Aurora Investment Trust plc

Annual Report 31 December 2021

Company No. 03300814

Annual Report Contents 3

Contents

Strategic

Report

Financial and Performance Highlights 5

Chairman’s Statement 6

Investment Policy and Results

9

Top Holdings

13

Portfolio Analysis

14

Statement from the CIO of the Investment Manager 15

Investment Management Review and Outlook

17

Phoenix UK Fund Track Record 20

Report under Section 172 of the Companies Act 2006

22

Other Strategic Report Information

26

Governance

Directors, Investment Manager and Advisers 31

Directors’ Report 32

Corporate Governance Statement

40

Directors’ Remuneration Report

50

Statement of Directors’ Responsibilities 55

Audit Committee Report

57

Independent Auditor’s Report

60

Financials

Statement of Comprehensive Income 73

Statement of Financial Position

74

Statement of Changes in Equity 75

Cash Flow Statement

77

Notes to the Financial Statements 78

Alternative Performance Measures

99

Glossary 101

Notice of Meeting 103

4 Annual Report Strategic Report

Strategic Report

4 Annual Report Strategic Report

Annual Report Strategic Report 5

Strategic Report

Objective

To provide Shareholders with long-term

returns through capital and income

growth by investing predominantly in

aportfolio of UK listed companies.

Policy

Phoenix Asset Management Partners

Limited (Phoenix) was appointed

Investment Manager on 28 January 2016.

Phoenix currently seeks to achieve the

Objective by investing, primarily, in a

portfolio of UK listed equities.

The portfolio will remain relatively

concentrated. The exact number of

individual holdings will vary over time but

typically the portfolio will consist of 15

to20 holdings.

The Investment Policy of the

Company can be found on page 9.

Benchmark

Performance is benchmarked against the

FTSE All-Share Index (total return),

representing the overall UK market.

Dividend

The Board proposes to pay a ﬁnal

dividend of 1.84p per Ordinary Share

(2020: 0.55p) to be paid on 1 July 2022 to

Shareholders who appear on the register

as at 10 June 2022, with an ex-dividend

date of 9 June 2022.

Annual General Meeting

The AGM of the Company will be held at

Chartered Accountants Hall,

OneMoorgate Place, London EC2R 6EA

on 28June 2022 at 2.00 pm. If you are

unable to attend in person you have the

option of attending via webinar, where

you will have the opportunity to hear a

presentation from the Investment

Manager and ask questions. Instructions

on how to attend the webinar can be

found on the Company’s website at

https://www.aurorainvestmenttrust.com/n

ews/regulatory/56/ and in the Notes to

the notice of AGM.

Financial and

Performance

Highlights

The chart above shows the Company’s NAV performance (total return) compared to the FTSE All-Share Index

(total return) since Phoenix became the Investment Manager.

Performance

FTSE All-Share Index

Aurora Net asset value (NAV) per Ordinary Share

90

100

110

120

130

140

150

160

170

31/12/21

30/09/21

30/06/21

31/03/21

31/12/20

30/09/20

30/06/20

31/03/20

31/12/19

30/09/19

28/06/19

29/03/19

31/12/18

28/09/18

29/06/18

29/03/18

29/12/17

29/09/17

30/06/17

31/03/17

30/12/16

30/09/16

30/06/16

31/03/16

28/01/16

6 Annual Report Strategic Report

Performance Review

The Company’s daily published unaudited Net Asset Value (‘NAV’) for the year ended

December 2021 rose by 19.1% and the share price rose by 13.5% on a total return

basis, versus the benchmark, FTSE All-Share Index (total return) which increased by

18.3%. This was the third year in succession of outperformance versus the market.

• The year was again dominated by COVID-19, and the stop-start nature of the

transition back to normality post the pandemic. There are signiﬁcant elements of

the portfolio such as the low-cost airlines, which will beneﬁt from a full return to

normality, which Phoenix expects to be a source of positive performance in the

fullness of time.

• As announced on 3 September 2021 and as we have previously discussed,

Castelnau Group Limited (“Castelnau”) was listed on the Specialist Fund segment

of the London Stock Exchange in October 2021. As part of the transaction, the

Company acquired shares in Castelnau in exchange for a proportion of the Company’s

holding in Dignity PLC, Hornby PLC and Phoenix SG. Since listing Castelnau has

performed well. Further details of Castelnau’s performance can be found in

Castelnau’s fourth quarterly report of 2021 which can be found on their website at:

www.castelnaugroup.com/application/ﬁles/1416/4382/9198/Castelnau_Group_Ltd_

Q4_2021.pdf.

• The major contributor to performance in 2021 was a hedge against rising inﬂation

using options on the short sterling future contract. In early 2021, Phoenix became

concerned at the potential impact of rapidly rising interest rates on intrinsic value

of the portfolio holdings. The hedge was implemented in the summer, and in the

fourth quarter of 2021, as concerns over inﬂation increased signiﬁcantly, strong

performance was generated from the hedge.

• The outperformance in 2021 ensured that the Company has again added to

previous NAV returns in excess of its benchmark. Since Phoenix took over the

management of the Company in January 2016, the Company’s NAV and share

price have grown by 75.9% and 66.1% respectively to 31 December 2021, versus

a benchmark rise of 59.2%.

• One of the unique features of the Investment Management Agreement with

Phoenix, and one that creates signiﬁcant shareholder alignment, is that Phoenix

earns no management fee other than an annual performance fee, equal to

one-third of NAV per share total return in excess of the FTSE All-Share Index (total

return).

• In 2021 a performance fee was earned by Phoenix. This fee was received in shares

in the Company, which Phoenix cannot sell for three years, and there is a clawback

mechanism in place through which, if the outperformance which earned the shares

were to disappear on the third anniversary of their award, the shares would either

be cancelled or, in limited circumstances and following consultation with Phoenix,

the Company would have the discretion to either (i) reduce the number of shares

that are clawed back or (ii) extend the lock-in period for up to a further two years.

Chairman’s

Statement

Lord Flight

Chairman

April 2022

Annual Report Strategic Report 7

Strategic Report

• The Company’s share price rose by 13.5% over the year ended 31 December 2021.

In the ﬁrst half of 2021, NAV and share price traded around parity with share

issuance occurring in June, but in the second half of the year the Company’s share

price fell to a discount to NAV. During the year ended 31 December 2021, the

Company’s shares traded between a premium of 4.3% and discount of 11.4% to

NAV, with an average discount of 3.2%. As at 31 December 2021, the discount to

NAV was 7.6%. The Board, along with its advisors and the investment manager,

monitor any discount closely. As at the end of March 2022 the Company’s shares

were trading at a slight premium of 0.15%. The Board will consider buying back

shares in the Company if a discount becomes persistent. Phoenix took the

opportunity to purchase £5 million of shares in the Company when the NAV traded

at a discount and continues to promote the Company proactively together with

Liberum, the Company’s broker and with Frostrow Capital, its distribution advisor.

The Investment Manager

2021 was the sixth year of Phoenix’s management of the Company’s portfolio, which

began with their appointment as Investment Manager in January 2016, and it is

positive that 2021 brought continued outperformance versus the FTSE All-Share index

(total return).

Phoenix again employed a focused, patient investment approach during another

year of signiﬁcant market stress. The implementation of the hedge against inﬂation

was effective in preserving value in the underlying equity portfolio.

Growth of the Company

Growing the Company remains a key objective of the Board. Market capitalisation rose

from £162 million in January 2021, to ﬁnish the year at £179 million. This rise,

however, came almost solely from share price appreciation and not from new share

issuance.

The Board, along with Phoenix, is committed to broadening the proﬁle of the

Company and has agreed a programme of activity with Frostrow Capital and Liberum,

the Company’s distributor adviser and broker, which will include an increased number

of investor meetings, conference presentations and engagement with platform

providers.

It remains an objective of both the Board and the Investment Manager to increase

the size of Aurora to £250 million over the course of the next two to three years.

Annual General Meeting (“AGM”)

The AGM of the Company will be held at Chartered Accountants Hall, One Moorgate

Place, London EC2R 6EA on 28 June 2022 at 2.00 pm. If you are unable to attend in

person you have the option of attending via webinar, where you will have the

opportunity to hear a presentation from the Investment Manager and ask questions.

Instructions on how to attend the webinar can be found on the Company’s website at

https://www.aurorainvestmenttrust.com/news/regulatory/56/ and in the Notes to the

notice of AGM.

Continuation Vote

In accordance with the articles, the Company will hold a continuation vote at the next

AGM on 28 June 2022. This provides an opportunity for the Company’s shareholders

to vote, once every three years, on whether the Company should continue to operate,

or otherwise be wound-up and cash returned to shareholders. Taking account of the

Company’s track record over the past three years the Board strongly recommends that

shareholders vote in favour of the Company’s continuation.

8 Annual Report Strategic Report

The Board

After 10 years serving together on the Board of Aurora, James Nelson and I will be

retiring at the forthcoming AGM. It has been a great pleasure for me to have served

the Company and played a part in its development over these years. On behalf of the

Board, I thank James Nelson for his particular support and contribution over these

years.

At the AGM, Lucy Walker will be taking over from me as Chair of Aurora. I know

the Board will be in capable hands and I wish Lucy every success for the future. I trust

she will enjoy the role as much as I have done.

The Board continues its search for additional Board members and will update the

market in due course.

Aggregate Directors’ Fees

At the forthcoming AGM an ordinary resolution will be put to shareholder vote to

increase the maximum aggregate Directors’ fees from £200,000 to £250,000. This

willallow greater ﬂexibility to retain and attract Board members with suitable skills

andexperience by offering competitive remuneration.

Dividend

The Board proposes to pay a ﬁnal dividend of 1.84p (2020: 0.55p) per Ordinary Share,

to be paid on 1 July 2022 to Shareholders who appear on the register as at 10 June

2022. The ex-dividend date is 9 June 2022. This dividend will be proposed at the

forthcoming AGM to be held on 28 June 2022. The Company’s dividend policy, which

is to distribute substantially all net revenue proceeds, remains unchanged and can be

found on page 9 of this Annual Report.

Outlook and Reflection

Since the year end the world has been shocked by Russia’s invasion of Ukraine.

Thishas further exacerbated inﬂation as utility bills look set to rise even higher than

initially expected and concern increases that the conﬂict will continue. This has

impacted stock markets around the world. However, since the year end, the

Company’s performance has been strong, due to the signiﬁcant gains achieved from

its hedge against rising interest rates discussed above. This hedge has now been fully

realised. We continue to believe that the Company will maintain its relative

outperformance over the longer term.

As this is the last time I shall be writing to you, I bid you farewell. It has been a

privilege to serve as Chairman. In the years that James and I have served the Board

we have seen many changes, one of the most signiﬁcant has been the appointment of

Phoenix Asset Management as the Company’s Investment Manager in 2016. Since

then, the Company has performed well and we both feel we will be leaving the

Company in capable hands with Lucy at the helm and Phoenix Asset Management

making impressive returns on behalf of the Company’s shareholders.

Lord Flight

Chairman

29 April 2022

Annual Report Strategic Report 9

Strategic Report

At a General Meeting held on 28 September 2021 the following new investment

policy was approved:

The Company seeks to achieve its investment objective by investing predominantly

in a portfolio of UK listed companies. The Company may from time to time also invest

in companies listed outside the UK and unlisted securities. The investment policy is

subject to the following restrictions, all of which are at the time of investment:

• The maximum permitted investment in companies listed outside the UK at cost

price is 20% of the Company’s gross assets.

• The maximum permitted investment in unlisted securities at cost price is 10% of

the Company’s gross assets.

• There are no pre-deﬁned maximum or minimum sector exposure levels but these

sector exposures are reported to and monitored by the Board in order to ensure

that adequate diversiﬁcation is achieved.

• The Company’s policy is not to invest more than 15% of its gross assets in any one

underlying issuer (measured at the time of investment) including in respect of any

indirect exposure through Castelnau Group Limited.

• The Company may from time to time invest in other UK listed investment

companies, but the Company will not invest more than 10% in aggregate of the

gross assets of the Company in other listed closed-ended investment funds.

• Save for Castelnau Group Limited, the Company will not invest in any other fund

managed by the Investment Manager.

While there is a comparable index for the purposes of measuring performance

over material periods, no attention is paid to the composition of this index when

constructing the portfolio and the composition of the portfolio is likely to vary

substantially from that of the index. The portfolio will be relatively concentrated. The

exact number of individual holdings will vary over time but typically the portfolio will

consist of holdings in 15 to 20 companies. The Company may use derivatives and

similar instruments for the purposes of capital preservation.

The Company does not currently intend to use gearing. However, if the Board did

decide to utilise gearing the aggregate borrowings of the company would be restricted

to 30% of the aggregate of the paid-up nominal capital plus the capital and revenue

reserves.

Any material change to the investment policy of the Company will only be made

with the approval of Shareholders at a general meeting. In the event of a breach of the

Company’s investment policy, the Directors will announce through a Regulatory

Information Service the actions which will be taken to rectify the breach.

Dividend Policy

The investment policy does not include any ﬁxed dividend policy. But the Board will

distribute substantially all of the net revenue arising from the investment portfolio.

Accordingly, the Company is expected to continue to pay an annual dividend, but this

could be lower than the level of recent dividends and may vary each year.

Investment

policy and

results

10 Annual Report Strategic Report

Borrowing Policy

The Company is not prohibited from incurring borrowings for working capital purposes,

however the Board has no current intention to utilise borrowings. Whilst the use of

borrowings should enhance the total return on the Ordinary Shares where the return

on the Company’s underlying assets is rising and exceeds the cost of borrowing, it will

have the opposite effect where the underlying return is falling, further reducing the

total return on the Ordinary Shares. As a result, the use of borrowings by the

Company may increase the volatility of the NAV per Ordinary Share.

The Company has a policy not to invest more than 10% of its gross assets in other

UK listed investment companies. As a consequence of its investments, the Company

may therefore itself be indirectly exposed to gearing through the borrowings from

time to time of these other investment companies.

Objectives and Key Performance Indicators (KPIs)

The Company’s principal investment objective is to achieve capital and income growth.

The Board measures the Company’s success in attaining its objectives by reference to

KPIs as follows:

a. To make an absolute total return for Shareholders on a long-term basis.

b. The Company’s Benchmark is the FTSE All-Share Index (total return), against which

the NAV total return is compared. After achieving the goal of making absolute

returns for Shareholders, the next aim is to provide a better return from the

portfolio than from the market as measured by the Benchmark.

c. The Company seeks to ensure that the operating expenses of running the

Company as a proportion of NAV (the Ongoing Charges Ratio) are kept to the

minimum possible.

d. The discount/premium to NAV at which the Company’s Shares trade is also closely

monitored in order to maintain Shareholder value.

The Chairman’s Statement on pages 6 to 8 incorporates a review of the highlights

during the year.

The Investment Manager’s Report on pages 17 to 19 gives details on investments

made during the year and how performance has been achieved.

Performance

The Investment Manager, Phoenix Asset Management Partners Limited (‘Phoenix’),

which is regulated by the FCA. The Chief Investment Ofﬁcer of Phoenix is Gary

Channon. Phoenix reports in detail upon the Company’s activities in the Investment

Management Report and Outlook on pages 17 to 19.

Under the Investment Management Agreement, no regular management fees are

payable. A performance fee is payable to the Investment Manager only if the

benchmark is outperformed.

Annual Report Strategic Report 11

Strategic Report

The benchmark is the FTSE All-Share Index (total return). The Company’s

performance since Phoenix was appointed is shown below:

Cumulative

since Year to Year to

28 January 2016 31 December 31 December

to 31 December 2021 2021 2020

% % %

NAV per Ordinary Share (total return)

1

+75.9 +19.1 –5.3

Ordinary Share price (total return)

1

+66.1 +13.5 –10.0

Benchmark (total return) +59.2 +18.3 –9.8

The Ongoing Charge Ratio was as follows:

Year to Year to

31 December 31 December

2021 2020

% %

Ongoing Charge Ratio

1

0.49 0.45

1

These are Alternative Performance Measures (“APMs”).

Revenue Result and Dividend

The Company’s revenue proﬁt after tax for the year amounted to £1,413,000 (2020:

£599,000). The Board is today proposing the payment of a ﬁnal dividend of 1.84p per

Ordinary Share (2020: 0.55p per Ordinary Share). This dividend will be paid on 1 July

2022 to Shareholders on the register as at 10 June 2022; the Ordinary Shares will be

marked ex-dividend on 9 June 2022. In accordance with International Financial

Reporting Standards this dividend is not reﬂected in the ﬁnancial statements for the

year ended 31 December 2021.

Discount to NAV

The discount of the Ordinary Share price to NAV per Ordinary Share is closely

monitored by the Board. The Ordinary Share price closed at a 7.6% discount to the

NAV per Ordinary Share as at 31 December 2021 (2020: 4.6%discount). During the

year ended 31 December 2021, the Company’s shares traded at between a premium

of 4.3% and discount of 11.4% to NAV, with an average discount of 3.2%.

Control of the level of ongoing charges

The Board monitors the Company’s operating costs carefully. Based on the Company’s

average net assets for the year ended 31 December 2021, the Company’s ongoing

charges ﬁgure calculated in accordance with the Association of Investment

Companies (AIC) methodology was 0.49% (2020: 0.45%). As the size of the Company

grows, the Board will manage expenses with the intention of keeping costs down and

reducing the ongoing charge ratio accordingly.

12 Annual Report Strategic Report

Five Year Summary

The following data are all expressed as pence per Ordinary Share. NAV ﬁgures are all

calculated at bid prices.

Published Net Dividend per

Asset Value per Ordinary Share in Ordinary Share

Ordinary Share respective year price (mid-market)

Year (pence)

1

(pence) (pence)

Year ended 31 December 2017 205.72 2.75 208.00

Year ended 31 December 2018 182.24 4.00 183.00

Year ended 31 December 2019 232.07 4.50 237.00

Year ended 31 December 2020 213.39 0.55 207.00

Year ended 31 December 2021 253.49

1

1.84 234.50

1

This is an APM, calculation can be found on page 99.

Annual Report Strategic Report 13

Strategic Report

Date Average

Holding Percentage of first cost per Share Market

Company Sector in Company Valuation of net assets purchase share* price capitalisation

£’000 % £

Frasers Group plc Retail 5,114,011 39,429 20.3 Jan-16 3.07 £7.71 £3.9bn

Castelnau Group Limited Financial

#

24,563,184 25,300 13.0 Oct-21 1.00 £1.03 £194m

Barratt Developments plc Construction 3,242,412 24,253 12.5 Nov-18 5.03 £7.48 £7.6bn

easyJet Plc Leisure 3,565,368 19,823 10.2 Sep-16 6.90 £5.56 £4.2bn

Options – ICE 3Mth SONIA OPTSep22 Financial 47,000 19,388 10.0 Jul-21 0.03 £0.33 n/a

Ryanair Holdings plc Leisure 928,600 11,911 6.1 May-19 8.34 €15.25 €17.3bn

Lloyds Banking Group plc Financial 19,618,000 9,377 4.8 Jan-16 0.62 £0.48 £34.0bn

Randall & Quilter Investment

Holdings Limited Insurance 5,211,225 8,963 4.6 Jan-16 1.08 £1.72 £473m

Bellway plc Construction 232,440 7,754 4.0 Jan-16 20.39 £33.36 £4.1bn

RHI Magnesita N.V. Materials 225,320 7,449 3.8 Jan-20 34.65 £33.06 £1.6bn

Other holdings (less than 3%) n/a n/a 12,990 6.8 n/a n/a

Total holdings

186,637 96.1

Other current assets and

7,556 3.9

liabilities

Net assets

194,193 100.0

* Average net cost including sales.

# Castelnau is a multi-sector ﬁnancial holding company.

The Company held over 3% of the issued share capital of the following:

Percentage

of share

Holding in capital of

Company Sector Company Company (%)

Castelnau Group Limited Financial 24,563,184 13.4 Castelnau Group Limited is also managed by Phoenix Asset

Management. The value of Castelnau Group Limited is excluded

from the Company’s net assets when calculating performance

fees earned by Phoenix Asset Management to avoid double

charging.

Top Holdings

as at 31 December 2021

14 Annual Report Strategic Report

Portfolio Analysis

as at 31 December 2021

Percentage of net

Sector Assets

%

Financial* 29.7

Retail 20.3

Leisure 17.9

Construction 17.6

Insurance 4.6

Materials 3.8

Food & Beverage 1. 0

Industrials 0.7

Pharmaceuticals 0.5

Other current assets and liabilities 3.9

Total 100.0

* Castelnau is included in Financial’s classiﬁcation as it is a multi-sector ﬁnancial holding company.

Other current assets

and liabilities

Pharmaceuticals

Industrials

Food & Beverage

Materials

Financial*

Retail

Leisure

Constructionl

Insurance

29.7

20.3

17.9

17.6

4.6

3.9

3.8

1.0

0.7

0.5

Annual Report Strategic Report 15

Strategic Report

Dear Shareholder,

Last year was one of gratiﬁcation postponed for us, as the pandemic carried on and

lockdown restrictions further damaged a number of the businesses in the portfolio,

which itself remains well positioned for the end of restrictions and a resumption of

normal economic life. This was particularly acute for our airline holdings.

The pandemic has proved to be another pullback from which our portfolio

recovered its value and set out a new high (NAV wise); this one took 476 calendar

days. In the 24 years that Phoenix has been managing money we have experienced

6signiﬁcant pullbacks of 24% and more. In all prior occasions, the reversal from old

peak to new peak has always been within a year, but this is the ﬁrst to go over that

timescale, albeit by asmall number of months. We believe starting out with a portfolio

of very undervalued businesses and using the fall in prices to act rationally, combined

with an absence of leverage is why this happens.

Apart from the preservation of capital, what matters is the amount of future value

we add by acting rationally in those dips to acquire investments whose valuations

have overreacted to the negative short term news.

In the market drop of 2020 we did add considerable value to intrinsic value but that

had to be set against the loss in intrinsic value suffered by a number of our businesses

from the forced closures and restrictions on economic activity. Considerable value was

lost in airlines and hospitality. Putting it together we emerged with more value than

we entered with but not with as signiﬁcant a boost as we would have liked and have

achieved in most other major pullbacks.

At the beginning of 2021 we outlined our plan to buy an inexpensive hedge against

the risk that the pandemic response would unleash inﬂation. The hedge was

purchased in July/August once conditions permitted. That inﬂation risk did

subsequently manifest itself and the hedge signiﬁcantly increased in value. This added

considerably to the Company performance and value during 2021. We spent 1% of the

Company net assets on the hedge and ultimately sold it for around 17 times that.

Thoseproceeds now sit in the Company as cash and UK Treasury Bills, which we will

deploy into opportunities that meet our criteria, which is with a minimum of 100% of

upside to their intrinsic values. If we do that, we will have turned 1% into at least 34%

which should more than compensate for any damage to the overall value of our

businesses from the higher rates that inﬂation brings.

We don’t hedge often (twice in 24 years). We only hedge when the following

conditions apply; there is a risk that we believe is improbable but could damage the

intrinsic value of our portfolio materially and there is insurance available in some form

that is very cheap so that we can spend a very modest amount of the portfolio (1% or

less) to hedge against it. We don’t hedge to smooth out expected swings in the

market – that’s not our deﬁnition of risk. We will never take open ended liability, and

the most that could have been lost on this investment was 1%. We will never imperil

your capital.

As we write the world is entering another period of bad news politically and

economically with the tragedy unfolding in Ukraine. This creates even more

complications for central banks trying to work out what to do with interest rates.

Inﬂation is being pushed higher by the impact on energy prices but this is the sort of

inﬂation that ends up in recession as spending is diverted away from other things to

cover higher energy prices. Based upon what we can see at this point there is less

fundamental damage to the intrinsic value of the portfolio than that caused by the

pandemic lockdowns. Furthermore, we enter into this turbulent period with 19% of

the Company’s total assets in cash and cash equivalents and, as always, a roster of

businesses we would like to own should they become available at attractive prices.

Statement from

the Chief

Investment

Officer of the

Investment

Manager

Gary Channon

Chief Investment Officer Phoenix

Asset Management Partners

April 2022

16 Annual Report Strategic Report

An analysis of our past record shows the majority of the value we add through

portfolio changes, occur in those infrequent windows where markets are

overwhelmed with pessimism. Although as an investor it is never comfortable

watching an investment fall in value, please take some comfort that it is in those times

we plant the seeds of future growth in your capital.

In 2021 we were able to create and ﬂoat the Castelnau Group Limited (“Castelnau”)

which contains the direct business activity we do at Phoenix. You can read more about

that on the Castelnau website, but during the year the Company exchanged holdings it

had in the businesses we are directly involved in, i.e. Dignity, Hornby and Stanley

Gibbons, for shares in Castelnau when it ﬂoated. This holding in Castelnau was capped at

15% at cost. Our goal at Castelnau, as it is in the rest of the portfolio, is to put your

capital to work in businesses that generate high returns on it. For a clearer understanding

of the philosophy and objectives of Castelnau I would recommend a read of the

Castelnau Group fourth quarterly report of 2021 which can be found on their website at

www.castelnaugroup.com/application/ﬁles/1416/4382/9198/Castelnau_Group_Ltd_Q4_20

21.pdf.

Changes we make to the portfolio are the minority and so the main engine of value

creation is the returns our underlying businesses make on their capital. We invest in

businesses which make at least 15% on capital and so the capital they retain each

year is building the long term earnings and therefore value. If we get those

assessments right, that return will ultimately be the return we achieve overall at the

portfolio level.

We continue to believe our approach will deliver long term results well in excess of

market averages, without risking permanent losses of capital.

Gary Channon

CIO Phoenix Asset Management Partners

29 April 2022

Annual Report Strategic Report 17

Strategic Report

Investment

Management

Review and

Outlook

Steve Tatters

Director

Phoenix Asset Management

Partners

April 2022

During the year to 31 December 2021, the NAV per share increased by 19.1%

1

and

the share price by 13.5%. The FTSE All-Share Index (total return) rose by 18.3% over

the same period. Net assets at year-end were £194m (2020 £163m). This compares

well with the Company’s prior year performance, when the NAV per share declined by

5.3%, the share price declined by 10.0% and the FTSE All-Share Index (total return)

declined by 9.8%. Since Phoenix began managing the Company on 28 January 2016

to 31 December 2021, the NAV has risen 75.9% versus 59.2% for the FTSE All-Share

Index (total return).

The outperformance in 2021 has again resulted in a performance fee being earned,

80% of which was paid to us by way of shares in the Company in February 2022, the

remaining 20% will become due once the audit has been ﬁnalised. In accordance with

the Investment Management Agreement we are required to hold those shares for

3years. If the outperformance versus the index disappears on the third-year

anniversary, these shares will be cancelled, and we will receive nothing. This, we

believe, is one of the most aligned fee structures in the industry.

2022 started positively as the impact of COVID restrictions related to the Omicron

variant were reversed. The inﬂation hedge also continued to perform strongly, however

as we write in April, the portfolio and market have been impacted by the war in

Ukraine. Since year end up to 28 February 2022, the NAV has fallen slightly, with the

FTSE All-Share Index (total return) falling 0.5% for the same period.

Performance Review

From a performance perspective, 2021 continued to be dominated by COVID but was

also impacted by noise around Brexit. Additionally, some of the portfolio’s holdings

ﬂagged during the year, the risk that persistent inﬂation would manifest itself became

more pertinent. Inﬂationary pressures were seen in the second half of the year and

Central Banks began to react by signalling the likelihood of interest rate rises.

The ﬁrst half of the year saw a broad market rally which the portfolio participated

in. On 30 June 2021, the NAV was up 8.5% versus 11.1% for the Index.

In Q3 the portfolio fell slightly with the market up over 2%. During this period,

performance was impacted by, what we considered was an unnecessarily large and

deeply discounted rights issue from easyJet on which we comment more fully later.

In the fourth quarter the Company posted a good performance. The NAV rose 10%

versus 1.8% for the Index, as fears over the impact of rising interest rates resulted in

the inﬂation hedge performing strongly.

From a share price perspective, holdings with the highest price rises were the

inﬂation hedge and Frasers Group. The inﬂation hedge was implemented to protect

the portfolio against the impact of inﬂation, through the purchase of September 2022

put options on the short sterling future contract, the security identiﬁer is LU2P99. The

options were purchased at £0.03 and were priced at £0.33 on 31 December 2021.

They subsequently rallied to over £1 and were sold in stages during the ﬁrst two

months of 2022. The Frasers Group share price increased by 71% during the year, as

the company demonstrated a strong recovery from the pandemic and highlighted the

potential of its elevation strategy in its Flannels luxury retail business.

Other share price risers of note were Lloyds, which rose 35% during the year, and

the housebuilders, Bellway and Barratt Development, which rose 17% and 16%

respectively.

Fallers of note included our low-cost airlines due to the continued impact of the

pandemic. easyJet fell by 20% with Ryanair falling 12%. Prior to the emergence of

the Omicron variant both holdings had beneﬁted from travel restrictions being lifted

but this was reversed when the scale of disruption around Omicron became clear.

1

This is an Alternative Performance Measure (‘APM’) the calculation of which can be found on page 99.

18 Annual Report Strategic Report

Activity Review

The only activity of note in the ﬁrst half of the year was the sale of our holding in

Redrow in February and March. We expected continued changes in environmental and

building regulations and the company is in transition following the retirement of its

founder. We preferred the way in which Barratt and Bellway utilised their landbanks

(the practice of holding land for future development) which were generally held for

short periods and turned around more quickly.

Also, in the ﬁrst half of the year, we called for a general meeting in Dignity to put

ourselves forward to replace the executive management after we came to the view

that the company was not collaborating as it had originally promised to do. We cannot

separately report on Dignity given our inside position. We appreciate your patience as

we implement a new management framework, but we can say that everything that

has happened since we were appointed leads us to believe it was the right thing to

do.

In September, as mentioned earlier, easyJet instigated a capital raise. We reported

in the Aurora September monthly report that we had anticipated and modelled for a

raise, but the size and structure of this one diluted value more than we expected and

our interactions with management revealed their shortcomings as capital allocators.

After rejecting a merger approach from Wizz Air at a premium to the £8 share price,

arguing that it undervalued the company, they issued £1.2bn of new equity at £4per

share.

At the time of the issue, easyJet had access to £2.9bn of unrestricted liquidity

versus an operating cash burn of £40m per week. 40% of their planes are owned

outright and unencumbered. In our opinion, per share shareholder value would have

been better served through a smaller raise and a more gradual balance sheet repair

from retained earnings as travel returns.

Despite strong reservations around the rights issue, we did participate as it was

the economically right thing to do and we remain conﬁdent in easyJet’s ability to

beneﬁt from the resumption of travel post the pandemic.

We were also pleased to report in the September factsheet that shareholders had

approved the inclusion of the Castelnau Group in the Company’s portfolio. We have

previously written of the rationale behind the new vehicle and for a full progress report

please see the Castelnau year end report on its website:

https://www.castelnaugroup.com/application/ﬁles/1416/4382/9198/Castelnau_

Group_Ltd_Q4_2021.pdf

We reported we are making progress in all the businesses within Castelnau. We

see signiﬁcant potential in them, and we believe we know what is required to realise

that potential. We are in the process of adding to our resourcing for Castelnau to give

us capabilities that we will deploy in Group companies.

Outlook

At the time of writing there is great uncertainty due to the Russian invasion of

Ukraine. In the December factsheet, prior to signiﬁcant concerns over Russian activity

in Ukraine, we wrote the following about the uncertainty created by rising inﬂation and

interest rates:

Annual Report Strategic Report 19

Strategic Report

For decades now investing has been done in an environment of low inﬂation and

low interest rates. That era may be drawing to a close. It probably will at some point

anyway because the nature of human progress is cyclical oscillations around a trend.

We believe our approach to stock selection is well positioned to cope with a

change in those conditions because of these three key attributes of a successful

investment in times of inﬂation and rising rates:

Pricing Power: This is the ability of a company to have some control over its

proﬁtability by passing on changes in its costs to its customers. Persistently low

returns on capital aren’t the choice of managements; they are imposed upon them by

the competitive landscape. Our process seeks out businesses that have some control

over their returns and this characteristic is highly valuable in times of inﬂation.

Absence of Leverage: Businesses with highly leveraged balance sheets run the

risk of a transfer of value away from equity holders in times of stress and higher rates.

We avoid leverage where there is a risk of ruin but there are many balance sheets we

see that will struggle with higher rates. Increasing leverage has turbo charged equity

returns over the past few decades and this has been something of a comparative

headwind for our approach. The beneﬁts of it though will be seen when those forces

reverse.

Margin of Safety: Probably Ben Graham’s most valuable contribution is the use of

a margin of safety between when you pay and what you expect value to be. Approach

this conservatively again and again and it builds into a cumulative edge that delivers

returns in excess of the average. We never pay more than half our estimate of the

present value of all its future cash generation. That margin of safety has meant that

despite all the errors in those estimations and the unexpected negative events, the

Phoenix UK Fund has returned around 6.7% more per year than the market and that

builds into a signiﬁcant difference when compounded through time since our inception

in 1998. (1,336.1% versus 232.5%). The Aurora portfolio remains a very close replica

of the Phoenix UK Fund.

The present uncertainty over Ukraine is signiﬁcant, but we have a track record in

previous crises of adding long-term value. As an organisation we strive to keep

learning and improving. The investment horizon looks fraught with danger or

opportunity depending on how you look at it; from our perspective it’s both. Thorough

analysis, patience and a long-term perspective have been and will be the winning

ingredients behind our ability to achieve superior returns over time.

Steve Tatters

Director

Phoenix Asset Management Partners

29 April 2022

20 Annual Report Strategic Report

Value of £1,000 invested

in the Phoenix UK Fund at

launch to 31 December 2021

Phoenix UK Fund Track Record

The investment strategy followed by the Phoenix UK Fund is the same as that followed by the Company*

Phoenix UK Fund (Net)

FTSE All-Share Index (total return)*

£

31 December

500

1,500

2

,500

3,500

4

,500

5,500

6,500

7,500

8,500

202120202019201820172016201520142013201220112010200920082007200620052004200320022001200019991998

Source: Phoenix. All ﬁgures shown are net of fees and do not account for an investor’s tax position. The FTSE All-Share Index is

shown with dividends re-invested. The Fund’s inception date is May 1998.

* Whilst the investment strategy is the same in all material respects, the portfolio holdings will not necessarily be the same and investors in the Company will have no

exposure to the investment performance of the Phoenix UK Fund. For illustrative purposes only, not a recommendation to buy or sell shares in the Fund.

Pastperformance is not a reliable indicator of future performance.

Annual Report Strategic Report 21

Strategic Report

Phoenix UK Fund Track Record

Investment NAV

Return NAV Return FTSE All-Share Per Share

Year (Gross) (Net) Index (A Class)

% % % %

1998 (8 mths) 17.6 14.4 -3.3 1,143.71

1999 –1.3 –4.6 24.3 1,090.75

2000 24.7 23.0 –5.8 1,341.46

2001 31.7 26.0 –13.1 1,690.09

2002 –17.8 –20.1 –22.6 1,349.64

2003 51.5 49.8 20.9 2,021.24

2004 14.1 11.2 12.8 2,247.26

2005 1.4 0.3 22.0 2,254.99

2006 9.5 8.3 16.8 2,442.90

2007 3.4 2.3 5.3 2,498.40

2008 –39.5 –40.2 –29.9 1,494.31

2009 62.8 59.7 30.2 2,386.48

2010 1.1 0.0 14.7 2,386.37

2011 3.0 1.9 –3.2 2,430.75

2012 48.3 42.2 12.5 3,456.27

2013 40.5 31.3 20.9 4,539.47

2014 1.9 0.1 1.2 4,544.25

2015 20.1 14.7 0.9 5,211.13

2016 9.1 7.6 16.8 5,605.58

2017 21.5 16.3 13.1 6,518.69

2018 –13.6 –14.7 –9.5 5,558.97

2019 30.3 27.7 19.1 7,098.36

2020 –3.9 –4.9 –9.7 6,748.66

2021 23.4 18.7 18.3 8,011.17

Cumulative 1,336.6 701.1 232.5 n/a

Annualised Returns 11.9 9.2 5.2 n/a

22 Annual Report Strategic Report

Directors’ duty to promote the success of the Company

The Board seeks to understand the views of the Company’s Shareholders and its

other key stakeholders as well as how their interests and the matters set out in

section 172 of the Companies Act 2006 have been considered. As part of the Board

and stakeholder evaluation processes that are undertaken annually, the Board reviews

its engagement mechanisms to ensure they remain effective. In fulﬁlling their duties,

the Directors carefully consider the likely consequences of their actions over the

long-term and on other key stakeholders.

During the Board’s quarterly meetings the Directors consider and are mindful of:

i. the Company’s investment objective and policy;

ii. the main trends and factors likely to affect the future development,

performance and position of the Company’s business;

iii. the Company’s key performance indicators;

iv. the Company’s peers;

v. the Company’s overall strategy; and

vi. the Company’s core values which are integrity, accountability, transparency and

commitment.

Identifying stakeholders

As an externally managed investment company, the Company’s operational activities

are all outsourced and therefore it does not have any employees. The Board has

identiﬁed its key stakeholders which include Shareholders, investee companies,

Investment Manager, ﬁnancial advisers, the Company Secretary, Administrator,

Registrar, Lawyers, Depositary and Custodian. The Board is aware of the need to

foster the Company’s relationships with its key stakeholders through its stakeholder

management activities. The Board provides oversight and challenge to the Investment

Manager to ensure that the Company meets its requirements to create and preserve

Shareholder value.

Shareholders

The Board and Investment Manager are seeking to promote an investor base of

long-term investors. The appropriate and regular feedback from its Shareholders is

achieved through the mechanisms described in detail in the ‘Other Strategic Report

Information and Corporate Governance Statement’ and through relations with

Shareholders and the investee companies with the support of Liberum, the

Company’s brokers, Frostrow, the Company’s distribution advisor, and the Investment

Manager.

The Board communicates twice a year via the Annual Report and Half-yearly

Report and more frequently via monthly factsheet. Additionally, it releases daily NAV

calculations via a regulatory news service. At each of its regular meetings the Board

tracks Shareholder changes and monitors the evolving Shareholder proﬁle. Details of

Shareholders owning a notiﬁable interest in the Company can be found on page 37.

All Shareholders have the opportunity to attend the Company’s AGM at which the

Directors and representatives of the Investment Manager are available in person to

meet with Shareholders and to answer their questions. Furthermore, a presentation

would normally be given by the Investment Manager to those present at the AGM

outlining the Company’s performance. Details of the proxy votes received on each

resolution are published on the Company’s website shortly after the AGM.

Report under

Section 172 of

the Companies

Act 2006

Annual Report Strategic Report 23

Strategic Report

Environmental, Social and Governance (‘ESG’) Matters

The Board expects good standards of business sustainability, especially on ESG (as

referred to below) at the companies in which it invests and satisfies itself that the

Investment Manager consistently and proactively engages with them on this basis.

All shareholdings are voted at listed company meetings worldwide where

practicable in accordance with the Investment Manager’s own corporate governance

policies.

Further details of the Investment Manager’s approach to ESG within its investment

framework can be found on its website at www.phoenixassetmanagement.com.

Key Service Providers

The Company relies on service providers to manage its operations. The Investment

Manager is the most fundamental service provider to the Company’s long-term

success. A description of key service providers’ role together with the terms of their

engagement can be found on pages 35 and 36. Each year and during the current

ﬁnancial year, the Board reviews the performance and terms of engagement of each

of its service providers to ensure each remain competitive and to consider the quality

of the service they provide.

Monitoring of Key Decisions and the outcome of those decisions

The Board meets at least quarterly and at such other times as deemed appropriate.

During these meetings, the Board considers reports from the Investment Manager on

the Company’s portfolio, its investment activity and sector diversity. In addition, the

Investment Manager provides an overview of engagement with the investee

companies as well as potential investee companies. The Board debates the Company’s

portfolio and notable acquisitions or disposals at each of its meetings and challenges

stock selection where deemed appropriate. In between meetings, the Investment

Manager and Board maintain contact through which they consider investment ideas,

further fundraising initiatives and market outlook and strategies to consider adjusting

the Company’s portfolio in line with the Company’s investment policy.

The Board receives reports from Frostrow (the Company’s Distribution Advisor) and

Liberum (the Company’s Stockbroker) on the Company’s Shareholder base including

any changes; its Secretary on the latest governance issues, legal or market

announcements; the Depositary’s oversight report and its Administrator on the

Company’s management accounts. Furthermore, the Board receives reports from

Liberum on the performance of the Company’s peers and ad hoc reports from its other

key stakeholders as deemed appropriate. During the year the Chairman, and

Investment Manager met with several of the Company’s Shareholders and beneﬁcial

owners to gain a greater understanding of their views and opinions and to help

promote the Company and support any share issues that were undertaken. These

discussions were relayed to the Board who considered these discussions at their

quarterly meetings.

The Board was pleased to note from Shareholders that had met with the Chairman

and Investment Manager during the year that they remained supportive of the Board

and the Company’s Investment Manager. During the year, the Board undertook a

review of its stakeholders, which included a review of its control report and policies,

such as whistleblowing, anti-bribery, anti-money laundering and corruption, cyber

security, data protection policies and each entity’s business continuity arrangements

to ensure they were in place and were adequate. During the current ﬁnancial year, the

Board reviewed the performance and terms of engagement of each of its key service

providers to ensure each remained competitive and agreed that it was appropriate that

they continue or be changed as disclosed elsewhere in this Report.

24 Annual Report Strategic Report

In satisfaction of Company’s Investment Management Agreement, the Board

agreed to issue shares to the Investment Manager in satisfaction of the performance

fee which the Investment Manager earned in respect of the year to 31 December

2020.

During the year, having debated the merits and structure of Castelnau, with the

Investment Manager and advisers and having considered the long-term interests of

the Company’s Shareholders, the Board approved the transfer of a portion of the

Company’s holding in each of Dignity PLC, Hornby PLC and Phoenix SG Limited to

Castelnau in exchange for shares in Castelnau. To facilitate the transaction, the

Boardrecommended the following to shareholders at a General Meeting held on

28September 2021 which were duly approved:

(i) amend its investment policy to permit investments in Castelnau (as a fund

managed by the Investment Manager);

(ii) transfer to Castelnau certain of the Company’s investments in exchange for

theissue to the Company of shares in the capital of Castelnau pursuant to the

terms of a share purchase agreement between the Company, the Investment

Manager and Castelnau (the “Castelnau Related Party Transaction”);

(iii) amend the performance fee provisions contained in the investment

management agreement between the Company and the Investment Manager

to exclude the Company’s investment in Castelnau and the fact that Castelnau

will pay a performance fee directly to the Investment Manager.

As part of the Board’s succession plan, the Board agreed to appoint Trust

Associates as search consultants, to search for two additional Board members to

replace Lord Howard Flight and the Honourable James Nelson who will be stepping

down from the Board at the Company’s forthcoming AGM. Trust Associates has no

connection to the Company or Board.

Other decisions included the payment of a dividend which was paid to satisfy the

Company’s dividend policy which states that nearly all the Company’s revenue is paid

to Shareholders by way of a dividend. It was also paid to satisfy the Company’s

investment trust status which states that no less than 85% of the Company’s

qualifying revenue must be distributed to Shareholders.

Boardroom Diversity

The Board currently comprises ﬁve non-executive Directors of which two are female

and three male. The Board considers its composition, including the balance of skills,

knowledge, diversity (including gender and race) and experience, amongst other

factors on an annual basis and when appointing new Directors. The Board has

considered the recommendations of the Davies and Parker review but does not

consider it appropriate to establish targets or quotas in this regard. Summary

biographical details of the Directors are set out in the Corporate Governance

Statement on page 31.

Annual Report Strategic Report 25

Strategic Report

Stewardship code

The Board and the Investment Manager support and have a strong commitment to the

UK Stewardship Code, the latest version of which was issued by FRC, effective from

1January 2020 and endorsed by the AIC which sets out the principles of effective

stewardship by institutional investors. Whilst the Investment Manager is not a formal

signatory to the Stewardship Code, it has chosen to adhere to the 12 principles as

closely as possible. Further details of the Investment Manager’s approach to the

Stewardship code can be found on the Investment Manager’s website at

www.phoenixassetmanagement.com.

Modern slavery disclosure

Due to the nature of the Company’s business, being a company that does not have

employees and does not offer goods or services to consumers, the Board considers

that the Modern Slavery Act 2015 is not applicable to the Company and the Company

is not required to issue a slavery and human trafﬁcking statement. The Board

considers the Company’s supply chains, dealing predominately with professional

advisers and service providers in the ﬁnancial service industry, to be low risk in

thismatter.

Anti-bribery and corruption

It is the Company’s policy to conduct all of its business in an honest and ethical

manner. The Company takes a zero-tolerance approach to bribery and corruption and is

committed to acting professionally, fairly and with integrity in all its business dealings

and relationships wherever it operates. The Company’s policy and the procedures that

implement it are designed to support that commitment. The Board has made enquiries

of its third-party service providers to ensure their procedures and policies are in place.

Criminal Finances Act 2017

The Company maintains a zero-tolerance policy towards the provision of illegal

services, including the facilitation of tax evasion. The Company has received

assurances from the Company’s main contractors and suppliers that they maintain a

zero-tolerance policy towards the provision of illegal services, including the facilitation

of tax evasion.

26 Annual Report Strategic Report

Principal Risks, Emerging Risks and Uncertainties

Procedure for Identifying Emerging Risks

The procedures in place to identify emerging or principal risks are described below.

The Audit Committee regularly reviews the Company’s risk matrix, focusing on

ensuring that the appropriate controls are in place to mitigate each risk. A system has

been established to identify emerging risks as they occur as detailed below. The

experience and knowledge of the Audit Committee and Board is invaluable to these

discussions, as is advice received from the Board’s service providers, speciﬁcally the

Investment Manager who is responsible for all portfolio management services.

The following is a description of the role each service provider plays in the

identiﬁcation of emerging risks.

1. Investment Manager: the Investment Manager advises the Board at each

quarterly meeting on world markets, stock market trends, information on stock

speciﬁc matters as well as regulatory, political and economic changes likely to

impact the Company’s portfolio;

2. Distributor and Broker: provide advice at each meeting speciﬁc to the Board on

the Company’s share register, sector, competitors and the investment company

market;

3. Company Secretary and Accounting Advisor: briefs the Board on forthcoming

legislation or regulatory changes that might impact the Company;

4. AIC: The Company is a member of the AIC, which provides regular technical

updates as well as drawing members’ attention to forthcoming industry and

regulatory issues.

Procedure for oversight of risks

Audit Committee: The risk matrix is reviewed at least twice a year. This includes a

review of the risk procedures and controls in place at the key service providers to

ensure that emerging (as well as known) risks are adequately identiﬁed and – so far as

practicable – mitigated. Experienced Non-Executive Directors on the Committee, each

bringing external knowledge of the investment trust (and ﬁnancial services generally)

marketplace, trends, threats etc. as well as macro/strategic insight. The principal risks

faced by the Company, together with the approach taken by the Board towards them,

have been summarised below.

Principal Risks, and Uncertainties considered during the year

Portfolio Risk

Changes in general economic and market conditions including, for example, interest

rates, cost increase, rates of inﬂation, industry conditions, competition, political events

and trends, tax laws, national and international conﬂicts and other factors, particularly

noting the ongoing threat posed by COVID-19, the war in Ukraine and the persistent

threat of inﬂation and rising interest rates as discussed below and the impact to the

economy, could substantially and adversely affect the Company’s prospects. Other

portfolio risks are outlined as follows.

• Poor stock selection, resulting in underperformance against the Company’s

benchmark;

• Poor use of gearing, creating a drag on performance during times of market declines;

• Illiquid stock creating a drag on performance;

• Concentrated portfolio; and

• Reputational damage caused by any of the above risks.

Other Strategic

Report

Information

Annual Report Strategic Report 27

Strategic Report

COVID-19

The market and operational risks and ﬁnancial impact as a result of the COVID-19

pandemic, and measures introduced to combat its spread, were considered by the

Board. Each of the Company’s key service providers was able to demonstrate

operational resilience. In addition, the Investment Manager undertook a thorough

review of the impact on the Company’s portfolio of investments and was able to

provide the Board with assurance that the Company’s portfolio of investments had

strong businesses with robust balance sheets that could withstand major interruptions

to their operations. The Directors and the Investment Manager continue to monitor the

situation closely.

Inflation

The Board has noted the sharp rise in inﬂation, the expectation that inﬂation would

continue to rise and the increasing threat this may pose to the Company. In response

to this the Board has agreed, following guidance from the Investment Manager, to

take out a put option with the intention of safeguarding the Company’s portfolio

against the impact of inﬂation. The Board and Investment Manager continue to

monitor the situation. The position was closed post year end, making substantial gains

for the Company which is discussed further in the Investment Manager’s Report.

Conflict in Ukraine

The Board and Investment Manager are monitoring the war that has erupted in

Ukraine and have considered the impact on the Company’s portfolio and operations.

The Company has a large cash position following the closure of the Company’s hedge

position which the Investment Manager intends to use strategically when an

appropriate opportunity arises.

Continuation Vote

In accordance with the articles, the Company will hold a continuation vote at the next

AGM on 28 June 2022. Having consulted with key shareholders and taking account of

the Company’s track record over the past three years, and the successful broadening

of the shareholder base, the Board believes the continuation vote will pass.

Management of risks

The Board undertakes a review of the performance of the Company and scrutinises

and challenges notable transactions at each quarterly Board meeting. At least on an

annual basis the Management Engagement Committee reviews the engagement of

the Investment Manager, including the Investment Manager’s achievements with

regard to the Company’s performance.

Diversification

The Company mainly invests in organisations listed and traded on the London Stock

Exchange, and by spreading its investments across a range of such securities. At

31December 2021, the Company held 21 (2020: 19) stocks, spread across 9 (2020: 8)

main sectors. The diversiﬁcation of the Company’s portfolio is considered at each of

the quarterly board meetings.

28 Annual Report Strategic Report

Gearing

The Company has the power under its Articles to borrow money, however does not

currently intend to use gearing. If the Board did decide to utilise gearing the aggregate

borrowings of the Company would be restricted to 30% of the aggregate of the paid-

up nominal capital plus the capital and revenue reserves. The Board will keep under

review whether any provision should be made for the use of short-term borrowing for

the sole purpose of meeting working capital requirements from time-to-time. Further

details concerning currency risks, liquidity risks and interest rate risks are given in

Note 17.

Liquidity

The Board undertakes a review of the liquidity of the investments at each quarterly

Board meeting and takes appropriate action, where deemed necessary.

Operational Risk

The Company is exposed to the operational and cyber risks of its third-party service

providers. The Investment Manager, Registrar, Depositary, Administrator and Company

Secretary each have comprehensive business continuity plans which facilitate

continued operation of the business in the event of a service disruption or major

disruption. The Audit Committee received the internal controls reports of the relevant

service providers, where available and was able to satisfy itself that adequate controls

and procedures were in place to limit the impact to the Company’s operations,

particularly with regard to a ﬁnancial loss.

The performance of service providers is reviewed annually via its Management

Engagement Committee. Each service provider’s contract deﬁnes the duties and

responsibilities of each and has safeguards in place including provisions for the

termination of each agreement in the event of a breach or under certain

circumstances. Each agreement also allows for the Board to terminate subject to

astated notice period. During the year under review the Board undertook a thorough

review of each service provider and agreed that their continued appointment remained

appropriate and, in the Company’s long-term interest.

Regulatory risk

Poor governance, compliance or administration, including particularly the risk of loss of

investment trust status and the impact this may have on the Company was considered

by the Board. Having been provided with assurance from each of the key service

providers, the Board was satisﬁed that no such breach had occurred.

Viability Statement

In accordance with the articles, the Company will hold a continuation vote at the next

AGM on 28 June 2022. Having consulted with the Company’s key shareholders, who

expressed support for the continuation of the Company, and taking account of the

Company’s track record over the past three years and the successful broadening of

the shareholder base, the Board are conﬁdent the continuation vote will pass. The

continuation vote will be put to shareholders at every third AGM.

Annual Report Strategic Report 29

Strategic Report

The Directors have considered the viability of the Company over a ﬁve-year period

to 31 December 2026, which they believe is an appropriate period over which to

assess the Company, given the Company’s long-term investment strategy and the

principal and emerging risks and uncertainties outlined on pages 26 to 28.

After making enquiries, the Directors have a reasonable expectation that the

Company has adequate resources to continue in operational existence and meet its

liabilities as they fall due for at least ﬁve years to 31 December 2026. Furthermore,

having made enquiries of the Company’s largest shareholders, the Board are satisﬁed

that the continuation vote has sufﬁcient support to successfully pass.

In reaching this conclusion, the Directors have considered each of the principal

risks and uncertainties set out above, including the ongoing impact of COVID-19 on

the Company, inﬂation and the conﬂict in Ukraine. As part of this process the Board

considered several severe but plausible scenarios, including the impact of signiﬁcant

market movements. The Board has considered the liquidity and solvency of the

Company, the level of discount at which its Ordinary Shares trade at the time of

assessment, its income and expenditure proﬁle including the absence of monthly

management fees and the non-utilisation of gearing as an instrument of normal

investment policy. Most of the Company’s investments comprise readily realisable

securities which could, if necessary, be sold to meet the Company’s funding

requirements. The Company’s plan to expand by the issue of new share capital is kept

under close, ongoing review by the Board. Portfolio changes and market developments

are also discussed at quarterly Board meetings. The internal control framework of the

Company is subject to formal review on at least an annual basis.

The Board has noted the sharp rise in inﬂation, the expectation that inﬂation would

continue to rise and the increasing threat this may pose to the Company. In response

to this the Board has agreed, following guidance from the Investment Manager, to

take out a hedge position against inﬂation. The Board and Investment Manager

continue to monitor the situation and have since year end closed the position, making

substantial gains on behalf of the Company.

The Board has considered the conﬂict in Ukraine and in particular the impact this

may have on the Company, particularly a severe market downturn. The Board noted

that the Company has a large cash and near cash position, due to the disposal of the

hedge. These resources will enable the Company to continue in operational existence

and for the Investment Manager to take advantage of depressed stock prices in order

to beneﬁt the Company.

The Company’s income from investments and cash realisable from the sale of

investments provide substantial cover to the Company’s operating expenses and any

other costs likely to be faced by the Company.

Outlook

The outlook for the Company is discussed in the Chairman’s Statement on pages 6

to8, and the Investment Manager’s Review on pages 17 to 19.

This Strategic Report was approved by the Board on 29 April 2022.

Lady Rachael Robathan

Chairman

30 Annual Report Governance

Governance

Annual Report Governance 31

GovernanceGovernance

Directors, Investment Manager and Advisers

Website Address: www.aurorainvestmenttrust.com

Registered Number – 03300814

A MEMBER OF THE ASSOCIATION OF INVESTMENT COMPANIES

Directors

Lord Flight (Chairman)

L Walker (Deputy Chair)

The Honourable J Nelson

Lady R Robathan

D Stevenson

Alternative Investment Fund

Manager (“AIFM”) and Investment

Manager

Phoenix Asset Management Partners

Limited

64-66 Glentham Road

London SW13 9JJ

Telephone: 0208 600 0100

Depository & Custodian

BNP Paribas Securities Services

10 Harewood Avenue

London NW1 6AA

Secretary, Administrator &

Registered Office

Sanne Fund Services (UK) Limited

6th Floor

125 London Wall

London EC2Y 5AS

Registrar

Link Group

10th Floor

Central Square

29 Wellington Street

Leeds LS1 4DL

Stockbroker

Liberum Capital Limited

25 Ropemaker Street

London EC2Y 9LY

Auditor

Grant Thornton UK LLP

30 Finsbury Square

London EC2A 1AG

Distribution Adviser

Frostrow Capital LLP

25 Southampton Buildings

London WC2A 1AL

Directors’ Report

By Order of the Board

Jenny Thompson

PraxisIFM Fund Services (UK) Limited

Company Secretary

April 2022

32 Annual Report Governance

The Directors present their report and Financial statements for the year ended

31December 2021.

Strategic Report

The Directors’ Report should be read in conjunction with the Strategic Report on

pages 4 to 29.

Corporate Governance

The Corporate Governance Statement on pages 40 to 49 forms part of this report.

Legal and Taxation Status

The Company has sought and obtained approval from HM Revenue and Customs of

its status as an investment trust under Sections 1158 and 1159 of the Corporation Tax

Act 2010. In the opinion of the Directors, the Company has conducted its affairs so as

to be able to maintain such status in respect of the year ended 31 December 2021.

Under Section 833 of the Companies Act 2006 the Company is an investment

company and operates as such.

Future Developments

The Company’s future developments are discussed in the Managers’ Report and

Chairman’s Statement on pages 6 to 19.

The Board and Re-Election of Directors

The Directors of the Company holding ofﬁce during the year are stated below. Except

where indicated the Directors held ofﬁce throughout the year and to the date of this

report.

Lord Flight (Chairman)

L Walker (Deputy Chair)

The Honourable J Nelson

Lady R Robathan

D Stevenson

Lord Howard Flight and The Honourable James Nelson, having served in excess of

nine years as Directors of the Company have agreed to retire at the forthcoming AGM

and will not be putting themselves forward for re-election. Lucy Walker was appointed

Deputy Chair on 19 October 2021. Lucy Walker will take over from Lord Flight as Chair

of the Company with effect from the date of the AGM and Lady Rachael Robathan will

take over from James Nelson as Chairman of the Management Engagement and

Nomination & Remuneration Committees with effect from the AGM. All Directors are

non-executive. In accordance with the AIC Corporate Governance Code, the entire

Board will be subject to annual re-election. Accordingly, resolutions will be put to

re-elect Lady Rachael Robathan, Mr David Stevenson and Ms Lucy Walker at the

Company’s forthcoming AGM.

The report on Corporate Governance below contains a description of the Board’s

composition, its method of operation, its work during the year and that of its

Committees and of how its performance has been evaluated.

Annual Report Governance 33

Governance

Director’s Indemnities and Insurance