No-one really believed it would ever get this far. But in the High Court in London at 10.30am on October 15, the court usher declared: “Silence in court, all rise” and Mr Justice Colman took his seat to preside over the battle between a fund manager and a very aggrieved client.
The received wisdom was that Merrill Lynch Investment Managers would not want its business with Unilever discussed in public – and it was obvious from the first day, with reporters having to sit on the floor because there were not enough chairs to go around, that this would be very public indeed. A court case set to last between six and eight weeks was bound to prompt unwelcome headlines during that time. Surely the two would settle?
However the distance between what Unilever was asking for and what Merrill Lynch was prepared to hand over was just too wide to be bridged.
In disputes between financial institutions it is not uncommon for the parties to play hardball right up to the last minute before finally reaching a deal on the steps of the court house. This time however, Merrill has not budged and so Unilever has gone ahead with its claim for £130 million in damages.
“I just can’t believe that it actually went to court,” says a fund manager at a rival London house. “I can’t believe they were prepared to air all the arguments in the open like this.”
Certainly the opening days of the case did not disappoint those looking for revelations about the collapse of the once very good relationship between Anglo-Dutch household products group Unilever and what was, before its November 1997 purchase by Merrill Lynch, Mercury Asset Management.
At the very heart of this lies a falling out between two forceful characters. In the blue corner: Carol Galley, Mercury’s co-head and variously described during her career as “the most powerful woman in the City” and “the Ice Maiden”. In the red: Wendy Mayall, chief investment officer of the Unilever Superannuation Fund.
As Unilever’s QC, Jonathan Sumption, set it out in court, Galley and Mayall’s relationship, prompted by Mercury’s performance, deteriorated to such an extent that the two had a “disagreeable” conversation in early 1998.
As the threat of legal action loomed, Galley went over Mayall’s head to Niall Fitzgerald, Unilever’s chief executive. She also met Hans Eggerstedt, the Unilever group finance director, but both men backed up Mayall. Galley was told that without movement from Mercury and substantial financial compensation, the fund would fight a legal battle “to the bitter end”.
Good, bad or negligent?
To an outsider, at first glimpse there would seem to be little to get worked up over. During 1997 Mercury, which had been a long-standing manager for Unilever, produced returns of £200 million on a £1 billion account.
However taking a closer look – and this is what Unilever argues – if Mercury had done what the fund says it asked it to do, it could have produced a further £110 million.
Mercury was being asked to achieve 1% outperformance of its benchmark, with a downside tolerance of 3%. While the markets boomed in 1997, Mercury’s tracking error went to 10.5%.
These numbers are not in dispute. What is argued by Merrill Lynch in its defence, however, is that Unilever was fully aware of how its fund manager operated and should therefore accept some of the responsibility.
Sumption portrayed the fund manager in charge of Unilever’s account, Alistair Lennard, as a “wild card” who was taking much larger positions in industrial stocks and against UK banks than his colleagues on the Select team, Mercury’s star UK equity fund managers. If those bets had come off he would have produced much greater returns.
Unfortunately they didn’t and Lennard was taken off the account in mid-1997 to be replaced by Paul Harwood who was given responsibility for recovering some of Lennard’s positions and putting the portfolio back on track. Unfortunately, things got worse and eventually, in March 1998, Unilever pulled the plug and took its business elsewhere.
Three years of negotiations later and the matter is still to be resolved. Now Galley and Mayall are enduring stands in the witness box, along with Lennard, his former boss John Richards and possibly expert witnesses in the form of leading industry figures Tony Dye and Dugald Eadie (see below).
Mr Justice Colman has a tough decision ahead of him, and a lot of people will be keeping a very close eye on how he finally resolves the dispute. Not least of these will be the fund of supermarket group J Sainsbury, which withdrew its own £300 million account from Merrill Lynch shortly after Unilever. A win in court for the pension fund would almost certainly prompt other funds to examine closely their own contracts with their fund managers.
“There are a lot of other people keeping an eye on this and if they lose it could cost [Merrill Lynch] a lot more than what they’re talking about at the moment,” says one London fund manager.
Arrogant Mercury
Is there more than just a hint of Schadenfreude in the City of London over all of this? Certainly while Mercury was rising to the top of the UK fund management tree, through the 1970s, ’80s and ’90s, it didn’t go out of its way to make friends with the competition. Now that it is being asked searching questions, people can’t resist having a dig.
What annoys its rivals is the way that Mercury, during its ascent to such prominence, seemed to have no room for self-doubt (see box).
“They’re not just supremely confident, they’re arrogant,” says a former consultant, since turned fund manager, who dealt with them in selection line-ups in the 1990s. “I remember on at least one occasion when they didn’t win a beauty parade, the fund manager rang me up to say there must have made a mistake because they had not been picked.”
If the purchase by Merrill Lynch, the departure of some high-profile managers and a slump in performance has done anything to dent that self-confidence, then it’s no bad thing, say competitors.
But while there may be a sense of smugness around the City among some of the opposition, there may also be a certain unease that precedent is being set. People are not happy with the idea that any time a pension fund isn’t totally satisfied with its fund managers’ performance the dispute could end up in court.
End of the old school
In the past the relationships between pension funds and their fund managers were such that Unilever’s current actions would have been unthinkable. Indeed Unilever had employed Mercury for many years quite happily.
Pension funds would hand over the money and give the fund manager a large amount of discretion as to how it invested those assets. A meeting every quarter to go over the numbers and talk things through would keep everything ticking over, unless performance fell off a cliff. The occasional lunch, maybe some corporate hospitality, all these facets of client service would help to ensure the relationship was a cordial one. The aim was that everyone should feel they were working together for the good of the fund rather than its just being a customer/client relationship.
When Mayall took on Galley, everything changed. Galley is formidable, but Mayall is far from a soft touch, having previously worked in the sophisticated investment consultant firm Stamford Associates. Stamford is not a huge organization with hundreds of clients like Watson Wyatt and William M Mercer. Rather, it commands high fees to provide a highly tailored service.
When Mayall moved in-house to handle Unilever she set about putting a full-scale investment review in action and out of this review would come the start of the problems with Mercury.
First the fund switched from using three traditional UK balanced managers, in Schroder, Gartmore and Mercury. Instead it let Gartmore go and appointed US managers in JPMorgan and Capital to run specialist accounts in US and Japanese equities.
The review also involved the introduction of new measurement benchmarks, moving away from the weighted averaged of the WM 2000 peer group to a new index-based benchmark.
A lot of these practices have become widespread throughout the industry, with performance being measured far more against indices than against the relative numbers of the peer group. Specialist management has also become more popular as large balanced mandates have started to lose favour.
So what will happen when the judge makes his decision? Either way, there will be much closer scrutiny of agreements between funds and their managers.
“The thing is that everyone will be renegotiating contracts,” says one London fund manager. “It has been quite a standard thing for contracts to say 1% of outperformance and no more than 3% of underperformance [like the Mercury/Unilever contract]. There will be a lot of discussion of the ins and outs of individual contracts, and people will be going back and checking exactly what was promised at the beauty parade.”
Onlookers may consider that pension funds cannot have it both ways. When times are good and returns are pouring in, everyone is happy yet when the markets are heading south, putting the blame solely at the feet of the fund managers may not be possible.
Yet in the wake of the looting of the Mirror Group pension fund by the company’s autocratic chairman, Robert Maxwell, the extra responsibilities placed on trustees by the resulting legislation, recently added to by the adoption of a new code of practice of investment principles, have meant their jobs have become increasingly onerous. Mayall’s actions at Unilever came about as the fund looked to maximize its returns and the falling off of Mercury’s performance was something they weren’t able to tolerate. Going one step further and seeking damages through the courts is a symptom of this new world order.
“Actions against fund managers are rare,” Unilever’s counsel, Jonathan Sumption, told the High Court. He was overstating things. Before this case, they were non-existent.
If Unilever wins, expect many other funds to follow in its path.
Wendy Mayall
No-nonsense director of the Unilever Superannuation Fund. Has attracted widespread awe for taking Carol Galley on. Was previously an investment consultant with Stamford Associates.
Dugald Eadie
Founded performance measurer The WM Company in Edinburgh which he sold to Bankers Trust (now owned by Deutsche Bank). Left WM after falling out with Bankers Trust and later re-emerged as head of Henderson Investors. Left fund management after negotiating the sale of Henderson to AMP in 1999. A skilled mathematician, he is credited with inventing the original FTSE indices. “A very bright guy and a mould-breaking individual,” says someone who knows him well. Eadie’s number-crunching skills will be brought into play by Unilever.
Jonathan Sumption QC
Fought UK home secretary Jack Straw’s corner in the battle to extradite former Chilean dictator general Augusto Pinochet in 1999. Chief task: to make Carol Galley jump through hoops under cross-examination in the witness box.
Carol Galley
Dubbed the Ice Maiden in some quarters. “Unfair” say her supporters. She is said to have negotiated the 1997 sale of Mercury to Merrill’s David Komansky over a plate of Peking duck at the Dorchester. She is set to leave Merrill after the court case.
Tony Dye
Known as Dr Doom thanks to his bearish stance at Phillips&Drew. Left P&D in 2000 shortly before a his long-held market predictions started to come good and improve its performance. Has since returned to the fray running his own hedge fund.
Alistair Lennard
A “wild card” and star of the Select team of UK equities managers that ruled the roost at Mercury in the 1990s. Hauled off the Unilever account as his bets failed to come good.
John Richards
Alistair Lennard’s boss as head of the Select team until mid-1997 when he left Mercury to join his old friend Nicola Horlick in founding SG Asset Management. Described in court as “a very highly regarded fund manager. As a team leader he was, to put it mildly, unassertive”.
