UK – The High Court trial between the Unilever Superannuation Fund (USF) and Merrill Lynch Investment Managers (MLIM), today (November 8) honed in on the period immediately before and after the establishment of the new investment management agreement (IMA), with MLIM chief operating officer (COO) Carol Galley continuing to be cross-examined in the witness box.

USF is suing MLIM for £130m (e210m) alleging that Mercury Asset Management (MAM) - now part of MLIM, negligently took too much risk when managing £1bn for the fund between January 1, 1997 and March 31, 1998, following the introduction of the new investment agreement, which sought to achieve 1% outperformance with a downside risk tolerance of –3%.

Jonathan Sumption Q.C. – acting on behalf of USF, asked Galley whether Mercury Asset Management (MAM) thought they were merely formalising existing investment arrangements with the establishment of the new IMA.
He then put it to Galley that this would mean that MAM would not have needed to examine the agreement in any depth.

Galley said that MAM had looked at the new IMA and concluded that there was no change from existing arrangements, noting: "it was expressed differently,” and calling it a “modern, numeric, quantified up to date expression of what we had been asked to do in the past in relation to the target and the downside equally."

Asked whether she did not think that it was necessary to consider the portfolio construction for USF in relation to the new IMA, Galley claimed: "we were examining in detail, the UK portfolio all of the time."

Galley added that under the new IMA, Mercury considered that the +1% outperformance request was the firm’s primary target and that the -3% downside tolerance was a secondary one.

Questioning the accountability of MAM during the period, Sumption suggested that charts Galley had asked to be produced internally in early 1997, prior to presenting the performance of the fund in 1996 to USF CIO, Wendy Mayall, and the trustees of USF, in fact represented the first time that the whole body of information regarding the fund had been drawn together by the firm.

Countering, Galley claimed that MAM fund managers knew their portfolios in enormous detail throughout the period, arguing that they "lived and breathed the stocks".

She added that in the run-up to the new agreement, MAM had subjected the portfolio to vigorous analysis, "We did not think it needed to be restructured to meet the new objectives, but that does not mean that we did not think about it and look at the portfolio.”