Lost in space
New Star shone with its galaxy of strong managers and stellar performances, but it fell to earth and its story ended in takeover and a messy tribunal. James Smith examines the group’s legacy and how the funds have performed since.
This April marks the third anniversary of New Star’s acquisition by Henderson, bringing an end to the company’s controversial and colourful eight-year life. New Star’s rise and fall encapsulated the investment industry story of the 2000s, with its trajectory mirroring the decade’s own.
Going back to 2001, the industry was still extricating itself from the fallout of the technology bubble and New Star was the biggest new market entrant for several years. Sir Patrick Moore, the amateur astronomer, hosted a huge lunch party at the London Planetarium and references to star managers delivering stellar performance were peppered throughout his speech.
Of course, it was John Duffield’s guiding hand behind the venture that so whetted appetites, having turned Jupiter into one of the industry’s major players in the 1990s. Entreaties to follow a new star in the investment galaxy were backed up by the presence of two ex-Jupiter managers managing the group’s debut funds.
Richard Pease headed up European Growth and was among the core of staff at the firm for its full duration, while Alan Miller ran UK Growth. His experience was more mixed to say the least and his critical views on active fund management – honed while at New Star – provide one of the more interesting of its many bequests.
Eschewing the caution usually surrounding start-ups, several high-profile advisers were keen to jump in at the launch.
Quoted at the time, Mark Dampier, the head of research at Hargreaves Lansdown, said: “There are so many plus factors going for New Star. The investment records of Miller and Pease are excellent. Duffield has the hunger of a 25-year-old and will not allow New Star to be anything other than a success. (Cover story continues below)
“New funds often deliver superior returns on the basis that managers can start with a clean slate and benefit from good cashflow.”
Comments coming out the group at the time highlight New Star’s culture, which led to its initial success and played a part in its eventual downfall.
Again quoted back in 2001, the chief executive Howard Covington said Miller and Pease were born stockpickers who would have total freedom over the stocks they chose.
“Too many investment groups have dented any investment flair they possess by asking managers to stick to agreed stock lists or introducing bureaucratic investment committees,” he added. “This leads to investment mediocrity. You won’t get that with New Star.”
Unfortunately, this was to prove untrue for many of its portfolios.
Several more ’star’ managers arrived in the following years: subsequent UK equity recruits included Stephen Whittaker, Toby Thompson, Tim Steer and Patrick Evershed – with the latter to have a greater impact on New Star’s legacy than anyone might have expected.
On the bond side, Theo Zemek and James Gledhill joined in 2002, having worked together since the mid-1990s at M&G where they launched the industry’s first retail credit portfolio.
New Star went from strength to strength through the mid-2000s with performance solid across the range, leading to a marketing campaign in 2005 to promote its own ’new stars’ such as James Ridgewell and Jamie Allsopp.
Things began to sour from about 2006, with performance taking a turn for the worse across most of the UK equity funds, largely down to a positive call on banks as they plummeted through the credit crunch.
Mutterings also surfaced about the group’s strong promotion of commercial property and many questioned the wisdom of launches like Heart of Africa for Allsopp. Again, this latter fund benefited from a major advertising campaign in 2007 but had to close two years later after liquidity conditions proved too difficult.
Duffield aimed to address the performance problem, replacing Whitaker on UK Growth in 2008 for example and also introducing more collaboration and sharing of ideas across managers. Unfortunately, market conditions and some moves at the corporate level rendered this largely redundant.
At its peak, New Star was worth £1.5 billion, with £20 billion in assets under management.
But the firm chose to leverage its balance sheet to fund a £364m special dividend to shareholders in 2007. This debt burden plus the poor fund performance caused a massive loss of confidence in the group and shares plummeted – from a list price of 225p in 2005 and a 2007 peak of 519p, they eventually dropped as low as 2p.
Duffield was forced into a £240m debt-for-equity swap with lenders late in 2008 and Henderson eventually stepped in to buy the company early the following year. New Star finally disappeared as a retail brand a year later.
”New Star was very effective in establishing a strong brand, but it had deep pockets and was able to build this through advertising”
From an investors’ perspective, many of the old New Star funds – particularly on the UK equity side – merged into more successful Henderson counterparts. Of those that remain, Henderson Higher Income – run by Thompson at New Star and moving to Graham Kitchen and Andrew Jones in 2009 – offers much improved performance, as does Sterling Bond. Elsewhere, investors in the former New Star UK Property fund have access to Henderson’s resources in this area.
Three years on – recent court cases aside – many market watchers are fairly generous about the company and its legacy.
Meera Patel, a senior analyst at Hargreaves Lansdown, says in its prime, New Star was an extremely successful business.
“I liked its star manager culture and Duffield did well to recruit some excellent names,” she adds. “Performance across funds was generally good (give or take the odd disaster like Heart of Africa – which was an exception rather than the rule). New Star was very effective in establishing a strong brand, but it had deep pockets and was able to build this through advertising.
“For us, its demise was the result of poor corporate decisions rather than poor fund performance. The good news is that most investors were not left out on a limb as Henderson took over.”
On the fund management side, most of the ex-New Star managers still in the industry today have joined boutiques or founded their own – apparently craving similar investment freedom.
Duffield himself set up Brompton Asset Management (in New Star’s old Knightsbridge offices), largely focusing on the private client side but also including a real estate division headed by ex-New Star International Property manager Stuart Webster. Brompton also manages the New Star Investment Trust, a vehicle of which Duffield holds 60% of the shares.
Of the original stars, only Pease stayed with Henderson, while the bond team of Zemek, Gledhill and Nick Hayes all ended up at Axa Investment Management.
Elsewhere, the former joint-CIO Whittaker and Phil Roantree, a bond manager, joined to set up Querns Asset Managers, offering an income portfolio blending equities and fixed income.
Other boutiques to rise from New Star’s ashes include Spencer Churchill-Miller Private, a wealth manager founded by Miller, and Matterley, set up by Henry Dixon an income manager.
Meanwhile, Thompson joined Brooks Macdonald last year to work on the private client side and Mark Harris and Craig Heron, both multi-managers, moved to Eden Financial and Railpen respectively.
Much greater continuity is evident on the sales and marketing side, with Henderson keen to import this successful team. Mark Skinner, the managing director of retail at New Star, came over to head up the pan-European retail business, while Simon Hillenbrand, Greg Jones, Mark Hutson and Stewart Cazier, all senior executives, also made the move.
”The problems come when the numbers dropped off as the funds were so associated with the individuals at the helm”
Taking a more circuitous route, Phil Wagstaff joined Henderson as global head of distribution last month. He was a relative latecomer to New Star, coming in as managing director of sales and marketing in 2005 and leaving two years later for Gartmore. Henderson also acquired that ailing business last year following various problems and following a short-lived move to Skandia, Wagstaff is back with two sets of former colleagues.
Darius McDermott, the managing director of Chelsea Financial Services, says this sales and marketing capacity reflects what he sees as New Star’s key legacy – the importance of brand.
“Duffield had experience at Jupiter of building a brand through high levels of retail marketing and continued this through the New Star years,” he adds.
“What this shows is that substantial branding does work in winning assets and this view has moved over to Henderson. The group now has a much stronger marketing presence – with a high-profile current campaign featuring Jose Mourinho – and I see that a clear legacy from New Star.
“While several groups have always been consistent advertisers, New Star proved particularly adept in packaging its proposition attractively and at the time of the acquisition, Henderson stressed it was keen to assume the group’s sales and marketing expertise as well as its assets.”
McDermott says the star manager culture was already growing pre-New Star with names such as Anthony Bolton, Bill Mott and William Littlewood but acknowledges Duffield’s firm fuelled the trend.
“Through its name and high advertising spend, the company certainly leveraged this idea of star fund managers,” he adds.
“That was fine as long as performance held up and managers like Toby Thompson on Higher Income had a fantastic first few years – but the problems come when the numbers dropped off as the funds were so associated with the individuals at the helm.”
Perhaps the best people to comment on New Star’s legacy are those who worked at the company and experienced its highs and lows first hand.
Rob Page joined New Star as marketing director, eventually leaving before the worst of the firm’s troubles in 2008. After a short spell at Liontrust, he moved to Ignis in 2010 before going to Ardevora last year.
His view is that history will probably judge New Star too harshly but it is vital to remember the state of the fund industry when the group launched back in 2001.
”A star culture creates a big pedestal from which mangers suffer a very public fall”
“The investment funds market was basically on its knees in the wake of the technology bubble bursting and many financial publishers were close to going out of business as there was so little advertising activity,” he adds.
“Against this backdrop, Duffield had the courage to bring a fresh proposition to market with some excellent managers, such as Pease, Zemek and Gledhill at a time when most other firms were burying their heads in the sand. For me, New Star helped reinvigorate the industry and we need entrepreneurs like Duffield to make this business interesting.”
On advertising, the group spent about £1m in its first year, rising to £7m by the seventh, helping to kick-start the market in the depths of 2001.
Being realistic, Page admits New Star promised too much and was unable to deliver in key areas, falling into a trap of style over substance.
“Performance on most of the UK equity funds was not good enough, leading to an overreliance on commercial property at the top of the cycle,” he adds. “Despite this, New Star played a major role in getting property in the mix as a viable asset class for retail investors, with most keeping to equities and bonds before.”
Meanwhile, Page says the group remained extremely supportive of the IFA market, with its adverts always suggesting people contact an adviser rather than direct response.
“Several other companies are happy to take business through the adviser channel without doing anything to support it,” adds Page.
As a further – often forgotten – legacy, he says New Star also bailed out several fund management businesses with its acquisitions.
Aberdeen, for example, was struggling in the wake of the split cap investment trust crisis when New Star stepped in to buy six funds in 2003 – acquiring almost £2 billion for £92m. Since then, the group has rebuilt its assets and reputation and is routinely mentioned as a potential buyer for any up-for-sale asset manager.
Page is less positive on New Star’s role in fuelling a star manager culture and says the firm’s downfall has slowed that trend.
”New Star’s culture implied that certain individuals could maintain track records forever”
“New Star was instrumental in making it the norm to have individual managers in the public eye,” he adds. “For me, that is always going to be a double-edged sword: if things are going well, it is great for marketing but if performance is poor, a star culture creates a big pedestal from which mangers suffer a very public fall. New Star had its share of excellent managers who remain successful at new employers but there are also several names who were so badly damaged that they have disappeared from view.”
For Page, it is easy to say New Star was bad for the industry because of the way the story ended but he does not accept this.
“Henderson benefited by acquiring what I still maintain is the best UK retail distribution team in the industry, who have helped take that company to the next level,” he adds. “I believe New Star, on balance, did more good than harm and its investors were well looked after through a turbulent ending.”
Among competitors Robin Stoakley, the managing director of UK intermediary at Schroders, sees a mixed legacy for New Star. He admits the company was significant in reinvigorating the industry in the early 2000s, helping to put mutual funds on the map again after many investors had a poor experience in the TMT bubble.
“With the personalities of some of the key players at New Star, the company made a lot of noise, which was good for an industry struggling post-TMT,” adds Stoakley. “That said, New Star must also take a large share of responsibility for taking the cult of individual fund managers to another level, which in hindsight was not a particularly positive development. Very few managers work in a vacuum and most have considerable teams behind them, whereas New Star’s culture implied that certain individuals could maintain track records forever.”
According to Stoakley, the group’s whole ethos also made outperforming look too easy. “It made investors believe all that was needed was the manager to have a good brain when in fact there is so much more to it than that,” he adds.
“For me, it is like Neil Armstrong getting all the credit for walking on the moon when hundreds of people helped to make it happen.”
Post-New Star, Stoakley says most groups now put much more emphasis on the depth of resource behind named managers. Elsewhere, he says the New Star experience also showed fund managers that they need to maintain brand awareness among investors.
”If investors have heard of you, they tend to react favourably”
“Much of the brand awareness in the fund industry tends to be brand positive, which means that if investors have heard of you, they tend to react favourably,” he adds.
“New Star’s rapid growth showed that groups looking for a major market share have to maintain a strong consumer brand even if most of their business comes through the advisory channel.”
Even though New Star was not always the top spender on advertising, Stoakley says most groups’ marketing budgets likely rose as a result of its activity. “As a company, there was nothing subtle about New Star and that directness extended to the advertising, taking things back to very simple messages,” he adds.
“That was positive as some of the advertising was getting too clever for its own good. New Star’s campaign’s were always simple and straightforward and most other fund managers followed suit.”