High risk and natural style

At the heart of the case is the future of the active fund management industry. This is where fund managers use their knowledge and instincts to try to outperform funds that simply track indices or benchmarks. Active management can produce much greater returns but also carries greater risks.

If Unilever wins, active fund managers will almost certainly be forced to put up their charges to protect themselves against similar future litigation.

IT IS often the way in the workplace. You do not realise how many friends you have until you leave. It is a pretty safe bet that is what Alistair Lennard is thinking. The former fund manager at Mercury Asset fund management saw his old mates, or maybe they were new ones, rally round him in the High Court this week, telling Mr Justice Colman the poor performance of the Unilever pension fund he ran was, well, just one of those things.

Sure, the fund missed the bull run in bank stocks in 1997 and took a hiding as a result of its heavy holding of industrial shares. But, according to former Mercury director John Richards, the high-risk approach was just part of Lennard's 'natural style'.

Another former Mercury fund manager, Paul Harwood, who watched his old pal being grilled in the witness box, also backed him up. Okay, so Harwood, unlike Lennard, said he would have thrown a few bank stocks into the fund. He also did not share Lennard's seemingly insatiable appetite for the property sector.

But each to his own, Harwood said. Every fund manager does things differently. And anyway, Lennard's investments would have proved wise if he had just been given a bit more time.

Harwood's remarks prompted Mr Justice Colman to wade in with a few questions of his own. 'You keep saying that at the end of the day value always wins,' the judge remarked. 'It's good that, isn't it?' Harwood replied.

The amount of risk contained in the Unilever equity fund managed by Lennard is a crucial issue in its bid to win £130m compensation from Mercury, now part of Merrill Lynch. Unilever believes it should be compensated because Lennard, dubbed a 'wild card' by Jonathan Sumption QC, took unacceptable risks which caused the fund's performance to fall well short of the agreed targets.

Much of this week's cross examination focused on the measures Mercury had in place to monitor and restrain Lennard's investment strategy. Richards acknowledged on Monday that Lennard had not followed Mercury's in-house recommendations when it came to sector weightings. The firm's sector strategy group had advised, among other things, that managers be underweight in bank stocks, but Lennard chose to have none. However, Richards said these were only recommendations and that Mercury employed intelligent people, allowing them significant freedom with their investments.

Sumption suggested Lennard was either trying to beat the performance targets or his portfolio was too high-risk for the returns required under Mercury's contract with Unilever. Richards said neither was true. But on Tuesday, the court was provided with a copy of a report written by a member of Mercury's internal audit team. Ms Waits (we never learned her first name) said the firm had no formal controls to monitor investments and depended on fund managers to be reliable and trustworthy. The more senior fund managers became, she said, the less control conscious they were. 'This is worrying in itself,' Ms Waits wrote.

Richards told the court on Wednesday that Mercury considered the downside performance threshold governing the fund was no more than a point at which Unilever would become 'uncomfortable' and begin asking questions. Mercury was required to avoid underperforming its benchmark by more than 3%. 'The key objective was still to outperform over the longer period,' he said.

Harwood replaced Richards on the stand, telling the court that criticism of Lennard's portfolio was being made with hindsight. Harwood said some of the shares he himself bought for the fund when he began running it in April 1997 had performed poorly and that maybe Lennard would not have purchased the same stocks.

Mind you, all fund managers are different.