Galley: MLIM Focused More on Returns, Less on Risk

November 8, 2001 ( - In the UK negligence suit brought against Merrill Lynch Investment Managers (MLIM) by Unilever Superannuation Fund (USF), Carol Galley, COO of MLIM, conceded that the group placed more emphasis on Unilever's demands for higher returns on its £1 billion mandate, than it did on requests for limited risk in its management.

But when USF lawyers in the landmark £130 million suit suggested that the pension fund’s portfolio was heading for “catastrophe,” Galley defended MLIM’s fund management. She pointed out that the fund had made money from 1987 to 1996.

In terms of its contract with USF, MLIM, formerly Mercury Asset Management, was required to beat the fund’s benchmark by 1% and not underperform it by more than 3%.

Galley explained that the first objective was to construct an aggressive portfolio, noting that managing two targets is very difficult.

Risky Business

When the contract started, Mercury executives did not change the fund’s risk profile, despite being warned in an internal memorandum that Alistair Lennard, a 27-year-old fund manager, held high-risk positions in his equities portfolio.

In fact, Lennard took more risk than colleagues who were running more aggressive mandates.

In 1996, 13 out of 14 of his 14 UK equities portfolios ran more active risk than fund managers on his “select” team, and 11 of his portfolios ran more risk than any of the 29 portfolios managed by the “specialist” team who’s objective was to take greater risk than the “select” team.

Mercury’s risk-control experts reviewed the positions, concluding that Lennard’s risks were offset by other positions in the funds’ portfolio and that risk levels were appropriate provided that Mercury had confidence in Lennard.

– Camilla Klein                 

See also our previous articles on this landmark court case