Phoenix Asset Management Partners has had its eye on the retail market for a few years, but it was only this year the group was able to offer a product to wealth managers and individual investors when it took over the Aurora Investment trust.
The group has been operating since 1998 and has £600m in assets under management, the bulk of which is in the Phoenix UK fund, a Bahamas-domiciled open-ended fund aimed at institutional investors.
The Aurora Investment trust follows the same strategy as the offshore fund. Phoenix assumed control of the trust from Mars Asset Management on 28 January 2016 following a period of underperformance. The investment team, including CIO Gary Channon and research analyst Tristan Chapple, swiftly turned over the portfolio, replacing all holdings to mirror the offshore fund.
While previously a reasonably concentrated portfolio with between 20 and 30 positions, the Aurora investment trust is now highly concentrated with 16 holdings, the top five of which account for 45 per cent of the portfolio.
Chapple says: “We are looking to invest rarely. We look for really great businesses and pay no more than 50 per cent of what we think the business is worth. We only get the opportunity to do this once or twice a year. When we buy a stock, we are thinking we will hold it forever.”
The mandate is certainly long-term and high conviction; the turnover in the offshore fund has been 20 per cent over its 18 year life. However, the portfolio’s highly concentrated nature means performance can be volatile.
Chapple says: “Our performance is very different to the FTSE All Share; it is far more volatile on both the upside and the downside. But the Phoenix UK fund has only had three years of negative performance out of 18, and these have been followed by strong rebounds in each following year.”
Tesco is the trust’s largest holding at 12.4 per cent. Chapple says Phoenix likes the company as it is has been on the radar of what is now the Competition and Markets Authority for 15 years, and is in the process of being turned around.
“It is taking time but the current management team is doing the right thing. They are listening to their customers,” Chapple says.
The share price is “too cheap”, he says, because people are worried about cheaper supermarkets, such as Aldi and Lidl. “But this is overstated; Tesco is far more resilient. The second concern is the internet, but Tesco is dominating grocery retailers in the UK with almost 50 per cent of the market. Tesco is a risk, but developments are happening slowly,” he adds.
Unlike many investment trusts, Aurora does not use gearing – which Chapple says it doesn’t need – or impose an annual management charge. Instead, the trust has a performance fee with a high watermark: one third of the outperformance of the FTSE All Share with a 4 per cent annual cap. This outperformance must then be maintained for three further years for Phoenix to keep the fees.
“Our fee structure is aligned with investors,” Chapple says. “Day-to-day they don’t pay a management fee. The performance fee is paid in shares rather than cash and if a performance fee is earned in 2016, we have to keep the performance for 2017, 2018 and 2019. If the performance falls away the board can take the fees back from us.”
Over the three months since Phoenix took charge of the portfolio, the Aurora Investment trust’s net asset value is up 4.5 per cent against the 3 per cent return of the AIC UK All Companies sector, according to FE.
When Phoenix took over the trust in January it had £17m in assets under management; it has now almost doubled to £30m largely due to the managers selling shares held in treasury and issuing 4.9 million of new shares.
Chapple says: “We see this as the first step of the journey to reaching £100m. We think we can do this in the next two to three years.”