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Ian Cowie: the extraordinary efforts of the Phoenix investor

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Ian Cowie: the extraordinary efforts of the Phoenix investor

Strange to say – but true – if you should notice someone loitering in the loo at JD Wetherspoon or asking awkward questions at Tesco or Morrisons, then they might be mystery shoppers from Phoenix Asset Management. This is the appropriately-named fund manager trying to revive what used to be one of the worst investment trusts in Britain, Aurora (ARR).

While some pooled funds deserve to be dubbed ‘closet trackers’ – charging for active stock selection while passively following stock market indices – the Phoenix team take original research to extraordinary lengths. Founder and fund manager Gary Channon explained: ‘We spend time inspecting the toilets in Wetherspoons’ because they are a good litmus test of pub management and are important when customers form impressions.

‘We visit numerous branches of Tesco and Morrisons and in each one we ask shop assistants “where is the soy sauce?" We grade them for the quality of their response, record the data and use the trend as one of many indicators of customer service standards.’

Such painstaking attention to detail reminds me of another fund manager – New Star, now, sadly, no longer with us. Chief executive John Duffield used to insist on his highly-paid colleagues joining him on nocturnal trips round the North Circular to check the firm’s posters were properly displayed.

Fortunately, and more importantly for investors than mere marketing, Phoenix can point to several examples of its research identifying businesses the stock market had seriously undervalued.

Following the Brexit referendum and fears that air transport might be disrupted, Aurora bought shares in easyJet (EZJ) at £9.91 in November, 2016. The airline reported earlier this week that revenues had risen by 20% to exceed £2 billion for the first time and its shares have soared to trade at £17.32.

Another shrewd stock selection by Aurora is Britain’s second-biggest funeral services provider, Dignity (DTY), which had traded as high as £26.70 last year before collapsing to a 12-month low of £7.40 last February, following a profits warning. Full disclosure: I should know because, as reported elsewhere at the time, I also bought into that dip, paying £7.53 per share.

Since then, encouraged by learning that Channon was digging deep at Dignity, I bought two more tranches to invest a total of just over 2% of my ‘forever fund’. With the shares now trading at £12.39, the funeral provider sits just below my top 10 holdings by value.

No wonder I often say the most valuable perk of being a financial journalist is having regular access to some of the brightest and best-informed people in Britain. Channon is reluctant to comment further on Dignity for the perfectly sound reason that he is still building his stake.

Other contrarian positions among Aurora’s top 10 holdings include the high street bank Lloyds (LLOY), pharmaceutical giant GlaxoSmithKline (GSK) and molten metals engineer Vesuvius (VSVS). Odder items further down Aurora’s batting order include the model train company Hornby (HRN) and the stamp collectors’ mecca, Stanley Gibbons International (SGI).

My anecdotal objection that few people aged less than 60 are interested in philately or choo-choo toys these days is brushed aside with the observation that both businesses were mismanaged and offer scope for recovery.

Committed value-seeker Channon claims only to invest in mis-priced stocks where there are prospects of substantial gains. Just over two years since he took the reins at Aurora, it remains too soon to say whether Channon has galvanised returns to shareholders.

According to the Association of Investment Companies, Aurora achieved total returns of 10% over the last year, in line with the UK All Companies sector average. It still lags behind over five and 10-year periods with returns of 61% and 57% respectively, compared to sector averages of 83% and 188%.

But Channon’s shrewd moves have attracted attention, as shown by Aurora’s shares trading at a 2% premium over net asset value, a big improvement on the 12% discount they stood at three years ago before Phoenix took over. This compares very well to the sector average discount of 7.3%. While no longer a bargain, the success with easyJet and Dignity demonstrates there could be a lot more value to come from Aurora.

Here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.

 

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