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Monthly Report: International Fund October 2020


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International Fund October Monthly Report

US Election

At the time of writing, the final result of the US election was still unknown. Democrats are likely to win the presidency by a whisker, but might fail to gain control of the Senate. While the Forager International Shares Fund wasn’t skewed towards any particular outcome, that’s probably not a bad result for financial markets. A Joe Biden presidency should be better for global geopolitics. A Republican controlled Senate means more radical Democratic policies won’t be law any time soon.

The Growth at Any Price Argument

“We’re racing towards the singularity, we’re experiencing exponential growth in computing power & AI and you want me to trim Tesla and Amazon to buy Exxon and Citibank… please.”

That was an unnamed fund manager’s recent response to a broker note making the career-limiting case for buying some cheap stocks. It’s an alluring argument, isn’t it? And the more Tesla’s share price goes up, the more alluring the argument becomes. Who wouldn’t want to own companies that grow and shares that go up?

This is a prime example of the narrative fallacy. The story makes sense, therefore the conclusion is correct. You see it in property, too. They don’t make any more land, do they? And there is usually a lot of truth to a good narrative. The world is moving online. And humans are likely to be using less oil in 30 years’ time than they consume today. Ignore
both of those trends at your peril.

But ignore price at your peril, too. You can be right about the future and still not make money if you pay a price that assumes too much. And that’s the problem with a good narrative. You can make the same argument at absolutely any price. Say Exxon falls another 90% from here. You could buy the whole company at that point for US$14bn and it’s going to pay you US$14bn in dividends over the next 12 months. At the same time, imagine Tesla is 10 times more expensive than today and has a $US3 trillion market capitalisation, 1,000 times its expected profit in 2021. You could still make exactly the same argument about their respective futures, but could anyone possibly argue that the return from owning the latter is going to be better than the return from the former?

That’s not the relationship between the two, of course. And we don’t have an investment in either stock. But we’re seeing more and more convincing investment theses that apply at any price. And that’s very dangerous for those who believe they will make money as a result.

The flip side is that there are stocks that no one wants to own no matter how cheap they get. A carefully picked selection of these should generate some outstanding returns as a result.

We’re running a fairly balanced portfolio at the moment. Half the Fund’s top 10 holdings are technology focused or predominantly online. Some of those at the more old-world end of the spectrum offer outstanding prospective returns, too. One is Lloyds Banking Group (LSE:LLOY). The UK’s largest bank is particularly unloved. Its share price has fallen more than 50% since the start of the year and its £20bn market capitalisation is now less than half the tangible value of its assets.

The UK is bumbling its way through COVID-19 and its exit from the European Union. Interest rates are near zero and likely to stay there, making it harder for banks to eke out a margin. Yet Lloyds still managed a £1bn profit for its recently announced third quarter. We think it can easily make £4bn of profit in a normal year. It has excess capital and will return to paying most of that profit to shareholders as soon as the economic outlook is clearer. Hold Lloyds shares for the next five years and an investor should earn an outstanding return from dividends alone. The price may never go up. It’s not going to be sexy. But it could still be a wonderful investment.