GAM’s bond star feels dollar pain as US$600mil gone

LONDON: Paul McNamara has the kind of track record few bond managers can rival: His emerging markets fund has beaten 95% of peers over the past decade, and he’s ahead of the pack again this year.

But these days, even such outstanding performance isn’t bringing in much-needed new money to GAM Holding AG, the battered Swiss asset manager where McNamara runs the US$8.7bil Multibond Local Emerging Bond Fund. Since March, about US$600mil have been pulled from his strategy as investors flee emerging market assets.

The outflows come at a difficult time for GAM, which is fighting to retain clients and contain the damage from the suspension of star fund manager Tim Haywood.

McNamara, whose strategy is separate from Haywood’s, has run the fund since 2000 and built it into one of GAM’s largest by beating a majority of peers.

But as rising US interest rates and trade tensions reduce the appeal of emerging market assets and lift the dollar, funds such as his that invest in local currency bonds are caught in a perfect storm.

“There is relatively little we can do in a strong-dollar environment, except basically move to cash,” McNamara, 49, said in an interview.

“There are no emerging markets currencies that we would look to outperform a strong dollar. That’s something that’s uncomfortably clear at the moment for the asset class.”

McNamara’s fund declined more than 9% this year in the dollar-denominated institu- tional share class, even as it outperformed a majority of similar funds, according to Morningstar Inc. It returned 15% last year and 11% in 2016.

“We’ve been too bullish Brazil, too bullish Argentina, and too bullish Russia – those I think are the three places which have cost us performance,” McNamara said.

One of the fund manager’s better calls this year was to be “consistently” very negative on Turkey, which he said helped the fund’s performance compared with other emerging markets funds.

He also scaled back an overweight position on Argentinian government bonds after initially underestimating how illiquid the market could be.

A trained economist who used to work for the UK government, McNamara in 1997 joined GAM’s former parent, Swiss asset manager Julius Baer Holding Ltd, working in the same unit as Haywood.

That business was sold in 2007 in a management buyout led by Haywood. Baer bought it back two years later after the financial crisis hit and integrated it into GAM, which was then taken public.

Haywood was suspended in late July and GAM was forced to freeze his funds to allow for an orderly liquidation.

The firm is winding down more than US$7bil of assets in funds that were part of Haywood’s strategy, after an internal probe found issues with his record keeping and risk management. The company’s shares have lost more than half their value this year and redemptions have spread to some other funds.

McNamara says the outflows in his fund this year aren’t down to Haywood’s suspension, though clients ask about liquidity more than they used to.

“Have we seen additional outflows on the back of corporate developments at GAM? No,” he said.

“Have I had to spend a lot more of my time on planes, meeting with customers and on conference calls to address concerns: Yes I have.”

McNamara’s fund is one of the largest emerging market local-currency strategies globally, Morningstar analyst Niels Faassen wrote in a report, adding that he has been encouraged by the team’s adept handling of volatile flows in the past. Hefty fees prevent the fund from being upgraded from bronze to a silver rating, he wrote.

Volatile flows, McNamara says, come with the asset class. The fund was down to US$600mil in early 2009, at the peak of the financial crisis. By early this year, it had surged to about US$11bil.

After the sell-off since, he said, there may be value in some emerging markets, though picking them won’t be easy. Turkey is probably the “most binary,” because it’s “hard to see a middle ground between recovery and catastrophe.”

Russia may see a rebound because it’s unlikely that the US will impose the most aggressive sanctions.

“The key to the next 12 months will be choosing which of the big casualties makes a comeback.” — Bloomberg