Aurora 07 May 2019
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
Aurora Investment Trust is a highly-concentrated portfolio of UK-listed companies run with a clear bottom-up, value style. It has been run by Phoenix Asset Management since January 2016, which has marked a significant change of fortunes with net assets rising from only £15m to £125m, largely through share issuance.
The managers seek to invest in UK-listed businesses of all sizes to deliver strong absolute and relative returns, although they are able to invest up to 20% overseas, and up to 10% in unlisted securities. They interpret the work of Warren Buffett etc, and look to buy companies at valuations which they think are fundamentally undervalued by the market. They are both classic “value” investors, but also aim to work with some companies in the portfolio actively to help engineer a turnaround.
Their stock-picking focus is entirely bottom-up led, and a hallmark of their process is to run highly-concentrated portfolios (as of the end of March 2019, they hold just 16 stocks). They place great emphasis on doing their own homework on businesses, including meeting company management, customers and competitors and aim to own companies that are deeply out of favour. The team claim that they won’t buy shares unless a company is trading at less than half what they consider its intrinsic value is.
This focus on value is clearly highlighted by the Morningstar style analysis, with zero percent of the portfolio in what they identify as “growth”. This is the lowest weighting of any of the UK All Company trusts. Perhaps unsurprisingly therefore, the portfolio is currently packed with domestic economically-sensitive stocks such as Lloyds, Tesco, Morrisons and Sports Direct. The managers topped-up holdings in UK housebuilders during the sell-off in the latter part of 2018.
The managers' long-term track record on their open-ended, offshore Phoenix UK fund, is very strong, having delivered a net return of 509.8% between May 1998 to 31st March 2019, compared to a return of 186% from the FTSE All Share, representing outperformance of 323.7%. Since taking the reins of Aurora, the trust has marginally underperformed relative to the FTSE All Share, but beaten its average peer in the UK All Companies investment trust and open-ended sectors. However, it is worth noting that most of the relative underperformance was generated during the managers’ first six months in the Brexit vote induced sell-off.
When Phoenix took over management of the trust, the share price rating significantly improved, and has consistently traded on a premium since then. The board has been very active in issuing shares, which means the trust now has net assets of £125m.
Aurora provides a highly-differentiated value approach to UK equities, managed by an experienced team with a long and successful track record on the open-ended Phoenix UK fund.
Significant share issuance has enabled the trust to grow to the size where it becomes relevant for most UK investors. The shares trade at a modest premium thanks to the board’s share issuance programme. If the manager decided that they wanted to limit the size of the fund, it is entirely possible that the shares could reach a more significant premium. On the other hand, the portfolio could be vulnerable to short term (Brexit induced?) volatility – particularly if consumer spending in the UK suffers a hiccup. The board do not have a discount control mechanism, and so it remains to be seem what sort of discount the shares might fall to in such a scenario.
We continue to view Aurora as an attractive long-term offering for UK investors - especially given the trust’s differentiated fee structure whereby it doesn’t charge an annual management fee. Phoenix only charge a performance fee relative to the FTSE All Share, capped at 4% of NAV, and clawed back if the trust underperforms in the subsequent three years.
|Strong long term track record
|Highly concentrated portfolio, exposed to relatively narrow range of sectors
|Clear investment rationale, and differentiated approach
|Even Warren Buffett is questioning the relevance of his own historic “intrinsic value” led approach.
|Low OCF, with innovative performance-fee only charging structure
|Premium rating could evaporate, and board untested as regards buybacks