Growing pains for tough little sister

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LAST YEAR it was 39 per cent, the year before 42 per cent and in the most recent half-year, the one to 30 September 1992, it was 56.5 per cent. It is the percentage of the group pre-tax profits of S G Warburg contributed by Mercury Asset Management, its 75 per cent-owned subsidiary.

The importance of the fund manager to Warburg is often underestimated. While Warburg has striven to become the most influential merchant bank in the UK, MAM has quietly achieved that honour in fund management. Though its total funds under management - pounds 42bn - are pounds 10bn less that the Prudential's, the growth of MAM's portfolio (more than doubling in five years) and the way it has been managed make it equally or even more important than the Pru in the UK. MAM is an active manager. It aggressively manages its assets, regularly visiting the management of companies in which it has an interest. As it showed when it voted against Boots's decision to bid for Ward White or when it led a revolt to oust Sketchley's management, it is not afraid to act on its principles.

Through Mercury Specialist Management it created one of the most successful special situation funds. Its style of investing, where it would take large, declarable holdings in fewer companies, rather than the small investments traditionally preferred, has influenced many rivals, notably current high-flyers Phillips & Drew, Morgan Grenfell and Schroder.

But has a wheel come off MAM's wagon? Its performance in 1991 was below par, and the (yet to be published) 1992 performance is not expected to win any awards. Its last two sets of results revealed embarrassing losses on two investments taken on MAM's own book, as well as its clients. Both investments - Isosceles and Jupiter Tyndall - were clients of S G Warburg, but MAM is adamant that there were no breaches of the strict Chinese wall between it and Warburg.

More worrying, in the last couple of years the group has seen three main board directors - Leonard Licht (vice-chairman and head of Mercury Specialist Management), James Dawnay (head of Mercury Fund Managers) and Richard Bernays (head of Mercury Life Assurance) - and another senior fund manager, Nicola Horlick, leave to join smaller firms. Peter Stormonth Darling, MAM's charming chairman, has retired to be replaced by Hugh Stevenson, who until recently was head of group services at the merchant bank.

Stephen Zimmerman, MAM's deputy chairman, insists the departures have not weakened the management. 'Only one of the directors lost was involved in the investment process, the other two were fulfilling other functions. It is one of the penalties of having been a successful business for a time that we attract headhunters.'

But Leonard Licht was quite a loss. MAM's top management is virtually a family. Zimmerman, Carol Galley, who runs the UK institutional business, and David Price, the deputy chairman in charge of operations, have all been at MAM for more than 20 years, as had Licht. He created the Mercury Specialist Management side and was cited by some clients, notably GEC, as the reason they came to MAM. Zimmerman acknowledges the loss, but says it creates opportunities for bright subordinates and new recruits, such as Mike Geering, former head of research at stockbrokers James Capel.

MAM faces other challenges. It recognises its growth in the UK pension fund market cannot be sustained, and had hoped to grow in Europe and Japan. But the former has not developed as fast as has been hoped and the latter is on hold.

So, like its sister company, it is looking to the US. But it is less reluctant to purchase something there, and has pounds 100m to play with. Meanwhile, MAM is developing new business strengths, such as in bonds - where it has an astounding pounds 11bn under management - charities and international private clients. None provides a satisfactory answer, and MAM's success is threatening to become a burden.

(Photograph omitted)