You’d think Guillaume Rambourg’s exit from Gartmore would be priced in by now.
And you’d be wrong. Some early share action on Thursday:
How much key man risk is left, we wonder?
Update (8.55 GMT): That’s a question Merrill Lynch has been attempting to answer for its clients this morning. The broker reckons Gartmore is going to see another large outflow of funds. Now, to put things in perspective, Bloomberg reckons the hedge funds run by ‘Rambo’ and Roger Guy had assets under management of $2.4bn at the end of May, down from $3.2bn at the end of March:
It is hard to estimate exactly the impact which Mr Rambourg’s unfortunate departure will have on AUM, but absent commentary from the company we would presume that especially the hedge funds will see further outflows, possibly of the quantum they have already seen. It is worth stressing that in Roger Guy and Darrell O’Dea, the funds will still have two extremely well regarded managers. Although Gartmore have a range of extremely marketable products aside from the largecap European hedge fund products, we believe that this will slow asset gathering elsewhere, simply because of the amount of time which will be taken up dealing with investors in the European products.
We will review our estimates, but would expect to have to make material cuts to numbers, especially in FY 11, where a full year’s impact will be felt. The largest factor here is the likely hedge fund outflows, but dull markets overall and investor risk aversion will also be factors. We would see eps for FY 11 possibly falling to something in the low to mid ‘teens. Even on this sort of earnings, Gartmore would look very cheap, on a single digit p/e, but we would expect the shares to open weakly, as this news adds further uncertainty to the investment case. We retain our Buy, but think that the situation, which we have for a while suggested is a long term one, will be modestly termed out by yesterday’s announcement. We will review our price objective in the context of lower earnings.
Of course, things could turn out to be much worse if Guy decides to follow Rambo and leave Gartmore. And just imagine what would happen to AUM if the two of them were to set up a new business in, say, Switzerland. The result would not be pretty — for Gartmore investors, anyway.
Update II (09.55): Canaccord Genuity is remaining cautious on Gartmore ahead of its half year results announcement.
Gartmore’s shares have fallen by 50% over the last six months and by 22% in the last three – although its share price has risen by 4% over the last month outperforming many of its peers. It still trades at a significant discount to those peers, though, on a 2010 PE of 6.2 times with no immediate yield support.
· In our view, the share price should reflect Gartmore’s exposure to significantly greater downside risk. The lack of a dividend until 2011 and a potential stock overhang further limit the shares’ attractions as well.
· Following market falls, our target price suggests some upside but we remain cautious on Gartmore ahead of its next potential catalyst – its interim results announcement on 17 August 2010.
Gartmore is scheduled to report on 17 August 2010.
More from Canaccord:
The last update on AUM came in Gartmore’s Q1 IMS. The £126 million of net inflows achieved during Q1/10 was followed by £1.2 billion of net redemptions in the wake of the Rambourg incident. Despite Rambourg’s focus on alternative strategies, the outflows were substantial across the board.
· At that time, Gartmore’s management was confident that the majority of Rambourg-related redemptions had already occurred. However, it seemed that momentum had certainly been lost.
· On the business front, investors have been wary of European equity strategies. In addition, competition has intensified in another area of Gartmore’s focus – absolute return funds.
· Our current forecasts incorporate net outflows of £1.5 billion in 2010, reflecting management’s optimism that the Rambourg fall-out has been contained. We base 2011 estimates on neutral flows.
Related links:
Star trader Guillaume Rambourg resigns from Gartmore – FT Alphaville
Key man risk, redux – FT Alphaville