Rocker v Full Circle Asset Management

A discretionary investment manager is contractually bound by the agreed risk profile of the portfolio as a whole. Where no express flexibility has been agreed, a medium-risk mandate is not extended by an uncertain tolerance or by the client’s general awareness that risk may increase. A performance benchmark ordinarily measures performance; it does not impose an asset-allocation obligation or guarantee returns. The expression “stop loss” ordinarily denotes an automatic or semi-automatic sale at the specified trigger point. In this case, “aggressive” or “tight” stop losses required sale after a 5% loss. Damages were available for breach of the risk mandate and stop-loss obligation, but not for hypothetical returns measured by a benchmark.

The claimant invested £1.5 million in the defendant’s discretionary Inner Circle Portfolio in 2009. The portfolio pursued an agreed bear strategy. The claimant alleged that the defendant exceeded the agreed medium-risk mandate, failed to operate promised stop losses, breached performance-benchmark obligations and contravened the Conduct of Business Sourcebook (COBS). The defendant denied liability and contended that the portfolio had a flexible medium-risk profile, that stop losses were discretionary alerts, and that any breach caused no recoverable loss. The court determined the contractual terms, portfolio risk scoring, stop-loss meaning and operation, regulatory duties, causation and quantum.

1. Contractual terms and risk. The Client Agreement, Custodian Form and Suitability Letter formed part of the 2009 agreement. The claimant agreed to the bear strategy. His customer risk profile and the portfolio risk profile remained medium until June 2012. The defendant was precluded from asserting a different risk profile, and the evidence did not establish agreement to a “medium but flexible” profile.
2. Breach of mandate. The basic medium-risk range was 3.5 to 6.5. No additional 0.5 tolerance or undefined flexibility was established. Risk scoring was not a negligence issue: the claim concerned whether the portfolio objectively exceeded the mandate, even if scoring was undertaken retrospectively. The defendant’s individual-asset scoring and netting methodology were accepted, but the portfolio exceeded 6.5 during nine monthly periods. This breached clauses 2.3 and 3.1 of the Client Agreement and, insofar as the portfolio became unsuitable, COBS 9.3.1.
3. Benchmark. Clause 2.9 imposed a performance measure, not an asset-allocation obligation or guarantee of returns. COBS 6.1.6 likewise required a meaningful method of evaluating performance and did not prescribe portfolio composition. The benchmark claim therefore failed.
4. Stop losses. The repeated contractual statements and the Suitability Letter created an obligation to provide stop-loss protection. In context, “stop loss” meant an automatic or semi-automatic sale when the specified level was reached. “Aggressive” or “tight” meant a 5% trigger. The defendant’s discretionary-alert approach necessarily breached the obligation where an investment falling beyond the trigger was retained.
5. COBS and loss. The defendant inadequately assessed the claimant’s attitude to risk, but other information duties were substantially satisfied. Record-keeping failures caused no separate loss. Damages were recoverable for breach of mandate and stop-loss obligations, subject to recalculation and avoidance of double recovery. Opportunity loss based on APCIMS returns was rejected because the counterfactual had to preserve the agreed strategy and risk level.