Investors lose £55m after New Star puts liquidators into split cap trust

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The Independent Online

New Star Asset Management, the fund manager run by the financier John Duffield, has appointed KPMG as liquidator to handle the breaking up of its split capital investment trust, through which investors have lost more than £55m.

The move is the culmination of a disastrous foray into the controversial arena of split capital trusts for New Star, which launched its Enhanced Income Trust in May 2001.

The trust was designed to take advantage of the distress which many split caps were in at the time, by picking up their assets at rock bottom prices. Instead, New Star's fund was also hit by plunging equity values and it was forced to suspend its shares.

New Star raised £58.5m from investors, with £49.5m going into ordinary shares and £9m into zero dividend preference shares. The shares were placed at 100p, before collapsing. They were suspended at 1.75p for the ordinary shares and 0.5p for the zeros.

New Star borrowed £31.5m from Bank of Scotland to provide gearing for its only split cap fund and has paid back all but £280,000 of the loan. However, its investors have not been compensated for their losses, which stand at more than £55m.

Howard Covington, the chief executive of New Star, said: "Split capital investment trusts are geared, which works very well when markets go up but that is a big disadvantage when they go down, and we have seen the third worst bear market in 100 years."

Aberdeen Asset Management, the largest manager of split caps, was a shareholder in the ironically named Enhanced Income fund. Britannic Asset Management and Framlington also held stakes.

Managers of split caps are currently the subject of the Financial Services Authority's most ambitious investigation ever into whether the products were mis-sold. The watchdog is most interested in establishing whether a "magic circle" of managers colluded to artificially buoy up trusts' share prices by investing in each other.