UK - The £4bn Unilever Superannuation Fund (USF) finally brought its £130m (e207m) law suit against Mercury Asset Management (now Merrill Lynch Investment Managers) to the High Court today, despite weeks of negotiation in an attempt to settle the case out of court.
The case, which alleges negligence by the investment manager, was instigated in 1999, with Unilever claiming that Mercury was in breach of contract in failing to take sufficient account of the risk of under-performance in its management of USF assets.
Discussion between the two sides in recent weeks failed to make any headway. Unilever, it was reported, would not agree to settle for less than £60m in compensation, while Merrill Lynch was not prepared to offer any more than £25m to avoid court action by the fund.
In an opening defendant's statement today, MLIM rebutted the allegations against the firm and claimed that it had actually produced returns of some £200m for the fund during the period of the claim: “We were not negligent and we believe the claims of Unilever Superannuation Fund (USF) to that effect are without grounds.
“We regret this isolated case of underperformance but it occurred because we were on the wrong side of some highly unusual and persistent market factors in 1997. With the benefit of hindsight anyone can make the right calls, but that is a very different thing from saying the portfolio was negligently constructed, or constructed without proper checks and balances. Mercury Asset Management (MAM) still achieved 20.65% growth for USF of around £200m in the period of the claim.”
Merrill Lynch also added its belief that to succeed in the trial, USF would have to establish that MAM was negligent in the way it managed the fund.
The firm noted that this meant that no “reasonable” fund manager would have managed the fund in the way that MAM did.
In the statement, Merrill claims: “USF set MAM an objective - to seek to achieve 1% over the benchmark. In order to achieve this demanding target, a fund manager must deviate from the benchmark, thus taking a level of active risk. The legal argument will revolve around whether MAM took an appropriate level of risk while making a series of complex investment judgements. We firmly believe that the level of risk adopted was entirely appropriate.
“The objective of +1% and the proviso of -3% were not guarantees or limits or portfolio protection - they did not mean the fund would never perform outside the range in a given period. These figures were targets, not a guarantee or a stop-loss.”
MAM was re-appointed as one of USF’s investment managers under new contractual terms from 1 January 1997, having previously managed USF portfolios for some 10 years, to run securities then worth approximately £1,090m.
According to USF, during the first four quarters of the new contract, MAM’s overall portfolio under-performed an agreed downside tolerance stating the return was expected to be no more than 3% below the benchmark for any four successive calendar quarters.
USF trustees terminated MAM’s contract in March 1998, by which time the under performance had increased to 10.5% over the five quarters since reappointment.