It is fair to say the past 10 years or so have been a tricky time to be an investor in the Aurora Investment Trust which has lost more than 10 per cent in the past 10 years while its average peer and the FTSE All Share index is up around 60 per cent.
This is not only the worst in its sector, the IT UK All Companies, but it’s also been beaten by every portfolio in the IA UK All Companies sector over that period.
This period from March 2006 includes the 2007-8 financial crisis and the European sovereign debt crisis of which both hit the fund harder than its peer average or benchmark.
Performance of trust and index over 10yrs
Source: FE Analytics
However, shareholders in the £16m Aurora IT now have a new management and portfolio in the form of the little-known Phoenix Asset Management headed by Gary Channon.
The manager’s track record goes back to 1998 in their flagship £600m Phoenix UK fund which is a concentrated multi-cap fund domiciled in the Bahamas and unavailable to UK retail investors and this portfolio, which will be mirrored in Aurora IT, has done very well since launch.
According to FE Analytics, it has returned 430.43 per cent since launch beating the likes of the Invesco Perpetual Income and High Income funds – which until a few years ago were run by star manager Neil Woodford for the entirety of this period – and has more quadrupled the returns of the FTSE All Share.
Performance of funds, sector and index since 1998
Source: FE Analytics
The fund consists of between 15-20 stocks and often runs positons to much higher than Investment Association rules allow, which is one reason it is Bahamas-based, as opposed to the UK, according to Tristan Chapple, head of research at Phoenix.
“Our approach to managing the portfolio has been the same for the last 18 years. It is a concentrated portfolio of stocks that we select using an approach that you could describe as ‘value investing’. Most importantly, the approach is driven by our assessment of the long term fundamentals of the businesses that we own.”
“We think that is the best way to position yourself for any market conditions. We do not position the portfolio with any considerations for macro or top down views. We see market turmoil as an opportunity to make great investments. Unlike most of the financial services industry we don’t see volatility as risk.”
The team look for firms with high returns on capital, run by “competent and honest managers” whose interests are aligned with shareholders, Chapple adds.
“We then wait to invest in them when they are trading at attractive prices, often when the share price has overreacted to short term bad news. If our research is correct, they emerge ‘phoenix-like’.”
“Ideally we look for an investment that we can hold forever. We pay a price that has a big margin of safety; in fact, we never pay more than half what we think a business is worth.”
This includes current holdings such as Tesco, whose share price has fallen almost 50 per cent over three years.
Performance of stock versus index over 3yrs
Source: FE Analytics
“Tesco is a market leading business that has adopted a ‘back to basics’ strategy that we like. Barratt Developments is selling houses as fast as it can build them, and making more profit from doing so than in the past.”
Charles Cade, head of investment company research at Numis Securities thinks the new management of Aurora and as well as an innovative fee structure looks compelling but he has his reservations.
“It is a very interesting, good addition to the sector but it is early to judge I'd say at the moment. Generally, I’m positive about the manager and I like the fund but like any small fund it needs to deliver and perform if it is going to grow because it is [currently] sub-scale.”
“It is a completely different vehicle now and there has been quite big change in the shareholder register. So it is completely new beginning and you should look at it as if it is a new issue. It is the sort of thing that will appeal to private investors and smaller wealth managers and ultimately as long as it performs ok it'll be fine as long as it grows.”
As predicted by FE Trustnet, it is an example of a portfolio that follows the £800m Woodford Patient Capital Trust in only charging a performance fee subject to a high watermark.
“The fee structure is certainly differentiated and it'll certainly be easier to judge that over time but the fund needs to get bigger for people to get the benefit from it,” Cade said.
“A lot of people like the idea of a manager being compensated on performance, that's fine but the only issue I would raise there is that the percentage is pretty high.”
“Also they are unconstrained and tend to focus on mid and smaller cap ideas but the benchmark is the FTSE All Share - that is not necessarily a problem but, for example, they would have earned substantial fees on that basis over the past few years. This also meant it got hit pretty hard in the financial crisis as you'd expect from a concentrated portfolio.”
The performance fee will also be subject to a clawback if, over a rolling period of three years following the end of the last financial year for which a performance fee was payable, the company underperforms.
Phoenix will not earn an ongoing annual management fee but will be paid an annual performance fee equal to one third of the outperformance of Aurora’s net asset value total return which includes dividends and is also adjusted for the impact of share buybacks and the issue of new shares over the FTSE All Share total return for each financial year.The performance fee will be paid in ordinary shares (issued at the net asset value per share on the date of issue) and such shares must be retained by the firm for a minimum period of three years from the date of issue.
Just over 23 per cent of Aurora is currently owned by Phoenix. It is on a discount of 2 per cent.