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Test of strength

Troubled New Star Asset Management has created a nervous atmosphere around fund management as a whole.

Having spent millions to achieve strong name recognition, New Star’s recent woes have been equally as high profile. The implications for the group itself is one thing but advisers will also have to contend with the knock-on impact that its implosion has had on the rest of the fund management industry.

Advisers not only have to continue to debate moves out of New Star’s funds and reassure clients that assets are safe and separate from the parent company but now they will also have to start advising on the financial strength of the firms backing the funds they recommend.

Although New Star has settled its banking woes, restructured and is now to delist from the market, the speculation and activities surrounding its problems have done little to encourage investors as a whole.

Advisers have been commenting that they have been receiving calls from investors in New Star’s funds, under the erroneous impression that the issues of the parent company would have an impact on the assets they have in their funds.

It is not hard to understand the fear, considering what has happened with banks of late, nor is it difficult when there have been few memorable examples of a large asset management company struggling so publicly.

Barings went under after troubles caused by rogue trader Nick Leeson in 1995, although in that case the fund management arm of the group was unaffected.

In the late 1990s. Morgan Grenfell suffered reputational damage after fund manager Peter Young was involved with issues concerning its European funds.

Following the split-capital investment trust scandals in the early years of this decade, Exeter went into administration but before it did, its funds were sold off, to New Star. In 2003, Exeter Investment Group sold its unit trust business, which included around a dozen open-ended funds with assets of more than £300m, to New Star for £10m.

Unlike banks though, no matter the struggles with the parent company, the funds themselves are protected.

According to the Investment Management Association, a core principle of UK regulation is that the assets of a fund remain the property of that fund, no matter what firm is the management company or whether the management company changes, for whatever reason.

All UK-authorised funds are required to have a trustee – in the case of unit trusts – or depository, for Oeics, which is independent of the management company.

In a situation where the fund management firm itself goes into administration, the trustees or depositories would step in and take over the funds.

In the case of the fund managers leaving as a result of a company going into administration, the trustees would appoint interim managers.

Obviously that did not happen with New Star and, under its revised structure, it has said it has offered its managers incentives to continue with the group.

But while the issues concerning New Star the company are put to rest, it does not resolve some of the bigger-picture problems nor does it draw a line under the uncertainty of its funds and their performance.

Perception of the troubles from its parent group as well as the negative market environment have led to large- scale redemptions at New Star and it is uncertain whether the resolution to the company’s issues will stop outward flows.

With assets leaving at a time when markets are already difficult, the need to meet these redemptions could cause liquidity issues in some portfolios and any forced selling by managers is likely to put further pressure on the performance in the funds.

Already, the group has had to suspend dealing in its international property fund to avoid such a scenario but that does not mean its other funds could not face similar actions.

To avoid a run on a portfolio, even an equity fund can suspend dealing for a limited time, albeit for a far shorter period than a property fund.

Such an event is almost unheard of in the UK, although some advisers may remember it occurring in the case of the troubled Morgan Grenfell European funds.

With fixed interest being priced similar to a distressed asset at the moment and with mid and small caps notorious for running into liquidity issues, some of New Star portfolios may find it difficult to contend with further large-scale redemptions. According to Morningstar statistics, over the three months to November 17, the £737m New Star fixed interest fund was ranked 45th of 50 funds and its sister portfolio, the £344m New Star high-yield bond was ranked 49th, on losses of 21.8 per cent and 22.9 per cent respectively. In the UK corporate bond sector, the £611m New Star sterling bond fund is 89th of 90 funds over three months on losses of 18.9 per cent.

The group has six portfolios listed in the UK all companies sector, the best performing of which over the three-month period was Trevor Green’s UK select opportunities fund, ranked 299th out of 327 funds.

Tim Steer’s portfolio, the £370m alpha fund with its mid-cap bias, was ranked 305th on a loss of 32.7 per cent. New Star’s £179m global financials portfolio is down by 20.4 per cent over the three-month period, compared with a 9.6 per cent gain in its rival, Jupiter financial opportunities.

That is not to say that all its funds are bottom quartile over the more recent period. New Star global equity is ranked 16th out of 191 in the global growth sector over three months while its fund of funds, New Star Asia portfolio is ranked 14th out of 78. New Star European growth is ranked 45th out of a Europe ex UK peer group of 100 while its fund of funds, European portfolio, is ranked 24th out of 100.

Although the issues of New Star’s structure and debt may be settled, there remain issues for advisers and investors. As continued outflows from the funds may have a further impact on performance, deciding to stay or go becomes a vital call. The group has said that managers are being incentivised to stay but questions remain as to whether or not they actually will stay.

The broader and long-term picture that this situation has created may take more time to resolve. New Star’s climb to become one of the most recognisable fund management names in the UK was meteoric, considering the firm is less than 10 years old. Its equally public troubles have not only hurt the company but fund management as a whole.

Whether it, and the industry itself, can recover consumer confidence in fund management remains to be seen and will at the very least take some time. In the meantime, advisers are going to be under even greater pressure in advising not only on funds but also now on the structure and financial strength of the company that manages those portfolios.



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