Gam woes put spotlight on unconstrained bond funds

Aug 5, 2018

Last week the Swiss firm halted dealing in its absolute return bond funds after suspending the products’ lead manager, in a move that has sparked concern about such strategies.

Gam woes put spotlight on unconstrained bond funds

Embattled fund house Gam’s woes deepened further last week after it halted dealing in its absolute return bond funds (ARBFs) after suspending the products’ lead manager. Its ongoing issues risk tarnishing the appeal of such funds, which have grown in popularity in recent years with Asian and global investors.

Gam said on August 2 that all subscriptions and redemptions in its Sfr7.3 billion ($7.35 billion) of ARBFs had been suspended as of July 31 following a high level of redemption requests. This took place as investors reacted to the news that the firm has suspended portfolio manager Tim Haywood on July 2 for issues around his risk management and record-keeping.

The firm said satisfying the withdrawal requests “would lead to a disproportional shift in their portfolio composition, which could compromise the interests of remaining investors”. Yesterday (August 6) it put in place a section the home page of its website providing dedicated information and updates on the situation.

The episode has not only undermined Gam’s credibility, but highlighted potential issues with unconstrained, absolute return bond funds, argued investment heads at two different large insurance firms, one of whom is based in Hong Kong, the other in London.

Such strategies typically take both long and short positions in government and corporate bonds, emerging market debt, high yield and asset-backed securities. They may also take long and short currency positions. The strategies aim to provide a return of cash plus a certain amount, typically 3% to 5%.

These products have steadily gained popularity in recent years. Global institutional assets in such strategies rising from $184.5 billion in the last quarter of 2016 to $299.1 billion as of the first quarter of 2018 (see graph below), according to data provider eVestment.

Flows from investors in Asia Pacific into unconstrained bond strategies domiciled in Asia Pacific recorded $965 million of net inflows in the first half of this year, following straight years of net inflows totalling $15.2 billion, said eVestment. They represent a small but material proportion of overall flows; for instance, global net inflows were $43.3 billion last year, versus $3.6 billion from Asia Pacific.

A Gam spokeswoman declined to say how much of the capital in its ARBFs was sourced from clients in Asia.

Unconstrained bond fund flows ($ ,000s)

(Click for full view; Source: Evestment)

The impact on Gam's business as a result of the latest episode will be substantial, noted the Hong Kong-based insurance CIO. It will also likely have a wider impact on absolute return bond products in the industry generally, he added.

“A lot of people will look at similar strategies they have on their books," he said. "They will ask more questions of their managers about how they run these products and how they deal with redemption requests.”

Private banks, for instance, may well do more detailed due diligence on such funds, added the Hong Kong-based executive. “No private banker wants to tell his client: ‘You know that fund I sold you? You can’t get your money back’.”

Investors will definitely be more cautious about such strategies now, agreed the London-based CIO.

“You need to trust the manager to put money in a pooled fund. If they lose that trust, investors can easily take their money next door. There are so many managers out there they could move to.”

When announcing that it was closing dealing in its ARBFs, Gam said no other part of its Sfr164 billion AUM business is affected and its other investment teams and its third-party managers are continuing to manage funds as normal.

The Hong Kong-based CIO said he could understand why the fund might need to be gated, especially given that bond markets are far less liquid than they used to be. That’s because after the 2008 financial crisis banks were forced to reduce the risk their balance sheets so heavily cut down their holdings of bonds.

Still, these developments have come soon after Gam warned (on July 13) that almost Sfr60 million in charges linked to its 2016 acquisition of quant manager Cantab Capital Partners will hit its profits for the first half of the year.

Gam’s share price has halved from Sfr17.92 from its peak this year on January 17 to Sfr8.92 as of yesterday (August 6).

ASIA PUSH

All of this is unlikely to enhance Gam's prospects in Asia, where it is seeking to expand, most recently by bringing in Alex Zaika last month from BlackRock to build a local team in Australia in a planned new office.

In addition, last week the firm was granted a discretionary investment manager licence in Japan, which will enable it to provide investment management and advisory services to institutions in the country.

These moves following Rossen Djounov being named the new head of Asia last year, in a move to refresh Gam’s strategy there.

The Gam spokeswoman declined to comment on whether the issues around the ARBF funds were affecting the firm’s business plans for Asia or how many staff it has in the region.