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Monthly Report International Fund April 2022


International Fund April Monthly Report

Global stock markets continued to fall in April. By month’s end, the Forager International Shares Fund was 6.2% lower, against an index that was down 2.7%. It was also a busy time of stock-specific news—most of it positive, at least in contrast to the Fund’s performance.

Social media, in particular, made headlines. At the end of March, the world’s richest person—Elon Musk—made some cryptic tweets about free speech on the Twitter (NYSE:TWTR) platform. By early April, he disclosed a 9% stake in the company. And by mid-month, he placed a bid for the entire company at $54.20 per share, which the Twitter board soon agreed to.

Twitter has been a frustrating investment for the Fund. We see it as the most important media asset in the world. We also went in, eyes wide open, to the warts that prevented any of that immense inherent value manifesting for shareholders. There are few companies with such a gaping gulf between fair value based on today’s management and execution, and what the value of business would be under ideal management and execution. Perhaps we were naive to expect even a partial closure of that gap. Musk’s bid is a fair price for Twitter as it looks today.

On one hand, we’re relieved to have had a problem taken off our hands for a decent premium (and at a time when opportunities elsewhere abound). Turnarounds and excessive dilution through stock-based compensation are now Musk’s problems.

But on the other hand, we’re also disappointed that Twitter’s board and management team couldn’t do more over recent years to extract value for shareholders from this immensely important asset. And now they’re passing the baton without securing much for old owners for all that unrealised potential. The Fund made a little money on this stock, but should have made a lot more. While free speech is the stated aim of Musk’s bid, we think he will add meaningfully to his fortune thanks to Twitter.

Meta Platforms (NASDAQ:FB)—formerly known as Facebook—reported decent results for the first quarter, rallying almost 20%. Advertising sales increased 6%, which was within the guided range, but the market clearly expected worse. Geopolitical issues are negatively impacting both users and advertising spend for the business. It is also still facing headwinds from Apple’s privacy changes and increasing competition for consumers. TikTok isn’t going away anytime soon. But Meta is learning to adapt, as it has done many times in the past.

The type of content users see on their feeds is changing. For instance, Instagram’s Tiktok rip-off, Reels, now makes up 20% of time spent on the app. Meta is increasingly using artificial intelligence to select relevant content based on user preferences, rather than just showing posts from followed accounts. This is helping with engagement. But perhaps most important was Mark Zuckerberg’s clarification that continued investment in the Metaverse would be contingent on the increasing profitability of its advertising business.

Our view remains that this is one of the world’s best businesses. Investor sentiment has swung from overly optimistic to wildly pessimistic. At its April lows, Meta’s share price was just 13 times last year’s earnings. While we had no idea it was going to trade so low, we continue to believe our modest expectations at the time of purchase were justified and have added to the investment while it is deeply out of favour.

Across the pond, both of the Fund’s UK stalwarts reported pleasing results.

Sales at UK grocery retailer Tesco (LSE:TSCO) were up 2.5% to £54.8 billion, representing an 8.3% increase over the past two years. This is higher than industry sales growth, with Tesco’s overall market share increasing over the period. Cost inflation is an issue for grocery retailers. However, Tesco is continuing to generate lots of cash and return it to shareholders. A final dividend of 7.7 pence per share brings the total dividend for the year to 10.9 pence—a 4% yield at the current share price. Management has also committed to buying back £750 million of stock before April 2023.

Lloyds (LSE:LLOY) reported pre-tax profits of £1.6 billion for the first-quarter—down 14% compared to last year, but ahead of market expectations. The UK retail bank was a beneficiary of rising interest rates and growth in mortgages, which helped offset a £177 million provision taken against potential loan losses as a result of inflationary pressures. This trend is expected to continue throughout the financial year, with Lloyds increasing its expected revenue from interest rate payments. Via dividends and buybacks, the company returned 10% of its market capitalisation to shareholders last year and is generating more than enough profits to keep doing the same.