12-Oct-2023: Forager Australian Shares Fund (FASF, FOR.asx): Update Regarding FOR Discount to NAV

The main part is inside the orange, and the part in the blue is probably true across the board for most LICs (Listed Investment Companies) and LITs (Listed Investment Trusts). On the back of this announcement, the FOR SP (share price) rose +9% today to close at $1.33, some 11 cents higher than yesterday's $1.22 close. FOR actually disclose their NAV (Net Asset Value) every trading day via the ASX announcements platform, and their NAV per Unit of the Forager Australian Shares Fund as at close of business yesterday (11/10/2023) was $1.47, so even after today's +9% SP rise, they're still trading today at around -9.5% below their NAV yesterday, and were trading at around a -17% discount to their NAV yesterday.

This sort of thing (converting a closed-end fund to an open-ended fund that trades at NAV) is becoming more common lately, and is only accelerated by funds such as Geoff Wilson's WAR (WAM Strategic Value) which takes stakes in other listed closed-end funds that are trading at significant discounts to their respective NAVs/NTAs and then tries to agitate for increased action from the managers of those funds to close the gaps between the share price (or unit price) and the NAV/NTA. Sometimes Geoff attempts to takeover some of those closed-end funds or at least the management of them - and roll them into his Wilson Asset Management stable - which is now up to 8 managed LICs - WAM, WAX, WAA, WMI, WLE, WGB, WMA and WAR. Sometimes he succeeds (such as with TGG - the Templeton Global Growth Fund more recently) - and sometimes he doesn't, but whatever the outcome it tends to increase the focus of the management of those funds on closing the gaps between the share/unit prices and the NTAs/NAVs - and on shareholder returns in general. Which is a good thing!

Of those 8 LICs that Wilson Asset Management manage, half (4) are trading at discounts to their NTA, and the other half (also 4) are trading at premiums to their NTA. I've highlighted the premiums in green and the discounts in red below (and WAR in orange).

Note those NTAs are all as at 31 August 2023, and the share prices are all as at 13 September 2023, so there's about two weeks between the numbers. However it is still indicative of the way those funds tend to trade. WAM Capital (WAM), WAM Research (WAX) and WAM Microcap (WMI) usually trade at significant premiums to their respective NTAs, and WAM Leaders (WLE) often does as well, although not as often as the other three (WLE can fluctuate between premiums and discounts).

WAM Global (WGB) usually trades at a discount to NTA, as all globally focused closed-end funds that are listed on the ASX seem to do. WAM Alternative Assets has always traded at a discount and one of the main reasons is that people can struggle to get comfort around the accuracy of their respective asset valuations, so punters tend to want to have a margin of safety in the WMA share price because of that uncertainty - it's typical of funds holding assets that are alternative in nature, such as water entitlements.

WAM Active (WAA) is their smallest fund and hasn't been overly succesful, as their "Active" strategy investments have always tended to underperform their "Research-driven" strategy investments, so the discount to NTA in WAA is more to do with lack of demand - there's little reason to own any WAA for most people.

WAA and WAX (Active and Research) are chalk and cheese. WAA has less than 2 years worth of dividends in their PR (profits reserve) and WAX has a bee's whisker under 4 years worth of dividends in their PR - and WAX has a better record of regularly increasing their dividends as well, and better TSRs due to WAX's share price moving higher over time along with their increased dividends.

Although it's also worth noting that the share prices of both WAA and WAX are now well below their early 2022 highs:

WAM Capital (WAM) holds everything that WAX and WAA does, but in larger quantities - because it's a larger fund - and it's also well off its highs, although their SP has started to recover over the last 3.5 months (since late June):

Chart Source: Commsec.

The technical rubbish (from Commsec) at the end of each graph only refers to the most recent three months or so, which on the WAM chart (above) means that tiny uptick at the end - as those are all 10-year charts - for some perspective.

Here's a little more info on WAR:

Their top 20 holdings - in alphabetical order - not weighting order - are there in the bottom right corner of that slide.

Source: WAM-Funds-August-2023-Investment-Update.PDF

FOR (the Forager Australian Shares Fund LIT) is NOT one of those top 20 WAR positions and indeed FOR does not appear to have ANY substantial shareholders (holding 5% or more), but my point was that funds like WAR and activist investors like Geoff Wilson at Wilson Asset Management and Gabriel Radzyminski at Sandon Capital (SNC) are only accelerating this move to either wind up funds that are trading at persistent substantial discounts to their net asset value (NAV, also known as net tangible assets or NTA) or else convert back from a closed-end structure to an open ended fund that trades at or very close to NAV.

Gabriel R. at SNC has recently taken on Magellan Financial Group (MFG) - see here: Sandon Capital | Campaigns: Magellan Financial Group ASX:(MFG)

And Nick Bolton - through his company Keybridge - is currently taking on Magellan as well but more specifically Nick is targeting the persistent discount between the NAV of MGF (the Magellan Global Fund closed-end LIT) and the unit prices it trades at on the ASX, and even more specifically he has been accumulating millions of MFGO options which are due to expire worthless on March 1st (2024) if the discount persists. He's betting on an alternative outcome.

Nick Bolton acquired BrisConnections options for 1 cent in 2006 and forced a $4.5 million settlement. Bolton's current plan is to force Magellan to pay him the discount or change the structure of MGF to realise the NTA (or NAV) value. According to a Graham Hand article for Morningstar - see here: https://www.morningstar.com.au/insights/funds/239916/the-fascinating-battle-between-nick-bolton-and-magellan ...based on the current share price of $1.68 and NTA of $1.89, Bolton could exercise into MGF at a price of $1.75 (that is, $1.89 X 92.5%) and sell for around $1.89. In other words, his 143 million options could buy $270 million worth of MGF on which 7.5% is over $20 million.

That was written by Graham on October 1st (eleven days ago) and MFG closed at $1.685 today and their most recently disclosed NAV/NTA (as at end-of-day on Friday 6th October) was $1.91, so not much has changed.

Interesting times!

Disclosure: I currently hold MGF shares in a portfolio for our two children and I own a reasonable position in SNC in two larger portfolios. I do not currently hold any of the 8 WAM Funds' LICs although I have in the past. If I was to own shares in any of those eight LICs now, it would be WAM Global (WGB) - because it's well run, has a good profits reserve, and is trading at a decent discount to their NTA. I have held FOR on and off over the years but I'm not currently holding any FOR shares. I have held MFG shares in the past but I sold out a few months ago. They've only gone lower since due to their most recent monthly FUM announcement (Funds-Under-Management---September-2023.PDF) showing $2 Billion less Funds Under Management (FUM) due to net outflows (people withdrawing money from the funds) as well as another $2 Billion of share price declines and trading losses on their investments, for a total of $4 Billon less FUM over a single month - $39 B down to $35 B; they had around $115 Billion of FUM this time two years ago but they aint going back there any time soon! Damn basket case!

I'm always interested in the LIC/LIT space, but I'm not often heavily exposed to it. But I do like opportunities - and they do come along in this area - some of you may remember that I spelled out my thesis here around the Blue Sky Alternative Investments Fund when it was confirmed that Geoff Wilson's WAM Funds were set to takeover the management of that fund; they did and renamed it WAM Alternative Assets; I rode that one up and sold out at a reasonable profit once the fund had been appropriately positively re-rated by the market. LICs and LITs are not always good for a long time, but they can be great for a short time - if you buy low with a positive catalyst approaching and then sell out at higher levels once the catalyst has occurred.

I'm not sure whether the required positive catalyst will eventuate or not with either MFG or MGF, because Magellan is still a BIG company and MFG is still a very big fund by Australian standards - Graham Hand noted on Oct 1st that the Magellan Global Fund includes an open-ended class comprising about $7 billion and the closed-ended trust (MGF.asx) worth about $2.8 billion. And that there are over 1 billion MGFO options on issue with a potential exercise value of about $1.8 billion. In that light you may be able to see why I feel that it's likely harder to push either MGF or their managers (MFG) into doing something that they really don't want to do compared to dealing with much smaller funds or companies.

So it's interesting to note that Forager are doing to their closed-ended Australian Shares Fund (FOR.asx) exactly what many activists are pushing other funds to do, but Forager are doing it on their own, without any obvious pressure from any large shareholders or prominent activist(s).

I've always had time for Steve Johnson at Forager. He has integrity and he's a smart cookie too. Always worth listening to what he has to say, and watching what he does too.

Further Reading/Listening: The Rules Of Investing - Steve Johnson (Forager Funds) - YouTube (20 January 2023)

00:00 - Intro

1:10 - Lessons learned from 2022

2:30 - The right time to sell

3:40 - Preserving capital

5:00 - Managing risk through weightings

6:30 - Managing investor expectations

8:40 - Inflation, rates and the Aussie consumer

13:00 - Earnings downgrades and small caps

16:00 - Are quality companies crowded?

21:20 - Forager's shopping list

33:00 - Forget about picking the bottom

35:00 - Biggest wins, deepest losses

39:00 - The Big Tech stock for the bottom drawer

Steve Johnson and Gareth Evans from Forager Funds doing a podcast that mixes whisky drinking with talking stocks.

Very interesting stuff, especially if you're interested in whisky - or stock market investing.

23-Dec-2021: Steve and Gareth on travel, Omicron and lessons learned

21-Jan-2022: Stocks Neat: Small-caps, Magellan, and men who fly

09-Sep-2020:  Monthly Performance Report August 2020

The Forager Australian Shares Fund (FASF, ASX: FOR) managed a +18.80% NAV rise in August, so perhaps they are finally regaining their mojo.  As a FOR shareholder, I sincerely hope so!

At the end of August, their TOP 5 HOLDINGS (as % of NAV) were:

• RPM Global Holdings Limited (ASX:RUL) 8.7%
• Thorn Group Holdings Limited (ASX:TGA) 7.1%
• Mainstream Group Holdings Ltd (ASX:MAI) 6.4%
• AMA Group Limited (ASX:AMA) 5.9%
• Enero Group Limited (ASX:EGG) 4.9%

--- click on the link above for the full report ---   [I hold FOR shares.]

08-Sep-2020:  "Dealing with investment FOMO" Blog post on 8 Sep 2020 by Steve Johnson

27-Aug-2020:  Steve Johnson:  Blog Post:  Aussie Portfolio Shows August Grit

[I hold FOR shares.]

13-July-2020:  Forager June 2020 Quarterly Report

And if you want to read it without that annoying "For Personal Use Only" watermark up the left hand edge of every page (that the ASX adds) - then you can also download the report directly from the Forager website here:  https://foragerfunds.com/news/investor_resources/quarterly-report-june-2020/

The report covers both the unlisted Forager International Shares Fund (FISF) and the ASX-listed Forager Australian Shares Fund (FASF, ASX: FOR, a LIT: Listed Investment Trust, same as a LIC except it's a trust structure).  I hold shares in FOR, the Australian shares fund, and some of the news and commentary from Steve Johnson concerning the Australian fund included:

"We’re not for a moment shying away from the poor performance of the Forager Australian Shares Fund.  But the past three months have provided ample evidence for our conviction that March’s share price falls were an absurd over-reaction to the impact of an economic downturn on this portfolio.

"The portfolio net asset value has rebounded 39% in the June quarter. More importantly, we avoided any recapitalisations [we did make small investments in a number of companies we thought were likely to need capital, with a mixed record of picking the right ones] and a significant number of companies have released positive trading updates.

"From smash repair company AMA (AMA), to auto leasing business Eclipx (ECX) and homewares retailer Adairs (ADH), business has rebounded quickly after lockdown. Government support in the form of Jobkeeper means many are reporting profits higher than the prior period. The Fund’s largest investments, RPM Global (RUL), Macmahon (MAH) and Enero (EGG) seem to be largely unaffected by the economic backdrop. And those that have been heavily affected have battened down the hatches, minimised cash outflow and look like they have the wherewithal to make it through to 2021.

"While none of that stopped the share prices getting walloped, it does give us confidence in our valuations. And further confidence that the share price recoveries have a long way to go." 

OPPORTUNITIES IN THE COVID DRAWDOWN

"The market implosion in March offered up some stunningly low entry prices for listed stocks. But it came with a catch. Many businesses were impacted quickly and ferociously. How long can they survive without revenue? This question very quickly became the first one for analysis of beaten down companies. But through the fear, value emerged. And with a quick resumption of activity, some share prices rallied hard.

"One of these was Star City casino owner Star Entertainment (SGR). Its casinos were closed on 23 March, 90% of its 9,000 employees were stood down and spending was wound back. The stock lost more than 60% of its value. But since then the picture has improved quickly.

"Star Entertainment is awakening already. Star City reopened on 1 June and from 1 July was able to host up to 5,000 patrons. In the private gaming rooms, turnover returned to last year’s levels. The Queensland casinos reopened on 3 July. Auckland casino owner Sky City (SKC) reopened earlier and is already seeing pokie machine revenue recover to 86% of last year’s level. Table games, subject to more stringent physical distancing, are at 65% of prior levels. It is forecasting a roughly breakeven result for the three months to June.

"Star’s assets are high quality and highly cash generative. Less than 10% of the company’s earnings come from international customers. It might take a few years, but earnings should move to prior levels. If they do it remains an attractive investment.

"Another to cop a big hit and then see a subsequent reversal was Motorcycle Holdings (MTO), Australia’s largest retailer and wholesaler of motorcycles and accessories.

"The business had a market capitalisation of $37m in late March, down 70% from the February peak. Its net debt balance was a scary $68m. The situation looked dire as the company cut costs, sought rent reductions and prepared to bunker down. The Fund held a small position from February, but increased it by two-thirds in early April.

"By late June, Motorcycle Holdings forecast half year profits to more than double from the prior year. It is also swimming in more than $30m of cash. How did the company’s fortunes reverse so suddenly?

"COVID-19 restrictions lifted quicker than many feared while government JobKeeper support kept more people employed and spending. It also meant Motorcycle’s salespeople had a portion of their wages subsidised. With travel off the calendar and access to $10,000 of superannuation, Australians turned to spending on discretionary items like motorcycles. With public transport suddenly less appealing, motorcycles present a cheap way to get around. And farmers are having their best season in a long time, increasing demand for ag bikes.

"This government induced spike in spending won’t last; JobKeeper is due to end in September and only one more $10,000 super withdrawal is available. But there has been enough progress for the company to pay down significant amounts of debt, allaying investor concerns. And the industry was at a cyclical low prior to COVID-19. The new motorcycle sales market should see a benefit from lone transit riders for a while to come.

"Lining up the long-term earnings trajectory is going to be impossible with so much noise in the numbers, but this small business should come out of COVID-19 stronger than it went in.

"The Fund also used the market volatility to invest in UK bank Virgin Money (VUK). The business was separated from the National Australia Bank (NAB) as Clydesdale Bank and later merged with a similar sized Virgin Money. The share price fell by 70% in a straight line from late February to late March. Virgin Money was trading at only one quarter of the value of its net tangible assets.

"The UK economy was being ravaged by COVID-19. Investors were concerned that borrowers would not repay the banks. These bad debts can very quickly overwhelm not just a bank’s profits in a given year, but also the capital it has set aside for difficult times.

"UK regulators and the Bank of England acted quickly. Interest rates were cut, banks were told to stop the payment of dividends and were offered access to more funding. The UK government stepped up to help borrowers by paying some wages and extending credit and grants to small businesses and the self-employed.

"Virgin Money won’t be spared the damage from COVID-19, but it does have some good attributes to help it survive and return to earning decent returns. Mortgage lending, where banks have traditionally not lost much money, represents 82% of loans. Of these loans, the value of the homes exceed the loan by 75% on average. And, due to its recent merger, cost reductions are still in progress. Senior leadership believes the cost base of the bank can drop by more than 20% over the next few years. An insurance selling scandal, which has plagued UK banks for years and cost £3.1bn, is finally behind them.

"It won’t be a smooth ride, and we have kept the investment small, but Virgin UK should be a beneficiary of a return to a more normal situation.

"Not all businesses were severely impacted by COVID-19. Mining services provider Perenti (PRN) [formerly Ausdrill (ASL)] makes most of its money helping miners extract gold from mines in Australia and Africa. Most of the company’s work takes place underground, using know-how and equipment to build infrastructure, explode rock and haul it up to the surface.

"During COVID-19 the share price fell by 70% on concerns about mine closures and debt levels. With more than 8,000 staff working and living in close quarters, the company has had to be particularly careful to avoid the spread of COVID-19. With the virus subsiding, Perenti has felt minimal impact from closures. In late June the company reinstated its profit forecast at a level 8% lower than its pre-COVID expectations.

"Whilst the debt makes it riskier than our other mining services company, Macmahon (MAH), it also has a lot more upside. We have reallocated a small portion of the Macmahon investment to Perenti and kept the overall industry exposure roughly the same."

WILL WE EVER TRAVEL AGAIN?

"Australians won’t be travelling overseas any time soon. That’s 11.3 million trips that we won’t be taking overseas in the coming 12 months. And with the country’s borders closed, 9.5 million trips by foreign visitors won’t be made here either. Travel and leisure businesses, already reeling from bushfires and floods, have been poleaxed by COVID-19. Many are in hibernation, operating with a handful of employees to keep the cobwebs away until things improve. But the businesses in this sector aren’t all the same.

"Some cater mostly to business travellers. That is all of Corporate Travel’s (CTD) and two-fifths of the Flight Centre’s (FLT) businesses. Smaller companies like NZ upstart Serko (SKO) and small agency Helloworld (HLO) play in the space as well. To say the state of business travel is uncertain would be an understatement.

"Employees have found that meeting via video conferencing using tools like Zoom (NASDAQ:ZM) works just fine. It’s far cheaper and easier than sending employees around the country or around the world. And with many businesses facing revenue declines, travel has been an easy place to cut costs. A mid-June survey of corporate clients by agency Uniglobe Travel found that more than half of their clients had made changes to travel policies. The most common were limiting or banning travel for internal meetings and limiting conference related travel. People will start flying once borders open, but it may never be the same again. The Fund has stayed away from investments in this corner of the travel sector.

"Others cater to leisure travellers or provide experiences. Experience Co (EXP) operates skydives and Great Barrier Reef trips. Tourism Holdings (NZX:THL) and Apollo (ATL) rent recreational vehicles. These three are current investments in the Fund, totaling about 9% of the portfolio.

"At the moment the situation for these businesses is also difficult. International visitors were about two thirds of Experience Co’s business. With international borders closed, those visitors are not coming into the country. The company has responded by going into hibernation. Skydives and reef trips are operating only when they make economic sense. Leases and salaries have been slashed. The business is still burning cash to the tune of $1m per month after government support through JobKeeper. Assuming increased costs after JobKeeper expires in September, the business has enough cash and access to debt to survive into late 2021 without any additional capital.

"Luckily for Experience Co, it shouldn’t have to wait that long. Opening interstate borders will restart domestic tourism. Queensland, an important state for the business, will be opening its borders on 10 July. And Australians unable to travel internationally will redirect at least some of their travel domestically, boosting this further. Cairns hosted 2.4 million visitors last year. Many of those were international tourists who won’t be coming back, but some of the 1.8 million Australians who travelled to Indonesia, Thailand and Fiji on holidays might just plug the gap. If a New Zealand bubble opens up travel with our neighbour, the company’s businesses on both sides of the Tasman will benefit." 

THE ISO-HOLIDAY BENEFICIARIES

"In a recent interview, Airbnb’s CEO Brian Chesky put it plainly: “Travel will never, ever go back to the way it was”. He predicts travellers will holiday closer to home, in smaller cities and spend more time visiting national parks. Recreational vehicle rental companies Tourism Holdings and Apollo are aligned to this vision. Both have seen healthy demand from travellers seeking a socially distant local holiday. And both have had to make big adjustments to improve their financial position.

"Apollo is a small investment in the Fund owing to its high debt load. During the crisis the company sought to delay debt repayments, sold its US fleet to reduce debt, and cut its employment costs by 70%. Domestic rental bookings have improved. Apollo is trading at a similar price to its February peak, despite falling by 75% and then rising more than 300%.

"Tourism Holdings has also made some difficult but necessary decisions in the last few months. The business is larger and went into the year with lower debt levels. The company has struck a new deal with banks in June, delaying debt maturity to after September 2021. It also allayed investor concerns around a capital raising, stating it does not need to issue new shares. A rarity in the tourism space, the company also guided for a slight profit in the second half of the financial year. An improving market for secondhand recreational vehicles has allowed the business to sell campers it doesn’t need at a profit, while reducing debt. The change was so dramatic that on 11 June the company estimated it would finish the year with $165m of debt, by 25 June that estimate had improved to $140m.

"Travel and leisure businesses have been some of the hardest hit from COVID-19. And the Fund added to its investment in the sector during some of the darkest days of the crisis. These stocks have been strong performers since, and as the country continues to cautiously open they should continue to be good investments." 

Forager's top Top 5 Investments as at June 30, 2020, were: 

1. RPM Global Holdings Limited (13.0%), 
2. Enero Group Limited (6.4%)
3. Mainstream Group Holdings Limited (6.3%)
4. Eclipx Group Limited (5.8%)
5. AMA Group Limited (5.1%)

Cash represented only 1.2% of the fund.

--- click on one of the two links at the top of this straw for more of Forager's June 2020 Quarterly Report - including charts, graphs & photos ---

Disclosure:  I hold FOR shares.

Forage

verb, for·aged, for·ag·ing.

to search about; seek; rummage; hunt (for what one wants)

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.

16-Apr-2020:  March 2020 Quarterly Video

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).

Forager - Investor Roadshow 2019 - Video

July 2019 Monthly Report

The FOR portfolio rose +6.67% in July, reversing a little of their recent underperformance.  It's a good start to FY20.  (I hold FOR shares).

You can access Forager's FY2019 Performance Report by clicking here.  They run 2 funds, their unlisted Forager International Shares Fund (FISF), which is covered off first in the report, and their Forager Australian Shares Fund (FASF, ASX:FOR) which is covered off next.  You can skip straight to the Australian Fund (FOR) Performance by clicking on the "Australian Fund Performance" Quick Link on the left.

By their own admission, they had a painful year.  FASF (FOR) delivered a return of negative 19.7% for the year ended June 2019, underperforming the benchmark by 30.7%.

However, to give you an idea of how well they have performed in prior years, even taking FY19 into account, an investor that reinvested their dividends would have grown $100,000 from inception in 2009 to $247,765 at 30 June 2019 (ignoring taxes), compared to $217,470 for the index, so they've outperformed since inception - even though this past annus horribilis has ruined their 1 year, 2 year, 3 year, and 5 year numbers (in fact, they've now underperformed over every time period up to 6 years due to this year's terrible result, and outperformed from 7 years onwards).

So what happened?  They had to write their substantial Freedom Insurance (FIG) investment down to zero, Thorn Group (TGA) was also a major holding, and they held iSelect (ISU), MMA Offshore (MRM), Mainstream Group (MAI), Matrix (MCE), NZME (NZM), MSL Solutions (MPW) and Boom Logistics (BOL) - to cut a long story short they had a lot more positions in companies whose share prices went down - than they did in companies whose share prices went up.  And the ones that went down, went down by more than the ones that went up.

I don't think they've lost their mojo however.  It's a bad year, but it's ONE bad year.  I think Steve Johnson and his team will come back from this, and I think FOR looks like good buying at these levels.  FOR is now trading at a discount to NTA, which was a rarety indeed in the years prior to FY19 and Steve's long been warning to expect a year of substantial underperformance at some point (a promise he's certainly delivered on in FY19).  Now that he's got that one out of the way, I feel he can get back to his winning ways.

As a LIT - Listed Investment Trust (a Trust not a Company), they have to distribute ALL of their profits (dividends, franking credits, and capital gains) to shareholders every year, so expect lumpy distributions - they don't smooth their dividends like LICs tend to do - so, for instance, they have just paid 2.17 cents as a distribution whereas this time last year they paid 21.29 cents per unit (almost 10 times more).

The following Forager Quarterly Report for June 2019 is VERY good reading:

http://foragerfunds.com/news/investor_resources/quarterly-report-june-2019/

Some of the headings include:  "VALUE INVESTING: WASN’T MEANT TO BE EASY", "Concentrated investing is dead ", "Unfortunate side effects or essential prerequisites?" and "Hard to compete in a rational market".  It includes a section on "Bubble Stocks" which includes a lot of companies that are very popular here on Strawman.Com!  If Steve is right, the share prices for those companies are way too high, and when the bubble bursts, there will be pain for those holding them.

Those "Bubble Stocks" are:  Avita Medical, iSignthis, Polynovo, Clinuvel Pharmaceuticals, Pro Medicus, Megaport, Mesoblast, Audinate, Bubs & Elixinol.   That's Steve's list of ASX-listed companies with less than $50m of revenue and market capitalisations of more than $500m.  Excluding mining, oil and gas and investments companies, there are 10 on the ASX that meet that criteria.  The combined market capitalisation is more than $10bn (that’s billion, with a B).

"As a group, these companies lost $227m in the most recent 12 months, so we won’t bother with earnings multiples. The average ratio of total enterprise value to revenue is 71 times.  Well done if you owned them a year ago. The 12 month share price movement for this basket of stocks averages out at 186%.  This speculative pocket of the market—there are many more than these 10—is a bubble.  I’m happy to be on the record saying that." (Steve Johnson).

Remember that Steve is a value investor, not a growth investor, and they look at things a lot differently.  You can make money using both styles, but you have to stick to your own game plan.  Growth investors and momentum traders can make money out of these types of companies, but Steve is just warning that there is a huge amount of upside already baked into these share prices, so don't just assume that they'll keep going up.  One miss-step, or a guidance-miss, or a profit warning (for those few that actually make any profit), or a guidance downgrade, and you'll see how punishing the market can be when a stock is priced for perfection.  It can be a long fall.

Disclosure:  I hold FOR.  I have held AVH, PME, MP1, AD8 and MSB in the past, but I don't hold any of them currently.

Additional:  FY2020 OK for FOR so far, NAV is rising.

FOR is a LIT - a Listed Investment Trust (just like a LIC - a Listed Investment Company - but a LIT is a trust rather than a company - and is bound by all the normal rules that apply to trusts - such as that all profits have to be distributed to unitholders every year).

Excellent manager - Steve Johnson, who is honest, trustworthy, readily admits his own mistakes - and learns from them, is an excellent communicator, independent thinker, and is prepared to do things differently.

Forager have an International Fund and an Australian Fund - click here for their March 2019 Quarterly Report - which covers both funds.  FOR is just the Australian Shares Fund - so no exposure to their international fund or to any companies listed on exchanges other than the ASX.  Click here for the FOR (Forager Australian Shares Fund - FASF) report for April 2019 and here for May 2019.

22-June-2019:  Currently trading at $1.15, being a 12% discount to their NAV ($1.31) which is due to recent underperformance - with a handful of big losers in their portfolio - like FIG (Freedom Insurance), TGA (Thorn Group) and MRM (MMA Offshore).

Forager did a webinar in May concerning their poor recent fund performance, and here is a link to the presentation slides from that webinar:  Forager Investment Performance - May 2019

Steve also features in the latest Livewire "The Rules of Investing" podcast with Patrick Poke - and here's the link to that podcast:  Soundcloud: Livewire: Rules of Investing: Steve Johnson - The search for extreme dislocations

He talks about how Forager came to be (from Macquarie to Forager), his greatest influences, some of his biggest mistakes, the dangers of anchoring and the narrative bias, luck versus skill, and plenty more.

Steve has a very good track record as a fund manager, and his returns in previous years have been excellent, which is why FOR always traded at a healthy PREMIUM to their NAV.  Having now moved to a DISCOUNT to NAV - due to recent underperformance, I see FOR as a "buy" at these levels.  You can gain exposure to a portfolio of companies that most people would view as higher risk - but put together by a manager that understands risk - and risk management - more than most.

Disclosure:  I hold FOR shares.