For the past 12 months New Star Asset Management has had a pretty tough time of things. Since a peak of 485p last summer its shares have been hit by a series of hammer blows that have driven down the price to its current level of less than 90p.

To start with New Star has been clobbered by the falling stock market. Asset managers are a geared play on the market. When shares are riding high, this boosts the value of assets under management and attracts fresh money from investors eager to share in the boom. Because most of the costs of fund management are fixed, a large part of any additional income flows straight through to the bottom line. But when markets are falling, as they have been since last summer, this has a correspondingly negative effect, shrinking the assets managed and tempting investors either to withdraw their money or, at best, not add to their holdings.

In addition to this general trend New Star has also had to cope with a more specific problem. The performance of its funds, once a huge selling point, has been decidedly poor over the past 18 months. Many of its UK funds, and some of its European offerings, have underperformed - and one of the biggest disappointments of all has been the New Star UK Property fund. At one point this fund was managing more than £2 billion of investors' money on the back of a booming commercial property market, but it has lost more than 20 per cent of its value in the past 12 months.

In January New Star acknowledged that it was facing problems when it revealed that funds under management had tumbled by 6.5 per cent to £23.1 billion in the six months to December 31. It issued a profits warning and cut its dividend for last year to 5p, from a forecast 9p. Brokers have followed suit by downgrading their estimates of New Star's earnings per share. Evolution Securities has reduced its earnings estimate for New Star this year by 13 per cent to 15.3p and its estimate for next year by 21 per cent to 13p.

So why, given this catalogue of seemingly endless bad news, would investors consider these shares anything but a screaming sell?

First, because most of the bad news is already in the share price. This is a classic, though admittedly high-risk, recovery situation. If New Star does not collapse altogether - unlikely, though not impossible - it will regain its health eventually and the share price will start climbing again, though this will depend heavily on a stock market recovery.

Secondly, there is the powerful presence of John Duffield, the chairman. Mr Duffield has many years' experience in the investment industry, he is a formidable salesman and has the distinction of having built up two fund management businesses from scratch. If anyone can turn around an ailing fund group, that man is John Duffield. He will not tolerate failure for very long and has already started to wield the axe among the poorly performing managers.

Those remaining have been left in no doubt about what is expected of them in future and Mr Duffield's new share incentive plan is designed to ensure that they remain at New Star until at least 2012, albeit at the price of issuing 35 million new shares, equivalent to 15 per cent of the current equity. Though these shares would dilute the existing equity if taken up by employees, that would happen only if New Star was reaching some demanding performance targets, which would be beneficial for all shareholders.

New Star continues to benefit from a very visible brand, a sizeable body of assets and some talented fund managers. There is no doubt that backing New Star still represents a considerable gamble. But I, for one, would not bet against Mr Duffield.

If the stock market continues to fall, things could grow worse before they start to get better. New Star is a buy, but only for the brave and not for another six or nine months.

Times Recommends

• How to turn yourself into a model borrower
• The art world is no longer a safe haven
• Stampede for safe but sorry returns