2020 was quite a year. In case you missed our 2020 wrap up video just before Christmas, here it is with a transcript below.
Steve Johnson shares some of the main highlights and insights from 2020 in both the Australian and International Funds.
Hi everyone, I’m Alex Larkman and I’m joined by Steve Johnson, Chief Investment Officer at Forager Funds. Hi, Steve.
Hi, Alex. Welcome back to the Forager YouTube videos.
Good to be back. Today we are going to talk through a wrap up of the crazy year that has been 2020. Steve, let’s start with some highlights of the year from you please.
Sure Alex, there’s lots of things to be proud of as a business. I think the way that we’ve worked together as a team, the way that the clients have supported us over the past 12 months has been really important. Ultimately though, we’re here to make money for our clients and we pride ourselves on performing well in dysfunctional markets. I think in a year where a lot of people have not covered themselves in glory, it’s been a year of outstanding performance for us.
There’s still a few weeks to go, but I was just looking at the combined P&L’s for our funds last week and we’ve made almost $75 million across the business for our clients through what’s been a very difficult year. I think that’s something for us to be proud of as a business.
That’s some good performance by both funds there. Can you take us through what the contributing factors have been?
Obviously, volatility has been huge for us. I wrote a blog about this recently. I think the more prices move around and go up and down, the more opportunity there is to buy things at very attractive prices, the more panic there is in the market, the easier it is for us to get out there and find screamingly attractive opportunities.
I think something with a little bit more nuance, we’ve been working very hard and it wasn’t an easy two years for us leading up to this. We’ve really tried to learn from some of those mistakes a few years ago and try and incorporate some of those lessons into the portfolios. I was really happy around Christmas 2019 that we put a lot of work into these portfolios to set them up to perform better than they had been in the future. I think we saw a lot of that come through in 2020. The crisis added a lot of volatility to it but I think these portfolios would have performed very well without a crisis.
Now actually touching on the funds themselves. Can you give us a few insights from each fund? We’ll start with the Forager Australian Shares Fund please.
If you look through the P&L, and we’ll have our performance report out in June next year, you’ll see lots of stocks that we didn’t own at the start of this year on that list. Again, volatile markets are great opportunities to pick up some of those businesses. I still think some of them have got a lot of upside in them. We’ll talk about that later. The performance of some of those new additions has been outstanding already, but I’m most happy with some of the stocks that we already owned leading into this.
Like I said, we put a lot of effort into tidying up the portfolio, that tidying up process continued throughout the year. But when I look at businesses like Enero and Mainstream, companies that we’ve held for a very long period of time where we thought they were performing well and the market just wasn’t recognising it, and then they got hammered through COVID, I’m really proud of the results that they have been able to achieve. We know those management team will change. We’ve worked really hard with them on them improving their businesses, and how we as shareholders can help with that. It’s been great to see them deliver some outstanding returns through the year as well. It’s the performance of that portfolio that we held prior to COVID hitting that I’m probably most proud of in that Australian Fund.
Great, and what about the Forager International Shares Fund?
Obviously, some really big returns there from under-researched small stocks. I haven’t ever had a year in my career where I’ve had more multibaggers than we’ve had over the course of the past 12 months. We’ve got Celsius, that’s up five or six fold. Gan, we made many multiples of our money. Thinksmart, it must be an eight bagger over the course of the past 18 months, thanks to the meteoric rise of Afterpay here in Australia. That’s not going to happen all the time. It’s also not surprising that it comes at the smaller end of the market, but we’ve also had a lot of success at the bigger end of the market in that International Fund.
I think it just goes to show that if you’re patient enough and you wait, there can be dysfunction in all types of stocks. We copped a lot of criticism for our investment in Uber at $24 a share. It’s trading north of $50 now and it really was widespread panic in that part of the market that nobody was ever going to start using that company’s products again. I don’t think anyone that actually sat down and did a proper analysis of what that business was worth at the time would have concluded it was worth less than $24. In widespread panic, you get the opportunity to buy these higher quality, bigger businesses as well. I think that’s added a lot of balance to our portfolio and a lot of good performance as well.
That’s interesting to hear about performance coming from lots of different places in that International Fund portfolio. Moving on to the rest of the team at Forager. How have they handled this extremely tumultuous year?
Well you might be able to answer that one better than me. It’s been a very tough year and I don’t just mean that from a markets perspective. I think psychologically, people working from home dealing with families, dealing with partners that are going through all sorts of career and life issues themselves through an environment like this. I think we just dealt with it day to day at the time, but when you look back, it’s a serious amount of stress for everyone involved. I’m really proud of the way the team has pulled together through that. And I think it’s been the making of us as a team and as a business in a lot of different ways.
People will have seen Gareth and Harvey both promoted to portfolio managers of the International Fund back in June, on the back of some really good performance from them. I think Chloe’s come on in leaps and bounds and people are starting to see that in some of the contributions to the International Fund that are specifically her stocks. Alex Shevelev has been with us for three years now. He joined at a time, that in hindsight, was a very difficult time. He inherited a portfolio where some things went wrong, that were a function of actions that had been taken prior to his arrival and he’s worked so hard to fix that portfolio up and improve his own performance as an analyst and we’re starting to see the result of that as well.
I’m really proud of the team and I think it’s set us up as a business to move beyond me as a stock picker running both of these funds, to a funds management company where we have a staple of people that are delivering performance across the board. It’s my job to see them around the park rather than get up there and just find ideas. I’ve seen so much evidence over the course of this year about how much better that can be for the business’s returns.
So lots of resilience during a tough year. What would you actually say that the key lessons have been as of that?
Like I touched on earlier, it’s been a great year for both funds in terms of relative performance, but the absolute performance has been much higher in the International Fund. Partly, that’s a function of better performing markets globally than here in Australia. I don’t necessarily think that is fair, our economy is performing quite well, and companies we own going quite well as well.
I do think diversity has been one of the big things that I’m trying to incorporate more into the portfolios. I mean diversity across a whole range of different facets. We want to run concentrated portfolios at our best ideas. Even within a portfolio of 15 or 20 stocks, I think the more differences you can have in there, the better. So, some big companies, some small companies, some resilient companies, perhaps some riskier companies, some companies from different geographic parts of the world, companies that are just different types of ideas from different people in your team. I think if you can put that difference together, you get a much more resilient result. You’ll see in our Australian Fund, that we’re trying to incorporate a lot more of that into it.
I think philosophy and process are just so important in times of crisis. If everyone knew it was going to turn around on the 23rd of March, we never would have hit the lows of 23rd of March. At the times when the best opportunities are there, it is going to be stressful, it’s going to be very difficult and you need to fall back on a process where you can say “we know what we do in these times”. That’s probably my most important role as CIO here that I get up in those times of crisis and I say to our whole team, everyone is panicking, it is time for us to invest. I think having your process having your stocks picked out that you want to own at the right point in time and be ready to pull the trigger in those environments is the most important thing that you can do to take advantage of it.
Some great lessons there for the year of 2020. Finally, what are you most looking forward to in 2021?
I think it’s going to be a difficult year. We’ve had stock markets recover well ahead of economic recovery. I still think you’ve got a huge gap between the returns that you’re going to earn on equities over a long period of time, versus the returns that you can earn on interest in the bank or from a bond portfolio. I do think in absolute terms though, people need to expect those returns from equities to be lower than they’ve been historically from today’s pricing level. That makes it more difficult from our perspective. It’s not like you’re just walking around buying Uber’s at screamingly cheap prices in today’s markets. That doesn’t mean there won’t be more volatility or more opportunities down the track.
I think we’re in for a very interesting three to four years from a monetary perspective. We’ve had a sluggish global economy ever since the financial crisis, you’ve finally got monetary policy, fiscal policy and consumer confidence pushing in the same direction in 2021. If we’re ever going to see pressure on interest rates going up and inflation, it’s going to be over the course of the next two years. I think that’s the big risk for financial markets of all sorts out there, that interest rates start to pick up over the next few years and that people start looking at 5% and 6% returns on equities and saying, ‘Well, I can get 3% on a bond portfolio now. I want more’.
We’re really positioning ourselves to be short duration, that we own businesses, that are going to give us cash flow in the short to medium term, rather than using a low discount rates to justify high prices for businesses down the track.
From a business perspective, some stability would be great into 2021. Like I said, we’ve been working hard to learn from our lessons and mistakes in the past and improve this business. Hopefully we’re sitting here with the same team this time next year and some more great performance and that people both within the business and our clients are getting well rewarded for that.
Great thanks for that Steve. Some interesting things to watch for in 2021 and beyond. That is the end of our 2020 wrap up video. Thanks for joining me Steve and thanks everyone for watching.
Great thanks Alex, I’ll just add one more thank you. Our client base over the course of the past 12 months has been our most important asset. I remember that week of 23rd March when markets were in complete turmoil and I had five phone calls from long term clients of ours. You think the worst when you get a phone call from a client in a week like that and all five of them were phone calls to me saying, A, ‘Are you okay? I’m worried about your mental health and how’s the business holding up?’, and B, ‘This is your time to shine. We want you to get out there and invest our money in markets like this’. That’s an asset for funds management business that is irreplaceable, so thank you very much.
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