New Star buries ill-starred split-cap foray

While asset manager savages rivals, it sends liquidators into trust that lost £55m of investors' cash in two years. Jason Nissé reports
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The Independent Online

As the Financial Services Authority gears up its investigation into the split-capital trust scandal, New Star Asset Management is quietly putting into liquidation an ill-conceived foray into the sector which managed to lose around £55m in just two years.

The New Star Enhanced Income Trust is holding an extraordinary meeting on Tuesay 29 July when liquidators from KPMG are expected to be appointed.

The fund's collapse comes as New Star launches an advertising campaign criticising other fund managers for their performance. John Duffield, New Star's high-profile foun- der, attacked rivals last week, saying: "They have done a bloody awful job. It's an absolute disgrace."

The trust was launched by Mr Duffield's fast-moving fund manager in May 2001, when many trusts in the sector ran into trouble, attempting restructurings or even launching controversial rescue rights issues. Indeed, it made much of this in its prospectus, saying: "There are 10 split-capital trusts due to be wound up by the end of 2002. These companies have total assets of approximately £1.5bn. It is expected that this could lead to a significant amount of corporate action in the sector and present investment opportunities to the Group."

The New Star trust raised £58.5m from investors - £49.5m going into ordinary shares and £9m into Zero Dividend Preference Shares. Both share classes were placed at 100p, but soon fell. The shares were suspended at 1.75p for the ordinaries and 0.5p for the zeros. The trust borrowed £31.5m from the Bank of Scotland and has paid back all but £280,000, indicating it has lost over £55m of investors' money in two years.

A look at the trust's portfolio gives a clue to why it performed so badly. It invested in 19 split-capital trusts, buying two classes of shares in two of them. Of these, 11 trusts have had their shares suspended and face restructuring or liquidation, making New Star's investment virtually worthless. The remaining eight investments were worth only £165,504 when last valued three weeks ago.

As with many split-capital trusts, the shareholders bore a great similarity to the investors. Aberdeen Asset Management, which ran two of the suspended trusts New Star invested in, was its largest shareholder with 25.65 per cent. Britannic Asset Management held 9.72 per cent and New Star invested in two trusts, one of which has been suspended. Framlington held 9.49 per cent and New Star bought into two trusts, both of which are suspended. Similar cross-investment relationships exist with BC Asset Management, Leggmason Investors and Morley Fund Managers.

Both Mr Duffield and Philip Butt, New Star's head of investment trusts, are directors of the trust. However, management of the fund was delegated to James Ridgewell, who was just 27 when the fund was launched.

New Star received a fee of 2.25 per cent of assets, or £1.3m, at launch and then 1 per cent per annum, or £585,000. In addition, the firm charged the trust £50,000 a year for administration. New Star waived half its management fee from 1 April to 1 September 2002 and then waived all its fees.

In addition, New Star has said it will cover the cost of the liquidation and any outstanding bank debts up to a maximum of £400,00.

Neither Mr Duffield nor Mr Butt were available for comment. However, Howard Covington, a director of New Star, said: "It is fair to say we were probably more bullish about the prospects for the market and the split-capital sector than most people. Split- capital trusts are leveraged vehicles and they tend to lose more in bear markets."