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Inflation hedge works to Aurora’s benefit

Aurora beat its benchmark over 2021 but its share price lagged a little. An NAV total return of 19.1% was ahead of the 18.3% return on the UK market but the share price return was 13.5% as the discount widened. The trust benefited from the IPO of Castlenau in September 2021. The board proposes to pay a final dividend of 1.84p (2020: 0.55p).

The major contributor to performance in 2021 was a hedge against rising inflation using options on the short sterling future contract. In early 2021, Phoenix became concerned at the potential impact of rapidly rising interest rates on intrinsic value of the portfolio holdings. The hedge was implemented in the summer, and in the fourth quarter of 2021, as concerns over inflation increased significantly, strong performance was generated from the hedge.

Phoenix earns no management fee other than an annual performance fee, equal to one-third of NAV per share total return in excess of the All-Share. In 2021, a performance fee was earned by Phoenix. This fee was received in shares in the company, which Phoenix cannot sell for three years, and there is a clawback mechanism in place through which, if the outperformance which earned the shares were to disappear on the third anniversary of their award, the shares would either be cancelled or, in limited circumstances and following consultation with Phoenix, the company would have the discretion to either (i) reduce the number of shares that are clawed back or (ii) extend the lock-in period for up to a further two years.

Extract from the manager’s report

From a share price perspective, holdings with the highest price rises were the inflation hedge and Frasers Group. The inflation hedge was implemented to protect the portfolio against the impact of inflation, through the purchase of September 2022 put options on the short sterling future contract, the security identifier is LU2P99. The options were purchased at £0.03 and were priced at £0.33 on 31 December 2021. They subsequently rallied to over £1 and were sold in stages during the first two months of 2022. The Frasers Group share price increased by 71% during the year, as the company demonstrated a strong recovery from the pandemic and highlighted the potential of its elevation strategy in its Flannels luxury retail business.

Other share price risers of note were Lloyds, which rose 35% during the year, and the housebuilders, Bellway and Barratt Development, which rose 17% and 16% respectively.

Fallers of note included our low-cost airlines due to the continued impact of the pandemic. easyJet fell by 20% with Ryanair falling 12%. Prior to the emergence of the Omicron variant both holdings had benefited from travel restrictions being lifted but this was reversed when the scale of disruption around Omicron became clear.

ARR : Inflation hedge works to Aurora’s benefit

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