When hedge funds were born into the pension scheme world, Gartmore was there ... Gartmore's Jeff Meyer (pictured) and Phil Wagstaff talk to Nick Fitzpatrick ...
Jeff Meyer, president & CEO of Gartmore, a London-based investment manager, has managed to sell the firm twice in his career. First of all, as a banker working at Schroder & Co he advised Nationwide, a US insurance firm, on its purchase of Gartmore from NatWest in 2000. Then, as Gartmore’s chief executive in 2006, he managed the sale of a Gartmore stake a second time to Hellman & Friedman, a private equity firm.
Between the two deals Meyer became CEO of Gartmore in 2004, meaning he was very much a stakeholder in the business when the Hellman deal went through some two years ago.
“The transaction has exceeded our expectations,” he tells Funds Europe. “Hellman & Friedman is a great business partner, with about twelve investments in the sector.”
But he stresses that Hellman is not the only owner. “Gartmore has about 400 employees and around 100 of them have equity in the business.
“This ownership structure has created a strong incentive. It means we are more team orientated and retention is strong. Our model works by attracting the best portfolio managers and retaining them.”
In the UK Gartmore is a high-profile retail manager and it also has a history in long-only institutional pension fund investment. Meyer, though, flinches at the suggestion that the firm is a ‘traditional’ asset manager.
Myners’ and hedge funds
Many long-only fund managers in Europe have added hedge funds to their businesses in recent years. The spur for this was an influential report by Paul Myners for the British government in 2001 that encouraged pension plan trustees to consider hedge funds as a means of diversifying their investment strategies. Since then hedge funds, new and old, have piled on assets from public and private retirement schemes in the UK and also in Europe.
How fortuitous for Gartmore, where Myners was CEO until 2000. Already well known in the long-only pensions world, Gartmore was able to respond to hedge fund interest in the UK with its own already built hedge funds. First-mover advantage doesn’t get any better.
Nearly eight years down the line, Myners, now Lord Myners, is the government minister for the City of London. As for Gartmore it has around £6bn (\7.5bn) of assets under management in its hedge funds – a quarter of its total £24bn.
Meyer says: “Gartmore’s AlphaGen hedge fund business began in 1999 with the launch of the AlphaGen Capella Fund managed by Roger Guy and Guillaume Rambourg. They were European long-only managers at the time.
“The team was previously asked by a large US pension client to create a long-short fund investing in European equities. They did this and the fund did well, so nine months later we launched AlphaGen Capella, the first fund in the AlphaGen range.”
These were perhaps innocent days before the question of whether long-only managers could, or even should, run short money.
Meyer adds: “After the launch of AlphaGen Capella, other fund managers with long-only capabilities began to run long-short strategies. About 90% of our hedge fund business has been built on long-only managers transitioning to long-short funds, but their funds would go through lengthy incubation periods of typically one and a half years first.
“The hedge fund business is predominantly an institutional business. Investors do question whether long-only managers can run long-short funds. A lot of long-only managers want to do that these days. The questions are whether the manager has the capability to run long-short strategies and whether the house has the right risk management system.
“But we do not get questioned about this so much because we have a track record in long-short investment of nine to ten years.”
Some pension funds are still struggling with alternatives, says Meyer. “Funds on the continent are probably more receptive than in the UK, but I think the next three to four years will present the biggest opportunity that alternative managers have in terms of money coming into the market. There is no doubt in my mind that this business is building very nicely.”
Phil Wagstaff, Gartmore’s global head of distribution, says there are a lot of pension funds that are quite far ‘down the road’ in terms of hedge fund acceptance. These are now ready for single-strategy funds, he believes.
“Their first steps had been into the hedge-fund-of-funds world, but we are now seeing the next phase. They aren’t comfortable with the level of transparency in hedge funds of funds, and so they will start buying single-manager strategies. These are more transparent and less expensive. They can also offer as much diversification as a hedge fund of funds.”
Gartmore has 18 single strategy funds, and a fund of funds product called Perseus. Half of Gartmore’s total of £24bn in assets are for retail investors. Could it repeat its hedge fund success in the retail world?
Wagstaff says: “We have a big footprint both in the retail camp and in the hedge fund camp. We could move into the middle ground if an alternative retail market were to come about rather than start from scratch. Many of our hedge funds are hard closed, though, so we could not just shift them into this middle ground, but we are well placed to deliver new products in this space.”
Wagstaff also revealed that Gartmore is considering entering the fixed-income hedge fund arena.
“We exited fixed income hedge funds at the time of the sale [to Nationwide], but we may get back into it. The credit long-short strategy is attractive.
“If we launched we would use our existing track records.”
The rest of Gartmore’s assets – around £6bn – that are not hedge fund or retail, are segregated mandates. The firm expects segregated mandates to be a growth area because, says Wagstaff, “clients are becoming bigger and as they become bigger they want segregated mandates”.
But he adds that Gartmore is increasing the minimum investment for a segregated mandate, while more institutions are buying more funds with smaller amounts of money. Absolute return products may be in the pipeline also.
The sale to Hellman & Friedman was not easy. There were reports that the auction process dragged on and staff became demoralised. But eventually the deal was settled for, reportedly, in the region of £500m.
Meyer says the first year after the deal saw record profits, but Gartmore declined to give a figure. Accounts filed at Companies House show Gartmore Fund Managers, part of Gartmore Group, made an after-tax profit the year before (2006) of £10.44m.
The cash from Hellman & Friedman has so far been invested mainly in distribution rather than on the investment side, says Meyer.
“At the time of the sale of a stake to Hellman & Freidman we created various initiatives around both distribution and investment, but you cannot always get initiatives done in the same timeframe. We will look to concentrate more on our investment division this next twelve months, mainly by strengthening some of our existing teams, such as Europe, emerging markets, global equities, UK small cap, and quant.
“We will also look to strengthen the financials team, consumer team and hedge fund team. We have just announced the appointment of Dominic Rossi as chief investment officer.”
On the product side, Gartmore also would like to create a lower beta Perseus. “Multi-strategy is a natural area for
us,” says Meyer. “We are not in the fund of funds business, but in the multi-strategy business.”
The firm also has US ambitions. “The institutional business has been very successful in Europe and now we need to drive further into the US market. We are not looking to get into the mainstream US mutual funds market. The infrastructure is too much. We are focusing on the US institutional market. Gartmore has successful global and emerging market products there. Most emerging-market managers in the US have capacity constraints,” says Meyer.
Asia is also a target. The firm already distributes to institutions in Japan, which is the biggest market for Perseus. Meyer says Gartmore may seek joint ventures or partnerships in the region.
©2008 Funds Europe