September, 2023
In the December 2022 Chief Investment Officer Letter we made the case for smaller companies in 2023. So far, in aggregate, they haven’t delivered.
For the first nine months of 2023, small and mid-cap stocks continued their trend of underperformance relative to their larger counterparts. Market performance has become even more concentrated among a small number of mega-cap tech stocks.
The largest seven companies in the S&P 500 (Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla and Meta) delivered a disproportionate 11 percentage points of the index’s total 13% return year to date. We are always sceptical about these types of statistics, the largest contributors are always a significant proportion of market gains.
But these are simply the seven largest stocks—it is unprecedented that they are also the seven largest contributors to overall index performance.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/QR-FISF_SEP23-final-1.pdfAugust, 2023
While August was a weak month for global stock markets, an even weaker Australian dollar more than offset the decline. The Forager International Shares Fund notched up a gain of 0.9% for the month, just shy of the 1.1% return from the MSCI World Investable Market Index.
Share price appreciation associated with a takeover offer for Blancco (AIM:BLTG) added more than 1% to Fund returns for the month (see the July monthly report). The shares are currently trading at a small premium to the takeover offer. The bidder, Francisco Partners, hasn’t gained any traction beyond the three largest shareholders that had already committed to selling their cumulative 47% stake when the deal was first announced. We’re now slightly more hopeful that enough shareholders might join us in vetoing the current deal but, with the deadline for acceptance still a month away, it is too early to have any confidence.
The uranium price is up almost 10% since the start of August and is now up 27% so far in 2023, bolstering the Fund’s investment in the Sprott Physical Uranium Trust (TSX:U.UN). This investment is part of a broader commodities basket intended to provide a useful hedge against inflation. The Fund has slowly increased its investment in this owner of physical uranium over the past two years, with it now representing 2.3% of the Fund’s assets. After 15 years of next to no investment in uranium mining assets, our view is that the price needs to rise further to encourage enough mining to meet the world’s growing needs.
Nuclear power is controversial. But it’s likely an important piece of the decarbonisation puzzle. Wind, solar and other intermittent renewable sources of energy will only get us so far. Environmentally-conscious Germany, which recently decommissioned its last nuclear plant, is now burning more coal instead. In contrast, California has pushed back its plan to shutter the Diablo Canyon reactors for at least a decade.
Additional reactor life extensions are being granted across the US, UK and Japan. Political support for nuclear power has also turned a corner since 2022, with the US and EU now classifying it as a clean/green energy source.
But this story isn’t really centred on the West. After 20 years of almost no new nuclear reactors being built across the world, 40 are set to be completed between 2024 and 2027 (largely driven by India and China, where nuclear power has become a core to their emissions reduction and pollution control strategies). Further out, there are 19 additional reactors under construction and 425 new reactors planned or proposed across 31 countries.
Even without these new reactors, current demand sits well above existing uranium production (the gap having been met by stockpile depletion). Some of the world's largest uranium producers, such as Kazatomprom (KAS:KZAP) and Cameco (TSX:CCO) have missed production targets and downgraded guidance.
The investment case for higher uranium prices has been doing the rounds for a decade. While the recovery was set back by the Fukushima disaster, it’s our belief that this has only exacerbated the underinvestment in future production.
An investment in Sprott Physical Uranium Trust (a closed-ended trust that owns physical uranium) gives the Fund direct exposure to the uranium price without the risks associated with miners themselves. If we’re right about a significantly higher uranium price, there will undoubtedly be miners and mining explorers that prove to be wonderful investments. In our experience, there will also be plenty that end up losing money whether the uranium price rises or not. It is our preference to keep it simple, and Sprott is as simple as it gets.
Backing out currency and the Blancco contribution, the rest of the portfolio was down a touch more than 4% for the month. Open Lending (Nasdaq:LPRO) and Taskus (Nasdaq:TASK) were the two most significant detractors, delivering good results for the June quarter but warning that the second half of the calendar year looks difficult.
Even some of those that exceeded market expectations saw their share prices fall, like Canadian manufacturer Linamar (TSX:LNR). With stock markets around the world rising strongly so far in 2023, some negativity is welcome.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_AUG23.pdfJuly, 2023
July was an eventful month for the Fund. The unit price of the Forager International Shares Fund rose 3.0% on the back of several positive results, outpacing a 2.6% return from the index.
In early July, data erasure software provider Blancco (AIM:BLTG) released a trading update saying that its second half had been strong and the business expected to report revenue and profit for the year ended 30 June 2023 ‘comfortably higher than current forecasts’. The stock popped more than 15% on the news. It seemed strange the company took until three days after books closed to tell us it had been a good year. Perhaps they’d been busy?
A few days into August, the news broke that private equity firm Francisco Partners had bid £2.23 cash per share to take Blancco private. The bid represents a 25% premium over the share price at the end of July. The Blancco board has endorsed the bid and several large shareholders have committed to accepting it in the absence of a better offer.
We’re certainly not celebrating. The bid offers no obvious premium for control and undervalues the returns this business can likely generate for shareholders over the medium to long term. We’re also concerned the board hasn’t significantly shopped the company around to other potential bidders before accepting this one. We outlined those concerns in an Open Letter to all shareholders in Blancco Technology Group, which you can find published on our website. We may have more to say on the matter over the coming months.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_JULY23-3.pdfJune, 2023
Over the year to 30 June 2023, the Forager International Shares Fund returned 19%. Despite slightly underperforming its benchmark index over the year, it’s a result our team can be proud of.
This portfolio—by design—is invariably weighted towards smaller companies. Smaller companies garner less attention from investors and research houses. They tend to grow faster than more mature counterparts. Furthermore, mergers and acquisitions tend to be a more important tailwind for these companies given their size. The results? Smaller stocks have historically achieved higher returns over the full business cycle.
The S&P SmallCap 600 Index has outperformed the large cap S&P 500 by more than two times since the turn of the millennium. When seeking an analytical or behavioural edge in order to scoop a bargain, small caps are an evergreen hunting ground.
But that hunting ground is currently even more fertile than usual. In the decades prior to 2021, small caps traded at a premium multiple to the S&P 500 (higher growth is the reason they typically deliver higher returns). They are currently trading at a 25% discount—a multi year low.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF-PERFORMANCE-REPORT-JUNE-23.pdfMay, 2023
The fads come and go quickly these days. In 2021, all you had to do was change your name to “XYZ as a Service” and make up some annual recurring revenue and your share price would double. Then 2022 was all about the metaverse. This year it is impossible to sit through an earnings call without hearing a spiel about artificial intelligence (AI).
The frenzy was set off by the phenomenal success of generative artificial intelligence app Chat GPT. Within two months of launch, chat GPT had reached 100 million users. It took TikTok nine months to reach that marker, and Instagram more than two years. If you haven’t already had a play around with the tool, you should. It is free and fun.
We don’t pretend to have grand insights about how the technology will progress from here. It feels a little “flavour of the month” to even mention it. But, like cloud computing and online search, this technology will change our lives over the coming decades. Some listed companies will be losers and others winners.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_MAY23.pdfApril, 2023
April was another positive month for the Fund and the wider market. The unit price of the Forager International Shares Fund rose 2.0%, slightly underperforming a 2.6% return from the index. While most portfolio investments will report results in May, those that were out in April were good.
Meta Platforms (Nasdaq:META) released its first-quarter results and continued its share price run for the calendar year, up 100% since 31 December 2022. Advertising revenue from the company’s social media platforms increased 4% compared to the prior year, after three consecutive quarters of revenue declines.
Users are sharing Reels twice as much as they were six months ago and newly introduced AI recommendation tools have driven a whopping 24% increase in time spent on Instagram. That’s equal parts scary and impressive. Meta’s margins are still lower than they were a year ago but there was a nice improvement versus the last quarter of 2022. Cost guidance for 2023 was lowered again.
Online travel agency lastminute.com (SWX:LMN) has been on a similar trajectory, though on a smaller scale. After Swiss legal troubles, a board and management sweep and some underwhelming fourth-quarter results, we were running out of patience for this business. The rest of the market was too. But there was some light at the end of the tunnel with the company’s full-year result this month. 2022 was a lackluster year for the business, with revenues still 10% below 2019 levels and margins much worse. But trading for the first quarter of 2023 looks promising. Sales were 10% above the same period in 2019 and while margins aren’t quite there yet, they’re definitely getting better. We need both of these trends to continue throughout the year.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_APR23.pdfMarch, 2023
It has been another wild start to the year for financial markets. Silicon Valley Bank, the 16th largest bank in the US, failed due to two years of mismanagement. Credit Suisse, one of Europe’s largest banks, was about to fail due to two decades of mismanagement, only to be rescued by competitor UBS in a near wipeout for shareholders.
Through all that, the unit price of the Forager International Shares Fund rose 10.7% for the quarter, versus an 8.3% return for the MSCI ACWI IMI index in Australian dollars.
Our team has attended various conferences over the past two months, across the United States and Europe. Meetings included a number of existing portfolio holdings and many other companies that are on our watchlist. Some end markets are showing signs of weakness—consumerexposed businesses being chief among them.
But we were surprised at the optimism across many other sectors. Industrials continue to do very well, driven by reduced Covid restrictions in China and onshoring efforts in North America and other Western nations. Other sectors such as semiconductors and commercial construction continue to exceed expectations of a few short months ago. The faster growing retailers on our watchlist, JD Sports (LSE:JD) among others, expressed no desire to pull back on store rollout plans. IT services businesses like Computacenter (LSE:CCC), Softcat (LSE:SCT) and Insight Enterprises (Nasdaq:NSIT), whose customers come from all corners of the economy, aren’t experiencing a slowdown in most parts of their business. Aggregates and cement companies such as Martin Marietta (NYSE:MLM) are talking about an acceleration in their business due to US infrastructure spending while solar power distributors Enphase (NASDAQ: ENPH) and Sunpower (NASDAQ: SPWR) continue to see strong demand for their products.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/QR-FISF_MAR23.pdfFebruary, 2023
January’s investor optimism dissipated quickly in February. Global equity markets gave up much of their January gains as investors digested a plethora of results and stubbornly persistent inflation data, with the latter suggesting interest rates still need to rise more than anticipated in 2023 and potentially opening the door to having no rate cuts in the second half of the year either.
For both the Index and the Forager International Shares Fund, a weak Australian dollar offset all of the stock price falls. The Index was up 1.6% for the month, while the Fund’s unit price increased 1.9%. It is not easy running a business in the current environment. Inflation and supply chain issues are improving but still problematic, labour shortages are still rife and, just as those things start to improve, consumers are proving much more judicious.
Combine a difficult cost environment with dramatic shifts in consumer demand and you get significant changes in profitability from quarter to quarter. Results for the last quarter of 2022 are showing exactly that, with big winners and losers across the portfolio.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_FEB2023_Final.pdfJanuary, 2023
Global share markets rose over January, with the MSCI ACWI IMI index up 3.3% in Australian dollars, despite enduring a headwind from a strong Australian currency. The unit price for the Forager International Shares Fund rose 7.0%, with those stocks most brutalised by 2022 finally catching some interest.
By the time Meta Platforms (Nasdaq:META) reached its low point in November it had fallen a stunning 74% from the start of 2022. Today, it’s up 69% from that low and 24% during January alone.
It’s a similar story for other beaten-down portfolio investments. Open Lending (NASDAQ:LPRO), a tech company that facilitates loans between lending partners and “near prime” borrowers in the US, fell 70% in 2022. Its share price rose 30% in January. Fellow 2022 losers Installed Building Products (NYSE:IBP), Fathom Holdings (Nasdaq:FTHM) and Cryoport (Nasdaq:CYRX) rose 29%, 26% and 32% for the month.
Over in Europe, lastminute.com (SWX:LMN) began the arduous process of reputational recovery from its misuse of public Covid relief funds in Switzerland. In December, shareholders agreed to a clean sweep of the entire board of directors and the appointment of a new CEO. The new board quickly and wisely decided to accept rather than appeal the Swiss State Secretariat for Economic Affairs’ decision that it must repay the full CHF29m in relief funds it received over the pandemic.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_JAN2023.pdfDecember, 2022
The 2022 calendar year was a shocker for financial markets, and worse for the Forager International Shares Fund. The Fund’s net asset value fell 28% for the year, only the second negative year in its 10-year history and the largest loss by some margin. That was with some help from a depreciating Australian dollar.
As explained in recent monthly and quarterly reports, we have been concentrating the portfolio on those businesses performing well and reducing the overall number of investments. Recent months have also seen the addition of two new investments to the portfolio, both of which are introduced below.
YETI—NOT SO ABOMINABLE
Yeti Holdings (NYSE:YETI) is a smaller cap business that had a tough 2022. But fortunately we didn’t own it until November when it became a new addition to the portfolio.
US-listed outdoor lifestyle brand Yeti specialises in designing and distributing premium coolers and insulated drinkware, with opportunities to expand into other adjacent product categories. Yeti products were originally designed for rugged outdoorsmen and have a reputation for being “nearly indestructible”. Brand recognition has expanded to reach the masses in the United States (Yeti's major market) and key international markets like Australia and Canada.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/QR-FISF_DEC22.pdfNovember, 2022
Global equities performed strongly in November, with major indices rising between 5% and 15%. The Australian dollar also appreciated strongly, particularly against the US dollar, mitigating most of the gains for Australian investors. The Index rose 2.7% in Australian dollars and the unit price for the Forager International Shares Fund fell a touch.
The main market gains were made following relatively benign US inflation estimates and growing evidence for a significant fall in inflation throughout 2023. The Manheim index of used car prices—the single most significant contributor to US inflation over the past year—has now fallen 16% from its peak in January. Petrol prices are down 25% since June, shipping costs have more than halved and lumber prices—after quadrupling through 2021—are now back to historical levels. Moreover, global food price growth looks like it is about to turn negative, a stark difference from the 20-40% year on year rises witnessed through 2021 and the first half of 2022.
When the 2022 highs for these items are used as the base for inflation calculations in 2023, they will be meaningful negative contributors and headline inflation numbers will fall dramatically (and possibly be negative). That could be a temporary reprieve—job markets remain extremely tight— but longer-term interest rates have fallen meaningfully as investors get confident that there aren’t too many rate rises to come.
Whether they are right or not, the economic effect of the current level of interest rates is yet to be felt by most of the economy. While some of the more obviously resilient companies’ share prices are now back near all time highs, share prices for many still reflect extreme pessimism about future profitability.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_NOV22.pdfOctober, 2022
The net asset value of the Forager International Shares Fund jumped 8.6% in October, while the MSCI World IMI rose 6.7%.
Elon Musk’s pursuit of Twitter (NASDAQ:TWTR) reached a conclusion in late October. After months of trying to back out of his original agreement, attempting to torpedo the business itself and some expensive and entertaining legal wrangling in court, Musk bought all outstanding Twitter shares for $54.20 each, the exact price he agreed to pay in April.
As explained in previous investor reports, we expected the Delaware courts to force Musk to honour his prior agreement. But we were also fully resigned to some form of haircut on the original $54.20 price. Share prices of other tech companies have been hammered since the original agreement, particularly those with digital advertising revenue like Twitter. Twitter's own results have been woeful. Absent Musk’s offer, Twitter’s share price would likely have a one in front of it.
Some reports suggested the financing Musk arranged back in April would be impossible to replace in the current environment. Others that an enforced court deposition could have horrible consequences for Musk.
Whatever the reasons, Twitter’s board and CEO did a wonderful job getting the deal across the line without a discount. It has been a rocky ride but, ultimately, a profitable investment and a saga that is going to be much more fun to watch without a vested interest.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_OCT2022.pdfSeptember, 2022
The macroeconomic concerns that punctuated the end of August continued throughout September, with equities down sharply for the month. The Forager International Shares Fund was lower by 5.9% in September against an index that was down 3.7%, despite a weak Australian dollar. That erased the gains for both the Fund and the market from earlier in the quarter.
Not many sectors have been spared this year as the S&P 500, a broad-based index of US stocks, has fallen 25% in the nine months to 30 September. Some sectors have been hit harder than others, though. The US housing market is one of them, with an S&P US Homebuilders Index down 36% over the same nine-month period and plenty of stocks exposed to the sector down much more than that, particularly at the smaller end of the market capitalisation spectrum.
It’s not surprising that investors are spooked. The US 30-year fixed rate for mortgages has more than doubled, rising from 3.2% at the start of 2022 to 6.7% on 29 September.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/QR-FISF_SEP22-1.pdfAugust, 2022
Having rallied strongly in the first few weeks of August, equity indices ended the month slightly lower, with macroeconomic concerns returning with a vengeance.
Federal Reserve Chairman Powell’s Jackson Hole speech dented investors’ confidence that interest rate rises might soon end. Declaring the Fed must “keep at it until the job is done”, Powell drew parallels with the 1970s, suggesting the risks associated with pausing too early were greater than the short-term economic impact of going too far: “the longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched”.
The message was clearly pointed towards financial markets—investor optimism is unfounded. Share prices fell promptly.
Still, it’s a nicer problem to be dealing with than the rampant energy prices hitting Europe. Everything is going wrong, including Russia shutting off gas supplies, drought-afflicted rivers curtailing nuclear energy, and a global shortage of coal. Wholesale gas prices in Europe have risen four-fold over the past year. If recent prices hold, it is a dramatic impost on the economy (Goldman Sachs has forecast a $2 trillion rise in energy bills) that’s likely to send the Eurozone into a recession.
The craziness of recent years is showing no signs of abating.
Amidst the turmoil, portfolio investments Flutter (LSE:FLTR), Zeta Global (NYSE:ZETA), and RumbleOn (NASDAQ:RMBL) announced results that offset market pessimism.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_AUG2022-1.pdfJuly, 2022
July was a big up month for stock markets, with our benchmark index up 5.6%. The Forager International Share Fund lagged a little, up 4.5%, with many quarterly results still to be reported.
Online travel technology firm lastminute.com (SWX:LMN) fell 33% in July after Swiss authorities launched an investigation into the company. Four executives have been held in remand, including the CEO and founder Fabio Cannavale and Chief Operating Officer Andrea Bertoli. They’re accused of fraud related to COVID-19 assistance received by the company.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_JULY_2022.pdfJune, 2022
You might question our right to open with a Warren Buffett quote after the year we’ve just had. Giving back more than half the outperformance of 2020/21 in an increasingly difficult market environment, the exact time when value investors are supposed to shine relatively. It’s all for the purpose of selfflagellation. Buffett used the so-called Noah rule to castigate his own performance after his insurance business was walloped by the September 11 terrorist attacks. He didn’t lean on “unknown unknowns”, “perfect storm” or the musician Shaggy’s “It wasn’t me” defence to describe the left-field event. He focused on how he should have been positioned in such a way that would have made Berkshire Hathaway more resilient to any such calamity
We know the feeling. Yes, smaller capitalisation stocks got hit particularly hard this past year, with the World Small Cap index down 23% over the past year. The index now trades at a priceto-earnings ratio not seen since the global financial crisis back in 2008. Technology and faster-growing businesses more generally were hit hard, with the Nasdaq down 30% these past six months alone. The number of Russell 3000 (non-financial) companies trading for less than cash has surpassed the month-end record set during the Global Financial Crisis. Finally, the compression of valuations for global markets—measured by the ratios of price to trailing earnings for global stocks—has been the greatest since the stagflation of 1975. It has been a calamitous year, particularly at the smaller end of the market where we tend to invest.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_JUNE_2022.pdfMay, 2022
Jamie Dimon recently warned of a “hurricane brewing”. The Chief Executive of JP Morgan (NYSE:JPM) says consumers are still spending, for now, but they are doing so by dipping into their stimulus-boosted savings. The ratio of savings to income in the US is now the lowest in 14 years.
It should be no surprise, then, that it has been a tough year for shareholders in economically sensitive businesses. Already rampant inflation, the prospect of rising interest rates, and a subsequent global recession in 2023 have sent investors and speculators running for the exits.
In the Forager International Shares Fund, calendar year share price falls have ranged from 27% for manufacturer Linamar (TSX:LNR) to 29% for insulation installer Installed Building Products (NYSE:IBP) and 44% for auto-loans facilitator Open Lending (NASDAQ:LPRO).
There is no doubt a recession will temporarily impact all three businesses. If recent results are anything to go by, though, they are heading into any potential turmoil from a position of strength.
Linamar is already in the midst of the worst downturn it has ever faced. Prior to the COVID virus’s arrival, the world was producing almost 100 million cars per annum. Those numbers have been hammered. By the end of 2022, a cumulative shortfall of some 40-50 million cars won’t have been produced. The 2008/9 global recession saw a decline in volumes barely one-third of what has been experienced this time around, although it would have been worse if not for massive government incentives.
File:April, 2022
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.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_April_2022.pdfMarch, 2022
Stock markets have fallen sharply. The Russell 2000 Index of small US companies, measured in Australian Dollars, fell 2.1% over the month of March and 10.2% over the March quarter. Despite also owning some larger stocks, the Forager International Shares Fund performed worse than that. You can put most of that down to unforced errors.
March was an important month for the Fund, with many of its investments reporting their 2021 results and 2022 outlook. It was a chance to collect evidence and reappraise. Had the operating performance justified Fund valuations, or was the market pessimism correct? The hope was for emphatic wins, but the result was a mixed bag
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/QR-FISF_March-22.pdfFebruary, 2022
Global share markets tumbled further in February, with the MSCI ACWI IMI falling 5.1% and the unit price of the Forager International Shares Fund falling 6.3%.
The month began with a focus on increasingly concerning signs of inflation and the prospect of higher interest rates, and ended with Russia mounting a full-scale military invasion of Ukraine. The latter event sent the prices of already scarce commodities like oil, gas and fertiliser soaring.
Any war is a senseless waste of life. One in a country many of us have travelled and have personal connections to is particularly gut-wrenching. When it comes to investing your money, though, we don’t have a geopolitical insight worth listening to. Our focus remains on finding businesses that are significantly undervalued and where we expect that value to be realised within three to five years.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_FEB22_v2.pdfJanuary, 2022
The unit price for the Forager International Shares Fund fell 6.2% over the month, as the late 2021 small-cap sell-off became a rout in January. The Russell 2000 Index of US small companies fell 9.7% for the month, leaving it 17% off its November highs. Under the surface, it has been even more tumultuous than that. According to investment bank JP Morgan, half of the stocks on that index— that’s one thousand companies—have suffered share price falls of more than a third from their two 52-week highs.
From the highs of 30 June last year to the end of January, the Fund has suffered a 17.9% decline. Like the Russell 2000 Index, a significant number of individual stocks have fallen. For example, the share price of one of our investments, online real estate agent Fathom Holdings (NASDAQ:FTHM), soared from $10 to $50 in the nine months after its June 2020 IPO and has since crashed back to $14 again. In the 18 months that it has been listed, the business has more than doubled in size and, in our opinion, has plenty of growth ahead of it. It seems a more attractive investment today than when we first bought the shares.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_January_22.pdfDecember, 2021
December brought to a close a tough end to the year for the Forager International Shares Fund. Over the past six months, the Fund’s unit price declined 12% while the MSCI ACWI IMI (in Australian dollars) returned 8%. Over the December quarter, the numbers were -5% and 5% respectively.
The return for the year was still positive at 15%, thanks to a stellar first-half performance. With a few notable exceptions, it was largely the same small-cap stocks contributing to both sides of the ledger. Small-stock outperformance was a significant tailwind to the Fund’s returns in the 2021 financial year and you should note that there is little crossover between the Fund’s holdings and any index. We provide those references so you can see which way the wind is blowing.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/QR-FISF_DEC21.pdfNovember, 2021
In November, the unit price of the Forager International Shares Fund increased 1.3% against a benchmark increase of 3.1%. Over the month, most of the smaller companies in the Fund reported quarterly or half-yearly results. Given some of last financial year’s best-performing stocks have been experiencing significant share price falls since June, the shareholder updates were more important than usual. The overarching theme was pleasing results in a challenging environment.
The automobile industry was one of the first to suffer from a clogged-up supply chain. In 2019, the world produced 97 million light vehicles. In 2020, with COVID shutdowns and reduced demand, production fell to 78 million. Since then, demand has well and truly bounced back. However, thanks to a shortage of computer chips essential to all modern automobiles, supply has not. Global vehicle production for 2021 is now expected to be well below normal, roughly flat with 2020, with most of the surprise volume losses coming in the second half of the year.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_NOV21.pdfOctober, 2021
Abrupt changes to the social media landscape came into focus over the month of October, with some businesses more impacted than others. By month’s end, the Forager International Shares Fund unit price was down 1.79% against an index return of 0.85%.
The challenges for social media stocks began with one we don’t own. Snap (NYSE:SNAP) reported its quarterly earnings on 21 October, and was down 27% the next day. Snap owns Snapchat, a messaging and photo-sharing app which generates revenue by serving advertisements to its users. The share price reaction was due largely to a lower revenue forecast for the next quarter. Snap’s CEO pointed to privacy changes implemented by Apple (NASDAQ:AAPL) as a reason for the shift in expectations.
File:September, 2021
Global markets sold off during September. The supposed triggers were inflationary pressures and fears of rising interest rates. The Fund’s unit price fell 3.6% during September, against an index decline of 2.9%
File:August, 2021
August was as eventful as ever, with the majority of portfolio investments revealing financial results for the past six months. Lingering COVID-19 lockdowns caused trouble for some, while the same forces propelled the results of others. Financials across the market were messier than usual, with companies making rosy adjustments to reported results.
With so many disruptions throughout the year, many management teams preannounced result expectations, often updating these many times as the environment shifted. In these actual results, outlook commentary focused on recurring supply chain issues and labour inflation. Uncertainty around the length of lockdowns and the post-COVID-19 state of the world meant very few companies were confident enough to provide earnings guidance for the coming year.
Motorcycle Holdings (MTO), the motorcycle dealer and seller of motorcycle accessories, saw its profit expectations increase a few times during the 2021 financial year. With profits coming in at the higher end of its May guidance, the company’s net profit surged 86%. Gross profit from new motorcycle sales rose 69%, with more bikes being sold at much higher prices. An overly leveraged business before COVID-19, Motorcycle Holdings ended the year with $5m in cash and no corporate debt.
Will the good times come to an end this year? Management, led by 19% shareholder and managing director Dave Ahmet, suggest demand is sustainable and that the elevated profit margins of the past 12 months will continue for another year at least. Investors don’t seem as convinced. Shares are trading at ten times this year’s lockdown affected earnings with profit falls assumed in 2023. With plenty of levers for management to pull in the meantime, including sensible acquisitions, the business should positively surprise investors.
File:July, 2021
The Forager International Shares Fund gave up most of June’s gains in July. The unit price fell 4.25%, versus a 2.65% increase in the MSCI AC World Net Index in Australian dollars. Share price falls among small companies were widespread, with the Russell 2000 index of US small companies falling 4.43% for the month.
We had realised substantial profits in those same small caps earlier this year and an unwind in share prices is welcome. Expectations are now far more sensible into the coming quarterly reporting season. We have been able to top up a number of investments as a result of the weakness, especially those where the results are likely to be good.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_JUL21_FINAL.pdfJune, 2021
The final quarter was a bumper end to a bumper year for the Forager International Shares Fund. The June quarter return for the Fund was 18%, taking the full-year return to 79% after all fees and costs. That’s 9% and almost 50% better than the MSCI AC World Net Index in Australian dollars for the respective periods.
Many of the trends defining markets in 2020 have withered in the 2021 calendar year. Large tech and growth stocks have generally underperformed, and value stocks even had their day in the sun. The Fund’s continued outperformance has been partly a result of our valuation methodology, enabling us to identify attractive investments in a variety of different markets and types of businesses. Many of our long-held investments outside the US have been trucking along nicely, while that progress has only been turning up in share prices more recently. You can read some updates later in this report.
But the biggest recent contribution has come from new investments that have only entered the portfolio this calendar year. While we don’t expect all new ideas to contribute to the portfolio immediately, the importance of recycling investments that have run their course and constantly searching for attractively priced replacements has been paramount
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FOR-FISF_JUN21.pdfMay, 2021
The Forager International Shares Fund returned 1.4% this month, slightly ahead of the MSCI AC World Net Index in Australian dollars. Some of the Fund’s new undisclosed investments have contributed significantly to performance over the past couple of months. These will be discussed in detail in the June Quarterly Report.
A number of existing investments reported results throughout May.
Canadian manufacturing conglomerate Linamar (TSX:LNR) has been in the portfolio for almost 3 years. This family-controlled company prides itself on advanced manufacturing capabilities and applies those skills across farm equipment, construction equipment and the automobile industry. All end markets were suffering prior to COVID-19, and were hit even harder by the subsequent global slowdown. The environment is getting rapidly better in 2021 and 2022 is shaping up as a bumper year
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_MAY21.pdfApril, 2021
April was another big month, with Fund returns of 8.05% compared to a 2.88% increase in the MSCI AC World Net Index in $A.
It’s been an encouraging start to the year globally, as a number of countries reopen after strict COVID-induced lockdowns. More than 50% of Israel’s population, and a much higher proportion of vulnerable people, have been fully vaccinated against the virus. Bars, restaurants and beaches are back to normal. Great news for businesses that have been struggling for the past year. The UK is a step behind on the same path. Early data indicates that retail sales are up, bookings for hotels and restaurants are increasing and companies are hiring new staff.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_APR21.pdfMarch, 2021
The world’s stock markets continued their year-long recovery in the first quarter of 2021. For the three months, the MSCI ACWI IMI (AUD) added 6.5%, taking the 12-month return to 26.6% (March 2020 was close to the market bottom). That’s despite the Australian dollar also rebounding rapidly and subtracting some 18% from returns in Australian dollars. While the initial market bounce was driven by COVID beneficiaries and tech stocks, recently the recovery has been more widespread. In the March quarter, oil stocks, travel stocks and other 2020-laggards picked up the baton
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/QR-FISF_MAR21.pdfFebruary, 2021
Be careful not to pick your flowers and water your weeds. But you never go broke taking a profit. Like most investing “wisdom”, both of these contrasting sayings can be useful, and also be downright dangerous. For every person who sold their Apple (NASDAQ:AAPL) shares 10 years too early, there is someone who let Blackberry (TSX:BB) become 50% of their portfolio, only to see what could have been a very comfortable retirement evaporate into thin air. Trite investing wisdom is no substitute for first order thinking. It’s true that opportunities to compound wealth over decades in a single stock are rare. When you find one, you need to make the most of it. Energy drink company Celsius (NASDAQ:CELH) is a prime candidate. The Forager International Shares Fund has owned it since January 2020. It is growing rapidly in the US and the most substantial barriers to national distribution have already been overcome. Sector juggernaut Monster Beverage (NASDAQ:MNST) has been one of the world’s most wonderful investments over the past 20 years. Celsius is showing some early evidence that it is on a similar trajectory. If its share price were up 100%, we would not have sold a share given the thesis confirming evidence to date. If it were up 200%, it would still be one of our largest investments. But it’s up 857% in the space of 12 months. We’ve had a strong bias towards hanging on. We’ve recognised how much potential this business has. But it’s still a tiny company with an unproven management team and an auditor we have not previously heard of. The risks of substantial falls from here are too high for us to keep holding, and we have sold most of the Fund’s investment
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_FEB21.pdfJanuary, 2021
January was an exciting month for share traders. News of a GameStop Corp (NYSE:GME) “short squeeze” dominated the media. Short selling is the process of selling stock you don’t own, with the intention of buying it back later at a lower price. Short sellers make money if the stock price falls and lose money if the stock price rises. In order to short-sell a stock, you need to borrow it from someone who does own it.
A short squeeze occurs when a large number of short sellers are forced to unwind (or close out) their short position en masse. This could happen due to risk management. As a stock price rises, the size of a short seller’s exposure increases. Or there could be issues related to borrowing the shares. Sometimes, because of lack of supply, the cost of borrowing a stock increases dramatically. Sometimes stock is entirely unavailable. So short sellers need to close out their positions by buying shares on market. Buying on market often pushes the price of shares up, further compounding a short seller’s problems, hence the term short “squeeze”. More than 100% of GameStop’s shares were sold short, making it a prime candidate for a short squeeze. Enter WallStreetBets, a posting board on Reddit. There, an army of retail investors (some of them very sophisticated) engineered a short squeeze by buying GameStop stock, causing some of the short sellers to exit their positions for risk management. Borrowing the stock got more expensive, brokers forced short sellers to cover their positions and a major fund, Melvin Capital, lost a big chunk of its portfolio value and required a capital injection. At their peak, GameStop shares were trading at US$483 in January. Up from less than $5 just six months ago.
But what does this have to do with the Forager International Shares Fund? Early this month, before all the action on GameStop, we were looking closely at US homewares retailer Bed Bath & Beyond Inc (NASDAQ:BBBY).
It’s a classic retail turnaround story. A traditional bricks and mortar retailer with an overpaid management team who were late to the eCommerce party. Almost two years ago, a group of activist investors pushed for change within the company. Since then, we’ve seen a complete board and management team overhaul, and huge improvements in the online offering. In the last quarter, 31% of Bed Bath & Beyond’s sales were online, and that number should continue trending higher. So the risk that current management can’t manage the transition to online is falling. With the worst of COVID-19 behind them and a net cash balance sheet, the business looked attractive based on fundamental analysis. So we like the long-term story. But, as the GameStop saga spread, the potential for a short squeeze meant we had to get in quickly. With more than 60% of the equity base sold short, Bed Bath & Beyond is another of the market’s most shorted stocks.
The short squeeze thesis proved prescient. At one point this month, Bed Bath & Beyond’s share price had doubled from our entry price, allowing Forager to realise gains almost equal to the initial investment. That leaves us with a bet on the turnaround thesis, at a cost of close to zero.
Frantic trading and wild share price moves are emblematic of highly speculative pockets of the market. But those pockets remain relatively small. Elsewhere, the prospects of a rapid economic recovery are yet to be fully priced.
More than 10% of the US and 15% of the UK population has already received a COVID-19 vaccination. Estimates suggest that most developed nations will have vaccinated over 50% of their population six months from now. Between the economy reopening, further fiscal stimulus and falling unemployment, a consumption boom is almost certain. Goldman Sachs estimates that US consumers have accrued well over a trillion in savings throughout 2020, as the savings rate jumped to 15.7% of disposable income. Assuming this normalises to a rate closer to 10% (still well above the 7-8% seen over the past decade), there could be almost a trillion US dollars worth of pent up consumer demand to be spent this year.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_JAN21.pdfDecember, 2020
Wow, what a ride. We have never seen anything like 2020. The first quarter of the year saw one of the largest and fastest sell-offs in market history, with stock markets hammered by the pandemic and global economic lockdown. The recovery was almost as steep, underwritten by the world’s central bankers. The buffering effects of the Australian dollar helped mute the sharpness of both the downturn and the recovery for local investors. But volatility was extreme. Violent price moves left many paralysed. We’re not going to pretend some nights in March weren’t restless. But it’s the sort of investing environment where we can best hope to gain an edge over the crowd.
The Fund owned eight stocks (Celsius, Fathom, Open Lending, ThinkSmart, Farfetch, GAN, Spotify and Uber) that doubled over the full course of the year. Many more if you cherry pick from the 23 March low. In Celsius’s case, its share price ended the year almost 10 times higher than our first purchase in January 2020. One should not expect a repeat near-term. Even if we managed to eliminate all mistakes next year, market conditions are unlikely to reward winners so rapidly. This has not been a normal market. However, it remains more bifurcated than usual, and that should prove good for us.
The portfolio is more diversified than it’s been in years. At 31 December 2020, the largest five investments represented just 20% of the portfolio, versus more than 30% a year earlier. We do not know what 2021 will bring. But if the market continues to race higher, the portfolio will continue to get more defensive. In cricketing parlance, more blocks and singles, fewer boundaries.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/FISF_DEC20.pdfNovember, 2020
A slate of positive vaccine news sent global sharemarkets higher in November, with the MSCI World Index surging more than 7% in Australian dollars. We outlined four key themes for 2021 in our July 2020 roadshow, including a travel recovery, a general value recovery, some highly appealing small growth stocks and a collection of special situations. All four themes contributed in November.
The total Fund return for the month was 10.85%, taking the calendar year to date return to a touch over 30%, after all fees and expenses.
Travel and traditional value stocks were beneficiaries as investors shifted from the perceived safety of expensive work from home winners to recovery stocks. Lloyds Bank (LSE:LLOY), Wizz Air (LSE:WIZZ), Skywest
(Nasdaq:SKYW) and Flughafen Wien (WBAG:FLU) are just a few of a long list of strong performers.
Despite November (finally) being a month where growth stocks were on the nose, some of our small companies delivered better-than-expected returns.
It wasn’t all good news. eGain (Nasdaq:EGAN) provided a disappointing update. While its third quarter results were good, the company announced that it had lost two larger clients currently using its customer engagement software. There are plenty of new customers coming on board, too, but the loss has us and others worried about the long-term likelihood of hanging on to them. The stock fell almost 30% in November and gave up all of our gains since purchase.
That was more than offset with some stellar results reported elsewhere.
It was a huge month for online luxury platform Farfetch Limited (NYSE:FTCH). In the first few days, after some speculation, Farfetch announced a joint venture in China with Alibaba Group (NYSE:BABA) and Compagnie Financière Richemont (SWX:CFR). The partnership should significantly expand the platform’s reach in China, as well as serving as an endorsement from two big players in eCommerce and luxury. An impressive set of results followed just a week later. Consumers spent 66% more on the platform than they did one year ago, and profitability continued to improve, eclipsing most people’s expectations. Farfetch’s share price increased 94% throughout the month as a result.
Energy drink company Celsius (Nasdaq:CELH), which has seen its share price rise fivefold over the past 12 months, keeps delivering results that justify the optimism. Revenue for the September quarter was 60% higher than the previous year in its key North American segment. Recent Nielsen data suggest the fourth quarter might be even better. Profit margins and cash generation are both heading in the right direction and, while we have taken a lot of profit off the table, the chances of this stock justifying our most optimistic assumptions are increasing by the day.
Used car retailer Motorpoint (LSE:MOTR) is another small business showing evidence that it is going to be a winner. First half sales were down 27%, unsurprising when COVID-19 closed all of its sites for 2 months. The company didn’t sit on its hands during shutdown, developing a home delivery offering by May. More than 40% of first half sales were online, chiefly click-and-collect, but by September 8% of total sales came from home delivery.
Dealerships reopened in June and pent up demand, strong used car prices and incremental online orders made for a gusty tailwind. Earnings per share for the half rose 10% (revenue, remember, was down 27%). This was accentuated by government support and an unusually strong pricing environment. Margins will come down over time. But the company has sailed through the pandemic. Adding more physical sites and increasing its online presence, Motorpoint will grow for years yet.
And finally, in the special situations category, Oriental Watch (HK:0398) grabbed the baton from Thinksmart (AIM:TSL), which has done much of the lifting for this group in 2020. Oriental Watch is a premium watch retailer (mostly Rolexes) in Hong Kong, China, Macau and Taiwan. The Fund acquired stock 18 months ago when it was a genuine Ben Graham bargain, trading at a sharp discount to net working capital, mainly cash and inventory. The market further ignored significant value in its property portfolio. Paid to wait via a double-digit dividend yield, we participated in November’s buy-back offer, selling almost a third of our holding at prices more than 50% above our purchase price. Interim results came out during November, citing a difficult environment in Hong Kong (due to COVID-19) more than offset by boom times in China. Overall, sales “slightly increased” (managements’ words) by 16.4% versus the same half last year.
ticker: FHT0032AU
commentary_block: Array
factsheet_url:
https://foragerfunds.com/international-fund-summary/
Under Reports at bottom of screen
release_schedule: Monthly
fund_features:
The Forager International Shares Fund offers a different approach to investing overseas. With investments in large liquid and resilient businesses (outside of the “FANGS”), combined with smaller value based ideas when the opportunities arise, the Fund offers exposure to a unique portfolio of global shares.
- Aims to outperform the MSCI ACWI IMI (AUD) over a rolling 5 year period.
- Typically invested in 20-40 securities around the world.
- Predominantly focusing on markets which have established legal frameworks and stable political systems, the Fund has investments in North America, Europe and Asia.
- The currency exposure that arises from owning foreign stocks is not hedged back to Australian dollars.
manager_contact_details: Array
asset_class: Foreign Equity
asset_category: Large Blend - Specialised
peer_benchmark: Foreign Equity - Large Specialised Index
broad_market_index: Developed -World Index
structure: Managed Fund