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Mergers look to raise returns

New Star is planning to merge two of its single-country funds after poor uptake and performance.

The £5.5m Japan fund run by Amanda Gold and £7.7m North America fund run by Greg Kerr have both delivered fourth-quartile returns over three and five years.

The Japan fund has returned 12.1 per cent over five years compared with 47.1 per cent from the Investment Management Association’s Japan sector while the North America fund has returned 3.1 per cent compared with 28.5 per cent from the IMA’s North America sector.

The Japan fund will be merged into the £105m New Star Pacific growth trust run by Ian Beattie and the North America fund will be merged into the £12.6m America fund of funds managed by Mark Harris.

The mergers will go through on June 13, subject to approval, with Gold and Kerr staying to focus on institutional responsibilities.

New Star chairman John Duffield has already made a number of changes this year as he looks to turn round fund performance and the firm’s share price, which is currently 116p after peaking at 523p in the past 12 months.

James Ridgewell’s UK special situations fund was merged into Tim Steer’s UK alpha fund in February. In April, the firm brought in three new fund managers to boost performance on some of its range.

Ex-Barings UK income specialist Charles Deptford and Allianz RCM fund manager Trevor Green joined the UK desk while BDT fund manager David Cornell joined the emerging markets desk.

New Star Investment Funds managing director Mark Skinner says: “By consolidating these small portfolios into more established funds with broader remits, New Star is seeking to improve performance for investors. Investors in these funds should be well served by Ian Beattie and Mark Harris.”

New Star acquired both funds from Edinburgh Fund Managers in 2003.

Chelsea Financial Services managing director Darius McDermott says the decision is rational. He says: “Both funds were not setting the world on fire in the five years or so they were at New Star, taking in less than £15m. Neither area is having the best time at the moment, with the US particularly out of fashion – a big issue considering it is 45 per cent of the world market. Pulling them together with bigger funds with more diversification and opportunities is sound business acumen.”

New Star is not the first firm to axe struggling regional funds in favour of a more diversified approach. Credit Suisse streamlined its multi-manager range last summer after its European, North America, Japan and Asia Pacific funds pulled in only £75m in six years.

At the time, Credit Suisse said the poor uptake had reinforced its belief that advisers prefer to allow fund managers to take asset allocation calls.

Hargreaves Lansdown head of research Mark Dampier says: “You normally leave it to the fund managers to deal with it as asset allocation makes most of the returns. The trouble is that they tend to get it wrong, which is why I would prefer to go with the star fund managers.

“I would agree with the argument for funds of funds as it is hard to get diversification from a portfolio in regional funds with the exception of the UK.

“Although New Star is keen to expand its emerging markets operation, getting rid of single-country funds in the likes of the US and Japan is often a sign that perhaps it is time to go back in.

“A good example is when M&G merged its gold fund into a global basics fund in February 2001. That has done well but I would expect that keeping the gold exposure would have seen it go through the roof as the market has turned.”

New Star’s decision to axe two single-country funds in the developed world fits with what Duffield has been trying to do with the business. He believes there has been a change in the investment world in the past two years, with emerging markets overtaking Western markets, hence the launch of the India and Heart of Africa funds and talk of a potential China fund.

Informed Choice director Martin Bamford says: “It is hard to choose between the developed world and an emerging nation when it comes to making a singlecountry bet as you often have an underlying exposure to an emerging market and there is a danger of doubling up.

“I would use a developed single-country fund for a client, provided their portfolio was big enough. However, the argument is that if a client is doing a single-country bet that fits around the edge of their portfolio, they are looking for the type of returns you would get from an emerging market.”

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