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Alex Friedman, chief executive officer of GAM Holding AG, poses for a photograph following a Bloomberg Television interview in London, U.K.

(bloomberg)

(Bloomberg) -- GAM Holding AG slumped the most in nine years after the Swiss investment firm suspended the manager of its flagship bond fund and warned that the disciplinary action, together with volatile market conditions, may lead to outflows.

GAM took action against Tim Haywood, who heads the 11 billion franc ($11.1 billion) absolute return bond strategy, after an investigation revealed issues with his risk management procedures and record keeping. The probe has not raised concerns about his honesty and the firm has so far not seen a material impact on clients, GAM said.

GAM fell as much as 21 percent after the news, extending losses this year to more than 40 percent. It’s the latest blow to Chief Executive Officer Alex Friedman after the firm earlier this month issued a profit warning following an impairment charge at its Cantab quant fund unit.

“There is no doubt this is a setback,” Friedman said in a phone interview. “In the fund management business, we have got to make sure that all documentation and reporting is done correctly -- if it isn’t, it’s an issue.”

Friedman declined to say what documentation wasn’t done correctly or what triggered the probe. Unconventional bond funds such as Haywood’s frequently buy more complex securities that are traded over the counter and can be more difficult to value and assess. Haywood also oversaw 2.9 billion francs in trade finance funds and 653 million francs in other fixed-income portfolios, GAM said.

‘Further Action’

The company declined to make Haywood available for comment, and a mobile number that he previously used no longer connects. The U.K. Financial Conduct Authority declined to comment. The Swiss Financial Market Supervisory Authority said it had been informed of the matter and is in contact with the company. It declined to comment further.

“The suspension of Tim Haywood is definitely unlucky from a timing perspective, given confidence has already suffered a crack after the profit warning a couple of weeks ago,” said Daniel Regli, a vice president at Mainfirst. “Outflows could be substantial.”

Jack Flaherty and Alex McKnight, investment directors, have assumed joint responsibility for the strategy overseen by Haywood and other associated portfolios. The GAM Multibond Absolute Return Bond Fund, which has about 2 billion euros in assets, trailed 96 percent of peers over the past five years, according to data compiled by Bloomberg.

The firm still attracted 2.6 billion francs in net new money in the quarter, thanks mainly to its specialist fixed-income funds, according to the earnings report. Group assets under management rose 3 percent in the first half to 163.8 billion francs.

‘Directionless Market’

About 56 percent of GAM’s assets under management outperformed respective benchmarks over three years, down from 77 percent at the end of 2017, Friedman told analysts on a call. He said that slight underperformance in three of their larger strategies were largely responsible for the performance decline.

The outlook, however, is less upbeat, and not only because of Haywood’s suspension. Friedman said the asset manager has seen a "significant slowdown in net inflows in the later part of the first half of 2018" as some clients chose to rebalance their portfolios.

“The volatile and directionless market conditions are likely to continue in the second half of this year, which may affect clients’ risk appetite and the group’s flows," GAM said.

The asset manager said it remains committed to its medium-term targets of an operating margin of between 35 percent and 40 percent and underlying earnings growth of over 10 percent a year.

"Compliance risk is a big deal for financial services firms,” said Laith Khalaf, a senior analyst at Hargreaves Lansdown. "Financial companies do spend a lot of time and money mitigating it, but it still does seem to crop up from time to time unfortunately."

(Adds comment from GAM CEO interview from fourth paragraph.)

--With assistance from Geoffrey Smith and Silla Brush.

To contact the reporters on this story: Ross Larsen in Rome at rlarsen2@bloomberg.net;Julie Edde in London at jedde2@bloomberg.net;Patrick Winters in Zurich at pwinters3@bloomberg.net

To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Christian Baumgaertel, Andrew Blackman

©2018 Bloomberg L.P.

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