Performance Targets Questioned in Unilever Suit

November 26, 2001 ( - Mercury Asset Management had the wrong target in sight when it set the risk levels of the £1 billion portfolio it ran for the Unilever Superannuation Fund (USF), according to lawyers for the consumer giant.

In its £130 negligence suit against Mercury, now Merrill Lynch Investment Managers, USF claims that the firm failed to supervise the risk levels of its £600 million UK equity portfolio, which subsequently lagged its benchmark index by 10.5%

Leading and Lagging

According to a Reuters report, Unilever’s lawyer told the UK High Court that in terms of the plaintiff’s contract with Mercury, the portfolio was to outperform its benchmark by 1% and not lag it by more than 3% for any four consecutive quarters.

Unilever charges that Mercury should have set risk levels so that it would be 95% certain that performance would not breach the negative 3% tolerance, according to the report.

However, Peter Stanyer, head of risk control at Mercury, said that risk levels were set in terms of the industry standard, which would ensure that the fund would not lag the 3% mark in more than one year out of six, as opposed to one year out of twenty.

Measure for Measure

In addition, while the contract did not state risk levels, it specified that underperformance would be measured on a rolling four-quarter period.

Mercury did not calculate risk levels based on the rolling four-quarter period but on calendar years, where the chances of breaching the downside limit, Stanyer conceded, were less. However, he added that for risk control purposes the two were not commonly considered separately, according to the report.

Statistical Differences

Stanyer also conceded that in setting risk levels, Mercury assumed its fund managers would outperform the benchmark by 1% annually. However, if calculations are based on a return of zero, the chance that Unilever fund would underperform was 50% higher.

Merrill denies negligence and has filed a counterclaim for £580,000 in unpaid fees and interest.

– Camilla Klein