John Duffield, the flamboyant founder of New Star Asset Management, has been re-learning some harsh lessons lately about just what happens when you promise the earth and don't deliver it.
Over the past 12 months, performance across the majority of New Star's funds has been absolutely dire, with customers withdrawing money in their droves and financial advisers being forced to question the loyalty they have shown to the company for the first time since it was established six-and-a-half years ago.
A quick browse around the group's website reveals that around one-third of the group's retail funds are currently in the bottom 25 per cent of performers in their sectors over the past year, while just five rank in the top quartile.
Furthermore, and somewhat alarmingly, many of the fund managers whose performances have been worst are the most experienced and seasoned managers of the lot.
Richard Pease, the director of European equities; Stephen Whittaker, the company's chief investment officer; Toby Thompson, the manager of the Higher Income fund; and Patrick Evershed, the highly respected veteran fund manager, are four of the biggest names in the fund management industry today – yet each of their funds ranks amongst the very worst performers in their respective sectors over the past year.
So what's the reason behind New Star's rot? It's one thing for a fund management house to have a few bad eggs in their basket, but when you find that there are only a few left that are not starting to stink, you have to begin wondering whether there is something in the water in Knightsbridge (where New Star's plush offices are).
The Save & Spend columnist Mark Dampier has suggested that it may be because the managers barely speak to each other. Unlike most fund management houses, New Star is all about the individuals – hiring those with the best track records, and leaving them to get on with it.
Elsewhere, however – even in other institutions which also subscribe to the so-called "star" fund management model – the managers tend to at least talk to each other on a regular basis, sometimes in daily conferences, sharing views and engaging in healthy debates about where markets are going.
Another potential issue, in my opinion, could be the way the managers are remunerated. Unlike other houses, where pay is linked directly to their funds' performance, the managers at New Star have always been paid low-ish basic salaries, but promised much more via shares and options in the company. They were finally given the chance to cash in a slug of these when the business floated two years ago, and have been given another fairly large slug or two since.
Unfortunately, over the past six months, New Star's share price – and hence the value of many managers' share packages – has been chopped in five. Hence, after cashing in the large windfalls that they'd spent several years waiting for, they then discovered that the value of their remaining shares and options was 80 per cent less than they had bargained for.
As Theo Zemek, the head of the company's corporate bond team, proved when she defected to Axa last month, New Star's managers are no longer too expensive to be poached – and have far less incentive than they did in their day-to-day work.
I'm told that Duffield has some changes in the pipeline, and if history is anything to go by, heads are sure to roll. But will he have the guts to sack the likes of Pease, Whittaker and Thompson – names on which he built the company? Given that he had the courage to fire his long-time friend Alan Miller after his fund failed to perform a few years ago, I wouldn't rule it out.
Nevertheless, in my opinion, more firings are not the answer. Financial markets are now more complex than they once were, and being a superhero is no longer as easy. Is it possible that New Star's model is starting to go out of date?Reuse content