Monthly Archives: December 2018

GAM – London

Ali Miremadi is an investment director, who runs global equity funds and a US-focused fund. Miremadi was one of the principal partners at THS Partners, (acquired by GAM in 2016). He joined THS Partners in 2007. Previously, Miremadi worked at Goldman Sachs. He started his career in 1994 at Baring Securities. Miremadi holds a first-class degree in English Literature from Wadham College, Oxford and is also a CFA charter holder.

GAM is an independent asset manager, providing active investment solutions and products for institutions, financial intermediaries and private investors.  GAM employs over 900 people in 14 countries. Headquartered in Zurich, it is listed on the SIX Swiss Exchange. The Group has assets under management of CHF163.8 bn ($165 bn) as at 30 June 2018. CHF84.4 bn ($88 bn) is managed actively in-house.

What is the geographic split of GAM’s CHF12.5 bn equity assets?

In London, we have teams that invest in UK, European and global equities as well as technology companies. In Zurich, teams invest in Swiss and German equities as well as European, healthcare and luxury stocks, for example. We also invest in Japan from London and Zurich and emerging markets from London, Zurich and Hong Kong.

I manage $650 mn with my colleague Kevin Kruczynski. $400 mn in global equities and $250 mn in the US-focused fund.

How do GAM’s offices collaborate?

Each team has the freedom to make independent investment decisions. However, we leverage the knowledge and expertise of our colleagues across locations. I regularly consult with the European and technology teams in London. Last month, I did some research on Tencent and conferred with a colleague in Hong Kong who had recently met management. I consult with our pharmaceutical specialists in Zurich. Consulting with colleagues can be both casual – ‘water-cooler conversation’ – and formal.  The recent big correction in Facebook resulted in the tech team writing a note saying they believed it would last a couple of quarters rather than being a long term problem, for example.

Which screens do you use?

We have 40 holdings in the global funds. We look for companies that are undervalued.  We have a clear idea of what we’re interested in, so we don’t use screens. Company meetings are a core part of our approach. We do around 350 meetings a year, but we don’t buy and sell that often. Primary research is extremely valuable – I’ve never had a meeting where I didn’t learn something new. For example, I’ve held FedEx for a long time and feel I know it well but Jeffrey Smith (IRO) obviously knows the logistics industry inside out.

What is your investment style?

Value oriented. We look forward three years. We do a bull, base and bear case and a fundamental evolution of the business and then flex it to be better and worse than our expectations. We also flex valuations. We look for a minimum of 30 percent upside. We believe our portfolio is 55 percent undervalued currently versus in three years’ time. Being value oriented doesn’t mean that we just own bank and oil shares though! Equally, it doesn’t mean we won’t own something like Microsoft. We look at Microsoft’s free cash flow yield, so we are prepared to be flexible about valuation.

We start our research by looking at the industry and sector and then do extremely specific individual stock analysis. We are bottom-up, so we look at drivers of profitability, capital allocation, management and strategic decisions and the likely outcome on revenues and earnings. Then we look at valuation. Being overweight or underweight in particular sectors and geographies is a consequence of our stock picking process. Our investment horizon is three years plus.

Do you have a recommended list?

No, every team has freedom to make their own investment decisions. Examples of stocks held by more than one team, however, include: Continental, CRH, UniCredit and Telecom Italia.

What’s your benchmark?

All our funds are pooled and we use the MSCI World or the S&P 500.

Are there any sectors you won’t invest in?

I have never invested in tobacco but that’s not a GAM-wide decision.

Do you incorporate ESG into your investment process?

We have a central responsible investing team and they take an interest in our holdings. We take governance very seriously and do vote our proxy.

What’s your market cap cut off?

We have a very broad remit. We have some holdings below $1 bn but $10 bn tends to be the median market cap. So we own one or two mega caps and one or two very small companies.

What’s your average turnover?

Around four years.

Buy backs or dividends?

It depends on the circumstances. We don’t require a company to pay a dividend. Companies shouldn’t promote a progressive dividend policy unless their business can support it. Companies shouldn’t use cash to buy back shares unless the stock is undervalued. The US is full of companies doing buy backs regardless of a stock’s valuation.

What’s your average position? And your largest position?

An average position is 2-3 percent and the largest position is 5 percent. We could own a 5 percent position in our global funds and 5 percent in our US focused fund.

Discuss some of your larger holdings

Apache: this has been an on-going challenge. We’ve owned it on and off for the best part of a decade. It has gone through a real transformation in the last three years or so. For a long time, it was run by various generations of the Plank family but the last Plank was ejected about two years ago. The current team is now focusing the business on two cash generative parts, the North Sea and Egypt, and using cash flow to develop its onshore US operations. It built up 3,000 acres in Alpine High. We think it will be a fantastic 20-year oil and gas producing province. The market has not given Apache any credit for this because most of the wells they drill tend to be gassy liquids and at this point all people want out of the US is oil.

Firstly, it is operating within cash flow, which we approve of. Secondly it is not just gas but oil we expect them to get out. So we think the market is being typically very short term in thinking they do not have enough oil-rich wells and they are using all their cash flow to develop this field. We think this could be a fantastic long-term asset. Probably in the second half of 2019, once they produce more of these non-gas liquids – about two thirds of production – and once the market accepts that and starts to value that, the potential for returns is very attractive.

Rolls-Royce: we are currently doing well in it. Warren East, CEO, has taken a very complicated business and simplified it operationally and financially. Rolls-Royce has been a very sprawling operation and has not been very well run. It now has three divisions instead of five and has removed middle management. The financial controls, not solely its accounting, were substandard previously, but it has now adopted a free cash flow target of £1 bn by 2020. East has beefed up financial accounting in each geography and division. Now sales of new engines need to be cash flow positive and the firm can no longer subsidize engine sales with aftermarket sales. We are very supportive of his strategy. Being in the business of selling engines for civil aerospace is a long-term growth story. The company is fundamentally very strong from an engineering perspective, but East is now turning it into a company that is run as a commercial operation. The shares have recovered well from their lows, but we believe they have further to go if East can demonstrate that he can deliver.

Many investors aren’t prepared to invest in companies with problems, but we think there is a clear road map to fixing Rolls-Royce.

CRH: we know the industry well. We sold Heidelberg and bought CRH a year or so ago. CRH are very good allocators of capital – they buy things cheaply and sell divisions when they become more highly valued than they ought to be. They have a very strong corporate culture. Effectively it is a US and European business, but management is based in Ireland. CRH shares are currently on a very low multiple. No credit is given for their ability to create value through M&A but the firm has 20 years of hard evidence of doing exactly that. If you look at Heidelberg, LafargeHolcim and Cemex, they all did large, value-destroying debt finance deals before the financial crisis. CRH didn’t. Their US business is doing well. Europe has just had its third year of good growth. In France, we are still a long way from them getting operating leverage, but as more and more capacity gets used up we think they’ll get there. So there has been very good earnings growth at CRH and the balance sheet is strong. We are very much in favor of buy backs when the shares are very cheap, and they had the available financing. CRH is a high quality operation, which should do well over the next three to five years.

Do you have to meet management before you buy a stock?

Meeting management is immensely important to us. It is rare that we buy something without meeting management, seeing them at a conference or without a call. In 90 percent of cases, we’ll have met management before deciding to buy.

How do you prefer to meet management?

One-on-ones are the most valuable as we get more time with management. We’ll also attend group meetings and conferences. We tend to do a lot of one-on-ones as we are stable, supportive shareholders.

Best companies at IR?

FedEx is very good at IR, as is CRH.

Why should corporates target GAM?

We are stable, supportive shareholders. Our structure means companies may meet more than one team. Also, we don’t focus on the next quarter or even the next 12 months – our questions are more strategic. Generally, companies like speaking to us.

A version of this interview appeared in IR Magazine’s 30th Anniversary Issue

Disclaimer:

The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Allocations and holdings are subject to change.

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