NEW YORK -- Merrill Lynch & Co. Inc.'s long-term mutual fund assets dropped 6% last year -- nearly $5 billion.
Poor performance in a number of its flagship mutual funds and an out-of-favor value investing bias convinced many retail investors to head for the hills.
Institutional investors, including 401(k) plan participants, largely stuck around, company officials said. Global institutional assets grew 11%, and 401(k) plan assets invested in Merrill Lynch's proprietary funds grew 12% in 1998, they said.
Regardless of the source, so much money leaving a fund family "has a direct impact on management of the funds. The portfolio manager has to raise cash to meet the outflow -- it doesn't just go away. It has a knock-on effect for some years to come," said David Masters, senior fund analyst at Standard & Poor's Micropal, New York.
The damage to Merrill Lynch's mutual fund complex was severe last year.
Mutual fund tracker Financial Research Corp., Boston, reported a 5.9% drop -- $4.8 billion -- in Merrill Lynch's long-term mutual fund assets, to $76.7 billion as of Dec. 31.
By contrast, total growth of long-term mutual fund assets across the industry was 20%, to $3.658 trillion as of Dec. 31.
Of the 25 largest mutual fund companies ranked by long-term mutual fund assets, only Merrill Lynch and Franklin Distributors Inc., San Mateo, Calif., saw a drop in assets from 1997, according to FRC data. Franklin's long-term mutual fund assets dropped 1.2% to $160.3 billion as of Dec. 31, from $162.3 billion a year earlier.
The culprit behind Merrill Lynch's shrinking fund family was a negative $5.8 billion net flow to long-term mutual funds. That is a formidable drop -- 645% -- from the approximately $1 billion net flow the funds attracted in 1997, and a veritable free-fall from the more than $10 billion net flow attracted to the funds in 1993, according to FRC data.
FRC's long-term mutual fund asset and flow figures exclude short-term money market mutual funds, offshore and closed-end funds, and mutual fund products used only in variable annuity programs.
The FRC figures for 1998 do not include the approximately $800 million that flowed into two new Mercury mutual funds introduced late in 1998 by Merrill Lynch subsidiary, Merrill Lynch Asset Management Group, New York, because the funds are distributed through different channels, said David Haywood, a consultant at FRC.
Of the 25 largest mutual fund companies, in terms of long-term mutual fund assets managed, 14 had smaller net fund flows in 1998 than in 1997. The worst case was Franklin, whose net flow in 1998 dropped $16.7 billion or 1,106%, compared with 1997.
Of the 80 long-term mutual funds in the Merrill Lynch family, FRC reported 47 experienced negative net flow in 1998. Two were on FRC's list of the 10 mutual funds with the worst net cash flow last year: the Merrill Lynch Growth Fund, which lost a net $1.968 billion; and the Merrill Lynch Global Allocation Fund, which lost a net total of $4.745 billion.
Company officials contested the accuracy of the net fund flow figure from FRC, although they were unable to provide their own statistics by press time.
Merrill Lynch's total assets under management increased to $501 billion as of Dec. 31, up from $447 billion a year earlier, said Christine Walton, a company spokeswoman.
New cash flow was $34 billion in 1998, of which $15.9 billion came from institutional clients through Merrill Lynch Mercury Asset Management and $18.1 billion came to Merrill Lynch Asset Management primarily from retail and 401(k) plan investors, Ms. Walton said. Both asset and cash flow figures include institutional assets, money market, offshore and closed-end mutual funds and products for variable annuities.
FRC's estimate of Merrill Lynch's combined total of long-term and money market mutual fund assets as of Dec. 31 was $202.9 billion, up 9.9% from a year earlier. By contrast, combined growth in long-term and money market mutual funds industrywide was 22.1%.
Merrill Lynch officials admit 1998 was not a year that favored the company's investment style. A substantial discrepancy between the returns of growth and value stocks, coupled with a fairly significant exposure to emerging markets, especially on the fixed-income side, "meant we were more negatively impacted than other mutual fund companies, because of our value orientation," said Greg Upah, senior vice president of Merrill Lynch Asset Management Group, Princeton, N.J.
Market observers agreed Merrill Lynch's value orientation was a huge drag on the company.
"They are not alone among mutual fund companies in terms of the suffering caused by poor market conditions for value investing," said Glen Davis, a consultant at Eager Manager Advisory Inc., Louisville, Ky.
Mr. Upah said that while retail money fled because of these conditions, institutional money did not, although there was a modest flight to growth-oriented mutual funds within the family.
The Merrill Lynch Fundamental Growth Fund, for example, hit its fifth year in 1998 -- generally the minimum required by many 401(k) plan sponsors for consideration as a plan option -- and was immediately picked up by a number of plans. Assets from 401(k) plans invested in the fund increased 600% in 1998, said Mr. Upah.
Growth Fund suffers
One notable exception to the growth-seeking trend was Merrill Lynch's Growth Fund. Retirement plan investors last year withdrew about 4% of assets they had invested in the fund.
The Growth Fund had bottom-of-the-barrel performance as of year-end 1998: with a return of -23.5%, the fund ranked dead last for the year among the 100 equity funds most used by defined contribution plans.
For the five-year period, the fund ranked 92nd, with a 10.4% return.
Mr. Upah said many 401(k) plan sponsors didn't kill the Growth Fund as a plan option last year "because they recognize that the fund had a tremendous nine-year record and that 1998 was a year in which some sectors that the fund invested in just didn't do well -- namely energy stocks and REITs. I think they were willing to accept the volatility last year in hopes of the fund returning to its former performance levels."
By way of helping that transformation along, 15-year Merrill Lynch veteran fund manager Stephen Silverman assumed management of the Growth Fund at the end of January.
Company officials said Merrill Lynch will be introducing a range of mutual funds throughout 1999, managed by its subsidiary, Merrill Lynch Mercury Asset Management.
Mr. Masters of Micropal agreed Mercury's offerings could help Merrill Lynch recover some mutual fund market share. Still, he said, the company needs to broaden its fund stable.
"For such a large money management group," Mr. Masters said, "they have a real need to diversify their products. It might be retail investors that pull assets in one year, but it might be the big money 401(k) plans the next, so they need to broaden offerings to be sure they always have something that is attractive to investors, whatever the market conditions."