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New Star aiming for cutting edge

New Star has renegotiated its banking covenants and is to embark on further cost-cutting after assets under management fell by £3.1bn in the third quarter of 2008.

The fund firm says it has come to an agreement with its bank syndicate in response to the “unsettled trading environment”. The interest rate on the firm’s debt will rise by 1.5 per cent, with New Star retaining the option to repay the debt as a single payment in June 2013.

New Star says that, contrary to some reports, it has never breached its banking covenants.

The firm intends to embark on a business restructure after it revealed that assets under management fell by 15.6 per cent to £16.7bn in the third quarter. It says a drop in asset prices accoun- ted for £1.8bn of the fall. Net outflows were £523m,with £316m from mutual funds.

The restructure is expected to provide annual savings of £20m and the firm is understood to be cutting 50 to 60 from its workforce of 380.

The company’s UK mutual funds fell by 15 per cent to £7.9bn from £9.3bn in the third quarter while institutional assets fell by 19 per cent from £7.5bn to £6.1bn.

Chairman John Duffield says: “The fall in markets since summer and increased redemptions across the asset management sector have had a significant impact on our business. Our banks understand our position and are supportive. We are taking further action to cut our costs significantly.

“We were one of the first companies to warn investors about the impact of the credit crunch on our sector and we believe the exceptional risk aversion among investors may persist for some time, posing further challenges for fund companies over the short term.

“The longer-term prospects for asset managers remain intact, however, as a result of the secular trends towards increased savings and investment flows both in the developed and the emerging markets. Such flows are likely to be redeployed in the financial markets, possibly after a timelag, in response to the coord- inated interest rate cuts by the world’s central banks and government moves to rebuild the solvency and liquidity of financial institutions.”

Chelsea Financial Services managing director Darius McDermott says: “It is no surprise that a fund manager is looking to cut jobs, given that the market is down by between 30 and 40 per cent. For me as an IFA, there is no problem, so long as the infrastructure is there to support fund performance which I am sure it will be.”

Hargreaves Lansdown investment manager Ben Yearsley says: “It has had a bad year and the loss of £2bn since September 30 has clearly hurt the firm. Poor performance from some of its key funds has now coincided with the market downturn. Expected job losses will not be too big a concern, depending on what parts of the business they come from.”

Value in the East and property

New Star founder John Duffield believes the best value for UK investors now lies in real estate and the East.

In an interview with Money Marketing, Duffield says the fact that UK equities are down over 10 years and only marginally up over 20 years shows that the balance of power is still clearly moving to the East.

He says the influence of India and China continues to grow in the world economy and adds that for investors who want to invest in the UK, property remains the best option.

He says: “In the long term, property will continue to succeed and England, in particular, has things going for it that will not change, such as office demand. For now, those positives for real estate outstrip any desire to invest in the likes of UK banks. This is a financial centre and will remain so.”

Duffield says he was amazed at what happened with Icelandic banks and is surprised that anyone put savings into them following their sudden appearance as a financial centre.

He says: “It is quite beyond credit that a nation can spring up next to the North Pole and become a leading financial centre. It is unbelievable that anyone had any faith in Icelandic banks from the start.”

Duffield believes investors were right to question the role of the rating agencies after the structured product debacle.

He says: “An awful lot of people looked at these products and, if they were AAA, they assumed they were superb offerings without any risk, which proved not to be the case.

“Nobody looked beyond the rating agencies and, with hindsight, many of these agencies have done a poor job. It was fair to trust these institutions as that is the whole point in them being there.”

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