Fund manager slammed in court

Unilever says unacceptable risks were taken

		Andrew Verity BBC personal finance reporter

One of the City's biggest fund managers was negligent in the way it managed more than £1bn of pension savings, leaving a pension scheme £130m poorer than it should have been, a court heard today.

The High Court heard that Mercury Asset Management, now owned by the giant US investment house Merrill Lynch, ran "unacceptable risks" when it was in charge of investing money on behalf of the pension fund of Unilever, the consumer goods giant.

Opening an unprecedented court case brought by the pension fund's trustees, Jonathan Sumption QC said Mercury concentrated too much of Unilever's money on a narrow selection of shares favoured by its analysts.

Mercury had misjudged its choice of shares, Mr Sumption said.

Negligence into play

But negligence only came into play when Alistair Lennard, the Mercury fund manager in charge of Unilever's money, bet much more than his colleagues on the fortunes of those shares.

"The critical fact is that those misjudgements didn't affect other portfolios of shares in anything like the way they affected those of Mr Lennard¿Whatever the team did in tens, he did in hundreds."

He added that Mercury "did not even try" to limit the risks being taken: "Not putting too many eggs in one basket is a fundamental canon of investment management which was disregarded."

He said if the bets had come off, Mr Lennard's portfolio would have soared in value compared to his colleagues - but he was taking more risk than the trustees of Unilever's fund desired.

Control failure

Mercury's internal controls failed to stop Mr Lennard from taking "extreme positions", even though it had signed a contract which implied a much more cautious approach was needed, said the barrister.

Mercury replaced Mr Lennard in May 1997.

The fund he managed was ranked bottom out of 1,600 similar funds across the City.

By March 1998, the fund had failed to recover enough ground to satisfy the Unilever trustees, and Mercury lost its contract to manage the pension money.

On the defensive

Mercury will begin its defence on Wednesday. It says its funds were ranked top for nine years before 1997.

Mercury claims its investments performed poorly because of highly unusual market conditions in 1997 - with a large chunk of the stock market's growth centred on banks such as Lloyds TSB.

Mercury had invested little in banks, believing they would be hit by an economic slowdown.

The court case is expected to last up to eight weeks.

Within three weeks, star witnesses will be called from the City's fund management community.

Stars come out

One is Carol Galley, the Mercury executive who made millions from its sale to Merrill Lynch and was once nicknamed "Ice Maiden".

For years she struck fear into the hearts of many of the City's top executives, using Mercury's shareholdings to decide the outcome of takeover battles such as Granada's purchase of the Forte hotel group.

Another is Tony Dye, the fund manager whose pessimistic view of the stock market at first earned him brickbats, but now plaudits, as the City's most prominent "bear".