INVESTORS in New Star Asset Management could be forgiven for being a little worried.

Shares in the fund manager, plagued by money outflows, crashed after the fund manager said it had entered fresh debt talks with banks.

The UK Listing Authority rejected New Star’s request to suspend trading in its shares on Monday and the stock plummeted 68 per cent to 4.5p in early trading.

A year ago, the stock was trading at 219.25p, but in the past 12 months, a mammoth 98 per cent has been knocked off its share price.

We explain how it got into this mess and what it means for investors.

Are my New Star unit trusts safe?

Money held in unit trusts is ring-fenced. Those fretting over the diving value of New Star’s stock have the guarantee that their funds are protected, were the company to go bust.

Mark Dampier, at independent adviser Hargreaves Lansdown, said: “It’s understandable that investors are worried, especially after the likes of Bradford & Bingley and Northern Rock – companies whose share prices plummeted to nothing. But money in New Star’s funds is ring-fenced – so it’s not like a bank.”

If that safeguard failed, investors are protected under the Financial Services Compensation Scheme. The level of protection provided is 100 per cent of the first £30,000 and 90 per cent of the next £20,000, providing a total cover of up to £48,000.

Should I quit New Star's funds?

Dampier said he was holding fire on giving clients advice until New Star made an announcement on the outcome of its debt talks.

"Investors should look at their holdings on a case by case basis," he said. "Don’t panic just because of the share price movement.”

He has stopped recommending New Star’s UK Growth fund, now managed by Trevor Green, and its Higher Income fund, managed by Toby Thompson, to new investors. However he said he was still recommending New Star’s Heart of Africa and India funds.

How did New Star get into trouble?

Every fund manager has suffered from the financial crisis. Henderson Global Investors, F&C and Schroders have all reported outflows in the past month as clients, spooked by the stumbling economy, withdraw their cash.

However, New Star has been among the hardest hit by outflows. Last week, it was forced to suspend trading in its flagship International Property fund, following a surge of redemption requests as global property markets deteriorated. The fund, worth £470m, has had about £75m pulled out of it in the past month, mainly by institutional investors managing pension funds, as they have sought to cover their own losses in the past few weeks. Thousands of investors are now locked into the fund.

How much money has been pulled out of New Star?

Overall, investors have pulled £150 billion out of New Star since the start of July, including £716m from its UK mutual funds. Its funds under management have been dragged down from £19.8 billion on June 30 to £14.3 billion in mid-November – a 28 per cent fall.

What about debts?

To add to its problems it has around £236 million in debt. This has been an obstacle in its discussions with potential buyers, reported to include major industry players such as Henderson and Aberdeen Asset Management.

New Star said on November 14 it had accepted tougher repayment terms after talks with its banks. Under the new terms, the interest rate on New Star’s bank debt rose by 1.5 percentage points.The debt is due to be repaid in June 2013, it said at the time.

A week later the company said its joint chief investment officer Stephen Whittaker was leaving the company as part of a reorganisation and that it would merge some smaller and poorly performing funds. Whittaker ran the UK Growth fund, one of numerous New Star funds to have underperformed. The fund has lost retail investors 48.2 per cent in the past 12 months, compared with an average fall in the sector of 30.9 per cent, according to Trustnet, the financial data company.

New Star’s Equity Income and Monthly Income – often favoured by low risk investors looking for a safe haven for their money – have both underperformed, as have its bond funds.

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