The executives at Gartmore would be forgiven for feeling that 2010 has not been their year.
A minor breach of internal guidelines by a European fund manager, Guillaume Rambourg, has spiralled into a potential restructuring and sale for the group. It floated a year ago at a price some analysts considered too high, but looked like a triumph given market conditions. Its shares have since halved and its prospects as an independent business is open to debate.
The first sign of problems was the temporary suspension of Guillaume Rambourg while Gartmore concluded its investigation into whether he used preferred brokers, which would have breached their internal guidelines but not Financial Services Authority (FSA) rules. Rambourg decided to leave the group in July, ostensibly to focus on the ongoing FSA investigation.
The big worry, however, was not just Rambourg’s suspension but the reaction of Roger Guy, Rambourg’s long-term co-manager and fellow shareholder, who was responsible for about a quarter of Gartmore’s revenues through his offshore AlphaGen Capella fund. Guy openly criticised Gartmore’s treatment of Rambourg. The firm’s heads of compliance and legal have since left.
”Resources are an issue, but Roger is not the only person managing all that money”
After a period of speculation, the group announced Guy’s retirement this week. Like Neil Woodford, his ultimate departure has been much discussed and Gartmore has done its best to reduce its dependency on him, not least by handing all of the European retail funds to John Bennett in February. However it has struggled to fight the perception that this is, in its chief executive’s words, a “nightmare” for the firm.
It may have had a better chance had Guy’s departure not coincided with the departures of Darrell O’Dea, also on the European team and just six months in the role, Gervais Williams, a long-standing smaller companies manager, and chief investment officer Dominic Rossi. Analysts, understandably, started to spot a trend.
The group has announced a strategic review to be completed by March. Jeff Meyer, the chief executive, said in an interview with the Daily Telegraph that the group needed to get some stability, which could mean selling the Hellman & Friedman stake, which is 20%, or securing a merger with a larger company. Whatever the conclusions of the review, Meyer said, getting out of the public markets would be better for the firm. The Rambourg problem would not have come to light in a private company. (article continues below)
The company does not seem to be short of bidders. According to rumours Aberdeen, Henderson, Man Group and Schroders are potential acquirers. That said, the only two asset management groups building a stake at present are Henderson – which holds 14% – and Lansdowne Partners, an alternative assets group – which has built a 6% holding. This may be for simple investment reasons rather than to mount a challenge for the group as a whole.
Should this corporate intrigue matter to investors? After all, in the British retail funds market Roger Guy only ran the European Absolute Return fund, which at £180m is relatively small. The offshore AlphaGen Capella hedge fund may be important for Gartmore as a business, but it is not important to most retail investors. The group has lost five key investment professionals out of more than 90 – concerning rather than disastrous. The real worry is whether Gartmore’s wider culture will be undermined.
The first problem is the extent to which the possibility of a new ownership structure destabilises managers. The group has said that there are new lock-ins for managers in its recent statement to the stock exchange, but has as yet given little detail. Gavin Haynes, an investment director at Whitechurch Securities, says that Gartmore’s corporate future needs to be decided relatively quickly and with it reassurance that key managers will stay under a new ownership structure. He adds that uncertainty can be damaging for fund performance: “If there is excessive leakage in the underlying funds, it can make them difficult to manage.”
The second problem is whether the managers have sufficient support. This is a particular concern for Bennett, who is managing large funds with a significantly depleted European team.
Darius McDermott, the managing director of Chelsea Financial Services, is sanguine. He says: “He brought two people with him from GAM and two of Roger’s analysts are staying. Resources are an issue, but he is not the only person managing all that money.”
However, to prevent these problems the group needs to ensure that it is communicating with the market effectively and investors are reassured. In this respect, Patrick Connolly, the head of communications at Chase de Vere, is critical. “They need to say what is happening and what they are doing,” he says. “This could be as straightforward as ’we have spoken to all the key managers and they have indicated that they are staying’.”
Connolly says that, for Chase de Vere, the key managers are Bennett on the European Select Opportunities fund, Chris Burvill on the Cautious Managed fund and Charlie Awdry on the China Opportunities fund. McDermott adds Ben Wallace on the UK Absolute Return fund to that list.
If these key managers remain in place, there is no reason that a takeover need be a disaster for unitholders. Haynes points out that for New Star funds where the managers were retained – such as the European fund under Richard Pease – investors saw no significant dip in performance.
Of course, Gartmore would probably rather avoid further comparison with New Star, which was taken over by Henderson Global Investors at the start of 2009 after collapsing under the weight of its £238m debt burden. Gartmore’s debt burden is neither as severe, nor is financing so difficult to come by. Gartmore has about £79.7m in debt.
Gartmore may continue as an independent business, but the potential for a loss of confidence is there. As such, perhaps the biggest worry for shareholders and unitholders is that everyone is worried about it. They may need more reassurance about the the group and its key managers to persuade them to stay.