It is an uncomfortable aspect of value investing that there is a disconnect between the work fund managers do and the results they deliver.
When it comes to communicating with investors it means that there is often a peculiar conundrum in that what fund managers are able to talk authoritatively about, i.e. the fundamental performance of the portfolio and the value of our changes to it, bears little resemblance to the performance numbers that accompany our words.
In the five years from December 2019 to December 2024 the share price of UK listed investment trust Aurora UK Alpha [LON:ARR] (managed by Phoenix Asset Management Partners) has moved from 237p to 227p. In that same period though the intrinsic value of the portfolio, based upon the Phoenix estimates of the individual intrinsic values of the portfolio holdings, has risen from 420p per share to 650p, and this is being hailed by the managers as a better measure of their efforts and the performance of the businesses.
The amount of upside to that level has increased from 60% to 171% and that is what the team often refer to as the “stretched elastic” between price and value.
“Intrinsic value is our North Star for a reason, it anchors us on fundamentals and allows us to avoid or take advantage of the noise,” explains Gary Channon, Chief Investment Officer at Phoenix. “Our decision making is rational and based upon values. Our history tells us that ultimately it ends up being the best predictor of what is to come.”
What is affecting the performance of Aurora UK Alpha?
The most significant positive event influencing performance occurred mid-year. Positive news regarding the balance sheet restructuring at Dignity, the largest investment within Castelnau Group LON:CGL, led to a 35% uplift in Castelnau’s NAV in early July. This single event propelled ARR’s NAV by 9.1% in July alone, and made Castelnau Group the largest positive contributor for the full year, adding 1.9% to performance despite the later market downturn.
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The fund made one new investment in the year, taking a position in Burberry LON:BRBY in September at an attractive price equivalent to circa £2 billion market capitalisation (£5.72 per share). This was our its investment in the luxury goods sector, despite over a decade studying it and therefore the portfolio management team limited the initial position size. Unfortunately, the price moved out of the buying range before the fund got to a 2% weight, which was below the initial target allocation.
“Our thesis rests on the enduring nature of luxury demand, the excellent economics of established brands (where value is often not captured by balance sheet assets), and their resilience to mismanagement,” said Channon. “Burberry, with its deep heritage rooted in innovation like gabardine and iconic products like the trench coat, exemplifies these qualities.”
The opportunity arose from multiple compounding negative factors: a cyclical luxury market retreat (especially in China), specific company missteps around pricing, and the general undervaluation of its London listing, capped by Burberry’s FTSE 100 demotion. This created a purchase price offering a significant margin of safety, allowing for potential setbacks in the turnaround under new leadership, while retaining considerable upside potential towards our intrinsic value estimate. We have a mid-case intrinsic value of £4.8 billion.
In summary, 2024 was a year of good fundamental progress in the portfolio, and the team at Phoenix believe their actions added to the intrinsic value of the trust, but the NAV declined by 4.3% and the share price was down by 5.5%. At the same time, the FTSE All-Share rose by 9.5%.
“I am incredibly optimistic about what the value in the fund means for future returns but back to that problem with value investing, I have no idea when it will show up in price but a high degree of confidence that it will,” Channon concluded.
