GAM is battling on various fronts, with the ongoing restructuring programme being compounded by adverse market conditions. When you took the job in 2014, did you expect it to be such an intensive task?
There is a saying: “If you want to make God laugh, make a plan“. In other words, you never really know what you are getting into. Of course, I knew that we needed some restructuring to position GAM for the future. But I did not expect the market environment to change so quickly and drastically, accelerating the urgency of our restructuring plans.
Did you have to change your original restructuring plan? The basic strategy is still the same. But we have to increase the pace on the cost side and in the transformation of the operating processes.
At which point of the process does GAM stand now?
We are on track, but it is always darkest before the dawn. When I took on this position, GAM essentially consisted of two separate entities that were not integrated – the old GAM and Swiss & Global, the former asset management division of Bank Julius Baer. There was duplication in the funds we ran, in IT, operations, and our fund administration was done almost fully in-house… Many of the cornerstones of our new strategy are now in place, but they have not yet materialised in our top-line results. We have streamlined our fund range, made some additions to it, are outsourcing back and middle office, have established one brand and will now strengthen the distribution organisation.
How long will it take before success kicks in?
We launched our strategic plan in March 2015. The moment we will see it pay off is not far away. In asset management, nothing happens quickly, I am afraid. If you add new investment capabilities or invest in the brand, it takes time until success will materialise. If the changes we kicked off in 2015 had been implemented a few years earlier, we’d be in a different position today.
You have closed or merged 56 funds so far, without a major loss in assets. What type of funds?
We had duplicate funds as a result of our company’s history. There, we determined which management team was stronger and pooled the assets and responsibility for running them – as an example we gave the responsibility for Japanese equities to our team in Zurich. We also had several products where I felt we were not positioned for future success. For instance we had a small range of so-called smart ETFs. They were well-run, but this kind of product is easily scalable and is today an area that is dominated by large providers that can compete at very low fee levels. Our small ETF business would not have been able to keep up with this type of pricing – which is why we closed the funds.
Do you have plans for further acquisitions?
Currently, we are focused on the integration of the businesses we have just acquired: Renshaw Bay, specialised in investments in real estate debt; Taube Hodson Stonex, a global equity specialist; and lastly, Cantab, a quantitative manager. We are always hiring new specialists, most recently an expert for merger arbitrage in Lugano, and we plan, over time, entire team lift-outs. At the same time, we develop new solutions organically, such as our new trade finance capability.
Your outlook for financial markets at the half-year press conference was not particularly cheerful – as an asset manager, how do you cope with this environment?
Valuations of financial assets are artificially inflated by the extremely loose monetary policy adopted by the central banks in many industrialised countries. These policies, however, are reaching their limit. Now it is about good fiscal policy – which is the task of elected governments. At present, we have ongoing election campaigns in the US and several European countries, and this is creating even more uncertainty. Slow economic growth and sideways, volatile markets, combined with low yields, is quite a fertile environment for quantitative managers like Cantab. They can exploit pricing trends and micro trends with the help of computer models, in a way that is much faster and more accurate than humans could do it. Today’s market moves and valuations have nothing to do with fundamentals.
Should we now expect ‘helicopter money’, money that is simply given to citizens? Could this protract the artificial volatility of financial markets?
In economies like the US ‘helicopter money’ is unlikely to have a chance. Japan might try it. But it will not be effective. If an economy is to grow, it needs to be run more efficiently and the population has to spend more money. ‘Helicopter money’ may address the second point, but is a very short-term solution. What really counts for a country is a well-functioning infrastructure, a smart immigration policy and good solutions for demographic problems.
You recently stated that an interest rate hike in the US represents a risk for markets. But somehow there needs to be a way out of the current monetary expansion.
That is true. I am not worried about higher interest rates, I just anticipate that markets will be temporarily destabilised when it finally happens. The Fed’s mandate consists in reaching full employment in the US and an inflation rate of 2%. Both have been achieved. The Fed has become too dependent on markets – each time it indicates that it may raise interest rates, markets react and the Fed draws back. The same goes when something risky happens in any part of the world – for instance Brexit. The Fed should stick to its core mandate and focus on what is happening in the US. This means it has to raise interest rates.
What could be viable solutions for Europe and Japan? These countries also need to normalise their monetary policy at some point.
The European experiment – a monetary union without a fiscal union – makes the situation more difficult. EU countries diverge in their economic development, and there is recessionary pressure. The answer here lies again in sound fiscal policies. There is not much the ECB, Mario Draghi or the Bank of England can do. In Japan, the problem is an ageing population. Japan needs to find a path to cultural change, enabling more women to enter the workforce and perhaps opening up to immigration.
Longer term, what is your outlook for financial markets?
On balance, returns and valuation gains will remain low. If you take drugs – for instance after surgery – it is momentarily soothing, but at some point you will feel the side effects. We struggle already with the first side effects of this extremely expansive monetary policy. Financial markets are simply responding to the news that central banks might inject more money – even though it has gone too far, and it is hardly healthy for the overall system. We are on our way to a rude awakening and the call is on fiscal policy. It’s about infrastructure, education, immigration and global trade. Present election campaigns are counterproductive, with an unfortunate tendency to populism. I still hope that they will result in more balanced results than what is currently being propagated by some extremists.
You mentioned that quantitative managers benefit from the current environment – something hedge funds have claimed in the past. GAM used to be known as a hedge fund firm – how would you characterise the company today?
‘Hedge fund’ is a very broad term. It can encompass many different investment strategies and business models. In every market cycle, some are successful, some are not. Today, there is probably an oversupply. Many smaller firms are facing headwinds, some give up. I would caution against generalisation and drawing conclusions for the entire active asset management industry. The picture looks much brighter, if you look at value creation over a longer timeframe.
What do you define as a hedge fund in this context?
At GAM, we would consider strategies to have a hedge fund character when their fees are linked to performance. That pertains to about one-third of our assets under management. It includes our global macro interest rates strategy, our long/short equity range, the investment strategies run by Cantab, etc. Some of these alternative strategies are packaged to be authorised for public distribution under UCITS rules and accessible for private investors, a format that is suitable also for certain of Cantab’s investment strategies.
GAM is an active manager – what does the competitive environment look like in this industry segment?
We view ourselves as specialised active asset managers with a skew towards alternative strategies. Part of our business is comparable with large hedge fund firms like Man Group, but we also offer classical investment funds like for example Schroders does. Once our strategy is fully implemented, we will be very differentiated – highly diversified across the entire spectrum of truly active investments, whether they are run with human conviction or based on computer models. While low-cost passive solutions and ETFs are growing rapidly, our strategy puts us in a completely different space, where they can’t compete with us. Asset managers who simply rely on traditional approaches will be squeezed out by the ETF competition.
Compared to the US, Europe has many ETF providers and a large number of asset managers. How will this end?
Asset managers with very traditional approaches, such as buying and holding shares of large corporates, are endangered. In order to succeed, they will need scale. Alternatively, you could position yourself as small and innovative, to sidestep the fierce pricing competition from ETFs. By small and innovative I mean products like our recently launched merger arbitrage fund. It can’t be substituted by an ETF. As far as the ETF providers are concerned, they rely on scale. Large US providers like BlackRock, Vanguard and State Street are increasingly targeting European markets and this will accelerate the consolidation of today’s fragmented competitive landscape. The business in this segment is all about size and distribution.
Does GAM have the right size to succeed in its niche?
We still have to grow, but the way we are positioned now, we will be able to do that mostly organically. A couple of additions are not excluded. But currently it is mostly about getting our internal structure, especially in distribution, set up properly and effectively.
You have reduced jobs but also made new hires. In which areas did that happen?
The outsourcing of our back and middle office to State Street will reduce jobs by around 15%, mostly in fund administration and IT. In our distribution and investment teams, on the other hand, we are hiring.
To what extent are you integrating your products under one brand? The multi-boutique approach is always challenging for distribution teams, but product brands in the fund industry can be very sticky for regulatory reasons.
We have clearly abandoned the multi-boutique model. Our company’s brand is GAM, and it is prominently used on all our services and products, including those which we distribute under the additional label “Julius Baer Funds”.
This is the English translation of an interview with Alexander Friedman conducted by Neue Zürcher Zeitung and originally published in German, on the NZZ website and, in a shorter version, in the newspaper’s edition of 5 August 2016.
The original coverage in German can be found here - http://www.nzz.ch/finanzen/fonds/alexander-c-friedman-ceo-gam-der-erfolg-der-strategie-wird-sich-bald-zeigen-ld.109043