MAM shares hit by fears of weaker growth

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Mercury Asset Management reported a 22 per cent rise in pre-tax profits in the year to March but disappointed the City with a warning that its strong growth over the past 10 years might not be sustainable. MAM's shares reversed their recent powerful run as investors who had expected a share buyback were also let down.

Hugh Stevenson, chairman, said MAM had achieved compound earnings growth in the 10 years since flotation of more than 20 per cent a year, but added: "Shareholders cannot necessarily expect these rates of growth to be sustainable in the future."

His comments accompanied a rise in pre-tax profits from pounds 140.4m to pounds 171.3m, boosted by a sharp rise in the company's average funds under management during the year from pounds 71.8bn to pounds 85.5bn. New mandates during the period amounted to pounds 5.3bn, with the pounds 3.3bn attracted in the second half equal to the total for the 12 months to March 1996.

Mr Stevenson's caution was mirrored by Carol Galley, deputy chairman, who said MAM had increased the overall proportion of cash and bonds in its portfolio of assets over the past year.

MAM's shares, which have been among the financial sector's best performers, tumbled 69.5p to 1,372p as the market focused on the relatively cautious statement and a sharp rise in the company's operating costs. Increased spending on internal systems, the consolidation of MAM's subsidiary in Australia and higher performance bonuses pushed costs up from pounds 170m to pounds 220m.

The rise in costs confirmed the high price of retaining talented staff. Attention had focused on that issue earlier in the week when it was announced that a senior MAM fund manager, John Richards, was to set up a fledgling investment business for Societe Generale, the French bank.

MAM's strong new business figure was buoyed by the UK and Japan, where the company is hopeful of benefiting from the opening up of that previously closed market to foreign firms. Growth also came from portfolio restructuring fees and significantly higher performance- related fees thanks to the stock market's strong run last year.

Announcing a bigger-than- expected dividend payout of 45p a share, up from 35p last year, Mr Stevenson suggested that higher regular dividend payments would be MAM's preferred way of returning excess capital to shareholders.

He defended the company's apparently high shareholders' funds, which rose during the year from pounds 237.3m to pounds 284m, as insurance against the possibility of a disaster such as the Peter Young affair that cost Morgan Grenfell Asset Management pounds 450m last year.

Mr Stevenson said MAM had success in attracting defined contribution business. Increasing numbers of companies are adopting defined contribution, or money purchase, schemes because they are unwilling to face the high cost of defined benefit schemes, which link pensions to employees' final salaries.

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