Aurora UK Alpha PLC Fund Data

In March, the NAV was down 12.1% for the month, versus the FTSE All Share (incl. dividends), which was down 6.7%. During the month, there were price declines across much of the portfolio, with Barratt Redrow down 28.7%, Ryanair down 13.0% and Lloyds down 9.9%. There was a modest increase from Nintendo, which was up 1.6%. Wars are ugly human failures, full of individual tragedies, ruined lives and so it sounds tastelessly insensitive to say that they are also great moments of opportunity for the prepared value investor. The reasons are mainly psychological; wars come with uncertain outcomes and negative consequences as the current war with Iran has. Uncertainty is not greater in wartime; it just feels that way because the danger is visible. Overweighting what we can actually see in judgements is called the Availability Heuristic. With enough long-term perspective wars can be properly evaluated. Investors shown a 50-year chart of the stock market and asked when they would want to be investing would likely be picking drawdown periods, including those caused by wars. If at the beginning of a 50-year investing experience you were told there are likely to be some wars along the way, some impacting energy prices, as any student of financial history sees, then it probably wouldn't put you off, in fact from that perspective it is clear it is a time of opportunity. As we have previously reported, around two thirds of our alpha comes from activities in those times of crisis-triggered market falls. Bad news and volatility create disconnects between price and value. One of the distortions that has occurred is in interest rate markets which have reacted to a jump in oil prices by expecting higher interest rates. We think this is wrong, energy price spikes push the headline CPI number up, but that is not the same as embedding inflation in the economy and raising interest rates is not the right response. If the overall price level (i.e. CPI) rises when the initial price shock hits and then a year later it comes out when that year-on-year effect passes, raising interest rates will have no impact. Sudden jumps in energy prices are recessionary; consumption spend is diverted to pay higher prices for energy and that money comes from somewhere that suffers lower demand. The overall volume of economic activity goes down and so does real GDP. The inflation worry for central bankers is that rising CPI numbers feed into pay demands which can set off a secondary round of inflation which is a worry. This matters less in a weak labour market, which is where we are now, and the way central banks deal with this is to talk tough on inflation to keep expectations down. This approach taken by the Bank of England was misconstrued as signalling an intention to raise rates. At one point the market was discounting 4 rises in the next 12 months and this has led to a more pronounced sell off in those sectors the market thought would be most affected if interest rates did rise, like UK housebuilders. This is how we end up with a quarter where Barratt is down 32% and Lloyds, where higher rates are helpful, only down 6%. Taking advantage of that has been our main activity in the quarter. It may look like a straightforward switch, but the value implications are mouth-watering. As we have discussed in the past, both of these businesses earn, when noise is taken out, around and above 15% on their real tangible capital. Not long ago they were both trading around the level of their capital, but the rerating of Lloyds last year and their divergence this year means that Lloyds is now trading on twice its capital (2.0) and Barratt is on 60% of its capital even though some of it is just cash (0.6). Imagine these were 15% deposit accounts at a bank. In the Lloyds one you take a 50% haircut (1 / 2.0) when you deposit, so if say you had £100 then only £50 would go into the account and would earn you 15% (£7.50). In your Barratt account you get a 66% uplift (1 / 0.60) so £100 would become a £166 deposit earning 15% (£25). So, in that one switch your capital has gone from earning £7.50 to £25, that's value investing alchemy. Simple as that looks, it closely resembles our detailed modelling. There are other considerations when you make these judgments like the future return on retained capital which for these two is expected to be pretty much the same at just over 15%, another is the scope to grow the capital base and again they are both quite constrained and you get similar results. The risk considerations like downsides, technology disruption and regulatory intervention tend to favour the housebuilder over the bank. So, all in all, this looks to us like a fair assessment, you triple your value when you switch Lloyds to Barratt Redrow. We don't expect to have any particular skill in predicting how long wars will persist or their outcomes, we invest avoiding outcomes that permanently damage capital and seizing great opportunities when we see them. We do this without knowing how long they will be there or whether there will be more attractive terms tomorrow. So far, this has been a drawdown that has been about price not intrinsic value, none of our holdings have suffered any material adverse changes to their intrinsic value. The result of our actions has been to push overall intrinsic value for Aurora to £7.55 which, coming at a time when the NAV has fallen to £2.60, leaves the upside at 190%. Wars, pandemics and their like do impact, disrupt and interrupt economic progress but their effects over a longer time period tend to be transient. What drives real wealth creation as we have discussed before is productivity gains. In the thousand years before the Industrial Revolution, improvements in labour productivity were cancelled out by population change, as Gregory Clark showed in his work which we have previously mentioned. Since the Industrial Revolution that progress has been relentless, and every generation has enjoyed higher standards than the one before it. AI has the potential to bring in another era of rapid increase in productivity and wealth generation, but it also remains the most significant long-term factor for us to study, observe and analyse both as risk and opportunity. When businesses are judged in 10 years' time, looking back, the war with Iran is most likely to have been temporary noise and the impact of AI will have been profound. We continue to assess, monitor and position the portfolio with this in mind. We don't want wars, but we don't invest whilst projecting our idea of how the world should be, we take it as it is. Our job is to protect your capital and find ways to compound it substantially through time and in that regard the recent conditions have been very helpful.

In March, the NAV was down 12.1% for the month, versus the FTSE All Share (incl. dividends), which was down 6.7%. During the month, there were price declines across much of the portfolio, with Barratt Redrow down 28.7%, Ryanair down 13.0% and Lloyds down 9.9%. There was a modest increase from Nintendo, which was up 1.6%. Wars are ugly human failures, full of individual tragedies, ruined lives and so it sounds tastelessly insensitive to say that they are also great moments of opportunity for the prepared value investor. The reasons are mainly psychological; wars come with uncertain outcomes and negative consequences as the current war with Iran has. Uncertainty is not greater in wartime; it just feels that way because the danger is visible. Overweighting what we can actually see in judgements is called the Availability Heuristic. With enough long-term perspective wars can be properly evaluated. Investors shown a 50-year chart of the stock market and asked when they would want to be investing would likely be picking drawdown periods, including those caused by wars. If at the beginning of a 50-year investing experience you were told there are likely to be some wars along the way, some impacting energy prices, as any student of financial history sees, then it probably wouldn't put you off, in fact from that perspective it is clear it is a time of opportunity. As we have previously reported, around two thirds of our alpha comes from activities in those times of crisis-triggered market falls. Bad news and volatility create disconnects between price and value. One of the distortions that has occurred is in interest rate markets which have reacted to a jump in oil prices by expecting higher interest rates. We think this is wrong, energy price spikes push the headline CPI number up, but that is not the same as embedding inflation in the economy and raising interest rates is not the right response. If the overall price level (i.e. CPI) rises when the initial price shock hits and then a year later it comes out when that year-on-year effect passes, raising interest rates will have no impact. Sudden jumps in energy prices are recessionary; consumption spend is diverted to pay higher prices for energy and that money comes from somewhere that suffers lower demand. The overall volume of economic activity goes down and so does real GDP. The inflation worry for central bankers is that rising CPI numbers feed into pay demands which can set off a secondary round of inflation which is a worry. This matters less in a weak labour market, which is where we are now, and the way central banks deal with this is to talk tough on inflation to keep expectations down. This approach taken by the Bank of England was misconstrued as signalling an intention to raise rates. At one point the market was discounting 4 rises in the next 12 months and this has led to a more pronounced sell off in those sectors the market thought would be most affected if interest rates did rise, like UK housebuilders. This is how we end up with a quarter where Barratt is down 32% and Lloyds, where higher rates are helpful, only down 6%. Taking advantage of that has been our main activity in the quarter. It may look like a straightforward switch, but the value implications are mouth-watering. As we have discussed in the past, both of these businesses earn, when noise is taken out, around and above 15% on their real tangible capital. Not long ago they were both trading around the level of their capital, but the rerating of Lloyds last year and their divergence this year means that Lloyds is now trading on twice its capital (2.0) and Barratt is on 60% of its capital even though some of it is just cash (0.6). Imagine these were 15% deposit accounts at a bank. In the Lloyds one you take a 50% haircut (1 / 2.0) when you deposit, so if say you had £100 then only £50 would go into the account and would earn you 15% (£7.50). In your Barratt account you get a 66% uplift (1 / 0.60) so £100 would become a £166 deposit earning 15% (£25). So, in that one switch your capital has gone from earning £7.50 to £25, that's value investing alchemy. Simple as that looks, it closely resembles our detailed modelling. There are other considerations when you make these judgments like the future return on retained capital which for these two is expected to be pretty much the same at just over 15%, another is the scope to grow the capital base and again they are both quite constrained and you get similar results. The risk considerations like downsides, technology disruption and regulatory intervention tend to favour the housebuilder over the bank. So, all in all, this looks to us like a fair assessment, you triple your value when you switch Lloyds to Barratt Redrow. We don't expect to have any particular skill in predicting how long wars will persist or their outcomes, we invest avoiding outcomes that permanently damage capital and seizing great opportunities when we see them. We do this without knowing how long they will be there or whether there will be more attractive terms tomorrow. So far, this has been a drawdown that has been about price not intrinsic value, none of our holdings have suffered any material adverse changes to their intrinsic value. The result of our actions has been to push overall intrinsic value for Aurora to £7.55 which, coming at a time when the NAV has fallen to £2.60, leaves the upside at 190%. Wars, pandemics and their like do impact, disrupt and interrupt economic progress but their effects over a longer time period tend to be transient. What drives real wealth creation as we have discussed before is productivity gains. In the thousand years before the Industrial Revolution, improvements in labour productivity were cancelled out by population change, as Gregory Clark showed in his work which we have previously mentioned. Since the Industrial Revolution that progress has been relentless, and every generation has enjoyed higher standards than the one before it. AI has the potential to bring in another era of rapid increase in productivity and wealth generation, but it also remains the most significant long-term factor for us to study, observe and analyse both as risk and opportunity. When businesses are judged in 10 years' time, looking back, the war with Iran is most likely to have been temporary noise and the impact of AI will have been profound. We continue to assess, monitor and position the portfolio with this in mind. We don't want wars, but we don't invest whilst projecting our idea of how the world should be, we take it as it is. Our job is to protect your capital and find ways to compound it substantially through time and in that regard the recent conditions have been very helpful.