The concentrated value fund betting on a UK recovery

The threat of a hard Brexit has held back the performance of domestically orientated UK stocks and created a value opportunity for those who believe that the economy will withstand all the business and political uncertainty surrounding the negotiations.

If you share this view you might want to consider the Aurora Investment Trust (LON:ARR). This small £90 million fund provides exposure to a highly concentrated portfolio of UK stocks that are trading at a deep discount to their fundamental value and is heavily tilted towards cyclically sensitive areas whose performance is linked to that of the UK economy.


Aurora has one of the most concentrated portfolios on the market with the top ten positions at the end of December – including a 5.5% cash weighting – making up just over 90% of the assets. If the managers get their stock selection decisions right this extreme concentration would add to the fund’s ability to outperform, but if they don’t it would dramatically increase the risk.

Since January 2016 the fund has been run by Phoenix Asset Management, whose contrarian, value orientated approach means that they will never pay more for a stock than their estimate of the company’s intrinsic value under the worst feasible outcome. It is the same philosophy that they use in their open-ended Phoenix UK fund, which has returned an annualised 10% per annum since its launch in 1998, compared to the 5.5% achieved by the FTSE All-Share over the same period.

At the end of December the largest holdings were: Lloyds Bank, Tesco, Bellway, Sports Direct, Glaxo, Randall & Quilter and Redrow, with the seven companies accounting for a massive 61.3% of the portfolio.

If you think that Brexit will work out better than the market seems to be pricing in, Aurora could be a good way to benefit.

The two housebuilding stocks Bellway and Redrow both performed strongly last year due to political initiatives to tackle the shortage of housing and the widespread availability of mortgages on attractive terms. Sports Direct also had a good year, and despite the bad publicity the fund managers are impressed by the management of the company.

Tesco continues to improve its operational performance and customer offering, yet Phoenix point out that its relatively low valuation remains disconnected from the steady progress being made in the underlying business. Lloyds is another that looks cheap despite the apparently strong fundamentals.

Randall & Quilter is a niche insurance business that specialises in buying “run-offs”, which are insurance companies that are no longer writing new policies and just running off the existing ones. According to Phoenix, this is a sector with exciting long-term potential.

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The investment trust analysts at Winterflood believe that Aurora has the potential to outperform over the long-term and have included it as one of their recommendations for 2018. They do however acknowledge that the concentrated nature of the portfolio is likely to result in periods of significant volatility, while the exposure to UK cyclicals will increase the fund’s sensitivity to the health of the UK economy.

ARR is highly unusual as there is no base management fee, with the managers only charging a performance fee of one third of the NAV total returns above the FTSE All-Share, subject to a cap and high water mark. Its shares are currently trading on a small premium to NAV.

If you think that Brexit will work out better than the market seems to be pricing in, Aurora could be a good way to benefit.