GAM announced on 31 July 2018 the suspension of Tim Haywood, investment director and business unit head for the unconstrained/absolute return bond strategy. This follows an internal investigation into issues relating to "his risk management procedures and his record keeping in certain instances." No wider breach has been found involving people from other departments or close colleagues.
As the investigation isn't complete, the precise nature of the issue hasn't been fully disclosed. A key question is whether any shortcomings have been uncovered in the firm’s risk-management processes. Investment teams at GAM have primary responsibility for the level of risk in their portfolios.
Fund managers are allowed to pursue investment opportunities using their own unique processes, without the constraints of a "house view" or investment committee. They do, however, operate within the risk-monitoring and oversight framework of the group.
Matthew Beesley, GAM’s head of investments, joined in March 2017 and is charged with optimising performance and risk management. He has stressed that the current issue surrounds a particular manager. While this has not resulted in clients being disadvantaged, their findings suggest Haywood failed to follow certain internal policies and procedures.
More broadly, there is no widespread risk failure across its systems or fund range. However, he added that the firm has been working on optimising its risk-management capabilities in recent years, and, through the investigation, it has identified a few practice improvements in its risk framework. Following Haywood’s suspension, outflows from his funds have taken place.
In fact, on 2 August 2018, GAM announced that it suspended all subscriptions and redemptions in its unconstrained/absolute return bond funds as of 31 July 2018 because of a high level of redemptions. This is in order to keep the shape of the portfolios intact. None of the funds managed by him are under Morningstar analyst coverage.
At this stage, we are not making any changes to the Morningstar Analyst Ratings for any GAM funds. Also, we are not changing the current Neutral Parent Pillar rating. Despite the turmoil caused by the suspension of Haywood, we feel there is enough strength and experience at the firm to mitigate our concerns to an extent.
The firm has some standout offerings with long-tenured managers, and it is well placed to benefit from investors’ search for alternative sources of return given its strong focus on UCITs compliant alternative investment strategies. That said, the unconstrained/absolute return bond strategy overseen by Haywood is one of the flagship funds in this area. It also suffered large redemptions in 2016, following a period of disappointing performance.
GAM operates a platform model where investment managers enjoy a high degree of autonomy, and, historically, the firm has been able to attract and retain investment talent despite the trouble experienced in recent years. We draw comfort from the breadth of resources available to the absolute return capability. Jack Flaherty and Alex McKnight, investment directors, have assumed joint responsibility for the absolute return bond fund and other associated portfolios.
Flaherty has been one of the comanagers for more than six years, while McKnight has been a key member of the underlying team for the past 11 years. They can draw on a team of 18 for further support. That said, we will closely watch the firm for any potential signs of instability within its investment teams as a fallout from the current investigation and resulting outflows.
The Parent rating remains Neutral while we monitor closely how the situation evolves.
