May 15 (Bloomberg) -- BlackRock Inc.’s Mark Lyttleton, who was picking winning stocks as an 8-year-old, became a U.K. poster boy for retail clients seeking hedge-fund style investments after posting positive returns in 2008 when markets crashed. Money poured in.
When performance nosedived over the next four years, he first took a three-month leave and quit New York-based BlackRock in March. With the funds lagging behind peers, he was arrested last month and is under investigation as part of a Financial Conduct Authority probe into insider trading, two people with knowledge of the investigation said May 13, asking not to be identified because the matter isn’t public.
“He was a star manager with a high profile,” said Adrian Lowcock, senior research analyst at Hargreaves Lansdown Plc, the U.K.’s biggest retail broker. “Sadly, it has negative connotations for the wider industry of finance, which doesn’t have the best reputations anyway, but it’s important for the FCA to investigate any potential laws being broken to restore confidence for investors.”
Insider-trading probes have led to arrests of employees at other 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, one of the people said. 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.
An FCA spokesman declined to comment yesterday beyond the agency’s May 3 statement announcing that two people had been arrested.
Mark Lyttleton, who was based in BlackRock’s London office, couldn’t be reached for comment. A man who answered the phone at Anamaya, where Delphine Lyttleton is listed as a practitioner in homeopathy, life coaching and meditation, said she was unavailable to comment.
Lyttleton, who is British, 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.
While studying at York University, Lyttleton was an intern at Mercury Asset Management Group Plc and went to work for the firm after graduating with a degree in chemistry. Merrill Lynch & Co. acquired Mercury in 1997 and then sold it to BlackRock for $9.4 billion in 2006.
By then, Lyttleton’s star was 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, according to Lowcock. It grew to about 2 billion pounds ($3 billion) of assets in 2008, he said. The fund had 383 million pounds of assets as of April 30, according to data compiled by Bloomberg.
Delphine Lyttleton’s homeopathy business is based in Kensington, west London, according to public records at Companies House. She studied finance and economics in the U.K. and France before working for Merrill Lynch from 2000 to 2003, according to a LinkedIn profile matching her name. Feeling “so unfulfilled and burnt out,” she left the bank to become a homeopathic therapist, it said. 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 has 558 million pounds of assets.
Lyttleton’s performance suffered at Absolute Alpha when interest rates were cut at the end of 2008, said Ben Yearsley, head of investment research at Charles Stanley & Co., a U.K. broker that administers 17 billion pounds of assets.
“That’s not uncommon among absolute return guys,” Yearsley said. “A lot of their returns were generated on the cash held and a few positions on shares.”
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, according to data compiled by Bloomberg.
“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.
He raised 17,316 pounds and completed the half-marathon in two hours and 13 minutes, according to the race website.
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.”