| BUSINESSWEEK ONLINE : NOVEMBER 1, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- FINANCE
Mercury Dips, and the City Shivers (int'l edition) A Unilever lawsuit shakes up London's fund managers Merrill Lynch Mercury Asset Management Ltd.'s headquarters offices in the City of London are designed to convey a sense of dignity and respectability. Understated art adorns the walls, and handsome longcase clocks chime the hours. But since Oct. 7, the fund-management company has been dragged into a legal fight by one of its biggest former clients, the $6.6 billion pension fund of British blue-chip company Unilever PLC. The pension fund filed a lawsuit charging Mercury with ''negligence'' in its role in investing about $1.7 billion of the fund between January, 1997, and March, 1998, alleging that over the five quarters Mercury underperformed an unidentified benchmark by 10.5% vs. a contractual limit of 3% in any four quarters. Unilever is seeking more than $160 million in damages. ''The U.K. equity portfolio selected by MAM was far too risky for the agreed investment mandate,'' says Richard Greenhalgh, chairman of the pension fund's trustees. Mercury, owned by Merrill Lynch & Co. since late 1997, says it plans to contest the case vigorously. Charles Farquharson, Mercury's chief operating officer for institutional business, acknowledges that the company performed poorly during the period in question. Mercury's mistake was to underweight big stocks listed on the London Stock Exchange. Unfortunately, big caps far outperformed the rest of the market. In 1997, the 10 largest stocks gave a total return of 46%, compared with 23% for the next 90 and just 11% for mid- cap stocks. Farquharson says that such misjudgment isn't sufficient to justify a lawsuit. He adds that Unilever made money--but not as much as if it had bought the index. Subsequently, Mercury tightened controls on stock and sector weightings, though individual managers will still be allowed discretion. Unilever's move has sent shivers through the British financial-services industry and beyond. London-based management companies were hoping to sell profitable services on the Continent and as far away as Japan, as other countries move toward private pension schemes. But fund managers worry that instead of winning billions in new business, they could face a flood of costly litigation from unhappy customers. Already, another Mercury client, British grocery chain J. Sainsbury, says it is ''monitoring the legal process with interest.'' Alan Pickering, chairman of the National Association of Pension Funds, which represents British fund managers and their clients, warns that ''an increase in litigation is likely to increase costs and lower the returns.'' The dispute may be hurting Mercury's mainstay British pension business. This year it has lost a net $1.8 billion of such assets, according to PensionsWeek, a trade magazine. Mercury concedes that it has lost business but attributes that to changes in the way funds parcel out mandates rather than to its performance. It still has about $258 billion of assets under management now, vs. $215 billion at the end of 1997, when Merrill paid $5.1 billion to acquire Mercury and its star executives Carol Galley and Stephen A. Zimmerman, who are now co-CEOs. Both Mercury and Merrill say the dispute is an isolated incident that won't distract them from expanding Mercury's reach beyond Britain. It is a leading asset manager in Japan, and has garnered $2.7 billion with five mutual funds launched in the U.S. last year. A new U.S. small cap fund is in the works. Also, since the end of 1998, it has more than doubled to over $8 billion the assets it manages in offshore funds. ''I don't think I've spent a day thinking about the price we paid for Mercury,'' says Jeffrey M. Peek, president of Merrill's asset management group. NO BULL. Still, the clubby British pension industry is doing some major soul-searching. ''This [dispute] has pulled the lid off a large number of issues,'' says Robin J.H. Geffen, chief investment officer of Orbitex Investments Ltd. in London. British managers, for instance, have basically sat out ''the greatest bull market Wall Street has ever seen'' because their performance is measured mainly against British stocks. The Mercury case has also revved up debate about the relative merits of active vs. passive, or index-type, fund management. Taking a cue from the U.S., indexers such as Barclays Global Investors and Legal & General have made big inroads in Britain. Such managers charge much lower fees and in recent years have looked good because so many of the more expensive active managers have failed to beat the indexes. As a result, analysts worry that fund managers could be intimidated into becoming closet indexers--potentially a risky course when, as now, the stock markets look rocky and the major benchmark indexes around the world are loaded with a few big stocks. ''There is much higher risk than people think in index investing,'' says Michael Hughes, chief strategist at Barings Asset Management in London. That doesn't mean the highly individualistic methods once in vogue at Mercury and other British managers are going to make a comeback anytime soon. Managers are going to be on a tighter leash--and under a lot more pressure to deliver. By Stanley Reed, with Heidi Dawley in London _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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