Aurora manager’s payday creeps closer – Aurora had a great 2019, beating the All-Share by 10.8% with a return on NAV of 29.9%. This included a dividend of 4.5p (up from 4p for 2018). The good performance encouraged the shares to trade at a premium and allowed the trust to expand in 2019, issuing £22.5m worth of shares.
2019’s good returns reversed previous underperformance and meant that, as at 31 December 2019, the trust had beaten the UK market since the new managers took control in January 2016 (by 6.8%). this was great news for the manager, which was able to earn a fee for the first time. The managers get no base fee, just a performance fee. last year’s returns enabled them to collect £1,361,000. However, they are not out of the woods yet. They received this fee in the form of shares in Aurora which they cannot sell for three years and there is a clawback mechanism. This means that if the outperformance which earned the shares was to have diminished wholly or partially on the three year anniversary of their award, the shares would wholly or partially be forfeited – [enter, the COVID-19 outbreak.]
The focused portfolio includes stakes in Frasers Group (formerly Sports Direct), Easyjet and Ryanair. these three accounted for a third of the portfolio at the end of 2019.
The manager says
“At the very outset back in January, we considered whether our businesses were at risk of ruin if the virus in China ended up being a global pandemic with a shutdown of the economy. We also asked whether our businesses will be weakened competitively by it or strengthened. Our assessment then was that our businesses are all robust enough in their financing that they will be here on the other side and their competitive positions will either be the same or better after. Now we are in the reality of the lockdown and we have had the chance to see the impact and speak to our managements, we still believe those assessments are correct.
That is not to say that the economic shutdown does not do damage – it does. Our holdings in easyJet, Ryanair, JD Wetherspoon and Frasers in particular will suffer big losses this year from the ceasing of activity. When we apply that to the overall portfolio, that damage is around 13% of our starting estimate of Intrinsic Value. This is bad but not disastrous. In the meantime, the portfolio price has dropped by 40%.
We have used the drop in share prices to invest the cash in the portfolio at very attractive levels. We have looked to purchase at one-third of intrinsic value (i.e. with 200% of upside) even adjusted for the impact of COVID-19. As we do this, we add considerable future value, and if we are to do our job well, then we have used the opportunity presented by COVID-19 to build the next leg of our performance. As we have a long history of doing so at Phoenix, downturns are when we do our best work, create the most value whilst reporting negative numbers and then later, provided our investment judgements were correct, we deliver excellent returns whilst seeming to do very little.
COVID-19 is a very unusual type of downturn, but investment-wise, carries all the familiar hallmarks to others in that there is a sudden overreaction to bad news, which of its nature, will mean that it is time limited. A rush for safety and liquidity causes equity prices to plummet and those falls beget more fear and more selling to a point where the price move is out of proportion to the negative news.
We will stick to what we know, avoid using leverage, invest in long-term winners run by honest and competent managers and then let time do its bit. When I write this report next year, this crisis is likely to have passed and you will be able to judge the wisdom and value of our actions. However, as of now, the Company has not represented better value since we started managing it.”
Restructuring plans
The announcement also says that they have started a process to organise their activities in companies they control and influence into a single investment vehicle and listing that on the London Stock Exchange. We think that is a reference to Phoenix SG – an unquoted company invested in Stanley Gibbons.
ARR : Aurora manager’s payday creeps closer