GAM promises a collapse of profits

An employee of asset manager GAM works at the company's headquarters in Zurich's Prime Tower. (Image: Gaetan Bally / Keystone)

The institutional asset manager GAM surprisingly announced a sharp drop in its profits in the first half. The company expects a surplus of about CHF 25 million, compared to a total of CHF 67.7 million in the same period of the previous year.

High depreciation

The main reason for this decline is an impairment of intangible assets (customer contracts, goodwill) of CHF 59 million related to the acquisition of Cantab Capital Partners in October 2016. At that date, GAM had $ 217 million in cash for the hedge fund company, which had two funds paid. One of the two funds, which is highly volatile and associated with large fluctuations in value, has not appreciated the clients and has not been able to achieve the profit forecasts – the volume of the fees related to the performance and the expenses management were below expectations. The performance of Cantab's disappointing results, although boring. But the damage is limited to the extent that the deferred payments agreed at the time of the acquisition can be adjusted downward. Thus, the final purchase price will be lower than originally planned. Since the acquisition of the Cantab funds, provisions for deferred payments of CHF 57 million have been released – CHF 30 million for the current year alone. As a result, now announced value adjustments and accumulated discounts are close to the balance. The last deferred payment expires in the fifth year after the purchase.

No Magnet for Investment Funds

Not only returns but also the influx of funds have been below expectations. At the time of their acquisition in October 2016, Cantab's two funds managed assets of 3.8 billion Swiss francs, which allowed the funds to be increased and the GAM Systematic unit to be managed at the same level. 4.7 billion francs at the end of March this year. Despite this, it can be assumed that both Cantab funds have seen cash outflows. More accurate numbers are not available. The share of assets managed by GAM Systematic in the funds managed by the group remains manageable. The latter amounted to 158.7 billion francs at the end of last year

The head of GAM Alexander Friedman, who announced in October 2016 the immediate tangible impetus of cantab funds on profits and nurtured exaggerated expectations, remains confident, Regardless of this, it is obvious that the seller has benefited most from the transaction Cantab. The hedge fund shops are fortunately overpaid by asset managers

Legitimate Critics

Already in April 2017, the investment vehicle RBR Capital Advisors had criticized the Cantab operation. GAM has spent half of its liquidity by buying an average player in an overcrowded market segment. While the seller's shareholders would have benefited from this, GAM shareholders should accept significant downside risks. This assessment should prove correct.