Like many brokers that sell their own mutual funds under their own name, Merrill Lynch has been struggling to drum up sales. In the latest move, the Wall Street giant announced that it intends to change the name of Merrill Lynch Investment Management’s funds to—well, that has yet to be determined and won’t be until sometime in early 2006. (Morgan Stanley, with $430 billion under management, also recently announced that it was rethinking its name.) Some speculate that it’s just one way to gussy up Merrill Lynch Investment Management for its eventual sale (all or part). ML, of course, won’t comment, but it’s no secret that Merrill did explore the idea of spinning off MLIM and retaining a minority stake.
Even if the rumor of an eventual sale of MLIM is merely idle speculation, re-branding would distance the funds from its brokerage unit, a step that might encourage sales by competing brokerages. “For Merrill, about 95 percent of its sales come from its own brokers,” says Ross Frankenfield, an analyst with Financial Research Corporation. “The company needs to find ways to reach other advisors.”
Of course, strong performance attracts attention. But, like many other proprietary fund families, plenty of Merrill offerings are uninspiring. Merrill Focus 20, for example, has lagged 99 percent of its competitors during the past five years, according to Morningstar. Other funds that finished in the bottom half of their classes include Merrill Developing Capital Markets and Merrill Global Technology. But not all the results have been dismal. In the past two years, some Merrill offerings have produced healthy returns, and assets in all MLIM funds have actually grown by $4 billion to $60.9 billion, according to Financial Research Corporation. “Merrill has problems, but if you compare the two-year returns with the returns before that, you can see an improving trend,” says Arijit Dutta, a Morningstar analyst.
A strong performer lately has been Merrill Global Allocation, the company’s largest fund with $12 billion in assets. The world allocation fund has returned 10.7 percent annually during the past five years, outdoing 85 percent of its competitors. The global portfolio achieved net sales of $1.3 billion in the first 10 months of 2005. Portfolio manager Dennis Stattman aims to find undervalued assets, shifting between stocks, bonds and cash. Stattman is something of a contrarian, whose moves usually produce results. In 2002, he shifted into stocks, enabling the fund to profit when markets rose the next year. In 2005, the fund had a sizable stake in Asia, a move that produced sizable gains.
Some bond funds have also delivered healthy results. Merrill Core Bond, an intermediate-term fund, has outdone most of its competitors for four consecutive years. Currently holding $1.9 billion in assets, the fund attracted inflows of $224 million in the first ten months of 2005. The bond fund has produced steady results by focusing on categories that seem primed to deliver capital gains. In 2003, the fund shifted to high-yield corporate bonds. These rose as the economy recovered and investors worried less about defaults. Last year, many competing funds shifted away from long-term bonds. Such issues tend to suffer big losses when rates rise. But the Merrill fund stuck with its longer bonds. That proved to be a winning strategy when long-term rates stayed flat for much of the year.
While a few of the Merrill portfolios have been seeing strong sales, many more members of the fund family have suffered from outflows. The worst losses occurred at Merrill Basic Value, a fund with $7.8 billion in assets, which saw outflows of $986 million in the first ten months of 2005. But the fund may be stronger than it appears at first, says Morningstar analyst Karen Dolan. Merrill Basic Value has out-returned most of its competitors during the past five years. Dolan says that the fund focuses on very big stocks. That has been a disadvantage in recent years when markets favored smaller issues. The Merrill fund could thrive when megcaps come back in fashion. The portfolio also has a relatively low expense and turnover ratios, says Dolan. “The returns have looked middling, but there are some clear advantages that could help going forward,” she says.
For years, Merrill has been trying to turn such funds from also-rans into top sellers. Perhaps under a new name, the funds will stand a better chance of succeeding.
|Merrill Lynch funds with competitive returns|
|Name||Ticker||category||1-year||3-year||5-year||% category rank 5-year return|
|Basic Value A||MDBAX||large value||5.7%||12%||5.2%||41%|
|Core Bond A||MDHOX||intermediate Bond||2.0||4.0||5.6||46|
|EuroFund A||MDFEX||Europe stock||10.7||17.7||6.0||45|
|Global Allocation||MDLOX||world allocation||10.8||17.9||10.7||15|
|Fundamental Growth||MDFGX||large growth||13.5||12.0||-2.6||42|
Source: Morningstar. Returns through 11/30/05.