The best time to invest is when negative market sentiment drives share prices well below their intrinsic value because of an over sensitivity to current and near-term news. Gary Channon, the manager of the Aurora Investment Trust (LON:ARR), says that this is exactly where we are now with domestically exposed UK stocks and thinks that the short-term uncertainty over Brexit has created a great opportunity to invest in his fund.
Channon believes that the best guide to the amount of value that they have in the fund is their estimate of the intrinsic value, rather than the NAV that is based upon the current share prices. At the end of December that figure was £12,543 per share versus an NAV of £5,559, which implies an upside of 126%.
The average 3-year return has been 58%
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Whenever the upside with their almost identical open-ended vehicle, the Phoenix UK fund, has been above 120% at a quarter end, the average subsequent three-year gain has been 58% and there have been no negative returns. They have had 33 quarter ends in their 21-year history where this situation has occurred, and they have the three years subsequent returns data.
Channon took responsibility for the £108 million investment trust in January 2016 when the management was transferred to Phoenix. He and his team focus on stock picking and adopt a contrarian value approach driven by in-depth fundamental research, with the aim being to identify companies with a strong business franchise, a high return on capital and good management.
This strategy has enabled them to draw up a candidate universe of between 70 and 90 UK stocks, which they then monitor over extended periods to see whether a value opportunity arises that would allow them to buy at an attractive entry point. These sorts of companies rarely trade at cheap prices and when they do it is normally after the release of bad news. It is analysing these situations to see whether the price fall is temporary or permanent where the manager is able to add value.
An extremely concentrated portfolio
The fund has an extremely concentrated portfolio of 12 to 20 UK-listed stocks and at the end of December the 10 largest holdings accounted for 77% of the net assets. These included the likes of GlaxoSmithKline, Sports Direct, Lloyds Bank, Bellway, Dignity, Tesco, Stanley Gibbons and Redrow. The biggest sector exposures at the end of June were Retail (30%), Finance (20%) and Leisure (13%).
The investment trust analysts at Winterflood have included Aurora on their list of recommendations for the year. They believe that it has the potential to outperform over the long-term, although it is likely to experience periods of high volatility due to the concentrated nature of the portfolio. It is also worth noting that Phoenix is only paid for outperformance and this is through the issuance of shares. This ensures that the managers’ interests are closely aligned with those of their shareholders and helped to keep the ongoing charges for 2017 down to 0.54%.
Aurora’s high exposure to consumer stocks makes the fund extremely sensitive to the UK’s economic cycle and could result in a bumpy ride while Brexit continues to dominate the news. Long-term investors who are prepared to ride out the short-term volatility could be richly rewarded.