Is yesterday’s 30 per cent dive in New Star Asset Management’s stock price overdoing it? Hardly. The former darling of the UK retail fund sector is in a nasty spot of bother.
To a degree, it is a sign of the times. Its funds are heavily exposed to UK commercial property and European equities – markets which have been badly hurt in the fallout from the subprime crisis. Several other UK property funds have already blocked withdrawals.
But some of New Star’s problems are of its own making. It admitted in yesterday’s trading statement that it was “badly positioned” for the credit squeeze and high natural resource prices in the second half of 2007, and its equity funds underperformed peers.
Several other factors make New Star’s position even more difficult. First, it geared up its balance sheet near the peak of the market last year. It has already paid down nearly a third of that debt, now standing at £250m, and the rest does not have to be repaid until 2013. But the timing looks unfortunate.
Second, New Star’s lean business model, until now one of its strengths, seems rather less desirable in difficult times. Troubled rivals at least have plenty of fat to cut – though how effectively they will do so is another issue.
Turning New Star around will not be speedy work, even if hopes that the worst is over in the UK commercial property market prove justified. The company expects further net outflows, at least in the first half.
Even if performance picks up quickly – hardly a given – there is bound to be a lag before such an improvement attracts new investors. Yesterday’s dividend cut was painful but prudent. Investors may take a crumb of comfort from New Star’s alacrity in tackling its problems. Unfortunately, management’s lack of optimism for 2008 also looks spot on.