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Aurora: why Sports Direct is a great business

Sports Direct (SPD) shares have plunged this year as the retailer has been engulfed in controversy over its treatment of workers and corporate governance breaches. That has not discouraged Aurora (ARR) investment trust which has added to a big holding as the stock has fallen.

In this video interview, Tristan Chapple, a director of Aurora and its fund manager Phoenix Asset Management Partners, explains how Sports Direct typifies the fund's long-term, value-driven stock picking strategy. He argues Sports Direct's low-cost business model remains successful and praises the management team under Mike Ashley, the company's founder and majority shareholder.

Can't watch now? Read the transcript

Gavin Lumsden: Hello, with me today is Tristan Chapple, director of Aurora investment trust and Phoenix Asset Management. Now, you took over management of Aurora at the beginning of this year. Before that it was a small and pretty badly performing investment trust. What have you done to turn it around?

Tristan Chapple: Yes, it was essentially a family, a friends and family investment trust that performed very badly and dwindled to £15 million of assets. We’ve been in business 18 years running a concentrated portfolio using a value approach.

GL: You run a Phoenix UK fund based in the Bahamas?

TC: That’s right, it’s an offshore fund which we’ve run for 18 years. It’s not accessible to UK wealth managers and retail investors and we wanted to bring our approach to that audience, so an investment trust enables us to do that.

GL: So you’ve got a fund on the London Stock Exchange and you’ve completely changed the portfolio and you’ve got quite an unusual approach. And you’ve been buying shares, for example, in Sports Direct. So I’d like to talk to you about that. It’s been a huge story this year. Everything’s been thrown at that company: accusations of share price manipulation, underpaying the workers and corporate governance failings, all sorts of things. And there’s been a profits warning since Brexit. So the shares have fallen off a cliff but you’ve been buying in and you’ve got about 10% of the fund in Sports Direct.

TC: That’s right.

GL: What’s the attraction?

TC: Just taking a brief step back. The approach that we use is to look for really high quality companies. We use a phrase ‘long-term greats’ internally. But we want to buy them at a price where they’re not being priced for quality. So we never pay half of what we think a company is worth.

GL: Does that mean a company will be in some sort of trouble for you to be buying into the shares?

TC: Either a perception of trouble or some fundamental problems where there is a price over-reaction, so effectively things have got too cheap but where we think the shares are worth more than twice as much what they’re at. So paying 50%. In Sports Direct we think they’re worth £7-8 a share.

GL: What gives you the confidence that the shares will bounce back.

TC: So we think fundamentally the company has had a series of PR problems, which is a bit of an understatement, but we do a lot of ‘mystery shopping’ and a lot of monitoring of our investments, involves going into stores in the UK or in Europe and comparing the performance of the business against its competitors. And where we’re able to do that we see Sports Direct outperforming where it needs to, so, for example, when it was killing JJB, its main competitor in the UK, it could sell something at a lower price than JJB and make more profit from it, so they’re the low-cost producer, that’s their business model. And that continues today. If you put aside the PR issues what you have at the core is a business run by an incredibly able management team, able to sell the same things for cheaper than its competitors, including Amazon. So we look at a basket of goods: a cricket bat, an England football shirt, 10 or 12 things and Sports Direct is able to be cheaper than all its main competitors on that basket of goods.

GL: So you think it will be able to grow its market share even further?

TC: I think its market share in the UK is around 50%, it can probably grow a little bit. The big opportunity is in Europe where at the moment the price of the shares, you’re getting the UK business for less than it’s worth. You’re paying nothing for the European business and its prospects there.

GL: So you think Mike Ashley is essentially a good manager of that business.

TC: Yes, but I wouldn’t want to underestimate the impact that the management team below him have. So he’s got a very, very loyal, long-serving cadre of people who effectively allow him to focus on what he likes which is the sort of high-level, strategic thinking, which is really important to the business, whilst relying on his bench of executives to really run the business on a day-to-day basis.

GL: What do you think of other investors, institutional investors who have been campaigning against the group quite publically? I mean are you glad they’re doing that because it’s enabling you to buy the shares cheaply?

TC: Most of the noise is around corporate governance, or what people take corporate governance to be. Our answer to most of those criticisms is that we are trying to make money for our investors over the long run. And the most important thing for us is that management are aligned to shareholders. And with Mike Ashley owning over 50% I think any of these corporate governance concerns, whether it be his son-in-law running the property side of the business, ultimately you’re in business with this guy. And that’s what we think.

GL: OK well Tristan thank you very much for telling us about it, we’ll have to come back to you in a year or two’s time to see how it’s all panned out.

TC: OK thank you.

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