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MENA Fund Manager Interview
AN INDEPENDENT SPIRIT
Bahrain-based multi-family advisory firm Capital Growth Management made its reputation when it accurately advised its clients to de-risk in advance of the 2008 financial crisis. CEO Nabil Hamadeh tells Mena FM how the firm’s independence and flexibility allows it to make tough market calls
While a rising market can make investors look good across the board, successful long-term investment sometimes requires having the courage of your convictions and standing out from the crowd. That’s exactly what Nabil Hamadeh’s firm, Capital Growth Management, did in late 2007 a
few months before the financial world was turned on its head by the credit crisis. While others remained bullish about global capital markets, CGM advised its clients to de-risk portfolios and move
equity allocations into cash. It was a decision which paid off in spades, but it was not one that many asset managers or investment advisors would have been in a position to make. A multi-family investment adviser, CGM has an unusually flexible approach to asset allocation, as
Hamadeh, who is CEO of the Bahrainbased firm, explains. “We have an asymmetrical range: for example, in the case of a 50% benchmark equity allocation, we can go up to 55% like anybody else, but on the downside we are not afraid to go to 25%,” he says. “That’s exactly what we did during the financial crisis, which explains our performance. “We don’t use this asymmetrical range very often, only when we have a very strong conviction. In 2007 I thought there were enough negative
signals from the market that a big correction was going to happen, but I imagined a correction of 15-20% - I had no idea it was going to be a 60% bloodbath. So we had a strong conviction about the direction, if not the magnitude.”
Advisory fee model
It’s no accident that CGM is willing to go against the grain, since its business
model is designed in way which fosters an independent spirit. The firm does not accept commissions for choosing any financial products, and takes its fees from the client only. It means the advice it gives – whether in asset allocation or fund manager selection - is uncluttered by the system of incentives that are common in private banking. But this was not always the case. Hamadeh, whose career has included roles at Arab Bank, Barings and Bankers Trust, took over at the company in 2005 and was instrumental in changing its model and mindset. “In 2005, the company was doing what everybody else did, which was find products, sell products and then collect commission from the fund manager,” says Hamadeh. “We changed that so that we were finding the client, getting the appropriate product for the client and getting paid by the client only; any income that we might receive from fund managers will be directed 100% back to the client. So there’s no ambiguity about who we are working for - it’s 100% alignment of interests. Alignment of interests is a term that a lot of people use loosely, but very few actually implement it.” For this reason, CGM, which has a client base across the GCC and the Levant and manages portfolios from $10m up to hundreds of millions thinks of itself as ‘the Chief Investment Officer of the client’. However, Hamadeh believes they have a number of advantages over a CIO working for a single family office. The experience of serving a range of clients means they have established relationships with a much broader range of financial institutions, while they are not inhibited by working within the guidelines of a single powerful patron. CGM has its own internal process for fund manager selection, using a combination of software and qualitative criteria; it also prides itself on its transparent reporting, which permits easy measurement and comparisons of the performance of the managers it chooses from across the globe. Getting the best fund managers to do the stock-picking in their individual specialisms means CGM’s team of six professionals can concentrate on asset allocation, where it carries out its own research and takes some challenging, but well-considered, positions on global asset classes. For example, the firm never recommends structured products and has an established underweight position on hedge funds. Hamadeh says that
having researched the correlation between hedge fund and equity performance over 25 years, he is convinced that the asset class is no longer fulfilling the function for which it was originally designed.
“When you bought a hedge fund, what it said on the tin was that it was an equity-like return with bond-like risk; that’s what you were sold,” he says. “Now if you go back to the early 1990s, there was a time when this was very nearly true: hedge funds universe (HFRI) was zero correlated to equities.
But since then the correlation has been rising, not in a straight line, but clearly and unambiguously, and now the correlation is 0.8 or 0.85. They are getting more correlated, and you are paying all those fees for something that is closely correlated to equities.”
Long-term horizons
Hamadeh also has some reservations about private equity, while he says he is broadly positive on real estate and emerging market equities. He does not typically allocate to Middle East managers: given the fact that most of CGM’s clients are GCC-based, with core business interests in the region, they are usually already over-exposed to the region, and Hamadeh believes that home market bias is one of the fundamental but universal mistakes an investor can make.
In his discussions with clients, Hamadeh says that most say they are investing not for themselves but
for future generations of their family – and this long-term horizon sometimes justifies taking a conservative position to protect assets. As well as 2007-8, the firm also de-risked portfolios amid the Eurozone crisis in 2010. While the anticipated market falls did not materialise on that occasion,
Hamadeh says that the lost upside to clients – around 2% in annual performance – was a price worth
paying for the insurance of downside protection in such circumstances. Over the last decade CGM has built up significant loyalty and trust among its client base, and he says that interaction with clients, and their understanding and appreciation of what the firm does, is the most rewarding part of his job.
The multi-family office model has not been widely adopted in the Middle East, but he says that many high net worth individuals and families - who have often built up a disorganised variety of portfolios as a result of dealing with multiple private bankers – do have a “lightbulb moment” when they realise they need an independent advisor. Hamadeh is convinced that the model is the right one: while standards
are improving in the financial sector, too many investors in the region have been short-changed in the past. “What we do is not the easiest route to take in the investment business,” he says. “In fact our space is more challenging, but it’s a space that we are committed to and personally I feel passionate about this model. I’ve seen throughout my career how people can get taken advantage of in their investments because of a lack of professional knowledge and/or misalignment of interest; it’s bordering on criminal really.
And that’s something I feel very strongly about. “Investors, regardless of size, deserve better: they deserve better transparency, they deserve someone managing their money who is aligned with them and will do their best for them in return for a fee.”
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“Investors deserve better: they deserve better transparency, they deserve someone managing their money who is aligned with them and will do their best for them”
Nabil Hamadeh,
CEO |
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