News Analysis: Hail Morgan Grenfell, comeback kings
The asset manager sent reeling by the fallout from the Nicola Horlick and Peter Young affairs has returned to the top
Tuesday 27 April 1999
Unlike most of its peers, Morgan Grenfell beat the FTSE All-Share index in 1998, with its flagship pooled pension fund returning 16.4 per cent over the 12 months. It won pounds 5bn of net new business last year, more than any other major UK house - not bad at a time when active fund managers are under more pressure to match the performance of tracker funds. "People have certainly been surprised at how well they've done," said one competitor.
It's all a far cry from a couple of years ago when the prospects of Morgan Grenfell - then known as Morgan Grenfell Asset Management (MGAM) - had been all but written off by the investment community. MGAM was reeling from the double whammy of Nicola Horlick - the so-called Superwoman who left the amid claims that she was plotting to defect to a rival bank- and the Peter Young scandal.
Mr Young, one of MGAM's star fund managers, was suspended after a series of "irregularities" were discovered in a number of his funds. Deutsche, MGAM's parent, bailed out investors to the tune of almost pounds 200m, several MGAM senior managers were unceremoniously sacked, and Mr Young became the subject of a lengthy investigation by the Serious Fraud Office that still continues.
The speed of Deutsche's bail-out was one reason why the damage to MGAM's reputation was not as bad as feared. But it is only part of the story. According to management at Morgan Grenfell, there were at least two other reasons why the company was able to come back so strongly. First, internal measures - a lot of time and energy was devoted into persuading MGAM fund managers to stay. And second, solid investment performance.
Karl Sternberg, deputy chief investment officer at Morgan Grenfell, said: "We would have lost clients in large numbers if we'd lost fund managers in large numbers. But we didn't."
On investment performance, Morgan Grenfell profited from spotting a series of investment trends its major competitors failed to notice. The company realised early on that the so-called "new industries" such as pharmaceuticals were characterised by high entry barriers and clear sources of competitive advantage - both good news for earnings. Unlike many peers, Morgan Grenfell did not pile into more traditional UK industries, arguing that a combination of excess capacity and low inflation would harm their ability to generate quality earnings growth.
According to Mr Sternberg, Morgan Grenfell has also realised the limits of active fund management - the company only takes bets when it feels it can win. For example, it has refused to try to call the markets. Many UK fund managers - most notably Phillips & Drew - moved heavily into cash in the mid-1990s amid fears the bull run was about to end. Morgan Grenfell resisted the temptation, arguing it was virtually impossible to call the market at the right time. "One area where we have added value is that, unlike many competitors, we haven't made the cash call," says Mr Sternberg.
Other Morgan Grenfell peers - including Merrill Lynch Mercury Asset Management - have been criticised for failing to rein in their fund managers. Although Morgan Grenfell fund managers are allowed a degree of discretion, the key allocation decisions - such as the weighting given to cash or to bonds - is made by a central committee. Fund managers are only allowed to vary by 1 per cent from the committee's decisions.
However, Morgan Grenfell cannot claim all the credit for their recent solid run. Put simply, its competition - at least among UK active managers - hasn't been up to much. The other major houses - Mercury Asset Management (MAM), Gartmore, Schroders - have consistently underperformed. MAM is also struggling with the fallout from its spat with Unilever, which is attempting to sue MAM for its poor performance in 1997, while Phillips & Drew has seen its reputation tarnished by its move into cash.
Where does Morgan Grenfell go from here? It cannot count on continued underperformance from its rivals. Indeed, the signs are that Morgan Grenfell's competitors have already begun to get their act together. Mercury, for example, has won $8bn (pounds 5bn) of new business in the first quarter of this year, more than in any year before it was bought by the US bank Merrill Lynch.
Morgan Grenfell, like its rivals, is also going to have to contend with the growing competitive challenge from passive fund management. And, although the company's institutional reputation may be flourishing, retail investors are still wary - Peter Young's decision to appear in court to answer fraud charges dressed as a woman only served to remind retail customers of the scandal that engulfed the firm a few years ago.
But perhaps the most serious challenge facing Morgan Grenfell is its parent company's merger with Bankers Trust of the US. The uncertainty caused by the BT deal has caused all sorts of problems in other parts of Deutsche's franchise, but the asset management business has, at least until now, remained largely immune.
Publicly, of course, Morgan Grenfell is confident the merger will be nothing but good news. Privately, both inside and outside the firm, there are doubts about how well the risk-averse culture that pervades Morgan Grenfell will go down with the innovative and brash fund BT managers.
That said, if a company can successfully cope both with losing a fund manager with the profile of Nicola Horlick and with the fallout from the Peter Young scandal, dealing with a merger or two should, in theory, be a breeze.
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