EMBARGOED UNTIL 7.00AM 20 March 2008
20 March 2008
New Star Asset Management Group PLC
Audited preliminary results for the year ended 31 December 2007
Highlights:
*Profit before taxation, interest, exceptional items and amortisation of intangibles.
Commenting today, John Duffield, Chairman, said:
"We have delivered results fully in line with expectations; but, as we have said before, the second half of 2007 and the start of 2008, have been the most difficult period for New Star since we began trading in 2001 and we expect 2008 as a whole to be a year of consolidation for our business.
Our company has entered this more challenging environment with a diversified mix of funds covering a broad range of asset classes and a wide range of retail, high net worth individual and institutional clients, both in the UK and overseas.
We remain confident that through a combination of investment performance, marketing and service we can return over the medium term to generating significant value for shareholders in our company."
Enquiries:
Citigate Dewe Rogerson 020 7638 9571
Anthony Carlisle (mobile) 07973 611888
Chairman's statement
2007 was a year of significant growth for New Star Asset Management. During the second half of the year, however, trading conditions became increasingly challenging. Our net revenue during the 12 months to 31 December 2007 rose 29% to £173.3 million while our operating earnings before tax, interest, exceptional items and amortisation of intangible assets rose 36% to £98.1 million. Over the year, our total funds under management rose 9% to £23.1 billion.
Most of New Star's businesses expanded their assets under management, with the most significant fund inflows occurring within our UK retail funds operations. Our European mutual funds and some UK mutual funds were, however, poorly positioned for the stockmarket impact of the credit squeeze and high commodity prices in the second half of 2007. This affected performance and fund flows. In addition, we suffered from the UK commercial property market downturn, which affected the performance and fund flows within our UK property fund. Our US institutional fund managers generated returns significantly ahead of their benchmark. A number of our specialist funds, including our award-winning funds of funds, and our hedge fund products performed well.
UK retail funds
While there were relative performance issues within some funds, 2007 was a year of achievement across much of our retail business, reflected in the ratings and awards for our funds, our fund managers and the group as a whole. At the end of 2007, 21 of our UK retail funds were rated 'A' or better by one or both of the leading independent rating agencies, Standard & Poor's and OBSR. During the year, our funds were also named as winners in awards ceremonies organised by Lipper, Standard & Poor's and Citywire and well-respected publications such as Professional Adviser, Investment Week and Global Investor Magazine.
The achievements of our fund of funds team, in particular, resulted in us being named Best Multi-Manager Group in Professional Adviser's Multi-Manager Awards for 2007 and 2008 while Global Investor Magazine named the company as the Asset Management Firm of the Year for 2007. In Citywire's All Stars Awards for 2007, we were placed second overall and were named as winner in the UK Equity Income and Cautious Managed sectors. Further details of our awards are given within the Operating and Financial Review.
During the year, we took further steps to broaden our product offering, which now spans a diverse range of asset classes from mainstream UK and overseas equities, fixed income and commercial property, both domestic and international, through to funds of funds and more specialist areas such as financials, technology and emerging markets. We also maintained our investment in sales, marketing and client service, building our brand awareness among investors and financial intermediaries, enhancing our distribution capabilities and focusing on efficient client service.
As a result of the efforts of our sales and marketing staff, gross retail sales within the UK retail business grew by 31% to £3.8 billion. Net retail sales declined 21% to £1.4 billion principally as a result of more challenging market conditions in the second half and in particular outflows from our UK commercial property fund. Over 2007 as a whole, our share of net retail sales in the UK was 14.1%, a percentage that we believe placed us in the top two fund providers during 2007 as measured by net retail sales.
The sales highlight of 2007 was the launch of the New Star International Property Fund as a complementary fund to the New Star UK Property Unit Trust. The first of its kind to offer retail investors access to international direct bricks and mortar commercial property investment, the fund was the UK's biggest-selling fund of 2007 as measured by net retail sales according to the Investment Management Association. This is the second year in a row that the IMA has named a New Star fund as the UK's biggest selling fund by net retail sales.
While the International Property Fund contributed the most to fund inflows, we maintained our record in offering innovative specialist funds alongside more mainstream products through the launch in October of the New Star Heart of Africa Fund. The fund, designed to offer sophisticated investors access to sub-Saharan Africa excluding South Africa, raised £34 million during its three-week offer period and by 18 March 2008 sales had totalled £52 million. During the course of the year, there were also significant net inflows into our income products, including bond funds, our European funds, our fund of funds and our specialist equity growth funds.
International retail funds
2007 was a difficult year for our international retail sales business, where we have made a long-term investment in building up sales, marketing and administration resources in Continental Europe and selectively in Asia, selling mainly through "open architecture" banks and insurers. While the gross retail sales of our Dublin-domiciled funds were strong at £1.4 billion, redemptions were higher as investors responded to turbulent market conditions and underperformance within some of our funds, with the result that these funds suffered a net outflow of £96 million over the year.
Institutional, alternative funds and private clients
In the institutional marketplace, New Star Institutional Managers made further progress in 2007. Our North American institutional business has spent the last two years focusing on meeting existing clients' needs and building its team of fund managers. The results of this measured approach came through in performance, with the team's core Europe, Australasia and the Far East (EAFE) mandates comfortably beating the MSCI EAFE Total Return Index and achieving returns that placed us in the top quartile relative to the peer group. In the UK, our focus on developing relationships with leading investment consultants led to us being awarded a number of specialist UK equity mandates. Towards the year end, we broadened our marketing approach, offering institutions access to our growing expertise in international direct property investment and in emerging markets equity mandates.
Within our alternative investments business, which includes our leveraged Global Property Fund, assets grew 33% to £1.6 billion. We continued to recruit long-short equity fund managers and launched new long-short strategies in areas such as pan-European equities, real estate securities and technology. In addition, we made secondary issues of shares in our closed-end fund that tracks the RBC Hedge 250 Index, the most representative global index of hedge fund performance.
Assets under management in our private client business grew 6% to £321 million. In difficult market conditions, existing and new clients drew comfort from our focus on absolute returns and capital preservation.
Return of capital and reconstruction
During 2007, New Star graduated from the Alternative Investment Market (AIM) of the London Stock Exchange to a Full Listing in line with the commitment made at the time of our AIM admission in 2005. We also returned £364 million of capital to our shareholders by way of a capital reduction, with shareholders receiving four new shares and 625p in cash for every five old shares. As a result, our net indebtedness was £270 million at 30 June 2007. At 31 December 2007, cash flow had enabled us to reduce our net debt to £246 million.
New incentive scheme
Long-term incentives are at the heart of our culture because we believe that such incentives are critical in building and developing a fund management business. Almost all our staff are shareholders or option holders. This means their interests are aligned with those of our clients and our public shareholders.
To maintain this culture, we plan to introduce a new employee incentive scheme. This is primarily intended to replace the lock-in provisions that apply to existing shares and options owned by our employees and expire in August 2009.
Historically New Star has not paid cash bonuses to its employees. The new incentive scheme will consist of cash bonuses for the majority of employees together with participation in a long-term share incentive plan (LTIP) for approximately 35 of the Group's most senior employees. The new LTIP is not expected to mature until December 2012 at the earliest. Awards from the LTIP will be earned primarily through the satisfaction of investment performance, sales and profit targets. We are well advanced in preparing the scheme and expect to put proposals to shareholders during the current half year.
Current trading
As we forecast at the time of our pre-close trading statement in January, New Star has had a difficult start to 2008, with our sales momentum affected adversely by depressed investment market conditions and the poor relative investment performance of some of our principal products.
In January, we anticipated net outflows of assets during the first half of the current financial year and this has been confirmed by our experience during the first 11 weeks. Redemptions have continued from our international mutual funds and we have also experienced redemptions from our UK mutual funds as UK retail investors have sought to reduce their exposure to mutual fund products as a result of concerns about the longer-term consequences of the credit crunch. This is in line with general net redemptions across the industry.
Assets under management at 18 March were £20.3 billion compared with £23.1 billion at 31 December 2007. Within this total, UK mutual fund assets were £9.5 billion, down from £10.6 billion after net outflows of £0.3 billion, and international mutual fund assets were £0.6 billion, down from £1 billion after net outflows of £0.3 billion.
While the trading environment remains challenging, there are early signs that at least conditions are no longer deteriorating.
The UK commercial property market, whose difficulties during the second half of 2007 affected our business significantly, has started the year with a healthier tone at the prime end, where our UK Property fund specialises. Buyers have returned to the property investment market and the value of the properties in this fund's portfolio has not changed significantly this year. Although still experiencing modest net redemptions, the fund is highly liquid and well-positioned to benefit from any upturn in the UK commercial property market. Our International Property Fund has attracted strong investor interest since its inception and continues to sell well.
In equities, while outflows from our European equity funds continue, the investment performance of our principal fund, European Growth, has improved. We are recruiting some additional fund managers to broaden and strengthen our UK team, where the investment performance of some of our UK funds remains unsatisfactory. In other parts of our business, such as our specialist mutual funds, our fund of funds business, our North American institutional arm and our hedge funds, we continue to make healthy progress overall.
In the face of the more challenging environment we have taken measures to keep our costs under firm control with the aim of protecting our profitability as far as possible. A number of cost-saving initiatives have already been taken and we will see the benefit of these and other measures during the second half of 2008 and during 2009. As we signalled in January, we intend to use our cashflow principally to reduce further the debt we incurred to fund last summer's capital repayment to shareholders.
We continue to expect, in line with our January trading statement, that operating profits will be significantly lower in 2008 than in 2007.
Dividends
In response to these market conditions and in the interests of maintaining our financial position, the board believes it is prudent to reduce the 2007 dividend from the level of 9p per share forecast in April 2007. As we announced in January, the board is, therefore, recommending to shareholders a final dividend of 1p per share in respect of the year ended 31 December 2007, leaving the total dividend in respect of the year at 5p per share.
Prospects
The second half of 2007 and the start of 2008 have been the most difficult period for New Star since we began trading in 2001 and we expect 2008 as a whole to be a year of consolidation for our business.
Our company has entered this more challenging environment with a diversified mix of funds covering a broad range of asset classes and a wide range of retail, high net worth individual and institutional clients, both in the UK and overseas.
In this difficult environment, we will maintain our product development drive, both in the UK and in international markets, so that we continue to offer our clients investment products tailored to the needs of today's retail and institutional investors.
We remain confident that through a combination of investment performance, marketing and service we can return over the medium term to generating significant value for shareholders in our company.
Board appointment
We are delighted to announce that John Tiner has agreed to join the Board as a non-executive director.
John Tiner retired as chief executive of the Financial Services Authority (FSA) in July 2007 having held the position since September 2003. He joined the FSA in June 2001 as managing director - consumer, insurance and investment business. Prior to joining the FSA, he was a managing partner at Andersen responsible for the worldwide financial services practice. He joined Andersen in 1976, where his clients were in the banking, capital markets and fund management industries. He is 51 years old and a chartered accountant. John is a member of the global advisory board of the Oxford University Centre for Corporate Reputation.
His extensive experience of the financial services industry will bring welcome additional strength to our Board.
Conclusion
Our various teams have responded effectively to the more volatile and uncertain environment prevailing in recent months and to the problems we have faced. I would, therefore, like to pay tribute to the dedication and efforts of our staff and thank them all on behalf of our shareholders.
J L Duffield
19 March 2008
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