New Star set for split capital backlash

Investors and advisers to sue for compensation after collapse of trust that lost £55m. Jason Nissé reports

A rash of compensation claims is expected to follow the collapse of a trust launched just 26 months ago by New Star Asset Management, the fund management group founded by John Duffield.

Liquidators were appointed to the New Star Enhanced Income Trust last Monday, after it had managed to lose £55m since it was launched in May 2001, with the stated aim of investing in other split capital trusts. The incestuous market was already in a downward spiral at that point, and the New Star trust, run by 27-year-old fund manager James Ridgewell, bought into 11 trusts that later had their shares suspended. Of £55m invested in the market, only £165,504 was left when the trust was closed.

New Star said it was only marketing the trust to institutions - with fellow split capital trust managers Aberdeen Asset Management, Britannic, Framlington BC, LeggMason and Morley all investing. But The Independent on Sunday has discovered that private investors were sold the zero dividend shares via HSBC Securities, the broker for the fund's launch.

HSBC held a number of presentations to independent financial advisers (IFAs) and private client stockbrokers. One IFA who went to the presentation and recommended New Star Enhanced to clients was Andrew Harwood of CFS Independent in London. He said he was planning to sue the trust's directors, which include Mr Duffield, and possibly HSBC for "negligence and misrepresentation" over how the fund was marketed and managed.

"There may have been some brilliant opportunities, but they just seemed to invest in rubbish," said Mr Harwood.

Michael Mawer from Cheltenham invested over £3,000 after talking to the Bath branch of Gerrard Stockbrokers. "I'm not very knowledgeable in financial matters and I was recommended to buy it by my stockbroker."

Clients of Gerrard were the largest private client losers in the collapse of the trust, holding over 10 per cent of the zero dividend shares. There are plans to try and bring a claim for compensation against it and other brokers who recommended the trust, including Crédit Lyonnais and Brewin Dolphin.

No one from Gerrard wanted to talk about its marketing of shares in the trust. But the firm issued a statement saying: "There was no central marketing of this Trust within Gerrard. Individual invest- ment managers made different decisions based on individual clients' needs and we must reiterate that Gerrard has a very small number of clients and a modest amount of funds invested in the Trust."

Howard Covington, a director of New Star, said the trust was only intended to be marketed to institutional investors. But he added: "A block of the zeros were placed through HSBC and these went mainly to private client brokers."

No one at HSBC Securities was available to comment on how a fund supposedly only for institutional investors ended up being sold to individuals.