The Arbiter for Financial Services (the ‘Arbiter’) confirms the principle that the calculation of losses resulting from the discretionary management of an investment portfolio needs to take into consideration all investments in the portfolio, including all capital gains and losses, and income generated thereon[1].

In this case, plaintiff had entered into a discretionary management agreement with defendant company.  The portfolio held pursuant to such agreement was invested on a total return basis.  Plaintiff claimed the portfolio made losses, and sought to prove damages on the basis of a number of investments held in his portfolio which allegedly incurred capital losses.  Plaintiff based his case on a couple of handpicked investments allegedly making losses, and not on all investments in his portfolio, whilst also ignoring in his calculations returns by way of interest or dividend distribution, not only on the entire portfolio, but also on the handpicked investments he chose to rely on.

Defendant argued that any alleged damages resulting from discretionary management services relating to a portfolio of investments invested on a total return basis, would need to be calculated on the basis of the entire portfolio, taking into consideration the income generated by all the holdings in the portfolio, and their price appreciation or depreciation.

The Arbiter upheld defendant’s arguments, and considered that once plaintiff alleged losses in relation to a portfolio of investments managed by defendant company, he could not calculate losses on the basis of a selected number of investments, but on the basis of the entire portfolio, whilst also taking into consideration income on investments (interests and dividends), and capital gains and losses on all the investments forming part of the portfolio complained of.  If this were not the case, it would allow a complainant to move the goal posts as suited him best.

Had the Arbiter accepted plaintiff’s position and taken into consideration only the investments selected by plaintiff to calculate the loss, plaintiff would still not have proved his case, since he only took into consideration the capital depreciation of his chosen investments, whilst completely ignoring income in the form of dividends or interest accruing thereon.  This was contrary to the Arbiter’s decisions in various other cases[2], where it was consistently decided that in calculating losses it was not enough to look at the loss in capital that one originally invested, but one would also need to consider the income accrued over time on those investments and offset this against any capital loss.  Plaintiff in this case had merely taken into consideration the loss in capital.  Had he calculated income accrued over the investments he relied on to prove loss, and offset this against the alleged capital loss, his case would still have failed, as it resulted that he had in fact still made again. 

This case thus confirms that any calculation of losses on investments will need to take into consideration income derived thereon and not merely capital loss.  It also sets the principle that calculation of losses in a discretionary portfolio management arrangement will need to assess all investments in that portfolio, all income derived thereon, together with all capital appreciation or depreciation.