If any City business highlights the risks of relying on star performers motivated by bonuses it is Gartmore, the investment company that Henderson Group agreed to buy last week.
When it floated on the stock market only 13 months ago, its European large stocks team, headed by Roger Guy with Guillaume Rambourg, ran a £4bn portfolio accounting for a fifth of Gartmore's assets. After losing those stars, only £200m of that team's money remains.
Once the managers left, the investors demanded their money back, leaving Gartmore with plunging fees. Its chief executive, Jeff Meyer, admits: "The vast majority of the loss is due to Roger's business. In essence, the book has gone."
Now Henderson's chief executive, Andrew Formica, must not only halt the outflow of funds from Gartmore, but also ensure his own clients do not withdraw their £61bn. And that means paying new bonuses to keep the remaining key Gartmore managers.
Gartmore's downfall was swift. When it floated on the London Stock Exchange at the end of 2009 it had more than £22bn of assets invested by the public and institutions in mutual funds and pension schemes. That's now down to £16.5bn, with holders of another £700m asking for their money back, and Formica expects to lose up to £3bn more.
The shares were floated at 220p – well below the planned range of 250p to 330p but still valuing the group at £676m. Roger Guy, the head of the European Large Cap team, held 8.5 per cent of the shares prior to the offer, with Rambourg owning 5.7 per cent: both sold shares in the flotation but both had been rewarded well with equity bonuses for their success and stood to receive more during 2010.
The problems began in March when Rambourg, Gartmore's star dealer, was investigated by the Financial Services Authority for directing trades at specific stockbrokers rather than choosing the firm offering the best deal. He was suspended but allowed to return in April as a senior investment analyst under Guy.
An internal inquiry found Rambourg had breached Gartmore's guidelines by directing 5 per cent of trades in the previous year to brokers. The company insisted there had been no dishonesty or lack of integrity and that no clients had suffered – but clients were already withdrawing their funds.
A report for the group by City solicitors Clifford Chance was passed to the regulator, and Rambourg resigned in July, with Meyer saying: "He has decided to devote his attention to concluding the FSA investigation into his conduct and to allow Gartmore to put these matters behind it."
But the matter stayed to the fore and the run on funds continued. In November, Gartmore was forced to announce a strategic review and reorganisation and ask investment bank Goldman Sachs to start the search that led to Henderson's takeover last week.
That reorganisation saw more equity handed to managers to stop them leaving, but Guy nevertheless announced his retirement. With him went Darrell O'Dea, recruited from rival Threadneedle in April to replace Rambourg, and Gartmore also lost the head of its UK smaller companies unit plus its chief investment officer, Dominic Rossi.
Gartmore has had eight owners in the past 21 years, but it clearly needed another quickly before the business imploded. However, Formica's deal valued it at just 92p a share last week, or £335m.
Meyer, who will collect a £12m package when he leaves, blames hedge funds for withdrawing their money from Guy's funds. "Approximately £200m of Roger's business remains. Absent that, there is no material loss from other areas – nothing as significant as Roger Guy's book, which is the vast majority of what has happened," he says. "The hedge-fund industry is generally not that sticky, especially where there's a major management change like Roger's."
Other parts of the group did suffer, but earlier, and Formica admits: "The biggest trouble Gartmore has seen in recent weeks has been in getting any great sales, given the uncertainty."
But he concedes that the outflow of funds will continue. "If anyone asks me what sort of attrition I expect, it would be hard to give a figure," he says. "I'd prefer zero and that's what we're aiming for, but in reality there'll be some uncertainty and some flow away."
Formica has seen such continued losses before. In 2009 Henderson paid £94m for another fund management group headed by a high-profile City figure when it bought New Star Asset Management, the group built up by John Duffield after he split with Jupiter, comparing its German owners to Nazis.
Then, almost a quarter of New Star's £8bn of assets were taken away, despite Henderson imposing a price-adjustment mechanism to deter withdrawals. However, Formica says: "They had dire performance and we took across few of their fund managers so it was a different environment."
But even using New Star as a worst-case precedent would mean Henderson retaining nearly £15bn of Gartmore's assets, points out Formica. The company he is buying has management fees of 72p per £100 of investments compared with his own margin of 44p, thanks to the dominance of retail funds rather than pension money.
And with offices in Tokyo, Frankfurt, Boston and Madrid, as well as the City, Gartmore is strong in markets where Henderson is weak. But Formica must act quickly to keep his new network intact – and that means yet more bonuses.
"Gartmore had recently put in place a retention policy for key investment professionals – equity in Gartmore stretching out for three years," he says. He has support from managers looking after 84 per cent of the acquired company. "We've not talked to everyone but we targeted the large desk heads in the first instance and they've agreed to roll over their existing equity awards into Henderson stock."
Those pay awards bump up the associated costs of the bid to £70m and must be recovered through savings elsewhere – though the departure of Guy and Rambourg has already cut Gartmore's overhead significantly.
But Formica must also keep investors on side, especially as the Gartmore brand will disappear. "We have worked well over the last couple of weeks to put together a joint client communication," he says.
That will mean roadshows to the City actuaries who direct pension-fund money and to the financial advisers who guide private investors.
"All that is being done to provide comfort to clients," says Formica. "That said, some clients might like change."
And some that already have money managed by Henderson might think the merger leaves them with too many eggs in one basket, just as Gartmore placed too much reliance on the award-winning Guy and Rambourg, even though neither was a main-board director.
Formica is keen to move on from that star duo. "A lot has been said about Roger Guy and the pre-eminence of Roger in the business," he insists. "But when we remove Roger there are a lot of strong managers that have not had the spotlight on them."
And with revamped bonus packages, these are Henderson's new stars.
A tale of two companies
1934: Formed to manage the family wealth of Alexander Henderson, the First Lord Faringdon.
1983: Floats on the London Stock Exchange.
1992: Buys rival Touche Remnant, turning itself into Britain's biggest investment trust group.
1998: Taken over by Australian Mutual Provident life assurance.
2003: Demerges as HHG group with shares listed on the LSE and the Australian Stock Exchange.
2004: Sells its half of Virgin Money for £90m.
2005: Renamed Henderson Group.
2006: Sells Towry Law financial advisory group for £37m.
2008: Becomes Jersey-registered company but tax resident in Ireland.
2009: Buys New Star Asset management for £115m.
1969: Founded by British & Commonwealth shipping company
1985: Paul Myners who was later to be Gordon Brown's City minister, becomes chief executive (until 1993).
1989: Sold to Banque Indosuez of France.
1993: Floats on London Stock Exchange.
1996: Taken over by National Westminster Bank.
1999: Lord Myners returns as chairman for a year
2000: Royal Bank of Scotland buys NatWest and sells Gartmore to Nationwide Mutual Insurance of the US for £1bn.
2006: US private-equity group Hellman & Friedman buys 20 per cent stake.
2009: Becomes Cayman Islands company.
2009: Re-floats on the London Stock Exchange.
2011: Taken over by Henderson.Reuse content