GAM theory: A buy-side interview with Ali Miremadi of GAM

Ali Miremadi is an investment director who runs global equity funds and a US-focused fund. He was one of the principal partners at THS Partners (acquired by GAM in 2016), having joined in 2007. Previously, he worked at Goldman Sachs, having started his career in 1994 at Baring Securities. He holds a first-class degree in English literature from Wadham College, Oxford and is also a CFA charterholder. 

GAM is an independent asset manager, providing active investment solutions and products for institutions, financial intermediaries and private investors. It employs more than 900 people in 14 countries. Headquartered in Zurich, it is listed on the SIX Swiss Exchange and has assets under management of SFr163.8 bn ($165 bn) as at June 30, 2018. More than half of that, SFr84.4 bn, is actively managed in-house. 

What is the geographic split of GAM’s SFr12.5 bn equity assets?

In London, we have teams that invest in UK, European and global equities as well as technology companies. In Zurich, teams invest in Swiss and German equities
as well as European, healthcare and luxury stocks. We also invest in Japan from London and Zurich and in emerging markets from London, Zurich and Hong Kong. 

I manage $650 mn with my colleague Kevin Kruczynski: $400 mn in global equities and $250 mn in the US-focused fund. 

How do GAM’s offices collaborate?

Each team has the freedom to make independent investment decisions but we leverage the knowledge and expertise of our colleagues across locations. I regularly consult with the European and technology teams in London. Last month, I did some research on Tencent and conferred with a colleague in Hong Kong who had recently met with management. 

I consult with our pharmaceutical specialists in Zurich. Consulting with colleagues can be both casual – of the ‘water-cooler’ style of conversation – and formal. The recent big correction in Facebook resulted in the tech team writing a note saying it believed it would last a couple of quarters rather than be a long-term problem, for example. 

Which screens do you use?

We have 40 holdings in the global funds and we look for companies that are undervalued. We have a clear idea of what we’re interested in, so we don’t tend to use screens. Company meetings are a core part of our investment approach. We do around 350 meetings a year, but we don’t buy and sell that often. 

Primary research is extremely valuable – I’ve never had a meeting where I didn’t learn something new. For example, I’ve held FedEx shares for a long time and consequently feel I know the company really well but the IRO – Jeffrey Smith – obviously knows the logistics industry inside out. 

What is your investment style?

We are value-oriented and look forward three years. We do a bull, base and bear case and a fundamental evaluation of the business and then flex it to be both better and worse than our expectations. 

We also flex valuations and look for a minimum of 30 percent upside. We believe our portfolio is currently 55 percent undervalued compared with [where it will be in] three years’ time. Being value-oriented doesn’t mean we just own bank and oil shares. Equally, it doesn’t mean we won’t own something like Microsoft. We would look at Microsoft’s free cash flow yield, so we are prepared to be flexible about valuation. 

We start our research by looking at the industry and sector and then do extremely specific individual stock analysis. We are bottom-up stock pickers, so we look at drivers of profitability, capital allocation, management and strategic decisions, as well as the likely outcome on revenue and earnings. Then we look at valuation. 

Being overweight or underweight in particular industry sectors and geographies is a consequence of our stock-picking process. Our investment horizon is three years plus. 

Do you have a recommended list?

No, each team has freedom to make its own investment decisions. Examples of stocks held by more than one team include Continental, UniCredit and Telecom Italia. 

What’s your benchmark?

All our funds are pooled and we use the MSCI World Index or the S&P 500.

Are there any sectors you won’t invest in?

I have never invested in tobacco but that is not a GAM-wide decision. 

Do you incorporate ESG into your investment process?

We have a central responsible investing team and it takes an interest in our holdings. We take governance very seriously and do vote our proxy. 

What’s your market cap cut off?

We have a very broad remit. We do have some holdings below $1 bn but $10 bn tends to be our median market cap, so we own one or two mega-caps and one or two very small companies. 

What’s your average turnover?

Around four years. 

Buybacks or dividends?

It depends on the circumstances. We don’t require a company to pay a dividend – companies shouldn’t promote a progressive dividend policy unless their business can support it. And they shouldn’t use cash to buy back shares, either, unless the stock is undervalued. The US is full of companies doing buybacks regardless of their stock’s valuation. 

What’s your average position? And what’s your largest?

An average position is between 2 percent and 3 percent and our largest position is 5 percent. We could own a 5 percent position in our global funds and 5 percent in our US-focused fund. 

Can you discuss some of your larger holdings?

Apache has been an ongoing challenge. We’ve owned it on and off for the best part of a decade and it has gone through a real transformation in the last three years or so. For a long time, the company was run by various generations of the Plank family but the last Plank was ejected about two years ago. 

The current team is now focusing the business on two cash-generative parts – the North Sea and Egypt – and using cash flow to develop its onshore US operations. It built up 3,000 acres in the Alpine High site in west Texas, which we think will be a fantastic 20-year oil and gas producing province. 

The market has not given Apache any credit for this because most of the wells it drills tend to be gassy liquids and at this point all people want from the US is oil. Firstly, Apache is operating within cash flow, which we thoroughly approve of. Secondly, it is not just gas but also oil we expect it to get out, so we think the market is being typically very short term in thinking the company doesn’t have enough oil-rich wells and is using all its cash flow to develop this field. 

We think this could be a fantastic long-term asset. Probably in the second half of 2019, once it produces more of these non-gas liquids – about two thirds of production – and once the market accepts that and starts to value it, the potential for returns is attractive. 

We are currently doing well in Rolls-Royce. Warren East, the CEO, has taken a very complicated business and simplified it operationally and financially. Rolls- Royce had been a very sprawling operation and was not very well run but it now has three divisions instead of five and has removed middle management. 

The financial controls were substandard previously, but the company has now adopted a free cash flow target of £1 bn ($1.3 bn) by 2020. East has beefed up financial accounting in each geography and division, and sales of new engines now need to be cash flow- positive – so the company can no longer subsidize engine sales with aftermarket sales. We are very supportive of his strategy. 

Being in the business of selling engines for civil aerospace is a long-term growth story. The company is fundamentally very strong from an engineering perspective, but East is now turning it into a company that is run as a commercial operation. The shares have recovered well from their lows, but we believe they have further to go if East can demonstrate that he can deliver. Many investors aren’t prepared to invest in companies with problems, but we think there is a clear road map to fixing Rolls-Royce. 

We know CRH’s industry well. We sold Heidelberg and bought CRH a year or so ago. It is a very good allocator of capital: it buys things cheaply and sells divisions when they become more highly valued than they ought to be. It has a very strong corporate culture; in effect, it is a US and European business, but management is based in Ireland. Its shares are currently on a very low multiple. No credit is given for the firm’s ability to create value through M&A but it has 20 years of hard evidence of doing exactly that. If you look at Heidelberg, Lafarge, Holcim and Cemex, they all did large, value-destroying debt finance deals before the financial crisis. CRH didn’t. 

Its US business is doing well and Europe has just had its third year of good growth. In France, we are still a long way from the company getting operating leverage, but as more and more capacity gets used up we think it’ll get there. There has been very good earnings growth at CRH and the balance sheet is strong. We are very much in favor of buybacks when the shares are very cheap, and CRH had the available financing. It is a high-quality operation that should do well over the next three to five years.

Do you have to meet management before you buy a stock?

Meeting management is immensely important to us. It is rare we buy something without meeting managers, seeing them at a conference or having a call. In 90 percent of cases, we’ll have met a management team before deciding to buy. 

How do you prefer to meet management?

One-on-ones are the most valuable as we get more time with management. We also attend group meetings and conferences. We tend to do a lot of one-on-ones. 

Best companies at investor relations?

FedEx is very good at IR, as is CRH. 

Why should corporates target GAM?

We are stable, supportive shareholders. Our structure means companies may meet more than one team. Also, we don’t focus on the next quarter or even the next 12 months – our questions are more strategic. 

Gill Newton is a partner at Phoenix-IR, an independent investor relations consulting firm, which also operates CorporateAccessNetwork 

This article was published in the winter 2018 issue of IR Magazine – the 30th anniversary issue of IR Magazine