The global scaling back and re-emphasis on profitability at Merrill Lynch instigated by Stanley O'Neal's elevation to president and COO in July is now sweeping its $550 billion asset management business, creating dramatic cost cuts throughout the Asia-Pacific region.

Merrill Lynch Investment Managers is eviscerating its Asia-based operations, in particular erasing its Singapore-based fund management operation and relocating most activities to London; and in Japan, where it is giving up what it has come to see as a pointless attempt to launch a US-style retail funds business.

Brian Murdock, chairman of the Pacific region in Tokyo, is relocating to London as of January 1 in an expanded role as CIO for Europe, Asia and Japan as well as global CIO for fixed income and alternative investments. "I'm returning to an investment role as a CIO," he says, adding he remains on MLIM's executive committee. An American, he has spent the past two years in Tokyo running the Pacific business. He has also performed two tours of duty in Hong Kong.

Japan deputy president David Semaya, a long-serving Tokyo veteran, will assume the role of president for the Japan business.

In addition, Clifford Shaw, Murdock's long-serving predecessor in Japan and "godfather" of MLIM's Japan business, is considering returning from semi-retirement in London to act as the firm's senior Japanese advisor. If he accepts, Shaw will likely make periodic trips to Japan to hobnob with key clients and regulators.

Murdock's alternative investments role is new. Shaw himself spearheaded a new global marketing effort for alternatives, but Murdock's role will be to run both the business and the investment side. Akihiro Sen will be his alternative investment lieutenant in Tokyo and Ken Liow will handle marketing and sales in Sydney.

As for managing global fixed-income, Murdock replaces Tim Manna in London, who was left. Murdock declined to get into details. His fixed-income deputies in this region will be Hideki Takiyama in Tokyo and Rochelle Hall in Sydney.

Global equities are headed by Andres Utermann in London.

The move also signifies the end of MLIM treating Asia and Japan (the Pacific) as a separate region. "We are taking the EMEA [Europe, Middle East and Africa] region and combining it with the Pacific," Murdock says. "My job was to create the Pacific business in order to better connect it to the rest of the business, and that's what we've done. Then came the question of whether to run it as a separate region, or combine it with Europe. The end game is to be a global company, so we're combining it. This also lets us save money in terms of overhead," he says.

Singapore slung

MLIM says it has a successful investment distribution hub in Hong Kong, with a satellite office in Taipei. One source at the firm says Taiwan operations have been "scaled back considerably", and that the Korean sales office has been closed.

Murdock says this is not quite accurate, saying virtually no changes have been made in Taiwan and Hong Kong, except the some people have accepted voluntary retirement packages. "This remains a growth business," he says. Murdock declined to get into headcounts, so at this time FinanceAsia cannot ascertain the degree to which cutbacks are taking place in these markets.

The changes in Singapore are more sweeping, since a substantial investment management team has been closed and responsibilities transferred to London. "We spent 13 years trying to grow an Asian equity centre of excellence," Murdock explains. "But it was a challenge to connect intellectually what the fund managers in Singapore were doing with our strategy in London. We couldn't manufacture portfolios in Asia and tie it in to London's thinking. Futhermore, clients weren't putting money into Asian equities. We just never made money trying to make it work. Our clients are not based in Asia, so we feel we provide them a more integrated solution by moving our fund management team to London."

The firm will keep four investment analysts on the ground in Singapore, where it is necessary to keep them in the local information flow.

Australia operations are largely untouched, Murdock says. "Unfortunately some people accepted voluntary leave," he says, but the firm is maintaining its same business strategy. Last week Merrill Lynch slashed its Aussie private client team, but this is unrelated to MLIM.

If you build it, they won't come

The changes in Japan are in a way more fundamental, even though Tokyo will remain a major hub for MLIM. It represents the failure by American investment management firms in general to import an equities culture into Japan. Indeed, Merrill is only the latest major US player to recently scale back operations in Japan, following various degrees of pullbacks by Morgan Stanley Asset Management, Citigroup Asset Management, Fidelity Investments and Charles Schwab, the last of which just closed an online brokerage joint venture with non-life insurer Tokio Marine.

Merrill has been in Japan for 40 years and its institutional funds business is "extremely profitable and well established," says Murdock. The firm will maintain this business, and the concurrent shuffling of senior managers in and out of Tokyo is merely a routine rotation. According to one source at the firm, it sent out letters to consultants and institutional clients last week explaining the changes and reassuring them of its commitment to this segment.

"As for the private client business," Murdock says, "Merrill Lynch has a commitment to the retail business, but who are these customers? We built a business for the middle market, but they didn't come. We will continue our business with high-net worth individuals, but the retail market was never able to fill that bucket û we put a bucket beneath a water spout but nothing came out. This is an experience that everyone has had. Why? Because retail is not investing, it is saving. We've had great performance with our products but the size and scope of the market is not there. A lot of new players came in about five years ago thinking there was low-hanging fruit in the retail market. A lot of foreign players now have a retail business that is not viable. The regulations are not there, the market is not there."

He adds compared to its rivals, MLIM spent relatively little on building the retail business or aiming for Japan's nascent defined contribution segment. For example, it did not advertise. Murdock expresses disappointment that the retail channel built via Merrill Lynch's acquisition of Yamaichi Securities never took off, which never accounted for more than 1% of MLIM's distribution. Murdock says this channel was tuned perfectly to offer consultative services rather than churn products like Japan's traditional leading brokers, which should have been perfect for MLIM. But Japan's savings-minded, risk-averse retail segment has proven to be uninterested in advice, and prefers to keep its money in bank deposits and at the post office, which are viewed as "safe".

So where does MLIM go from here in the world's second-biggest asset management market? Murdock says the firm has an extensive existing business to defend, and will be looking for sustainable opportunities. He says it is wrong to paint this situation as typical American short-termism. "We are build a long-tailed business. We operated in Japan for 12 years before we ever made any money. We have found that the pension channel deregulated and became meritorious. Our clients didn't take away their money in bad markets. This never developed on the retail side, and it's a long way away. In the US it really took a 10-year bull market to instil an equities culture. It's going to take Japan a long time to unlearn its lessons."