The team at the Aurora UK Alpha Investment Trust employs a value-investing approach to UK equities, supported by meticulous research into the interactions between its portfolio companies and their customers.
Aurora’s long-term strategy and depth of research have rewarded investors with share price returns of over 16% year-to-date as the trust benefits from strong returns in key holdings such as Lloyds, Burberry, and Ryanair.
The UK Investor Magazine had the pleasure of speaking with Kartik Kumar, Portfolio Manager of Aurora UK Alpha, earlier this year, who explained the deep research process the Aurora team follows to identify undervalued consumer-facing shares.
Kumar explained a research process focused on gaining a deep understanding of their portfolio companies’ customers through extensive data analysis, site visits, and customer interactions. He explained a situation in which they reduced holdings in a stock after not liking what they saw across a series of store visits.
Aurora spends years researching a company before buying. Interestingly, they only have one Bloomberg terminal in their office. They don’t believe in sitting and watching prices tick and back and forth.
Having spoken with the Aurora on a couple of occasions this year, it’s clear they have a deep-rooted philosophy of investing in companies with extensive and robust competitive advantages that set them apart from the rest of the market.
Kumar provided fascinating insight into their approach to Barratt Redrow when he joined the UK Investor Magazine podcast, pointing out the difficulties smaller housebuilders face in getting anywhere near Barratt Redrow’s scale, affording them a highly defensible position in meeting the UK’s need for new homes.
Each company within the portfolio has a similar thesis.
Outlining their investment case for Lloyds, Aurora says:
“In an industry where cost is one of the primary considerations for borrowers, this is an important competitive advantage. In addition, the regulatory framework in the UK creates significant barriers to effective, at-scale competition with, for example, capital regulations which distinctly favour the larger incumbents.
“This is something which is particularly pronounced in the largest consumer facing area, namely mortgage lending – Lloyds’ most important line of business on the lending side.
“These advantages on both sides of the balance sheet are combined with a business model which is UK, consumer focused – no hard to monitor international business or opaque investment banking – and a culture of conservative lending, all factors which we believe are important in reducing investment risk in a sector which has significant operational and financial leverage – albeit both of these are lower now than in the past.”
Lloyds’ view demonstrates Aurora’s approach to selecting companies in fairly unique positions. Naturally, selecting companies with such deep moats means Aurora’s universe is purposely small. This results in a highly concentrated portfolio.
High concentration brings with it its own benefits and considerations, but the main one is that winners have an outsized impact on portfolio gains compared to peers.
Aurora spends years researching companies and is prepared to hold them for even longer. The trust composition rarely changes, and Aurora goes long periods without buying anything. There is an approach to UK equities in Aurora UK Alpha that is only found in a few investment trusts.
Investors can now gain exposure to Aurora’s technical expertise, philosophy, and portfolio of high-quality UK shares by buying shares at a 10% discount to NAV.