Merrill's horrible year
Merrill Lynch’s May 2002 is testimony to the old saw that it never rains but pours. There was the well-publicised agreement reached with New York attorney general Eliot Spitzer that saw the investment bank pay a $100m (E109m) fine.
In making a settlement, Merrill Lynch was at pains to say it represented neither evidence nor admission of wrongdoing or liability. Nevertheless, chairman and CEO David Komansky concedes that their reputation has been damaged (see US Report page 52).
And then in the UK, the Co-operative’s £2.1bn (E3.3bn) pension fund announced that it was replacing Merrill Lynch Investment Management on an active £500m mandate, thereby ending a 30 year relationship.
In London the investment management arm has been hit by a number of staff departures, a loss of business and some clients expressing dissatisfaction with unsatisfactory performance figures.
In a statement from the Co-op, Nick Eyre, group secretary and fund trustee admitted the fund had been unhappy with Merrill’s investment performance for some time and that, in view of the recent exodus of key managers, it had decided to dispense with their services.
But more worrying for MLIM, he went on to confirm that they are discussing the prospects of legal action with the law firm Richards Butler.
Responding to the Co-op’s announcement, MLIM said it was unaware of the basis of any claims. Nevertheless, the messy end of this relationship raises the spectre of another potentially high profile court case mirroring last year’s scrap with the Unilever Superannuation fund.
Unilever’s £5bn scheme took MLIM to court claiming the then-named Mercury Asset Management took excessive risk when managing £1bn for the fund during 1997 and 1997. The case was settled, on the instruction of the New York office who feared the adverse publicity, for an undisclosed sum, believed to be about £70m.
Now, only five months on and MLIM is facing another potential case. Co-op entering the fray has added to the total number of funds known to be considering legal action.
Pension funds of the UK supermarket chain J Sainsbury, of Surrey County Council and of pharmaceuticals firm AstraZeneca are working on an internal investigation that may lead to similar legal action.
Co-op has made a point of not disclosing details about the nature of the fund, the degree of underperformance, nor the size of recompense it may be after. Whether it reaches court remains to be seen, consulting the lawyers has only just begun.
Almost as important in the short run is the damage done by the steady drip of bad news, be it related to staff departures, mandate losses or allegations of poor performance. A week after the Co-op announcement, MLIM admitted it had registered a net loss of £3bn since the beginning of the year.
In recent months, numerous senior investment managers have parted company with MLIM. Andreas Utermann, head of the firm's equity funds outside the US, quit early last month as did Habib Annous, who ran the UK smaller companies and UK value funds.
And in April Anne Richards, managing director of MLIM’s E17bn UK equities Alpha team, was named as CIO at Edinburgh Fund Managers. Last year Carol Galley and Stephen Zimmerman, who used to run Mercury, left as well.
Other large clients of MLIM are departing, albeit for other reasons- normally ALMs and strategic reviews. The pension funds of Meyer, a building materials company, and Bath and North East Somerset have both taken business away from the investment manager.
Meyer dropped MLIM from a £500m balanced mandate and awarded it a £70m fixed income mandate but stressed the change was unrelated to underperformance or staff departures.
A spokesman at Bath said its decision to replace MLIM on a £500m mandate earlier this year was not for the same reasons as Unilever and Co-op, although it conceded performance could have been better.
In fairness, a spokesman at MLIM said that, despite a net loss of business, it is picking up mandates, including $500m UK equities for a Scandinavian client, $200m in Japanese fixed income, $100m in global equities and $250m in fixed income.
Reports last month suggested consultants had removed the manager from their ‘buy list’ making it difficult for it to win new business. One UK-based consultant, asked about recommending Merrill Lynch to clients, refused to say whether the manager was still on the ‘buy list’. What they said, however, was as straightforward as it was revealing. For the time being, there are other plenty of other managers they consider to be more appealing to pension funds.