PLAINSBORO, N.J. - Merrill Lynch Investment Managers is winning new business after refocusing its U.S. institutional business over the last two years.
While its parent company, Merrill Lynch & Co., New York, has endured its share of notoriety over research and investment banking scandals, and the U.K. investment arm has been sued by pension fund clients over alleged investment mandate violations, the U.S. investment unit has been quietly rebuilding a presence in the institutional market. MLIM was always known as a retail mutual fund manager with a huge broker network, even though institutional clients accounted for 56% of the $452 billion it managed as of Sept. 30.
Consultants and plan sponsors needed to be convinced that Merrill Lynch was a credible institutional manager, and the company could only achieve that objective by trimming more than half of its investment strategies, said Frank Salerno, chief operating officer of MLIM America Institutional. Mr. Salerno came to the company with the quantitative and enhanced indexing team MLIM lifted out of Bankers Trust Co., New York, in 1999. That team became the focus of a reorganization begun as a cost-cutting exercise in the spring of 2001, said Mr. Salerno. The asset management division went from offering 15 strategies to focusing on five or six major initiatives.
It was important to initially focus on its very best investment offering, Mr. Salerno said. "We couldn't bring five products to consultants right off the mark. We had to be credible, and one way to do that was to bring a small number of very good products to market."
The quantitative team had good performance and, once the market was certain their new home at Merrill Lynch was permanent, consultants were a little more receptive. In addition, other indexed and quantitative money managers were being merged or acquired or were otherwise in turmoil, which helped make MLIM look more stable to the institutional community, Mr. Salerno said.
Consultant interest is picking up even more now that the quant team has achieved a three-year track record. "It's a funny thing about consultants. One day they won't talk to you and the next day, when you've hit the three-year mark, it's totally different. I think the perception in the market is that the body has accepted the transplant," he said.
Institutional investors are showing interest in MLIM's enhanced investment strategies. New clients this year include the $85 billion New York State Teachers Retirement System, Albany, which invested $350 million in the firm's EAFE enhanced index account, and the $22 billion State of Connecticut Trust Funds, Hartford, invested $215 million in the same strategy.
The MLIM enhanced EAFE index strategy returned -8.64% for the year ended June 30, an annualized -13.89% for the three years.
Other new clients won this year include Washington Mutual Inc., Seattle, which invested insurance assets of $145 million in a tactical asset allocation portfolio; Empire Blue Cross and Blue Shield, New York, which invested $25 million of general account assets in an S&P 500 Index portfolio account; the $240 million defined benefit plan of the Amalgamated Transit Union, Local 1181, New York, invested $47 million in a passive bond portfolio benchmarked to the Lehman Brothers Aggregate bond index; and the $12 billion Indiana State Employees' Retirement System, Indianapolis, which invested $300 million in active domestic large-cap value equities.
The MLIM U.S. small-cap growth fund returned -8.84% for the year ended June 30, -1.86% for the three years and 4.58% for the five years. (Multiple-year returns are annualized.)
The MLIM large-cap value strategy returned -0.47% for the year ended June 30, 4.87% for the three years and 10.9% for the five years.
The Merrill Lynch indexed fixed income strategy returned 8.5% for the one-year ended June 30; 9.46% for the three years and 7.86% for the five years.
Mr. Salerno expects continued moderate growth of about 5% into next year, given the difficult market environment. To achieve that goal, he has assembled a team of heavy hitters to attract more institutional business.
"I saw that I had to create a marriage of manufacturing capability to build strong, consistent performance, and I needed a consistent, recognizable set of people for distribution. I hired familiar faces to gain credibility in the institutional market," Mr. Salerno said.
Those "familiar faces" include Obie Mckenzie,managing director and head of public fund sales; Richard Hoag, managing director and head of corporate, foundation and endowment sales; Neal Howe, managing director and head of consultant relationships; Tom Skrobe, director and head of marketing; and Michael Brady, managing director and head of channel and midmarket sales. The first three marketers, Messrs. Mckenzie, Hoag and Howe, have been friends for more than 20 years, and each is well known, in the institutional marketing community, he said.
With the senior team in place, Mr. Salerno said he expects to hire one or two more consultant marketers early next year to support Mr. Howe.