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21st of October 2018

Economy



GAM’s great fund unwind leaves Greensill-linked debt behind

Swiss fund manager GAM has pulled off a slick move in smoothly unwinding the bulk of its stricken bond funds, but the stub of illiquid debt still in its portfolios goes to the heart of the scandal that has brought its management and reputation into question.

Two months after the investment house abruptly suspended star fund manager Tim Haywood over what it says were potential breaches of due diligence practices, GAM is in the process of handing cash back to clients in his Absolute Return Bond Funds (ARBF) – a highly unusual move for such a large series of funds investing in a diversified range of fixed-income assets.

The liquidation means GAM, has been quietly selling down SFr7.3bn of holdings, largely without spooking the broader market, even in rare assets. But left behind are obscure and illiquid securities linked to Greensill – a start-up claiming to be “changing finance to change the world”. The young company has a close relationship with the investment firm, having run a separate “GAM Greensill” fund since 2016.

The presence of those hard-to-sell assets prompts some advisers to worry about what lies inside popular absolute-return bond funds like GAM’s, which give managers a free hand in picking investments. While such funds have proved adept at fundraising, they have faced growing criticism due to their opaque nature and generally poor performance.

“They don’t do what they say on the tin: they haven’t delivered an ‘absolute return’ consistently,” said Ben Yearsley, a director at Shore Financial Planning. “And then when you add in the complexity, you have to ask: do advisers and investors actually understand what they’re either putting their clients to or what they’re buying themselves?”

Founded in 2011, Greensill provides companies with working capital based on their invoices, a model it says helps them to “optimise their balance sheets”. An analysis of GAM’s main Luxembourg-domiciled fund’s reported holdings shows that, a month before Haywood’s suspension, nearly 12 per cent of the fund was invested in Greensill-related paper for several different borrowers. Much of this paper remains on GAM’s books.

Mr Haywood’s investments in Greensill’s so-called supply-chain finance bonds were central to GAM’s investigation into his due diligence processes, according to people familiar with the matter. GAM declined to comment but has previously said the fund’s holdings did not breach any of its restrictions.

Public filings indicate that GAM has now liquidated the bulk of its ARBF holdings. Its main Luxembourg-domiciled fund reported it had just 27 positions left at the end of September, down from the nearly 600 at the end of June.

But complicating matters for GAM’s process of unwinding the rest of the portfolios, much of the Greensill paper is unlisted and cannot be sold through brokers in the same way it has sold off other holdings. In the main Luxembourg fund, five out of its top 10 positions left at the end of September are unlisted securities linked to British industrialist Sanjeev Gupta’s Liberty House group, a prominent Greensill client. Liberty House declined to comment.

The ARBF also held bonds from a subsidiary of Greensill. Laufer Limited, a UK subsidiary, raised the equivalent of $364m from GAM last year, and Laufer lent a total of $372m to Australia’s Greensill Capital and one of its subsidiaries, according to the UK entity’s 2017 accounts.

“GAM provides no financing to Greensill,” a Greensill spokesman told the Financial Times. “Greensill has a wide ranging access to capital, as you would expect from a financial services provider of our scale.”

While much of the Greensill paper is difficult to sell, the debt facilities are short-term. People familiar with the matter said the remaining paper is expected to naturally roll off around the end of this year, meaning investors may have to wait to get the remainder of their money back.

“My hunch is that you could justify them as being ‘liquid’ enough because they’re six- to nine-month rolling pieces of paper,” said one rival fund manager. “That’s all well and good, but if your client gets daily liquidity, they don’t want to wait for months.”

The liquidation of GAM’s portfolios sent fund managers and traders poring over the funds’ holdings in a bid to anticipate market disruption. Nerves were particularly high among holders of so-called “legacy” bank capital notes, as the GAM funds held large positions in perpetual dollar bonds issued before the financial crisis by Barclays, Lloyds and RBS. But the wind-down was smooth.

“As they had some quite substantial exposures, we tried to sell ahead of the liquidation,” said one manager at a fund that specialises in bank bonds. “But the impact hasn’t been massive. We haven’t seen any fire sales of significant amounts, it’s been mostly progressive selling and not that distressed.”

One hedge fund manager also said that the selldown of GAM’s bank capital holdings had gone “relatively smoothly”. He said the Swiss manager sold out of the last of its nearly $100m position in Lloyds bonds through several brokers at the end of September, adding that this holding was cleared in a matter of days at only around a percentage point lower than their market prices.

GAM’s filings show it was also left with some other holdings unrelated to Greensill at the end of September, with its three Luxembourg funds reporting positions in an esoteric payment-in-kind note from US real estate company Carrington Holding.

GAM’s Cayman Island funds do not publicly report their positions, but they are believed to hold higher proportions of illiquid paper, as they have so far only returned 66 per cent of fund assets to investors. The Luxembourg funds have returned 82 to 86 per cent.

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