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GAM tumbles 11% as Credit Suisse questions viability

GAM tumbles 11% as Credit Suisse questions viability

Shares in GAM tumbled more than 11% today after Credit Suisse halved its target price on a warning that its earnings may fall as much as 56% by 2020 due to its misfiring absolute return range.

Today’s 11.3% slide took the shares to a low last seen in the depths of the credit crunch at 7.27 Swiss francs, and extended a decline since January to almost 60%.

A GAM spokesperson declined to comment.

While the bank said the business would likely survive the immediate crisis, under its negative forecast scenario its ‘viability as a standalone company would be less straightforward’.

Credit Suisse updated its view following the July exit of GAM head of absolute returns Timothy Haywood - who the company subsequently accused of breaking its inducement and dealing rules – and the suspension of redemptions from his £5.6 billion Absolute Return Bond fund.

Zurich-based GAM has more recently said it would liquidate the range and would likely be able to return the bulk of client capital in September.  

‘How much of the circa CHF3.7 billion of ARBF mandates will remain with GAM?’ asked Credit Suisse asset management specialist Tom Mills. ‘We assume zero.’

The house modelled a further £6.3 billion outflow of its current £129 billion in total client funds from elsewhere in the business between now and 2019.

‘It is very difficult to model what the collateral damage to GAM’s overall business will be as a result of what has happened at ARBF.

‘For sure, there will be some clients who are invested in other GAM strategies as well as ARBF, including other fixed income funds, given their weight within the overall firm. Instinctively, it feels like this AUM is at most risk of being redeemed, although we do not know what proportion of the book this represents.

‘For context, it should be noted that almost all listed European asset managers have seen their net flows turn negative in 3Q18-to-date (according to EPFR data), and so GAM is not alone in this regard, but the quantum of outflows (excluding ARBF) does appear to be at an elevated level versus peers.’

The downgrade means Credit Suisse goes from holding GAM on one of the most aggressive target prices in the coverage universe to the most bearish, well below a median CHF10.41.

Analysts currently rate the company on a negative outlook by a seven-to-two ratio, down from a six-to-three negative split in May, according to Reuters tracking.

Mills added that GAM had room for self-help regardless of client flows, but that efficiency savings had already been factored into the house’s forecast and these were no longer expected to be net contributions to the bottom line. 

‘GAM has not yet set out whether it intends to take specific cost actions as a result of the ARBF issue. We think it is likely that, at the very least, it will act to rein-in discretionary costs/investments through 2019/20. We therefore assume the business realises a full CHF20m of cost efficiency savings through end-2020.'

Using Credit Suisse’s terminology for main/worst case probabilities, he said that while it remained likely that GAM would have the resilience to continue as an independent entity, it was possible that it would ultimately need to seek a sale.

‘Under the Blue Sky scenario (as well as our base case), we could comfortably see GAM remaining as a standalone independent company.

‘However, under the Grey Sky scenario, we think GAM’s viability as a standalone company would be less straightforward and that were signs of that magnitude of franchise erosion to become apparent, then we think the board would be highly motivated to try to sell the business.’

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