E Boxing Day

Under pressure from shareholders, the fund has now changed its rules, with effect from 2017. There will be no performance fee if the gain is less than 5% higher than the benchmark, the S&P 500. However, in years when PSHZF beats the S&P it will take not 16% of the gain, but 30%, which will not be much compensation for the losses of the past 3 years.

*We have found a sui generis and more generous closed end fund here in London. It was discovered by our Canada reporter, Martin Ferera, but I have nailed down from London that is is accessible to US investors and not subject to the evil Passive Foreign Investment Trust taxes (imposed on behalf of the US fund industry by 'Saint' Ronald Reagan.) This triggered switches to lower-cost exchange-traded funds rather than PFICs.

This latest recommendation is the result of the quirky UK fund buying a beaten down share of UK firm Sports Direct, which last spring was revealed to have treated its part-time warehouse employees unfairly by a newspaper campaign. The fund, called Aurora Investment Trust plc, whose parent Bahamas open-end fund had earlier made out like bandits in Sports Direct, loaded up on Sports Direct when its share took a hit. After a few weeks of further investigative journalism it turned out that Sports Direct's competition was also underpaying warehouse workers, and the pressure came off and the stock rose. Martin thinks this was brilliant.

London-listed Aurora had only just been acquired by the parent group, Phoenix Asset Mgm Partners, from the hapless Mars Asset Mgm Group which had lost money for years. This was a bit over a year ago. Mars was paid with shares not money. Buying the Mars listed fund was intended to provide on-shore individual investors like us with a change to gain from Phoenix's investment smarts. The new managers formally launched only in Jan. 2016 and then did two capital raising efforts to build up the assets under management, AUM. Phoenix has a dozen in-house analysts and uses only their input, not brokerage research. Phoenix was founded in 1998 in Barnes, a middle-class area of west London by Tristan Chapple but its chief manager now is Gary Channon.

Phoenix is a PFIC under US law and was founded by Warren Buffett-fan Chapple and listed in the Bahamas in 1998. It seeks to hold about 12 to 20 holdings (concentrated, like Ackman's fund) and hold for about 5 years (unlike Ackman.) All are London-listed companies, making this a more global investing-style vehicle than Pershing which is very North American. Aurora holdings include UK global firms like GlaxoSmithkline (GSK, which we own), Diageo (DEO) and Tesco (TESO) (both of whose ADRs we have owned in the past.) Pheonix has has about £600 mn under management. It charges zero management fee, only a profit share.

Mart is keen on the Sports Direct move because its East End barrow-boy managers Mike Ashley and Keith Helland beat the profitability levels of Amazon. I am also impressed with how Aurora and Phoenix managed the Brexit vote, going in with about a quarter of their funds in cash. They then bought heavily in a sector that crashed after the vote, real estate, loading up on Barratt Developments and Bellway Homes. They also bought a beaten down bank under government control, Lloyds—but not the Royal Bank of Scotland whose $-denominated non-cumulative preferred shares we dote upon. (They do not trade in London so it is not able to buy them under its prospectus.)

In its near one year of operations, Aurora IT which trades on the pink sheets as AIVTF has gained a bit over 5% while its benchmark, the FTSE all-share index, gained 12%. So this is a moment when the management compensation moves into focus. In years where it beats its benchmark in NAV (which includes dividends and buybacks and for which we do not yet have year-end numbers but they will almost certainly be negative) the managers will eventually get a 33% fee out of the outperformance of NAV. This is paid in shares not pounds sterling to them and then they must maintain their outperformance over the following 3 years to avoid a clawback of those sums to the rest of the shareholders. This is a 'high water mark' in fund terminology. The fee for outperformance is limited to 4% of the total AUM (vs 30% now at Pershing) and the maximum loss of fees for underperformance is 2% of AUM (vs zero at Pershing).

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Chee Hin Teh 3 years ago Member's comment

Thanks for sharing. Merry Christmas