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John Duffield, chairman of New Star Asset Management, has a reputation for being an exacting taskmaster who demands the best from his fund managers, but rewards them well when they perform. Both qualities had deserted him over the past year, but last week he took some radical action to regain both his own and his firm's reputation.
His most dramatic move was to sack New Star's joint chief investment officer, Stephen Whittaker, who also runs one of its flagship funds, UK Growth. Whittaker has been with the firm for six years but his performance has been very poor. UK Growth has lost 52 per cent of its value over the past year and is down 23 per cent over five years, putting it 907th out of the 935 UK All Companies funds ranked by Trustnet over one year, and 620th out of 671 over five years. This is partly due to his conviction that banks were undervalued at the start of the year - a conviction that proved disastrously wrong - but it was not his only mistake.
His replacement will be Trevor Green, who joined the group in June and has recently taken over Patrick Evershed's New Star UK Growth fund, which has lost 38.1 per cent over five years, putting it second-bottom among the 671 UK funds with a five-year record. Evershed remained heavily invested in the dismally performing Alternative Investment Market.
The changes do not stop there: Duffield has also taken the Hidden Value fund away from Jamie Allsopp, leaving him with just the recently launched Heart of Africa fund. Change at Hidden Value was also long overdue: it ranks 914th out of the 935 UK funds in the past year, having lost 55 per cent in that year and it has only just broken even over five years, lagging well behind its sector. Two further funds will also be merged with others: Monthly Income is being combined with Managed Distribution while European Leaders is being bundled into European Value.
'I recognise we have been too slow in some of our funds in adjusting to the sustained falls in securities markets,' Duffield says. 'But I am determined to restore New Star's reputation for delivering first-class returns for our investors.'
There will also be more fundamental changes to the way New Star manages its investment process. Historically - as its name suggests - it has been a collection of independent star managers, who were allowed to pursue their own investment strategies without interference, and there was little communication, never mind collaboration, between them. Duffield seems now to recognise this is not a sensible strategy, so, while managers will still be allowed some autonomy, there will be move more collaboration and sharing of ideas.
There are some bright spots among New Star funds. Tim Cockerill, head of research at Rowan, likes Richard Pease's European Growth fund, which, although it has had an indifferent 12 months, is still well ahead of most of the competition over three and five years. Tim Steer, who is taking on Allsopp's Hidden Value, is also going through a bad patch, but Darius McDermott of Chelsea Financial Services is among those who still rate him. New Star's UK and European property funds too are in line with, or better than, their peers. But that sector as a whole has performed poorly, which raises questions over New Star's aggressive promotion of these funds: their markets peaked 18 months ago.
But turning underperforming funds around would be difficult for Duffield even if markets were roaring ahead. New Star itself is in a parlous position: its shares languish at less than 30p compared with a 225p when it floated in 2005 and a peak in 2007 of 519p. Fund managers have traditionally taken most of their salary and bonuses in shares; the price collapse is having a serious impact on their motivation.
While the management changes - provided they also bring an improvement in fund performance - may help to discourage investors from cashing in, it may not have that much impact on New Star's share price, as its collapse is largely due to its crippling debt - a legacy of its £364m return of capital to shareholders (including Duffield and some of his managers) during 2007. The remaining £236m of debt has just been refinanced, but the group has to pay an extra 1.5 per cent interest or £3.5m a year.
Some analysts suggest the firm could go bust; others speculate it could be taken over by a rival such as Henderson or Aberdeen, or that Duffield himself might buy it back. If that does happen - and the debt is a big disincentive - it is unlikely to be at anywhere close to the flotation price, never mind last year's peak. Uncertainty about its future will not help fund managers, old or new, to perform well.
John Jay, New Star's development director, admits that its share-based bonus scheme has been undermined by the collapse in its share price, so it plans to introduce a cash-based scheme which will pay out 'only if they generate superior and sustained risk-adjusted returns for investors'.
That may help to motivate the remaining fund managers, but turning performance round takes time. Neither of the two new managers - Charles Deptford, who has replaced Whittaker at UK Equity Income, and Green - are particularly well-known among financial advisers, which may not be a bad thing given the poor performance of some of its so-called stars.
Those who are still invested in New Star's underperforming UK funds will doubtless be considering moving their money, which may be the right strategy. But cashing in at this low point in its fortunes, and at this stage in the cycle, means crystallising some horrendous losses. It may be preferable to give Duffield the benefit of the doubt and wait to see whether his actions do finally start to turn the business around.
But it will be a long, hard slog, and there is a risk that New Star will not stay independent long enough for Duffield to see it through. Keep a close eye on the funds and prepare to switch if performance worsens - or just fails to improve.
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