Merrill's Global Money Magnets

Galley and Zimmerman are building a global fund business

Not long ago, a reporter arrived behind schedule for lunch with two senior British investment bankers. But when he explained that "Carol Galley kept me late," the bankers' irritation vanished. Instead, they demanded to know what Galley had to say about the markets.

In the City of London, Galley, 49, is perceived with something approaching awe. Probably the most prominent businesswoman in Britain, the elegant Galley has made a name for herself as a savvy stock-picker whose investment decisions have been known to determine the fate of entire companies. It's Galley's cachet that has helped build Mercury Asset Management Group PLC into Britain's premier fund manager (table, page 51). "Mercury has strength and depth," says Peter A. Murray, chief executive of the British railways pension system, who entrusts $7.3 billion to Galley and her colleague, Stephen A. Zimmerman. "They can outperform in almost any equity market."

Galley enhanced her reputation last year when she and Zimmerman, also 49, sold Mercury to Merrill Lynch & Co. for $5.2 billion. At 25 times earnings, it was a fat price to pay for a British fund-management house--even one that was founded by the legendary Siegmund Warburg. But Merrill didn't just buy this elite manager to handle mutual funds and pensions in Britain. It sees Mercury as its ticket into the lucrative business of fund management around the globe. The fast-growing asset-management markets of Europe and Japan alone could amount to $9 trillion in a few years. "This is an enormous opportunity," says Jeffrey M. Peek, president of Merrill's asset-management unit.

Merrill has named Galley and Zimmerman co-heads of its global institutional money management arm in hopes that they will turn into the fund-manager gurus and rainmakers that the investment bank has lacked. Merrill already has $1.4 trillion in clients' accounts. But it has given the Britons a key role in its plans to bring out families of mutual funds in the U.S. and abroad.

TUT, TUT. Galley and Zimmerman joined Mercury in 1971 and have collaborated closely for years. Zimmerman was deputy chairman before the sale, handling business strategy, and Galley, as vice-chairman, presided over the inner workings of the firm and kept clients happy. Immediately after the sale, there was some tut-tutting that Galley and Zimmerman, who earned an estimated $16.5 million and $23 million from the deal, respectively, had been interested mainly in cashing out. However, the pair have attacked their new challenge with enthusiasm. They say they want to double the sum that Merrill Lynch Mercury Asset Management--their firm's new name--has under its umbrella, to roughly $500 billion in four or five years. That would put Merrill in the elite club of asset managers, including Fidelity Investments and Switzerland's UBS, that are expected to dominate international fund management in years to come.

To put the strategy in place, Galley and Zimmerman have been shuttling between London and New York for skull sessions with Merrill's hometown brass. The missions have already spawned several projects. In the U.S., Mercury is creating a global and a European equity mutual fund that Merrill can offer to wealthy investors this fall. Merrill is hoping that the mutual funds will pull in about $1 billion. Galley and Zimmerman have also taken charge of Merrill's $50 billion U.S. pension business in hopes of broadening its current base of bonds and international equities.

But Merrill's big targets are Europe and Japan. After years of being nearly off-limits to foreign money managers, Japan is finally opening its doors to foreigners to help oversee the country's $10 trillion in household savings. Zimmerman figures that foreigners could be managing $1 trillion by 2002. Mercury came to Merrill with a strong foothold managing pensions for 25 of the top 50 Japanese companies. But the new Mercury has added some $3 billion this year, bringing its total to $11 billion. Mercury also collaborated on a crash project with Merrill's retail mutual-fund arm earlier this year to create 17 funds for the Japanese market. Invested in global equities and bonds, the funds will be sold through the 33 offices that Merrill picked up in February from the wreckage of failed Yamaichi Securities Co.

TARGET: EUROPE. Merrill sees similar opportunities in Europe. Its $9 trillion economy is even bigger than that of the U.S. But the Continent's private-pension and mutual-fund industries are still in their infancy. The leading British pension-fund manager, with $125 billion in corporate retirement assets, Mercury is gearing up for an assault on the Continent. Drawing on Merrill's knowhow, Galley and Zimmerman are zeroing in on Europe's moves to get workers into defined-contribution pension accounts similar to America's 401(k)s. They're also beefing up their mutual-fund marketing teams in anticipation that German and French investors will make a shift from domestic investments to European funds once a single currency arrives next year.

Despite Merrill's--and Galley and Zimmerman's--lofty ambitions, becoming a global winner is far from guaranteed. More than half of Mercury's assets remain in Britain, a mature market where competition is on the rise and Mercury hasn't much room to grow. And Mercury has trailed in selling funds to individual investors, one of its chosen global growth strategies. Domestically, it's the top pension-fund manager, but it is only fifth in retail funds.

Mercury has also suffered some corporate client defections after a less-than-stellar record in some funds lately. Over the past 12 months, its $8.4 billion Mercury MFS pooled fund ranked 49th among 66 peers, returning 16.9%, vs. a median of 19.8%, according to Combined Actuarial Performance Services Ltd., a pension consultant.

Galley and Zimmerman say that Mercury's returns have recovered. But some companies are beginning to transfer their pension funds from Mercury and other active fund managers into cheaper index funds or accounts run by better-performing American competitors, such as Capital International, J.P. Morgan, and Fidelity International. Still, if Mercury's global strategy is successful, its travails in the British market will seem insignificant only a few years from now. And Mercury's stock-picking skills may come back into favor in a tougher market. Meanwhile, where is Mercury investing its money? It's underweighted in U.S. and Asian stock markets and overweighted in European equities and bonds in Western industrialized countries. Galley adds that with their management responsibilities growing, she and Zimmerman miss the hands-on feeling of running other people's money. But they have an even bigger job now: turning Merrill into a global brand name in fund management.

Before it's here, it's on the Bloomberg Terminal.