Investor Alert

Jan. 29, 1999, 11:59 p.m. EST

Weak Performance for Funds Pushes Merrill to Clean House

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By Patrick McGeehan and Karen Damato

Amid the flood of mutual-fund advertising, here's a number you're unlikely to see: The average dollar invested in Merrill Lynch & Co.'s diversified U.S.-stock funds earned a meager 7.5% return in 1998, far below the average 26.1% return at rival Fidelity Investments, according to Boston-based consultants Kanon Bloch Carre.

The performances of some of Merrill's largest bond and international-stock funds were also weak compared with peers.

Now, Merrill is cleaning house at its mutual-fund operation. The big brokerage firm's Merrill Lynch Asset Management is changing the top ranks of its fund business and is looking outside for both new fund managers and at least one new senior executive.

Investors Can Learn Good Lessons From Some Mutual Fund Laggards

People familiar with the situation say that last week's switch of managers at Merrill Lynch Growth Fund , one of the firm's biggest and most severely lagging funds, is just one of many changes in store at the asset-management operation.

"What we have is an intensified focus and emphasis on investment performance and investment processes," says James Wiggins, a Merrill spokesman. Mr. Wiggins acknowledged that some of the firm's biggest stock funds "had some challenges" and "there's a number of management changes in the works."

This reorganization comes one year after Merrill paid more than $5 billion to buy London-based Mercury Asset Management, one of Europe's biggest asset-management companies. As it digests that costly purchase, Merrill is going through a challenging transition, from a firm that relied on its army of commission-paid stockbrokers to peddle funds to loyal customers to a global asset manager that has to compete on investment performance with dozens of other big fund managers.

As part of a plan to establish the Mercury brand name in the U.S. and abroad, Merrill has started selling funds managed by Mercury in this country, including one that invests in large-cap U.S. companies. Merrill also may sell Mercury funds through distribution channels other than its own sales force, Mr. Wiggins said. For example, the firm may even slap the Mercury name on new no-load (free of sales commissions) funds that it could sell through mutual-fund "supermarkets," such as Charles Schwab Corp.'s popular OneSource program, other people familiar with Merrill's plans say. That would mark a big change for Merrill.

Compounding the difficulty of Merrill's transformation is an accelerating flow of money out of some of its biggest funds, whose returns trailed their peers last year.

Last year was indeed a tough one for many Merrill funds. The 1998 performance of Merrill's diversified U.S.-stock funds ranked the firm ninth among the 10 largest fund firms, according to Boston-based consultants Kanon Bloch.

Several of Merrill Lynch's largest funds lagged far behind competitors last year:
Fund Name (category) 1998
'98 Rank
vs. peers
ML Basic Value (growth & income) 11.7% 72 $12.45
ML Capital (balanced) 5.1 89 11.20
ML Global Allocation (multi-asset global) -0.4 85 9.35
ML Corp. High-Income (high-yield bond) -3.7 81 5.97
ML Growth (growth) -24.2 100 4.35
ML Global Value (world stock) 25.8 12 2.98
ML Fundamental Growth (growth) 33.4 16 2.14
ML Municipal Insured (nat'l muni bond) 5.8 25 1.90
ML Federal Securities (govt. bond) 6.3 78 1.88
ML EuroFund (Europe stock) 23.8 40 1.85
NOTE: Performance and percentile rank in Morningstar objective is for share class with most assets. Highest rank is 1, lowest rank is 100. Source: Morningstar

A big part of the problem, said Kanon Bloch consultant William Dougherty, is simply that Merrill's "value" investing style was out of favor last year. Seemingly cheap value stocks lagged far behind "growth" stocks with fast-rising earnings and revenues.

When compared with a narrower universe of funds investing in large value stocks, for instance, Merrill Lynch Basic Value Fund /zigman2/quotes/203859673/realtime MABAX +1.30% was an average performer in 1998 and over the past three years, according to fund tracker Morningstar Inc., Chicago. Similarly, Merrill Lynch Capital Fund /zigman2/quotes/202930755/realtime MACPX +0.89% , a "balanced" fund holding a mix of stocks and bonds, trailed peers in 1998 because of the value bent of its stocks.

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