Expert View | Christopher Walker

City superstars and the risk factor
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The Independent Online

City stars don't come much bigger than Carol Galley. From the Nicky Clarke hair to the Jimmy Choo shoes, she looks it every inch. The last time it was reported, her income was estimated to be £20,000. That was per day, and some suspected even that figure was too low. Is it any surprise that the grilling of the Ice Maiden in the Unilever court case has held the Square Mile spellbound this week?

Personalities are an increasingly rare thing in the financial community. Ms Galley has therefore achieved near-cult status with the usual unsubstantiated City gossip – the stretch limo with tinted windows and the fridge full of champagne next to her desk. Her clash with Unilever's Wendy Mayall has also attracted attention simply because both are women. It is sad that we continue to treat women in powerful positions as something of a novelty.

But behind the high drama there are some very serious issues at stake for the investment community as a whole.

The Unilever Superannuation Fund is suing Merrill Lynch Investment Managers (formerly Mercury Asset Management) for some £130m. It claims that the asset manager behaved negligently while running its pension fund. At one stage the fund reportedly underperformed its target benchmark by a colossal 10 per cent, way above a limit that Unilever claims was agreed by contract. It's not unknown for managers to be sacked for an underperformance of only 1 per cent.

Underperformance in itself, however, cannot be the charge. Appointing a fund manager is no different to a coach choosing a player for the game – you cannot predict that he/she will score. But prediction is still central to the case. Placing limits on under-performance requires some estimate of a portfolio's likely return. This element of risk is known as "tracking error" and various systems have been designed to forecast it by looking at historic price movements.

I know myself from experience that such predictions are dangerous. For example, new stocks have a very inadequate price history. Imagine such predictions during the period of the dot-com boom. In these circumstances, tight controls on the size of individual "bets" are vital.

More instinctive analysis also has a role, particularly in estimating the risk associated with a company's management – consider the effect on BT's share price of management change. In consequence there is inevitably an element of individual fund manager risk. Which brings us back to the star issue. Some have commented on the relative youth of the fund manager Ms Galley passed the £1bn portfolio over to, it is claimed, without the pension trustees knowing. But at 27 he would not have been the youngest person in the City making big money decisions.

More important is how asset managers monitor this element of individual risk. If fund managers are allowed to deviate radically from the "house view" then clients must be made aware of this. Otherwise they are buying something different to what they have been sold.

Pension funds are a collective vehicle of millions of ordinary people's savings for retirement. We must never lose sight of this. The questions the Unilever case raises are awkward for the City, but they have to be asked. If they lead to better risk controls, and a requirement for trustees to have a better understanding of what they buy, this is no bad thing. The danger is that they could lead to more index hugging and managers simply tightening legal contracts. No reward comes without risk, and if the equation is skewed too far either way, we may all be the losers.

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