If Unilever successfully sues Merrill Lynch for fund mismanagement the consequence could be a timid fund management industry
A courtroom separation, as any divorce lawyer will tell you, is seldom an edifying spectacle. Secrets are revealed, grievances aired, resentments ventilated and petty jealousies given their moment to shine. Few people ever emerge from the proceedings with either their souls or their wallets in better shape.
This is a truth that Unilever Plc, the Anglo-Dutch consumer goods giant, and Merrill Lynch & Co may be about to learn. Like divorcees, however, they may also be about to learn another lesson as well; that lawyers, like dogs, can be hard to get rid of once they are on the payroll; and that legal cases, like wars in Afghanistan, are trickier to finish than they are to start.
In the British courts, Unilever's pension fund is suing Merrill Lynch for damages of about £130m for what it alleges was mismanagement of its fund. The case has prompted much amusement in the City of London, which always likes to see one of its number under attack.
But it is also a case that raises important issues. If successful, Unilever could permanently change the structure of the fund management industry. It would also take a big step towards the criminalisation of commercial failure, a trend which can't work to Unilever's advantage.
The case itself is fascinating and complex. Unilever is saying something original, and potentially very dangerous, for financial markets around the world: you were rotten at managing our money, you picked the wrong stocks, we lost money as a result and we want our money back.
The case is expected to run for several more weeks and it would be irresponsible to speculate on its outcome. The raw facts are not in dispute, however. Like most legal cases, it is interpretation that is at stake.
In 1997, Merrill Lynch paid £3.1bn for Mercury Asset Management, at the time one of the leading UK fund managers, one of whose clients was the Unilever pension fund.
During the period from January 1997 to March 1998, the Unilever fund underperformed its agreed benchmark index by 8%. Of the 1,600 pension funds monitored by WM Co in 1997, the Unilever fund's performance was the worst.
In March 1998, Mercury, not very surprisingly, was sacked. One might speculate that Bozo the Clown would have done a better job of looking after the retirement incomes of Unilever's staff.
Everyone makes rotten investments sometimes, even Merrill Lynch (which must be wondering if it can sue anyone for the £3.1bn it paid for Mercury). It is part of the game, and if that were Unilever's entire claim, the court case would be a short one.
But the company also argues that Mercury broke a contract which governed the kind of stocks the fund would be invested in and which guaranteed that it would not lag its benchmark by more than an agreed amount. Mercury argues that the performance target was a goal, not a guarantee, and that Unilever's fund trustees had a duty to monitor the investments made on their behalf.
This is the stuff lawyers dream about at night ' two very rich clients with a lot at stake and plenty of scope for arguing over the definitions of obscure words. Still, no matter how it may have been provoked by Mercury's underperformance, Unilever is probably mistaken in bringing this case.
The one thing Mercury was almost certainly guilty of, like most fund managers, is over-selling itself. Few fund managers can ever consistently beat an index. It is harsh to criticise them for claiming they can. What else are they to do? Turn up at a presentation with a blindfold, a set of darts and list of stocks and ask the client if they would like to sit in on the asset allocation meeting?
How happy, one wonders, is Unilever's chairman, Niall Fitzgerald, with the road his pension fund is traveling down? Can everyone in the marketing department put his hand on his heart and promise that every claim of whiter whites made for its Persil detergent would stand up in court? Does eating Ben & Jerry's ice cream really create a happier, more peaceful world?
Consumer goods companies need to tread carefully before accusing others of making extravagant marketing claims.
More broadly, Unilever is adding to the trend of criminalising failure. Whenever something goes wrong, when a fund tanks, a company collapses or a bank gets landed with a mountain of debts, the cry goes up for handcuffs to be clamped on guilty hands.
That is dangerous. The freedom to fail is an important component of a free market economy, since it is only through risk and innovation that new ideas are ever tried out. The consequences of a victory for Unilever would be a timid fund management industry, obsessed with exactly replicating the performance of its rivals and incapable of original thinking.
A free market, and the fund management industry is a very free market, with literally hundreds of firms to choose from, already has a more than adequate mechanism for punishing failure. It's called not buying their rubbish anymore.
Unilever has already sacked Merrills as the manager of its pension fund. The firm is doing poorly in the asset management industry and the individual who ran the Unilever fund no longer works for the company. That, surely, is punishment enough, a far more effective sanction than paying millions to the lawyers.
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From 6 April 2019