Will a Rocky Boat Lead to Mutiny at Gartmore?

Shares in Gartmore Group PLC slumped as much as 20% on Monday after the investment group announced a number of developments including the resignation of star manager Roger Guy, the defection of chief investment officer Dominic Rossi, and the departure of senior fund manager Darrell O’Dea. The moves add to a list of high-profile departures from the firm, including that of Guy’s former co-manager Guillaume Rambourg, who resigned in July of this year following an FSA investigation regarding trading rules, and small companies fund manager Gervais Williams, who stepped down in September. Gartmore CEO Jeffrey Meyer also announced that he has hired Goldman Sachs to conduct a strategic review that could include merger or sale options.

Equity analysts’ initial reactions to the strategic review news were largely positive, suggesting the company could present an attractive acquisition if it manages to minimise fund outflows following the news. However, Numis Securities analysts David McCann and James Hamilton on Tuesday said they were dubious about the ability of Gartmore to achieve what they believe are its goals: to find a buyer for the business as a whole rather than a partial sale, with whom it can deliver decent synergies so as to justify a premium price tag compared to the current share price, and all before March 2011. “We are struggling to identify any obvious buyer, not least in this time frame,” they wrote in a note to clients on Tuesday. The analysts added that they do not think any buyer would be willing to buy even part of the company without several periods of flow data, unless it was offered at a substantially discounted price to reflect the risk. Furthermore, there’s the added concern of further manager departures. “There remains a risk, in our view, with every day that passes and the business is not sold, that other key individuals defect away from the organisation, leaving only those staff not able to get a job elsewhere on merit,” McCann and Hamilton said.

It’s not only fund managers flowing from the company that investors need to worry about; a number of equity analysts have suggested that not only will Gartmore lose 100% of those assets previously invested in Guy’s funds, but will also suffer outflows elsewhere as investors baulk at the uncertainty over the business’s future. “It’s not a favourable environment for investors to be in and the outflows are likely to be huge,” commented a portfolio adviser who preferred not to be named. “Why would you want to keep your money somewhere where you don’t know what’s going to happen?” he said, adding that the latest manager departures “aren’t the first and won’t be the last.”

Skandia Investment Group on Monday terminated its 10-stock EUR 38 million mandate run by Roger Guy within its EUR 325 million Skandia European Best Ideas Fund and said it will not hesitate to take action regarding its other Gartmore-run mandates should it seem necessary to do so. “Within our other multi-manager funds, we currently have a further £150 million invested across several mandates run by Gartmore which are not directly affected by the announcements today,” Skandia CIO James Millard commented, adding: “We will continue to monitor the situation and will not hesitate to take appropriate action should we deem it necessary.”

Killik Asset Management also withdrew its funds from Guy’s European Absolute Return fund, noting that the key reason for buying an absolute return fund is usually the skill of the fund manager.

Gartmore’s accompanying announcement on Monday that it plans to cut £10 million in costs—including potential personnel cuts, raised questions about the ability of the firm to hold onto remaining managers. Management confirmed at a press conference on Monday that it is issuing shares worth 15% of its existing equity in an attempt to retain key portfolio managers. “The managers are understandably jumpy but the 15% share issue has helped to settle them in the short term,” said someone close to the matter. “One thing’s for sure and that’s that something will happen before March—either they’ll be sold or they’ll merge—three months is too long for a strategic review in this case,” they added. Numis Securities’ McCann and Hamilton have doubts over the ability of the share issue to persuade managers to stay. “There is a risk that staff come to a similar conclusion to us, in that there are no obvious buyers in the short term and therefore this additional equity incentive may not be worth very much relative to the security of gaining employment elsewhere,” they said.

A recruitment drive a few years ago means that many of Gartmore’s remaining managers have only been with the firm for two years. The soon-to-depart CIO, Dominic Rossi, joined approximately two years ago from Threadneedle but is now set to join Fidelity. In contrast, Roger Guy has been an integral member of Gartmore for the past 17 years.

The impact of changes at Gartmore will not only affect those funds that fell under Roger Guy’s remit. Gartmore’s potential takeover or merger with another asset manager could see portfolios combined with other funds if an appropriately similar offering exists. Guy’s departure, in conjunction with that of his colleague O’Dea, will also lead to mergers within the company. Gartmore is to merge its European Large-Cap and European All-Cap management teams to form one European Equities team that will pass to John Bennett, who joined Gartmore from GAM at the start of 2010, when he also took over management of the Gartmore European Select Opportunities fund. Bennett’s competent management earned that fund a Superior Morningstar qualitative rating. But Monday’s news has raised concerns in the market as to his ability to deal with an increasingly heavy workload in the wake of manager departures.