Gartmore’s Rise and Fall Hinged on Star Manager Who Beat Gross
Gartmore Group Ltd., the U.K. fund manager founded by the Cayzer shipping dynasty, has been sold five times over the past 20 years. Its sixth sale, being run by Goldman Sachs Group Inc., will take place without its biggest asset and liability -- star fund manager Roger Guy.
Guy, 44, has outperformed Bill Gross and David Herro, two of Morningstar Inc.’s three fund managers of the decade, since 2000 as he ran Gartmore’s best-performing funds with partner Guillaume Rambourg, 39. His success made the firm too dependent on their star managers and his exit has left it struggling to stem client withdrawals and find a buyer a year after going public, former employees and analysts say.
“They weren’t as good as Warren Buffett, but they were close,” said Joe Seet, senior partner at Sigma Partnership, a London hedge-fund advisory firm, and an investor in Gartmore’s European Absolute Return fund run by Guy and Rambourg. “Investors follow the manager. Talent is hard to come by and very difficult to replace.”
Gartmore has promised to update investors by March on a search for a buyer or merger partner after clients pulled 14 percent of their assets following Rambourg’s suspension last March and Guy’s announced departure this month. Although Guy’s rise from investment analyst to the firm’s highest revenue producer over 17 years increased profits for its revolving door of owners, his success caused a concentration of power within the firm that was exposed on his departure, analysts and ex- employees say.
Henderson Group Plc, Gartmore’s second-largest shareholder, is a possible buyer while Threadneedle Asset Management Ltd. and Newton Investment Management Ltd. may be potential merger partners, according to Sarah Ing, an analyst at Singer Capital Markets Ltd. in London. Spokesmen for the three firms declined to comment.
A number of companies have been building stakes in Gartmore after the fund manager announced it was for sale. Swan Street Partners LLP, managed by John Zwaanstra, who founded Penta Investment Advisers Inc., has a 4 percent stake, according to a regulatory filing. Hedge fund Lansdowne Partners Ltd. has also increased its holding, according to regulatory filings.
The percentage of Gartmore shares outstanding on loan, a measure of investors betting against the stock, has risen sevenfold to 3.4 percent since Nov. 8, when Guy announced his plans to leave, according to data compiled by Data Explorers, a New York-based research firm. Short sellers borrow a stock and sell it, in the hope of buying it back and returning it to its original owner at a lower price later.
“Time is of the essence,” said Ing, who has a “fair value” rating on the stock. “They’re in a period of corporate uncertainty and that’s potentially negative for flows.”
Guy and Rambourg, who ran the European Absolute Return fund and three hedge funds, accounted for 37 percent of the company’s funds under management at the time of its initial public offering in December. A $10,000 investment in their AlphaGen Capella hedge fund at the beginning of January 2000 is now worth $28,750, according to data compiled by Bloomberg. Capella, launched in 1999, was named after a star that outshines all others in the Auriga constellation.
The same investment in Bill Gross’s Pacific Investment Management Co. Total Return Bond Fund is worth $22,000 and Herro’s Oakmark International Fund would have returned $24,200, according to data compiled by Bloomberg.
A $10,000 investment with Morningstar’s third fund manager of the decade, in Bruce Berkowitz’s Fairholme Fund, would have returned $39,000. The same investment in Warren Buffett’s Berkshire Hathaway Inc.’s Class A shares would have returned $21,130 since the beginning of 2000.
Gartmore, which has 20.7 billion pounds ($33 billion) of assets under management, declined to make Guy available to comment, and he didn’t answer questions e-mailed to his work address. Rambourg couldn’t be reached for comment.
Guy and Rambourg’s importance was reflected in where they sat at Gartmore, side by side for more than a decade in the middle of the firm’s second floor, surrounded by executives, brokers and analysts, in an office near the Tower of London, say ex-colleagues. Every morning they led meetings before the markets opened at 8 a.m. and would stay at those desks until as late as 8 p.m.
“They were super efficient,” said Paul Hondros, Gartmore’s chief executive officer from 2003 to 2006 and now head of AlphaOne Capital Partners LLC in Pennsylvania. “They would have morning meetings where no prisoners were taken. They would systematically go through analysts, getting their best ideas, holding them accountable. They were all about performance. They were one of a kind.”
While British-born Guy was the senior member of the partnership with Rambourg, he had little interest in the firm’s internal politics and was purely focused on stock-picking, ex- colleagues said. Rambourg, a French Canadian from Ottawa, was more social, playing softball with colleagues and finishing in the top five percent of all runners in last April’s London Marathon. Guy was a soccer fan who liked to take his son to Arsenal games in north London.
On Jan. 21, they collected the award for 2009’s best European Equity Fund from EuroHedge, an industry publication that holds a black-tie annual awards dinner in London’s Grosvenor House Hotel. Gartmore, founded in 1968 to invest the wealth of the Cayzer family, which made its fortune in British shipping, won three awards that night.
Less than a year after Gartmore’s public offering, Guy and Rambourg have departed, three other fund managers -- Gervais Williams, Darrell O’Dea and Dominic Rossi -- quit and Gerry Harvey, the firm’s head of compliance, has also left. Customers have pulled or plan to pull $5.3 billion of assets and Gartmore’s share price has dropped 53 percent to 101.5 pence a share since its IPO on Dec. 14.
“It was not an unexpected item that suddenly blew up,” said Ian Poulter, a London-based analyst at Canaccord Genuity with a “sell” rating on the stock. “People had been concerned about the key-man risk to start with. The fact that it came up so soon after flotation is something that clearly gave the stock a real knock.”
Guy and Rambourg sold shares worth 23 million pounds between them when Gartmore went public in December. After the share sale, Guy held a 6 percent stake worth about 36 million pounds, which has since fallen to about 17 million pounds. The value of Rambourg’s 4 percent holding has dropped to about 12 million pounds from 25 million pounds at the IPO.
Gartmore’s investors were warned about the risk of having two key fund managers in its IPO prospectus published last year. The company had “a concentration of assets under management around one investment team,” citing Guy and Rambourg as “key portfolio managers.”
Guy joined Gartmore from Eagle Star, an insurer then owned by British American Tobacco Plc, in 1993. He graduated from Sussex University with a degree in economics in 1988 and completed a postgraduate degree in European financial analysis at Newcastle University the following year.
Rambourg, the son of United Nations diplomat, graduated in 1993 from ESSEC, one of France’s top business schools, after majoring in finance, and joined Guy’s European equity team at Gartmore two years later.
During Guy’s rise to become Gartmore’s top fee earner the firm’s ownership was transferred between two banks, an insurer and a private equity firm and between two continents, helping to increase his personal influence within the company.
In 1990, the firm was bought by Banque Indosuez, a French bank, for 132 million pounds. National Westminster Bank Plc paid 466 million pounds for Gartmore in 1996 and when NatWest was acquired by Royal Bank of Scotland Group Plc in 2000 the company was sold to Columbus, Ohio-based Nationwide Mutual Insurance Co.
Nationwide encouraged Guy and Rambourg’s to expand the hedge fund business to diversify away from their less lucrative mutual funds and increase its sales in Europe. The pair’s average annual return in their $2.5 billion AlphaGen Capella hedge fund was almost 15 percent from 2000 to the middle of 2006, when San Francisco-based private equity firm Hellman & Friedman LLC paid 500 million pounds for a 52 percent stake.
Guy hired Soditic Ltd., a London-based investment bank, to represent his and other key fund managers’ interests during the sale to Hellman & Friedman. In 2009, three years after the deal and immediately before the firm’s IPO, Guy was the biggest individual shareholder in Gartmore, owning 8.45 percent of the firm. Rambourg owned 5.73 percent.
Hellman & Friedman
“The revolving ownership may have weakened the management and inhibited it from a more balanced strategic development,” said Keith Baird, an analyst at Oriel Securities Ltd. in London who follows the U.K. asset-management industry. “That didn’t appear to have an effect on Guy and Rambourg’s performance.”
Hellman & Friedman decided to sell shares in an initial public offering last December and raised 280 million pounds, which it used primarily to pay down debts incurred in acquiring the company before the credit crisis. Hellman & Friedman retained a 24 percent stake in the firm, making it Gartmore’s largest shareholder. A spokeswoman declined to comment.
In March, Gartmore suspended Rambourg following an internal probe that said he may have directed orders to buy and sell shares to favored brokers.
The internal rule that Rambourg broke was a “safeguard” put in place to make sure managers fulfilled the Financial Services Authority’s requirement that a broker is chosen for his execution services only, CEO Jeffrey Meyer said on a conference call with analysts in April.
Gartmore’s share price plunged by a third the day Rambourg’s suspension was announced and a month later the company’s compliance chief quit. Rambourg returned to work as an investment analyst in April after law firm Clifford Chance LLP conducted an internal review and said there was “no suggestion of dishonesty” on his part and no clients suffered losses.
Asset managers are required to choose a broker based on which one can best execute a trade rather than any personal relationship, according to the European Union’s Markets in Financial Instruments Directive. The rules are often a “gray area” for fund managers and compliance officers, according to Jerome Lussan, founder of hedge-fund consultant Laven Partners in London, who has no direct knowledge of the Rambourg case.
Guy said Gartmore’s “excessive” internal compliance rules were to blame for his colleague’s suspension, the Financial Times reported April 1, citing a private conference call for investors. “I’ve never been involved in day-to-day management of the firm, but maybe I should have after this,” he said the same day, according to trade magazine Fund Strategy.
Rambourg quit three months later as an FSA probe, which is continuing, prohibited him from executing trades. An FSA spokeswoman, Heidi Ashley, declined to comment.
The ensuing wave of fund manager departures and client withdrawals prompted CEO Meyer to issue new shares valued at as much as 15 percent of the company’s equity to retain remaining employees. “Is the end ever bottomless?” he said Nov. 8. “I think this is a very well-balanced amount, a well-judged amount. This is it and if it doesn’t do it, it doesn’t do it.”
The firm this week awarded 9 million shares, or 2.5 percent of the company, to John Bennett, a fund manager hired in June 2009 to reduce Gartmore’s reliance on Guy and Rambourg.
Sigma’s Seet is keeping his funds with Gartmore. “The jury’s still out on whether John Bennett will come through,” he said. “I’d like to think so.”
“Gartmore said very clearly at the time of IPO that they would be recruiting a wider team of fund managers in order to reduce their reliance on one or two ‘stars’ and deal with the so-called key-man risk,” the firm said in an e-mailed response to questions posed by Bloomberg News.
“We have done what we said we would do,” Gartmore said, citing the appointments of Bennett, head of U.K. equities Leigh Himsworth, and U.K. equity managers Dan Roberts and Luke Newman as examples. “Financially this is a strong profitable business with low debt, but it takes time for these new hires to become established in their new roles.”
While the departures of Guy and Rambourg have hurt current investors, one advantage the company may now have is an absence of the key-man risk.
“Perhaps you’re quite happy as a buyer not to be at the mercy of one or two very strong individuals that have so much economic say,” said Morten Spenner, CEO of International Asset Management Ltd., a London-based fund of hedge funds with $3 billion of assets and a former Gartmore client. “You can still buy a team with a strong offering.”
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