LEI: 2138007OUWIZFMAGO575
Aurora
Investment Trust plc
(the
"Company")
Changes to investment
objective and performance fee methodology
Eight years into the Company's
management by Phoenix Asset Management
Partners Limited (the "Investment Manager"), the Company has delivered absolute performance of 96.6% and
relative outperformance, against the FTSE All-Share Index, of
10.4%.
The directors of the Company (the
"Board") would like to
update shareholders on two changes:
Investment Objective
The Board has decided that the wording of the Company's published investment
objective should be clarified for consistency with the Company's
investment policy and dividend policy. The existing wording
refers to providing shareholders with "long-term
returns through capital and income growth" and the Board believes
it would be clearer if the words within the quotation marks were
replaced with "long-term total returns". While the Board
recognises that "long term total returns" are synonymous with
"capital and income growth", the Board considers "long term total
returns" to be more accurate in the Company's context, noting in
particular that the Company does not have a fixed dividend policy
or target and the Board's policy is to seek to distribute
substantially all of the net revenue arising from the investment
portfolio, regardless of whether such amount is higher or lower
than in previous years.
Accordingly, with immediate effect,
the Company's investment objective is changed to:
To
provide shareholders with long-term total
returns by investing predominantly in a portfolio of UK listed
companies.
Please note that there is no change
to the Company's investment policy or the way in which the
investment portfolio is managed. Moreover, there is no change to
the dividend policy and the Board expects to continue to
distribute substantially all of the net revenue
arising from the investment portfolio.
Performance fee methodology
Summary
A key aspect of the Company is its
clawback, where performance fees paid to the Investment Manager,
can only be retained by the Investment Manager if the Company does
not underperform in the subsequent three year lock-in period.
Currently if performance fees are clawed back, the high water mark
(or level at which future performance fees are payable) does not
get adjusted, meaning the Investment Manager must re-earn
performance which has already been generated. The Board believes
this approach does not reflect the parties' intention that the
Investment Manager should be rewarded for generating cumulative
long-term outperformance. Therefore with effect from close of
business on 13 June 2024, the performance fee methodology has been
adjusted to allow the Investment Manager to earn a performance fee
in respect of any outperformance that has been clawed back, where
it is subsequently re-generated by the Investment Manager. The
Board believes that the performance fee, adjusted in this manner,
will properly incentivise the Investment Manager for long-term
outperformance, consistent with the expectations of
shareholders.
Further details regarding the adjustment to the performance
fee methodology
The Company's fee structure is unique
in that the Investment Manager, does not earn an annual management
fee but is entitled to receive a performance fee (the "Performance Fee") equal to one third of
the outperformance of the Company's net asset value ("NAV") total return (the "Fund Return") over the percentage
return of the FTSE All Share Total Return Index (the "Benchmark Return") for each financial year (or, where no performance fee is
payable in respect of a financial year, in the period since a
performance fee was last payable) (the "Performance Period"). The Performance
Fee is capped at 4 per cent. per annum of the end of year NAV in
the event that the NAV per share has increased in absolute terms
over the period, and 2 per cent. in the event that the NAV per
share has decreased in absolute terms over the period (the
"Fee Cap"). Excess
outperformance is carried forward and only paid if the Company
outperforms, and the Fee Cap is not exceeded, in subsequent years.
The Performance Fee is payable in ordinary shares of the Company
which must be retained by the Investment Manager for three years
(the "Lock-In Period"). In
the event that the Fund Return is less than the Benchmark Return at
the end of any Lock-In Period, the Company is entitled to claw back
the Performance Fee and require some or all of the ordinary shares
received by the Investment Manager in satisfaction of the payment
of the Performance Fee to be returned to the Company (the
"Clawback").
Following a review of the clawback
element of the performance fee methodology, it became apparent that
the Clawback may, in certain circumstances, operate in a manner
which is inconsistent with the parties' original intention that the
Investment Manager would earn one-third of outperformance since
inception.
While any performance fee with a
clawback will generate fees which are not directly linear to the
level of outperformance, this is particularly true in the Company's
case because the mechanics of the Clawback do not allow for an
adjustment to the high-water mark (being the level of
outperformance which must be achieved in order for a Performance
Fee to become payable) to reflect the impact of the Clawback. This
means that, even if the Company's long-term performance improves
and the Fund Return returns to outperformance over the Benchmark
Return, there is no mechanism for the Investment Manager to be
rewarded for long-term outperformance lost as a result of a
Clawback.
In order to allow the Investment
Manager to earn a cumulative long-term performance fee which is
consistent with the parties' stated intention of generating
cumulative long-term outperformance, it is proposed that the
clawback mechanics be amended to provide that the high water mark
for Performance Periods which arise subsequent to a Clawback will
be adjusted to take account of the level of outperformance which
was lost as a result of the exercise of such
Clawback.
In respect of the Clawback which
occurred on 31 December 2022, the high water mark has today been
adjusted to reflect the outperformance related to that Clawback.
Adjusting the high water mark in this manner does not crystallise a
fee today and does not give rise to any immediate adjustment to the
Company's NAV but will reduce the level of outperformance that will
need to be generated during the remainder of the current
Performance Period in order to achieve a Performance Fee by an
amount equal to the performance related to the previous Clawback.
Such Performance Fee will only become payable if and when the Fund
Return exceeds the Benchmark Return at the end of a calendar
year.
In respect of any future Clawbacks,
an adjustment will be made to the high-water mark at the same time
as the Clawback occurs and daily accruals will be made to ensure
that the NAV is adjusted on a daily basis to take account of any
Performance Fees which may become payable in the event that
performance exceeds the adjusted high water mark. Such accruals
will be made without distorting accruals to be made in respect of
any Clawbacks for previous Performance Periods.
Any Performance Fee paid on the basis
of an adjusted high water mark (or otherwise) will continue to be
paid in ordinary shares of the Company that will remain subject to
a Lock-In Period and may be clawed back if there is
underperformance during that Lock-In Period. Moreover, any
Performance Fee paid on the basis of an adjusted high water mark
(or otherwise) will be subject to the Fee Cap (which will continue
to apply notwithstanding the adjustment to the mechanics of the
Clawback).
Under the Listing Rules of the FCA,
the Investment Manager is a related party of the Company. As the
adjustment to the performance fee mechanics will reduce the level of outperformance that will need to be
generated in order to achieve a Performance Fee in the current
Performance Period and in any future Performance Periods which are
subsequent to a Clawback, there is a
financial benefit to the Investment Manager which has been assessed
in accordance with Chapter 11 of the Listing Rules. The adjustment
is a smaller related party transaction as defined in LR
11.1.10R.
Contact:
Paul Griggs
Frostrow Capital LLP
Company Secretary
Tel: 020 3709 8733