The £30m Aurora Investment Trust had a shareprice return of 73.38% over the three years to April 200...
The £30m Aurora Investment Trust had a shareprice return of 73.38% over the three years to April 2000, more than doubling the sector average of 36.25%. This performance placed the portfolio first out of 11 trusts in the UK Capital Growth sector over that period.
Francis Northbrook, assistant fund manager to James Barstow at Mars Asset Management, said the objective of the trust is to achieve capital appreciation through investing in companies listed on the London Stock Exchange. There is also a marginal exposure to fixed interest investments at 2.25% of the portfolio. He said there is a focus on businesses that have exposure to economies which are growing faster than the UK. For example, 10% of the fund is invested in Irish companies listed in London.
Northbrook said the fund is benchmarked against the All-Share and takes a top down approach to asset allocation in a concentrated portfolio of 35-40 stocks.
Although the top performer in the sector over three years, Aurora was also the most volatile of all trusts, with an annualised standard deviation (ASD) of 34.78, against the sector average of 22.07. The annualised alpha was also high at 10.22, against the sector average of 1.40 and the beta was 1.55, above the sector average of 1.12.
Northbrook said this high volatility was a result of the concentrated portfolio, as well as high exposure to the technology sector. He added: "This trust has been perceived as a technology trust by the market makers, therefore the movement in tech stocks has led to volatility in our share price, which is a feature of smaller funds."
The trust will continue to remain skewed toward technology, which now represents 28% of the portfolio. Other key focuses are telecoms, at 15% and pharmaceuticals, at 8%. Northbrook said: "Despite the correction in technology, we have decided to stay with these stocks. We feel this is really just a shakeout and at the end of the year the quality companies will re-emerge. We are therefore taking a long-term view on this sector."
Exposure has also been built up toward value stocks, like tobacco, which were left behind amid the rally in technology earlier this year.
There is an increased exposure to housebuilders, due to an expected comeback once interest rates peak.
Northbrook added: "We are positive on the banking sector, where we expect there is still room for rationalisation following the NatWest and Royal Bank of Scotland merger."
The trust is negative on manufacturers due to the strong sterling and on retailers, because of deflationary pressures and a lack of pricing power.
Auora is 10% geared, out of a potential 15% and was trading on a discount to NAV of 25.5%, as of 23 May. The strong performance can be attributed to the high exposure to technology and pharmaceuticals, as well as borrowing in euros.
The top 10 holdings in the trust include Geo Interactive Media Group, which represents 10.7%, Vodafone at 10%, Baltimore Technology at 8.9%, Gallagher Group at 8%, Herald Investment Trust Warrants at 8%, Misys at 4%, Cable & Wireless at 4.8%, Gartmore Irish Growth at 4.5%, London Pacific Group at 3.8%, and SmithKline Beecham at 2.5%.
The £40m Liontrust First UK Investment Trust, managed by Jeremy Lang since launch just over three years ago, is ranked third in the sector over three years to April 2000, achieving a share price return of 45.80% against the sector average of 36.25%. The asset value includes the trust's 10% gearing.
The majority of this performance was achieved in the first and third years of that period, with the trust underperforming in the year to April 1999, by returning -8.79%, against the sector average of -5.24%, placing it 10th of the 13 funds over that year.
Lang manages the investment trust, which mirrors the Liontrust First Growth Unit Trust, with a bottom up investment approach based on identifying companies with positive earnings surprises.
He holds between 75 and 80 UK listed companies in the portfolio, after identifying stocks with above average potential to produce positive earnings surprises.
Lang said: "This is achieved by buying stocks which have recently experienced increases in their earnings per share growth expectations and where the fundamentals of the company suggest that these rising expectations are likely to persist."
As a risk control measure, Lang holds nine stocks which account for more than 2% of the All-Share, but if negative on these will underweight them by 0.5% of the index weighting.
He also attempts not to deviate significantly from the sector benchmark as a risk control measure.
Lang said these risk control measures, and the large number of stocks in the portfolio, led to the trust's low volatility over the three-year period to April 2000. The trust had an ASD of 18.10 over the 36 months, which was lower than the 22.07 sector average, and the second lowest of all 11 funds in the sector, after the Legal & General UK Select Trust. At 5.59, the trust's annualised alpha, the second highest in the sector after the Fleming Mid-Cap fund, was higher than the sector average at 1.40. The beta, at 0.90, was below the 1.12 mean.
Lang said the period of underperformance in the year to April 1999 was due to his style not suiting the market at the time, which depressed due to the aftermath of the Asian economic collapse. He said: "The rapid change in the economy was not conducive to selecting companies which had positive earnings surprises. Stocks, which under normal conditions would have produced positive earnings surprises, were disappointing."
The strong performance since launch is due to holding a disproportionate number of stocks with positive earnings surprises, once the market started performing normally.
The portfolio now closely resembles the FTSE All-Share index. The top 10 holdings are Vodafone at 9.1%, BP Amoco at 6.9%, Vodafone certificates
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