Young star took risks with fund, Unilever alleges

Unilever kicked off the first day of its trial against Mercury Asset Management by attacking the UK's fourth biggest investment house for allowing one of its youngest fund managers to take risky positions in the Unilever portfolio, leading to alleged mismanagement of £1bn of its pension fund.

Jonathan Sumption QC, Unilever's counsel, told the High Court that the fund's shares allocation was "extreme and unbalanced, with little or no downside protection" for much of the 14 months that it was under Mercury's control.

The man in charge of this fund was Alastair Lennard, a fund manager in his twenties who was promoted by Carol Galley, Mercury's head of investment. Mr Lennard was part of a six-man group at Mercury known as the Select Team, who managed different funds but mainly made similar investment judgements.

Mr Sumption said: "The contrast between Mr Lennard and his colleagues was striking. What they did in 10s, he did in 100s. If things had gone right, Mr Lennard would have done far better than his colleagues, but the corollary of that was that if they did not, it would be disastrous."

Trustees of the Unilever pension have brought a case for £130m of compensation after Mercury failed to meet performance targets from January 1997. The case, which is expected to last eight weeks, is directed against Merrill Lynch Investment Managers because it bought Mercury for £3.1bn in 1997.

Mercury, which had managed a substantial chunk of Unilever's pension assets for nine years until 1996, fell out with the trustees after the two sides renegotiated the terms for 1997. The new contract introduced performance benchmarks of beating an agreed index by 1 per cent or not undershooting it by more than 3 per cent.

Unilever claims that this conservative mandate was not in line with the investment positions taken by Mr Lennard, who did not have any exposure to banks, insurance or pharmaceuticals in the portfolio.

Unilever's case also levels criticism at Mr Lennard's superiors at Mercury, who did not curtail his decisions before he was forced to stand down in May 1997, five months after he had started work under the new contract.

"Mr Lennard was something of a wild card, but it wouldn't be fair to suggest it was all his fault. They [Unilever] were buying Mercury, not just Mr Lennard himself," Mr Sumption said.

Mercury had carved out a reputation for having one of the most fluid approaches to fund management, giving more autonomy to its star employees than was customary. Unilever acknowledges that it knew this, but argues that key checks on employees were not in place for the first part of 1997, even though they were subsequently imposed.

"The management of this portfolio is punctuated by the sound of stable doors being closed after the horse has bolted," Mr Sumption said, opening his argument for Unilever. He will conclude his initial remarks on Wednesday, when Ian Glick QC will present his opening arguments for Mercury. Mr Glick will call Ms Galley to defend her role in the affair.

Mercury is expected to argue that this was an isolated case of under-performance, and that the performance targets were guidelines, not guarantees. Its owner, Merrill Lynch, said in a statement: "With the benefit of hindsight anyone can make the right calls, but that is a very different thing from saying the portfolio was negligently constructed or constructed without proper checks and balances."

The case will be watched closely as could lead to other pension fund trustees trying to sue fund managers for not meeting targets. But the impact is likely to be limited. One pensions lawyer said: "Trustees are going to find that their contracts are not sufficiently tight to bring this kind of case – the Unilever contract appears to have been quite unusual."