Unilever/Merrills case will do little to improve confidence in the fund management industry
Will 2001 be the annus horribilis of the fund management industry? The industry is under siege from all sides. The markets remain treacherous ' slow, thin and volatile. After seven fat years clients are struggling to accept how difficult it is to make money in these changed times.
Retail clients, normally docile and eager to hand over their cash to managers they respect or even revere, have started sniping and sneering about 'mis-selling'. There is little public sympathy for the regulatory onslaught the industry is facing. Every aspect of the business is under scrutiny: links with brokers, pricing structures, performance and risk management, marketing and corporate governance.
The Government is thrilled about the sweeping reforms proposed by its gamekeeper Paul Myners, the chairman of Gartmore Investment Management. So excited, in fact, that it has already set a review date in March 2003 to prepare legislation in case the voluntary measures, which are not even in force yet, do not have the desired effect.
Given this generally hostile environment, you would think the industry would close ranks, and take a collective decision to lie low until it can rally for a counter attack. Not a bit of it. The biggest legal case in UK investment history has just started because two heavyweights, Merrill Lynch (for onetime Mercury Asset Management) and the Unilever Superannuation Fund (USF), cannot sort out their differences.
USF is suing Merrill for £130m for alleged negligent management of its investments. Pre-court negotiations stalled after the Unilever fund came down to £75m; Merrill wouldn't go above £20m. The difference is a handy sum in these sparse times, but hardly worth burning a brand, or a reputation, for.
What exactly are they fighting over? USF says Merrill underperformed agreed targets and was negligent. Merrill says it might have underperformed the target (which was only a target), but it still outperformed everyone else, and it was not negligent.
As the Unilever/Merrill case gathers momentum, a group of eight institutional investors are preparing to sue the government over its handling of the dissolution of Railtrack. The circumstances are very different but everyone will be on the lookout for any suspicion of double standards or inconsistency.
Litigation is of course commonplace in the US, the inspiration for much of present-day UK investment practice. But even there, judges are tiring of opportunistic claims. Recently, a group of investors who sought to blame their losses on research from Morgan Stanley technology analyst Mary Meeker were told to go away and take the hit on the chin. Oddly, Merrill Lynch chose to settle rather than contest an arbitration claim (a lower ranking charge) against its technology analyst Henry Blodget.
Increased recourse to the courts is partly the result of improved transparency. In times gone by, foul play or incompetence was quietly but ruthlessly dealt with by fellow professionals and the perpetrator sunk without trace. These days, the nod-and-wink culture is taboo, so every failing is in the public domain, with no room for face-saving compromise.
The Unilever/Merrill case will establish a legal precedent, and there are already further suits lined up pending the outcome. But for most players in the industry, and for the broad public, this is an unedifying spectacle that will further damage confidence in investment managers.
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