Aurora Investment - Investment objective and performance fee changes
14/06/2024 07:00
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RNS Number : 4076S Aurora Investment Trust PLC 14 June 2024
LEI: 2138007OUWIZFMAGO575
Aurora Investment Trust plc
(the "Company")
Changes to investment objective and performance fee methodology
Eight years into the Company's management by Phoenix Asset Management Partners
Limited (the "Investment Manager"), the Company has delivered absolute
performance of 96.6% and relative outperformance, against the FTSE All-Share
Index, of 10.4%.
The directors of the Company (the "Board") would like to update shareholders
on two changes:
Investment Objective
The Board has decided that the wording of the Company's published investment
objective should be clarified for consistency with the Company's investment
policy and dividend policy. The existing wording refers to providing
shareholders with "long-term returns through capital and income growth" and
the Board believes it would be clearer if the words within the quotation marks
were replaced with "long-term total returns". While the Board recognises
that "long term total returns" are synonymous with "capital and income
growth", the Board considers "long term total returns" to be more accurate in
the Company's context, noting in particular that the Company does not have a
fixed dividend policy or target and the Board's policy is to seek to
distribute substantially all of the net revenue arising from the investment
portfolio, regardless of whether such amount is higher or lower than in
previous years.
Accordingly, with immediate effect, the Company's investment objective is
changed to:
To provide shareholders with long-term total returns by investing
predominantly in a portfolio of UK listed companies.
Please note that there is no change to the Company's investment policy or the
way in which the investment portfolio is managed. Moreover, there is no change
to the dividend policy and the Board expects to continue to distribute
substantially all of the net revenue arising from the investment portfolio.
Performance fee methodology
Summary
A key aspect of the Company is its clawback, where performance fees paid to
the Investment Manager, can only be retained by the Investment Manager if the
Company does not underperform in the subsequent three year lock-in period.
Currently if performance fees are clawed back, the high water mark (or level
at which future performance fees are payable) does not get adjusted, meaning
the Investment Manager must re-earn performance which has already been
generated. The Board believes this approach does not reflect the parties'
intention that the Investment Manager should be rewarded for generating
cumulative long-term outperformance. Therefore with effect from close of
business on 13 June 2024, the performance fee methodology has been adjusted to
allow the Investment Manager to earn a performance fee in respect of any
outperformance that has been clawed back, where it is subsequently
re-generated by the Investment Manager. The Board believes that the
performance fee, adjusted in this manner, will properly incentivise the
Investment Manager for long-term outperformance, consistent with the
expectations of shareholders.
Further details regarding the adjustment to the performance fee methodology
The Company's fee structure is unique in that the Investment Manager, does not
earn an annual management fee but is entitled to receive a performance fee
(the "Performance Fee") equal to one third of the outperformance of the
Company's net asset value ("NAV") total return (the "Fund Return") over the
percentage return of the FTSE All Share Total Return Index (the "Benchmark
Return") for each financial year (or, where no performance fee is payable in
respect of a financial year, in the period since a performance fee was last
payable) (the "Performance Period"). The Performance Fee is capped at 4 per
cent. per annum of the end of year NAV in the event that the NAV per share has
increased in absolute terms over the period, and 2 per cent. in the event that
the NAV per share has decreased in absolute terms over the period (the "Fee
Cap"). Excess outperformance is carried forward and only paid if the Company
outperforms, and the Fee Cap is not exceeded, in subsequent years. The
Performance Fee is payable in ordinary shares of the Company which must be
retained by the Investment Manager for three years (the "Lock-In Period"). In
the event that the Fund Return is less than the Benchmark Return at the end of
any Lock-In Period, the Company is entitled to claw back the Performance Fee
and require some or all of the ordinary shares received by the Investment
Manager in satisfaction of the payment of the Performance Fee to be returned
to the Company (the "Clawback").
Following a review of the clawback element of the performance fee methodology,
it became apparent that the Clawback may, in certain circumstances, operate in
a manner which is inconsistent with the parties' original intention that the
Investment Manager would earn one-third of outperformance since inception.
While any performance fee with a clawback will generate fees which are not
directly linear to the level of outperformance, this is particularly true in
the Company's case because the mechanics of the Clawback do not allow for an
adjustment to the high-water mark (being the level of outperformance which
must be achieved in order for a Performance Fee to become payable) to reflect
the impact of the Clawback. This means that, even if the Company's long-term
performance improves and the Fund Return returns to outperformance over the
Benchmark Return, there is no mechanism for the Investment Manager to be
rewarded for long-term outperformance lost as a result of a Clawback.
In order to allow the Investment Manager to earn a cumulative long-term
performance fee which is consistent with the parties' stated intention of
generating cumulative long-term outperformance, it is proposed that the
clawback mechanics be amended to provide that the high water mark for
Performance Periods which arise subsequent to a Clawback will be adjusted to
take account of the level of outperformance which was lost as a result of the
exercise of such Clawback.
In respect of the Clawback which occurred on 31 December 2022, the high water
mark has today been adjusted to reflect the outperformance related to that
Clawback. Adjusting the high water mark in this manner does not crystallise a
fee today and does not give rise to any immediate adjustment to the Company's
NAV but will reduce the level of outperformance that will need to be generated
during the remainder of the current Performance Period in order to achieve a
Performance Fee by an amount equal to the performance related to the previous
Clawback. Such Performance Fee will only become payable if and when the Fund
Return exceeds the Benchmark Return at the end of a calendar year.
In respect of any future Clawbacks, an adjustment will be made to the
high-water mark at the same time as the Clawback occurs and daily accruals
will be made to ensure that the NAV is adjusted on a daily basis to take
account of any Performance Fees which may become payable in the event that
performance exceeds the adjusted high water mark. Such accruals will be made
without distorting accruals to be made in respect of any Clawbacks for
previous Performance Periods.
Any Performance Fee paid on the basis of an adjusted high water mark (or
otherwise) will continue to be paid in ordinary shares of the Company that
will remain subject to a Lock-In Period and may be clawed back if there is
underperformance during that Lock-In Period. Moreover, any Performance Fee
paid on the basis of an adjusted high water mark (or otherwise) will be
subject to the Fee Cap (which will continue to apply notwithstanding the
adjustment to the mechanics of the Clawback).
Under the Listing Rules of the FCA, the Investment Manager is a related party
of the Company. As the adjustment to the performance fee mechanics will reduce
the level of outperformance that will need to be generated in order to achieve
a Performance Fee in the current Performance Period and in any future
Performance Periods which are subsequent to a Clawback, there is a financial
benefit to the Investment Manager which has been assessed in accordance with
Chapter 11 of the Listing Rules. The adjustment is a smaller related party
transaction as defined in LR 11.1.10R.
Contact:
Paul Griggs
Frostrow Capital LLP
Company Secretary
Tel: 020 3709 8733
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