided to stay in the fund by introducing the gate over its own reputation. But he adds that GAM's actions will now dictate how damaging the decision will ultimately be for the company.

"It really depends on how fast GAM deals with it," he says. "The more time passes, the more likely there will be more withdrawals."

Additional coverage by Attracta Mooney

Timeline GAM's tale of suffering

June 14, 2016

Prior to the half-year results, a profit warning was issued indicating a decline in performance fees

7th April 2017

Activist investor RBR Capital is calling for a radical overhaul, including redesigning the GAM board, firing chief Alexander Friedman and cutting hundreds of jobs

April 12, 2017

Institutional Shareholder Services supports the RBR's proposal to appoint two new Board members to the Board, and also recommends a vote against the Compensation Report

April 18th, 2017

GAM announces the quarterly results early and has a 5 percent increase in assets under management. It announces plans to review its salary structure, and Mr. Friedman demands that his bonus be cut

April 27, 2017

GAM suffers a rebellion over executive salaries at its annual shareholder meeting. Investors reject the board members proposed by RBR even though their candidates received at least a quarter of the votes for August 3, 2017. GAM's profits in the first half exceeded expectations

December 20, 2017

GAM is revising its salary structure for executives. Mr. Friedman's fixed salary is reduced and the bonus pool of the board is limited. Requirements for officers to hold shares in the Company are also imposed

March 1, 2018

Earnings before taxes for the full year increase by 44 percent. The group is attracting net inflows of CHF 24.3 billion to its asset management department, bringing total assets to CHF 158 billion

July 31, 2018

GAM suspends Tim Haywood, fixed income director and head of GAM's $ 11 billion bond / absolute return strategy, after an internal review has highlighted risk management and documentation errors

AUGUST 2, 2018

GAM shares stagger after freezing withdrawals from some bond funds after receiving payouts of more than 10 percent.

August 6, 2018

In a letter to customers dated 2 August, GAM said that Mr. Haywood had not deviated from a "legitimate investment strategy" and that there had been no "material customer loss" so far.

Separately, GAM says that Haywood may have violated company policy by signing contracts that required two signatories. It also claims that it violated the Company's Gifts and Entertainment Policy and used its personal email for business purposes. He refuses to set a date on which to withdraw the return gate.

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