It's still the main MAM in the City
Mercury Asset Management's methods are unconventional, but it remains the stock-picker to follow;
Sunday 13 October 1996
Its cultivation of a colourless anonymity has led to a life under the microscope. Its choice of stocks to buy or sell is scrutinised by competitors; companies who find them on their share register often have a sinking feeling that the only reason MAM is on board is in anticipation of a bid for their business.
Certainly the professed aim of the firm is to identify stocks that are undervalued, which often means the company is a likely takeover candidate.
Of necessity, it also means that MAM does not track the index but instead hopes to outwit it. To do so, its stakes in companies also have to be sizeable. The best example of this was Granada's takeover of Forte, in which MAM owned a 15 per cent stake.
The decision of vice-chairman Carol Galley, who has honed MAM's tactic of taking substantial stakes in a business, was crucial to the bitterly fought bid.
Because its influence can be decisive, detractors say it holds too much sway over the companies in which it invests; its tactics have - in a notoriously conservative business - upset rivals and angered many in the Square Mile.
A cynic might say it must be getting something right. And its role and influence places it bang in the middle of some of the most critical debates on the welfare of UK plc: long termism versus a quick buck, corporate governance and executive pay packets.
What is unquestionable is its management's ability to generate better than average returns for its clients. That much is evident from its share price, which has grown more than fivefold since it was floated in 1987.
Much of MAM's success can be traced to its origins, as the fund management arm of SG Warburg, the merchant bank taken over last year by Swiss Bank Corporation. After the demise of Warburg, MAM gained complete independence. Its new freedom also makes it a takeover target itself, giving its shares an added attraction.
A measure of a fund manager's ability is growth in funds under management. Success - measured by the simple criterion of performance - begets more success. In most sectors, over long periods of time, Mercury consistently appears in the upper quartile of fund manager performance for most of its funds. Figures compiled by statisticians Hardwick, Stafford Wright show that in the all-important UK pension fund market, Mercury funds are usually in the top band over the long run.
For its 1996 results, funds under management stood at pounds 81bn - a rise of 27.6 per cent rise from the pounds 63.5bn at the 1995 financial year-end. In 1992, funds under management were only pounds 40bn. These figures can be misleading in that they include the growth in value of the funds. Net new business in 1996, for example, was pounds 3.3bn, with a first half enfeebled by uncertainty after the demerger from Warburg.
The collegiate, highly disciplined management style inherited from Warburg colours every aspect of how the business is run. Fund managers cover a sector, where they are expected to be expert and conduct their own research. Every two years, however, they have to start all over again in a new sector.
The official reason is that it provides a fund manager with a constant training programme. It also gives him or her a far broader-based understanding of the market as a whole. Unofficially, it also prevents a fund manager from becoming too cosy with any one company in his or her portfolio. Personal attachments to a company are frowned on. It also lessens the chance of the manager developing an over-close relationship with the stockbrokers.
As one chief executive of a small leisure company in which MAM has a significant stake said: "Visiting them is a different experience from other fund managers. They put you through the hoops and they always seem to come up with a couple of questions the others never ask."
Good growth looks like it can continue at the company, helped by slip ups at some of its rivals. MAM has begun an assault on a new sector of the UK pensions market: defined contributions schemes. It expects this to represent the bulk of pensions business in the years ahead and already has a head start over many of its rivals.
There are two downsides for the company. One is the market, where a correction of some sort over the next six months looks ever more likely - and shares in financial companies would suffer more than most. The other is that it can become a victim of its own success. As the funds it manages grow, there is less room for the nimble manoeuvring that allows it to identify and capitalise on undervalued stocks. As it grows bigger, the size of such stakes, and the availability of companies that fits its profile, diminishes. There is no evidence as yet that this is a problem.
On a yield of 4 per cent, and a forward p/e of around 16 times for 1997 earnings, the shares carry a premium to the market. If one is looking to buy into the skills and attributes of a management team, then it seems that MAM still rules the roost in the City. The shares remain a long-term buy.
Mercury Asset Management
Share price 1,117.5p
Prospective p/e 16.2*
Gross dividend yield 4%
Year to 31 March 1994 1995 1996 1997* 1998*
Turnover (pounds m) 221.5 255 286 332 365
Pre-tax profits (pounds m) 109.5 111.5 140.4 162 175.2
Earnings p/s (p) 42.9 43.1.1 53 60.9 64.7
Dividend p/s (p) 22.5 26 35 40 43
*NatWest Securities forecasts
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