Unilever unlikely again
UK - Underperformance similar to that of the Unilever UK equity portfolio would be unlikely to happen in current conditions, leading fund managers claim.
Henderson Global Investors director of research and strategy Rupert Carnegie believes the control of risk is more sophisticated now than five years ago when the Unilever portfolio suffered from high risk levels in a concentrated portfolio.
This is because core satellite structures are now used to control risk levels.
This means that a fund has a low risk core with very aggressive satellite funds on the outside of it.
Carnegie said: “I would say that the Unilever case was early growth pains of a process that has become increasingly mature and sophisticated.”
The court case also brought up the balance between using risk models and personal judgement of the fund manager to control risk.
Carnegie said: “Fund management is never going to be a science because you have to think quite carefully about how you use the risk models. It is always going to involve an element of judgement and an element of judgement in how you set up models in the first place.
Even if you had a completely quant process, there is always judgement at the creation of the process. But people are gradually improving their understanding of risk.”
Threadneedle said it must be remembered that no matter what the safeguards, there is always an element of the “unknown”.
It said: “It is a fuzzy science. There is a lot of software that can be used to measure risk like Barra. But all that data is retrospective. What happens when there is a sudden event particularly a political event cannot be quantified. You can, by diversification, in most times and most places structure risk for reasonable effects. But there is always an element of the unknown.”
The management of risk was one of the key strategies for both Unilever and Merrill Lynch Investment Managers during the trial. Unilever alleged that its portfolio underperformed due to excessively high levels of risk taken on the UK equity portfolio in 1996 and 1997.
By Paul Sanderson
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