New Star Asset Management has given warning on profits and cut its final dividend by 80 per cent, becoming the first fund manager to slash its payout since the onset of the credit crunch.

The FTSE 250 company, chaired by John Duffield, said that depressed market conditions and the poor relative investment performance of some of its funds meant it expected operating profits “to be significantly lower in 2008 than in 2007”.

“We are not optimistic about the outlook for 2008,” it said, warning that it expected more clients to withdraw their cash from its funds in the coming months.

The final dividend for the year to December 31, 2007 will now be 1p, making a total dividend of 5p, against the 9p that investors were expecting. New Star had become one of the most attractive income stocks in the FTSE 350, offering a prospective yield of 7.4 per cent at the end of last week.

Shares in New Star plunged 37 per cent in early trading, down 55p to 92p, a record low.

The company said its UK mutual funds had been hurt by the credit squeeze and high natural resource prices in the second half of 2007, as well as the sharp downturn in the UK commercial property market.

As a result, the company’s assets under management fell to £23.1 billion at the end of the year, down 6.5 per cent from £24.7 billion at June 30.

Net outflows of funds were £500 million in the second half, against inflows of £2.3 billion in the first, while the company anticipates further net outflows of assets, “at least during the first half of 2008”.

John Duffield said: “We have a number of issues to address in the current year. We are committed to doing whatever is necessary to address the problems we have experienced with investment performance in certain of our products."

Elsewhere, RAB Capital, the hedge fund which is one of the two biggest shareholders in Northern Rock, said pre-tax profits for 2007 were expected to exceed £50 million, compared with £50.6 million last year. Analysts had forecast £53.8 million.

“The strong first half was followed by more difficult trading in the third and fourth quarters, when credit and liquidity issues impacted negatively on equity markets,” the company said in a statement. Shares in RAB Capital fell 7 per cent, or 5¼p, to 65½p, in early trading.

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