Aurora Investment - Annual Financial Report
21/04/2023 07:00
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RNS Number : 9807W Aurora Investment Trust PLC 21 April 2023
Aurora Investment Trust PLC
Annual Report for the year ended 31 December 2022
.
Strategic Report
Financial and Performance Highlights
Objective
To provide shareholders with long-term returns through capital and income
growth by investing predominantly in a portfolio of UK listed companies.
Policy
Phoenix Asset Management Partners Limited ("Phoenix") was appointed as
Investment Manager on 28 January 2016. Phoenix currently seeks to achieve the
Company's Objective by investing, primarily, in a portfolio of UK listed
equities.
The portfolio will remain relatively concentrated. The exact number of
individual holdings will vary over time but typically the portfolio will
consist of 15 to 20 holdings.
The Investment Policy of the Company can be found on page 7.
Benchmark
Performance is benchmarked against the FTSE All-Share Index (total return),
representing the overall UK market.
Dividend
The Board proposes to pay a final dividend of 2.97p per ordinary share (2021:
1.84p) to be paid on 4 July 2023 to shareholders who appear on the register as
at 9 June 2023, with an ex-dividend date of 8 June 2023.
Annual General Meeting ("AGM")
The AGM of the Company will be held at 25 Southampton Buildings, London WC2A
1AL on 27 June 2023 at 2 p.m. There will be no Investment Manager presentation
at the AGM. Instead, there will be a separate Investment Manager presentation
and Q&A event at 4 p.m. on 10 October 2023 at the
Queen Elizabeth II Centre, Broad Sanctuary, Westminster, London SW1P 3EE.
.
Chair's Statement
This is my first statement as Chair of your Company, since I succeeded Lord
Howard Flight on 28 June 2022. I would like to thank Lord Flight and The
Honourable James Nelson for their service to the Company during their tenure,
following their retirement at last year's AGM.
Performance
2022 was a difficult year, with concerns over inflation and the war in
Ukraine causing significant market turbulence. The Company's Net Asset Value
("NAV") Total Return* for the year ended 31 December 2022, on a non-IFRS
basis, was -17.4% (2021: +17.1%) and the share price total return* was -16.3%
(2021: +13.5%). Over the same period the Company's benchmark FTSE All-Share
Index (total return) increased by 0.3% (2021: 18.3%), predominantly due to the
c.25% weighting in energy and mining stocks which performed strongly after the
Russian invasion. The Mid Cap index is less exposed to those sectors, and saw
a fall of 20% for the year.
The strongest contributor to the Company's performance was the inflation
hedge put in place in 2021 and sold early in 2022, while the weakest
contributor was Barratt Developments, where the proceeds from the inflation
hedge were invested. We recognise that this was a disappointing performance
for shareholders, but concentrated portfolios of undervalued holdings are
not immune to short or medium term market volatility. The Board remains
confident that the investment approach followed by the Investment Manager will
lead to long term outperformance for shareholders.
Your Investment Manager, Phoenix Asset Management Partners Limited
("Phoenix"), has provided a full description of the development and financial
performance of the portfolio over the year in the Investment Manager's Review
on pages 14 to 23.
The Investment Manager and Performance Fees
2022 was the seventh year of Phoenix's management of the Company's portfolio,
which began in January 2016. Throughout that time, Phoenix continued to employ
a focused and patient investment approach.
Phoenix receives no annual management fee, which is a unique aspect of the
Company. Instead it is solely remunerated from an annual performance fee,
equal to one third of the outperformance of the Company's NAV against its
benchmark, the FTSE All-Share Index (total return).
The performance fee is paid by issuance of the Company's ordinary shares,
which are subject to a fixed three-year clawback period. That means the
issued shares will be returned by the Investment Manager in the event that any
outperformance versus the index reverses on the third-year anniversary. If
outperformance fully reverses, the Investment Manager will receive nothing.
In the years ending 2019, 2020 and 2021 the Investment Manager was awarded
shares in settlement of a performance fee.
In 2022, instead of paying a performance fee, the Company clawed back 530,311
shares from Phoenix, which were delivered to the Company and held in Treasury
at the year end, but cancelled shortly after on 9 January 2023.
Following this cancellation, the Company's issued share capital is now
76,078,460 ordinary shares of 25p, each carrying one voting right. The Company
does not hold any ordinary shares in Treasury
*Alternative Performance Measure (see page 97)
Share Premium/Discount
During 2022 the Company saw the discount of its share price to the underlying
NAV per share narrow from 7.6% at the end of 2021 to 4.4% at the end of 2022.
On occasions during the year, the shares traded at a small premium.
Closing the discount is one of the Board's key objectives for 2023, and
marketing activities are considered a key part of the strategy. Phoenix along
with Liberum, the Company's broker, and Frostrow Capital as investor relations
and marketing adviser continue to promote the Company proactively.
To assist with management of the discount and the liquidity of the Company's
shares, resolutions to renew the Board's powers to issue and buy back shares
are included in the Notice of Annual General Meeting beginning on page 100.
Growth of the Company
Growing the Company remains another key objective of the Board, with a
medium-term target of £250 million. This objective was set back during the
year, with the market capitalisation falling from £179 million in January
2022, to £148 million at the year end. The only shares issued in the year
were issued to Phoenix in relation to the 2021 performance fee. Growing the
company will only be possible with the Company's shares trading at a premium
to NAV per share, and therefore the first objective is to close the discount.
Annual General Meeting ("AGM") and separate Investment Manager presentation
event
Historically the AGM included a presentation from the Investment Manager,
however this year the Board is instead introducing an Aurora Investor Event to
be held at 4 p.m. on 10 October 2023 at the Queen Elizabeth II Centre,
Broad Sanctuary, Westminster, London SW1P 3EE.. This event is intended to be
of interest to both existing and prospective Aurora shareholders and will
include multiple speakers from the Investment Manager. It is intended for this
event to be recorded and made available afterwards on the Company's website.
This year's AGM will be held at the Company's registered office, 25
Southampton Buildings, London WC2A 1AL, on 27 June 2023 at 2 p.m. to consider
the business set out in the Notice of Meeting on page ●s 101 and 102, and
will not include an Investment Manager presentation.
With respect to the AGM, the Board strongly encourages shareholders to
register their votes online in advance of the meeting by visiting
www.signalshares.com (http://www.signalshares.com/) and following the
instructions on the site. Appointing a proxy online will not restrict
shareholders from attending the meeting in person should they wish to do so
and will ensure their votes are counted if they are not able to attend.
Shareholders are invited to send any questions they may have to the Company
Secretary by email to info@frostrow.com (mailto:info@frostrow.com) ahead of
the meeting.
The Board
As mentioned above, Lord Flight and The Honourable James Nelson retired from
the Board at the 2022 AGM. Two new non-executive Directors, Farah Buckley and
Helen Vaughan, were appointed on 8 September 2022. Unfortunately it was
necessary for Helen Vaughan to resign her appointment in February 2023 due to
a conflict of interest that arose post appointment. In line with other
investment companies of a similar size and taking into account the mix of
skills and experience of the existing Board members, the Board has decided not
to recruit a fifth member for the time being. Farah Buckley's biography is set
out on page 36.
Following these changes, Farah Buckley serves as Chair of the Audit Committee
and Lady Rachael Robathan chairs the Management Engagement Committee and the
Nomination & Remuneration Committee.
David Stevenson now represents the Company on the Board of Castelnau Group
Limited ("Castelnau"). This directorship is in the interest of the Company
since it provides access to, and a deeper understanding of, the Company's
investment in Castelnau. As a result, the Board continues to consider David
Stevenson as independent.
Administration
2022 was a busy year administratively, with changes of Auditor (now BDO LLP),
Administrator and Company Secretary (now Frostrow Capital LLP) and Depositary
and Custodian (now Northern Trust Investor Services Ltd). The Board thanks our
new service providers for a smooth transition. Further information is included
in the Directors' Report.
Dividend
The Board is recommending a final dividend of 2.97p (2021: 1.84p) per
ordinary share, to be paid on 4 July 2023 to shareholders who appear on the
register as at 9 June 2023. The ex-dividend date is 8 June 2023. This dividend
will be proposed at the forthcoming AGM to be held on 27 June 2023. The
Company's dividend policy, which is to distribute substantially all net
revenue proceeds, remains unchanged and can be found on page 7 of this Annual
Report.
Outlook
Whilst Phoenix's approach was not rewarded in 2022, market turbulence provides
opportunity. The portfolio was rotated into more attractive names, and in some
cases, companies that had been patiently followed for over a decade. These
times, whilst painful in the short run, are what provide foundations for a
strong return in the long run. Performance from the beginning of 2023 to the
end of March saw the NAV return +14.4% vs. the index +3.1%, demonstrating the
potential for significant performance.
Lucy Walker
Chair
20 April 2023
.
Investment policy and results
The Company seeks to achieve its investment objective by investing
predominantly in a portfolio of UK listed companies. The Company may from time
to time also invest in companies listed outside the UK and unlisted
securities. The investment policy is subject to the following restrictions,
all of which are at the time of investment:
• The maximum permitted investment in companies listed outside the UK
at cost price is 20% of the Company's gross assets;
• The maximum permitted investment in unlisted securities at cost
price is 10% of the Company's gross assets;
• There are no pre-defined maximum or minimum sector exposure levels
but these sector exposures are reported to and monitored by the Board in order
to ensure that adequate diversification is achieved;
• The Company's policy is not to invest more than 15% of its gross
assets in any one underlying issuer (measured at the time of investment)
including in respect of any indirect exposure through Castelnau Group Limited
("Castelnau");
• The Company may from time to time invest in other UK listed
investment companies, but the Company will not invest more than 10% in
aggregate of the gross assets of the Company in other listed closed-ended
investment funds; and
• Save for Castelnau Group Limited, the Company will not invest in any
other fund managed by the Investment Manager.
While there is a comparable index for the purposes of measuring performance
over material periods, no attention is paid to the composition of this index
when constructing the portfolio and the composition of the portfolio is likely
to vary substantially from that of the index. The portfolio will be relatively
concentrated. The exact number of individual holdings will vary over time but
typically the portfolio will consist of holdings in 15 to 20 companies. The
Company may use derivatives and similar instruments for the purposes of
capital preservation.
The Company does not currently intend to use gearing. However, if the Board
did decide to utilise gearing the aggregate borrowings of the company would be
restricted to 30% of the aggregate of the paid-up nominal capital plus the
capital and revenue reserves.
Any material change to the investment policy of the Company will only be made
with the approval of shareholders at a general meeting. In the event of a
breach of the Company's investment policy, the Directors will announce through
a Regulatory Information Service the actions which will be taken to rectify
the breach.
Dividend Policy
The Company does not have a fixed dividend policy. However, the Board expects
to distribute substantially all of the net revenue arising from the investment
portfolio. Accordingly, the Company is expected to pay an annual dividend that
may vary each year.
Borrowing Policy
The Company is not prohibited from incurring borrowings for working capital
purposes, however the Board has no current intention to utilise borrowings.
Whilst the use of borrowings should enhance the total return on the ordinary
shares where the return on the Company's underlying assets is rising and
exceeds the cost of borrowing, it will have the opposite effect where the
underlying return is falling, further reducing the total return on the
ordinary shares. As a result, the use of borrowings by the Company may
increase the volatility of the NAV per Ordinary Share.
The Company has a policy not to invest more than 10% of its gross assets in
other UK listed investment companies. As a consequence of its investments, the
Company may therefore itself be indirectly exposed to gearing through the
borrowings from time to time of these underlying investment companies.
Purpose and Key Performance Indicators ("KPI's")
The Company's purpose is encapsulated in its investment objective, which is to
provide shareholders with long-term returns through capital and income growth
by investing predominantly in a portfolio of UK listed companies. The Board
measures the Company's success in attaining its objective by reference to KPIs
as follows:
a. To make an absolute total return for Shareholders on a long-term
basis;
b. The Company's Benchmark is the FTSE All-Share Index (total return),
against which the NAV total return is compared. After achieving the goal of
making absolute returns for shareholders, the next aim is to provide a better
return from the portfolio than from the market as measured by the Benchmark;
c. The Board seeks to ensure that the operating expenses of running
the Company as a proportion of NAV (the Ongoing Charges Ratio) are kept to a
minimum; and
d. The discount/premium to NAV per share at which the Company's shares
trade is also closely monitored in view of its effect on shareholder returns.
The Chair's Statement on pages 4 to 6 incorporates a review of the highlights
during the year.
The Investment Management Review and Outlook on pages 14 to 23 gives details
on investments made during the year and how performance has been achieved.
Performance (KPIs a and b)
The Company's performance in absolute terms and relative to the FTSE All-Share
Index (total return) benchmark since Phoenix was appointed as Investment
Manager in 2016 is shown below:
Cumulative since Year to Year to
28 January 2016 31 December 31 December
to 31 December 2022
2022
2022
%
%
%
NAV per Ordinary Share (total return)1 43.2 (17.4) 17.1
Ordinary Share price (total return)1 38.1 (16.3) 13.5
Benchmark (total return) 61.0 0.3 18.3
1 Alternative Performance Measures ("APMs").
Ongoing charges (KPI c)
Phoenix does not earn an ongoing annual management fee, but instead is paid an
annual performance fee, only if the benchmark is outperformed, equal to one
third of the outperformance of the Company's NAV against its FTSE All-Share
Index (total return) benchmark.
The Board monitors the Company's other operating costs carefully. Based on the
Company's average net assets for the year ended 31 December 2022, the
Company's ongoing charges figure calculated in accordance with the
Association of Investment Companies ("AIC") methodology was 0.45% (2021:
0.49%). Expenses are managed with the intention of keeping costs down and as
the size of the Company grows the ongoing charge ratio should be expected to
reduce.
Discount to NAV (KPI d)
The discount of the ordinary share price to the NAV per Ordinary Share is
closely monitored by the Board. The ordinary share price closed at a 4.4%
discount to the NAV per Ordinary Share as at 31 December 2022 (2021: 7.6%
discount). During the year ended 31 December 2022, the Company's shares traded
between a premium of 1.6% and a discount of 13.6% to NAV per share, with an
average discount of 5.4%.
Revenue Result and Dividend
The Company's revenue income after tax for the year ended 31 December 2022
showed improvement towards pre-COVID levels, at £2,263,000 (2021:
£1,413,000). The Board is recommending the payment of a final dividend of
2.97p per ordinary share (2021: 1.84p per ordinary share). This dividend, if
approved by shareholders, will be paid on 4 July 2023 to shareholders on the
register as at 9 June 2023; the ordinary shares will be marked ex-dividend on
8 June 2023. In accordance with International Financial Reporting Standards
this dividend is not reflected in the financial statements for the year
ended 31 December 2022.
Five Year Summary
Year Year end Dividend per Year end
Published Ordinary Share in respect of the year Ordinary Share
NAV per (pence)
price (mid-market)
Ordinary Share
(pence)
(pence)1
Year ended 31 December 2018 182.24 4.00 183.00
Year ended 31 December 2019 232.07 4.50 237.00
Year ended 31 December 2020 213.39 0.55 207.00
Year ended 31 December 2021 253.49 1.84 234.50
Year ended 31 December 2022 203.45 2.97 194.50
Net Asset Value per Ordinary Share
The table below is a reconciliation between the NAV per Ordinary Share as at
31 December 2022 announced on the London Stock Exchange on 3 January 2023 and
the NAV per Ordinary Share disclosed in these financial statements. The
difference is principally the result of amortising the performance fees over
the vesting period in accordance with IFRS 2 Share-based Payment in these
financial statements, whereas the NAV as at 31 December 2022 published on 3
January 2023 treated the performance fees as earned on 31 December 2022, in
accordance with the investment management agreement. The remaining reconciling
balances related to adjustment of the unquoted investment valuation and
expenses, due to timing lag.
NAV per
share
NAV
p
£'000
NAV as published on 3 January 2023 157,967 207.64
Reversal of performance fee clawback accounted for under non-IFRS 2 approach (4,240) (5.57)
Add back performance fee clawback accounted for under IFRS 2 1,385 1.82
Year end adjustments on unquoted investment valuation and expenses (334) (0.44)
NAV as disclosed in these financial statements 154,778 203.45
.
Top Holdings
as at 31 December 2022
Company Sector Holding Valuation Percentage Date Average Share Market
in Company
£'000
of net assets
of first
cost per
price
capitalisation
%
purchase
share*
Million
Frasers Group plc Retail 5,114,011 36,309 23.5 Jan-16 £3.07 £7.10 £3.390
Barratt Developments plc Construction 5,866,312 23,278 15.0 Nov-18 £4.87 £3.97 £3,957
Castelnau Group Limited# Financial 24,563,184 16,212 10.5 Oct-21 £1.00 £0.66 £127
Ryanair Holdings Plc Leisure 928,600 10,060 6.5 May-19 €8.34 €12.21 €13,903
easyJet Plc Leisure 2,975,768 9,659 6.2 Sep-16 £6.86 £3.25 £2,461
Lloyds Banking Group plc Financial 19,618,000 8,909 5.8 Jan-16 £0.62 £0.45 £30,551
Netflix Inc Technology & 33,500 8,212 5.3 Apr-22 $164.00 $294.86 $129,554
Entertainment
Hotel Chocolat Group plc Food & 3,876,800 5,932 3.8 Jul-22 £1.33 £1.53 £214
Beverage
Bellway Plc Construction 306,940 5,855 3.8 Jan-16 £21.47 £19.08 £2,356
RHI Magnesita N.V. Materials 260,970 5,757 3.7 Jan-20 £33.55 £22.06 £1,046
Other holdings (less than 3%) 19,045 12.3
Total holdings 149,226 96.4
Other current assets 5,552 3.6
Net assets 154,778 100.0
* Average net cost including sales.
# Castelnau is a multi-sector financial holding company listed on the
Specialist Fund Segment of the London Stock Exchange. Castelnau is also
managed by Phoenix and its value is excluded from the Company's net assets
when calculating performance fees earned by Phoenix to avoid double charging.
.
Portfolio Analysis
as at 31 December 2022
Sector Percentage of Net
Assets
%
Retail 23.5
Financial* 20.8
Construction 19.4
Leisure 15.6
Technology & Entertainment 5.3
Food & Beverage 4.3
Materials 3.7
Industrials 2.1
Insurance 1.7
Other current assets and liabilities 3.6
Total 100.0
* Castelnau is included in the Financial classification as it is a
multi-sector financial holding company
.
Statement from the Chief Investment Officer of the Investment Manager
2022 was the year that the clawback process did its work and reversed the
performance fee earned in 2019. Although I imagine you appreciate the fairness
of this act, I know you would have preferred that we delivered the performance
instead. 2022 was a difficult year for our portfolio to outperform with
outsized gains in the energy sector triggered by the war, but those effects
will wear off in time and the extreme under valuation of the portfolio should
result in the sort of outperformance that is deserving of performance fees.
Instead of a portfolio that trades at intrinsic value and a great run of
recent performance that would lead you to think you had the right people
looking after your money we instead have for you a portfolio trading at 40% of
what we think it is worth and ask for your patience which we believe will be
well rewarded in future performance.
The UK market seems to be getting incrementally cheaper with each wave of
negativity that has hit since Brexit. History tells us that these effects are
transitory even if they can persist for long periods of time. We had negative
interest rates for so long that some thought they would be here forever, and
the UK has been cheap for so long now that you hear some who think it is also
going to be a permanent attribute.
We don't profess to make forecasts about the near term however we do expect
fundamentals to reassert themselves in the long run and the wonderful value
that we are accumulating in these times of cheapness will turn into the sort
of excellent long- term returns that make this approach to investing so
worthwhile.
Gary Channon
Chief Investment Officer
Phoenix Asset Management Partners
20 April 2023
.
Investment Management Review and Outlook
During the year, the NAV per share fell by 17.4% and the share price by 16.3%.
The FTSE All-Share Index rose by 0.3% over the same period. Since Phoenix
began managing the Company's portfolio on 27 January 2016, to 31 December 2022
the Company's NAV per share total return was 43.2% versus 61.0% for the FTSE
All-Share Index. Net assets at year-end were £158m (2021 £194m).
The underperformance in 2022 ensured that no performance fee was payable. As a
reminder, if a performance fee is payable, it is paid by way of the issuance
of ordinary shares, which are subject to a fixed three-year clawback period.
If the outperformance versus the index reverses on the third-year anniversary,
some or all the issued shares will be returned, and if outperformance fully
reverses, Phoenix will receive nothing.
On 31 December 2022, a clawback test for the year ending 31 December 2019 was
carried out and, due to underperformance in 2022, the clawback was triggered
in full. The 530,311 shares awarded to Phoenix for the 2019 fee have been
returned to the Company and the NAV per share increased by 1.66p as a result.
Following a review and dialogue with advisers, prompted by ourselves and the
Board, we agreed that accounting for the clawback in the daily NAVs better
represents the economic impact of the clawback and is more informative to
investors.
The impact of the fully clawed back 2019 fee and the 2020 & 2021 fees,
which would be clawed back if the underperformance as at 31 December 2022
continued, but which have yet to be subject to the final three-year clawback
test, was to increase the NAV by 5.44p per share in total.
2023 has started positively as the market looks towards inflation, and
therefore interest rates, falling. As of 28 February 2023, the NAV has risen
16.8% for the year, with the FTSE All-Share Index rising 6.1%.
Performance Review
From a performance perspective, 2022 was dominated by concerns over higher
inflation and the impact of higher interest rates. The war in Ukraine was
also a significant factor as it led to an increase in commodity prices, which
added to the existing inflationary forces.
The first half of the year saw falls across the portfolio, with the NAV down
16.6% versus 4.6% for the benchmark at 30 June 2022.
The year ended slightly weaker with the portfolio down 17.4% whilst the Index
recovered to end the year up 0.3%. Within the second half of the year, Q3 was
weak as the NAV fell a further 9.7% before a 9.5% recovery in Q4.
It has been a tough year in which to beat the UK indices. The main UK indices
have, unusually (from a global perspective), returned a positive performance
in 2022, largely owing to the weighting in energy and miners, whose prices
jumped in response to the elevated profit opportunity that followed Russia's
invasion of Ukraine. Between them, those sectors make up c.25% of the market
and they are up 42% and 23% respectively in 2022. We do not have any ownership
in those areas.
The Mid Cap Index, which has a lower exposure to those sectors and is more
domestically focused, fell 20% in the year.
The 17.4% decline in Aurora was after a positive 6.5% contribution from a
hedge against inflation, through put options on a short sterling future
contract, which was disclosed in detail in the Company's last annual report..
The biggest contributor to our decline was Barratt Developments where we
re-invested the proceeds of that hedge, it was down 41% in 2022, which results
in a -5.4% effect on the return. Castelnau Groupcontributed a -4.3% effect
after it declined by 35%.
The other stocks to make negative contributions of over 2% were Randall &
Quilter and easyJet, which were down 3% and 2.8% respectively.
Last year's biggest riser, Frasers Group, the Company's biggest holding, fell
8% in 2022 (having risen 71% in 2021). When combined with its large weight,
this had a -1.5% effect on the Company for the year.
The best performer in the portfolio in 2022 was Netflix, rising 50% from when
we purchased it and making a +1.3% contribution to the overall performance.
Activity Review
In the June 2022 monthly factsheet, we highlighted the valuation opportunities
afforded by the fall in the NAV during the half year. This piece was titled
"Christmas in Valueland".
Please refer to the June factsheet on our website for the full details, but it
highlighted the counter intuitive thinking of value investors as bad
fundamental news can often provide good investment opportunities. The essence
of "Valueland" is the ability to buy the future for less, and it follows that
the less you pay the higher the return you will enjoy in the future.
Those "Valueland" type opportunities persisted for much of the year and even
after recent positive performance valuations remain at an historically
attractive level.
We took advantage of the opportunity set and instigated 4 new holdings. We
reported in detail during the year on two; AO World and Netflix, a third,
Hotel Chocolat recently went over 3% and we will be formally introducing it in
the next monthly factsheet. A fourth, Wayfair, remains below our 3% disclosure
level and will be introduced when it exceeds that 3% threshold.
The investments in Netflix and Wayfair are outside our historic focus on UK
listed equities, but if they sit within our circle of competence, they are
investable, and the Company's mandate allows up to 20% of the portfolio to
consist of non-UK holdings. Ryanair for example is another member of the
portfolio from outside the UK. When we stray outside of the UK, it is to
multinational businesses where we think we bring some initial knowledge and
insight. Unilever is listed in the UK and Proctor & Gamble in the US, but
the expertise required to understand one is highly applicable to the other.
The rationale behind the purchase of Netflix was also outlined in the June
factsheet, and it is repeated below:
Rather than cover the story of Netflix, which you probably know and has been
covered well elsewhere, including in founder Reed Hasting's book collaboration
with Erin Meyer called "No Rules Rule", which is written up in the Phoenix
Reading Room, we thought we should explain why we have invested in it.
Long-term holders will remember that we have owned media production broadcast
businesses before, initially Carlton Communications and then, following its
merger with Granada, ITV. At the time of that merger in 2003 the competition
and media regulators decided that ITV would have too much power, and so
restricted their ability to change their business and capped their prices and
advertiser contracts at 2003 levels. This hobbled them in a changing world.
They tried something called ITV Digital, which was a failure, but even in 2008
when this was reviewed by Ofcom, they were still thought to need restrictions.
In that report streaming, though mentioned, was not expected to be
significant. What they called Broadband TV, or internet TV, was held back
because only two thirds of households had access to the internet at the time.
The internet itself was underestimated because they said it didn't allow the
same ability to target audiences the way broadcast TV did.
We sold our ITV and our WPP viewing that the world was changing fast in a way
that undermined both those businesses. All this time later, ITV trades 40%
below where we sold it and whenever we have reconsidered it as an investment,
for example in 2018 when Carolyn McCall moved there from easyJet, the fear of
Netflix has undermined its attractiveness. A show like The Crown would have
been a natural for ITV before the emergence of Netflix.
Now, 43% of UK households subscribe to Netflix, streaming services are in 59%
of households and Netflix dominates the Top 10 list of most enjoyed titles
watched according to Kantar. ITV finally got together with the BBC, and in
2017 created something called BritBox to compete. Currently Netflix has 100
times more subscribers.
What has been playing out in the UK has been going on everywhere at different
paces and in different ways. Streaming is a superior way of receiving media
content. To young people who have grown up with it, the idea of scheduled
linear timed broadcasting is quaint, anachronistic, and not the way they tend
to consume media unless it's a live broadcast. Around 300 million households
around the world now utilise a streaming service and we think over the next 10
years that could grow to a range of numbers averaging about 1 billion.
Netflix, as the first and biggest, we expect to lose share as others get up
and running, but they will have a smaller share of a much bigger market. Their
growth trajectory will be different to newcomers because they have reached
points of deep penetration in many markets. The pandemic has distorted numbers
and made trends harder to discern, but it seems reasonable to assume that
lockdown had a positive impact upon them and so the end of lockdown should be
negative. They entered the lockdown with 167m subscribers and have emerged
with 220m. Netflix is not just the UK's no.1; it is the World's. Whilst many
focus on Netflix versus Disney, we think the real pain points will be with
the likes of ITV and their ilk around the world.
Netflix has built this business whilst charging for it. ITV is free. ITV
doesn't have churn numbers because it is free, and advertisers pay for it.
This dynamic gives Netflix a great opportunity to vary its business model to
reduce subscription price as a point of friction. Netflix is already the
streaming service that consumers say is their favourite and would be the last
one they cancel. As Netflix experiments with the advertiser funded model that
has served Google, YouTube, Facebook and most of the world's commercial
broadcasters well, we believe it will increase its competitive advantage.
Netflix has a founder led culture that is always adapting and evolving, using
trial and error combined with a good understanding of data to develop. We see
this in many successful businesses and so when we consider the management team
and culture at Netflix, we think it will outcompete its rivals.
There are many scenarios you can model at Netflix. Our base one gives a value
of well over $500, and our downside stress test comes out around $200. We have
now invested 3% of the portfolio at an average price of $211.49 and, given
that it represents a new area for us, we will restrict ourselves there until
we believe we have developed our expertise further. In the past, that cap has
taken years not months to lift.
In January 2023, Phoenix Asset Management Partners, through Castelnau Group
Limited, launched an offer for Dignity PLCin conjunction with Sir Peter Wood.
For full details of that Offer, please refer to the Castelnau Group website
www.castelnaugroup.com. (http://www.castelnaugroup.com/)
Outlook
In the year-end factsheet for the Company published in January 2023, Gary
Channon, Phoenix CIO, outlined some thoughts to shareholders on inflation and
the general outlook for the year ahead. It is repeated below, as those
thoughts remain relevant today:
Inflation
Given the significant contribution of the inflation hedge to our recent
performance, it is worth commenting on our current thoughts and why we were
happy to take it off and not extend it.
There seems to be some general misunderstanding as to whether inflation is
controllable or not, which at times draws upon the 1970s as an example.
However, it is important when considering that period to understand that the
prevailing view of politicians and policy makers at the time was that
inflation could not be controlled with interest rates or money supply. The
way in which governments sought to control inflation was through government
intervention in prices and wages.
In the UK we had the National Board for Prices and Incomes, which was set up
in 1965 and through which the government attempted to impose controls on
prices and wages through direct legal constraint and coercion. Periods of wage
freezes were imposed, where no businesses could raise pay, followed by
mandated pay rise levels set by the government. This even extended to
dividends. All these measures seem unworkable today and they were even then.
Much mental and legal resource was spent trying to operate around them and
huge misallocations of capital were caused by those distortions, but their
ultimate undoing was that they failed to work. Inflation took off and labour
represented by unions went on strike bringing the UK to a standstill. (Plus
ça change, plus c'est la même chose!)
Some lessons of history are learned because they result in a change that
works, and so it was with inflation. We learned that inflation could be
controlled by the setting of interest rates and paying attention to the money
supply and that, even better, if you gave this as a mandate to an independent
central bank, then it would gain real credibility in the pricing of long-term
obligations from the government.
The lesson of history that you cannot control inflation by imposing below
market wage settlements looks like it is about to be relearned in the UK.
We were worried about inflation in 2021, because we saw the huge growth in
money supply caused by the pandemic interventions, which were funded by
effectively printing money. Because "quantitative easing", as it became known,
worked so well in the Global Financial Crisis of 2008, it was assumed not to
cause inflation. But the big difference then was that the money printing
occurred as the banking system shrank and the overall effect on money supply
was minimal. With COVID-19 there was no offsetting shrinkage. To make matters
worse, the interruption to the world trading system that COVID-19 caused meant
that supply could not respond to all the extra money in the system and so
price rises were the inevitable outcome.
To throw fuel to the fire, the invasion of Ukraine, accompanied by a
restriction on the supply of Russian energy, caused a surge in oil and gas
prices which quickly feeds into all prices.
The key central banks all have a clear policy objective of controlling
inflation, and this hiccup has undermined their credibility, which they are
acting quickly to regain. They have the tools and there is no reason not to
expect them to succeed. Money supply has already stopped rising and has even
been declining in the US for the first time in decades. It is a reasonable
assumption that long term inflation will be around the goals set for central
banks (UK is 2.0%), and that in focusing on restoring their credibility they
will tend towards undershooting that level.
2023 will be the year of transition and given the unsustainably elevated level
of energy prices (i.e. they are at such a high level that the excess profits
incentivise increased supply, whereas elevated prices reduce demand and
incentivise alternatives), it is highly possible that inflation could be
negative before the year is out.
Once central banks can see the trajectory is on target, we will see where peak
interest rates are, and also whether a greater recession is needed, albeit
that is the ultimate effect of raising rates to restrain inflationary
pressures.
Outlook
You know us better than to expect a forecast for 2023, but we do want to share
a thinking framework for someone with, or thinking of, making a long-term
investment in equities and then in particular with our investment philosophy.
For all the talk about inflation, interest rates and wars, the most important
factor for considering an investment in equities is the underlying economic
miracle engine that has been running now for some 300 years. Whatever you call
it, industrialisation, or capitalism, starting in the UK a force has been at
work that has raised the productive output of the world at a rate faster than
population growth. In the previous 1000 years this did not happen.
The effects of this machine can be seen in the world GDP figures adjusted for
inflation. The first column of GDP data in the table below shows the
figures adjusted for inflation, but when we are thinking about where
corporate profits come from, it is actual dollars which the next column
shows. Corporate profits have averaged between 8% and 10% of GDP over that
period and so the final column is an estimate of their size using a 9%
estimate.
The forces of that progress are identifiable and measurable. The number of
people involved and the output per person are the two simple factors of the
output result. Innovations in ways of working and innovation in the
technologies involved, combined with trade, drove that output. But by far the
biggest absolute driver has been the increase in the number of people joining
the system. Even without any innovation, newly industrialising countries can
just adopt methods and technologies already discovered.
World change World change Profit Pool
(2015$)
(current$)
1961 $11,316,399,618,088 $1,448,625,354,543 $130,376,281,909
1971 $18,866,906,740,753 67% $3,310,780,486,001 129% $297,970,243,740
1981 $26,824,107,597,640 42% $11,727,633,651,775 254% $1,055,487,028,660
1991 $36,481,847,683,018 36% $23,763,555,781,581 103% $2,138,720,020,342
2001 $49,318,791,162,402 35% $33,623,959,264,594 41% $3,026,156,333,813
2011 $67,008,015,715,948 36% $73,857,648,457,527 120% $6,647,188,361,177
2021 $86,852,662,217,901 30% $96,513,077,364,368 31% $8,686,176,962,793
Source: World Bank national accounts data, and OECD National Accounts data
files, Phoenix
The effects of this machine can be seen in the world GDP figures adjusted for
inflation. The first column of GDP data in the table below shows the
figures adjusted:
Throughout those decades interest rates went up and down, inflation came and
went and so did wars, but none of it derailed this relentless machine.
Increasing output at a rate faster than population growth raises the standard
of living and that has also happened at a relentless pace. The best way to
show it is with the GDP per capita, see table below:
World GDP per Capita
Year Value Change
1961 $3,683
1971 $5,007 36%
1981 $5,933 18%
1991 $6,778 14%
2001 $7,921 17%
2011 $9,500 20%
2021 $11,010 16%
Source: World Bank national accounts data, and OECD National Accounts data
files
As citizens get wealthier they consume differently, and the business
opportunities to satisfy that consumption grows. This is the basis of the
economic system in which we participate, from which our businesses derive
their profits and therefore, ultimately where the returns and values of our
businesses come from.
This is the strong and compelling case for equities over the long term, as a
participator in that great wealth generating machine and as a protection
against any inflation that accompanies that progress.
World GDP had just passed $30 trillion when we started Phoenix in 1998 and it
most likely will have passed $100 trillion now. The pool of corporate profits
has more than tripled in that period and a holder of one of the world indices
would have achieved something similar to that on their investment.
The Case for the Value Investing Approach
If the index-based approach can give such good returns for the long-term
investor, then why contemplate a value-based approach?
There are two key edges that a value-based approach has over a pure index
tracking one, which should mean that all value managers can outperform the
index, even after fees, if they do them.
1. Avoid bubbles of over valuation
2. Take advantage of troughs of under valuation
Both go against basic human instincts and are the primary reason why the
average investor underperforms.
Avoiding bubbles. As we have discussed previously, markets have in the past
few years become dominated by a euphoric interest in technology related
businesses. Many of them look like great businesses and are highly
profitable, but in a run reminiscent of the Go-Go Years rally of the 1960s,
which focused on the Nifty Fifty of forever stocks, the valuation put on
businesses with great prospects reached highly elevated levels.
A value-based approach keeps you out of such manias and protects you from the
fallout seen already in 2022. We had none of those in the portfolio.
Buying Value in a Trough. As we have discussed previously, the layers of
negative forces prevailing in the stock market, especially in the UK, have
created significant undervaluation opportunities. It has been our focus to
make the most of this opportunity. Although straightforward in principle,
buying cheap but declining and out of favour stocks is always uncomfortable
when you are doing it, because they usually keep declining and looking like
mistakes.
We save ourselves from the human side of that by sticking to our approach,
making rational value-based judgements, in the knowledge that, in the long
run, it is the underlying cash generation of a business that ends up
determining its value and long-term investment returns. We pay no attention to
timing but if we invest in undervalued securities, that are themselves making
high returns on the capital retained within them, then time works for us.
Value builds and, ultimately, returns follow.
The result of applying that edge, since we started in 1998, is that we had a
12-fold return whilst those world indices and profit pool tripled.
UK House Prices
Given our large exposure to UK housebuilding, and that this is again a
much-discussed topic, we thought we should say something on house prices.
Those familiar with our investment rationale will know that the movement in
house prices does not matter much for value and, counter-intuitively, the
outcome that produces the most cash for shareholders is one of continual house
price decline. The reason being that declining prices, in essence, release
capital currently tied up in land, because the replacement cost of land falls
as house prices fall. Because the cost of building houses does not decline,
land prices always take a disproportionate hit which releases a lot of
capital. (e.g. in 2009 a 9% fall in house prices was accompanied by a 40% fall
in land prices).
We restate that reasoning so it is clear that we don't have an endowment bias
(i.e. the cognitive bias you get when you already own something to favour
thinking that supports that ownership) that leads us towards optimistic house
price expectations.
Ultimately, we think house prices reflect the forces of supply and demand.
Rising mortgage rates have an impact on the area of demand that comes from
buyers of a house with a mortgage, but demand occupancy is a function of the
supply of households and most households are not formed with a mortgaged
purchase; they start as a rental decision. A shortage of supply of housing
means that occupancy of property is high and that landlords can expect a
tenant. Higher rates mean that landlords will either have to raise rents or
lower the price at which they are willing to buy properties. In 2022 private
rents rose 11% in the UK and 15% in London. Like higher energy prices, they
end up taking up a larger proportion of household budgets and for some it will
mean that a household does not get formed, e.g. young people will continue to
live at home longer.
More likely is a period of adjustment to new mortgage rates and rental prices,
a decline in prices from lower expectations of value by agents, sellers and
buyers, before the forces of supply and demand assert themselves to leave
residential property in the UK still expensive.
We have used many methods to estimate the level of undersupply of housing in
the UK and the best approximate figure we have is around 5% or 1.5 million
homes, not evenly distributed and most extreme in London. The latest changes
and government backdowns on planning policy show that there is no likely path
in the medium term to fix this. Even the political will, that we have seen
from both parties in the past 20 years to raise housing output, it has not
overcome the underlying local resistance to new housing.
China
Given the way we view the world, the most significant recent news has been
the re-opening of the Chinese economy from COVID-19. In the short run, it will
help alleviate inflationary pressures, but in the long term, the forces we
talked about earlier are what matters. China aspires to have an economy like
the US, but even if it managed to raise its GDP per capita to the level of the
UK, that alone would add $47 trillion to the $100 trillion world economy.
However, China's relationship with the US and Europe (including the UK) has
changed; there is a wariness about China's intentions, and this is causing
restrictions to trade in crucial areas like semiconductors. Military and
political rivalries are concerning, but a student of history cannot help but
notice how much innovation and economic progress has been made in the
competition for power between nations (see Paul Kennedy's 1987 book The Rise
and Fall of Great Powers for a great illustration of this over 500 years).
There is no military victory route available and so the best way for China
(and India) to build their power to match the size of their nations, is
economic progress towards conversion with the West, and in doing so the
standard of living of the whole world will rise substantially. And as
previously said, the best way for a long-term saver to participate in that is
by owning commercial enterprises.
Conclusion
All that grandiose macro context does not help you pick stocks. Companies
succeed and fail in much more dramatic fashion than countries. We have a
portfolio of strong businesses, and so in tough times they get relatively
stronger and that shows when conditions improve. We see that happening across
the portfolio, where companies with strong management teams are outcompeting
their competitors and creating great long term future value. Unfortunately,
our external scorecard is based upon the value that the market puts on those
businesses, and currently that is low. We believe we have added considerable
long-term value to the portfolio in this period and that will start showing up
in returns in the coming years.
Steve Tatters Director
Phoenix Asset Management Partners
20 April 2023
.
Phoenix UK Fund Track Record*
Year Investment NAV Return FTSE All-Share NAV
Return (Net)
Index Per Share
(Gross)
%
%
(A Class)
%
£
1998 (8 mths) 17.6 14.4 (3.3) 1,143.71
1999 (1.3) (4.6) 24.3 1,090.75
2000 24.7 23.0 (5.8) 1,341.46
2001 31.7 26.0 (13.1) 1,690.09
2002 (17.8) (20.1) (22.6) 1,349.64
2003 51.5 49.8 20.9 2,021.24
2004 14.1 11.2 12.8 2,247.26
2005 1.4 0.3 22.0 2,254.99
2006 9.5 8.3 16.8 2,442.90
2007 3.4 2.3 5.3 2,498.40
2009 (39.5) (40.2) (29.9) 1,494.31
2010 62.8 59.7 30.2 2,386.48
2011 1.1 0.0 14.7 2,386.37
2012 3.0 1.9 (3.2) 2,430.75
2013 48.3 42.2 12.5 3,456.27
2014 40.5 31.3 20.9 4,539.47
2015 1.9 0.1 1.2 4,544.25
2016 20.1 14.7 0.9 5,211.13
2017 9.1 7.6 16.8 5,605.58
2018 21.5 16.3 13.1 6,518.69
2019 (13.6) (14.7) (9.5) 5,558.97
2020 30.3 27.7 19.1 7,098.36
2021 (3.9) (4.9) (9.7) 6,748.66
2022 23.4 18.7 18.3 8,011.17
Cumulative (16.7) (17.4) 0.2 6,619.32
Annualised Returns 1,098.0 561.9 233.3 n/a
10.6 8.0 5.0 n/a
Source: Phoenix. All figures shown are net of fees and do not account for an
investor's tax position. The FTSE All-Share Index is
shown with dividends re-invested. The Fund's inception date is May 1998.
* Whilst the investment strategy is the same in all material respects, the
portfolio holdings will not necessarily be the same and investors in the
Company will have no exposure to the investment performance of the Phoenix UK
Fund. For illustrative purposes only, not a recommendation to buy or sell
shares in the Fund.
Past performance is not a reliable indicator of future performance.
.
Report under Section 172 of the Companies Act 2006
Directors' duty to promote the success of the Company
Section 172 of the Companies Act 2006 requires the Directors to seek to
promote the success of the company for the benefit of its members as a whole,
having regard to the likely consequences of any decision in the long term, the
need to foster the company's business relationships with suppliers and others,
the impact of the company's operations on the community and the environment,
the desirability of the company maintaining a reputation for high standards of
business conduct, and the need to act fairly as between members of the
company.
The Board seeks to understand the views of the Company's shareholders and
their interests, and those of its other key stakeholders, and to consider
these, together with the other matters set out in section 172, in Board
discussions and decision-making.
The Board keeps engagement mechanisms under review so that they remain
effective and in fulfilling their duties the Directors carefully consider the
likely consequences of their actions over the long-term.
The following describes how the Directors have had regard to the views of the
Company's stakeholders in their decision-making.
Shareholders
The Investment Manager regularly meets the largest shareholders and
beneficial owners and reports back to the Board on those meetings. Liberum
Capital Limited ("Liberum"), the Company's corporate broker, and Frostrow
Capital LLP ("Frostrow"), in its capacity as the Company's investor relations
& marketing adviser, also meet with investors and seek to understand their
views, which they relay to the Board.
Additionally, the Company Chair is available to meet with investors on
request. Through these interactions and other communications the Board and the
Investment Manager seek to promote a supportive investor base of long-term
investors.
The Board communicates with investors twice a year via the Annual Report and
Half-yearly Report and more frequently via the Company's website which hosts
various information, including news reports, video presentations by the
Investment
Manager and monthly factsheets. Additionally, the NAV per share is announced
daily via a regulatory information service.
The Company encourages all shareholders to attend the Company's AGM, at which
the Directors are available in person to meet with shareholders and to answer
their questions. Historically the AGM included a presentation from the
Investment Manager, however, this year the Board is instead introducing a
separate Investment Manager presentation and Q&A event at 4 p.m. on 10
October 2023 at the Queen Elizabeth II Centre, Broad Sanctuary, Westminster,
London SW1P 3EE. This event is intended to be of interest to both existing and
prospective Aurora shareholders and will include multiple speakers from the
Investment Manager. It is intended for this event to be recorded and made
available afterwards on the Company's website.
The Notice of Meeting on pages 101 and 102 sets out the business of the AGM
and each resolution is explained in Explanatory Notes to the Resolutions,
which follow the Notice, starting on page 107. Separate resolutions are
proposed for each substantive issue. The Company Chair, and where relevant,
each Committee Chair, welcomes engagement with the Company's shareholders (and
the Company's other key stakeholders) on significant issues raised by them at
the AGM or at other times.
Details of the votes cast on each resolution will be announced via a
regulatory information service shortly after the AGM and published on the
Company's website.
At each of its regular meetings the Board tracks shareholder changes and
monitors the evolving shareholder profile. A list of the largest shareholders
in the Company can be found on page 43.
Shareholders have generally been supportive through the year and nothing arose
from the shareholder interactions requiring a substantive decision to be made.
However, related to this topic, the Board has decided to participate in a
retail focus group initiative aimed at further understanding retail
shareholders.
Other stakeholders
As an externally managed investment company, the Company has no employees and
all operational activities are outsourced to third party service providers.
These include the Investment Manager, the Company Secretary and Administrator,
the Registrar, the Depositary, the Custodian, lawyers and financial advisers.
The Board has identified these service providers to be key stakeholders in
the Company, together with its shareholders and investee companies. The Board
is aware of the need to foster the Company's relationships with its key
stakeholders through its stakeholder management activities.
As part of the Board and stakeholder evaluation processes that are undertaken
annually, the Board reviews its engagement mechanisms to ensure they remain
effective.
In fulfilling their duties, the Directors carefully consider the likely
consequences, for stakeholders and otherwise, of their actions over the long
term.
During the Board's quarterly meetings the Directors consider and are mindful
of:
i. the Company's investment objective and policy;
ii. the main trends and factors likely to affect the future development,
performance and financial position of the Company;
iii. the Company's key performance indicators;
iv. the Company's peers;
v. the Company's overall strategy; and
vi. the Company's core values, which are integrity, accountability,
transparency and commitment.
The Investment Manager is the most fundamental service provider to the
Company's long-term success, and the Board provides oversight and challenge to
the Investment Manager at all Board meetings to ensure that the portfolio is
managed in line with the Company's published investment policy.
A description of key service providers' roles together with the terms of their
engagement can be found on pages 42 to 44. The Management Engagement
Committee, on behalf of the Board, reviews the performance and terms of
engagement of each of the Company's key service providers annually to ensure
each remains competitive and to consider the quality of the services they
provide.
Environmental, Social and Governance ('ESG') Matters
The Board expects good standards of business sustainability to be maintained,
especially with respect to ESG, at the companies in which the Company invests
and satisfies itself that the Investment Manager consistently and proactively
engages with them on this basis.
All shareholdings are voted at listed company meetings worldwide where
practicable in accordance with the Investment Manager's own corporate
governance policies.
Further details of the Investment Manager's approach to ESG within its
investment framework can be found on its website at
www.phoenixassetmanagement.com (http://www.phoenixassetmanagement.com/) .
(http://www.phoenixassetmanagement.com/)
Monitoring of Key Decisions and the outcome of those decisions
The Board meets at least quarterly and at such other times as deemed
appropriate. During these meetings, the Board considers reports from the
Investment Manager on the Company's portfolio, its investment activity and
sector diversification. In addition, the Investment Manager provides an
overview of engagement with the investee companies and with potential investee
companies. The Board debates the Company's portfolio and notable acquisitions
or disposals at each of its meetings and challenges stock selection where
deemed appropriate. In between meetings, the Investment Manager and Board
maintain contact through which they consider investment ideas, market outlook,
any strategies under consideration for adjusting the Company's portfolio in
line with the Company's investment policy and other initiatives.
The Board receives reports from Frostrow, in its capacities as Company
Secretary, Administrator and Investor Relations & Marketing Adviser,
respectively on the latest governance, legal and investment trust sector
issues, the Company's management accounts and, together with Liberum, the
Company's corporate stockbroker, on the Company's shareholder base, including
changes thereto. The Depositary also provides oversight reports and Liberum
also reports on performance relative to the Company's peers and the market
liquidity of the Company's shares. Contact with shareholders by the Investment
Manager, Frostrow and Liberum is also relayed to the Board who consider these
discussions at their quarterly meetings.
As mentioned above, the Board decided to participate in a retail focus group
initiative aimed at further understanding retail shareholders. During the
year, the Board reviewed the performance and terms of engagement of each of
its key service providers, which included a review of their control reports
and policies, such as whistleblowing, anti-bribery, anti-money laundering and
corruption, cyber security, data protection policies and each entity's
business continuity arrangements to ensure they were in place and were
adequate. This was a particularly active area of consideration in the year and
decisions were taken, and have been implemented, to change the Company
Secretary and Administrator, to Frostrow, the Depositary and Custodian, to
Northern Trust, and the Auditor, to BDO.
In accordance with the Company's Investment Management Agreement, the Board
agreed during the year to issue shares to the Investment Manager in respect of
the performance fee earned for the year to 31 December 2021.
As part of the Board's succession plan, the Board worked with independent
search consultant Trust Associates, to search for and appoint two new Board
members to replace Lord Flight and the Honourable James Nelson who stepped
down from the Board at the Company's AGM on 28 June 2022.
Other decisions included recommending the payment of a final dividend in
respect of the year ended 31 December 2021, which was paid on 1 July 2022, in
accordance with the Company's dividend policy to distribute substantially all
the Company's revenue to shareholders by way of a dividend. It was also paid
to satisfy the investment trust status requirement that no less than 15% of
the Company's qualifying revenue must be retained each year.
Boardroom Diversity
The Board supports the principle of Boardroom diversity, and the Board
currently comprises four non-executive Directors of which three are female and
one male. One Director is from a minority ethnic background. The Board
considers its composition, including the balance of skills, knowledge,
diversity (including gender and ethnicity) and experience, amongst other
factors on an annual basis and when appointing new Directors. The Board has
considered the requirements under the FCA's Listing Rule 9.8.6R (10) in
relation to target reporting, and has provided full details in the Corporate
Governance Statement section on page 47. Summary biographical details of the
Directors are set out on pages 35 and 36.
Stewardship code
The Board and the Investment Manager support and have a strong commitment to
the FRC's UK Stewardship Code, the latest version of which was effective from
1 January 2020. It is endorsed by the AIC and sets out principles of effective
stewardship by institutional investors. Whilst the Investment Manager is not a
formal signatory to the Stewardship Code, it has chosen to adhere to the 12
principles as closely as possible. Further details of the Investment Manager's
approach to the Stewardship code can be found on the Investment Manager's
website at www.phoenixassetmanagement.com
(http://www.phoenixassetmanagement.com/) .
(http://www.phoenixassetmanagement.com/)
Modern slavery disclosure
Due to the nature of the Company's business, being a company that does not
have employees and does not offer goods or services to consumers, the Board
considers that the Company falls outside of the scope of the Modern Slavery
Act 2015 and is not required to issue a slavery and human trafficking
statement. The Board considers the Company's supply chains, dealing
predominately with professional advisers and service providers in the
financial service industry, to be low risk in this matter.
Anti-bribery and corruption
It is the Company's policy to conduct all of its business in an honest and
ethical manner. The Company takes a zero-tolerance approach to bribery and
corruption and is committed to acting professionally, fairly and with
integrity in all its business dealings and relationships wherever it operates.
The Company's policy and the procedures that implement it are designed to
support that commitment. The Board has made enquiries of its third-party
service providers to ensure they have procedures and policies in place.
Criminal Finances Act 2017
The Company maintains a zero-tolerance policy towards the provision of illegal
services, including the facilitation of tax evasion. The Company has received
assurances from the Company's main service providers and suppliers that they
maintain a zero-tolerance policy towards the provision of illegal services,
including the facilitation of tax evasion.
Other Strategic Report Information
Principal Risks and Risk Management
The Board is responsible for the identification, evaluation and management of
the risks facing the Company. Risk is a key element of all the Board's
deliberations. Additionally, the Board has delegated to the Audit Committee
the formal regular review of these risks, together with their mitigation and
the discerning of emerging risks, on its behalf. This process accords with the
UK Corporate Governance Code and the FRC's Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting.
The Audit Committee and the Board has carried out a robust assessment of the
emerging and principal risks facing the Company, including those that would
threaten its business model, future performance, solvency and liquidity.
The Board's policy on risk management has not materially changed during the
course of the reporting period and up to the date of this report. In
particular, the Board undertakes a review of the performance of the Company
and scrutinises and challenges notable transactions at each quarterly Board
meeting.
The Audit Committee maintains a framework of the key risks and the policies
and processes in place to monitor, manage and mitigate them where possible.
This risk map is reviewed regularly by the Audit Committee, as set out in the
Audit Committee Report starting on page 60.
The Audit Committee and the Board consider that the risks summarised below are
the principal risks currently facing the Company. It is not an exhaustive list
of all risks faced by the Company.
Principal Risks and Uncertainties
Geopolitical and economic risks
The Company and its portfolio are at risk from changes in economic and market
conditions such as from rising interest rates; high inflation; recession;
local and global politics; and disruptive local and global events. These can
disrupt trade and supply chains and cause increased market volatility, which
could substantially and adversely affect the Company's prospects and the
market prices of its investments. Rising interest rates, high inflation and
the threat of recession are all contemporary areas of concern, together with
the war in Ukraine and the related sanctions that have been imposed.
The opportunity for the Board to mitigate such macro risks is somewhat
limited. The Board and the Investment Manager monitor and discuss the
macroeconomic environment at each Board meeting, along with potential impacts.
The Investment Manager also provides a detailed update on the investments at
each meeting, including, inter alia, developments in relation to the macro
environment and trends. Mitigating factors include the experience and
expertise of the Investment Manager, that the Company's portfolio, although
concentrated, is diversified across a range of sectors, and that the Company
has no leverage and a net cash balance. The sanctions in relation to the war
in Ukraine are not expected to have any direct impact on the Company, but the
Board will continue to monitor developments closely.
Investment objective and strategy
The Company's investment objective is to provide shareholders with long-term
returns through capital and income growth by investing predominantly in a
portfolio of UK
listed companies. It is not assured that the objective will be met or that it
will continue to meet investors' needs. Poor performance or the investment
objective losing its attractiveness to shareholders could result in
reputational damage and a widening discount.
The Board reviews performance at every Board meeting and challenges the
Investment Manager on stock selection and diversification.
The Board also seeks to understand shareholder sentiment with respect to the
investment objective and the strategy being followed with the help of the
Company's Investment Manager, corporate broker and investor relations &
marketing adviser.
Shareholders are provided with an opportunity to vote on the Company's
continuation every three years. The continuation vote provides a gauge of the
attractiveness of the Company to its shareholders. The most recent
continuation vote took place at the Company's AGM on 28 June 2022 and was
successfully passed with overwhelming support from shareholders (100% voted in
favour).
Risks related to the Investment Manager
The Company's success is closely dependent on the performance of the
Investment Manager. In addition to the performance of the portfolio, the
Company is also exposed to any potential loss of key personnel from, and the
reputation of, the Investment Manager.
The Investment Manager has a well-defined investment strategy, a proven
process and an extensive track record. The performance and the terms of
engagement of the Investment Manager are reviewed annually by the Management
Engagement Committee on behalf of the Board, in addition to the Board's
ongoing communications, monitoring and challenge. The Investment Manager also
reports regularly to the Board on personnel changes and other developments.
Service Provider Transition Risk
Although this has abated somewhat since the dates of the transitions, during
the course of the year the Board recognised the risks posed by the transition
of a number of the Company's service providers: Auditor; Company Secretary and
Administrator; Depositary and Custodian.
Care was taken to minimise the risk through hand-over protocols, communication
and parallel running where possible. The Board continues to monitor the new
providers and plans to conduct a 360º review of all the providers and their
interaction later in the year.
Operational Risks
Also related to the service provider transition, operational risks are
considered to be at a heightened level until the new providers have been in
place sufficiently long to prove themselves. These incorporate, amongst other
things, the potential for errors or irregularities in published information,
cyber risks, business continuity risks, and regulatory risks.
The Audit Committee has received internal controls reports from the relevant
service providers, where available, and has satisfied itself that adequate
controls and procedures are in place to limit any impact on the Company's
operations, particularly with regard to a financial loss. It has also
satisfied itself that they have appropriate business continuity plans in
place. The performance of service providers is reviewed annually by the
Management Engagement Committee. Each service provider's contract defines
their duties and responsibilities and has safeguards in place including
provisions for termination in the event of a breach or under certain
circumstances.
Discount risk
The Board specifically recognises the risk that the price of the Company's
shares may not reflect their underlying net asset value, which could
compromise shareholders' returns.
The Board, along with its advisers and the Investment Manager, monitors any
discount closely and seeks to enhance share price performance through
effective marketing.
The Board also seeks authority from shareholders each year to buy back shares
and will consider doing so if a discount becomes excessive and persistent.
ESG
The Board recognises the risks posed by environmental, social and governance
("ESG") factors, particularly with respect to portfolio risks and potential
reputational risk should the Company not meet investor expectations in
relation to ESG. Investment companies are currently exempt from reporting
under the Task Force on Climate-Related Financial Disclosures ("TCFD") and the
Company has not voluntarily adopted the requirements, but considers ESG
factors that might affect portfolio companies to be an emerging risk area for
the Company. The Board and Investment Manager also recognise the potential
opportunity afforded by attention to the wider climate change agenda. ESG risk
assessment is embedded in the Investment Manager's due diligence and
decision-making process when investing in new companies and monitored
thereafter.
Financial Risks
The Company is exposed to liquidity risk and credit risk arising from the use
of counterparties. If a counterparty were to fail it could adversely affect
the Company through either delay in settlement or loss of assets. The most
significant counterparty to which the Company is exposed is the Depositary,
which is responsible for the safekeeping of the Company's custodial assets.
Further details on the Company's financial risks are included in Note 12 to
the financial statements starting on page 92.
The Board reviews the services provided by the Depositary and the internal
controls report of the Custodian to ensure that the security of the Company's
custodial assets is maintained. The Investment Manager is responsible for
undertaking reviews of the credit worthiness of the counterparties that it
uses.
Viability Statement
In accordance with the UK Corporate Governance Code, the Directors have
carefully assessed the Company's position and prospects as well as the
principal risks and have formed a reasonable expectation that the Company will
be able to continue in operation and meet its liabilities as they fall due
over the next five financial years to 31 December 2027.
The Board has chosen a five-year horizon in view of the long-term nature and
outlook adopted by the Investment Manager when making investment decisions.
After making enquiries, the Directors have a reasonable expectation that the
Company has adequate resources to continue in operational existence and meet
its liabilities as they fall due for at least five years to 31 December 2027.
A continuation vote, as required by the Company's Articles, was held on 28
June 2022 and passed with overwhelming support from shareholders. The next
vote is expected to take place at the Company's AGM in 2025. The Board and the
Company's advisers will continue to work closely with shareholders and are
confident that the next vote will successfully pass.
In reaching this conclusion, the Directors have considered each of the
principal risks and uncertainties set out above as well as the following
assumptions in assessing the Company's viability:
• there will continue to be demand for investment trusts;
• the Board and Investment Manager will continue to adopt a
long-term view when making investments;
• the Company invests principally in the securities of UK listed
companies to which investors will wish to continue to have exposure; and
• regulation will not increase to a level that makes running the
Company uneconomical.
Factors including high inflation, the conflict in Ukraine and any tail risks
from the Covid-19 pandemic were also incorporated into the key assumptions. As
part of this process the Board considered the impact of severe but plausible
scenarios, including the impact of significant market movements, on the
Company's liquidity and solvency, its income and expenses profile and the
non-utilisation of gearing as an instrument as permitted by the Company's
investment policy. A significant proportion of the Company's investments
comprise readily realisable securities which could, if necessary, be sold to
meet the Company's cash requirements.
The Company's plan to expand by the issue of new share capital is kept under
close and ongoing review by the Board. Portfolio changes and market
developments are also discussed at quarterly Board meetings.
The internal control framework of the Company is subject to formal review on
at least an annual basis. The Audit Committee considered the operational
resilience of the Company's service providers, and thereby the operational
viability of the Company. The Committee is reassured that all key service
providers were operating effectively and to their normal high service
standards.
Outlook
The outlook for the Company is discussed in the Chairman's Statement on page
6, and the Investment Manager's Review on pages 17 to 23.
This Strategic Report was approved by the Board on 20 April 2023.
Farah Buckley
Director
.
Statement of Directors' Responsibilities for the Annual Report
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have prepared the financial
statements in accordance with UK-adopted International Accounting Standards
and in accordance with those parts of the Companies Act 2006 that apply to
those companies reporting under UK-adopted International Accounting Standards.
Under company law, Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of
affairs of the Company and of the profit or loss of the Company for that
period. In preparing the financial statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• state whether applicable UK-adopted International Accounting
Standards have been followed, subject to any material departures disclosed and
explained in the financial statements;
• make judgements and accounting estimates that are reasonable and
prudent; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business.
Under applicable law and regulations, the Directors are responsible for
preparing a Strategic Report, a Directors' Report, a Corporate Governance
Statement and a
Directors' Remuneration Report which comply with that law and those
regulations.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements and the Remuneration
Report comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
The Directors have delegated responsibility to the Investment Manager for the
maintenance and integrity of the Company's page of the Investment Manager's
website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Directors' confirmations
The Directors consider that the Annual Report and financial statements, taken
as a whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's position and performance,
business model and strategy. Each of the Directors, whose names and functions
are listed on pages 35 and 36 confirm that, to the best of their knowledge:
• the Company's financial statements, which have been prepared
in accordance with UK-adopted international accounting standards and in
accordance with those parts of the Companies Act 2006 that apply to those
companies reporting under UK-adopted international accounting standards, give
a true and fair view of the assets, liabilities, financial position and loss
of the Company; and
• the Strategic Report includes a fair review of the development
and performance of the business and the position of the Company, together with
a description of the principal risks and uncertainties that it faces.
For and on behalf of the Board
Farah Buckley
Director
20 April 2023
.
Financial Statements
.
Income Statement
Year ended Year ended
31 December 2022
31 December 2021
Notes Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
2 Losses/gains on investments - (40,410) (40,410) - 30,038 30,038
Losses on currency - (17) (17) - (3) (3)
3 Income 3,117 - 3,117 2,305 - 2,305
Total (loss(/income 3,117 (40,427) (37,310) 2,305 30,035 32,340
4 Investment management performance fee clawback/(charge) - 2,746 2,746 - (720) (720)
4 Other expenses (777) - (777) (862) - (862)
(Loss)/profit before tax 2,340 (37,681) (35,341) 1,443 29,315 30,758
5 Tax (77) - (77) (30) - (30)
(Loss)/profit for the year 2,263 (37,681) (35,418) 1,413 29,315 30,728
7 (Losses)/earnings per share - basic and diluted 2.95p (49.20)p (46.25)p 1.85p 38.44p 40.29
The total column represents the Income Statement of the Company, prepared in
accordance with International Financial Reporting Standards ("IFRSs") as
adopted by the United Kingdom.
The revenue and capital columns, including the revenue and capital earnings
per ordinary share data, are supplementary information prepared under guidance
published by the AIC.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued during the period.
The Company does not have any other comprehensive income. Therefore, no
separate Statement of Comprehensive Income has been presented.
The notes on pages 78 to 96 form part of these accounts.
.
Statement of Financial Position
Notes 31 December 31 December
2022
2021
£'000
£'000
NON-CURRENT ASSETS
8 Investments held at fair value through profit or loss 149,227 186,637
CURRENT ASSETS
Trade and other receivables 310 222
Cash and cash equivalents 5,348 7,664
5,658 7,886
TOTAL ASSETS 154,885 194,523
CURRENT LIABILITIES
4 Investment management performance fee payable - (174)
Other payable (107) (156)
(107) (330)
NET ASSETS 154,778 194,193
EQUITY
8 Called up share capital 19,152 19,130
Capital redemption reserve 179 179
Share premium account 111,166 110,984
Treasury shares (133) -
8 Other reserve (2,877) (1,271)
8 Capital reserve 24,421 63,155
Revenue reserve 2,870 2,016
TOTAL EQUITY 154,778 194,193
8 Number of Ordinary Shares in issue 76,078,460 76,519,675
9 NAV per Ordinary Share 203.45p 253.78p
Approved by the Board of Directors on 20 April 2023 and signed on its behalf
by:
Farah Buckley
Company no. 03300814
The notes on pages 78 to 96 form part of these accounts.
.
Statement of Changes in Equity
Year to 31 December 2022
Notes Called up share capital Capital redemption reserve Share premium account Treasury shares Other reserve Capital reserve Revenue Total
£'000
£'000
£'000
£'000
£'000
£'000
reserve
£'000
£'000
Opening equity 19,130 179 110,984 - (1,271) 63,155 2,016 194,193
(Loss)/income for the year - - - - - (37,681) 2,263 (35,418)
4 Performance fee clawback in relation to performance year 2019 (crystalised) - - - (133) - (1,053) - (1,186)
4 Performance fee clawback in relation to performance year 2020 and 2021 - - - - (1,385) - - (1,385)
6 Dividends paid - - - - - - (1,409) (1,409)
8 Issue of new Ordinary Shares 22 - 199 - (221) - - -
Ordinary Share issue costs - - (17) - - - -- (17)
Closing equity 19,152 179 111,166 (133) (2,877) 24,421 2,870 154,778
The notes on pages 78 to 96 form part of these accounts.
Statement of Changes in Equity
Year to 31 December 2021
Notes Called up share capital Capital redemption reserve Share premium account Other reserve Capital reserve Revenue Total
£'000
£'000
£'000
£'000
£'000
reserve
£'000
£'000
Opening equity 18,776 179 108,438 665 33,840 1,023 162,921
Profit for the year - - - - 29,315 1,413 30,728
4 Performance fee charge for the year - - - 720 - - 720
6 Dividends paid - - - - - (420) (420)
8 Issue of new Ordinary Shares 354 - 2,599 (2,656) - - 297
Ordinary Share issue costs - - (53) - - - (53)
Closing equity 19,130 179 110,984 (1,271) 63,155 2,016 194,193
The notes on pages 78 to 96 form part of these accounts.
.
Cash Flow Statement
Note Year to Restated*
31 December
Year to
2022
31 December
£'000
2021
£'000
Net cash inflow from operating activities 10 2,126 1,493
Investing activities
Payments to acquire non-current asset investments 2 (47,454) (45,142)
Receipts on disposal of non-current asset investments 2 44,455 46,437
Net cash (outflow)/inflow from investing activities (2,999) 1,295
Financing activities
Proceeds from issues of new Ordinary Shares 8 - 297
Ordinary Share issue costs (17) (53)
Dividends paid 6 (1,409) (420)
Net cash outflow from financing activities (1,426) (176)
(Decrease)/increase in cash and cash equivalents (2,299) 2,612)
Cash and cash equivalents at beginning of year 7,664 5,055
Losses on currency (17) (3)
CASH AND CASH EQUIVALENTS AT END OF YEAR 5,348 7,664
* Restatement of presentation only. Refer to Note 1L for further details.
The notes on pages 78 to 96 form part of these accounts.
.
Notes to the Financial Statements
1. Reporting entity
Aurora Investment Trust plc is a closed-ended investment company, registered
in England and Wales on 10 January 1997 with Company number 03300814. The
Company's registered office is 25 Southampton Buildings, London WC2A 1AL.
Details of the Directors, Investment Manager and Advisers can be found on
pages 35 to 37.
Basis of Accounting
The financial statements of the Company have been prepared in accordance with
UK-adopted International Accounting Standards and the applicable legal
requirements of the Companies Act 2006.
The annual financial statements have also been prepared in accordance with
the AIC SORP for the financial statements of investment trust companies and
venture capital trusts, except to any extent where it is not consistent with
the requirements of IFRS.
In order to better reflect the activities of an investment trust company and
in accordance with guidance issued by the AIC, supplementary information which
analyses the Income Statement between items of a revenue and capital nature
has been prepared alongside the Income Statement.
The functional currency of the Company is Sterling because this is the
currency of the primary economic environment in which the Company operates.
The financial statements are presented in Sterling rounded to the nearest
thousand, except where otherwise indicated.
Going concern
The financial statements have been prepared on a going concern basis. The
Directors have a reasonable expectation, after making enquiries, that the
Company has adequate resources to continue in existence for at least twelve
months from the date of approval of this Annual Report.
In reaching this conclusion, the Directors have considered the liquidity of
the Company's portfolio of investments as well as its latest financial
positions and forecast on income and expenses.
As at 31 December 2022, the Company held £5,348,000 (2021: £7,664,000) in
cash, £146,356,000 (2021: £183,237,000) in quoted investments and
£2,871,000 (2021: £3,400,000) in an unquoted investment. The total operating
expenses for the year ended 31 December 2022 were £777,000 (2021: £862,000).
It is estimated that 32.2% of the Company's latest portfolio could be
liquidated in a non-market impacting way within 7 days, using 25% of historic
three-month average daily volume. This approach is considered conservative as
it does not include the Company's ability to access liquidity through block
trades.
The management has assessed the Company's going concern status under stress
scenarios, which incorporated key assumptions such as significant falls in the
Company's investment portfolio and investment income. The scenario tests also
factored in high inflation, existing and potential further risks arising from
the conflict in Ukraine, and any tail risks from the COVID-19 pandemic as well
as Brexit. A prolonged and deep market decline could lead to falling
investment values or interruptions to cash flow, however the Company currently
has more than sufficient liquidity to meet any liabilities when they fall due
in the foreseeable future. The Board is keeping the development of external
risk factors under close scrutiny and does not believe that these will any
impact on the Company's going concern status.
At the date of approval of this Annual Report, based on the aggregate of
investments and cash held, the Board notes that the Company's cash balance and
investments held are well in excess of the estimated level of liabilities, and
the Company has substantial operating expenses cover.
Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment being an investment business in accordance with its Investment
Objective and Policy
Significant accounting policies
The accounting policies adopted are described below:
a. Accounting Convention
The accounts are prepared under the historical cost basis, except for the
measurement at fair value of investments and measurement of performance fees
awarded.
b. Adoption of new IFRS standards
New standards, interpretations and amendments adopted from 1 January 2022
A number of new standards and amendments to standards are effective for the
annual periods beginning after 1 January 2022. None of these had a
significant effect on the measurement of the amounts recognised in the
financial statements of the Company.
New standards and amendments issued but not yet effective
The relevant new and amended standards and interpretations that are issued,
but not yet effective, up to the date of issuance of the Company's financial
statements are disclosed below. These standards are not expected to have a
material impact on the entity in future reporting periods and on foreseeable
future transactions.
Amendments to IAS 1: Classification of Liabilities as Current or Non-current
In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 to
specify the requirements for classifying liabilities as current or
non-current. The amendments are effective for annual reporting periods
beginning on or after 1 January 2023.
Definition of Accounting Estimates - Amendments to IAS 8
In February 2021, the IASB issued amendments to IAS 8, in which it introduces
a definition of 'accounting estimates'. The amendments are effective for
annual reporting periods beginning on or after 1 January 2023.
Disclosure of Accounting Policies - Amendments to IAS 1 and IFRS Practice Statement 2
In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice
Statement 2 Making Materiality Judgements. The amendments to IAS 1 are
applicable for annual periods beginning on or after 1 January 2024.
c. Investments
Investments held at fair value through profit or loss are initially
recognised at fair value, being the consideration given excluding transaction
or other dealing costs associated with the investment. After initial
recognition, investments are measured at fair value through profit or loss.
Gains or losses on investments measured at fair value through profit or loss
are included in the Statement of Comprehensive Income as a capital item and
transaction costs on acquisition or disposal of investments are also included
in the capital column of the Statement of Comprehensive Income. For
investments that are actively traded in organised financial markets, fair
value is determined by reference to stock exchange quoted market bid prices at
the close of business on the year-end date. All purchases and sales of
investments are recognised on the trade date, i.e. the date that the Company
commits to purchase or sell an asset.
Unquoted investments are measured at fair value, which is determined by the
Directors in accordance with the International Private Equity and Venture
Capital valuation guidelines and IFRS 9. Valuation reports provided by the
Investment Manager of the unquoted investments are used to calculate the fair
value where there is evidence that the valuation is derived using fair value
principles that are consistent with the Company's accounting policies and
valuation methods. Such valuation reports may be adjusted to take account of
changes or events to the reporting date, or other facts and circumstances
which might impact the underlying value.
d. Income from Investments
Investment income from the Company's investment portfolio is accounted for on
the basis of ex-dividend dates. Income from fixed interest shares and
securities is accounted for on an accruals basis using the effective interest
method. Special Dividends are assessed on their individual merits and are
credited to the capital column of the Statement of Comprehensive Income if the
substance of the payment is a return of capital; with this exception all
investment income is taken to the revenue column of the Statement of
Comprehensive Income.
e. Share Capital and Reserves
The share capital represents the nominal value of equity shares.
The share premium account represents the accumulated premium paid for shares
issued above their nominal value less issue expenses.
The capital redemption reserve arises when shares are bought back by the
Company or returned by the Investment Manager under the performance fee
clawback arrangement, and subsequently cancelled, at which point an amount
equal to the par value of the shares is transferred from share capital to this
reserve. This reserve is not distributable.
Other reserve represents the combination of the share-based payment expenses
in relation to performance fees, and the restricted shares issued in
settlement of performance fees that are still within the lock-in period.
The capital reserve represents realised and unrealised capital and exchange
gains and losses on the disposal and revaluation of investments and of foreign
currency items. In addition, performance fee costs are allocated to the
capital reserve. The amount within the capital reserve less unrealised gains
(those on investments not readily convertible to cash) is available for
distribution. The realised gains within the capital reserve amounted to
£42,863,000 as at 31 December 2022 (2021: £15,234,000). The Company has no
intention to make distributions out of its capital reserve.
The revenue reserve represents the surplus of accumulated revenue profits
being the excess of income derived from holding investments less the costs
associated with running the Company. This reserve may be distributed by way of
dividends, if positive.
f. Expenses
All expenses are accounted for on an accruals basis and charged through the
revenue column of the Income Statement except the following:
• expenses that are incidental to the acquisition or disposal of an
investment are charged to the capital column of the Income Statement; and
• expenses are charged to the capital column of the Income Statement
where a connection with the maintenance or enhancement of the value of the
investments can be demonstrated. In this respect the performance fees have
been charged to the Income Statement in line with the Board's expected
long-term returns, in the form of capital gains, from the Company's portfolio.
g. Share-based Payment
The Company's Investment Manager does not receive an on-going investment
management fee and instead receives a performance fee if performance criteria
are satisfied. The performance fee is settled by issuance of the Company's
Ordinary Shares and therefore recognised as an equity settled share-based
payment in accordance with IFRS 2.
The cost of share-based payments is recognised as an expense in the capital
column of the Income Statement with a corresponding increase in equity reserve
(Other Reserve). The share-based payment expenses are recognised over the
period in which vesting conditions are fulfilled. No expense is recognised
for awards that do not ultimately vest. Awards where vesting is conditional
upon a market or non-vesting condition are treated as vesting irrespective of
whether or not the market or non-vesting condition is satisfied, provided
that all other performance and/or service conditions are satisfied.
h. Taxation
Current income tax assets and/or liabilities comprise those claims from or
obligations to fiscal authorities relating to the current or prior reporting
period that are unpaid at the year end date.
Deferred income taxes are calculated using the liability method on temporary
timing differences. Deferred tax is generally provided on the difference
between the carrying amounts of assets and liabilities and their tax bases. In
addition, tax losses available to be carried forward as well as other income
tax credits are assessed for recognition as deferred tax assets. Deferred tax
assets and liabilities are calculated, without discounting, at tax rates that
are expected to apply at their respective period of realisation, provided they
are enacted or substantively enacted at the year end date.
Deferred tax liabilities are always provided for in full. Deferred tax assets
are recognised to the extent that it is probable that they will be able to be
offset against future taxable income.
Changes in deferred tax assets or liabilities are recognised as a component of
tax expense in the Income Statement, except where they relate to items that
are charged or credited directly to equity.
i. Foreign Currency
The currency of the primary economic environment in which the Company operates
(the functional currency) is pounds sterling ("sterling"), which is also the
presentational currency of the Company.
Transactions involving currencies other than sterling are recorded at the
exchange rate ruling on the transaction date. At each year end date, monetary
items and non- monetary assets and liabilities denominated in foreign
currencies are retranslated at the closing rates of exchange. Such exchange
differences are included in the Income Statement and allocated to capital if
of a capital nature or to revenue if of a revenue nature. Exchange differences
allocated to capital are taken to gains on disposal or investment holding
losses, as appropriate.
j. Cash and Cash Equivalents
Cash and Cash Equivalents comprise cash held at bank and are measured at
amortised cost.
k. Dividends Payable
Dividends payable to equity shareholders are recognised in the Statement of
Changes in Equity when they are paid or have been approved by shareholders in
the case of a final dividend. Interim dividends payable are recognised in the
period in which they are paid.
l. Critical Judgements, Estimations or Assumptions
The Directors have reviewed matters requiring judgements, estimations or
assumptions. The preparation of the financial statements requires management
to make judgements, estimations or assumptions that affect the amounts
reported for assets and liabilities as at the year end date and the amounts
reported for revenue and expenses during the year. However, the nature of the
estimation means that actual outcomes could differ from those estimates.
Performance fees
The performance fee is calculated on Company's NAV outperformance against its
benchmark. No performance fee is earned by the Investment Manager in the
current financial year. The Company issued 89,096 ordinary shares during the
year in settlement for fees earned in relation to the year ended 31 December
2021 (2021: 1,290,932 ordinary shares in relation to the year ended 31
December 2020). These issued ordinary shares are subject to a fixed
three-year clawback period. If the outperformance versus the index reverses on
the third-year anniversary, subject to the Board's discretion, the shares will
be returned and cancelled by the Company.
In measuring the performance fee, the Board has made judgements in relation to
the service period, which it considers to be four years (being the current
year of service plus the further three year period which is the clawback
period). The Board has made the judgement that the performance fee contains a
non-market based performance condition as the hurdle is based on the
outperformance of the Company's NAV against its benchmark.
However, as the performance fee is calculated as a fixed amount which is
settled by a variable number of shares. The cumulative charge over the four
year period will equate to either the amount calculated at the end of the
first year where the performance of the Investment Manager remains on target,
or a lower amount where it is considered that the clawback will take effect.
This is as a result of the performance fee charge being adjusted during the
service period, which is a requirement of IFRS 2 where there is a non-market
based performance condition.
The performance fee is recognised on a straight line basis in the Income
Statement and is based on the outcome of the performance fee calculation as
stated in the Investment Management Agreement. This amount excludes the
projection of whether the clawback may occur at the end of the performance
period. Clawbacks are adjusted based on the management's expectation in terms
of the number of restricted shares that will ultimately vest at each reporting
date, and if applicable, credited back to the Income Statement.
The Board has considered it necessary to make certain judgements in relation
to the recognition and measurement of the performance fee, which it considers
are reasonable and supportable. However, it is acknowledged that if
alternative judgements were made, for accounting purposes, the measurement of
the performance fee charge to the income statement may be significantly
different in timing within the four-year service period.
As at 31 December 2022, performance fees earned in financial years 2020 and
2021 are estimated to be in 100% clawback, resulting in reversal of
£1,384,700 cumulatively charged in the Company's Income Statements for the
years ended 31 December 2021 and 31 December 2020.
Cash Flow Statement (presentation for comparative period restated)
In preparing the Company's Cash Flow Statement for the year ended 31 December
2022, the Directors have made the judgment that purchases and sales of
investments form part of the Company's investing activities, on the basis that
these activities are intended for the achievement of longer-term shareholder
returns, consistent with the Company's investment objective.
The Company has re-assessed the previous classification of purchases and sales
of investments as operating activities in the Company's Cash Flow Statement
for the year ended 31 December 2021. After careful consideration, the Board
has concluded on changing the accounting policy to better reflect the nature
of investment activities and classify purchases and sales of investments as
investing activities. As a result, the presentation of Cash flow Statement for
the year ended 31 December 2021 has been restated with 'Payments to acquire
non-current asset investments' and 'Receipts on disposal of non-current asset
investments' being presented under investing activities instead of operating
activities. This change has no impact on net assets or income in either the
current or the prior year.
Valuation of Unquoted Investments
The Company has an investment in Phoenix SG Limited ("Phoenix SG"), which is
unquoted and classified as a Level 3 investment under the fair value
hierarchy. Its fair value as at 31 December 2022 is £2,871,000 or 1.9% of NAV
(2021: £3,400,000 or 1.8% of NAV).
Phoenix SG is valued in accordance with the Company's accounting policy set
out in 1c, using the reported NAV provided by the investment's underlying fund
manager. In making the judgment that this valuation method is appropriate, the
Board has considered additional information, including an independent
valuation review report produced by Kroll Advisory Ltd, and published
financial statements. Whilst the Board considers the methodologies and
assumptions adopted in the valuation of unquoted investments to be
supportable, reasonable and robust, because of the inherent uncertainty of
valuation, the values used may differ significantly from the values that would
have been used had a ready market for the investment existed.
A 10% reduction of the unquoted valuation would have a negative impact of
£287,000 on the Company's NAV as at 31 December 2022 (2021: £340,000) and a
10% increase of the unquoted valuation would have the exact opposite impact.
2. Investments held at Fair Value Through Profit or Loss
Year to Year to
31 December
31 December
2022
2021
£'000
£'000
Listed securities 146,356 183,237
Unquoted securities 2,871 3,400
Total non-current investments held at fair value through profit or loss 149,227 186,637
Movements during the year:
Opening balance of investments, at cost 137,996 137,273
Additions, at cost 47,454 45,142
Disposals - proceeds received or receivable* (44,454) (46,437)
- realised profits 29,419 2,018
- at cost (15,035) (44,419)
Cost of investments held at fair value through profit or loss at 31 December 170,415 137,996
Revaluation of investments to market value:
Opening balance 48,641 20,621
Unrealised (losses)/gains (69,829) 28,020
Balance at 31 December (21,188) 48,641
Market value of non-current investments held at fair value through profit or 149,227 186,637
loss at 31 December
* These investments have been revalued over time and until they were sold any
unrealised gains/losses were included in the fair value of the investments.
Gains/(losses) on investments Year to Year to
31 December
31 December
2022
2021
£'000
£'000
Realised gains on disposal of investments 29,419 2,018
Movement in unrealised (losses)/gains on investments held (69,829) 28,020
Total (losses)/gains on investments (40,410) 30,038
Realised gains on disposal of investments include £31,433,000 (2021: £nil)
gains from the sale of the Company's put options on a short sterling future
contract in February 2022. The options were purchased as a hedge against
inflation and the details were disclosed in the Investment Management Review
and Outlook section of the Company's Annual Report and Financial Statement for
the year ended 31 December 2021.
Transaction costs on investment purchases and sales for the year ended 31
December 2022 are disclosed as shown in the following table.
Transaction costs Year to Year to
31 December
31 December
2022
2021
£'000
£'000
Transaction costs on purchases of investments 145 123
Transaction costs on sales of investments 38 21
Total transaction costs included in gains or losses on investments at fair 183 144
value through profit or loss
3. Income
Year to Year to
31 December
31 December
2022
2021
£'000
£'000
Income from investments:
UK dividends 2,762 2,196
Overseas dividends 332 109
Other income:
Deposit interest 23 -
Total income 3,117 2,305
4. Investment Management Performance Fees and Other Expenses
Year ended 31 December 2022 Year ended 31 December 2021
Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
Investment management performance fee (clawback)/charge - (2,746) (2,746) - 720 720
Administration fees 187 - 187 161 - 161
Depositary and Custody fees 60 - 60 64 - 64
Registrar's fees 43 - 43 49 - 49
Directors' fees 136 - 136 137 - 137
Audit fees* 64 - 64 109 - 109
Printing 18 - 18 30 - 30
Broker's fees 48 - 48 48 - 48
Professional fees 47 - 47 39 - 39
Public relation fees 71 - 71 90 - 90
Consultancy fees 32 - 32 82 - 82
Miscellaneous expenses 71 - 71 53 - 53
Total other expenses 777 (2,746) (1,969) 862 720 1,582
* All expenses include any relevant irrecoverable VAT. The amounts excluding
VAT paid or accrued for the audit of the Company are £53,000 (2021:
£90,000). The year ended 31 December 2021 charge includes prior year's
overrun costs of £25,000 excluding VAT.
Investment Management Performance Fees
The Company's Investment Manager does not earn an ongoing annual management
fee, but will be paid an annual performance fee equal to one third of any
outperformance of the Company's NAV per Ordinary Share total return (including
dividends and adjusted for the impact of share buybacks and the issue of new
shares) over the FTSE All-Share Index (total return) for each financial year.
The total annual performance fee is capped at 4% per annum of the NAV of the
Company at the end of the relevant financial year, in the event that the NAV
per Ordinary Share has increased in absolute terms over the period, and 2% in
the event that the NAV per Ordinary Share has decreased in absolute terms over
the period. Any outperformance that exceeds these caps will be carried forward
and only paid if the Company outperforms, and the annual cap is not exceeded,
in subsequent years.
The performance fee is subject to a high-water mark so that no fee will be
payable in any following year until all underperformance of the Company's NAV
since the last performance fee was paid has been made up.
Performance fees are settled by issuance of the Company's ordinary shares.
Such ordinary shares are issued at the NAV per Ordinary Share on the date of
issue, so that the then current value of the ordinary shares equates in terms
of NAV to the performance fees calculated at the end of the first relevant
financial period.
Any part of the performance fee that relates to the performance of Phoenix SG
will be accrued but will not be paid until such time as the Company's
investment in Phoenix SG has been realised or is capable of realisation. The
position will be reviewed at that time by reference to the realised proceeds
of sale or the fully realisable value of Phoenix SG as compared to the
original cost of acquisition.
Performance fees are calculated annually and if earned, by way of share
issuance by the Company, 80% is settled shortly after the year end date and
the remaining 20% is settled upon approval of the Company's Annual Report.
Shares issued to the Investment Manager are subject to a 3-year clawback
period, during which the Investment Manager is not entitled to sell, pledge or
transfer the shares, but is entitled to dividends and voting rights. If the
Company's NAV underperforms its benchmark index on a total return basis,
shares issued to the Investment Manager will be proportionally or entirely
clawed back and cancelled by the Company.
Share-based Payment
The performance fee arrangement is recognised as an equity settled share-based
payment under IFRS 2, and the related expenses are charged or credited in the
Income Statement on a straight-line basis over a vesting period of 4 years (1
year of performance fee calculation period followed by 3 years of clawback
period). At the end each reporting period, the Company reviews cumulative
total returns between the Company's NAV and its benchmark index, in relation
to each performance year in which a performance fee was earned and adjusts the
cumulative charges of share-based payment expenses accordingly.
No performance fee has been earned during the performance year ended 31
December 2022.
The clawback period for the performance fee earned during the year ended 31
December 2019 ended on 31 December 2022. The Company's cumulative NAV total
return underperformed that of the benchmark index over the vesting period. As
a result, the full £1,361,000 performance fee earned during the year ended 31
December 2019 has been reversed and the 530,311 restricted shares originally
issued in settlement of the performance fee earned were returned by the
Investment Manager to the Company. These shares were placed in treasury as at
31 December 2022 and subsequently cancelled on 9 January 2023.
The clawback period for fees earned during the year ended 31 December 2020 and
31 December 2021 will end on 21 December 2023 and 31 December 2024,
respectively. As at 31 December 2022, the Company's cumulative NAV total
returns for both performance periods underperformed that of the benchmark
index. As a result, expenses previously recognised in the Company's Income
Statement (£720,000 during the year ended 31 December 2021 and £655,000
during the year ended 31 December 2020) have fully been reversed.
A total of £2,746,000 clawback credit has been recognised in the Company's
Income Statement for the year ended 31 December 2022.
Share-based Payment Sensitivity Analysis
Performance fee period 31 December 31 December
2020
2021
End date for clawback period 31 December 31 December
2023
2024
As at 31 December 2022 % %
Company cumulative NAV returns (8.9) (5.2)
Cumulative index returns 7.1 18.7
Underperformance (14.9) (20.1)
Impact on the Company's loss after tax for the year ended 31 December 2022, if
the Company's underperformance improved by:
Performance fee period 31 December 31 December
2020
2021
Percentage £'000 £'000
5% nil nil
10% nil nil
15% (30) nil
20% (1,709) nil
5. Taxation
Year ended 31 December 2022 Year ended 31 December 2021
Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
Corporation tax - - - - - -
Overseas withholding tax 77 - 77 30 - 30
Tax charge in respect of the current year 77 - 77 30 - 30
Current taxation
The taxation charge for the year is different from the standard rate of
corporation tax in the UK of 19% (2021:19%). The differences are explained
below:
Year to Year to
31 December
31 December
2022
2021
£'000
£'000
Total (loss)/income before tax (35,341) 30,758
Theoretical tax at UK corporation tax rate of 19.0% (2021: 19.0%) (6,715) 5,844
Effects of:
Capital losses/(gains) that are not taxable 7,678 (5,707)
UK dividends which are not taxable (525) (417)
Overseas withholding tax 77 30
Overseas dividends that are not taxable (63) (21)
Unutilised excess management expenses (375) 301
Tax charge in respect of the current year 77 30
Due to the Company's status as an investment trust and its intention to
continue meeting the conditions required to maintain its status in the
foreseeable future, the Company has not provided deferred tax on any capital
gains and losses arising on the revaluation or disposal of investments.
Deferred Tax
The Company has £12,385,000 (2021: £13,015,000) in respect of excess
unutilised management expenses, equivalent to a potential tax saving of
£3,096,000 (2021: £3,088,000) at the prospective tax rate of 25% (2021: 25%)
and £1,491,000 (2021: £1,491,000) in respect of loan interest, equivalent to
a potential tax saving of £373,000 (2021: £373,000) at the prospective tax
rate of 25% (2021: 25%).
These amounts are available to offset future taxable revenue. A deferred tax
asset has not been recognised in respect of these expenses and will be
recoverable only to the extent that the Company has sufficient future taxable
revenue.
6. Ordinary Dividends
Year to Year to
31 December
31 December
2022
2021
£'000
£'000
Dividends reflected in the financial statements:
Final dividend paid for the year ended 31 December 2021 at 1.84p per share 1,409 420
(2020: 0.55p)
Dividends not reflected in the financial statements:
Final dividend recommended by the Board for the year ended 31 December 2022 at 2,263 1,409
2.97p per share (2021: 1.84p)
7. Earnings Per Share
Earnings per share are based on the loss of £35,418,000 (2021: profit of
£30,728,000) attributable to the weighted average of 76,592,940 (2021:
76,253,921) ordinary shares of 25p in issue during the year.
Supplementary information is provided as follows: revenue earnings per share
are based on the revenue profit of £2,263,000 (2021: profit of
£1,413,000); capital earnings per share are based on the net capital loss of
£37,681,000 (2021: profit of £29,315,000), attributable to the weighted
average of 76,592,940 (2021: 76,253,921) ordinary voting shares of 25p. There
is no difference between the weighted average Ordinary diluted and undiluted
number of shares. There is no difference between basic and diluted earnings
per share as there are no dilutive instruments.
8. Share Capital and Reserves
At At
31 December
31 December
2022
2021
Allotted, called up and fully paid (Number) 76,608,771 76,519,675
Ordinary Shares of 25p (£'000) 19,152 19,130
At 31 December 2022, the Company had 76,608,771 (2021: 76,519,675) ordinary
shares in issue. The number of voting shares at 31 December 2022 was
76,078,460, being the number of ordinary shares in issue less the number of
shares held in treasury (2021: 76,519,675).
Movement on share capital during the period
On 7 February 2022, in settlement for 80% of the performance fees earned
during the year ended 31 December 2021, a total of 69,738 restricted ordinary
shares were issued to the Investment Manager at the prevailing NAV of 254.37p
per share.
The remaining 20% of the performance fees earned were settled via a further
issuance of 19,358 restricted ordinary shares at the prevailing NAV of 226.40p
per share on 5 May 2022.
The total value of share issuances in relation to performance fees during the
year ended 31 December 2022 was £221,000 (2021: £2,656,000). These issuances
were non-cash transactions and therefore excluded from the cash flows from
financing activities in the Company's Cash Flow Statement.
The Company did not purchase any of its own shares during the year ended 31
December 2022 or 31 December 2021.
Treasury shares
On 31 December 2022, the clawback period on restricted shares issued to the
Investment Manager in relation to the performance period ended 31 December
2019 ended. All of the 530,311 shares originally issued to the Investment
Manager were returned to the Company and held in Treasury (2021: no shares
were held in Treasury). These shares were subsequently cancelled on 9 January
2023 reducing the shares in issue to 76,078,460.
Other Reserve
The other reserve balance represents the combination of the cumulative
share-based payment expenses in relation to performance fees, and the
restricted shares issued in settlement of performance fees that are still
within the lock-in period.
As at 31 December 2022, cumulative share-based payment expenses included in
this reserve is £nil (2021: £1,385,000).
9. Net Assets Per Ordinary Share
The figure for Net Assets per Ordinary Share is based on £154,778,000 (2021:
£194,193,000) divided by 76,078,460 (2021: 76,519,675) voting ordinary shares
in issue, being the number of ordinary shares in issue less the number of
shares held in treasury (Note 8) at 31 December 2022.
10. Reconciliation of Net Cash Flow from Operating
Activities
Year to Year to
31 December
31 December
2022
2021
£'000
£'000
(Loss)/profit after tax (35,418) 30,728
Losses/(gains) on investments 40,427 (30,035)
(Increase)/decrease in other receivables (88) 36
(Decrease)/increase in other payables (49) 41
Investment management fee (clawback)/charge (2,746) 723
Net cash inflow operating activities 2,126 1,493
11. Transactions with Related Parties and Investment Manager
Details of the management, administration and secretarial contracts can be
found in the Directors' Report.
There were no transactions with directors other than disclosed in the
Directors' Remuneration Report and no fees payable to the Directors were
outstanding as at 31 December 2022.
Phoenix Asset Management Partners Limited ("Phoenix"), the Company's AIFM and
Investment Manager, and Castelnau Group Limited ("Castelnau") are considered
as related parties under the Listing Rules. Details of transactions with
Phoenix can be found in Note 4 beginning on page 86.
As at 31 December 2022, the Company held 13.3% (2021: 13.3%) of the issued
share capital in Castelnau, there have been no transactions with Castelnau
during the year and there were no other balances outstanding with Castelnau as
at 31 December 2022.
12. Financial Instruments
Investments are carried in the balance sheet at fair value. For other
financial assets and financial liabilities, the balance sheet value is
considered to be a reasonable approximation of fair value.
Financial assets
The Company's financial assets may include equity investments, fixed
interest securities, short-term receivables and cash balances. The currency
and cash-flow profile of those financial assets was:
2022 2021
Interest Non- Total Interest Non- Total
Bearing
interest
£'000
Bearing
interest
£'000
£'000
Bearing
£'000
Bearing
£'000
£'000
Non-current equity investments at fair value through profit or loss:
£ sterling denominated security holdings - 128,638 128,638 - 174,726 174,726
E euro denominated security holdings - 10,060 10,060 - 11,911 11,911
$ usd denominated security holdings - 10,529 10,529 - - -
- 149,227 149,227 - 186,637 186,637
Cash at bank:
Floating rate - £ sterling 5,250 - 5,250 - 7,561 7,561
Floating rate - E euro 98 - 98 - 103 103
5,348 - 5,348 - 7,664 7,664
Current assets:
Receivables - 310 310 - 222 222
5,348 149,537 154,885 - 194,523 194,523
Cash at bank of £5,348,000 (2021: £7,663,798) is held by the Company's
Depositary, Northern Trust Investor Services Ltd.
Financial liabilities
The Company finances its investment activities through its ordinary share
capital and reserves. It has discontinued the use of borrowing for such
purposes. The Company's financial liabilities comprise short-term trade
payables. Foreign currency balances are stated in the accounts in sterling at
the exchange rate as at the Balance Sheet date.
There were no short-term trade payables (other than accrued expenses).
Fair Value Hierarchy
Under IFRS13 investment companies are required to disclose the fair value
hierarchy that classifies financial instruments measured at fair value at
one of three levels according to the relative reliability of the inputs used
to estimate the fair values.
Classification Input
Level 1 Valued using quoted prices in active markets for identical assets
Level 2 Valued by reference to valuation techniques using observable inputs other than
quoted prices included within Level 1
Level 3 Valued by reference to valuation techniques using inputs that are not based on
observable market data
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset.
Classification Year to Year to
31 December
31 December
2022
2021
£'000
£'000
Level 1 146,356 183,237
Level 2 - -
Level 3 2,871 3,400
(Decrease)/increase in other payables 149,227 186,637
There were no transfers between levels during the year.
The movement on the Level 3 unquoted investments during the year is shown
below:
Year to Year to
31 December
31 December
2022
2021
£'000
£'000
Opening balance 3,400 8,066
Disposals during the year - (4,523)
Unrealised (losses)/gains at year end (529) (143)
Closing balance 2,871 3,400
The Level 3 unquoted investment balance represents the Company's investment in
Phoenix SG Limited ("Phoenix SG"). The fair value estimate is based on the
attributable proportion of the reported net asset value of the Level 3
investment derived from the fair value of the underlying investments.
Valuation reports provided by the fund manager are used to calculate fair
value where there is evidence that the valuation is derived using fair value
principles that are consistent with the Company's accounting policies and
valuation methods. Such valuation reports may be adjusted to take account of
changes or events to the reporting date, or other facts and circumstances
which might impact the underlying value such as any issues being highlighted
or emphasised in Phoenix SG's audited financial statements.
The total fair value attributable to the Company's investment in Phoenix SG as
of 31 December 2022 is £2,871,000 (2021: £3,400,000). The Company held 9.4%
(2021: 10.3%) of the share capital of Phoenix SG.
Risk Analysis
The general risk analysis undertaken by the Board and its overall policy
approach to risk management are set out in the Strategic Report. Issues
associated with portfolio distribution and concentration risk are discussed in
the Investment Policy section of the Strategic Report. This note, which is
incorporated in accordance with accounting standard IFRS7, examines in greater
detail the identification, measurement and management of risks potentially
affecting the value of financial instruments and how those risks potentially
affect the performance and financial position of the Company. The risks
concerned are categorised as follows:
a. Potential Market Risks, which are principally:
i. Currency Risk
ii. Interest Rate Risk and
iii. Other Price Risk.
b. Liquidity Risk
c. Credit Risk
Each is considered in turn below:
A (i) Currency Risk
The portfolio as at 31 December 2022 was invested predominantly in sterling
denominated securities and there was no material currency risk arising from
the possibility of a fall in the value of sterling impacting upon the value of
investments or income.
The Company had no foreign currency borrowings at 31 December 2022 or 31
December 2021.
Currency sensitivity
The following table shows the impact on the Company's profit after taxation
for the year ended and net assets as at 31 December 2022, if sterling had
strengthened/weakened by 10% against Euro and USD.
2022 2021
£'000
£'000
Euro (923)/1,129 (1,201)/1,323
USD (957)/1,170 n/a
A (ii) Interest Rate Risk
The Company did not hold fixed interest securities at 31 December 2022 or 31
December 2021.
With the exception of cash, no interest rate risks arise in respect of any
current asset. All cash held as a current asset is sterling denominated,
earning interest at the bank's or custodian's variable interest rates.
The Company had no borrowings at 31 December 2022 or 31 December 2021.
A (iii) Other Price Risk
The principal price risk for the Company is the price volatility of shares
that are owned by the Company. As described in the Investment Manager's
Review, the Company spreads its investments across different sectors and
geographies, but as shown by the Portfolio Analysis in the Business Review,
the Company may maintain relatively strong concentrations in particular
sectors selected by the Investment Manager.
The Board manages these risks through the use of investment limits and
guidelines as set out in the Company's investment policy and restrictions, and
monitors the risks through regular financial and compliance reports provided
by the Company's key service providers.
The effect on the portfolio of a 10.0% increase or decrease in market prices
would have resulted in an increase or decrease of £14,923,000 (2021:
£18,664,000) in the investments held at fair value through profit or loss at
the period end, which is equivalent to 9.6% (2021: 9.6%) in the net assets
attributable to equity holders. This analysis assumes that all other variables
remain constant.
B Liquidity Risk
Liquidity Risk is considered to be small, because most of the portfolio is
invested in readily realisable securities. As a consequence, cash flow risks
are also considered to be immaterial. The Investment Manager estimates that,
under normal market conditions and without causing excessive disturbance to
the prices of the securities concerned, 46.6% of the portfolio could be
liquidated in a non-market impacting way within 7 days, based on 25% of
average daily volume. This is conservative as it does not include the ability
to access liquidity through block trades.
C Credit Risk
The Company invests in quoted and unquoted equities in line with its
investment objective and policy. The Company's investments are held by
Northern Trust Investor Services Ltd ("the Depositary"), which is a large and
reputable international banking institution. The Company's normal practice is
to remain fully invested at most times and not to hold large quantities of
cash. At 31 December 2022, cash at bank comprised £5,348,000 (2021:
£7,664,000) held by the Depository.
Credit Risk arising on transactions with brokers relates to transactions
awaiting settlement. This risk is considered to be very low because
transactions are almost always undertaken on a delivery versus payment basis
with member firms of the London Stock Exchange.
D Capital management policies and procedures
The Company's capital management objectives are:
• to ensure the Company's ability to continue as a going concern;
and
• to provide an adequate return to shareholders
by pursuing investment policies commensurate with the level of risk.
The Company considers its capital to be issued share capital and reserves, and
monitors capital on the basis of the carrying amount of equity, less cash and
cash equivalents as presented on the face of the statement of financial
position.
The Company sets the amount of capital in proportion to its overall financing
structure, i.e. equity and financial liabilities. The Company does not
currently intend to use gearing, but as set out in its investment objective
and policy, borrowings of up to 30% of the aggregate of the paid-up nominal
capital plus the capital and revenue reserves are permitted.
The Company manages the capital structure and makes adjustments to it in the
light of changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust the capital structure, the
Company may adjust the amount of dividends paid to shareholders (within the
statutory limits applying to investment trusts), return capital to
shareholders, issue new shares, or sell assets.
13. Post Year End Events
On 31 December 2022, the clawback period on restricted shares issued to the
Investment Manager in relation to the performance period ended 31 December
2019 ended. All of the 530,311 restricted shares originally issued to the
Investment Manager were returned to the Company and held in Treasury. These
shares were subsequently cancelled on 9 January 2023.
.
The figures and financial information for 2021 are extracted from the
published Annual Report for the year ended 31 December 2021 and do not
constitute the statutory accounts for that year. The Annual Report for the
year ended 31 December 2021 has been delivered to the Registrar of Companies
and included an Independent Auditor's Report which was unqualified and did not
contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006.
The figures and financial information for 2022 are extracted from the Annual
Report and financial statements for the year ended 31 December 2022 and do not
constitute the statutory accounts for the year. The Annual Report for the year
ended 31 December 2022 includes an Independent Auditor's Report which is
unqualified and does not contain a statement under either section 498(2) or
section 498(3) of the Companies Act 2006. The Annual Report and financial
statements have not yet been delivered to the Registrar of Companies.
The Annual Report will be posted to shareholders shortly. Copies may be
obtained by writing to the Company Secretary, Frostrow Capital LLP at 25
Southampton Buildings, London WC2A 1AL, or from the Company's website -
www.aurorainvestmenttrust.com - where up to date information on the Company,
including daily NAVs, share prices and fact sheets, can also be found.
A copy of the Annual Report will be submitted to the National Storage
Mechanism and will shortly be available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
Frostrow Capital LLP
Company Secretary
020 3709 8733
20 April 2022
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