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Chief Investment Officer Letter June 2020



The success of Forager’s International Shares Fund shows money can be made in difficult markets. Our Australian Fund has catching up to do.

That was quick.

After March’s dramatic selloff, global equities staged an equally dramatic recovery in the June quarter. The International Fund’s 23.3% gain for the quarter took it to a 13.7% positive return for the full financial year, some 10.6% ahead of its benchmark. The Australian Fund’s 39.3% gain was even more extreme, but still left it down 18.4% for the year and some 11.2% behind the All Ordinaries Accumulation Index.

You can read all of the details in our 2020 Performance Report.

I’m proud of the way the Forager team has performed through the volatility. The speed, magnitude and violent nature of March’s selloff dwarfed the financial crisis. Many investors— including professionals—crystalised the losses by panicking at the worst possible time.

We’ve all been working from home, some juggling children and partners with their own stressful jobs. I don’t think any of us would pitch it as the easiest bear market of our lives. Yet we have managed to be greedy when others were fearful. We were as fully invested as we have ever been at the market bottom and have added a significant number of new investments to both portfolios.

While we had no idea the recovery was going to come so quickly, we weren’t going to miss it.


None of that takes away from the fact that, over the whole year, it has been another period of poor performance for our Australian Shares Fund. That’s two horrible years in a row. We certainly don’t want it to be three.

The 2019 financial year was one for reflection and change to some of our processes. A lot of progress has been made. Today’s portfolio is in a much better place than it was a year ago. We have been able to change boards and management teams at several underperforming businesses, with some positive early signs of progress. We have exited some underperforming companies over the year. And with a little help from a market meltdown, have added a few new businesses about which we are quite excited.

Source of Frustration

That hasn’t been reflected in overall performance, which is frustrating. While it is easy to blame markets—tech bubbles, value underperformance and the like—the outstanding year from the International Fund shows that all those hurdles can be overcome if we get more things right.

First, the benefits of diversity are significant. Diversity of ideas, diversity of people in the team and diversity of
underlying business all allow a fund to be nimble. In the International Shares Fund, we owned a number of large, blue chip stocks that held up relatively well in the meltdown. That enabled us to recycle capital from the likes of Yum China, Alphabet and Sony into shares that had been punished much more severely. That’s obviously harder to achieve in a fund restricted to Australian stocks but, when the opportunities were most abundant, the stocks we already held were among the most heavily punished. In many cases, they were impossible to sell (or buy) due to lack of liquidity.

I’ve made the case for less cash rather than more over recent years. Some investors vehemently disagree with that view. But one thing we can all agree on is that, if you are going to take maximum advantage of investor panic, you need access to liquidity. If that’s not cash, it needs to be highly liquid assets that are as uncorrelated as possible with the rest of the portfolio.

The biggest difference between the two funds, however, had nothing to do with the market meltdown. In the International Fund, we have had just three stocks contribute almost 18%  of positive performance between them. GAN, Celsius and Blancco all had market capitalisations of less than $500m at the time we purchased them and all have returned multiples of our investments. There have been a few things go wrong in that portfolio, too, but a few big winners make the world of difference.

At heart we are stockpickers. Our job is to use our size, flexibility and contrarian nature to get out there and find investment opportunities that make a lot of money. They are always few and far between. And combining those opportunities with a portfolio of high-quality businesses has been a powerful recipe in the International Fund.

But the past three years has seen a drought of big winners in the Australian Fund. And that’s been the biggest difference between the two Funds and the biggest difference between the past three years and the seven prior to that.

We will be bringing on a new senior team member in the Australian Shares Fund over the coming months, specifically aiming to complement the skills we already have. You will see further progress on portfolio liquidity, a more diverse mix of ideas and a few more of those problem children on a better path. At the end of the coming year, that needs to translate to substantially better returns.

Fertile Paddock

It is the most fertile backdrop for stockpicking I have seen since the years following the financial crisis. That’s true across both Funds.

Yes, the economic backdrop is going to be difficult for the next few years at least. Yes, the speed of the market rebound has surprised even the most optimistic of us. But I, unlike others, don’t think current market levels are absurd. Company after company is showing that they can adapt and flex and still be profitable. And low long-term interest rates have to be taken into account. I’m highly confident that a broad equities index will do better than cash over the next decade.

It’s not that that gets me excited, though. It’s the difference in valuation being attributed to the underlying index constituents. Many stocks have been left behind in the rally. Many of those don’t deserve to be. The gap between the popular and unpopular is as wide as I have ever seen it. And the reward for finding a stock that can jump the gap is immense.

In addition to highly attractive current portfolios, we are still finding plenty of prospective ideas. We have bemoaned the lack of variability over the past few years. Today we have no such excuse.

New Portfolio Managers

You may have already seen the news in an email towards the end of June, but I’d like to pass on my personal
congratulations to Gareth Brown and Harvey Migotti on their promotions to joint Portfolio Managers of the International Shares Fund. It’s been a horrible environment for value investing. It’s been a horrible environment if you are doing anything other than buying tech stocks. That we have had such an outstanding year and are within a smidgen of the index’s return since inception is a testament to the team’s efforts.

You won’t notice much different at a portfolio level, but you will see a lot more of them over the coming months and years.

2020 Roadshow

We won’t be touring the country this year, but we’ll still be running our annual roadshow. Put lunchtime on the 5th of August in your diary and we will be emailing you with further details soon.

Steve Johnson