High-performance equity fund manager Forager Funds has sold out of a number of its Australian stock positions and is in the process of selling more. The fund has increased its cash position to 37 per cent over the past few months and says that level may rise further in the short term.
The Forager Australian Fund has produced a return of 12.8 per cent over the 12 months to the end of September, compared with the 8.5 per cent increase in the S&P All Ordinaries Accumulation Index over the same period.
Over the past three years the fund has produced an average return of 16.9 per cent a year, compared with a return of 7.3 per cent a year for the index. And over the past five years it has returned 19.9 per cent a year, compared with the index return of 10.1 per cent.
Forager chief investment officer Steven Johnson says the move to cash is “not a macro call.”
“Many of the stocks that have been fuelling the fund’s performance over the past three-plus years have delivered on or exceeded expectations. Some are now trading higher than our most optimistic initial assessment of value. Despite some updated thinking along the way, these stocks are on the way out of the portfolio,” Johnson says.
“Other positions also required a rethink as circumstances changed. With limited distress in the market at the moment, putting that cash to work will take some time.”
One stock that has been sold is network services provider Service Stream. The company has increased EBITDA from $17 million in 20134/14 to $48.4 million in the year to June. Its market capitalisation has grown from $80 million to close to $500 million over that period.
“Expectations for the company are much loftier now than they used to be. Investors are expecting growth to continue well into the future and the valuation is beginning to factor in plenty of certainty at an uncertain time,” Johnson says.
Another is online lottery ticket reseller Jumbo Interactive, which has lost market share since its ticket supplier Tatts Group upgraded its own online offering. The company’s profit was “reasonable” and its promise of an 85 per cent payout ratio is attractive but “Jumbo’s margin of safety has largely evaporated,” John son says.
Pacific Energy is another company on the sell list. Its growth is based on capital investment in generators and is dependent on new and expanding power requirements, mostly from gold mines. Johnson says pressure from larger and better financed competitors has increased and the business has been missing out on new contracts.
“Given the likelihood of lower returns on capital in future, the current valuation (at 1.7 times tangible book value) does not offer a sufficient margin of safety,” he says.
The fund’s second largest holding, Reckon, was sold in late July. Johnson says the spin-off of Reckon’s document management business, GetBusy, has eroded value.
GetBusy started trading on London’s AIM exchange in August and Johson says it is close to impossible for Australian shareholders to own this rapidly growing part of the business.
Further, competitive pressure has increased in Australia, with US giant Intuit introducing its cloud-based Quickbooks product to the market. Intuit spent $1 billion on research and development last year, while Reckon spent a little over $22 million.