After 20 years of management, the total return given by Phoenix UK Fund, managed by Gary Channon, has been 563% which is equal to 9.9% annualised. Although it is not an amazing return compared with other investors, the fund invests only in the UK market, whose annualised total return has been 5.4% during this period (FTSE All-Share Index total return). That is, £1,000 invested in 1998 in the fund would be £6,600 today, while the same amount invested in the index would be £2,900. Therefore, on a relative basis, the Phoenix UK Fund has done really well, beating the market by 4.5% annualised for 20 years.
Source: A Phoenix Primer, Phoenix Asset Management
The Fund is domiciled in the Bahamas and is only available to institutional investors and high net worth individuals, with a minimum initial subscription of £100,000. However, since January 2016, Phoenix Asset Management also manages Aurora Investment Trust, with the same strategy and investment style used for the Phoenix UK Fund, being available for retail investors as it is listed in the stock market.
One of the main characteristics of the fund is its concentration: they only hold between 12 and 20 stocks. Buffett said that “risk comes from not knowing what you’re doing”, and that is precisely the risk they try to avoid through a deep understanding of each company they hold. As every value investor, Phoenix AM does not consider volatility to be a risk, but rather an opportunity to buy good companies at cheap prices. In line with Buffett´s statement, Phoenix AM says that “we reduce risk through knowledge and focus helps us to do that”. In fact, in these 20 years, the fund has yielded a negative return only in three periods, beating the market in each of these, which implies that the maximum drawdown of the fund has been less than the index on a year-on-year basis, despite the concentration.
The first investment goal is, again, a consequence of one of Buffett´s most famous investment aphorisms: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1”. The main strategy to avoid permanent loss of capital is not overpaying, and Phoenix never pays more than half of their estimated intrinsic value. On top of that, they never pay more than the worst case scenario valuation. Therefore, “if things go wrong we want to make sure we get our money back”.
The investment philosophy consists of buying great companies, managed by competent and honest people, with high returns on capital at low prices. Their strategy is to buy and hold, with patience as one of its virtues. Out of the 10 stocks the portfolio included in February 2016 (after Phoenix started managing Aurora Investment Trust), 8 still among the first 10 positions in April 2018.
Another interesting fact about Phoenix, particularly about Aurora Investment Trust, is that the management fee is 0%. Yes, no management fee at all. The only fee that Phoenix AM charges the trust is a performance fee, paid in Aurora shares, but only for the 3-years outperformance with respect to the FTSE All Share Index total return, which amounts to one third. On top of that, the fee is capped at 4% of net assets in a bull market and 2% in a bearish market. Thus, managers have no incentives to track the index and it obliges them to think independently, as giving the index return is not going to make them earn any money.
As of April 2018, the portfolio of the Aurora Investment Trust includes 15 companies, with Tesco, Lloyds and Sports Direct as the main holdings (weighing 30% in total). The top 5 companies amount to 46.5% of the total portfolio. The cash balance is 13.6% and there are only two holdings with less than 2% of the portfolio.
In summary, Phoenix Asset Management has beaten the market in the last 20 years, thinking out of the box and applying common sense to its investment decisions. Additionally, thanks to the fee structure, there is an intrinsic alignment of interests between the managers and the investors. Plus, the directors and employees of Phoenix Asset Management own more than 10% of Phoenix UK Funds. Definitely, a good trust to have exposure to the UK for the long run.