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Morgan Stanley's asset management arm was supposed to bolster the firm's bottom line when deal making lagged. Now it needs help, too. Can CEO Mitch Merin provide it?

Morgan Stanley's asset management arm was supposed to bolster the firm's bottom line when deal making lagged. Now it needs help, too. Can CEO Mitch Merin provide it?

By Rich Blake
November 2002
Institutional Investor Magazine

CEO Richard Worley and the 19 other partners of Miller, Anderson & Sherrerd faced an agonizing dilemma. It was the winter of 1995, and Miller Anderson had grown in 26 years into one of the most respected names in institutional money management, a top-notch bond shop with $33 billion in assets. But investment fees were coming under pressure from intense competition, and the money management industry was relentlessly consolidating. Worley's 200-person West Conshohocken, Pennsylvania, firm found itself caught betwixt and between: Much as the partners would have preferred to remain independent, Miller Anderson was too big to operate as an investment boutique but too small to take on the emerging industry behemoths.

So Worley placed a call to James Allwin, the merger banker who had just been named CEO of Morgan Stanley Asset Management. "We saw Morgan Stanley as a perfect fit, strategically, culturally and philosophically," recalls Thomas Bennett, one of the original Miller Anderson partners. "It was Morgan Stanley or no one."

Conveniently enough, Morgan Stanley was in the midst of building up its money management arm -- assets at the time were only about one eighth of what they are today -- in the expectation that it would serve as a dependable grinder-out of revenue to counterbalance the firm's more lucrative but also more volatile investment banking business. M&A specialist Allwin's brief was to grow by acquisition.

Culturally, the off­Main Line Miller Anderson and the blue-blooded Morgan Stanley were two white shoes off the same rack (although Worley's penchant for hanging startling avant-garde art in Miller Anderson's campuslike offices was perhaps a bit over the top).

Most important, the two firms agreed philosophically that the best way for Miller Anderson to manage money, and for Morgan Stanley to reap the benefits of the firm's expertise, was to let it operate autonomously. This reassured the Miller Anderson partners. And it was reflected in a very reasonable sale price, as was Miller Anderson's relatively high proportion of fixed-income assets -- two thirds of its total -- which produce less fee income than equity assets. The $350 million purchase price represented just 1.1 percent of Miller Anderson's assets under management, versus an average of 2.3 percent for sales of money managers at the time.

Pleased to have found such a compatible partner but wanting to play it safe, Morgan Stanley locked the 20 Miller Anderson partners into five-year contracts. Of the $350 million, three quarters was in cash and one quarter in Morgan Stanley stock, paid in equal installments over five years.

That prenuptial agreement expired in January 2001, and today 15 of the original 20 Miller Anderson partners no longer work for Morgan Stanley.

Where did this model marriage go wrong?

One disgruntled client explains it this way. "The first couple of years after Morgan Stanley bought Miller Anderson, they left the operation alone, and things were fine," says Robert Hyer, deputy treasurer of the $140 million Tulsa County Employees Retirement System. "But then they started to integrate Miller Anderson more and more [into Morgan Stanley's overall money management operation], and finally, earlier this year, the place started falling apart." This spring Tulsa dropped Morgan Stanley from a $17 million large-cap core account.

"Falling apart" is a harsh term, but Morgan Stanley undeniably faces a welter of grave problems in money management. Veteran portfolio managers are stalking out the door: More than 30 out of some 200 have left since January 2001, most in the past 12 months. "Morgan Stanley has had an alarming amount of investment professional turnover," notes Sheila Noonan, director of manager research at consulting firm CRA RogersCasey in Darien, Connecticut. "We want to see if there is something systemic at play here."

Performance still shines in some areas, such as foreign stocks, but it is mediocre or just plain lousy in too many others. Of the 34 separate-account products that Morgan Stanley sells to institutions, 18 are trailing their benchmarks this year. The firm's core-plus fixed-income portfolio -- at $10 billion, Morgan Stanley's second-largest institutional product after international equity -- lagged behind its benchmark by a full percentage point through August. This was after solidly beating the Lehman Brothers aggregate index for eight of the past 11 years. The small- to midcap equity portfolio plunged 30 percent last year, while its benchmark lost 20 percent. Only 33 of Morgan Stanley's 100 mutual funds carry four- or five-star ratings from Morningstar, compared with 65 percent for T. Rowe Price Group and 46 percent for Fidelity Investments.

Still tenth on Institutional Investor's list of the 300 largest U.S. money managers, Morgan Stanley has seen its assets under management ($424 billion as of August) decline at an alarming rate -- one much faster than can be justified by even the grim state of global stock markets. Total assets have dropped 10 percent since the start of 2001, compared with an average of 5 percent for a universe of 14 big publicly traded asset managers tracked by Salomon Smith Barney. In the first nine months of this year, the 14 firms, including Alliance Capital Management, BlackRock and T. Rowe Price Group, suffered an average net asset outflow of $430 million, or 1.2 percent of their long-term retail fund assets. For Morgan Stanley the outflow was $4.6 billion, almost 4 percent of long-term retail assets. Only retail mutual fund houses Janus and Amvescap experienced worse outflows ($8.5 billion and $6.2 billion, respectively). Franklin Resources, the largest money manager in the group ($152 billion), reported an inflow of $3.8 billion.

Many clients clearly are abandoning Morgan Stanley. The firm has lost at least eight significant institutional accounts, totaling $1.5 billion, in the past 12 months -- including a $600 million mandate from the Federal Reserve Board that dates back 20 years.

Morgan Stanley's travails, in fact, do seem especially severe on the institutional side, which supplies about $172 billion of the firm's assets, or roughly 40 percent. Here, a firm's reputation for the integrity of its investment process, the quality of its client service and the stability of its professional staff is critical -- and surprisingly fragile.

Plan sponsors are worried that Morgan Stanley may be concentrating too much of its energies on its retail business and giving short shrift to pension clients. "You'd almost think," says a veteran marketer at a rival firm, "that Morgan Stanley was giving up on the traditional defined benefit business." In the scornful phrase used by some former Morgan Stanley investment executives, Morgan Stanley Investment Management, the umbrella asset management business, is being "Dean Witterized," a derisive reference to Dean Witter Reynolds, the onetime Sears, Roebuck & Co. brokerage that acquired Morgan Stanley in 1997.

Don't dare, however, use the term "Witterization" around the current president of MSIM, Mitchell Merin. "There are people who have wondered about our commitment to the institutional business," he says coolly. "Look at it this way: If you're not serving the toughest clients -- institutions -- in the best possible way, you won't succeed in any other channel. So the reality is, we couldn't be any more committed to the institutional business."

Personable, well-spoken, a quick study and persuasive advocate, Merin nevertheless faces a daunting challenge in convincing not only clients and consultants but also Morgan Stanley's own portfolio managers and marketers that the investment bank has a commitment to money management, particularly for pension plans and other institutions.

"This is a firm with deep problems," says Michael Rosen, a founder of Angeles Investment Advisors, a Los Angeles­based pension consulting firm. Adds CRA RogersCasey's Noonan, "We are looking into Morgan Stanley very closely."

For Merin as well as for Morgan Stanley Investment Management, the stakes in turning the asset manager around are high. Merin has been a close ally of Morgan Stanley CEO Philip Purcell ever since the two of them orchestrated the launch of the Discover Card back in 1985. And as one of a handful of executives in Purcell's inner circle, Merin, 49, is in the running to succeed the 59-year-old Morgan Stanley chief -- provided he succeeds with MSIM.

"We've been whacked around some in the press," Merin concedes, "but we sincerely believe that we start each day with an edge over our competition. I'm talking about intellectual capital, information sharing, research, resources, commitment. We are poised for tremendous growth."

Merin's optimism, paradoxically, largely emanates from the same source as the doubters' skepticism: his massive reorganization of Morgan Stanley's grab bag of asset management businesses at the end of 2000. The firm had grown its money management operation aggressively by spending some $1 billion to swoop up two firms in the space of 12 months between 1995 and 1996, growing assets by $90 billion. The Dean Witter merger added a further $70 billion. Each operated, like Miller Anderson, more or less as a separate entity.

What Merin did that has proved so controversial was drag together the firm's four distinct money management divisions into a single structure. There was Miller Anderson, best known for its prowess in fixed income, and Morgan Stanley Asset Management, well regarded for its international equity expertise, as the institutional managers; on the retail side were Van Kampen Investments, a fund family with middling performance that sold its products through brokers, and MSDW Advisors, a predominantly money market fund manager formerly known as Dean Witter InterCapital. The resulting consolidated operation -- renamed Morgan Stanley Investment Management to emphasize the new coherence -- has 3,600 employees, including 400 investment professionals, spread over nine cities around the globe.

By one important standard, the overhaul was an unqualified success. Eliminating staff duplication and other obvious economies produced, by one estimate, instant savings of $150 million, a significant 10 percent cut in the money management operation's expenses last year. About 100 people lost their jobs, and more layoffs are likely.

CEO Purcell and other top Morgan Stanley officials appreciated Merin's bow to the bottom line. The lackluster investment banking and brokerage business contributed 70 percent to the firm's revenues in the third quarter, compared with 80 percent during the boom years. MSIM kicked in 12 percent of third-quarter revenues, versus 8 percent at the height of the tech bubble in 2000's first quarter, when deal making was flourishing. Still, that was less than the 15 percent on average that prevailed for most of the 1990s. In a tough market asset management has proved to be something of a disappointment.

MITCH MERIN HAS LONG SHOWN A knack for parsing numbers and pleasing his superiors. Born into an upper-middle-class manufacturing clan in Hartford, Connecticut, he might well have followed his father into the family business -- designing and making women's coats under the Merin Brothers label -- but just as he was coming of age in the mid-1970s, the New England textile industry began to unravel. So after Trinity College (class of '75), Merin went off to Northwestern University to earn an MBA in finance and accounting.

After graduating in 1977, he landed a job in Chicago as an auditor for Touche Ross, then one of the Big Eight accounting firms, and on his first day was assigned to the firm's biggest account: Sears, Roebuck & Co. In May 1981 Merin joined the retailer as a manager of financial analysis.

Later that year the floundering Sears bid $607 million to acquire Dean Witter Reynolds, the nation's fifth-largest brokerage, on the quixotic theory that if a mass merchandiser knew how to sell socks, it ought to be able to market stocks. As a junior member of the team that conducted the financial analysis of the deal for Sears, Merin came to know a rising star at the mass merchandiser -- senior vice president for corporate administration Philip Purcell.

Purcell had joined Sears three years before, after an 11-year stint at consulting firm McKinsey & Co. Once the Dean Witter deal closed, Purcell took on the task of growing Sears' financial services business. His great inspiration came a few years later when he decided there might be money to be made in introducing a brand-new all-purpose credit card.

This was rash even for an ex-McKinseyite. It was an article of faith that no company could profitably launch a card to rival American Express, Mastercard or Visa. Nevertheless, Purcell persuaded Sears to come out with the Discover Card. In a further heresy, when the black-and-orange card was rolled out in 1985, it carried no annual fee and offered cash rebates to customers.

Funding the launch was equally unorthodox. As a brokerage firm rather than a full-service bank, Dean Witter didn't have access to deposits to underwrite the card's cost. So Purcell assigned Merin to explore alternative financing sources. Ultimately, Merin helped craft an ingenious plan to sell certificates of deposit through Dean Witter brokers and securitizations of future credit card receivables to institutional money managers.

The Discover Card turned out to be a personal triumph for Purcell and a welcome corporate success for Sears. Within just two years the business was profitable, and last year Discover earned $702 million on $3.6 billion in sales.

Upon becoming CEO of Dean Witter in 1986, Purcell, in one of his first acts, named Merin treasurer. Merin's critical mission was to serve as a vital link between Purcell and Sears' executives. "Mitch could speak the Sears language," remembers Christine Edwards, former general counsel for Dean Witter and now chief legal officer at Bank One Corp. in Chicago. "He had a way of getting them to understand our initiatives, and that made him extremely valuable to Phil Purcell. He's the kind of guy you love to work for because he knows exactly where he's going and how he's going to get there."

In 1993 Sears spun off its financial services operations into a new entity -- Dean Witter, Discover & Co. -- headed by Purcell. Within a year he had named Merin his chief administrative officer and chief strategist. The appointment solidified Merin's elevation to Purcell's inner circle. "Purcell surrounded himself with a club of guys he could trust deeply, and Mitch became a senior member of the club," says one former Morgan Stanley executive.

In the fall of 1994, Purcell asked Merin to identify companies that might be a good fit with Dean Witter. Since the firm was a domestic retail broker, the ideal partner, Purcell believed, would be a global institutional player.

Morgan Stanley was cut to fit the pattern. The grand ambition of the prospective merger was to leverage each firm's strengths -- Dean Witter's muscle for distributing investment products and Morgan Stanley's talent for designing them -- to command a larger "wallet share" of customers' money.

Formal talks with the investment bank got under way in June 1995. Merin was one of only three Dean Witter executives -- the others being Purcell and planning director Andrew Schoder -- who met with Morgan Stanley's senior team, consisting of president John Mack, CFO Philip Duff and vice president of strategic planning Stephen Belgrad. Their talks broke off in early 1996 but were revived in December of that year. On the morning of February 5, 1997, Mack and Purcell announced their $10 billion deal.

Purcell was named CEO of the newly formed Morgan Stanley, Dean Witter, Discover & Co., and within a few weeks he had installed Merin as CEO of MSDW Advisors, the parent company's proprietary retail business, which encompassed mostly the Dean Witter funds. Ten months later, in December 1998, Purcell appointed Merin president of Morgan Stanley's money management business.

Merin had neither managed money nor marketed investment products. But Purcell had confidence in his analytical and leadership abilities. He also liked the fact that Merin was not steeped in the money management culture and so would be more amenable to making changes. "He will take our asset management business to the next level," the Morgan Stanley CEO declared.

Merin was quick to grasp that the money management operation's eclectic character grew out of its history and that to master the business you had to understand how it had evolved. For an investment bank Morgan Stanley has a comparatively long history in asset management. In 1973 the firm hired a 40-year-old hedge fund manager named Barton Biggs to start a research division.

With May Day -- the May 1, 1975, abolition of fixed brokerage commissions -- looming, Morgan Stanley had decided to go with the expected cash flow and diversify into capital markets activities. Biggs, who is today 69 and Morgan Stanley's chief global strategist, urged his bosses to set up an asset management unit. They were leery. Start with research, they told Biggs, and then maybe we'll consider it.

Biggs, displaying a lifelong trait, was persistent, and in 1975 he was given the go-ahead to create Morgan Stanley Asset Management, chiefly to handle the few accounts that he had brought over from his hedge fund. "It was not until 1979 that we decided to get serious about institutional money management," Biggs recalls. His superiors initially feared that asset management could damage the more critical, and more profitable, investment banking operation: What if banking clients lost money in Morgan Stanley portfolios and got so peeved that they took their underwriting and merger business elsewhere?

But, having largely assuaged those qualms while playing up how asset management could stabilize the firm's wavering bottom line, Biggs was allowed to recruit portfolio managers and build an institutional sales team to cross-sell money management services to Morgan Stanley's blue-chip corporate clients.

The firm was not, however, inundated with assets. In 1981 this leading investment bank barely made its way onto Institutional Investor's ranking of the 300 biggest U.S. money managers, taking the 279th spot, with $910 million under management. The asset inflow picked up some during the ensuing decade, largely because of Morgan Stanley's outstanding performance in foreign stocks: From 1986 through 1991 MSAM's international equity portfolio grew 16.6 percent annually, versus 8.7 percent for the Morgan Stanley Capital International Europe, Australasia and Far East index. The firm entered the 1990s with $30 billion in hand, ranking it 42nd on the 1991 II 300.

Assets continued to mount, but too sluggishly for Morgan Stanley ever to reach the critical mass to be a serious player in money management. When merger banker Allwin took over asset management in 1995 with a mandate to build the business, the firm had assets of $52 billion, putting it 64th on the II 300. Adding Miller Anderson's $33 billion pushed up the total by almost two thirds. And in October 1996 Morgan Stanley harvested an additional $57 billion in assets by paying $750 million for Van Kampen/American Capital, as it was then known.

Money managers like to say you can't time markets, and the Van Kampen deal is a case in point. The Oakbrook Terrace, Illinois­based retail fund manager's expertise in value investing turned out to be a liability for Morgan Stanley during the growth-stock bonanza, and Van Kampen's assets under management grew at less than 3 percent a year at a time when the stock market was experiencing double-digit annual returns. The 1997 Dean Witter­Morgan Stanley merger added New York­based fund family Dean Witter InterCapital to the fold.

All this expansion was bound to produce growing pains, and they proved to be intense. In the wake of the collapse of the Russian ruble and the meltdown of hedge fund Long-Term Capital Management in 1998, Morgan Stanley Asset Management lost more than $200 million in an emerging-markets debt fund. The debacle was worse than merely embarrassing: MSAM had to make good on investor losses, contributing to a 5 percent drop in Morgan Stanley's net income for the third quarter of 1998.

Allwin, who had the misfortune to have been on the bridge when the fund imploded, resigned in November. Two weeks later Merin took the helm of a shaken organization.

He found himself plunged immediately into the role of peacemaker to broker a truce between Van Kampen and MSDW. The two retail units had erupted into civil war over obtaining shelf space in the parent's distribution system. Before Van Kampen was acquired by Morgan Stanley, it had sold its load funds through brokers. But these brokers were now loath to peddle funds that even indirectly bore the imprimatur of a formidable rival brokerage like Morgan Stanley. What's more, Duff, the ex­Morgan Stanley investment banker and CFO who had helped negotiate the Dean Witter merger, had quit as president of Van Kampen in September 1998 to join hedge fund Tiger Management Corp.

Merin never quite concluded a peace -- the feud still simmers. But for the MSIM chief, the shelf-space imbroglio drove home what his history lesson had already taught him: Morgan Stanley's four main money management units -- Morgan Stanley Asset Management, Miller Anderson, Van Kampen and MSDW -- saw themselves as essentially independent. Each business had its own investment products, distribution channels and client bases; each had its own vending relationships, back-office and trading systems, technology infrastructure and sales and marketing teams. In asset management Morgan Stanley wasn't a firm, it was a federation.

Merin's overwhelming instinct was to combine the divisions into a single organization to share resources, reduce expenses and prevent intramural squabbles. "It was either integrate or disintegrate," says MSIM chief investment officer Joseph McAlinden, a Rutgers University graduate who spent ten years as a portfolio manager at Dillon Read & Co. before joining Dean Witter InterCapital as CIO in 1995.

The potential savings seemed too immense to ignore, particularly after the bear market settled in during the summer of 2000. "It made too much sense [not to do it]," Merin says. Although no single unit offers a complete array of products and services, he says, "taken together we create a robust product line that cuts across every distribution channel."

So that September he called together 150 portfolio managers from the four asset management subsidiaries for a three-day retreat in Brazelton, Georgia, the small town made famous when actress Kim Basinger purchased it in 1989. Billed as a chance to get to know one another, the meeting was the first time representatives of all four units had assembled in one spot. Merin had already spoken to managing directors on the institutional side about the integration plan. But not until his closing remarks on the final day did he reveal to the portfolio managers that he intended to merge the four money management groups into a single global entity.

"The reaction to the speech was uncertainty," says Eugene Flood, a former MSAM quantitative equity manager who is now CEO of fixed-income manager Smith Breeden Associates. "At MSAM we operated with considerable independence. There was going to be much more coordination and centralized management, so we weren't sure how that would impact the existing teams."

Merin and McAlinden set up seven investment teams spanning all four asset management units and covering more than 30 products. They decreed that there would no longer be separate managers for institutional and for retail products. "We wanted best of breed, regardless of where the people were physically located," McAlinden explains. "The goal was to build a single investment manufacturing plant."

Such a retail-institutional synthesis has become an increasingly common structure among investment banks and insurers that own money management operations. Nonetheless, it unsettled many of Morgan Stanley's institutional portfolio managers, who took pride in their special status. "A lot of people did not want to be seen as retail fund managers," says one former Morgan Stanley portfolio manager.

Others found the changes jarring. Suddenly, everything seemed to be in a state of upheaval. For instance, fixed-income portfolio management teams from all four units were consolidated into one, with headquarters at Miller Anderson's offices and veteran Miller Anderson manager Bennett in charge. Some $17 billion in fixed-income assets were shifted over to the new team from other units; portfolio managers were allowed to remain where they were. Meanwhile, a U.K. fixed-income operation at MSAM and a team of onetime Dean Witter bond managers were shut down. Some portfolio managers quit; others were fired. Six other MSIM investment product groups were also created. The firm names were all scrapped, although Van Kampen endures as a retail fund brand.

Merin made a persuasive case for the reorganization. Still, many portfolio managers decided to leave. Among those who departed were Kenneth Dunn, a senior portfolio manager at Miller Anderson, who left to become dean of Carnegie Mellon Business School, and Philip Friedman, an MSAM growth equity veteran, who left to join money manager John A. Levin & Co.

Merin, however, insists that the turnover was to be expected. "Sure, you had some people who weren't on board with the program, and they are gone," he says. "You had some people retire. You had some people who, quite frankly, we weren't sorry to see leave."

Some plan sponsors take the departures in stride. "There has been a fair amount of turnover, but MSIM has a pretty deep bench," notes Nancy Eckl, vice president in charge of trust investments for Dallas-based AMR Investments, a $30 billion money management subsidiary of AMR Corp. MSIM manages three emerging-markets portfolios totaling $150 million for the American Airlines parent, in a relationship dating back to 1994. "We've seen a lot of people come and go, but the investment process has remained intact," says Eckl.

What, then, of the charge -- almost a refrain among competitors and disgruntled former employees -- that MSIM is stealthily scaling back its commitment to the institutional side of the money management market while intensifying its allegiance to the retail side: "Dean Witterizing" the firm, in that coinage of disdainful ex­Morgan Stanleyites?

Certainly, the retail and institutional businesses have always operated differently: Retail fees are higher, typically 100 basis points, versus 20 to 30 basis points for most separate accounts, but institutional assets tend to be stickier (no small consideration in bad markets). The retail money manager mind-set is more immediate: Push the hottest products to whoever seems likely to buy them. Marketing to pension funds, by contrast, is a long-term engagement (often 18 months to two years). Plan sponsors, moreover, insist on a level of client service that retail investors could expect only if their last name was Morningstar.

Former MSIM institutional marketers and client service executives say that they were pressured to keep expenses down. "The Dean Witter people just could not understand why the institutional side couldn't get their margins up as high as retail -- they have no concept of what it takes to serve the institutional market," says one former portfolio manager.

Counters Merin: "We've visited all of the major consultants over the past six months. They understand that our move to one investment platform doesn't mean we are turning the focus away from institutional to retail."

Critics of Morgan Stanley nevertheless say that an unmistakable sign of Dean Witterization at MSIM is the conversion of a handful of successful separate accounts into retail mutual funds. Institutional products, of course, have often been incubators for retail funds. But plan sponsors and consultants tend to suspect that converting a separate account into a mutual fund compromises the stock picker's discipline. Pension clients raise red flags when hot money comes into a portfolio, fearing a decline in performance, and fickle retail flows tend to move in and out much more rapidly than institutional flows.

"Plan sponsors can't stand it when their managers launch mutual funds, because they see that, time and again, the flood of new assets winds up hindering performance, particularly in small- and midcap," points out Ben Phillips, a senior analyst at Cerulli Associates.

In September 2000 MSIM turned a small- to midcap growth portfolio for institutions presided over by the respected Arden Armstrong into a retail mutual fund called New Discoveries. The fund was capped at $700 million after just a week, but portfolio manager Armstrong had already spent a good deal of time pitching the fund to brokers across the country on a prelaunch road show. Institutional clients complained that they didn't want their portfolio manager traveling when she should be home minding the store.

"We weren't happy with the organizational changes going on at Morgan Stanley," says John Day, the assistant executive director of the $22 billion Illinois Teachers' Retirement System. The pension fund had placed its $178 million small- to midcap growth portfolio with Morgan Stanley in early 2000. What alarmed Day was the departure in February 2001 of Armstrong, who had been lead manager on the Illinois account. Two months later the pension plan fired Morgan Stanley.

Armstrong, a 16-year Morgan Stanley veteran who left to launch a hedge fund, won't discuss her departure. But Merin concedes that "Arden is someone we obviously would have preferred to stay."

Pension fund managers worry that institutional separate accounts that morph into mutual funds will grow too big, hampering their performance. Marjorie Zwick, MSIM's head of institutional sales, confirms that Morgan Stanley is looking at adapting more separate-account products to retail channels but says that it is sensitive to capacity constraints. "We look very hard and only do it when appropriate," she says.

Merin recognizes that, whether it's a fund or a separate account, what ultimately counts for an investment product is results. "Our main priority is improving investment performance across the board. We've put together an organization that, honestly, has more world-class investment talent than any firm I can think of," he says.

MSIM does boast several first-class portfolio teams, most notably in international equity. Its $25 billion flagship active international equity portfolio is still at the top of the class. Over the ten years through June 2002, the portfolio returned an average annual 12.9 percent, versus 3 percent for the MSCI EAFE index. This year through late October the portfolio was beating the benchmark by a remarkable 10 percentage points. And MSIM's $4 billion emerging-markets portfolio has outperformed the MSCI emerging-markets index solidly for the past five years,

"There's no question that within the organization, there are pockets of true talent," concedes Angeles Investment Advisors' Rosen, one of MSIM's toughest critics.

"Will we succeed?" asks Merin in a pensive mood. "The jury is still out. Two years down the line, we'll have the proof."