GAM Holding AG (GAM) Earnings Call Transcript & Summary

Good morning. Thank you for joining GAM's full year results call today. My name is Pete Sanderson, Group CEO of GAM, and I'm joined today by Richard McNamara, our Group CFO. Before we start, please note that there will be time to ask questions at the end of the presentation. In order to be able to ask a question, you must be logged on via Cisco's Webex on your PC or the Cisco Webex app on your smartphone. Please note, all call participants today will be muted by default. If you are dialing in by phone, you will not be able to ask a question. So please do connect via your PC or the app. I'll start today by giving you an overview of the highlights of last year, and then we'll hand over to Richard, who will give you more detail about our financial results. 2021 will be an important year as we build on the strategic progress we've made in 2020 and the positive client momentum and investment performance we saw during the fourth quarter. After Richard's presentation, I'll give you a further update on our growth ambitions for the business and the outlook for the year ahead. Last February, I've set out our strategy to reset the firm and to begin our journey to restore shareholder value. When the extent of the pandemic became clear only weeks afterwards, our strong purpose as a firm and our commitment to protect our clients allow the GAM team to continue to deliver in a highly professional, resilient and relevant way. I'm proud of how the GAM team has served our clients and the progress we've made together. We closed the year with positive investment management flows, our best quarter of flows since 2018. Leveraging technology and reducing complexity helped us exceed our cost reduction targets by delivering more than CHF 71 million of savings. However, we could not fully offset the negative impact of the pandemic on our assets under management and on our revenues. Our group assets under management were down 8% to CHF 122 billion, and the net effect was an operating loss of approximately CHF 15 million for 2020 compared to a profit of CHF 10.5 million in 2019. We have continued to invest in our technology. The goal is to improve both client service and experience as well as the efficiency and scalability of our business by unifying the organization onto a single operating platform. The first tranche of equity portfolios have already been successfully migrated onto the new SimCorp platform and the remaining portfolios are scheduled for later this year. We've continued to enhance transparency with all our stakeholders. And in 2020, our clear priority was to ensure that all stakeholders receive regular communication about our response to the impact of the pandemic. In a moment, I'll give you some more transparency on the management company services we provide. And today, we're also publishing our first ever standalone sustainability report. There is more to do, but I do believe we're on the right track to meet our transparency goals. Although asset flows are negative in 2020, we continue to invest in the firm, and I remain convinced that GAM can deliver growth and restore shareholder value. We ended 2020 with most of our equity strategies outperforming their benchmarks and delivering top quartile or even top decile investment performance. Our fixed income capability staged a good recovery and our liquid alternative strategies also recovered and performed well relative to peers. Importantly, we closed 2020 with positive investment management flows in the fourth quarter, and we're building a good client pipeline into 2021. We've been investing in our people with a renewed focus on learning and development for existing staff, and we've also hired several experienced professionals who are excited by the opportunity at GAM. These include new heads of distribution and institutional solutions, the head of sustainable and impact investing, and we strengthened the investment specialist team across key asset classes. As well as our talent, another reason for confidence is our differentiated product offering that clients continue to appreciate. I'll return to the growth theme at the end of the presentation. Turning to our financial targets. You will not be surprised that the pandemic has had a negative impacts on the delivery of our financial targets. We believe our financial targets are still appropriate, we believe our strategy is the right one to deliver them and we're working hard to achieve them. However, given the impact of the pandemic, our ambition is now to deliver on these targets for the full year 2024. Our targets remain the same: pretax profit of CHF 100 million, operating margin of 30% and a compensation ratio of between 45% and 50%. Turning now to investment performance. We saw a good recovery in investment performance of our funds after the negative impact of the market volatility in March. Many of our equity strategies ended 2020 with top quartile performance over 1 year compared to their Morningstar peer group and are beating their benchmarks. Our fixed income strategies also staged a good recovery. However, both our Local Emerging Bond fund and Credit Opportunities fund were below benchmark. Because these 2 funds account for a large portion of our assets, the underperformance has a strong influence on the overall measurement of performance in our investment portfolio. Nonetheless, the overall outperformance of our strategies over 5 years as at the end of 2020 remained strong, both against benchmark and relative to their Morningstar peer group at 70% and 61%, respectively. I'd like to spend a moment looking at the performance of some of our equity strategies in more detail. Most of the investment strategies on this page are ranked in the first quartile, and in some cases, first decile. In relative terms, most have outperformed their benchmarks and delivered outstanding performance for our clients. The strategies on this slide account for approximately 63% of our total equity portfolio. To highlight a few, our Disruptive Growth fund beat its benchmark by just over 28% last year, while our European Equity fund delivered just over 21% of relative outperformance. Our Japan Leaders, Swiss Sustainable Companies and both our Asian and China equity strategies have all delivered double-digit relative outperformance in their returns. This is a real achievement, and we're very proud to be able to provide positive performance outcomes like this to our clients. Turning now to assets under management and flows. The first half of 2020 saw unprecedented market volatility with significant outflows across much of the industry in the first quarter. The net outflows in our investment management business totaled CHF 10.6 billion and was mainly driven by our Local Emerging Bond fund and our Credit Opportunities fund. Despite the market disruption earlier in the year, as noted earlier, by the fourth quarter, we were seeing the first net inflow since 2018. I do believe that this flow development is an early sign of the relevance of our product and the potential we have for growth within our investment management business. Within management services, our private label funds business was resilient throughout the first half of 2020 with inflows of CHF 1.2 billion in the first and CHF 1.4 billion in the second quarter, mostly from existing clients. In the fourth quarter, a long-term client, who also had fund administration capabilities of their own, decided to bring the services GAM had provided to them back in-house. However, we ended the year with our PLF assets under management at just over CHF 86 billion, slightly higher than the end of 2019. Looking at flows in more detail for a moment. You can see from this slide that our positive flows in the fourth quarter were diversified across fixed income, Absolute Return equities and our Systematic capabilities. This diversification of flow is really encouraging. Flows in fixed income were mainly generated by Credit Opportunities, Cat Bond and Supply Chain Finance. This is particularly positive since it reflects the fixed income performance recovery during the second half of 2020. In equities, the Q4 flow picture reflects the outstanding investment performance that our teams have generated across multiple strategies in our range. Of course, our business must always maintain our focus on performing for clients, but the signs are that the client asset flows are moving in the right direction. Before I hand over to Richard, I wanted to spend a moment talking about the management company services that we offer. Our ManCos provide management company services to both our private label funds clients and to our internal GAM funds, servicing around CHF 114 billion of assets under management. Around CHF 86 billion of these are private label fund clients assets and around CHF 28 billion are GAM funds. 165 people support our ManCo services infrastructure and it has a 28-year track record of launching over 320 funds for our private label fund clients. Our ManCo services currently operate over 200 funds for more than 50 clients from our offices in Luxembourg, Ireland, Switzerland, the U.K. and Italy. We're one of the largest third-party service providers in Europe. ManCo services is an attractive revenue diversifier for GAM. The average fee margin for our private labeling clients is 4.1 basis points. Pricing is driven by the level of services that we provide, and pricing is not exclusively determined simply by the level of a client's AUM. This is illustrated by the fact that the top 10 private label fund clients account for around 65% of revenues and around 90% of AUM, highlighting that the remaining clients who represent 9% of AUM contribute approximately 35% of our revenues. As well as providing revenue diversification, there are also opportunities for collaboration. For example, our investment management business can provide bespoke investment solutions for our private label fund clients. The private label fund clients business is managed separately from investment management, but shares a common ManCo services infrastructure. Hence, we do not provide a separate segment P&L. I'll now ask Richard to take you through more detail of our 2020 financial results.

Thanks, Pete, and good morning to you all. Before I start, let me note that the underlying profits we are presenting today are in line with the estimate we provided in mid-January. The IFRS net loss is slightly above our estimate at CHF 388 million as we finalized matters through January and February. As usual, I will start by giving an overview on the 2020 financial results. I will then focus on management fee margins, our expenses and our progress in driving efficiencies. I'll then cover the IFRS numbers and our cash and capital position. Let's start with the financial summary. Peter has already talked about our net new money and AUM movements. However, the reduced level of AUM in our investment management business impacted our overall net management fees, which reduced 27% to CHF 230.4 million compared to 2019. Performance fees were mainly driven by equity and fixed income strategies and resulted in net fees of CHF 2.8 million, a decrease of CHF 10 million. We accelerated our efficiency program in response to the market environment and our drop in AUM. This meant we were able to quickly adjust our expenses and offset some of the headwinds to the top line. Total expenses were down some 23% compared to 2019. Our guidance was to achieve savings of CHF 65 million, which we exceeded by delivering CHF 71.6 million. Our underlying pretax result was a CHF 14.9 million loss. Although we exceeded our savings target, this was not enough to offset the decline in revenues. This obviously impacted our operating margin, which was a negative 4.7%. So now turning to management fee margins. Our blended investment management fee margin declined to 51.8 basis points in 2020 compared to 54.2 basis points in 2019. As stated previously, the largest impact on margins is the impact of net flows and asset mix. In 2020, the main driver for this decline were outflows in the first quarter from higher-margin strategies, such as Credit Opportunities and Local Emerging Bond. Our exit margin at the end of 2020 is in line with last year's average at around 52 basis points. We continue to see some frictional pricing pressure of up to 1 basis point per annum. But the key driver for future movements in our margin will be flow and asset mix. The average margin in private labeling increased slightly to 4.1 basis points. As Pete mentioned earlier, pricing levels mainly depend on the level of service provided to a client rather than the clients' assets under management. The exit margin for PLF at the end of 2020 stood at 3.7 basis points. Now looking at costs. The total personnel expenses were 24% lower compared to 2019 at CHF 150.5 million. The main driver was a reduction in variable pay, reflecting lower revenues and reduced business performance. As you would have expected, the Group Management Board are not receiving a bonus and any bonus awards for 2020 to our employees will be fully deferred over 3 years. However, I want to highlight that the contractual arrangements we have with our investment management teams have remained fully in place and unchanged. In 2020, our head count reduced by 14% year-on-year as a result of the redundancy programs we commenced in the first half. This reduced our fixed personnel expenses by 15% to CHF 118.3 million. Our compensation ratio at 64.8% (sic) [ 64.5% ] is reflective of the decline in our revenues being greater than our cost reductions. We continue to manage cost rigorously with efficiency initiatives continuing into 2021. As Pete set out, our target compensation ratio of between 45% and 50% remains in place. Although given the effects of the pandemic, we now target this and our other financial goals for 2024. Our general expenses came in at CHF 75 million, a 25% lower than 2019. The pandemic has resulted in reduced travel and marketing spend. However, the reductions were also achieved in consulting and technology spend. So in 2020, our total expenses came in at CHF 244.1 million. This is more than CHF 71 million lower than in 2019, and as mentioned, exceeded our target. Our efficiency program has seen a reduction of 116 roles in 2020, with our head count now standing at approximately 700. Since 2018, we've reduced total expenses by approximately CHF 130 million, a 35% decline. Over that period, our head count has reduced by approximately 25%. The firm has gone through substantial rightsizing over the past 2 years, while simultaneously changing the operating platform. We will continue to drive efficiency, although not at the same level as last year, given much of our efficiency benefits have been realized in 2020. In 2021, we expect our fixed staff costs and general expenses to reduce by approximately CHF 15 million compared to 2020. The SimCorp project is on track to be completed this year. This technology upgrade brings our investment teams onto the same end-to-end investment, client and operating platform. The benefits will be experienced through each stage of the value chain, be it portfolio management, trading, investment risk and client reporting. This will enable us to better serve our clients and assist our growth ambitions whilst providing significant operating leverage. We are also soon to move on to Workday for our corporate HR and finance activities. This will provide efficiencies, greater internal transparency and better data quality for decision-making. Turning to our IFRS numbers. We recognized the CHF 388.4 million net loss compared to the CHF 3.5 million net loss in 2019. As always, we deduct 2 items from the underlying profit, acquisition-related and nonrecurring items. This year's IFRS net loss was mainly caused by the recognition of our CHF 373.7 million goodwill impairment charge in the first half of 2020. This goodwill was primarily created by the acquisition of GAM by Julius Baer in 2005 and UBS in 1999. In the first half of 2020, we also recognized an investment management and client contracts intangible impairment of CHF 27.4 million. These impairments were driven by the impact of the pandemic on our AUM and revenues. Our underlying effective tax rate is less meaningful given our profits are negative. Given this and the fact that nontax-deductible costs have a disproportionate impact on our effective tax rate, the rates will become more meaningful once our profits normalize. Turning to cash and capital. It is important to highlight that our balance sheet remains debt-free. Our cash position remained robust at CHF 271 million compared to the first half, but lower than at the end of 2019 as we dealt with the impacts of the pandemic and continued to invest in the business. We continued to ensure our capital structures are the most efficient they can be through regional capital allocation and simplification of our legal entity structures. Adjusted tangible equity was CHF 189 million, down slightly from 2019, given the impact of profitability on our investments in the business. Our dividend policy with a targeted payout ratio of at least 50% of underlying net profit remains unchanged. However, as we reported an underlying loss, the Board is not proposing to shareholders to pay a dividend for the financial year 2020. Last year, the AGM approved a new 3-year share buyback program designed to purchase up to 16 million shares to cover share-based awards and shares for cancellation. During 2020, a total of 1.8 million shares were repurchased over the first trading line to cover share-based awards. No shares were repurchased for cancellation in 2020. Finally, we remain focused on organic growth and on further strengthening our capital buffers. Thank you. And with that, I'll hand you back to Pete.

Thanks, Richard. Despite a challenging year in 2020, we will continue to drive our strategy, continue to invest in our firm. And in 2021, we're tilting more of our strategic focus towards growth. I have strong conviction about the opportunity for GAM to grow and serve our clients. As I mentioned earlier, our strong purposes are firm and our commitment to protect our clients allow the GAM team to deliver through 2020 in a highly professional, resilient and relevant way. Our progress in 2020 will serve us well as we look forward to 2021 with confidence. There are several reasons I'm optimistic about the year ahead, specifically, our strategy, our positioning as a specialist active investment manager, our performance and our platform. First, our strategy is on track. The strong foundations that we put in place during 2020 have given us a great platform for growth. We've been busy and focused during this difficult year. We've made the firm more efficient. We've demonstrated that we can be flexible and resilient. We brought more transparency to all our stakeholders. Critically, we've continued to perform for our clients there is clear evidence that all of this is beginning to have a positive overall effect on our business. Second, our positioning as a specialist active investment manager. Our clients are always looking for investment themes, which transcend the current economic conditions, and GAM is well positioned to provide these with our specialist actively managed strategies. We've reenergized our distribution team with new leadership, and we're responding to client demand for sustainable investment products by innovating new products within our offering. Thirdly, our performance. I'm proud of the performance outcomes we've driven for clients. We've seen evidence of some clients switching back from passive back to actively managed strategies since their strong active outperformance has made some passive strategies look somewhat expensive to hold. While we've entered 2021 with strong investment performance, I'm also very proud of our operational resilience and of our whole team's passion to deliver for our clients. The fourth reason is our strong platform. By the end of 2021, all our investment teams will be managed or overseen on one operating platform. Using cutting-edge technology across the firm will give us a strong advantage. As Richard mentioned, we're also implementing a new management information system, which will make us faster and better informed as a business. Our platform is not just about technology. Most importantly, it's about our people. Our purpose is about attracting and empowering the brightest minds. Our people have shown enormous resilience and determination during a challenging period. We continue to invest in them while we also attracted some very experienced professionals to join our talented team. Taking all this together with our clear client focus and reenergized distribution strategy and a range of new sustainable investment strategies to complement our existing product portfolio, we are now tilting more of our strategic efforts towards growth. Jill Barber, our new Head of Institutional Solutions; and Jeremy Roberts, our new Head of Distribution, have both moved swiftly to put in place their distribution strategy to best serve GAM's clients. This strategy is based on innovation, on diversification and on differentiation. Jill and Jeremy have already reenergized our sales and distribution colleagues who are now focused on optimizing our product platform, refocusing our client coverage, positively transforming our clients' experience and further strengthening our relationships with consultants. The delivery of our distribution strategy will be supported by our recently expanded team of investment specialists. We're also looking to build our business presence in the U.K., the Nordics and we have plans to grow further in Asia. Our distribution team see clear client demand for sustainable product. And with that in mind, I wanted to spend a moment talking about our overall approach to sustainability. Assuming 15% growth, which would be half the pace over the last 5 years, ESG assets under management could climb to more than 1/3 of total global assets under management, as projected by Bloomberg for 2025. I believe that sustainable investing is not simply a growth opportunity, but is a fundamental shift in the way we think about our clients' investment needs. Client, regulatory and societal expectations are evolving. And as active managers, we are well placed to create the investment products fit for a more sustainable future. Last year, I made sustainability a strategic priority, and we'll continue to explore B Corporation accreditation and look to improve our corporate ratings. Our sustainable investment strategy can be broadly put into product and corporate pillars. First, let's look at product on the top part of the slide. Our product portfolio is formed by distinct, highly active investment strategies. I'm convinced that by further embedding ESG, we will be strengthening our product offering. Our investment teams will benefit from leading tools and data and will be driving active engagement supported by ESG research and analysis. It is clear that we need to continue to develop innovative investment strategies and be able to offer our clients a distinctive, sustainable product set, which is fit for the future. I was delighted that our first launch, a sustainable version of our Local Emerging Bond Fund, was done in collaboration with a client who is a leader in sustainable investment. The second pillar on the bottom of the slide is corporate sustainability, and there are 2 elements of that. The area on the lower left of the slide outlines our role as investors. This is about supporting and strengthening sustainable investment standards and addressing key sustainability themes such as climate change. The lower right-hand side of the slide defines how we will embed sustainability in our culture, in our every day life as employees, colleagues and managers and how it's reflected in our processes and policies across the firm. Here, we've set the baseline with our first standalone sustainability report. We know there's still room for improvement and we will continue to focus on enhancing this and our ESG credentials. While we have some way to go in this journey, we have a strong platform to build on. Looking at the priorities for 2021, you can see that we're focused on growth and on using the good strategic progress that we made in 2020 to help position us strongly. While 2020 saw a significant reduction in costs, we have also made the firm stronger in line with our strategy to be fit for the future. We will use our unified technology platform to continually improve our client experience. And we will target further efficiency gains, aiming to deliver around CHF 15 million of cost savings in 2021. And we'll aim to further improve our levels of corporate disclosure, including further transparency around our sustainability efforts. In 2021, we will focus on growth by continuing to push forward with our reenergized distribution strategy by continuing to empower our people through our One GAM culture, and by continuing to live our purpose every day to protect our clients' financial future. Finally, turning to outlook. GAM is well positioned to satisfy client appetite for actively managed specialist strategies, supported by our global distribution platform. We expect the market environment to remain volatile and investors to remain cautious over the couple of months. However, we are seeing good levels of client interaction and believe that demand will remain resilient during 2021. We are fully focused on growth and are optimistic that this will be an important year for GAM. Finally, just to repeat, our financial targets remain unchanged: an underlying pretax profit of CHF 100 million, an operating margin of 30% and a compensation ratio of between 45% and 50%. But we are now working hard to target achieving these by the full year 2024. Thank you for your time and attention on the call today. That concludes our presentation. I will now open the call up to Q&A. Charles and Jessica, please let us know if we have any questions this morning.

Okay. We have a question from [ Michael Chang ]. The first question is what is -- what reasons do GAM continue to refuse to disclose segment results of private label units? With 165 FTEs, have you reviewed the cost/benefits that can be saved privately labeled?

[ Michael ], thanks for that question. Yes, as we said in the presentation, the private label funds business operates alongside our investment management business with a shared infrastructure for their management company services. And for that reason, we don't split out a separate profit number for that. Mac, I don't know if you would add anything more to that?