Motivation: Unilever vs. Mercury Asset Management - Accounting and Finance Assignment Help

Assignment Task:

Task:

Motivation: Unilever vs. Mercury Asset Management

Oct-Nov 2001: Unilever sued Mercury Asset Management (Merrill Lynch) for the loss of £130m due to negligent management in 1997-98 of their pension fund assets (worth >£600m)

• Poor performance
- active return of -14.49% (April 1997-March 1998)

- one of the worst returns out of 1,624 funds

- worst return out of 20 aggressive growth funds

• Poor risk management: risk out of line with agreed target

• Poor diversification: 75% of the equity fund was in 20 stocks

• ML paid £70m in out-of-court settlement of the claim

Measuring raw return performance

• A security earns 10% returns in year one and 5.66% returns in year two

• The arithmetic average return is just the simple average of the returns

Arithmetic average = (10+5.66)/2=7.83%

• If we have N observations: r1.....rN

Arithmetic average = (r1+r2+..........rN)/N

Suppose returns are reinvested?

• Consider the same security again

• If you had invested £1 in the security after one year it
would be worth £1.10

• If you invest that £1.10 in 2nd year in the security

• Worth £1.10 x1.056=£1.1616 end 2nd year

Money-weighted returns

What if we want to evaluate the performance of an investment where we have taken money out or put money into the investment between the start and end dates?

Example:

• A security earns 10% in year 1, -30% in year 2

• We invest £100 at the start of the year 1 but take out £90 at the start of year 2

How does our investment perform?

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