New Star threatened with loss of £1.7bn if mutual severs its links

Family Investments is reviewing its relationship followingfund's disappointing performance in recent months
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The Independent Online

New Star Asset Management faces losing nearly 10 per cent of its assets if the performance of its funds doesn't improve, a leading institutional investor has indicated.

New Star manages assets worth around £1.7bn for Family Investments, a Brighton-based mutual specialising in family savings accounts, which first invested in the John Duffield-led firm in 2003. The investor is believed to have taken soundings about transferring its assets should New Star's performance not improve.

Miles Bingham, the head of savings and investments at the mutual, said: "Performance at New Star is not so good now but it has been excellent in the past. We have an open-ended contract with New Star. In theory we could leave at any time, although I'm not saying we'll do that."

A spokesman for New Star said: "We are not expecting to see these funds depart New Star. It's part of the normal course of business for people to review mandates from time to time."

New Star manages assets worth around £20bn, with more than half coming from retail investors. Cash from such investors typically tends to be more stable than investments made by institutions.

News that Family Investments could end its relationship with the fund manager comes at a difficult time for the group. Its shares collapsed in January to 101.25p from a peak of 523p following a profits warning and the slashing of its dividend. Funds under the company's management tumbled by 6.5 per cent to £23.1bn over the six months to January's statement. Mr Duffield is reported to have said: "This is definitely the worst day of my business life."

According to the recently published Sunday Times Rich List, the 70 per cent fall in New Star's share price is believed to have cost Mr Duffield around £80m; nevertheless, his personal fortune is still estimated at £400m.

Mr Duffield has frozen the salaries of his fund managers after the recent turmoil, saying: "All the senior fund managers are not getting a single penny increase in salary this year. Not even a cost-of-living increase."

For the year to the end of January, when the profits warning was made, 25 out of 39 of the company's funds underperformed their sector averages.

For example, the firm's much-trumpeted Tri Star fund, which was launched in July 2006, has lost investors 10 per cent of their cash, making it the worst performer in the sector. The group will be pinning its hopes on the launch of an Indian equity fund in June, the management of which is being outsourced to India's Tata Asset Management.

The 380 staff at New Star own around 35 per cent of the firm's equity but are not able to sell their stock until 2009, when the terms of a lock-in agreement end. Mr Duffield is thought to have retained a personal stake of around 12.5 per cent.

The share-price dive is believed to have prompted a number of private equity firms including Candover and Apax to run the rule over the company. Aberdeen Asset Management, which has undergone a remarkable turnaround under Martin Gilbert in recent times, is also thought to have looked at it.

Shares in New Star closed up more than 5 per cent on Friday at 129.5p.