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#SJ: Buying what he hates
Last edited 2 weeks ago

17-June-2020:  Steve Johnson: How I Loathe the Gambling Industry and Buy Gambling Stocks

That's an interesting blog post by Steve Johnson, founder and CIO of Forager Funds on how "ethical investing" is a waste of time in his opinion, and how he divorces his personal views and preferences from his roles as a fund manager and investment analyst.

Can't say I agree with him on that.  My own view is more along the lines of some of the comments below his post, such as - if presented with a range of great opportunties, why not give preference to those that pose no ethical dilemmas? 

Steve's view is that if a casino is underpriced, somebody is going to make money by investing in it, so why leave those profits for someone else? 

I would say that shifts in investment sentiment can take time, but it is not wise to ignore them.  I would further point out that sometimes it just takes one very large player to refuse to invest in a sector, to cause that sector to decline in a meaningful way. 

Forager is not that very large player, but they would be wise not to be caught on the wrong side of a meaningful sentiment shift away from a sector they are heavily invested in. 

The large player I'm thinking of is actually BlackRock, who are the largest asset manager in the world;  As of March 31, 2020, the firm managed approximately $6.47 trillion in assets on behalf of investors worldwide. That's trillion - with a "t".  That's $6,470 billion (with a "b").  Larry Fink, Chairman and CEO of BlackRock, has written to many company CEOs about his concerns and has now removed companies who derive 25% or more of their revenue from thermal coal from his discretionary portfolios, including the portfolios that they manage for their thousands of clients.  While such companies still remain in some of BlackRock's ETF's - because those ETFs must shadow the underlying indices that they track - BlackRock have either already introduced or are in the process of introducing a range of new "sustainable" or "ethical" ETFs to provide investors with more options. 

Larry has signalled that this new focus extends to all fossil fuel companies and that oil companies are now in his sights.  Larry believes that the world is now moving to "sustainable investing" and he wants BlackRock to be at the forefront of that shift, which is having the effect of accelerating the shift - due to BlackRock being so huge and such a dominant force in the market.  Other fund managers are obviously following BlackRock's lead.  There were other much smaller fund managers doing this before of course, but they didn't really get the press that BlackRock is generating.  Why is this important now?  BlackRock is so big that when they introduce a policy change and decide to avoid a sector, that moves share prices.  It's a HUGE development.

Now, it's a long bow to draw to link thermal coal and oil companies to gambling companies, however my point is that ESG (Environmental, Social, and Governance) concerns can no longer be sensibly divorced from share price impacts.  There WILL be share price impacts as more and more industry participants decide that there are too many downside risks associated with companies where there are legitimate ESG concerns - and they decide to avoid such companies purely due to the perceived financial downside of investing in them.  In other words, you don't have to hate a sector to want to avoid it.  You could also avoid a sector simply because you think it has too many headwinds. 

While I understand Steve's point, I also note that the biggest losses in the Forager Australian Shares Fund (ASX: FOR) over recent years have been in companies that I personally have avoided due to ESG concerns - such as TGA (Thorn Group, lower tier lenders who target people who can't generally afford what they're buying and tend to have a high level of defaults) and FIG (Freedom Insurance, high-pressure telemarketing funeral insurance sales, with products that were very expensive and very poor options for everybody except the people selling them).   I see it as inevitable that companies with business models that are so rubbish - in terms of quality, fairness to customers, and value for customers - are going to fail.  If they don't fail all by themselves, they will fail as a result of government intervention or legislation changes.  Therefore, with so many superior options out there, why bother with them at all?  

The clue is probably in the name - Forager.  They tend to forage amongst the stocks that everybody else is discarding - or has discarded - as rubbish.  Occasionally, they will uncover a hidden gem, such as Macmahon (MAH).  But sometimes what they have ended up buying, particularly in recent years, has just been rubbish.

I hold FOR shares, and I think Steve Johnson is an exceptional fund manager who is different and very honest.  His investing track record up until about 2 years ago has been oustanding.  However, I don't agree with him on everything.

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#COVID-19 Update, March 2020
Last edited 3 months ago

23-March-2020:  Forager Funds Webinar - COVID 19 Pandemic - March 2020

Forager Funds Webinar Slides 23-Mar-2020

Forager Funds Webinar Recording - 23 March 2020 (their ASX announcement)

The NAV of the Forager Australian Shares Fund LIT (FASF, ASX: FOR) halved from $1.24 on Feb 28 to $0.62 on Monday (23-March-2020) - in less than 4 weeks.  It was up 1c to 63c at yesterday's close.  They would be up a little more today. 

One of their positions, Thorn Group (TGA) was up by over 30% early on today, but closed up only +2.63% (up by only 1 tenth of 1 cent in the end to 3.9 cents). 

Another FOR position, Experience Co (EXP) closed up +76.47% today, but that only took them to 6 cents (from yesterday's 3.4c close).  EXP was trading at 24c per share on Feb 20th, around 5 weeks ago.  Even after today's +76.47% rise, they're still down 75% over those 5 weeks.  

If you click here, you can view the webinar at the point at which they show you the entire FASF (FOR) portfolio and how much every position had fallen.  That is followed up by a chart which Steve Johnson has put together to show how resilient he considers the major positions in the portfolio will be through this period based on both operation resilience and revenue resilience.  Matrix (MCE) and Eclipx (ECX) look to be most at risk.  MRM Offshore (MRM, formerly Mermaid Marine) would have been even worse, but they "took their medicine" and sold out of MRM last week (on March 20th). 

TGA, EXP & ECX were the three positions in the FASF (FOR) portfolio that had fallen the furthest when the webinar slides were being put together.  Today, TGA is up a bit (+2.63%), EXP is up a lot (+76.47%), and ECX is up +14.29%, but they're all up off very low bases with plenty more ground left to make up obviously.

The six positions in the portfolio that Steve considers will likely be the most resilient - in terms of both revenue and operation resilience - are:

  • RPM Global (RUL, up +6.15% today);
  • Smartgroup (SIQ, down -3.72% today);
  • iSelect (ISU, up +25.71% today);
  • Macmahon Holdings (MAH, down -3.03% today); 
  • SG Fleet Group (SGF, down -9.65% today); and
  • CTI Logistics (CLX, unchanged, very illiquid, did not trade today).

Steve mentioned how with these microcap and nanocap stocks the lack of liquidity meant that there could be 20%+ falls on very low volume, which translated into large valuation changes for a fund like FASF (FOR) who held millions of shares in those companies.  People needed cash, so were selling whatever they could, often very indiscriminately, which presented opportunities of course - for the brave - but could create some large NAV falls as well.

He gave an excellent example of this in a letter to investors that I received in my inbox yesterday (Tuesday 24-Mar-2020) - but is dated Friday 20th March - and the example was:  "On Friday last week, the share price of marketing services company Enero Group closed at $1.295. On Monday morning the best price bid for the shares was $1.00 and the best offer $1.30. The first trade was 720 shares at $1 each, causing a 23% mark down in the “value” of our shares. Forager’s Australian Shares Fund owns 5.4 million of them, so that $720 trade decreased the value of our portfolio by some $1.6m."

He goes on to explain that this could get a lot worse, but that it does present opportunities, and that obviously he doesn't regard Enero (EGG) to be worth 23% less just because their share price fell by 23% due to a single trade worth less than $1K.

It pays to keep in mind that it works the same way when people want to buy very illiquid stocks - they can go up a long way on relatively low volume as well - as we saw today with EXP (+76.47%).  We need more of that!

The Q&A at the end goes for some time and there are some pointed questions, including about whether they deployed their cash too early and whether the fund would survive (both answers are "yes").  However Steve pointed out that trying to judge the performance of a fund at this point in a crisis is pointless.  Once things normalise and we're over corona, then a fair judgement can be made about whether they made good decisions during the crisis to come out the other end of it better off.  Because their cash levels were not nearly as high as they were a year ago, it's now got to the point where they have been selling stocks that are clearly cheap to buy other stocks that are VERY cheap (like, crazy cheap). 

As a FOR shareholder, I have a vested interest in following their progress, and look forward to seeing the share prices of some of their positions double and triple in the months to come - as they expect them to.


Disclosure:  I do hold FOR shares, as well as shares in MAH (of all of the companies mentioned in this straw).


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#Monthly Reports
Added 3 months ago
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