Following this month’s launch of Aurora’s first share offer to private investors, Phoenix’s Tristan Chapple popped into Citywire to talk about the ‘secret sauce’ applied to the now punchy portfolio of turnaround stocks.
In this video interview Chapple relates how Aurora’s managers upped their holdings in housebuilders Barratt Developments (BDEV), Bellway (BWY) and Redrow (RDW) after last year’s Brexit vote but recently took profits after seeing their shares soar.
This has left Aurora with 15% cash, prompting Chapple to explain the investment return Phoenix will seek for shareholders from any investments it buys with the money.
Can’t watch now? Read the transcript
Gavin Lumsden: Hello, with me today is Tristan Chapple, director of Phoenix Asset Mangement Partners, which manages Aurora, a small investment trust that they took over a while ago and turned around into a deep value fund. Tristan, very good to see you.
Tristan Chapple: Good to see you Gavin.
GL: You’re looking to raise more money with a share placing and offer. It’s going to be made available to private investors via the normal investment platforms, so tell us a bit about the fund. What is it you’re aiming to do?
TC: So until this point our strategy has been available to institutions, wealth managers, family offices. Through the intermediary offer that we’re doing this September it’s the first time that we can broaden that out a bit and give an opportunity for the retail investor through the platforms to access the Phoenix investment style.
GL: And what is so special about the Phoenix style?
TC: I think it’s just common-sense investing. It’s a very concentrated, stock-picking fund so at any one point we’ve got between 12 and 20 names in the portfolio.
GL: It’s not many.
TC. It’s not many. The top five often account for half of the assets. So it’s punchy. It’s conviction investing. And the secret sauce if we’re trying to explain what really makes us different is the research that we do. So we think part of having a very concentrated portfolio is that you have to have unique insights into things that you own and you only get those insights by doing proprietary research, finding out things that other people don’t know.
GL: So for example you take a great deal of interest in housebuilders. You go around their sites and get a really good understanding of their businesses. So you have big positions in the likes of Barratt Developments, Redway and the like … Redrow, sorry. But you’ve taken some profits there, particularly on Barratt. Why is that?
TC: Post Brexit, in the immediate aftermath of last year we had the opportunity to buy shares in housebuilders at extremely low valuation. I mean absurdly cheap. And so we took advantage of that last summer. We already owned them but we added substantially to it. And effectively what’s happened is that these really cheap shares that we bought have performed strongly and housebuilders got to a combined 30% of the portfolio, just under. And it was time to take a little bit of money off the table. They’d gone from being absurdly cheap to just cheap. And they’re still extremely attractive, we hold 15% of the portfolio in housebuilders today.
GL: You still like builders?
TC: Still like builders.
GL: But Barratt you’re a little bit wary of are you?
TC: We reduced the Barratt weight really just because of the focus that they have in the higher end part of the London market. That was a major consideration. It’s a great business, we still like it but I think it’s going to take a year or two for those high-end properties to work their way through. There’s also a consideration of valuation. Redrow and Bellway were cheaper than Barratt at the time that we made that trade.
GL: You’ve taken profits in those builders. Fifteen per cent of the portfolio is in cash, you’re obviously hoping to raise money from new investors. Where are you going to deploy all this money?
TC: Whatever money we raise will go into what’s currently in the portfolio. The portfolio is deserving of further investment. And it can be bigger than it currently is. So that includes the current positions and it includes the cash weight. The thing on the cash weight to bear in mind is a lot of investors end up getting mediocre returns because they are forced to deploy cash at levels where ultimately they’re not earning a good enough return, we think.
GL: So you’ll only invest that money when you see good things to buy.
TC: We’ve a 19-year track record of earning over 10% a year after all fees. We’ve only got that by sticking to our investment hurdle rigidly. So we don’t invest unless we think we can make 15% a year. And that does mean historically, sometimes you hold to a bit of cash. The strategy overall is to be fully invested but to be fully invested where you can earn those sort of returns. And so we’re quite happy, and have been historically, occasionally to sit on a little bit of cash because that’s given us the opportunity to take advantage of the real bargains that have driven the returns over the 19 years.
GL: Tristan, thanks very much telling me about it.
TC: Thank you.