Saturday, January 19, 2008

John Duffield has 'lost £100m'

NEWS ...

“New Star shares collapse by 31pc, the City wonders if the fund's boss has lost his magic.”

John Duffield, New Star's colourful boss, takes senior managers round London on an open top bus at night to review the fund manager's attention-grabbing billboard adverts. On these monthly evenings out, Duffield is on the prowl for the smallest imperfection in the way the adverts have been presented. If he finds any, the contractor can expect an irate call and a demand for a price drop.

In the cold light of yesterday's profit warning from New Star, many were saying the company's concern with marketing and presentation may have been its problem.

" New Star's shares were sold as a go-go stock, which had to be underpinned by massive growth. That has been fuelled by massive marketing of its funds," said one close observer.

New Star, whose shares collapsed by 31pc yesterday after it revealed a hefty outflow of funds and a dividend cut, was desperately trying to reassure the stock market and the thousands of clients whose money it manages that it is going through a rough patch, triggered by several setbacks coming at once, and will recover later this year.

But some are wondering whether the Duffield magic has worn off and if his own star is on the wane.

When Duffield launched New Star in 2000, he was flush from the success of Jupiter, another asset management firm he had created in 1985 with just £150,000 of his own money, selling it to Germany's Commerzbank in two slices in 1995 and 2000 for a total of £680m. The investment community had high hopes for the new firm.

Mark Dampier, head of research at independent financial advisers Hargreaves Lansdown, said: "Jupiter was a fantastic success. John brought great managers together and he was a brilliant marketer."

Now it is Duffield's talent for combining marketing flair with picking star managers that is in question. In addition to the growing suspicion that New Star may have been over-reliant on marketing, the shine has come off some of its star managers.

Alan Miller, Duffield's right-hand man at Jupiter, followed him to New Star but left the company last year after a disappointing run by his UK Growth fund.

Another long-standing senior employee, Richard Pease, is among the individuals whose poor performance recently contributed to yesterday's profit warning.

Meanwhile James Ridgewell, who has headed up a poster campaign for the group's "New Star's new stars" was demoted earlier this week from running the UK Special Situations Fund to a role helping Tim Steer, the former City analyst, run the company's strongly-performing Alpha Fund.

Duffield yesterday told The Daily Telegraph: "Nobody is more sorry than me - I have lost £100m from the peak to today - and it is pretty tough to lose £100m."

Few had much sympathy. Duffield has crossed swords with many in the financial world since he started as a stockbroker in 1961.

Most infamous was his bust-up with Commerzbank, which he referred to as a group of Nazis, calling members of the bank's senior management Hitler, Himmler and Goering, when they fell out over the sale of the final part of Jupiter in 2000. He has also had a fiery relationship with Jupiter's current head, Edward Bonham Carter, and yesterday some in the City reacted to the serious blow to Duffield's reputation with glee.

There is also a view that Duffield has a lot of work to do to put things right. "The company has grown too rapidly and it seems to be a place where there are lots of people who have joined as stars," said one person in the asset management world. "In contrast at other places a lot of people have joined as management trainees and there is a strong internal culture."

Another challenge at the company - which floated on Aim in November 2005 at 225p a share - is over whether it can keep key staff. The share incentive scheme which has locked in almost all senior employees makes its final pay-out next year.

There are also questions over New Star's decision last year to gear up its balance sheet with £250m of debt so that it could return cash to shareholders. Carolyn Dorrett, an analyst at Citigroup, said New Star should be able to retain enough funds under management to stay within its covenant to its lead banker HBOS, which lent it the money. "However, given the current difficult market conditions for fund flows, both across the UK and at New Star in particular, we will monitor this figure carefully going forward."

Ross Curran at UBS said that by slashing its dividend New Star is freeing up cash which it can use to pay off its debt, giving it breathing space with its banks. "However, a further 10pc fall in markets would make things tight," Curran said.

The final challenge is that New Star has found itself with large bets in many of the least attractive areas. Its commercial property fund was its biggest seller last year, yet its value has fallen sharply, reflecting the 10pc dive in property values in the past six months. Pease - whose historic performance in his European Growth Fund has been strong - has been hit by the fact that his holdings in medium-sized continental companies have had a bad run compared to large-cap stocks.

Duffield does not plan to force through significant change in the European or property funds, sources said. But they added that he has said in briefings this week that major changes can be expected on the funds managing UK shares, which have also been disappointing. Stephen Whittaker, who replaced Miller in charge of UK Growth Fund, and Toby Thompson, who runs the Higher Income Fund, are likely to keep their jobs, sources said, but Duffield may shift some employees sideways and hire more people to beef up his teams.

Howard Covington, New Star's chief executive, said plans for a new incentive scheme were well under way. "We have spoken to all of the big names and they are all on side," he said. But he acknowledged that there could be further ructions. "That is not to say nobody else will leave".

Taking the pressure off New Star a little is the fact that the fund management industry in general has been in turmoil. F&C only swung back into profit last year after its merger with Isis three years ago. Amvescap, which owns the Invesco brand, has had a bumpy ride in the past few years and Schroders has also changed its business model in response to heavy outflows of funds and a squeeze on profit margins.

Some observers believe that even if New Star's shares stay at the current depressed level, it will not be all bad for 68-year-old Duffield. The business, which is 35pc owned by its employees, could be taken private by the multi-millionaire and his senior circle.

Alternatively there are likely to be buyers for the business at its current price. Duffield may prefer to knock New Star back into shape in its current form, as much for his own reputation as for financial reasons.

Source: The Business

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