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MARKET COMMENT
By
Carburton Street, London -- The current legal scrap between Unilever (LSE: ULVR) and Merrill Lynch (NYSE: MER) highlights plenty of Wise investment mistakes. The "professionals" involved should read the Ten Steps To Foolish Investing before making any further investment decisions. To recap, Unilever and Merrill Lynch are currently in the High Court, with the consumer products group claiming £130m in damages from the US investment bank. The action stems from a deal made in 1996, whereby Mercury Asset Management (now owned by Merrill Lynch) agreed that Unilever's pension fund would, "in normal circumstances", not fall more than 3% below a benchmark index in any four quarter period. Unilever are arguing that its £1b fund fell 10.5% below the agreed benchmark between January 1997 and March 1998, and are claiming back the shortfall. While Unilever have pointed to a "wild card" fund manager, and Merrill expected to argue it actually did not underperform, both sides are equally to blame in this courtroom fiasco. The two companies have broken numerous Foolish principles. For starters, anybody promising some sort of short-term future investment performance is on a hiding to nothing. Merrill admitted yesterday they'd put Unilever's money on "the wrong side of some highly unusual and persistent market factors" during the fifteen months under scrutiny. Trouble is, stock markets are always inherently unpredictable over the short-term and always surprise investors with "highly unusual" movements. Unilever can be blamed for actually believing the original promises made by Mercury, and by emphasising a short-term performance approach for their pension fund. The fact that Unilever's pension fund couldn't stomach twelve months of underperformance undoubtedly led to Merrill's managers taking undue risks. As Unilever has belatedly found out, getting involved in any managed fund is always likely to end in underperformance tears. Don't large corporations know that about 90% of managed funds underperform the stock market average over the long-term? They should do. While the arguments continue, the only moral victor of this court case will be the simple index tracker. Unlike any managed fund, trackers guarantee a market average performance with little in the way of costs, courtroom or other.