This week Chief Investment Officer, Steve Johnson, is joined by Alex Shevelev, Senior Analyst on the Australian Shares Fund, as they provide insight into another month of strong performance for the Fund. Watch the video to learn what stocks have been performing well in addition to what it will take for the market to recognise the value of these businesses.
Steve Johnson here, Chief Investment Officer at Forager Funds. I’m joined by Alex Shevelev, Senior Analyst on our Australian Fund. We’re in our new office as you can see behind us, and we’ve somehow lost the microphone so apologies for the sound quality on this one. Hopefully you can hear us anyway. Alex, we’re just putting out our October monthly report at the moment. It’s been another pretty strong month of performance for the fund. We saw some really good results from the portfolio companies for the full year ended 30 June. We’ve had a lot of AGM updates and a lot of quarterly updates coming out over the past couple of weeks and it seems like the results are pretty strong still. What were some of the highlights of the news for you?
So it was a good October in terms of news for a lot of our business. One that stuck out, in fact there were a couple, but a main one and one of the largest positions in the Fund was Mainstream. Mainstream is an administration provider for funds and it saw that very important funds under administration number crack the 200 billion mark. That is a very sharp increase and up in the last quarter, predominantly because they’re winning clients a little bit of that because those clients are seeing increased funds themselves, but they’re really doing a good job winning clients and continuing that momentum that they’ve had with regards to funds administration.
They’ve got Magellan here as a big client. Obviously Magellan’s growing and launching new products, which is great, but also that US private equity business going very well and at 200 billion of funds under advice, you’re starting to become fairly significant in the funds administration game.
Absolutely and we’ve seen some of that reflected in the share price this month, a little bit more enthusiasm for the business and for other businesses in that space as well.
Would be good to see a takeover there at some point over the next few years. While the business is growing quickly and improving its earnings we don’t need to stress too much about it. It’s probably the logical conclusion there. What else in the portfolio?
So another one that came through quite strongly was a business called SG Fleet. It’s a fleet management business and it also provides novated leases for customers as well now. The novated leases business took a bit of a hit during the COVID impacted second half of last financial year, but we really saw what the company is now forecasting, that this current half has really seen a bounce back, both in that business and in their ability to sell used cars because those used car prices are actually quite a lot higher now than they were prior.
We’ve been arguing that these fleet leasing businesses are a lot more resilient than the market has given them credit for over the past 12 months and seeing pretty quick recovery at that one. Anything else?
Yeah, Enero is another one that’s been in the Fund for a very long time, longer than a decade in fact now, and it’s delivering some very strong numbers. It did so for June, but it actually continued amazingly to do that for the first quarter of the current year. Now, the environment for marketing services business, hasn’t been great but we’ve got here a business focused on PR, which has done better than other segments in that space and focused on tech companies in the US which again had done better than others. It also has a neat business in the US, their own tech marketing business, which is going phenomenally well as well.
That is increasing revenue, it was up by 11% this quarter on prior year’s quarter and the profit nearly doubling at an EBIT level. Now some of that comes out and goes to other owners of that US technology business. But these are very strong results from the company.
Yeah, it’s an interesting example. I think of a wider thematic across the portfolio. The business is growing in a very difficult environment. It’s growing its profit faster than its revenue. It’s paying dividends out to shareholders, and still trades at a single digit multiple of the earnings that we expect it to make this year. Now, the portfolio is up more than a hundred percent from its lows back in March. It’s hard to argue that the market is not paying any attention to our holdings. But it still feels to me like a lot of these stocks that are going well are not trading with any optimism in their share prices. What’s it going to take for the market to recognize some of that value?
I think a big thing here is there’s been a lot of very dramatic changes happen over the last six months and a lot of that’s been consumer changes in the way consumers buy goods, what goods they buy, how they direct their attention, how they direct their money and a lot of valuations are still struggling to find the right level. You’ve seen a lot of e-commerce businesses flying because people are buying.
You’ve seen a lot of other businesses sort of recover, but investors are still a little uncertain, about whether that recovery is consistent. So Enero is one we’ve spoken about, which is still after quite a strong set of results trading on sub 10 times multiple, another is Motorcycle holdings. So the company sells motorcycles, accessories, wholesales and retails those accessories.
That businesses was trading sub 10 times after a very strong last quarter of last year, very strong first quarter of this year and they gave us some guidance for the first half recently that has continued into this first half. It’s going to be interesting to see how those next couple of reporting periods go for that business, because if you can establish a level here which is a higher profit level reasonably consistently, then that will be overtime rewarded by the market.
I think some of the concerns are justified. We’ve got Job Keeper coming to an end at the end of September for some companies, a bit later for others, you’ve got this high consumer spending on domestic stuff, an environment that might change if people start to travel again.
So I think there’s some valid uncertainty there about what here is temporary and what’s permanent, but I feel with some of these businesses that we own as well the environment was pretty horrible leading up to COVID and Motorcycle Holdings is a good example. With Enero, there’s been an enormous amount of work going into that business over the past five years to try and reposition it to some of these sectors that are growing.
So hopefully with a few more quarters of good results and when there’s no job keeper and no stimulus out there, if these businesses can keep generating good healthy profits, people might start to extrapolate it into the future and give them some credit where credit is due. In any case as long as they keep paying us fat dividends and trading reasonable prices, it makes for a pretty good portfolio returns from here. That’s it from us. Keep an eye out for the monthly report out early next week and any questions you’ve got, send them through to [email protected]. Thanks for tuning in.
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