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Investment Trust Watch: UK’s worst fund gets Woodford fee

Shares in poorly performing Aurora trust spike on proposals for a new manager adopting Neil Woodford's no-performance, no-fee approach.

 
Investment Trust Watch: UK’s worst fund gets Woodford fee

Shares in Aurora (ARR ), the worst performing UK investment trust, rose 3.6% this week in response to proposals to change the manager and offer its dwindling band of shareholders an exit at 2% below net asset value.

After the announcement the discount on the shares narrowed sharply, moving in from 8.7% to 2.3%, giving it a Z-score of 2.6 and placing it in our weekly table of ‘expensive’ trusts from Numis Securities (see below).

Just to recap, the Z-score is a measure used by analysts to assess the significance of an investment trust trading either at a discount below net asset value or at a premium above NAV. A Z-score indicates how far a share price is trading outside its normal range. Generally, a Z-score above 2 is regarded as getting ‘expensive’ while a score below -2 is becoming ‘cheap’.

Can Phoenix revive Aurora?

Under James Barstow of Mars Asset Management the now £16 million Aurora has been dogged by poor performance, held back in recent years by its exposure to Asia, miners and struggling smaller companies such as Gresham Computing.

Over ten years to 14 September its shareholders made zero gains, which was lucky considering the portfolio was down 11% after all that time. This placed it firmly at the bottom of the UK Growth sector, where it also resides over five years. Whereas most funds have rallied since the financial crisis, Aurora shareholders have lost 25% since September 2010.

Last year, shareholders had had enough and the trust announced it would look to wind up in three years’ time. Earlier this year chairman Lord Howard Flight said it had received ten approaches from companies interested in taking over the management.

This week he revealed that Phoenix Asset Management Partners, a little-known manager of the Bahamas-based Phoenix UK Fund was buying Mars Asset Management and would run Aurora on the same lines.

Phoenix says it manages £570 million and has achieved a 438% return since launching the UK fund in 1998, an annual gain of over 10%, from a concentrated portfolio of 15-20 stocks.

The company was co-founded by its chief investment officer, Gary Channon, a former bond and derivatives trader at Nikko Securities, Goldman Sachs and Nomura in the 1980s and 1990s.

Phoenix doesn’t disclose its holdings on its website but says it invests for the long term in businesses with good, honest management, strong pricing power and high returns on capital.

Leaf from Woodford’s book

The exciting aspect of all this is that Phoenix has taken its cue from Neil Woodford’s Patient Capital (WPCT ) trust and says it will not charge the fund a base management fee and will only receive a performance fee in shares if it beats the total return of the FTSE All Share each year.

Details of the fee have not been announced but a high watermark will apply – so that the fund has to make up losses from previous years before it can earn the fee – and the payout will be subject to an annual cap.

Whether this will be enough to convince shareholders not to take the tender offer and run remains to be seen. In its statement, Aurora said it was Phoenix’s intention to make the fund an attractive investment and grow the company by issuing shares at a premium to NAV.

Clearly, if shareholders pass the proposals, Aurora will start from a very low base. The odds are stacked against its success but adopting a performance fee approach shows Phoenix is thinking in the right direction and may gain more attention than it would otherwise would with a conventional charging structure.

Before the announcement Phoenix built up a 21% stake in Aurora as CG Asset Management, the manager of Capital Gearing Trust (CGT ), and other investors sold out, according to stock exchange announcements.

Data from Thomson Reuters shows that John Walton, the former manager of British Empire Securities (BTEM ), retains a near 3% stake, having bought shares in March. Aurora shares have risen 10% in the past six months so he may have timed that well.

Barstow owns just under 9% of the investment trust.

'Expensive' trusts Share price premium (- discount) to net asset value % One-year average Z-score
ARC Capital Holdings (ARCH) 136.4 -34.6 8.1
Industrial Multi Property Trust (IMPT) -47.0 -72.5 2.8
European Real Estate (ERET) -26.6 -40.8 2.8
Terra Capital (TCA) -6.5 -11.1 2.8
Ottoman Fund (OTM) 222.6 41.1 2.7
Aurora (ARR) -2.3 -11.5 2.6
Aberdeen Smaller Companies High Income (ASCH) -10.6 -16.3 2.6
BlueCrest BlueTrend - £ (BBTS) 2.0 -1.7 2.5
Dexion Absolute - Euro (DABE) -3.4 -7.9 2.5
Trinity Capital (TRC) -22.0 -32.2 2.4
JPMorgan Mid Cap (JMF) -2.6 -10.9 2.3
JPMorgan US Smaller Cos (JUSC) 0.6 -4.4 2.3
Invesco Perpetual Select - Global (IVPG) 4.2 -0.3 2.3
Miton Worldwide Growth (MWGT) -7.4 -10.2 2.3
Invesco Perpetual Select - UK Growth (IVPU) 2.8 -0.8 2.3

Source: Numis Securities

ARC Capital Holdings (ARCH), a troubled China private equity fund, tops our table of ‘expensive’ trusts with a remarkable 8.1 Z-score.

Numis data shows the 19% discount vanished and turned into a 136% premium this week as the company announced it was continuing its legal fight against its former manager, ARC Capital Partners, over its investment in Orient Home. However, trading in the shares is suspended on AIM as the company seeks a new nominated adviser following the resignation of Grant Thornton.

'Cheap' trusts Share price premium (- discount) to net asset value % One-year average Z-score
Invesco Perpetual Enhanced Income (IPE) -2.1 2.7 -3.9
Scottish IT (SCIN) -11.9 -9.7 -3.2
International Public Partnerships (INPP) 2.7 8.9 -3.1
Picton Property Income (PCTN) -5.5 3.6 -3.1
Advance Developing Markets (ADMF) -14.1 -10.9 -3.0
Mithras IT (MTH) -20.3 -9.8 -2.9
Carador Income Fund (CIFU) -7.1 -1.6 -2.7
JPMorgan Global Emerging Markets Income (JEMI) -6.2 0.1 -2.6
Witan Pacific (WPC) -16.3 -12.0 -2.6
Caledonia Investments (CLDN) -20.7 -16.4 -2.6
Alcentra European Floating Rate Income (AEFS) -2.8 1.6 -2.6
Edinburgh Dragon (EFM) -13.2 -10.8 -2.5
Nimrod Sea Assets (NSA) -20.7 4.5 -2.5
TR Property (TRY) -5.5 -1.6 -2.5
Schroder AsiaPacific (SDP) -12.5 -10.1 -2.5

Source: Numis Securities

Give me some SCIN

All the above is very interesting, but what do the Z-scores say about potential buying opportunities?

Standing out from the list of ‘cheap’ trusts for me this week are Scottish Investment Trust (SCIN ) and Caledonia Investments (CLDN ).

SCIN, an independently run £600 million global fund, notches up a Z-score of -3.2 after its discount widened to nearly 12% below NAV, beneath the one-year average of 9.7%. Alasdair McKinnon took over as manager in July last year after the departure of John Kennedy. Over one year the NAV has declined 2.1%, ranking it 27th out of 37 in the Global sector up to 14 September. Its long-term record is not exciting either, with NAV total returns of 84.5% over ten years, placing it 19th out of 33 trusts.

However, SCIN does boast a low-cost ISA regular savings plan – for investors who don’t mind buying direct from the company rather than through a stock broker. This has a 0.6% annual charge capped at £30. The trust also levies ongoing charges of 0.68%.

Still in the global sector, Caledonia, the Cayzer shipping family fund open to private investors, had moved to a near 21% discount by yesterday’s close, compared to the 12-month average of just over 16%, which gives it a Z-score of -2.6.

Shares in this fund, which invests in companies both on and off stock exchanges, have gone nowhere in the past 12 months, but rest middle of the sector table over five years with a 45% gain, according to Morningstar data on this website.

1 comment so far. Why not have your say?

Jonathan

Sep 26, 2015 at 17:54

A fair way to charge management fund fees would be to charge a fee based on money made above the total market change for all shares in the category the fund is based. For example, if a fund made £10,000,000 above what it would have if it were just invested by spreading the investments across the entire market the fund manager should be able to take a fee based on the £10,000,000 profit above the market average they made. If they perform below the average of the market they should be penalized (by paying the investor) the negative of the commission they would have made if the shares had gone up against the market by that amount.

Fund managers should only stay in business and only make commission if they can, over time, perform above the market and with this formula a fund manager who does this would make a profit. If they perform under the market return they should be penalized as investors would be better off investing in a FTSE 100 fund or equivalent.

If they really thought they could offer more than a simple robot can offer they would do this. So why don't they?

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