In Depth: Settlement in Unilever Case Leaves Many Wondering

December 14, 2001 ( - In the end, Unilever Superannuation Fund (USF)'s £130 million negligence suit against Merrill Lynch Investment Managers (MLIM) ended not with a bang, but a whimper.

Without admitting guilt, MLIM paid Unilever an undisclosed sum – estimated to be around £70 million – to settle the case that threatened to change the way asset managers and pension trustees do business. That conclusion leaves plan sponsors and fund managers alike wondering about its implications.

The case, which played out in Britain’s High Court, saw the consumer goods giant accuse MLIM of negligence in its management of Unilever’s £1 billion mandate. It specifically addressed the £600 million UK equity portion of the portfolio, managed by Alistair Lennard, a “wild card” in the words of Unilever’s lawyers.

Reports state that under the contract between MLIM, formerly Mercury Asset Management, and Unilever, the portfolio was required to outperform its benchmark by 1%, and lag it by no more than 3% for any four consecutive quarters.

In 1997 the portfolio returned 9.9%. While not losing any money for Unilever, Mercury failed to beat the benchmark, which increased by 17.8% over the year. In the first quarter of 1998 the fund returned 9.8%, against a benchmark return of 11.2%. Unilever fired Mercury. It claimed Mercury did not provide sufficient downside protection and enough diversification.

Target Practice

Many fund managers and plan sponsor might feel that this is a highly unusual set of performance targets. One portfolio manager told “Why set a target that gives more room for downside than upside?”

One risk control expert at a well-known asset management firm thinks otherwise, “Many of the most sophisticated investors simply don’t understand the measures used to track a portfolio’s performance. The 1% requirement refers to a return target, while the 3% refers to the tracking error,” he said.

He points out that the time-horizons set for the tracking error in many investment contracts is often mismatched, adding to the confusion. If a tracking error is set with the long-term time horizon in mind, and then measured over the short term, the numbers may very well appear out of range, he explains.

“In Unilever’s case the measure chosen might not have been the correct one, and perhaps the parties involved did not have an adequate understanding of these measures” he added.

Merrill’s lawyers argued that their was no mention of any downside tolerance targets in manuscripts of meetings of Unilever’s pension fund trustees. They questioned whether the issue of downside tolerance was regarded as significant enough to be discussed at these meetings.

Even Hugh Stirk, a former member of the USF Board of Trustees testified that there was a lack of clarity in the contractual obligation. The judge in the case also seemed to agree, suggesting that the targets were “nebulous.”

Continued …