Collapse takes shine off New Star
NEW Star has told investors that it has wound up its only split capital investment trust, leaving the fund's shareholders more than £55m out of pocket.
Accountants KPMG have been called in to liquidate the New Star Enhanced Income Trust. The firm said the trust had only 400 backers, 'around half' of whom were small investors.
About 50,000 investors across the market are estimated to have lost up to £6bn in zero preference split capital trusts in the past two years. Twenty trusts have so far been suspended after their assets fell too low to safely meet bank repayments.
Split trusts offer shares that pay either income or offer capital growth. A further split of 'zero' shares promise to pay a set return after five or six years. It was this security that attracted many investors to use zeros to save for school or university fees.
However, many managers heavily borrowed and invested in other split trusts. Gains were ratcheted higher when prices rose but it also amplified losses in the bear market, eventually forcing suspensions and triggering the house of cards to collapse.
Enhanced Income Zero holders were promised a lump sum in 2008 based on 9% growth a year.
The New Star trust was a typically cross-held trust. It owned trusts run by Aberdeen Asset Management, which has been at the heart of the split trust debacle, Framlington and Britannic Asset Management. Managers at these firms also invested in the New Star trust. It also borrowed £31.5m from Bank of Scotland, most of which it has repaid, taking gearing to more than 50%.
The announcement came a day after the investment firm, set up by fund management maverick John Duffield, said it had attracted £1.2bn to 15 funds in its first two years. It also boasted that 85% of its funds, mostly unit trusts, with at least a one-year track record had performance ranking them in the top 25% of funds.
'This level of performance is unrivalled by any of the UK's top 10 fund management companies and we believe this is an unequivocal endorsement of genuine active management,' said Duffield, New Star chairman.
The Financial Services Authority has launched its largest ever investigation after being swamped by thousands of complaints over split trust mis-selling. Nearly half of the 200-strong staff at its enforcement department are examining claims.
