The Portfolio Manager has Covid-19. Should the Manager Tell You?

When the leader of a G-7 country is recovering after being admitted to the ICU, it’s clear that anyone can catch Covid-19. However, when James Gorman, the CEO of Morgan Stanley, caught the virus, he only informed the Morgan Stanley board of directors. The first that shareholders or MS customers (including many hedge funds) knew about his illness was when Reuters reported on a 10 minute video posted to the firm’s employees – which was the first time they found out too. This raises a key due diligence question: should asset managers disclose staff illnesses - and what should investors do with that information?

The obvious answer is yes, managers should tell investors. But – as with many diligence issues in the Covid crisis - it is helpful to take at least one step back and consider the question more thoughtfully. Even if an investor does decide that the answer is still “yes”.

Castle Hall first published comments on Covid-19 on February 14…which feels an awful lot more than just two months ago. We concluded with a point we still stand by: "Above all, though, coronavirus is not a time for "gotcha" ODD. Rather, this is a time when everyone in the asset management community can collaborate to share ideas and best practices. Working together, we can help protect our colleagues and their families, and support our businesses across the industry."

The danger, of course, is that an ODD team excitedly telling their CIO that the PM of manager 31 out of 84 has got the virus could be simply that…gotcha. What matters is what you actually do with that information - in a way which is constructive and value add.

Let’s think through some issues:

• First – let’s state the obvious. If Boris Johnson, Sophie Trudeau and Tom Hanks can catch Covid, then it would be utterly unrealistic to think that people working in asset management have not caught it as well. So let’s assume that at least some CIOs and CEOs, head traders and key back office staff have been (or will become) sick. Equally, the same applies at asset owner organizations, of course.
• Second – let’s state the next obvious point. Whatever happens to the manager's key PM, you can’t get at your money, at least not instantly. For hedge funds, redemption periods are infrequent; for closed ended PE / Real Estate / Infrastructure funds they do not exist. A hedge fund with quarterly / 45 days notice still leaves a month from today (so May 15 or so) before an investor could put in a redemption notice to be effective June 30, with cash to be paid some time thereafter. So, if an investor receives urgent information today – nothing we can do (in terms of access to capital) for at least a month. A month is a very long time in Covid timelines.
• What obligations does an asset manager have to notify their investors? The Reuters article which discussed James Gorman’s illness included the following:

His disclosure in a 10-minute video emailed to staff is one example of how and when financial firms are choosing to disclose sensitive health information during a global pandemic that has sickened half a million people, upended the global economy, and put banks at the center of relief efforts for any potential recovery. 

The U.S. Securities and Exchange Commission requires public companies to disclose material facts to the public, but there is widespread debate about when corporations must disclose information about the health of an executive, corporate governance lawyers said. 

Last month, Jefferies Financial Group Inc CFO.N disclosed its chief financial officer, Peg Broadbent, died of complications related to the coronavirus. 

Perella Weinberg Partners LP founding partner Joseph Perella also tested positive for the coronavirus and recovered after treatment, said a person familiar with the matter who was not authorized to discuss the information publicly. 

A spokeswoman said it is the firm’s policy not comment on the health of its employees. 

In contrast, JPMorgan Chase & Co (JPM.N) disclosed that Chief Executive Jamie Dimon had emergency heart surgery within hours of the event happening last month. 

Other CEOs – including Juan Domingo Beckmann Legorreta of Jose Cuervo tequila-owner Becle (CUERVO.MX), Jeff Shell of Comcast-owned NBC Universal (CMCSA.O) and Glenn Fogel of online travel agency Booking Holdings – each received diagnoses of coronavirus infections and disclosed them shortly after. 

Gorman’s staff-wide video was the first time Morgan Stanley shared with anyone beyond the board room and executive suite that its CEO had tested positive for the respiratory disease. It became public knowledge once news outlets including Reuters learned of the message.

• One group who certainly should know – the Fund Directors. Ultimately it is the directors’ responsibility to manage a fund – the asset manager is, ultimately, simply a service provider to an entity owned by the shareholders. Diligence could certainly canvass fund directors as to whether they have been informed of any illnesses of key staff, and proactively ask how directors would respond to a future notification. As an aside, Castle Hall has consistently pushed back at the lawyers and tax advisors who have structured master funds as partnerships, rather than corporations. If you only have directors at the feeder level, with the master fund (where all the assets are) controlled by the general partner – the manager – you are in a profoundly weaker governance situation.
• What do the fund documents say? Who is listed as a key person – and what are the periods of incapacity which must pass before a key person event is declared? Are key person provisions drafted on the basis that “several of a group” must be incapacitated at the same time? And then, what happens if a key person event is declared? Often, key person events essentially trigger a “freeze”, which might provide a useful period to consider the facts and circumstances, but may not help investors get their cash back quicker. A proactive review of fund legal terms and conditions across a portfolio to consider key man clauses could be useful. (Such a review can also document and prepare for other issues such as gating mechanisms and situations where funds have existing provisions to create side pockets via redemption in kind liquidating trusts.)
• If worst came to the worst…has the manager prepared a succession plan? We don’t need an hypothetical, nicely drafted document screened by the lawyers back when times were good – but can the manager at least give a reasonably plausible response based on today's environment? If the PM was out for 3 months, or even fell victim to the virus, how would the firm continue?
• What do counterparty agreements say? In practice, a key person event is more likely to impact a fund’s investment activities – and investor capital – if an ISDA counterparty is able to instantly pull credit due to triggering of a key person event. Which of your managers could not continue operations without ISDA agreements? (So start with levered strategies). Do all ISDA agreements have exactly the same key person terms – or is there some variability in drafting?
• Who actually is a key person in practice? Evidently the PM is critical – however, do you hold any funds that could not continue operations if the PM was out of the office for a 2 week illness? Is there an investment committee and some form of collective decision making, or does every decision require sign off of the most senior investment professional? We would hope – and would advise – managers to have some proactive contingency plan to reduce risk of frozen investment activities. Again, the world of investing today is hardly the same as it was 2 months ago, and what a manager might have documented and explained to investor ODD teams 8 weeks ago may well now be completely outdated and irrelevant.
• And, from an ODD (rather than IDD) perspective, let’s remember that a key person might not only be someone within the senior investment team. If the two people who handle daily reconciliations are out at the same time, can the manager cover those roles – or is there now a risk of trading errors if the PMs are looking at inaccurate portfolio listings, or if the risk system is not populated with correct position data? Will we have settlement problems or losses if we cover too much of a short position as our trading system didn’t have the right information in it?
• Finally – what happens external to the asset manager? We continue to be profoundly worried with respect to offshoring locations, especially in India. In our view – while we sincerely hope that Indian, and other offshore staff are all safe and well – managers must review their operations and identify any steps where they depend on an offshored administrator or third party for any time sensitive, critical trading task. Managers must shadow NOW and be ready to take outsourced functions back in house instantly.

So – should a manager tell their investors if a member of their team has Covid-19?

In our view, yes – if an asset manager chooses to sell services to large asset owners who have fiduciary responsibilities and are often themselves regulated, then the manager should recognize that their customers have a need to know. But, equally, investors should be working with their managers to mutually protect assets and collaborate to navigate these unprecedented times. There are no simple answers to complex questions right now – and this is not a time for gotcha.