Merrill Lynch Investment Managers’ approach to the US institutional market can best be described as nascent. Until two months ago, there wasn’t even anyone charged with the responsibility for overseeing, developing or even simply describing Merrill’s US institutional business.
In March MLIM president Jeff Peek put Frank Salerno in charge. He’s been at Merrill since mid-1999, when he brought over a big chunk of Bankers Trust’s successful quantitative analysis team.
The message can still sound a bit disjointed. But Salerno, whose official title is chief operating officer of US institutional business, is upbeat about the firm’s capabilities. “One of the best-kept secrets in US asset management is just how big Merrill is in institutional business,” he says. “We’re said to be a retail only firm, but we have about $100 billion in assets under management [$99.7 billion, actually]. That’s about one-third of the total amount of our US assets, yet very few know about it, including the consultants.”
If you ask Peek himself, he’ll tell you that this is the one area where Merrill still has something missing. “If there’s one product we lack now, it’s a good presence in US institutional equities. And we might want to buy our way in.”
What is clear is that Mercury Asset Management was not able to offer any kind of quick-fix solution. One of the reasons given at the time for spending $5.2 billion on it was that it added institutional product know-how to Merrill’s retail-centric offerings. With underperformance in both camps, and a major integration to get through, making progress has been tough. Even without these distractions, it was unlikely the UK-focused firm would be able suddenly to use its new owner as a springboard to instant US success.
Unsurprisingly, the combination has yielded little. Mercury did launch some funds in the US a few months after the merger, but only about $3 billion in assets – roughly what they started with three years ago. “In part that’s because of general market depreciation,” says Peek. “But also we launched those at a time when the old MLAM name was not doing well, and so take-up was not big.”
Building an institutional business in the US was forced to take a back seat. “In the US, the priority was to get retail right,” says Doll. “That was our core constituency after all. If I spent 5% of my time in my first year here on institutional, that would have been a lot. Of all the businesses MLIM is in or wants to be in, the institutional side is the slowest to add to the P&L.”
But now MLIM is pushing to increase its institutional presence. “Merrill never treated institutional as a business in its own right,” says Salerno. “So for example, the same portfolio manager would run their retail and institutional funds in fixed income. What I need to do is to assess what we’ve got already and turn it into a cohesive business. We’ve got a lot here under the MLIM tent which we simply haven’t even tried applying to the institutional side.”
He already has a couple of US retail products in mind that could be repackaged for the institutional market – the emerging-markets fund and the active growth fund – as well as some institutional funds offered just in Europe at present, such as the European small-cap fund and European high-yield debt fund.
The quant specialists he brought with him from Bankers Trust have served as the cornerstone of US institutional thus far, accounting for $40 billion in assets in less than two years. “Alternative investment products are very strong in the US, whether hedge funds, private equity or fund of funds,” says Salerno. “That’s the way the market’s going, and we’re very strong in that area.”
One of Peek’s pet projects, which Salerno is now responsible for, is tapping the links with Merrill’s investment bank. This could work for long-term assets, says Peek, “because responsibility for pension plans is passing from human resources to the chief financial officer, and that’s where Merrill lives”. But it also works on shorter-term assets. “Last year, for example the bankers advised Pirelli on the sale of its optics division to Cisco for about $2 billion,” explains Peek. “The company had no pressing need to use the proceeds so the banker offered to introduce the CFO to MLIM in London. We’re now managing $1 billion of that.” Another instance last year was winning a mandate from the City of New York – in part down to Salerno’s relationship, and in part to the relationship one of the muni bankers had with the City treasury.
In all, MLIM got $28 billion in a variety of new mandates from tapping into the investment bank.
The question over how to gain a core US institutional equities presence is still open.
Peek’s stance on possibly buying a US institutional equities manager is not new – he mused over the same topic when Euromoney spoke with him two years ago. Not everyone is convinced. “I’m not a believer in owning everything simply to get balance,” says Joan Solotar, brokerage and investment-management analyst at CSFB. “It needs to fit into the existing businesses, and there’s no obvious benefit to Merrill in having an institutional business in the US.”
Peek seems determined to get one, whether through building or buying, and Salerno states that “we need a core US active equity product.
But we need to decide whether we can do that organically – which involves working out our time to market, whether we can reconstruct mutual funds for the institutional market – or whether we go for an external solution.” He says he’s not ready with an answer. But he hopes to have plans drawn up before the year-end.
