UK - Unilever barrister Jonathan Sumption QC yesterday attempted in the High Court to prove that one of the key points of Merrill Lynch Investment Managers' (MLIM) defence was flawed.
He said that part of MLIM’s case rests on proving that monitoring total fund active risk – the likelihood of investment underperformance based on historical models – rather than UK equity active risk is more important.
He questioned Select team leader John Richards, who was Alistair Lennard’s direct boss, on whether total fund active risk figures were readily available to him.
Sumption asked: “You cannot claim, however, to have monitored total funds active risk levels on the Unilever portfolio at any time before your departure from Mercury because you did not have the relevant information. That is correct, is it not?”
Richards replied*: “Prior to October/November 1996 I do not recall having seen a Unilever total fund risk figure. I do not remember if I was shown one ... I do not know whether the total fund active risk figures for Unilever were produced. They probably were.”
MLIM later said outside court that it was not John Richards' job to monitor the total fund active risk levels, but only the UK equity risk figures.
The total fund levels were monitored by Peter Stanyer who was the head of performance and risk management team at Mercury Asset Management, which MLIM bought in December 1997.
Stanyer would only have highlighted excessive risk to the separate portions of the portfolio if the risk levels were likely to break 4% for the whole fund. But this barrier was not ever broken according to the spokesman.
Sumption also showed the active risk of the UK equity portion managed by Lennard had risen dramatically in the four years he managed the portfolio. At the end of 1993 risk stood at 4%. By October 1995 it had risen to 5%. It then peaked at 6.7% in July 1996 before falling to 5.9% before the end of the same year.
But Richards said this risk did not trouble him at the time. He told the court: “I was aware that Alistair's portfolios had a higher tracking error and I watched Alistair particularly carefully, partly because his risk levels were higher than the average and also because I knew and agreed with many of the investment decisions that he was taking, so I was happy with the view that he was expressing in his portfolios.”
*This was later retracted in court by Sumption who said that the information was indeed available to Richards from September 1996 on a monthly basis until the end of the year and quarterly after that. It was also available to Carol Galley - Richards’ boss - and Unilever’s chief investment officer Wendy Mayall.
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