UK - Merrill Lynch Investment Managers co-chairman Carol Galley admitted in court that if the objectives of achieving performance of +1% or -3% set by Unilever were treated equally, it would be impossible to achieve these benchmarks.
She said: “If the +1% and the -3% were perceived as equal I personally do not know any way of achieving that. In the context of a pension fund, I do not believe that is deliverable.”
Galley went on to say that the then Mercury Asset Management treated the +1% outperformance target as the primary objective with the -3% as a secondary aim.
She added: “Our understanding was that it was +1% primary objective in normal circumstances, we do not expect more than the -3% to happen.”
The benchmarks were set by Unilever in January 1997 and were based on performance of the FTSE-All Share index.
She also commented that the +1% target was considered achievable over a three year period and that on occasion there would be underperformance.
She said: ”So in aiming at the +1% there were bound to be rolling four quarterly periods that, from time to time, and one hoped not very often, and one hoped not by the amount we subsequently fell through -3%, that we knew there would be periods when we were likely to be [underperforming].”
The case is reliant on the interpretation of the clause in the 1997 contract between Unilever and Mercury Asset Management, which was bought by Merrill Lynch in December 1997. The clause stated an objective: “To produce a return of 1% per annum in excess of the benchmark, net of fees, over periods since inception of the portfolio subject to a reasonable time period.
“In normal circumstances the return will be expected to be no more than 3% below the benchmark in any period of 4 successive calendar quarters.”
Galley also claimed that the strong performance of Sterling against the Deutschemark in 1996 was responsible for the underperformance of the portfolio in 1996 and 1997. This was because the Unilever portfolio, managed by Alistair Lennard, was heavily concentrated in UK industrial stocks reliant on exports.
But Jonathan Sumption QC representing Unilever countered this claim. He read from a MAM economic outlook report from November 1996: “The recent appreciation of Sterling although unexpected is small on the historic scale and merely reverses part of the substantially depreciation of Sterling since September 1992.
“Thus as the fall in Sterling between early 1994 and late 1995 did little to prevent the slump in production growth over that period there is little reason to believe that the recent rise in Sterling will off-set the expected recovery in output.”
He added: “Despite the recent currency strength Sterling remains competitively valued particularly with respect to continental European currencies. This is reflected in survey data which shows manufacturing export orders and confidence are picking up despite the rise in the pound.”
The case continues.
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