The news that the Unilever Superannuation Fund is taking legal action against Merrill Lynch Mercury Asset Management for underperformance in the handling of its portfolio raises crucial issues for investor relations officers.
This is no longer just a fund management spat between client and manager. It has grave implications for the future of active fund management in the UK and other markets. Leading on from that is a major impact on corporate relationships with institutions.
For those IROs not yet au fait with the nature of the complaint, USF is alleging that Mercury failed to account for the risk of underperformance during its management of the portfolio in 1997. It sacked Mercury for underperforming an agreed benchmark by 10.5 percent and is now seeking damages of over £100 mn.
If successful, USF’s action could lead to massive increases in fees by active fund managers to cover increased costs. They would be forced to devote a larger part of their investing resources to risk assessment and also be prepared to shoulder the burden of regular legal challenges for underperformance. The likely outcome is an even greater increase in the popularity of indexed funds as their relative costs of management are reduced even further.
What might this mean for listed companies and their investor relations functions? Some of you might think that an increase in indexation would lead to a decrease in investor relations demands from fund management institutions. They are, after all, locked into a stock come hell or high water as long as it remains in the index.
Such a response is unlikely. All indications are that as indexation grows in importance, institutions become more activist in the pressures they put on management. Indexers, such as Calpers, can’t do the Wall Street walk so they push for greater performance from their holdings.
Meanwhile, those still intent on the active fund management game would be likely to increase pressure for greater transparency. You are certainly in a better position to analyze risk in a portfolio if you possess more, rather than less, information.
And what about the small and mid-caps? Any further move toward indexed funds will tend to push small and mid-cap companies further out of the limelight. They had better be prepared to really make their stories stand out in order to maintain investor attention.
Of course, such outcomes are largely dependent upon USF winning its court action. Mercury is ‘vigorously’ contesting the claim and remains confident of success. But regardless of the outcome, the action will lead many institutions to view active fund management in a new light. IROs take note: the benchmark has moved.
