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April 16, 2007 01:00 AM

True dedication: Face to Face with David Smith

David Smith parlayed a passion for performance into a career as investment director of multimanager strategies at GAM

By Christine Williamson
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    Michael A. Marcotte

    David Smith has always had two passions: soccer and financial markets. His competitive streak might have taken him far in the world of soccer (he played on two professional U.K. football teams before and during college), but the Liverpudlian opted to pursue his second passion, noting the decision “broke my dad’s heart.”

    Mr. Smith’s introduction to investment management was something of a trial by fire: He was recruited by the London office of Group AXA SA and started there in October 1987. “The graduate trainees were left to answer the phones” on Black Monday — Oct. 19 — after more senior employees departed for the pub in shock, he said.

    After a thorough grounding in European long-only investment, Mr. Smith moved into consulting, getting a “great tutorial” as a consultant at Mercer Fraser. He moved on to open Buck Consultants’ first office in Europe and lead its investment research practice, where he first started to construct fund-of-funds strategies for U.K. mutual fund companies, banks and building societies.

    Mr. Smith’s talent in selecting good money managers came to the notice of legendary hedge fund investor Gilbert de Botton, who founded Global Asset Management in 1983, primarily to serve wealthy private clients. Over a long lunch in 1992, during which, Mr. Smith recalled, he never actually was offered a job that he could accept — or decline — and salary was not mentioned, Mr. de Botton welcomed him to GAM. Mr. Smith now directs investment of GAM’s 12 hedge fund-of-funds strategies, which account for about one-third of the firm’s more than $68 billion under management.

    David Smith

    • Current position: chief investment director, multimanager strategies, GAM International Management Ltd., London
    • Assets under management in hedge funds of funds (as of Dec. 31): $22.6 billion (40% institutional)
    • Employees: 825 worldwide, 113 for the multimanager strategy
    • Education: BA (Honors) Economics, Leicester Polytechnic, and associate qualifications from the Institute of Investment Management and Research and the Securities Institute.
    • Performance (as of Dec. 31):
    •   GAM Equity Hedge
      • One-year return: 18.6%  HFR Combined Global: 11.7%
      • Three-year return: 14.2%  HFR Combined Global: 10.0%

    •   GAM Trading
      • One-year return: 16.4%  HFR Combined Weighted Trading: 10.0%
      • Three-year return: 7.0%  HFR Combined Weighted Trading: 6.9%

    •   GAM Arbitrage
      • One-year return: 13.1%  HFR Combined Arbitrage: 12.4%
      • Three-year return: 8.0%  HFR Combined Arbitrage: 8.4%

    Why did Mr. de Botton bring you on at GAM? After about 10 years of managing private client assets, in the mid-1990s, (Gilbert) decided that he wanted to start creating funds. In his words, have professionals that were independent in thought, with one thing in mind — the performance of the funds. He wasn’t interested in people who wanted to build careers. He just wanted to focus on performance. My passion is performance. I feel as happy this morning about … performance as I did the first day I joined.

    You really are completely focused on performance. Oh, yes. It’s a strange sort of job whereby you love it, but you wish your day away, hoping to preserve the performance you already have.

    What were the most important lessons you learned from Mr. de Botton? He taught me three things. He was a brilliant man and was really aware of clients. What he told me was that if a client wants his money, you’d better give him it that day or very close to it. Liquidity is vital. Because if you give a client his money back very quickly, the chances are he’ll come back once you’ve shown that you’ve improved whatever was wrong. You need to act swiftly.

    The other thing he taught me was to treat absolutely everyone you meet in this business with humility. Yes, I’m the buyer, but I am a parasite on other people’s genius. Gilbert showed me that you have to be cognizant of it. He often said that even if you are successful, what does it matter? What does it cost you to behave with humility? He was absolutely right and I think he recognized this in me because of the way I was brought up. The third — and I think the most important — lesson was to never lose the passion for performance. Because all the spin, all the presentation, all the PR will not make any difference if you don’t have performance.

    What do you do to keep GAM’s investment staff loyal and happy? Well, very few people have ever left through choice. I think it comes back to (my) being engaged with everyone. They can see how passionate I am about performance.

    We are very careful about who we recruit. We spend a lot of time with them and we warn them that they have to be up for this. This isn’t a place whereby you get into some sort of political pecking order and you spend time in a bureaucracy and in 10 years’ time, you’re still going to be here. Every day, every week, every month, every quarter, every year, you are measured. And you’re measured not only by me; every single person in the group knows how Manager X did that week and why he succeeded or failed. It’s a challenging environment.

    I don’t ask them to do marketing or sales or admin or operations. And that’s what keeps me here. I wanted to create an environment that would make me really really enjoy being here. That’s what I’ve been privileged enough to have done.

    But because of that environment, anyone that’s lucky enough to be here needs to be proven. Economics are what they are. I don’t think anyone should join us because of money and I don’t think anyone will leave us because of money. I think what we pay is right for our people. But we’ll only pay if you deliver.

    How did staff react when you closed the funds in 2004? We closed them (to new flow) because we thought (growing too fast) might impact existing investors (through lower performance). And then I trebled the size of the research team. The positive sentiment from everyone was tremendous. Staff thought it was great that we would spend more of our money and therefore have less profit as an organization in order to do the right thing because we want to build a business for more than the next one, two or three years. It all comes back to the culture of performance. That exists even at the board of directors’ level, (because) they voted to close the funds.

    Are you still willing to close funds if you need to you? Yes, we will; but we’re in a different place now. We’ve got 120 people in the hedge fund research group and that generates a new idea flow that is pretty phenomenal every single month. We’re going to be able to grow at a significant rate, if we choose to do so. We want to grow, but in a constrained fashion. We’re never going to have 200 sales people. I don’t even think we have 30 globally.

    How do GAM hedge fund researchers find new investment ideas and managers? We met 873 new hedge funds in 2006; we followed up with 1,530 other managers; we are invested with between 160 and 170 managers in total. Of those numbers, we invest in typically about 5% of the managers we meet in a year. In all the years I’ve been doing this, (the percentage we invest in) is always round about 5%. I have no idea why. So we end up investing in about one in 20 of the managers we physically meet, interview and assess.

    One of the things about hedge fund investing that people forget is that you’ve got to go back and re-evaluate every single manager you’ve met. We (assign) grades — A, B, C or D — to all the managers we meet. … I make sure that every quarter, we go back and evaluate how every manager in every grade did. I’ve divided the team into 16 substrategies and there’s a team dedicated to everything from convert(ible) vol(atility) to Japanese long/short to discretionary macro to event-driven. Their job is to cover the specific universe and to find what we missed. We’re constantly going through that process. It’s not easy.

    By going back and evaluating what we missed, we’re learning some lessons. As we’ve gotten bigger, we’ve gotten better at recognizing structural errors and changing the process accordingly. I think the process educates itself.

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