The share price of the firm fell sharply recently after it announced £500m of outflows from its UK mutual fund range and £1bn from international mutual funds in the second half of 2007.
Some of this was offset by gains in other areas, hedge funds, for example, pulling in some £100m, but overall funds under management fell by 6.5 per cent, from £24.7bn in June to £23.1bn in December.
The company’s trading statement said: “New Star’s European mutual funds and some if its UK mutual funds were badly positioned for the combination of the credit squeeze and high natural resource prices experienced in the second half of 2007. As a consequence, the majority of New Star’s UK and European equity mutual funds significantly underperformed their peers. In addition, New Star suffered from the sharp downturn in the UK commercial property market.”
New Star founder and executive chairman John Duffield says: “We have a number of issues to address. We are committed to doing whatever necessary to address the problems we have experienced with investment performance in certain products.”
Duffield has already announced plans to merge the underperforming UK special situations fund into Tim Steer’s UK alpha fund.
More changes are expected in the next few months across a firm that has prided itself on allowing managers to get on with managing money with little interference.
Hargreaves Lansdown senior investment manager Ben Yearsley says: “You have got to look at the numbers and say it has gone against the managers, who have no one to blame but them-selves. They had the freedom to express their views and they have failed to perform.
“Duffield has defended some of the big names, such as Patrick Evershed, Richard Pease, Toby Thompson and Stephen Whittaker, all of whom are senior managers, but for how long? Given the ability to switch funds nowadays, time is a far more precious commodity than it was five or 10 years ago.”
Like many other firms, New Star has been hit by the downturn in UK commercial property, with the group moving to a bid basis and fortnightly valuations on its UK property fund, which was marked down by 8 per cent last month following a revaluation.
Another concern for the company is the departure of the head of the corporate bonds team Theo Zemek. Her departure is proof that managers can be lured from New Star – in Zemek’s case to Axa.
Some suggest the firm’s shares and options scheme is no longer a big incentive, given the marked drop in the stock price in the past few months.
Chelsea Financial Services managing director Darius McDermott says: “New Star has lost a handful of managers since it launched back in 2001 and I would say that for someone to leave they would have to receive an extremely attractive offer, which is probably the case with Axa and Zemek.
“The fact that New Star has had a difficult year is not in question but for investors much depends on the funds you are involved with. It is up to Duffield to make the appropriate changes and his track record tells you to have faith in what he does.
“He will make the tough decisions if necessary, as he did with Alan Miller, and I believe he will make the same calls again if he believes it is in the best interests of the investors.”
AWD Chase de Vere investments manager Anna Bowes says: “I think that John Duffield will make changes as I do not believe that he would ever move on and leave something unsuccessful.
“We are keeping a very close eye on New Star but we do not believe in cashing in as there is talent there and we do not want to switch out and find all of sudden that the management have turned performance around. As for property in particular, New Star’s investments actually look good, it is more a case of the struggles in the market.”