Lennard had been responsible for running of a £600 million UK equity portfolio, part of the consumer giant’s £1 billion mandate with MLIM, formerly Mercury Asset Management, which underperformed its benchmark by 10.5% between January 1997 and March 1998.
Lennard, who managed the fund from August 1993 until he was replaced in May 1997, joined Mercury Asset Management from university. By the time he resigned in October 2000 he had risen to managing director status.
According to a Reuters report, Lennard testified that he made large sector and stock bets for USF, running high levels of risk, because his boss Carol Galley wanted him to boost the fund’s returns, which had been flagging under her management. He said that was a result of her spending more time running Mercury than managing USF’s money.
He added that by giving him control of the account, Galley had opted for a more concentrated portfolio approach.
According to USF lawyers, active risk in the portfolio rose from around 2% under Galley to more than 5% when Lennard took over.
He was removed from the account in May 1997 after two quarters of poor performance. However, the bets he had made proved difficult to unwind and Mercury was fired in March 1998.
In a statement, Lennard maintained that the level of risk he took was consistent with Mercury’s contract with USF, which stated that the firm should beat its benchmark by 1% but not underperform it by more than 3%.
Look and Sniff
However, Lennard testified that Mercury did not have quantitative risk-management procedures to ensure that fund managers took positions in line with the targets set by clients – adding that fund managers held brainstorming sessions to see how portfolios would behave given different economic scenarios.
Prompted by USF lawyers, Lennard conceded that this was something of a “look-and-sniff approach.”
Mercury later introduced more formal risk controls including in late 1998 a limit of 4% active risk for its fund managers.
Merrill is countersuing for £580,000 in unpaid fees and interest.
– Camilla Klein firstname.lastname@example.org
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