Another “star” fund manager falls from Grace – Black Rock’s Mark Lyttleton arrested

Mark Lyttleton of BlackRock

The elusive “alpha” in the centrall planned market environment gains another scalp…Mark Lyttleton, a star manager at asset management firm Black Rock and who became a U.K. poster boy for retail clients seeking hedge-fund style investments after posting positive returns in 2008 when markets crashed has been arrrested aling with his wife in connection with insider dealin issues. 

His fund was one of the best performers during the GFC – beating 98% of all other funds and he attracted quite a capital mass – at it’s peak over $3bn as retail investors flocked to his fund. When performance nosedived over the next four years, he first took a three-month leave and then resigned from BlackRock in March.

In a stunning fall from grace, he was arrested last month and is under investigation as part of a Financial Conduct Authority probe into insider trading.

Insider-trading probes have led to arrests of employees at other fund management firms, including Legal & General Plc, Schroders Plc and GLG Partners Inc., as U.K. regulators stepped up their pursuit of financial crime from day-traders to the country’s biggest institutional investors. Lyttleton, 41, was arrested along with his wife, Delphine Lyttleton, 37. Insider trading carries a maximum sentence of seven years in prison in the U.K.

The investigation relates “to allegations carried out for personal gain while off our premises,” BlackRock, the world’s biggest asset manager, said in an e-mailed statement, adding that neither the firm nor its employees are under investigation.

Lyttleton began investing as a boy when he entered the Daily Telegraph’s stock-picking competition in 1978. He won by selecting Siebens Oil & Gas Ltd., that year’s best performer. He was encouraged to enter by his father, who worked in finance, and picked the stock by pure chance, he said in a 2009 interview.

It was in 2006 that Lyttleton’s star was really rising. He was known for astute picks among U.K. small- and mid-cap companies and in 2005 was chosen to be the manager of a new flagship product, which became BlackRock U.K. Absolute Alpha Fund. The fund was one of the first in the U.K. offered to retail investors that bet on stocks falling as well as rising.

His wife Delphine Lyttleton’s homeopathy business is based in Kensington, west London and she studied finance and economics in the U.K. and France before working for Merrill Lynch from 2000 to 2003. The couple live in a Kensington home they bought in 2009 for 5.5 million pounds, Land Registry records show.

In 2008, Lyttleton’s Absolute Alpha fund avoided banks and returned 1.5 percent, beating 98 percent of its peer group, which dropped 29.5 percent, data compiled by Bloomberg show. He also managed BlackRock’s 509 million-pound U.K. Fund and its U.K. Dynamic Fund, which currently has 558 million pounds of assets.

Lyttleton’s performance suffered at Absolute Alpha when interest rates were cut at the end of 2008 – an issue that has caught many a seasoned fund manager as the old rules of the market seem to give with the new centrally planned, QE environment. What is cheap gets cheaper and what is expensive continues to run. It is an immensely frustrating environment in which to be an asset manager schooled in solid fundamentals.

While Lyttleton correctly forecast in the 2009 interview that rising taxes, high unemployment and cuts in government spending would constrain U.K. growth, he underperformed in 2009 and 2010. His Absolute Alpha fund was in the bottom 5 percent of peers in those years and the bottom 2 percent of its peer group in the past three years. The fund declined 5.6 percent in the past year, putting it in the bottom 1 percent of its competitor funds.

“Often what he talked was fine,” said Lowcock of Hargreaves Lansdown. “It wasn’t reflected in the right stock picking.”

Lyttleton’s skepticism of U.K. banks hurt the fund in 2009 when the market rallied and investments in large companies in 2010 detracted from performance when stocks with emerging-markets businesses rallied, Lowcock said. Wrong-way bets included long positions in fund manager Man Group Plc and house builder Taylor Wimpey Plc, he said.

Lyttleton also had a short position in auto-parts maker Tomkins Ltd. before the firm’s share price soared as it was acquired in 2010, Lowcock said.

“Shorting is a very powerful tool if you get it right,” Lyttleton said in a May 2008 interview. Shorting companies sensitive to an economic and a housing-market slowdown has helped the fund make “quite a lot of money,” he said.

In September 2011, BlackRock appointed Nick Little to co-manage the firm’s U.K. Fund with Lyttleton, who stopped managing the fund in March 2012. Lyttleton took a three-month leave of absence that year and then told BlackRock he planned to quit in March 2013, the company said at the time.

Aside from managing money, Lyttleton supported an African wildlife and education charity called Tusk Trust, according to the JustGiving.com website.

“People who know me well don’t believe that I am capable of running a bath never mind 21kms at 5,500ft on a summer’s day in Kenya..!,” he wrote on the website in 2009.

Lyttleton’s case marks the third time London finance workers have been arrested on suspicion of insider trading this year. The Financial Services Authority, the FCA’s predecessor, arrested five people including a Schroders trader in January.

“People had the perception that the risk of getting caught insider trading is low and the chance of being pursued is also low,” said Chris Finney, a regulatory partner at law firm Edwards Wildman Palmer U.K. LLP in London, who worked at the FSA for nine years. “If you get a big name with strong evidence against them, then it changes the landscape. People are more likely to think twice about whether to do it.”