There are three good reasons to get excited about the £125 million Aurora Investment Trust (ARR). First, the shares that the trust owns are collectively undervalued according to the manager, Phoenix Asset Management.

It estimated that the portfolio had approximately 138% upside to intrinsic value at 22 September 2020.

While Phoenix was only appointed to manage the trust in 2016, its flagship Phoenix UK Fund follows an identical strategy and has outperformed the FTSE All-Share index on a net asset value basis (NAV) by 3.3% a year since launch in 1988, growing at an annualised rate of 7.5% a year.

Historically there have been 28 quarter-ends when the upside to intrinsic value was over 140%, resulting in the Phoenix UK Fund delivering an average net return of 60.8% over subsequent three-year periods or 17.2% annualised, demonstrating a positive relationship between extreme discounts to NAV and future fund performance.

The second reason to look at Aurora is the fact it doesn’t charge a base management fee. Instead there is a performance fee which is paid entirely in shares and importantly has a clawback mechanism calculated after three years.

The fee is calculated as one third of the annual outperformance of the FTSE All-Share Total Return index, capped at 4% of NAV. As a result of the strong alignment of interests, the ongoing charge is very competitive and last year was 0.45%, one of the lowest in the peer group according to Liberum.

Thirdly, the UK market looks significantly undervalued relative to global markets, especially the US where the S&P 500 has recovered to pre-Covid-19 levels while the FTSE All-Share languishes 20% below January 2020 highs. Liberum estimates that UK equities trade on a forward price to earnings ratio of 14.8 compared with 22 for the US and 17.4 for Europe.

Aurora’s portfolio is highly concentrated and consists of 16 companies with the top five holdings accounting for around half of NAV. The fund is exposed to cyclical sectors most impacted by the pandemic with 28% in retail, 19% in housebuilders and 16% in budget airlines. The biggest holdings are Sports Direct owner Frasers (FRAS), Barratt Developments (BDEV) and EasyJet (EZJ).

The manager tries to find great companies with an enduring high rate of return on capital and a control over their own profitability. It looks to invest at attractive prices and specialises in ‘determining whether the factors causing the price to fall are temporary or more permanent’.

Investing in this trust requires patience and an understanding that value investing as a style has been out of favour for some time.

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