Aurora (ARR ), the Netflix-holding UK equities trust, has staged a strong first half recovery that investors aren’t paying for yet as the unusual value fund looks to make up last year’s losses.  

The £159m investment trust, run by Phoenix Asset Management Partners chief executive Gary Channon, is rare in in not levying an annual management fee, only paying a performance fee when returns beat the FTSE All-Share.

That they did in the six months to 30 June with net asset value (NAV) growing 12.4%, well ahead of the index’s 2.5% gain, although the shares lagged, rising just 4.4% as their price slipped to an 11% discount to NAV in a bearish stock market.

However, a performance fee, which can’t exceed 4% of assets, isn’t being booked until the portfolio has recovered from its 17.4% drop in 2022 and the trust is worth more than it was the last time Channon and team were paid.

Phoenix chief operating officer Steve Tatters said the result was ‘pleasing’ but should be taken in the context of last year’s fall.

Online white goods retailer AO World (AO) was the biggest contributor to returns, up 52% over the six months, while US film and TV streaming giant Netflix – a notable outlier in the UK small-cap fund making up 6.7% of assets – advanced 49%.

Tatters said the budget airline holdings, Easyjet (EZJ) and Ryanair (RYA), ‘benefited from the ongoing recovery in travel’, rising 49% and 41%, respectively. Global supplier to the paper and pulp industry RHI Magnesita (RHIM) rose 24% after a partial tender offer for 20% of its shares.

The biggest detractor was the newest holding, Hotel Chocolat (HOTC), which Channon added to the fund in the first quarter. The luxury chocolate maker saw its shares drop nearly 30% in the first half of the year, following a tough 2022 that saw it close its Japanese and US businesses, although it later went on to find a new Japanese partner for its joint venture.

Channon (above), a former bond trader inspired by a book about legendary value investor Warren Buffett, said he had considered investing when Hotel Chocolat floated in 2016 but the ‘price was above our limit’. Last year’s drop, which Channon said was an ‘over-reaction’ allowed him to pick up shares at a discounted price.

Channon has ‘modelled out a range of potential scenarios’ to determine the intrinsic value of the stock. ‘A central scenario values the UK business alone at 350p per share,’ he said. ‘The bottom of that intrinsic value range is around 200p per share. We invested at 135p, which based on the central case, would result in an upside to intrinsic value of 160%.’

Another holding the manager believes is vastly undervalued, is funeral services group Dignity. Dignity was taken private last year via a joint venture between Direct Line founder Peter Wood and Castelnau (CGL ), a listed portfolio of special situations that Channon also runs.

Aurora retained an interest in Dignity via Castelnau, which is the third largest holding in the fund, making up just over 14% of the portfolio.

Channon said Aurora can ‘now talk more openly about valuations’, and Phoenix is valuing the business at £30 per share, versus the 550p acquisition price.

‘This is not to underplay the huge amount of work to be done in order to deliver the performance that earns that valuation,’ he said.

In the medium-term Dignity’s new owners will look to release some value being created in the group, and Castelnau will produce an independently-verified monthly valuation of the company.

The manager said the acquisition of Dignity was proof the fund was living by Buffett’s rule that states ‘when it’s raining gold put out a bucket not a thimble’.

‘In 1999, in our first full year [running the Cayman Islands-based Phoenix UK fund], we lagged the market by 25%, and value investing felt like a lonely place to be as everyone was enjoying bumper returns in the market,’ said Channon.

‘What we learned then and have again and again, is that in the end value wins, it can be a long way, but ultimately value shines through.’

Other value stocks, such as Lloyds Bank (LLOY), a 4.7% position, and housebuilder Barratt Developments (BDEV), a 15.1% weighting, feature in the top 10. The biggest holding in the high conviction portfolio is Frasers Group (FRAS), the former Sports Direct, a long-standing stake that makes up nearly 23% of assets.

Aurora’s three-year performance in NAV terms bears out Channon’s faith in his approach, with the trust’s 52.8% underlying return at 26 September beating the 40.8% from the All-Share and the 37.8% average of closed-end funds in the UK All Companies sector. However, having fallen to a discount, the shares have done less well, up 36.9%.

It’s a similar story since Channon took over what was the UK’s worst-performing fund from Mars Asset Management in January 2016. Up to the end of August, it achieved a total 60% return on net assets, beating the 56.7% of the All-Share, but with shareholders receiving only 46.3% on their stakes. The share price discount means it is not yet raining gold for Aurora investors, although they have reason to be optimistic.