Mercury buy puts Merrill back among the elite

Merrill Lynch's record-breaking purchase of Mercury Asset Management may create the third-largest money manager in the world, but it's one with a weakening position in the US, writes Katherine Burton.

Merrill's piece of the US retail mutual fund business has eroded in the past five years, and that's significant because the US is the largest money management market in the world. Five years ago, Merrill Lynch was second only to Fidelity Investments in mutual funds, with a 6.47 per cent share of the market. Today, its market share has slipped to 4.61 per cent, and Fidelity, Vanguard Group and Capital Group are ahead.

"Merrill has ignored money management in the past few years, with the result that it has to spend $5bn (pounds 800m) to become a player in a business it once owned," said Rich Chimberg, partner at ROI Research, a Boston- based consultant.

Merrill's purchase of Mercury, the largest-ever in the money management business in terms of price, catapults it to the highest tier of money managers in terms of assets under management, with the combined firm totalling about $450bn. It also helps build its institutional business overseas at a time when opportunities to manage pension money in Europe and Asia are growing. Almost all of Mercury's $177bn in assets is from pension funds and other institutions. Merrill has only $50bn from institutions. "Mercury automatically lets Merrill gain access to markets it wouldn't have entree to," said Peter Starr, a consultant at Boston-based Cerulli Associates. "The US will be a separate endeavour and they need to be creative there," he added.

In the US, Merrill's trouble isn't only that it's lost business to other mutual fund managers. It also makes less money on the assets it manages. As of 30 September, about 47 per cent of Merrill's $223bn from retail investors was in money market funds. That compares with 12 per cent of Vanguard's $323bn and 20 per cent of Fidelity's $466bn in retail mutual fund assets. The average stock fund produces fees of about 1.25 per cent of assets under management, while the average fund produces fees of 0.58 per cent.

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