New Star crashes as fund flops force profits warning

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The Independent Online

Shares in New Star Asset Management, the fund management group founded by the outspoken City entrepreneur John Duffield, plummeted by as much as 44 per cent yesterday, after the company revealed it had been haemorrhaging assets in recent months, following a run of bad performance across its retail fund range.

As a result, the company said it was slashing its final dividend for 2007 by 80 per cent to just 1p, making a total dividend for the year of just 5p. In April last year, the company guided analysts to expect a total dividend of 9p for the year.

Overall, the group revealed its total funds under management had fallen 6.5 per cent to £23.1bn during the second half of 2007, driven by a combination of poor fund performance and an increasing number of investors withdrawing their savings. The firm saw net outflows of £500m over the period, the worst of which were from its international mutual funds.

The company was also gloomy about the prospects for the year ahead, predicting a sharp fall in its profits for 2008: "We are not optimistic about the outlook for 2008," it said. "As a result both of depressed market conditions and the poor relative investment performance of some of our principal products in 2007, there may be further net outflows of assets, at least during the first half of 2008. As a consequence, operating profits are expected to be significantly lower in 2008 than in 2007."

New Star has produced a spread of poor performance across its funds over the past year, with many of the worst results delivered by its highest profile "star" fund managers. Richard Pease, who manages the company's European Growth fund, Stephen Whittaker, the joint chief investment officer, and Toby Thompson, who manages the Higher Income fund, have all found themselves at the bottom of the performance tables in their respective sectors over the past 12 months.

Last week, the group decided to close down its UK special situations fund, managed by James Ridgewell, rolling investors' assets over into the UK Alpha fund, run by former equity analyst Tim Steer. Only 18 months ago, Mr Ridgewell featured as part of a high-profile advertising campaign, which introduced him as one of "New Star's new stars".

Meanwhile, New Star has also seen a large volume of outflows from its commercial property fund, which has accounted for the majority of fund inflows over the past few years.

Mr Duffield, who is chairman, as well as the founder, of New Star, admitted that the group was having some serious difficulties. "We have a number of issues to address in the current year," he said. "We are committed to doing whatever is necessary to address the problems we have experienced with investment performance in certain of our products."

One key change expected to take place over the coming year, is an overhaul of the fund managers' remuneration packages. Currently, most of New Star's managers are paid relatively low basic salaries, but incentivised with attractive share packages. However, managers were given a chance to cash in a large slug of their shares when the company floated two years ago, and have since been allowed to liquidate some more of their holdings. Meanwhile, the value of their remaining stock has plummeted.

Even before yesterday's announcement, shares in New Star had shed more than two-thirds of their value from the highs of close to 500p that they hit in May last year. After a further collapse yesterday, the stock is now trading at all-time lows, closing the day at 101.25p, giving the company a market value of just £343m.