LONDON -If Schroders PLC was the U.K. investment industry's problem child last year, Merrill Lynch Investment Management is fast turning into this year's delinquent.
Until the mid-1990s, both firms were dominant players in the U.K. pensions industry, which was characterized by the use of balanced mandates.
But the gradual decline in the popularity of balanced mandates, led by performance problems, has clients at both firms heading for the exits.
U.K.-based consultants say MLIM's difficulties have been exacerbated by integration problems following Merrill Lynch's late 1997 acquisition of Mercury Asset Management and internal frustration over pay and bonus packages.
During the last few weeks, high-level staff departures and the loss of key mandates have rocked the firm.
Sentiment towards Schroders from its U.K. clients, however, appears to be thawing, and consultants view recent senior management changes as long overdue.
Michael Dobson was appointed chief executive in November, replacing David Salisbury, who had agreed to resign two months earlier. Mr. Dobson, widely viewed by pundits as a "safe pair of hands," has appointed a number of renowned senior managers, including Jonathan Asquith as chief financial officer.
While it still might be too soon for Mr. Dobson to have engineered a complete turnaround, performance has improved - particularly in specialist asset classes such as European equities, said a U.K.-based consultant who asked not to be named.
Give me 6 months
Another consultant advising a large chunk of the U.K. market but who refused to be named said the firm's weak point remained its core U.K. and international equity portfolios. He would not say whether his company was recommending the group to clients. But it is likely that clients would want to give the firm at least six more months to see whether the new executive lineup would translate into a sustained improvement, he added.
In the United States, the picture is less clear.
Sharon Haugh, chairwoman of Schroder Investment Management North America Inc., New York, left the firm earlier this month. Sources say she was dumped, in part because Schroder's U.S. assets had plummeted; Mr. Dobson would not say why she left.
U.S. assets under management have slipped on the back of market falls from a peak of around $40 billion at the beginning of 2000 to $30 billion at the end of last year.
Mr. Dobson said he was concerned about the loss of U.S. assets but added most fund managers had seen assets decline and Schroders was no different.
Schroders found 2001 a tough year, with global net client losses of L6 billion ($8.8 billion). According to the firm's annual report, however, the bulk of the losses, L5.6 billion, occurred during the first half of the year, with only L400 million lost in the second half.
Mr. Dobson would not give details on client wins and losses so far this year but said fund flows had "improved" during the first quarter.
Despite Schroders' woes, the situation there was "a tea party compared with Merrill Lynch," said the U.K.-based investment consultant.
Big loss possible
If clients of those two firms dump Merrill, the company could lose up to 25% of its roughly L64 billion in U.K. assets under management, said the U.K.-based investment consultant.
The firm's core U.K. equity business is thought to be looking most vulnerable.
Charles Farquharson, Merrill's head of institutional business for U.K., Europe, Middle East, Africa and the Pacific region, confirmed that the company has had a L3 billion net loss in business so far this year. The decrease, he said, is the result of the breakup of balanced mandates across the U.K pensions market.
"That process has accelerated in the last six to nine months as a result of a number of factors, including (new accounting standard) FRS 17 and the Paul Myners report," added Andrew Dyson, MLIM's head of institutional marketing.
But recent staff losses will not have helped.
Andreas Utermann, MLIM's former global head of equities, quit the firm earlier this month. He was hot on the heels of Anne Richards, former head of MLIM's Alpha team, who left the firm in late April to join Edinburgh Fund Managers, Edinburgh, as chief investment officer.
Four other managers also have left the Alpha team, which manages assets for smaller U.K. institutional clients.
A week after Mr. Utermann's departure, Cooperative Wholesale Society Pension Fund, Manchester, dropped MLIM for a L500 million equities mandate. A statement issued by the fund said the reason was concerns over personnel changes and performance.
Plan trustees also announced they would be seeking legal advice on whether to sue MLIM. Trustees hired Lista Cannon, a senior partner for law firm Richards Butler, London, to investigate possible legal action against MLIM.
Alan Murphy, head of pensions at CWS, would not comment on the details. It is unclear for which asset classes or over what time period the pension plan will scrutinize MLIM's activities.
Mr. Farquharson said he was "not aware of the basis for any claim" and did not want to comment further.
In April, the L1.5 billion Bath and Northeast Somerset Council Pension Fund dropped MLIM from a L450 million active multiasset mandate following the firm's failure to meet performance targets and a move by the plan to use specialist money managers, said Tony Worth, investment officer.
Consultants have been concerned about MLIM's operations for some time. Early last year Tim Manna, global head of fixed income, and David Jacob, head of fixed income for Europe, Middle East and Africa, were fired after a currency trader misallocated trades.
The group's problems came to a head at the end of last year, when it agreed to an 11th hour settlement of a damaging lawsuit for negligence brought against the firm by Unilever Superannuation Fund, London.
Executives at Unilever had claimed MLIM's predecessor company, Mercury Asset Management, had managed its assets negligently. (Merrill bought Mercury in late 1997.)
Following Unilever's complaint, executives at a number of other U.K. pension plans, including J Sainsbury PLC, announced they are consulting with their attorneys to see if they, too, had a case.
Local consultants say the cost of the Unilever settlement, unofficially estimated at L70 million, took a large chunk of the firm's bonus pool and was a likely factor in recent staff departures.
But MLIM's Mr. Farquharson denied the Unilever settlement had reduced bonuses.
He said group profits were healthy and sufficient to cover bonuses, but added the group has moved to address its remuneration policy after money managers had requested bonuses be based on a more formulaic calculation and discretion.