Experts calling for calm over New Star

Published on Friday 5 December 2008 19:52

INVESTORS with money in New Star funds have been told not to panic despite the fund manager's dramatic decline.

The firm, struggling to service a debt of around 260 million, now plans to de-list following a restructure that sees five major banks given 75 per cent control of the firm. Wednesday's deal came two days after the Financial Services Authority rejected New Star's bid to suspend its shares, which have fallen 98 per cent in the last year, but speculation continues over potential buyers.

The turmoil (see right for more) has prompted some of the UK's leading investment advisers to remove New Star funds from their recommended lists. Bestinvest and Hargreaves Lansdownboth did so, while Scottish IFA Thomson Shepherd was among those to write to clients advising them to switch out and offering alternative funds.

However, Adrian Lowcock, senior investment adviser at Bestinvest, said it was not recommending that investors sell out of the New Star funds it removed from its list.

He added: "The managers who run the funds have, in the past, had an excellent track record, although they have suffered in current market conditions."

Investors' money is not threatened, however. While the security of bank deposits and savings has been a talking point in recent months, investors enjoy better protection in the event of a fund management firm going bust. Investments in FSA-regulated funds are ring-fenced from the fund management companies and protected by a board of trustees (for unit trusts) or depositaries (for open-ended investment companies, or Oeics).

If a firm goes bust, or cannot continue for other reasons, the trustee or depositary (typically a major bank) assumes management of the funds and has to find another management company. Only if there is mismanagement on the part of the trustee would the Financial Services Compensation Scheme come into play. It protects 100 per cent of the first 30,000 and 90 per cent of the next 20,000 of an individual's investments, taking the maximum covered to 48,000.

With the exception of the New Star International Property fund, withdrawals from which are currently blocked, investors are able to take their money out of New Star funds. However, this decision should be taken with advice and dictated by the normal factors influencing investment decisions, such as the performance of the individual fund, the fund's objectives and your own investment objectives.

According to Alan Steel, chairman of Alan Steel Asset Management in Linlithgow, the fate of the group's best managers is what matters for investors. Steel believes much depends on New Star keeping managers such as Tim Steer, Guy de Blonay and Richard Pease – managers of the UK Alpha, Financials and European funds respectively.

"As long as they retain their best managers New Star will do fine," he commented. "If Steer left I would look at UK Alpha a bit differently and suggest that clients switch out."

Gordon Wilson, managing director of Thomson Shepherd in Perth, said that, with the recent departure of chief investment officer Stephen Whittaker, the share options used to hold key staff now valueless and aggressive cost reduction measures being implemented, it is likely that more fund managers will leave.

"For those that remain, the uncertain environment does not lend itself to being fully focussed on the running of the funds. Added to this, it can be exceptionally difficult to manage a fund with increasing outflows," said Wilson. "The manager will be forced to sell assets he may otherwise have held which cannot be good news for those remaining in the fund.

"The acid test is, 'would I be an investor in New Star just now?' "The answer is a resounding 'no' so we are advising our clients to consider the alternatives, taking into account any costs, penalties or tax that may fall due as a result."