UK - Peter Stanyer admitted in the High Court on Thursday that Mercury Asset Management discussed in early 1996 whether a client may "seek compensation" if it underperformed and active risk figures in the portfolio were shown to have broken agreed boundaries.
The head of performance and risk management team at Merrill Lynch Investment Managers raised the issue in a note dated March 1, 1996 when an unnamed UK pension food was negotiating with Mercury about introducing a clause based on overperformance and underperformance similar to the one Unilever introduced at the beginning of 1997.
He said in his witness statement: “I specifically identified the potential scope for an aggrieved client ‘to seek compensation from Mercury in the event of underperformance when the portfolio’s active risk could be shown to have exceeded the parameters that were agreed at the outset.’”
He also added in the note that the BARRA figures, a model used to measure active risk, were “built on sand” because changes in market volatilities and market correlations might change the measured active risk of the portfolio.
Stanyer also noted that clients and consultants should be made aware that measured active risk will vary according to the degree of conviction of the fund manager and that if clients wished to monitor portfolio risk that it should be provided each quarter.
The note also stated that he would “strongly advise that any written indication of likely active risk should always be hedged by words such as ‘indicative range.”
Unilever Superannuation Fund is suing MLIM for £130m in compensation for underperformance in the UK equity portion of its portfolio. Jonathan Sumption QC, the barrister representing Unilever, is trying to prove that the active risk in the portfolio managed by MAM fund manager Alistair Lennard was excessive and that this led to the underperformance.
But MAM believes that it was unusual market circumstances at the time that led to the portfolio underperforming during late 1996 and throughout 1997.
Unilever alleges Mercury Asset Management (MAM), which MLIM bought for £3.1bn in 1997, acted negligently by failing to operate adequate risk controls in the running of £1bn of its assets in 1997 and 1998. It is claiming £130m. MAM’s return in the 15 month period under review was absolute growth of 20.65%, worth £200m. In the same period the FTSE All Share gained 31%.
By Paul Sanderson
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