Aurora 08 November 2023
Disclosure – Independent Investment Research
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
Aurora Investment Trust (ARR) owns a highly concentrated portfolio of predominantly UK-based equities. The trust is managed by the team at Phoenix Asset Management Partners, headed up by company founder and CIO Gary Channon. The team take a value-oriented approach and claim to analyse stocks in extreme detail. They have the freedom to invest across the market cap spectrum, and often buy companies that don’t feature in the trust’s formal benchmark, the FTSE All Share Index. Once a potential investment is identified, it is backed with conviction and allowed to run. This means stocks can become very large weights in the Portfolio and that stock-specific risk is a key driver of performance.
ARR has performed particularly well over the past year (see Performance). Its highly active approach means its returns tend to diverge from the benchmark, and it can be quite volatile.
Despite the stronger near-term returns, ARR trades at a wide Discount to NAV. In the past five years, the trust has traded close to NAV and even at a premium on numerous occasions, but the shares have moved to a discount that is over one standard deviation wider than the five-year average and wider than the peer group as at time of writing.
ARR also has a unique charging structure (see Charges). There is no management fee, with the managers compensated by a performance fee which is capped, awarded in shares of the company, and subject to a three-year lock period. Should the managers underperform, earned fees are subject to a claw-back which is designed to align interest between the managers and shareholders.
We believe the managers have maximised the use of the trust’s closed-ended structure to offer a truly unique vehicle. With some position sizes in excess of 20% and a double-digit holding in Castlenau Group, a specialist vehicle created by Phoenix, the Portfolio is, in our view, highly differentiated from its peer group. For this reason, we believe the trust could offer a complementary holding to core UK equity strategies for those looking to add diversification to a large portfolio.
Performance will likely be driven by these stock picks and therefore we believe returns are very reliant on the manager’s skill. The approach of allowing holdings to run to very large positions means that even a modest move in one stock can have a material impact on performance. This unique approach to portfolio management further distinguishes the trust from more traditional peers. Whilst this approach offers both risk and reward, the level of manager ownership and charging structure means there is a very strong alignment of interests with shareholders.
The view of the managers at present is that the market, and by extension their portfolio, is extremely cheap. Their valuation focus looks to identify those companies at a discount to their intrinsic value, which they believe can only go so far and may well bounce back. If valuations do begin to normalise, we believe there is a lot of potential on offer for investors as not only does ARR typically perform best in rising markets, but the shares are also available on an historically wide Discount which could prove a compelling entry point.
- Unique approach offers highly differentiated portfolio
- Trust is trading at a wide discount relative to its history
- High level of manager and shareholder alignment
- Concentrated portfolio brings risks
- Trust has typically underperformed in down markets
- Performance fee could be high if targets are achieved and sustained