What a tumultuous week for New Star. The ‘galaxy’ of talent, much to the glee of the headline writers, became the ‘fallen stars’ and was heading fast into a ‘black hole’. But by the end of the week there was a faint twinkle – New Star had survived, albeit stripped of hubris. What are the headlines now? Its fund managers (those not about to be cleared out) and financial advisers alike are hoping they’ll read ‘New Start’.
Richard Pease, manager of one of the company’s few moderately well-performing funds and a main board director of New Star, describes last week as “a nightmare”. He acknowledges that during the delicate negotiations with the consortium of banks, there were times he wondered if the company might face the ignominy of being put into administration.
It’s a tribute to the board’s negotiating skills that the debt problem has been resolved, at a time when banks are hardly in a generous mood. But the price has been paid by shareholders – many New Star employees – who have been all but wiped out.
The question is how much of an impact the public restructuring will have on the views of financial advisers; those huge billboard advertising campaigns worked brilliantly in creating a brand. But direct business has always been a tiny fraction of what New Star does. The overwhelming source of business is from advisers, and their goodwill has been stretched to the limit.
Pease is candid. “We have had big redemptions. My hope is that we’ll get out there and reverse that. Yes, it has been tricky for everyone. I don’t expect anyone to be nice to us for the sake of it. I don’t expect anyone’s charity, but I’d like to think there might still be a certain amount of goodwill out there. Our funds have fallen a long way and we will have to improve our numbers significantly. There’s a lot to do.”
Conversations I’ve had with financial advisers in recent weeks had a common theme. Everyone knew that New Star’s approach would result in the odd failure and that a tough boss like John Duffield would act swiftly to dump underperformers. That’s what happened with Alan Miller. So when performance started turning down across virtually all New Star funds, advisers were patient. After all, the big man would wield the axe and things would improve.
But it simply didn’t happen. Performance kept sagging, but the guilty fund managers kept their jobs. Why? Pease says: “Quite frankly, it’s always difficult to get rid of people you like.” He also speaks of an analogy favoured by John Duffield about whether you should chuck out the pilot if the plane is hurtling into the ground.
Underperforming managers were indulged. Again, Pease speaks frankly about Stephen Whittaker. “Stephen had a good record and started fairly well. But he got the macro picture so wrong. For some people, when you’ve lost hugely on relative performance, you keep hoping you’ll get some sort of bounce and so you hang on for longer than you ought to.”
What should we learn from the crisis that New Star has been through? As a fund manager, Pease monitors company managements all the time, so if he turned the spotlight on the board of New Star, what does it tell him?”You really have to focus on the balance sheet. I would start off by saying ‘let’s quickly run over the balance sheet. What’s the net debt? And let’s not confuse this with any other ratios’. I’d look at the net interest charge, split it into duration, look at which banks it is owed to and look at the payment schedule,” says Pease. The irony will not be lost on anyone – and not just at New Star. Other asset management companies carrying large amounts of debt include Jupiter and Gartmore. Speaking to Neptune’s Robin Geffen this week, his view is that asset management firms have no reason to carry debt. It’s convenient, of course, that he has a net cash position above £10m and is keen to pick up managers and assets on an opportunistic basis. Perhaps New Star is simply the victim of what happened to its own funds – an unexpectedly savage collapse in equity markets.
Pease describes markets in which he is a stockpicker as “grindingly bad” and littered with false dawns. “There’s a big bounce and then more bad news.” He’s not entirely confident that European bourses have troughed.
“We’ve seen a reasonable rally over the past 10 days, and a lot of the clever guys out there are saying it’s time to buy. We have had an extremely nasty market for 18 months, and that tends to be as long as it goes on for. However, the coming months could be a real test for the market’s resilience. We’re going to see some really gloomy numbers coming out of European retailers and car manufacturers. P/Es [price/earnings multiples] might look very cheap, but there is a lot of distortion in the figures.”
He says he got it “half-right” on financials, staying invested longer than he should, but pulling out at the end of last year. He was also protected by the fact that many of his financials were in Scandinavia, where price falls have not been so gruesome. These days, his largest single holding in the £732m fund is Finnish insurer Sampo. One of the chief reasons he holds it is that it is in a net cash position after several timely disposals.
But his biggest active bet is in European lift manufacturers. Superficially, this seems counter-intuitive: major construction projects everywhere have halted, and Shanghai and Dubai might not be ordering many lifts next year. But the reality is, says Pease, that manufacturers such as Kone and Schindler, both among his top 10 holdings, derive most of their revenues from recurring service and maintenance contracts. We’re not going to stop using lifts just because there’s a recession on.
New Star is now firmly on the ground floor. Will it shoot up again? Only time will tell. But Pease shows no signs of quitting. “I don’t have a Plan B, if that’s what you’re asking.”