Since its launch in 2001 New Star has made dramatic progress but, says Cherry Reynard, with a flotation scheduled for the end of the year the group must manage its evolution cautiously
New Star is the fund management industry's most precocious youngster. Started in 2001, few can have missed its dramatic debut. In four short years it has attracted nearly £6.5bn to its range of retail funds and has built a formidable array of talent. But sometimes growing up is hard to do. With a float scheduled for the fourth quarter of this year, can it keep its fund managers and unitholders happy in this new stage of its evolution?
New Star's story has been well-told. The founder of Jupiter, John Duffield, had a highly public spat with the group's new owners Commerzbank. Amid recriminations, he left to build a new empire with some of Jupiter's top fund managers, Richard Pease, Alan Miller and Guy de Blonay - New Star was born. The group has subsequently attracted some of the most high profile names in fund management. James Gledhill and Theo Zemeck arrived to run the bond side; Toby Thompson on equity income; Mark Harris on fund of funds and Tim Steer on UK Alpha. Some of the new managers were inherited from various acquisitions - including Aberdeen and Exeter.
On the face of it, the proposition is simple: hire g ood fund managers with good track records, pay them to perform well and leave them alone to manage money. It was the same culture Duffield established at Jupiter and that lives on in his absence. When growing through acquisition, Duffield focused on buying funds under management (technically the contracts to manage the funds) rather than companies, which ensured a cultural homogeneity at the group.
And no-one can deny that it works. A glance at the performance statistics shows all of its UK funds are in the top quartile over three years and all are four or five-star rated by S&P. The UK Strategic Income product is first in its sector over three years, though the Higher Income fund has performed less well. The Monthly Income fund is first over five years, but near the bottom of its sector over one and three years.
The Sterling Bond fund is also top quartile over three years, as is the £536m European Growth fund. The US and Japan funds are small, inherited from the WorldInvest takeover in 2001 and only the American portfolio has generated much of a performance record yet. The fund of funds range managed by Mark Harries has been a success and most of the seven funds reside near the top of their sectors.
This competitive culture has, naturally, had its victims. Alan Miller was replaced on the UK Growth fund by Stephen Whittaker after a period of poor performance, though he still runs a hedge fund for the group. The performance of the former Aberdeen technology fund, run by John Pullar-Strecker, had been weak, even compared to the technology sector. Mark Beale has now taken his place.
New Star has been careful to address any criticisms levelled at it. For example, it has previously been accused of having too many funds. It had 54 funds at its peak. It now has 36. It may have other smaller mergers in the pipeline, but the group is generally happy with the range as it stands.
It has avoided also some of the pitfalls of other groups, by ensuring that its plans have been well-communicated. This has been essential to maintaining the good-will of its unitholders and those of Aberdeen, Exeter and Edinburgh through the various changes to the funds. Mark Skinner, managing director, says: "We have always made sure we don't take on anything we can't service. This is part of the reason we have forged so many links with the life companies. It means we can access another 10,000-15,000 advisers. We couldn't service that many, but the life offices can. But we make sure we service that link with a fully equipped sales team. We have consistently advertised for the last four years. We have maintained our profile and established a brand based on financial strength and culture."
But the New Star culture brings two potential problems: One, star managers may leave. Two, they may end up managing too much money. With a push into Europe on the horizon, the latter question is particularly pressing. How is New Star addressing those concerns?
Duffield has shown himself willing to negotiate on capping funds. Patrick Evershed, for example, joined the group on the understanding that he would only run limited amounts of money. Equally, the group is also only taking a selection of its funds to the European market - those it believes have capacity. Skinner adds: "We make sure all our fund managers do is manage money - they are not involved in process or committee meetings."
The group also takes steps to dissuade short-term discretionary money from moving in and out of the funds. This can be difficult to manage if, for example, £20m moves in or out of a portfolio on a day where there is no liquidity. Last year Jupiter's fund of funds manager John Chatfeild-Roberts tried to buy into a New Star fund and was rebuffed. At the time, many were quick to label it the latest chapter in the New Star/Jupiter spat, but New Star were at pains to point out that it was Chatfeild-Roberts' reputation as short-term holder of funds that actually prompted the move.
In terms of succession, Skinner is realistic. He says: "The firm is built on recruiting experienced people. If a fund manager did leave, we would have to find an equivalent manager in the marketplace with a similar reputation and track record." That said, Skinner believes that the depth of the fund management team can be underestimated. He gives the example of the European team - Richard Pease is backed up by Richard Lewis, Dan White, Michal Bartek and Charles Stevenson. He also points out that at the moment, 65% of the issued share capital is owned by staff and most of the fund managers invest in their own funds, so they have good incentives to stick around.
So far so good. But what about post-flotation? It's a question that even New Star can't answer. The managers have lock-ins, but previous experience with other groups has shown that even lock-ins can't retain the manager who is determined to leave. Some of the managers are independently wealthy from their Jupiter days. Most have a personal stake in their own funds. But a lot will depend on whether Duffield has fostered a culture of happy fund managers
A happy environment
Perversely, the group's arch rival Jupiter may hold the best clue to this. Many of the managers stayed with Jupiter after Duffield had left, despite being phenomenally wealthy. At Jupiter Duffield had managed to foster that environment of happy fund managers. If he has pulled off the same trick at New Star, flotation should hold few problems.
Aside from the flotation, New Star is focusing on taking its business into the European markets, where it will distribute through banks, private banks, multi-managers, insurance companies and other institutional outlets. Skinner describes it as a 'more wholesale than retail' approach. In the UK, life office fund links are amongst the most important channels for the group - up to 60% of the business. They appear on almost all the major platforms - see the box-out - and this method now represents a significant portion of the group's business.
New Star has come a long way in four years and is one of the few groups in the industry still attracting money. Duffield has seemingly found a winning formula. The group will undoubtedly face challenges in the next phase of its development. But it has ensured that it has the brand, performance and servicing to deal with it.
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