Aurora tweaks investment objective and performance fee methodology

Aurora Investment Trust (ARR) has announced changes to its investment objective and the methodology used to calculate its performance fee. The change in the investment policy stems from a desire by the board to clarify the wording to make it consistent with ARR’s investment policy and dividend policy. ARR’s existing investment objective refers to providing shareholders with “long-term returns through capital and income growth” and ARR’s board believes it would be clearer if the words within the quotation marks were replaced with “long-term total returns”.

The board says it recognises that “long term total returns” are synonymous with “capital and income growth”, but believes “long term total returns” to be more accurate in ARR’s context, noting that the trust does not have a fixed dividend policy or target and the board’s policy is to seek to distribute substantially all of the net revenue arising from the investment portfolio, regardless of whether such amount is higher or lower than in previous years. Reflecting this, with immediate effect ARR’s investment objective has been changed to: To provide shareholders with long-term total returns by investing predominantly in a portfolio of UK listed companies.

ARR’s board says that there will be no change to the trust’s investment policy or the way in which the investment portfolio is managed. Moreover, there is no change to the dividend policy and the board expects to continue to distribute substantially all of the net revenue arising from the investment portfolio.

Changes to the performance fee methodology

ARR’s board says that a key aspect of the trust is the clawback provision in its performance fee, under which performance fees paid to the investment manager can only be retained by the investment manager if the trust does not underperform in the subsequent three-year lock-in period. Currently if performance fees are clawed back, the high-water mark (or level at which future performance fees are payable) does not get adjusted, meaning the investment manager must effectively re-earn performance which has already been generated.

The board says that it does not believe this approach reflects the intention that the investment manager should be rewarded for generating cumulative long-term outperformance and so, with effect from close of business on 13 June 2024, the performance fee methodology has been adjusted to allow the investment manager to earn a performance fee in respect of any outperformance that has been clawed back, where it is subsequently re-generated by the investment manager. The board believes that the performance fee, adjusted in this manner, will properly incentivise the investment manager for long-term outperformance, consistent with the expectations of shareholders.

It should be remembered that ARR’s investment manager does not earn an annual or base management fee. Instead, it is entitled to receive a performance fee equal to one third of the outperformance of the company’s net asset value total return over the percentage return of its FTSE All Share Total Return Index benchmark for each financial year (or, where no performance fee is payable in respect of a financial year, in the period since a performance fee was last payable).

The performance fee is capped at 4 per cent. per annum of the end of year NAV in the event that the NAV per share has increased in absolute terms over the period, and 2 per cent. in the event that the NAV per share has decreased in absolute terms over the period. Excess outperformance is carried forward and only paid if the company outperforms, and the fee cap is not exceeded, in subsequent years.

Rather than being paid in cash, the performance fee is payable in ordinary shares of the trust which must be retained by the investment manager for three years. In the event that the ARR’s return is less than the benchmark return at the end of any lock-in period, ARR is entitled to claw back the performance fee and require some or all of the ordinary shares received by the investment manager in satisfaction of the payment of the performance fee to be returned.

ARR’s board says that, eight years into the company’s management by Phoenix Asset Management Partners Limited (ARR’s investment manager), ARR has delivered absolute performance of 96.6% and relative outperformance, against the FTSE All-Share Index, of 10.4%.