Aurora UK Alpha (ARR ) manager Gary Channon describes 2024 as a year of ‘fundamental progress’, even though disappointing performance figures resulted in him returning last year’s performance fee.

The £279m portfolio of UK special situations, which significantly boosted its size last year after merging with Artemis UK Alpha, suffered a tough 12 months in terms of performance. The net asset value (NAV) slid 4.3% and the shares lost 5.5% over the year to the end of December, while its benchmark FTSE All-Share rose 9.5%, according to annual results released last week. 

Phoenix Asset Management founder and chief executive Channon also missed out on a performance fee for the year and was forced to return the performance fee the firm received last year as part of a three-year clawback clause.

Aurora is rare in not paying an annual management fee to its fund manager. Instead, a fee is only paid if performance beats the FTSE All-Share.

Phoenix was awarded a fee of £560,903 last year, paid entirely in shares, for the first time since 2021. However, when the clawback test was conducted at the end of 2024, the poor performance over the year meant Phoenix had to return all the shares it had been awarded.

Performance lag

However, Channon’s glass remains half-full. He said ‘to call it a year of good progress might sound delusional’ but he argued his concentrated portfolio made ‘fundamental progress’.

He said value investing inevitably means there is ‘a disconnect between the work we do and the results we deliver’. It creates a ‘peculiar conundrum’, where the fundamental performance of the portfolio bears little resemblance to the numbers in the results.

Channon admitted that over a longer five-year period, investors may be disappointed by a fall in the share price between December 2019 and December 2024 from 237p to 227p. However, he said over the same period the ‘intrinsic value of the portfolio’ had grown from 420p to 650p.

‘The amount of upside to that level has increased from 60% to 171% and that is what we often refer to as the stretched elastic between price and value,’ he said.

‘Intrinsic value is our North Star for a reason, it anchors us on fundamentals and allows us to avoid or take advantage of the noise.’

The largest detractor over the year was retailer and Sports Direct owner Frasers (FRAS), followed by housebuilder Barratt Redrow (BTRW).

Channon said the housebuilding sector had to navigate higher interest rates and affordability pressures over the year. This includes Bellway (BWY), which showed ‘resilience despite lower year-on-year completions’.

A positive contribution came from Castelnau (CGL ), which is another listed investment company investing in special situations that is also run by Channon. It is currently the largest position in Aurora at 16%.

Castelnau’s largest holding is Dignity, the funeral services giant Channon helped take private. A restructuring of the balance sheet at Dignity led to a 35% uplift in Castelnau’s NAV in July, which propelled Aurora’s NAV by 9.1% last July.

Other contributions came from Netflix, where growth was driven by successful paid sharing initiatives and subscriber numbers significantly exceeded expectations.

Channon said his portfolio now trades at a ‘significant discount to intrinsic value’. 

He remains ‘optimistic about what the value in the fund means for future returns’.

‘Back to that problem with value investing, I have no idea when it will show up in price but I have a high degree of confidence that it will,’ he concluded.

Over the past three years, Aurora UK Alpha’s shares are up 4.6%. The trust currently trades at a 9.4% discount to NAV.