TIDMARR
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 nal dividend of 2.97p per ordinary
share (2021: 1.84p) to be paid on 4 July 2023 to s hareholders 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 rst 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 dif cult year, with concerns over in ation and the
war in Ukraine causing signi cant 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
in ation hedge put in place in 2021 and sold early in 2022, while
the weakest contributor was Barratt Developments, where the
proceeds from the in ation 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 nancial 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 xed 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 GBP250 million. This objective was set
back during the year, with the market capitalisation falling from
GBP179 million in January 2022, to GBP148 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 rst 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 of ce,
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 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 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 con ict 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 nal 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 signi cant 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-de ned maximum or minimum sector exposure
levels but these sector exposures are reported to and monitored by
the Board in order to ensure that adequate diversi cation 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 xed 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 gure
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
GBP2,263,000 (2021: GBP1,413,000). The Board is recommending the
payment of a nal 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 re ected in the nancial statements
for the year ended 31 December 2022.
Five Year Summary
Year end
Published Dividend per
NAV per Ordinary Share Year end
Ordinary Share in respect of Ordinary Share
(pence)1 the year price (mid-market)
Year (pence) (pence)
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
nancial 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 nancial
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
NAV share
GBP'000 p
------------------------------------------------------ --------- -------
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
Date Average
Holding Percentage of first cost Share Market
Sector in Company Valuation of net purchase per price capitalisation
GBP'000 assets share Million
Company % *
Frasers Group
plc Retail 5,114,011 36,309 23.5 Jan-16 GBP3.07 GBP7.10 GBP3.390
--------------- --------------- ----------- ---------- ----------- --------- -------- -------- ---------------
Barratt
Developments
plc Construction 5,866,312 23,278 15.0 Nov-18 GBP4.87 GBP3.97 GBP3,957
--------------- --------------- ----------- ---------- ----------- --------- -------- -------- ---------------
Castelnau Group
Limited# Financial 24,563,184 16,212 10.5 Oct-21 GBP1.00 GBP0.66 GBP127
--------------- --------------- ----------- ---------- ----------- --------- -------- -------- ---------------
Ryanair
Holdings
Plc Leisure 928,600 10,060 6.5 May-19 EUR8.34 EUR12.21 EUR13,903
--------------- --------------- ----------- ---------- ----------- --------- -------- -------- ---------------
easyJet Plc Leisure 2,975,768 9,659 6.2 Sep-16 GBP6.86 GBP3.25 GBP2,461
--------------- --------------- ----------- ---------- ----------- --------- -------- -------- ---------------
Lloyds Banking
Group
plc Financial 19,618,000 8,909 5.8 Jan-16 GBP0.62 GBP0.45 GBP30,551
--------------- --------------- ----------- ---------- ----------- --------- -------- -------- ---------------
Technology
&
Netflix Inc Entertainment 33,500 8,212 5.3 Apr-22 $164.00 $294.86 $129,554
--------------- --------------- ----------- ---------- ----------- --------- -------- -------- ---------------
Hotel Chocolat
Group Food &
plc Beverage 3,876,800 5,932 3.8 Jul-22 GBP1.33 GBP1.53 GBP214
--------------- --------------- ----------- ---------- ----------- --------- -------- -------- ---------------
Bellway Plc Construction 306,940 5,855 3.8 Jan-16 GBP21.47 GBP19.08 GBP2,356
--------------- --------------- ----------- ---------- ----------- --------- -------- -------- ---------------
RHI Magnesita
N.V. Materials 260,970 5,757 3.7 Jan-20 GBP33.55 GBP22.06 GBP1,046
--------------- --------------- ----------- ---------- ----------- --------- -------- -------- ---------------
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
Percentage of
Net
Assets
Sector %
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 dif
cult 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 GBP158m (2021 GBP194m).
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
xed 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
nal 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 in
ation, 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 in ation and the impact of higher interest rates. The
war in Ukraine was also a signi cant factor as it led to an
increase in commodity prices, which added to the existing in
ationary forces.
The rst 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 pro t 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 Net ix, 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 Net ix, 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 Net ix 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 Net ix was also outlined in
the June factsheet, and it is repeated below:
Rather than cover the story of Net ix, 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 signi cant.
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 Net ix has undermined
its attractiveness. A show like The Crown would have been a natural
for ITV before the emergence of Net ix.
Now, 43% of UK households subscribe to Net ix, streaming
services are in 59% of households and Net ix dominates the Top 10
list of most enjoyed titles watched according to Kantar. ITV nally
got together with the BBC, and in 2017 created something called
BritBox to compete. Currently Net ix 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. Net ix, as the rst 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. Net ix is not just the UK's no.1; it is the
World's. Whilst many focus on Net ix versus Disney, we think the
real pain points will be with the likes of ITV and their ilk around
the world.
Net ix 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 Net ix a great
opportunity to vary its business model to reduce subscription price
as a point of friction. Net ix is already the streaming service
that consumers say is their favourite and would be the last one
they cancel. As Net ix 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.
Net ix 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 Net ix, we
think it will outcompete its rivals.
There are many scenarios you can model at Net ix. 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.
Outlook
In the year-end factsheet for the Company published in January
2023, Gary Channon, Phoenix CIO, outlined some thoughts to
shareholders on in ation and the general outlook for the year
ahead. It is repeated below, as those thoughts remain relevant
today:
Inflation
Given the signi cant contribution of the in ation 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 in
ation 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 in ation could not be controlled
with interest rates or money supply. The way in which governments
sought to control in ation 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. In ation 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 in ation. We learned that in
ation 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 in ation by
imposing below market wage settlements looks like it is about to be
relearned in the UK.
We were worried about in ation 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 in ation. 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 re, 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 in ation, 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 rst time in decades. It is a reasonable assumption
that long term in ation 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 pro ts incentivise increased supply, whereas
elevated prices reduce demand and incentivise alternatives), it is
highly possible that in ation 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 in ationary 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 in ation, 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 gures
adjusted for in ation. The rst column of GDP data in the table
below shows the gures adjusted for in ation, but when we are
thinking about where corporate pro ts come from, it is actual
dollars which the next column shows. Corporate pro ts have averaged
between 8% and 10% of GDP over that period and so the nal column is
an estimate of their size using a 9% estimate.
The forces of that progress are identi able 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 World
(2015$) change (current$) change Profit Pool
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 les, Phoenix
The effects of this machine can be seen in the world GDP gures
adjusted for in ation. The rst column of GDP data in the table
below shows the gures adjusted:
Throughout those decades interest rates went up and down, in
ation 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 les
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 pro ts 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 in ation 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 pro ts 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 pro table, 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 signi cant 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 pro t
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 re ect 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 gure 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 x 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 signi cant recent news
has been the re-opening of the Chinese economy from COVID-19. In
the short run, it will help alleviate in ationary 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*
Investment NAV
Return NAV Return FTSE All-Share Per Share
(Gross) (Net) Index (A Class)
Year % % % GBP
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 bene t 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 ful lling 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 bene cial 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 signi cant 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 s hareholder
changes and monitors the evolving shareholder pro le. 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 nancial advisers. The Board has identi
ed 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 ful lling 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 nancial 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 satis es 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 .
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 diversi cation. 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 nal
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 .
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 traf cking statement. The Board considers
the Company's supply chains, dealing predominately with
professional advisers and service providers in the nancial 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 identi cation, 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 in ation; 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 in ation 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 diversi ed 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 diversi
cation.
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-de ned 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 360
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 suf ciently 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 satis ed
itself that adequate controls and procedures are in place to limit
any impact on the Company's operations, particularly with regard to
a nancial loss. It has also satis ed 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 de nes 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 speci cally recognises the risk that the price of the
Company's shares may not re ect 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 signi cant 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 nancial risks are included in
Note 12 to the nancial 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
ve nancial years to 31 December 2027.
The Board has chosen a ve-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 ve 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 con dent 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 in ation, the con ict 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 signi cant market movements, on the Company's liquidity and
solvency, its income and expenses pro le and the non-utilisation of
gearing as an instrument as permitted by the Company's investment
policy. A signi cant 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 nancial statements in accordance with applicable law and
regulation.
Company law requires the Directors to prepare nancial statements
for each nancial year. Under that law the Directors have prepared
the nancial 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 nancial
statements unless they are satis ed that they give a true and fair
view of the state of affairs of the Company and of the pro t or
loss of the Company for that period. In preparing the nancial
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 nancial statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the nancial 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 suf cient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
nancial position of the Company and enable them to ensure that the
nancial 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 nancial statements may differ from legislation in
other jurisdictions.
Directors' confirmations
The Directors consider that the Annual Report and nancial
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 con rm that, to the best of their
knowledge:
-- the Company's nancial 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, nancial 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
---------------------------- ----------------------------
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'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
------ ---------------------------------- -------- -------- -------- -------- -------- --------
Investment management
4 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
------ ---------------------------------- -------- -------- -------- -------- -------- --------
(Losses)/earnings per
7 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
31 December 31 December
2022 2021
Notes GBP'000 GBP'000
------ --------------------------------------------- ----------- -----------
NON-CURRENT ASSETS
------ --------------------------------------------- ----------- -----------
Investments held at fair value through
8 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
Called Capital Share Capital Revenue Total
up share redemption premium Treasury Other reserve reserve GBP'000
capital reserve account shares reserve GBP'000 GBP'000
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'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)
------ --------------------- --------- ----------- -------- --------- -------- -------- -------- --------
Performance fee
clawback in relation
to performance year
4 2019 (crystalised) - - - (133) - (1,053) - (1,186)
------ --------------------- --------- ----------- -------- --------- -------- -------- -------- --------
Performance fee
clawback in relation
to performance year
4 2020 and 2021 - - - - (1,385) - - (1,385)
------ --------------------- --------- ----------- -------- --------- -------- -------- -------- --------
6 Dividends paid - - - - - - (1,409) (1,409)
------ --------------------- --------- ----------- -------- --------- -------- -------- -------- --------
Issue of new Ordinary
8 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
Called Capital Share Capital Revenue Total
up share redemption premium Other reserve reserve GBP'000
capital reserve account reserve GBP'000 GBP'000
Notes GBP'000 GBP'000 GBP'000 GBP'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
------ ---------------------- --------- ----------- -------- -------- -------- -------- --------
Performance fee charge
4 for the year - - - 720 - - 720
------ ---------------------- --------- ----------- -------- -------- -------- -------- --------
6 Dividends paid - - - - - (420) (420)
------ ---------------------- --------- ----------- -------- -------- -------- -------- --------
Issue of new Ordinary
8 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
Restated*
Year to Year to
31 December 31 December
2022 2021
Note GBP'000 GBP'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 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 of ce 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 nancial 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 nancial statements have also been prepared in
accordance with the AIC SORP for the nancial 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 re ect 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 nancial statements are presented in Sterling
rounded to the nearest thousand, except where otherwise
indicated.
Going concern
The nancial 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 GBP5,348,000 (2021:
GBP7,664,000) in cash, GBP146,356,000 (2021: GBP183,237,000) in
quoted investments and GBP2,871,000 (2021: GBP3,400,000) in an
unquoted investment. The total operating expenses for the year
ended 31 December 2022 were GBP777,000 (2021: GBP862,000). 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 signi cant effect on the measurement of the
amounts recognised in the nancial 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 nancial 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 de nition 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 pro t 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 pro t or loss. Gains or losses on investments
measured at fair value through pro t 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 nancial 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 xed
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 GBP42,863,000
as at 31 December 2022 (2021: GBP15,234,000). The Company has no
intention to make distributions out of its capital reserve.
The revenue reserve represents the surplus of accumulated
revenue pro ts 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 satis ed. 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 ful lled. 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 satis ed,
provided that all other performance and/or service conditions are
satis ed.
h. Taxation
Current income tax assets and/or liabilities comprise those
claims from or obligations to scal 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 nal 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 nancial
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 nancial 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 xed 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 xed 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 rst 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 signi cantly different in timing
within the four-year service period.
As at 31 December 2022, performance fees earned in nancial years
2020 and 2021 are estimated to be in 100% clawback, resulting in
reversal of GBP1,384,700 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 GBP2,871,000 or 1.9% of NAV (2021: GBP3,400,000 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 GBP287,000 on the Company's NAV as at 31 December 2022
(2021: GBP340,000) 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
GBP'000 GBP'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 loss at 31 December 149,227 186,637
------------------------------------------------------ ------------ ------------
* 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.
Year to Year to
31 December 31 December
2022 2021
Gains/(losses) on investments GBP'000 GBP'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 GBP31,433,000
(2021: GBPnil) 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 inv estment purchases and sales for the
year ended 31 December 2022 are disclosed as shown in the following
table.
Year to Year to
31 December 31 December
2022 2021
Transaction costs GBP'000 GBP'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 value through profit or loss 183 144
----------------------------------------------------- ------------ ------------
3. Income
Year to Year to
31 December 31 December
2022 2021
GBP'000 GBP'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 Year ended 31 December
2022 2021
---------------------------- ----------------------------
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'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 GBP53,000 (2021: GBP90,000). The year ended 31 December 2021
charge includes prior year's overrun costs of GBP25,000 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 nancial year.
The total annual performance fee is capped at 4% per annum of
the NAV of the Company at the end of the relevant nancial 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 rst relevant nancial 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
GBP1,361,000 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 (GBP720,000
during the year ended 31 December 2021 and GBP655,000 during the
year ended 31 December 2020) have fully been reversed.
A total of GBP2,746,000 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 GBP'000 GBP'000
---------------------- ----------- -----------
5% nil nil
---------------------- ----------- -----------
10% nil nil
---------------------- ----------- -----------
15% (30) nil
---------------------- ----------- -----------
20% (1,709) nil
---------------------- ----------- -----------
5. Taxation
Year ended 31 December Year ended 31 December
2022 2021
---------------------------- ----------------------------
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'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
GBP'000 GBP'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 GBP12,385,000 (2021: GBP13,015,000) in respect
of excess unutilised management expenses, equivalent to a potential
tax saving of GBP3,096,000 (2021: GBP3,088,000) at the prospective
tax rate of 25% (2021: 25%) and GBP1,491,000 (2021: GBP1,491,000)
in respect of loan interest, equivalent to a potential tax saving
of GBP373,000 (2021: GBP373,000) 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 suf cient future taxable revenue.
6. Ordinary Dividends
Year to Year to
31 December 31 December
2022 2021
GBP'000 GBP'000
----------------------------------------------------- ------------ ------------
Dividends reflected in the financial statements:
----------------------------------------------------- ------------ ------------
Final dividend paid for the year ended 31 December
2021 at 1.84p per share (2020: 0.55p) 1,409 420
----------------------------------------------------- ------------ ------------
Dividends not reflected in the financial statements:
----------------------------------------------------- ------------ ------------
Final dividend recommended by the Board for the year
ended 31 December 2022 at 2.97p per share (2021:
1.84p) 2,263 1,409
----------------------------------------------------- ------------ ------------
7. Earnings Per Share
Earnings per share are based on the loss of GBP35,418,000 (2021:
pro t of GBP30,728,000) 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 pro t of GBP2,263,000
(2021: pro t of GBP1,413,000); capital earnings per share are based
on the net capital loss of GBP37,681,000 (2021: pro t of
GBP29,315,000), 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 (GBP'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 GBP221,000 (2021:
GBP2,656,000). 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 GBPnil (2021: GBP1,385,000).
9. Net Assets Per Ordinary Share
The gure for Net Assets per Ordinary Share is based on
GBP154,778,000 (2021: GBP194,193,000) 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
GBP'000 GBP'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 nancial assets and nancial liabilities, the balance sheet
value is considered to be a reasonable approximation of fair
value.
Financial assets
The Company's nancial assets may include equity investments, xed
interest securities, short-term receivables and cash balances. The
currency and cash- ow pro le of those nancial assets was:
2022 2021
------------------------------ ------------------------------
Non- Non-
Interest interest Interest interest
Bearing Bearing Total Bearing Bearing Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------- --------- --------- -------- --------- --------- --------
Non-current equity investments
at fair value through profit
or loss:
------------------------------- --------- --------- -------- --------- --------- --------
GBP 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 - GBP 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 GBP5,348,000 (2021: GBP7,663,798) is held by the
Company's Depositary, Northern Trust Investor Services Ltd.
Financial liabilities
The Company nances its investment activities through its
ordinary share capital and reserves. It has discontinued the use of
borrowing for such purposes. The Company's nancial 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 classi es nancial 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 signi cant to the fair
value measurement of the relevant asset.
Classification Year to Year to
31 December 31 December
2022 2021
GBP'000 GBP'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
GBP'000 GBP'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 GBP2,871,000 (2021:
GBP3,400,000). 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 identi cation, measurement and management of risks
potentially affecting the value of nancial instruments and how
those risks potentially affect the performance and nancial 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
GBP'000 GBP'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 xed 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
GBP14,923,000 (2021: GBP18,664,000) in the investments held at fair
value through pro t 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 ow 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 GBP5,348,000 (2021: GBP7,664,000) 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 rms 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 nancial position.
The Company sets the amount of capital in proportion to its
overall nancing structure, i.e. equity and nancial 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
Frostrow Capital LLP
Company Secretary
020 3709 8733
20 April 2022
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END
FR URAWRORUSUAR
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April 21, 2023 02:00 ET (06:00 GMT)
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