Unilever battle highlights risk control

THE Unilever Superannuation Fund launched its High Court suit against Mercury Asset Management, Britain's largest fund manager, now owned by Merrill Lynch, alleging negligence and claiming damages of £100m (now £130m) two years ago. Unilever had already sacked MAM 18 months earlier for underperforming an agreed benchmark by 10.5%.

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.

Galley's revelations

CAROL GALLEY vacated the witness box to her former junior this week, but she went out with a bang. The former head of Mercury Asset Management, dubbed the Ice Maiden for the power she wielded in the City, has played a starring role in the £130m High Court negligence case brought by Unilever Pension Fund against her firm's now owner Merrill Lynch Investment Managers.

Her involvement ended on Tuesday, but not before she provided some stunning revelations into problems facing the group in 1997. By Monday Galley, the 53-year-old City superstar, was into her fifth gruelling day under examination from Jonathan Sumption for Unilever, and starting to thaw. Her answers were direct, and in the afternoon there was a bombshell.

Sumption derided Mercury's informal risk management as no more than 'shoulder-tapping' between colleagues, and Galley admitted that by 1997 risk controls were failing. Asked by Mr Justice Colman whether risk controls had broken down, she simply replied: 'Yes.'

On Tuesday morning Galley had a relatively easy session and it was all over by lunchtime. The contrast between her and the next former Mercury staffer into the witness box was stark. Alistair Lennard, just 27 when handed the reins of the £600m UK equity portion of the Unilever fund by Galley in the early 1990s, is now a ruddy-faced 35-year-old who runs his own investment company.

Despite his youth, he quickly rose to the small team formulating Mercury's overall investment strategy. His day-to-day involvement with the portfolio started in 1993 after Galley became distracted by the demands of running the business, and he managed it until his removal from the account in May 1997. Of his first meeting with Unilever pension fund chief investment officer Wendy Mayall, in October 1995 at the Capital Club, he said: 'She did not seem interested in investment and I recall the lunch being hard going.'

It was hard going for the silver-haired Sumption on Wednesday against a durable Lennard. The fund manager said he took risks and made mistakes, but was authorised to do so and was never negligent. By the mid-afternoon break, Merrill spin-doctors were calling it a 'good day', but in the last session Sumption moved up a gear and Lennard admitted the portfolio tracking system was incapable of accurately measuring portfolio performance in real time.

Lennard said that meant the fund's woeful performance in the last quarter of 1996 was not fully known to him until late December. Galley had testified that she was aware of problems with the Unilever portfolio by October. In the last exchange of the day, Mr Justice Colman asked Lennard whether he had ever run any portfolio to the bog-standard guidelines for the fund established by Unilever for 1997. Lennard replied: 'I personally had not.' The case continues.