Old-fashioned value investing gives new life to Aurora
Regime change at the Aurora Investment Fund has seen its assets under management increase, while its portfolio achieved a 5.7 per cent return, against a market rise of 1.9 per cent, in August.
The change was the arrival of old fashioned value managers Phoenix Asset Management with GBP600 million under management in UK stocks that don’t at first glance appear appealing, but that Tristan Chapple, Director of the Aurora Investment Fund, says they never want to sell.
Phoenix became investment adviser to Aurora in January 2016 when it was on its last legs, in wind up mode with just GBP15 million under management. August saw funds grown to GBP42 million. Investors are drawn from a mix of institutional, family office, endowments and wealth managers.
Chapple says: “We had a complete clear out of the old portfolio and aligned it to our existing portfolio. We could then take our track record and go out and meet investors who know us but who have wanted a different structure, but also investors who haven’t met us before.”
Phoenix’s track record shows a net annual return of 9.2 per cent since 1998, against the FTSE All Share for that period, which saw a return of 4.9 per cent.
Phoenix hopes to take Aurora to GBP100 million in the next couple of years. Chapple explains that their approach to investing is to invest in UK stocks when there is a short term problem or negative market sentiment.
Firms in their list include Sports Direct, J D Wetherspoon, Tesco and housebuilders such as Barratt and Bellway Homes. Chapple says: “We’ve been very familiar with the house building sector for 18 years and have held Barratt Developments for a long time. Pre-Brexit the housebuilders were more fully valued, reflecting improving trading conditions so we had a lower weighting and then Brexit happened and we saw more bearishness about UK property, and got the opportunity of buying quite a lot more at lower prices. We think the share price impact post Brexit was dramatic, but long term, the impact on the business is negligible.”
Fundamental to the firm’s investment approach is their approach to research. “The portfolio is highly concentrated and that means that we need to stay very close to what we own,” Chapple says. “We monitor with a huge amount of mystery shopping.”
Phoenix likes to be cautious, holding investments it can monitor at the front end of the business. “We own whole companies and want to understand what all our individual holdings are,” Chapple says.
“We’re not contrarian because those are people who have made their mind up before looking. That’s not what we do and would be dangerous in our portfolio. Our portfolio contains lots of out of favour names and that is what our investment style ends up with as we look for high quality great businesses buying at a price at no more than 50 per cent of what they are worth. We like to buy good quality companies cheap while they have short term problems.”
The portfolio holds companies where there is a strong distinction between how they are perceived as a consumer and how they are run. “Our businesses are very high quality indeed,” Chapple says.
Sports Direct has been in their portfolio for nine years and despite its recent disastrous PR issues, Chapple says it is an incredibly well run company with a management team that is among the best in the retail space.
“Some of the issues have been of their own making,” Chapple says, referring to recent complaints of bad staff practices in their warehouses. “But now they have addressed them and changed the business to react to that, where justified. We need misperception in our investments or we wouldn’t get the opportunities that we get.”
While they aim to hold stocks forever as their starting point, they would sell if the actual price overtook the intrinsic value or if there was something wrong fundamentally in the investment case.
The firm uses a concept of intrinsic value for every holding which allows them to measure the portfolio in terms of intrinsic value. Currently the portfolio is 120 per cent upside to intrinsic value