GAM Star Japan Ldrs Instl GBP Acc |
Morningstar's Take
|26/09/2024by Ronald van Genderen
| Liontrust announced on May 4, 2023, that it will acquire GAM, the Swiss listed asset manager with assets under management of GBP 21 billion in its fund management arm. The firm’s GBP 43 billion fund management services division is not part of the deal, and will be absorbed by a different provider. A suitor for GAM had been widely touted, as the firm was looking to get on an even keel after a troubled recent past. It has been in crisis mode ever since suspending one of its key portfolio managers in 2018, which eventually resulted in the liquidation of the multibillion-pound funds he oversaw. Since then, the firm has been faced with significant outflows, putting increasing pressure on its profitability and share price. Under new leadership, GAM has responded by streamlining its fund lineup, slashing costs, and staff cuts which did not spare the investment teams. Still, the firm struggled to regain its footing, as also reflected in its twice-delayed annual results for 2022, which reported sharply rising losses compared with 2021. If accepted by GAM’s shareholders, the acquisition by Liontrust concludes the protracted search for a buyer amid dwindling hopes that GAM could survive as a standalone company. GAM offers a range of specialist strategies across asset classes, run by investment teams which are allowed to manage assets according to their own individual philosophy and investment process. They are not bound to any house view. As such, this culture should align well with how Liontrust operates, assembling distinct managers pursuing tailor-made investment approaches under one roof while providing risk oversight and other support functions. The firms also share similar remuneration practices, with both of their investment teams operating on formal revenue-share agreements. GAM has been able to retain key portfolio managers despite its troubles, and the apparent cultural fit between the two firms should help in keeping key investment staff. Also, Liontrust has amassed a lot of experience acquiring and bringing other firms into its fold as part of its model. The most successful has been the Alliance Trust Investments acquisition in 2017, whereby the sustainable team manages around one third of the firm’s assets. More recent purchases are that of Neptune in 2019, which brought a wide range of new strategies to the firm but an investment team that had been in a state of flux, and Majedie in 2022. There is also a bedrock of managers who are homegrown, most notably the team led by Anthony Cross who run UK equities counting for around 25% of Liontrust’s AUM. But challenges abound with this new acquisition. To date, Liontrust’s purchases have leaned toward boutique managers and GAM is a bigger piece to digest. Going into this, Liontrust had GBP 32 billion in AUM, so the combined entity would create GBP 53 billion of AUM. Liontrust management points to the advantage of scale and new capabilities being brought in across fixed income (asset-backed securities, emerging-markets debt, global credit, catastrophe bonds, and insurance-linked securities) but GAM is a loss-making entity that might still have some shackles to shake off. With just under 100 investment professionals from GAM to join, plus a further roughly 300 headcount, the integration will require a lot of work. Also, Liontrust hasn’t been able yet to build and share best-in-class practices across its different units such as in its compensation structure or capacity management, for example. It’s unclear at this stage if this will be a long-term win for investors. We retain the Parent Rating at Average for Liontrust and Below Average for GAM until the deal completion, but will closely monitor the integration and developments. The ratings of the following funds also remain unchanged: GAM Star Credit Opportunities GAM Multibond Local Emerging Bond GAM Star Japan Leaders Liontrust GF Sustainable Future Pan European Growth Liontrust Special Situations Liontrust Sustainable Future Cautious Managed Liontrust Sustainable Future Defensive Managed Liontrust Sustainable Future European Growth Liontrust Sustainable Future Managed Liontrust Sustainable Future Managed Growth Liontrust Sustainable Future UK Growth Liontrust UK Growth Liontrust UK Smaller Companies |
| GAM Japan Leaders' parent company is facing critical challenges that need to be monitored for the potential negative impact on this team and its ability to serenely manage the portfolio. Another change in the team also limits our conviction, although we have a high regard for lead Ernst Glanzmann. The strategy earns a People Pillar rating of Average and a Process Pillar rating of Above Average. The lead portfolio manager for this strategy is the very capable and seasoned investor Glanzmann, one of the most experienced portfolio managers within the Japan equity space. He has dedicated his career to Japanese equities and can boast an impressive four decades of relevant experience. Despite our conviction in him, we believe the issues faced by the firm could have a ripple effect on this team. Glanzmann is supported by two co-portfolio managers. While small, the team is well suited to its task, covering a concentrated universe of around 80 stocks. However, in recent years the team has seen some instability, and key-person risk is on the rise. Glanzmann's retirement isn't imminent, but his tenure is unlikely to last more than one full investment cycle, and GAM hasn't confirmed that an official succession plan is in place. Glanzmann has developed a proven, repeatable, and very consistently applied process. It was first applied to the 50% sleeve of GAM Multistock Japan Equity in July 2008, before being rolled out to this fund in June 2015. The approach is purely bottom-up, driven by the team's in-depth fundamental research, with a focus on high-quality stocks. The well-[codified and selective quality criteria include superior long-term growth potential, high return on equity, low leverage, and preferably a discount to perceived fair value of at least 30% at the time of purchase. This results in a high-conviction and very concentrated portfolio that typically holds 20–30 positions. Positions are equally weighted, a distinctive feature of this approach, and rebalanced annually. The strategy is further distinguished by a very low turnover, exemplified by the fact that the portfolio has been invested in largely the same stocks since inception in July 2008. Just under 20 positions were sold, and just over 10 positions were bought during this period. Glanzmann rarely trades on valuation grounds, preferring to hold on to quality companies even when they are trading at perceived premiums. Instead, fundamental reasons are more common triggers for portfolio changes The strategy has experienced lackluster performance in recent years, underperforming the Morningstar Japan Target Market Exposure Index Morningstar Category benchmark in each calendar year since 2021. Much of this can be attributed to the strategy's structural quality/growth style, but negative stock selection also played a role. However, investors can take more comfort from the strategy's longer-term performance, as it impressively outperformed the category benchmark in every calendar year between 2008 and 2015 as a 50% sleeve of GAM Multistock Japan Equity. |
A highly regarded manager, but concerns surrounding the team limit our conviction.To find out how Morningstar rates a fund click here.
| Morningstar Pillars | |
| People | Average |
| Parent | Low |
| Process | Above Average |
Morningstar Medalist RatingMorningstar assigns the Medalist Rating to funds that are qualitatively and quantitatively assessed through manager research and algorithmic processes. The assessment turns on three key “pillars” – People, Process, and Parent – that yield an estimate of how well a fund will perform before fees but after adjusting for risk.
|
| Morningstar reserve its rights to charge for access to these Ratings and/or Rating report. |
|
| Permissions/Reprints E-mail Morningstar |
